Corporation Code

CORPORATION CODE[Batas Pambansa 68]

BY

DEAN CESAR L. VILLANUEVA,[1] BSC, LLB, CPA, LLM, DJS, FAICD

I. DEFINITIONS, THEORIES AND CLASSIFICATIONS

1. Definition of Corporation - A corporation is an artificial being created by operation of law, having the right of succession, and the powers, attributes and properties expressly authorized by law or incident to its existence.[2]

Section 2 contains the classic definition of a corporation, from whence is drawn the ultra-vires doctrine: that a corporation being a mere creature of law, is in fact a creature of limited powers, and thereby shall not possess or exercise any power except those conferred by the Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so confered.[3]

Monfort Hermanos Agricultural Dev. Corp. v. Monfort III434 SCRA 27 (2004)

A corporation has no power except those expressly conferred on it by the Corporation Code and by its articles of incorporation, those which may be incidental to such conferred powers, those that are implied to its existence, and those reasonably necessary to accomplish its purposes.[4]

In turn, a corporation exercises said powers through its Board of Directors and/or its duly authorized officers and agents.[5]

a. Four Attributes of Corporation - A corporation is deemed incorporated and have juridical personality from date of the issuance of SEC Certificate of Incorporation, and "thereupon the incorporators, stockholders/members and their successors shall constitutre a body politic and corporate under the name stated in the articles of incorporation.[6]

• AN ARTIFICIAL BEING ("Capacity to Contract and Transact Business")

• CREATED BY OPERATION OF LAW ("Creature of the Law")

• WITH RIGHT OF SUCCESSION ("Strong Juridical Personality")

• HAS POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE ("A Creature of Limited Powers")

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Reynoso, IV v. Court of Appeals345 SCRA 335 (2000)

A corporation is an artificial being invested by law with a personality separate and distinct from those of the persons composing it, as well as from that of any other entity to which it may be related. It was evolved to make possible the aggregation and assembling of huge amounts of capital upon which big business depends. It also has the advantage of non-dependence on the lives of those who compose it, even as it enjoys certain rights and conducts activities of natural persons.

PNB v. Andrada Electric & Engineering Co.381 SCRA 244 (2002)

A corporation is an artificial being created by operation of law. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related.[7]

Shipside Inc. v. Court of Appeals352 SCRA 334 (2001)

"The 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 special act of the Board of Directors.[8]

2. Theories on Corporate Existence and Powers:a. Theory of Concession - Philippine jurisprudence has formally adopted the "theory of

concession" as the underlying basis for the existence and powers of corporate entities.

Tayag v. Benguet Consolidated, Inc.26 SCRA 242 (1968)

A corporation being a creature of the law, "owes its life to the state, its birth being purely dependent on its will;" it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs.

We formally reject the genossenchaft theory which recognizes the corporate entity as "the reality of the group as a social and legal entity, independent of state recognition and concession."

Int'l Express Travel v. Court of Appeals343 SCRA 674 (2000)

Before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a "general enabling act," and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. Although it may be true that a particular statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be construed the grant of a juridical personality to such an association, since such acts may only be done by persons, whether natural or artificial, with

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juridical capacity; nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding that such association achieved the acquisition of a separate juridical personality, even when it adopts sets of constitution and by-laws.

b. Theory of Corporate Business Enterprise or Economic Unit - Under this theory, the Supreme Court has looked upon a corporation not merely as an artificial being, but more as an aggregation of persons doing business, or an underlying economic unit called the "business enterprise."

The doctrine recognizes that the existence of the business enteprise as the basis of several contracts and transactions apart from the issue of whether there was duly constituted a juridical person, requires that the members of the public who dealt in good faith with the apparent corporation have a right to be protected in their contractual expectations.

NOTE: This is the underlying theory of many of the cases where the Supreme Court applies the doctrine of piercing of the veil of corporation fiction, the de facto corporation and corporation by estoppel doctrines.

Arnold v. Willits & Patterson, Ltd.44 Phil. 634 (1923)

The corporation is emerging as an enterprise bounded by economics, rather than as an artificial personality bounded by forms of words in a charter, minute books, and books of account.

The proposition that a corporation has an existence separate and distinct from its membership has its limitations. It must be noted that this separate existence is for particular purposes; there can be no corporate existence without persons to compose it; and there can be no association without associates.

PSE v. Court of Appeals281 SCRA 232 (1997)

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. As to its corporate management decision, the State will generally not interfere with the same; that questions of policy and of management are left to the honest decision of the officers and directors of a corporation; and the courts are without authority to substitute their judgment for the judgment of the Board of Directors.

Tan Boon Bee & Co. v. Jarencio163 SCRA 205 (1988)

Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as to avoid the execution of the property of a sister company.

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3. Private Corporations Cannot Be Created By Specific Legislative Act - Sec. 16, Art. XII of the 1987 Constitution expressly provides that, except for government-owned or controlled corporations, private corporation cannot be given a special charter, but may incorporate only pursuant to a general enabling law (i.e., Corporation Code).[9]

NDC v. Philippine Veterans Bank192 SCRA 257 (1990)

Pres. Decree 1717, which created the "NEW AGRIX, INC." violated Sec. 4, Art. XIV of 1973 Constitution which prohibits the formation of a private corporation by special legislative act, since the new corporation was neither owned nor controlled by the government, and that National Development Corporation (NDC) was merely required to extend a loan to the new corporation, and the new stocks of the corporation were to be issued to the old stockholders of the insolvent Agrix upon proof of their claims against the abolished corporation.

Feliciano v. Commission on Audit419 SCRA 363 (2004)

Congress cannot enact a law creating a private corporation with a special charter. Since private corporations cannot have a special charter, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled.

4. FOUR BASIC ADVANTAGES OF CORPORATE ORGANIZATIONS:a. STRONG SEPARATE JURIDICAL PERSONALITY - A corporation has a personality

separate and distinct from its individual stockholders or members. Being an officer or stockholder of a corporation does not make one's property also that of the corporation, and vice-versa, for they are separate entities. Traders Royal Bank v. CA, 177 SCRA 788 (1989).

The transfer of corporate assets to the stockholders is not in the nature of partition among co-owners, for the stockholders do not own corporate assets; such transfer must be treated as a conveyance from one party (the corporation) to another (the stockholders). Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).

Shareholders are in no legal sense the owners of corporate property or credit which is owned by the corporation as a distinct legal person. Concepcion Magsaysay-Labrador v. CA, 180 SCRA 266 (1989).

The interest of shareholders in a corporate entity is purely inchoate; and this purely inchoate interest will not entitle them to intervene in a litigation involving corporate property. Saw v. CA, 195 SCRA 740 (1991). Nor can stockholders bring actions involving properties of the corporation. Magsaysay-Labrador v. Court of Appeals, 180 SCRA 266 (1989).

Likewise, a corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in ther individual capacities. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976).

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PLDT v. NTC190 SCRA 717 (1990)

Although a telecommunication corporation has a personality separate and distinct from that of each stockholder and has the right of continuity or perpetual succession, nevertheless a distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and the franchise itself which is owned by the corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction.

Since stockholders own the shares of stock, they may dispose of the same as they see fit; they may not, however, transfer or assign the franchise. Even if the original stockholders had transferred their shares to another group of shareholders, the franchise granted to the corporation subsists as long as the corporation, as an entity, continues to exist; the franchise is not invalidated by the transfer of the shares.

DBP v. NLRC186 SCRA 841 (1990)

The ownership of a majority of capital stock and the fact that majority of the directors of the corporation are the directors of another corporation do not create employer-employee relationship between the holding corporation and the employees of the held corporation, nor does it occasion the piercing of the veil of corporate fiction.[10]

Edward J. Nell v. Pacific Farms15 SCRA 415 (1965)

If A Inc. buys the share of B Inc., which later turns out to be insolvent, will A Inc. answer for the debts of B Inc.?

General Rule: Where a corporation buys all the shares of another corporation, this will not operate to dissolve the bought corporation and as the two corporations still maintain their separate corporate entities. Consequently, a corporation which buys all the shares of another corporation which becomes insolvent will not be liable for the latter's debts..

Exceptions:(a) If there is an express assumption of liabilities by the

buying entity;

(b) If the purchase was in fraud of creditors;

(c) When there is consolidation or merger; or

(d) If the purchaser merely continues the business enterprise of the seller (i.e., when it amounts to a business enteprise transfer).

NOTE: Unlike a partnership which may be dissolved by many causes, either by the withdrawal, death, insolvency, etc., of a partner, the right of succession of a

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corporation allows it to maintain its separate juridical personality in spite of what happens to the stockholders or members who constitute it.

b. LIMITED LIABILITY TO INVESTORS - As a general rule, stockholders in a stock corporation are personaly liable for corporate debts and liabilities only to the extent of what they have invested (paid-up capital) and what they have promised to invest in the corporation (unpaid subscriptions).

NOTE: The more appropriate way to state the "limited liability" feature, in line with the doctrine of separate juridical personality, is that: stockholders are not personally liable for corporate debts and liabilities, and if they stand to lose anything at all by reason of the corporation's insolvency, it is only to the extent of what they invested or promised to invest into the venture.

Edward A. Keller v. COB Group Marketing141 SCRA 86 (1986)

A stockholder is personaly liable for obligations of the insolvent corporation to the extent of his unpaid subscription.

San Juan Structural v. Court of Appeals296 SCRA 631 (1998)

One of the advantages of a corporate form of business organization is the limitation of an investor's liability to the amount of the investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation.

NOTE: The application of the doctrine of piercing the veil of corporate fiction is an exception to the limited liability feature of the corporate set-up.

c. CENTRALIZED MANAGEMENT - Except when otherwise provided in the Corporation Code, all corporate powers and all corporate properties are vested in the Board of Directors or Trustees;[11] and other than electing directors or trustees, the stockholders or members do not have management powers relating to the operations and assets of the corporation.

d. FREE TRANSFERABILITY OF UNITS OF OWNERSHIP - The doctrine of delectus personam in partnership is not applicable to corporate setting, and that stockholders hold their shares as personal property with rights to dispose, assign or encumber them as they may desire.

5. MAIN DOCTRINE ON SEPARATE JURIDICAL PERSONALITY - A corporation has a personality separate and distinct from that of its stockholders or members, and the officers that represent it.

Land Bank of the Philippines v. Court of Appeals

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364 SCRA 375 (2001)Upon coming into existence, a corporation is invested by law with a

personality separate and distinct from those persons composing it, its directors and officers, as well as from any other legal entity to which it may be related.[12] This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of justice.[13]

Lim v. Court of Appeals323 SCRA 102 (2000)

Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members-by legal fiction and convenience it is shielded by a protective mantel and imbued by law with a character alien to the persons comprising it.

APPLICATIONS OF MAIN DOCTRINE :(a) The general presumption is that a corporation is a bona fide corporation, and should

alone be liable for its corporate acts and liabilities. Western Agro Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

NOTE: The defect in the juridical personality of a corporation cannot be inquired into, much less used as a defense to avoid claims, except in a quo warranto proceeding brought on behalf of the State where the main action is to question the validity or existence of such juridical personality.

(b) Being an officer or stockholder of a corporation does not by itself make one's property also that of the corporation, and vice-versa, for they are separate entities, and that shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991).

The corporate debt or credit is not the debt or credit of the stockholder, nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. CA, 177 SCRA 789 (1989).

Corporate officer cannot be held personally liable for the consequences of their acts, for as long as these are for and on behalf of the corporation, within the scope of their authority and in good faith. Solidbank Corp. v. Mindanao Ferroalloy Corp., 464 SCRA 409 (2005); Prudential Bank v. Alviar, 464 SCRA 353 (2005).

The mere fact that a person is President of the corporation does not render the property he owns or possesses the property of the corporation, since the President, as an individual, and the corporation are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001).

The President cannot be held solidarily liable with the corporation for mere breach of contract done by the corporation because the latter has a distinct juridical personality EPG Constructions v. Court of Appeals, 210 SCRA 230 (1992); Rustan Pulp & Paper Mills V. IAC, 214 SCRA 665 (1992).

The President of a corporation which becomes liable for the accident caused by its truck driver cannot be held solidarily liable for the judgment obligation arising from

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quasi-delict, since the fact alone of being President is not sufficient to hold him solidarily liable for the liabilities adjudged against the corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).

The Treasurer, although he has official custody of the finances of the company, cannot be held personally liable for the judgment rendered against the corporation. Del Rosario v. Bascar, 206 SCRA 678 (19 ).

The hornbook law is that corporate personality is a shield against personal liability of its officers. Thus, when the trust receipt sued upon was clearly entered into in behalf of the corporation by its Executive Vice-President, then such officer and his spouse cannot be made personally liable; the personality of the corporation is separate and distinct from the persons composing it. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).

(c) Mere ownership by a single stockholder, or by another corporation, of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Sunio v. NLRC , 127 SCRA 390 (1984).[14]

A corporation's authority to act and its liability for its actions are separate and apart from the individuals who own it.Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).

(d) If used to perform legitimate functions, a subsidiary's separate existence must be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

A subsidiary corporation has an independent and separate juridical personality, distinct from that of its parent company, hence, any claim or suit against the latter does not bind the former and vice-versa. Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005).

The mere fact that the parent company owns all or substantially all the equity of the subsidiary corporation would not authorize the merging of their separate juridical personalities. Pabalan v. NLRC, 184 SCRA 495 (1990).[15]

Even when parent company is controlling shareholder of subsidiary company, it does not legally make it the owner of the latter's property, which is legally owned by the subsidiary company as distinct juridical person. As such, parent company is not entitled to the possession of any definite portion of the subsidiary's property; and neither is parent company a co-owner or tenant-in-common of subsidiary's properties. Silverio, Jr. v. Filpino Business Consultants, Inc., 466 SCRA 584 (2005).

Parent company cannot be held liable on a guaranty or indemnity agreement entered into by its subsidiary simply on the basis that it owns controlling interest in subsidiary company. Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005).

The veil of corporate fiction cannot be applied to make the parent company liable, even when it is shown that the goods obtained through the indemnity agreement were delivered by the subsidiary to the parent company. Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005).

Even when parent corporation agreed to the terms to support a standby credit agreement in favor of subsidiary, it does not mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).

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Substantial ownership by a corporation of another corporation, both of which are engaged in the same line of business, will not warrant piercing on the allegation that the second corporation was organized to evade payment of liabilities, when the facts show that the second corporation was already existing before the case was even filed. Del Rosario v. NLRC, 187 SCRA 777 (1990); Complex Electronics Employees Asso. v. NLRC, 310 SCRA 403 (1999).

(e) The property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's Board of Directors. Woodchild Holdings, Inc. v. Roxas Electric and Construction Co., 436 SCRA 235 (2004).

Where real properties included in the inventory of the estate of a decedent are in the possession of and are registered in the name of the corporations, in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of said corporations should stand undisturbed. Lim v. Court of Appeals, 323 SCRA 102 (2000).

(f) Tax privileges enjoyed by a corporation do not extend to its stockholders. "A corporation has a personality distinct from that of its stockholders, enabling the taxing power to reach the latter when they receive dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to foreign corporations as stockholders are subject to the payment of the income tax, the exemption clause to the charter [of the domestic corporation] notwithstanding." Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 898 (1936).

(g) A corporate defendant against whom a writ of possession has been issued, cannot use its obtaining controlling equities in the corporate plaintiffs to suspend enforcement of the writ, for their separate juridical personality, and thus their separate business and proprietary interests remain. Silverio, Jr. v. Filipino Business Consultants, Inc., 466 SCRA 584 (2005).

(h) Even when the foreclosure on the assets of the corporation was wrongful and done in bad faith, its stockholders have no standing to recover for themselves moral damages proportionate to their equity holdings. Otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporation's assets before the dissolution of the corporation and the liquidation of its debts and liabilities. Asset Privatization Trust v. CA, 300 SCRA 579 (1998).

6. PIERCING THE VEIL OF CORPORATE FICTION - The separate personality of a corporation may be disregarded under the doctrine of "piercing the veil of corporate fiction," as in fact at times the courts will look at the corporation as an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation in unifying the group. The classic language by which we now invoke the piercing of the veil of corporate doctrines was first enunciated in United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905):

". . . If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the notion of legal entity is used to defeat public convenience, justify

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wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons."

Hi-Cement Corp. v. Insular Bank of Asia and America534 SCRA 169 (2007)

If any general rule can be laid down, it is that the corporation will be looked upon as a legal entity until sufficient recissions to the contrary appear. It is only when the fiction or notion of legal entity is used to defeat public convenience, justify wrong, perpetuate fraud or defend crime that the law will shred the corporate legal veil and regard it as a mere association of persons. This is referred to as the doctrine of piercing the veil of corporate entity.[16]

a. Types of Piercing Application

Umali v. Court of Appeals189 SCRA 529 (1990)

Three basic areas where piercing of the veil of corporation fiction is allowed:[17]

(a) Defeat of public convenience; (alter-ego piercing);(b) Justify wrong, protect fraud or defend crime; (fraud piercing);

or(c) When used as a mere alter ego

The piercing of the veil of corporate fiction is employed only "to hold officers and stockholders directly liable for a corporate debt or obligation," and does not apply in a case which does not impose a claim against the officer or members of the corporation such as seeking to establish a bargaining unit for purposes of CBA.[18]

[CLV: This particular ruling in Umali contradicts the application of the piercing doctrine in La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953); and Shoemart v. NLRC, 225 SCRA 311 (1993).]

General Credit Corp. v. Alsons Dev. & Investment Corp.513 SCRA 225 (2007)

Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation from any other legal entity to which it may be related, is allowed. There are: (a) defeat of public convenience, as when the corporation is used as vehicle for the evassion of existing obligations; (b) fraud cases, or when the corporate entity is used to justify wrong, protect fraud, or defend a crime; or (c) alter egocases, where the corporation is so organized and controlled as to make it merely an instrumentality agency, conduct or adjacent of another corporation.[19]

Robledo v. NLRC238 SCRA 52 (1994)

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Piercing is not available when the personal obligations of an individual are sought to be enforced against the corporation.

NOTE: Umali and Robledo rulings should be limited to fraud piercing, and have no application to alter ego piercing when the objective of the application of the doctrine is not necessarily one to make corporate actors personally liable for corporate debts.

b. Distinction Recognized Between Alter Ego Piercing and Fraud Piercing:

Lipat v. Pacific Banking Corp.402 SCRA 339 (2003)

There is a clear distinction between the application of the alter ego doctrine or the instrumentality rule from that of fraud in the piercing the veil of corporate fiction. "When the corporation is the mere alter ego or business conduit of a person, the separate personality of the corporation may be disregarded. This is commonly referred to as the 'instrumentality rule' or the alter ego doctrine, which the courts have applied in disregarding the separate juridical personality of corporation.

[After enumerating instances to show application of the alter ego piercing]: "It could not have been coincidental that BET and BEC are so intertwined with each other in terms of ownership, business purpose, and management. Apparently, BET and BEC are one and the same and the latter is a conduit of and merely succeeded the former. Petitioners' attempt to isolate themselves from and hide behind the corporate personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. In our view, BEC is a mere continuation and successor of BET, and the petitioners cannot evade their obligations in the mortgage contract secured under the name of BEC on the pretext that it was signed for the benefit and under the name of BET."

c. Rundowns on Instances of Application of the Piercing Doctrine:

Sta. Monica Industrial & Dev. Corp., v. DAR Regional Director for Region III

555 SCRA 97 (2008)The use of the corporate fiction as a means to evade legal liability is

not new. This scheme or devise has long been preceived to be used in other fields of law, notably taxation to minimize payment of tax with varying degrees of success or acceptability. But the continued employment of the scheme in agrarian cases is not only deplorable; it is alarming. It is time to put a lid on the cap where the veil of corporation fiction is used to evade the effects of agrarian laws.

Martinez v. Court of Appeals438 SCRA 139 (2004)

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Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit sparingly, the disregard of its independent being and the piercing of the corporate veil. Thus, the veil of separate corporate personality may be lifted when such personality is used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate issues; or when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation; or when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or for the protection of the creditors. In such cases where valid grounds exist for piercing the veil of corporate entity, the corporation will be considered as a mere association of persons. The liability will directly attach to them.[20]


This Court pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to cover up an otherwise blatant violation of the prohibition against forum shopping. Only is these and similar instances may the veil be pierced and disregarded.[21]


This Court has pierced the veil of corporate fiction in numerous cases where it was used, among others, to avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of a decedent, to avoid liability arising from debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate issues, or to promote unfair objectives or otherwise to shield them.

San Juan Structural and Steel Fabricators, Inc. v. CA296 SCRA 631 (1998)

When the fiction is used as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.[22]

d. Standing On Who Can Invoke Piercing Doctrine:

Secosa v. Heirs of Erwin Suarez Fancisco433 SCRA 273 (2004)

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The corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it.[23]

Gochan v. Young354 SCRA 207 (2001)

The fact that respondents are not stockholders of the corporations involved, does not make them non-parties to this case. Since it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners, and that the former acquired the properties sought to be reconveyed in violation of directors-petitioners' fiduciary duty, then the notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if, as alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.

e. Effects of the Application of the Piercing Doctrine -

The application of the piercing doctrine would make the corporate actors liable for fraud or the commission of corporate wrong personally liable for the resulting corporate liability. Umali v. Court of Appeals, 189 SCRA 529 (1990).

"The law will regard the act of the corporation as the act of its individual stockholders when it is shown that the corporation was used merely as an alter ego by those persons in the commission of fraud or other illegal acts." Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000).

Piercing the veil of corporate entity requires the courts to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. Lim v. Court of Appeals, 323 SCRA 102 (2000).

In the case of two corporations, the law will regard the corporation as merged into one. Velarde v. Lopez, 419 SCRA 422 (2004).

f. Nature of Piercing Doctrine:(1) General Rule: A corporation will be looked upon as a legal entity, unless and until

sufficient reason to the contrary appears.Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).

The fact that related corporations may be engaged in the same business but itself does not warrant piercing the veil of corporate fiction.[24]

The fact that related corporations share the same address or have interlocking incorporators, director and officers, in the absence of fraud or other public policy condiration, which must be clearly proven, does not warrant piercing.[25]

CKH Industrial and Development Corp. v. CA272 SCRA 333 (1997)

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The interests of payees in promissory notes cannot be off-set against the obligations between the corporations to which they are stockholders absent any allegation, much less, even a scintilla of substantiation, that the parties' interest in the corporation are so considerable as to merit a declaration of unity of their civil personalities.

(2) The doctrine of piercing the corporate veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001)

Consequently, piercing the veil of corporate fiction is remedy of last resort and is not available when the corporation employed fraud in the foreclosure proceedings, and other remedies are still available, such as in this case the remedy of annulment based on vice of consent. Umali v. CA, 189 SCRA 529 (1990).

To disregard the said separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly. Martinez v. Court of Appeals, 438 SCRA 130 (2004).[26]

It cannot just be alleged nor be presumed. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004);Solidbank Corp. v. Mindanao Ferroalloy Corp., 464 SCRA 409 (2005).

And the burden is on the party who seeks its application. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).[27]

National Power Corp. v. Court of Appeals273 SCRA 419 (1997)

The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personally for the judgment rendered against the corporation.

Luxuria Homes, Inc. v. Court of Appeals302 SCRA 315 (1999)

To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. This is elementary. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders.

Gala v. Ellice Agro-Industrial Corp.

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418 SCRA 431 (2003)

Avoidance (As Distinguished from Evasion) of Taxes - The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the corporations: "With regard to their claim that Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."

(3) The doctrine can be applied only if it can be shown that the veil of corporate fiction was the very tool used to commit fraud or to do wrong, or the very means to avoid the consequences of one's wrongdoing or to evade one's liabilities. Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).

Any piercing of the corporate veil has to be done with caution. However, the Court will not hesitate to use its supervisory and adjudicative powers where the corporate fiction is used as an unfair device to achieve an inequitable result, defraud creditors, evade contracts and obligations, or to shield it from the effects of a court decision. The corporate fiction has to be disregarded when necessary in the interest of justice. Reynoso, IV v. Court of Appeals, 345 SCRA 335 (2000).

Traders Royal Bank v. Court of Appeals269 SCRA 15 (1997)

Piercing the veil of corporate entity is merely an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person. But to do this, the courts must be sure that the corporate fiction was misused, to such 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 innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine.

Therefore, one cannot invoke the doctrine to save itself from transactions which it knew to be defective or contrary to the law, rules or regulations applicable to its industry.

Ramoso v. Court of Appeals347 SCRA 463 (2000)

Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that the stockholders or officers and the corporation are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of corporate entity.

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(4) Piercing No Available to Establish a Right for the First Time or to Support a Legal Theory: Piercing the veil of corporate fiction is allowed to remedy a wrong done by virtue of the use of the corporate fiction; consequently, it cannot be allowed when there is no wrong committed, such as in the case to justify a theory of co-ownership to allow the stockholder the continued use and possession of corporate properties. Boyer-Roxas v. CA, 211 SCRA 470 (1992).

R & E Transport, Inc. v. Latag422 SCRA 698 (2004)

Basic is the rule that the corporate veil may be pierced only if it becomes a shield for fraud, illegality or inequity committed against a third person. We have cautioned against the inordinate application of this doctrine. Since no evidence has been shown that one company had stock control and complete domination over the other or vice versa, and the fact that there was a seven-year gap between the time the first corporation closed shop and the date when the second corporation came into being, also casts doubt on any alleged intention to commit a wrong or to violate a statutory duty."

Ramoso v. Court of Appeals347 SCRA 463 (2000)

The petitioners had signed the continuing guaranty of the franchise company's bad debts in their individual acts, and their liabilities arose out of the regular financing venture of the franchise companies, and there is no evidence that these bad debts were fraudulently incurred. Any taint of bad faith on the part of GCC in enticing investors may be resolved in ordinary courts, inasmuch as this is in the nature of a contractual relationship. Changing of the petitioners's subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity.

Union Bank v. Court of Appeals290 SCRA 198 (1998)

The piercing doctrine cannot be availed of to dislodge from SEC's jurisdiction a petition for suspension of payments filed under P.D. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor. "The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime."

(5) Piercing the veil cannot be employed to allow fraud.

Gregorio Araneta, Inc. v. Tuason de Paterno91 Phil. 786 (1952)

Piercing doctrine cannot be availed of to perpetrate a fraud, such as in a case where the seller of real property wishes to avoid the consequences of a sale to a corporate entity by claiming that the broker

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through whom the seller transacted sale was also the President of the corporate buyer, when such fact was known to her from the beginning.

Laguio v. NLRC262 SCRA 715 (1996)

It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it, as well as from that of any other legal entity to which it may be related. Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud, nor warrant piercing. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other.

Enriquez Security Services v. Cabotaje496 SCRA 169 (2006)

The attempt to make the security agencies appear as two separate entities, when in reality they were but one, was a devise to defeat the law, i.e., to avoide labor claims, and should not be permitted. Although respect for corporate personality is the general rule, in appropriate cases, the veil of corporte fiction may be pierced as when it is used as a means to perpetuate a social injustice or as a vehicle to evade obligations.

(6) Piercing the veil cannot be availed of by one who is not a "victim" of a fraud or wrong:


Facts: Filriters, 90% owned by Philfinance, assigned without consideration its CB Certificates to Philfinance, which in turn assigned them to Traders Royal Bank (TRB) and for which Philfinance received payment, with obligation to repurchase them back within a stipulated period. When Philfinance failed to repurchase the certificates, TRB sought to have them registered in its name. Central Bank refused by virtue of Filriter's insistence that the original assignment thereof was without consideration and the certificates formed part of its reserved requirements.

TRB contends that the transfer of the certificates must be upheld as Filriters and Philfinance, though separate entities on paper, have used their corporate fiction to defraud TRB into purchasing the certificates.

Held: The corporate separateness between Filriters and Philfinance remains. The allegation that Filriters is 90% owned by Philfinance, and the identity of one shall be maintained as to the other, there is nothing else which could lead the court under the circumstances to disregard their corporate personalities.

TRB cannot put up the excuse of piercing the veil of corporate entity, as this is merely an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience,

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justify wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a person. In this case, TRB cannot claim innoncence, since it was aware of Central Bank restrictions on the certificates.

(7) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).

The courts may in the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

g. Tests Evolved to Determine Applicability of Piercing Doctrine:

Heirs of Ramon Durano, Sr. v. Uy344 SCRA 238 (2000).

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction are as follows:

(a) 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;

(b) 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 acts in contravention of plaintiff's legal rights; and

(c) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.[28]

PNB v. Ritratto Group, Inc.362 SCRA 216 (2001)

While there exists no definite test of general application in determining when a subsidiary may be treated as a mere instrumentality of the parent corporation, some factors have been identified that will justify the application of the treatment of the doctrine of the piercing of the corporate veil. These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.

(e) The subsidiary has grossly inadequate capital.

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(f) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.

(g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.

(h) 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.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary to not act independently in the interest of the subsidiary but take their orders from parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.[29]

ASJ Corp. v. Evangelista 545 SCRA 300 (2008)

Although no hard and fast rule can be accurately laid down under which the juridical personality of a corporate entity may be disregarded, the following probative factors of identity the application of the doctrine of piercing the veil of corporate diction in this case: (1) San Juan and his wife own a bulk of shares of ASJ Corp; (2) The lot where the hatchery plant is located is owned by the San Juan spouses; (3) ASJ Corp. had no other property or assets, except for the hatchery plan and the lot where it is located; (4) San Juan is in complete control of the corpofation; (5) There is no bona fide intention to treat ASJ Corp. as a different entity from San Juan; and (6) The corporate fiction of ASJ Corp. was used by San Juan to insulate himself from the ligitimate claims of respondents, defeat public convenience, justify wrong, defend crime, and evade a corporation's subsidiary liability for damages.

h. Fraud Piercing Cases:(1) When it is proven that the corporate officer has used the corporate fiction to

defraud a third party, or that he has acted negligently, maliciously or in bad faith, the corporate fiction may be pierced to make both the officer and the corporation liable. Francisco v. Mejia, 362 SCRA 738 (2001).

Mendoza v. Banco Real Dev. Bank470 SCRA 86 ( 2005)

Mendoza and Yokoto, on authority of the Board of Directors, obtained a loan on behalf of TVI with LBC Bank, and mortgaged the company's video machines to guarantee the loan. Later, the video machines were relocated in another business establishment owned and operated by a new corporation named FGT. When the Bank sought to

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foreclose on the machines, Mendoza and Yokoto feigned ignorance of the whereabouts. The Bank brought suit against both TVI, FGT, Mendoza and Yokoto for the payment of the loan.

Issue: Can FGT, Mendoza and Yokoto be held liable for what clearly was a separate corporate obligation of TVI, duly authorized by board resolution?

Held: Yes. Although the general rule is that obligations incurred by a corporation, acting through its directors, officers or employees, are its sole liabilities; however, the veil with which the law covers and isolates the corporation from its directors, officers or employees will be lifted when the corporation is used by any of them as a cloak or cover for fraud or illegality or injustice.

Lafarge Cement Phils., Inc. v. Continental Cement Corp. 443 SCRA 522 (2004)

The exceptionary rule which allows the defendant to bring into the action by way of counterclaim any claim against persons other than the plaintiff to achieve the granting of complete relief (Sec . 14, Rule 6) applies in this case, where the counterclaim is made against the President and the Secretary of the plaintiff-corporation. The counterclaim is not based on the assumption that the plaintiff-corporation does not have the financial ability to answer for the damages, but rather such inclusion is based on the allegation of fraud and bad faith on the part of the corporate officers, with the allegations warranting the piercing of the veil of corporate fiction, so that the said individuals may not seek refuge therein, but may be held individually and personally liable for their actions.

Namarco v. Associated Finance Co.19 SCRA 962 (1967)

Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable soidarily with co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation.

Heirs of Ramon Durano, Sr. v. Uy344 SCRA 238 (2000)

Where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling stockholders, then piercing should be allowed.

(2) When corporate officers do fraudulent or illegal acts in the name of the corporation, such as illegal dismissal or unfair labor practices, then they become personally liable for the consequences of their fraudulent or illegal acts done in behalf of the corporation. Maglutac v. NLRC, 189 SCRA 767 (1990).[30]

Malayang Samahan ng mga Mangagagawa sa M. Greenfields v. Ramos

357 SCRA 77 (2001)

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In labor cases, the Court has held corporate directors and officers solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. Bad faith or negligence is a question of fact and is evidentiary. It has been held that bad faith does not connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud.

(3) When one tries to evade civil liability by incorporating the properties or the business. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962).

Azcor Manufacturing, Inc. v. NLRC303 SCRA 26 (1999)

Where the corporate fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the legitimate issues, it would be discarded and the two (2) corporations would be merged as one, the first being merely considered as the instrumentality, agency conduit or adjunct of the other. In this case, because of the actions of management of the two corporation, there was much confusion as to the proper employment of the claimant.

Villa Rey Transit, Inc. v. Ferrer81 SCRA 298 (1978)

Veil of corporate fiction may be pierced when used to avoid a contractual commitment by the main stockholder/officers against his contracted non-competition commitment when he sold the original business enterprise.

i. Alter-Ego Piercing Cases: In alter ego cases, there is a disrespect by the individual actors (officers and/or stockholders) of the separate juridical entity, such as when the corporate entity is being merely used as an alter-ego of the controlling officers or stockholders. McConnel v. CA, 1 SCRA 722 (1961); Marvel Building Corp. v. David, 94 Phil. 376 (1954).

(1) The question of whether a corporation is a mere alter ego is a purely one of fact. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).

Land Bank of the Philippines v. Court of Appeals364 SCRA 375 (2001)

Use in corporate name of initials of controlling stockholder is not sufficient reason to pierce the veil of corporate fiction, since the practice alone does it mean that said corporation is merely a dummy of the individual stockholder. A corporation may assume any name provided it is lawful, and there is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders.

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(2) It is the established doctrine that control of the equity of a corporation by one stockholder or by another corporation by itself would not warrant the application of the piercing doctrine.

PNB v. Ritratto Group, Inc.362 SCRA 216 (2001)

Mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. The courts may in the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity.

(3) In early alter ego cases, the fact that there was a merging of personnel, resources, and holding offices in the same premises, were considered sufficient to apply the piercing doctrine to hold two corporations as one.

Genera; Corp. V. Alsons Dev. and Investment Corp.513 SRA 225 (2007)

Application of the piercing doctrine is warranted by the fact that no less than so documented circumstances and transactions, which taken together, indeed strongly support the conclusion that one corporation was an adjunct, and instrumentality or business conduit of GCC. The "certain circumstances" included commonality of directors, officers and stockholders and even the sharing of office by the two corporations; certain financing and management arrangements between the two, allowing GCC to handle the funds of the other corporation; the virtual domination if not control wielded by GCC over the finances, business policies and practices of the other corporation; and the establishment by the other corporation by GCC to circumvent BSP rules.

Sicam v. Jorge529 SRA 443 (2007)

The theory of separate corporate entity is not meant to promot unfair objectives or confuse legitimate issues. When the facts show that Luly pawned her jewelry at the time the pawnshop was owned by Sicam himslef, and it was subsequently incorporated, but the receipts being issued were still in the name of Sicam, thus inevitably misleading, or at the very least, creating the wrong impression on Luly and the public as well, then piercing may be applied to treat Sicam and the corporation as one and the same.

Sibagat Timber Corp. v. Garcia216 SRA 470 (1992)

There would be basis for piercing when the officers and directors of two corporations are practically the same and both corporations hold office in the same room.

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La Campana Coffee Factory v. Kaisahan ng Manggagawa93 Phil. 160 (1953)

Piercing was allowed to treat two corporations as one bargaining unit for purpose of establishing the jurisdiction of the Court of Industrial Relations over the labor issues, when it was proven that although the corporations had different lines of business (one gawgaw factory and the other a coffee factory), both factories were located in the same compound, they shared officers and employees, and both corporations were owned by the same set of stockholders.

(4) In more recent alter ego cases, unless there was showing that a wrong or inequity committed by the merging of resources and interests, then the piercing doctrine was refused application, especially when there is a plausible business purpose for the existence of corporate fiction, thus:

Padilla v. Court of Appeals370 SCRA 208 (2001)

The facts that two corporations may be sister companies, and that they may be sharing personnel and resources, without more, is insufficient to prove that their separate corporate personalities are being used to defeat public convenience, justify wrong, protect fraud, or defend crime.

Land Bank of the Philippines v. Court of Appeals364 SCRA 375 (2001)

Business Purpose for Manner of Operating the Corporate Enterprise - The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce. "It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are secured."

DBP v. Court of Appeals363 SCRA 307 (2001)

Neither do we discern any bad faith on the part of DBP by its creation of three mining companies, since DBP is not authorized by its charter to engage in the mining business. The creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In the absence of any entity willing to purchase these assets from the bank, what else would it do with these properties in the meantime? Sound business practice required that they be utilized for the purposes for which they were intended. To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

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Marubeni Corporation v. Lirag362 SCRA 620 (2001)

Just because two foreign companies came from the same country and closely worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction.

To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. The separate personality of the corporation may be disregarded only when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary for the protection of creditors. We could not juts rely on respondent's testimony regarding the existence of the "Marubeni-Sanritsu tandem" to justify his claim for payment of commission.

Francisco v. Mejia362 SCRA 738 (2001)

Time and again it has been reiterated that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Neither has it been alleged or proven that Merryland is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency conduit or adjunct of Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this alone is not justification for disregarding their separate personalities, absent any showing that Merryland was purposely used as a shield to defraud creditors and third persons of their rights.

Jardine Davies, Inc. v. JRB Realty, Inc.463 SCRA 555 (2005)

The existence of interlocking directors, corporate officers and shareholders, is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy consideration. Even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. The wrongdoing must be clearly and convincingly established, it cannot just be presumed.

Velarde v. Lopez419 SCRA 422 (2004)

The existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.

[The Jardine Davies and Velarde rulings treats the alter ego piercing application as being an adjunct of the fraud piercing application, when in fact they are separate and distinct appllications of the piercing doctrine.]

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Arnold v. Willets and PattersonLtd.44 Phil. 634 (1923)

Where the capital stock is owned by one person and it functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same.

Tan Boon Bee & Co. v. Jarencio163 SCRA 205 (1988)

When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded.

PBCom v. Court of Appeals195 SCRA 567 (1991)

Where a debtor registers his residence to a family corporation in exchange of shares of stock and continues to live therein, then the separate juridical personality may be disregarded.

j. Parent-Subsidiary Relationships Warranting Piercing

Tomas Lao Construction v. NLRC278 SCRA 716 (1997)

When three corporations referred to as the "Lao Group of Companies," all of which are engaged in the construction of public roads and bridges, enter into joint venture agreements among each other to undertake their projects either simultaneously or successively so that, whenever necessary, they would lease tools and equipment to one another, each one would also allow the utilization of their employees by the other two, there is proper basis for piercing the veil of corporate fiction as to workers' claims.

Where it appears that three business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that the corporations are distinct entities and treat them as identical.


Facts: CCC-Quezon was organized as a subsidiary of the mother company CCC. The facts showed that CCC had dominant control of the business operations of CCC-Quezon; that the exclusive management contract insured that CCC-Quezon would be managed and controlled by CCC and would not deviate from the commands of the mother corporation. In addition, CCC appointed its own employee, as the resident manager of CCC-Quezon.

Issue: Can the writs of execution obtained by the employees against CCC-Quezon be enforced against the assets of CCC, especially when the subsidiary had been closed down already?

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Held: Yes, CCC can be held liable for the obligations of the subsidiary. The organization of subsidiary corporations, using the same corporate names, is usually resorted to for the aggrupation of capital, the ability to cover more territory and population, the decentralization of activities best decentralized, and securing of other legitimate advantages. But when the mother corporation and subsidiary cease to act in good faith and honest business judgment, when the corporate devise is used by the parent to avoid its liability for legitimate obligations of the subsidiary, and when the corporate fiction is used to perpetrate fraud or promote injustice, the law steps in to remedy the problem. When that happens, the corporate character is not necessarily abrogated; it continues for legitimate objective; however, it is pierced in order to remedy injustice, such as that inflicted in this case.

De Leon v. NLRC358 SCRA 274 (2001)

Facts: By virtue of a contract for security services, Company A provided Company B with security guards to safeguard the latter's premises; both companies have the same owners and business address; the purported sale of the shares of the former stockholders to a new set of stockholders who changed the name of Company A appears to be part of a scheme to terminate the services of security guards, and bust their newly-organized union which was then beginning to become active in demanding the company's compliance with Labor laws. When judgment was sought to be enforced against Company B, it pleaded lack of employer-employee relationship with the dismissed security guards.

Held: The Labor Arbiter correctly applied the doctrine of piercing the corporate veil in order to establish employer-employee relationship, and hold the Company B liable for unfair labor practice and illegal termination effected by an affiliate company. When the concept of separate legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons, or in case of two corporations, merge them into one. The separate juridical personality of a corporation may also be disregarded when such corporation is a mere alter ego or business conduit of another person.

k. Extent of Legal Effects When Piercing Applied:

Koppel (Phil.) Inc. v. Yatco77 Phil. 496 (1946)

The application of the piercing doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied.

l. Due Process Issues in Application of Piercing Doctrine:

PCGG v. Sandiganbayan365 SCRA 538 (2001)

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A suit against individuals as shareholders in a corporation is not a suit against the corporation. Failure to implead the 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.

Padilla v. Court of Appeals370 SCRA 208 (2001)

Facts: Phoenix Omega, with consent of lessor SRI, transferred all its contractual rights to construct and operate commercial stalls at the LRT terminal to its system company PKA. Several ancillary contracts were executed between and among SRI, PKA and Phoenix Omega with the system companies being both represented by Padilla when the terms of lease where breached, SRI obtained an ejectment order with awards of damage against PKA. When no property could be found to enforce the judgment debt against PKA, an alias writ was obtained against Phoenix Omega and Padilla based on a litigated motion on setting forth the basis for piercing. Padilla and Phoenix Omega now opposes the issuance of a writ against them.

Held: Although both the RTC and Court of Appeals found sufficient basis for the conclusion that PKA and Phoenix Omega were one and the same, and the former is merely a conduit of the other the Supreme Court held void the application of a writ of execution on a judgment held only against PKA. The main issue to be resolved is whether the RTC obtained jurisdiction over Padilla and Phoenix Omega were never summoned as formal parties to the case. The general principle is that no man shall be affected by any proceedings to which he is a stranger, and strangers to a case are not bound by the judgment rendered by the court.

The general rule is that a corporate is clothed with a personality separate and distinct from the persons composing it. The veil of corporate fiction may only be disregarded in cases where the corporate vehicle is being used to defeat public convenience, justify wrong, protect fraud or defend crime. PKA and Phoenix Omega are admittedly sister companies, and may be sharing personnel and resources, but the Court still found no allegations much less positive proof, that their separate corporate personalities are being used to defeat public convenience, justify wrong, protect fraud, or defend crime.

"We understand private respondent's frustration at not being able to have monetary award in their favor satisfied. But given the circumstances of this case, public respondent cannot order the seizure of petitioners properties without violating their constitutionally enshrined right to due process merely to compensate private respondent."

7. Nationality of Corporation - The corporation is a national of the country under whose laws it is organized or incorporated.[31] This is termed as the "place of incorporation" test, which is the primary test in Philippine jurisdiction.

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SPECIAL RULES : In the following cases, in addition to the place of incorporation test, the nationality of the corporation is also determined by the "control test," thus:

a. Exploitation of Natural Resources - Section 2, Article XII, 1987 Constitution provides that only Filipino citizens or corporations whose capital stock are at least 60% owned by Filipinos can qualify to exploit natural resources.

b. Ownership of Land - The 1987 Constitution provides that only corporation with at least 60% Filipino equity can own land in the Philippines. Therefore, the Constitution allows foreign equity into corporations owning land up to the extent of 40% of the outstanding capital stock.

J.G. Summit Holdings, Inc. v. Court of Appeals450 SCRA 169 (2005)

If the foreign shareholdings in a landholding corporation exceed 40%, it is not the foreign stockholders' ownership of the shares which is adversely affected by the capacity of the corporation to own land-that is, the corporation becomes disqualified to own land.

The prohibition in the Constitution applies only to ownership of land; it does not extend to immovable or real property as defined under Article 415 of the Civil Code. Otherwise, we would have a strange situation where the ownership of immovable property such as trees, plants and growing fruit attached to the land would be limited to Filipinos and Filipino corporations only.

c. Public Utilities - Under Sec. 11, Article XII, 1987 Constitution, no franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens.

People v. Quasha 93 Phil. 333 (1953)

The constitutional prohibition on foreign corporations on public utilities, and the statutory penal sanctions imposed in connection therewith, pertain to the grant of secondary franchise on public utilities and does not cover the grant of primary franchise upon incorporation of a juridical entity organized for such purpose.

d. War-Time Test - Although the corporation may be organized under the laws of the Philippines, but if the controlling stockholders are enemies, then the veil of corporate fiction will be pierced and the nationality of the corporation will be based on the citizenship of the majority stockholders in times of war. Filipinas Compania de Seguros v. Christian Huenfeld, 89 Phil. 54 (1951); Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952); Haw Pia v. China Banking Corp., 80 Phil. 604 (1948).

e. Investment Test - Sec. 3(a) and (b), Foreign Investment Act of 1991 (R.A. 7042), considers for purpose of investment a "Philippine national" as a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, or a trustee of funds for pension or other employee retirement or separation benefits, where the

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trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals.

f. Anti-Dummy Law - Comm. Act. 108, as amended by P.D. 715, makes it criminal for Filipinos to make themselves dummies for foreign interests in areas reserved for Filipino citizens or Filipino corporations.


The agreement of co-shareholders to mutually grant the right of first refusal to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations; if the foreign shareholdings of a landholding corporation exceed 40%, it is not the foreign stockholders' ownership of the shares which is adversely affected by the capacity of the corporation to own land-that is, the corporation becomes disqualified to own land. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee or such other party which the holder of the right of first refusal feels it can comfortably do business with.

8. Grandfather Rule - Method used to determine the nationality of a corporation, in cases where corporate shareholders are present in the situation, by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, is computed, by attributing the nationality of second or even subsequent tier ownership to determine the nationality of the corporate shareholder.

SEC has adopted the formula of Secretary of Justice (DOJ Opinion No. 18, s. 1989) to the effect that:

"Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizensshall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60% only the number of shares corresponding to such percentage shall be counted as of Philippine nationality."[32]

9. Matters Pertaining to Corporation as "Person"a. Liability for Torts - A corporation can be held liable for torts committed by its officers

for corporate purpose. PNB v. CA, 83 SCRA 237 (1978).

Sergio F. Naguiat v. NLRC269 SCRA 564 (1997)

Our jurisprudence is wanting as to the definite scope of "corporate tort." Essentially, "tort" consists in the violation of a right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legal duty. Article 283 of the Labor Code mandates the employer to grant separation pay to employees in case of closure or cessation of operations of establishments or undertaking not due to serious business losses or

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financial reverses, which is the condition obtaining at bar. Clark Field Taxis failed to comply with this law-imposed duty or obligation. Consequently, its stockholder who was actively engaged in the management or operation of the business should be held personally liable.

PCIBank v. Court of Appeals350 SCRA 446 (2001)

As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had participated.

b. Liability for Crimes - Since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case the responsible officers would be criminally liable. (People v. Tan Boon Kong, 54 Phil. 607 [1930] Sia v. CA, 121 SCRA 655 [1983]; Times, Inc. v. Reyes, 39 SCRA 303 [1971]).

While it is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself, it does not follow, however, that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officers. (Cometa v. CA, 301 SCRA 459 [1999]).

Ching v. Secretary of Justice481 SCRA 602 (2006)

In a trust receipt, though the entrustee is a corporation, nevertheless, P.D> 115 specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the offense. The rationale is that such officers or employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law. [33]

If the crime is committed by a corporation 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.

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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 may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such penalty. Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime.

The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those corporate agents who themselves commit the crime and to 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 touchtone of their criminal liability. Benefit is not an operative fact.

Tupaz IV v. Court of Appeals476 SCRA 398 (2005)

Facts: In the trust receipt executed for the corporation, under Petronila's Tupaz's signature are the words "Vice-Pres-Treasurer" and under Jose Tupaz's signature are the words "Vice-Pres-Operations." By so signing, did the corporate officers make themselves personally liable for the trust receipt?

Held: The corporate representatives signing as a solidary guarantee as corporate representative did not undertake to guarantee personally the payment of the corporation's debt. Debts incurred by directors, officers and employees acting as such corporate agents are not theirs but the direct liability of the corporation they represent. As an exception, directors or officers are personally liable for the corporation's debt if they so contractually agree or stipulate.

The Executive Secretary v. Court of Appeals429 SCRA 81 (2004)

It has been held that the existence of the corporate entity does not shield from prosecution the corporate agent who knowingly and intentionally causes the corporation to commit the crime. The corporation obviously acts, and can act, only by and through its human agents, and it is their conduct which the law must deter. The employee or agent of a corporation engaged in unlawful business naturally aids and abets in the carrying on of such business and will be prosecuted as principal if, with

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knowledge of the business, its purpose and effect, he consciously contributes his efforts to its conduct and promotion [illegal recruitment in this case], however slight his contribution may be.

Ong v. Court of Appeals401 SCRA 6478 (2003)

Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a corporation, hence, if the entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense liable to suffer the penalty of imprisonment.

c. Constitutional Rights - Corporate entities are entitled to:

(i) due process (Albert v. University Publication Co., 13 SCRA 84 [1965];

(ii) equal protection (Smith Bell & Co. v. Natividad, 40 Phil. 136 [1920]); and

(iii) protection against unreasonable searches and seizures. (Stonehill v. Diokno, 20 SCRA 383 [1967]).

But a corporation is not entilted to the privilege against self-incrimination. Bataan Shipyard & Engineering Co. v. PCGG,150 SCRA 181 (1987).

d. Non-Entitlement to Moral Damages - Time and again, we have held that a corporation - being an artificial person which has no feelings, emotions or senses, and which cannot experience physical suffering or mental anguish - is not entitled to moral damages. Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).[34]

Meralco v. T.E.A.M. Electronics Corp.540 SCRA 62 (2007)

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.

ABS-CBN Broadcasting Corp. v. CA301 SCRA 589 (1999)

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system.

The statements in People v. Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB [130 Phil. 366 (1968)], that a corporation may recover moral damages if it "has a good reputation that is debased, resulting in social humiliation" are obiter dicta. The possible basis of recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith.

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Filipinas Broadcasting Network v. Ago Medical and Educational Center

448 SCRA 413 (2005)A juridical person is generally not entitled to moral damages

because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. Nevertheless, a educational corporation's claim for moral damages arising from libel falls under Article 2219(7) of the Civil Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation, and does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person can validly complain for libel or any other form of defamation and claim for moral damages.

e. Practice of Profession -

Acebedo Optical Company, Inc. v. Court of Appeals329 SCRA 314 (2000)

Although a corporation may hire a professional which is not tantamount to practice by the corporation itself, however, the corporation itself cannot promote itself into such practice since corporate practice of any profession must never be sanctioned based on the policy that the ethics of any profession is based upon individual responsibility, personal accountability and independence, which are all lost where one acts as a mere agent, or alter ego, of unlicensed persons or corporations.

NOTE: R.A. No. 9266 allsows the registration of architectural professional corporations.

10. Classifications of Corporationa. Stock Corporation - one which has a capital stock divided into shares and is

authorized to distribute to the holders of such shares dividends or allotments of the surplus profits (i.e., retained earnings) on the basis of the shares held.[35] A stock corporation is organized for profit. The governing body of a stock corporation is usually the Board of Directors.

b. Non-Stock Corporation - one expressly organized for eleemosynary purpose, and where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution (whereupon, surplus may be distributed). A non-stock corporation is one not organized for profit. The governing body is usually the Board of Trustees.

c. Corporation De Jure - a corporation organized in accordance with the requirements of law.

d. De Facto Corporation - a corporation where there exists a flaw in its incorporation.

(1) Rule on De Facto Corporations: The due incorporation of any corporation claiming in good faith to be a corporation, 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 only by the State in a quo warranto proceeding.[36]

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(2) Requisites of De Facto Corporation:(a) Organized under a valid law;(b) Bona fide compliance with formalities of law;(c) User of corporate powers.(d) SEC issuance of certificate of incorporation (Arnold Hall v. Piccio, 86

Phil. 603 [1950]).

ILLUSTRATION:

A, B, C, D and E decide to form a corporation, A, Inc. The articles of incorporation were prepared, but by omission in good faith, D and E failed to sign. The notary public who ratified the articles failed to notice the omission. Likewise SEC did not notice the omission and so it issued a certificate of incorporation. Later, it discovered that D and E did not sign. (Under the law, a corporation cannot be formed with less than 5 members). A, Inc. began to operate as a cooperation (user of corporate powers). This is a de facto corporation, no one-not even the corporation's creditors, debtors nor stockholders-have the personality to question the due incorporation of the corporation. Only the Solicitor General (and SEC under PD 902-A) may do so in a quo warranto proceedings.

Sawadjaan v. Court of Appeals459 SCRA 516 (2005)

By its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party.

e. Corporation by Estoppel[37] - 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.

Where a group of persons misrepresent themselves as a corporation, they are subsequently estopped from claiming lack of corporate life in order to avoid liability.

On the other hand, 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.

Albert v. University Publishing Co.13 SCRA 84 (1965)

Facts: Albert wrote a book on the Penal Code and had it published by the University Publishing Co. Many copies were sold but the publisher refused to pay the agreed royalties. Albert's heirs sued in the CFI and won. Both the Court of Appeals and the Supreme Court, on appeal, affirmed the CFI decision ordering the publishing company to pay, the

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contract having been signed by its president. The affirmed judgment was made the subject of a motion for reconsideration (in the Supreme Court) wherein it was alleged for the first time that the company was not a corporation (as it was alleged it was).

Held: The publishing company is a corporation by estoppel because its corporate status was not raised as an issue during the proceedings in the CFI, Court of Appeals and in the Supreme Court until the motion for reconsideration was filed in the Supreme Court.

Pioneer Surety v. Court of Appeals175 SCRA 668 (1989)

Where a person convinces other parties to invest money for the formation of a corporation, but which was never duly incorporated, there can be no resulting partnership among them, and the mere passive investors cannot be held liable to share in the losses suffered by the business enterprise.

Merill Lynch Futures v. Court of Appeals211 SCRA 824 (1992)

A party is estopped to challenge the personality of a foreign corporation and its standing to sue in the Philippines even when it has no license to do business, after having acknowledged the same by entering into a contract with it. Corporation by estoppel doctrine applies to foreign as well as to domestic corporations. The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its non-compliance with the statutes, chiefly in cases where such person has received benefits from the contract.

People v. Garcia271 SCRA 621 (1997)

An individual cannot avoid his liabilities to the public as an incorporator of a corporation whose incorporation was not consummated, when he held himself out to the public as officer of the corporation and received money from applicants who availed of their services. Such individual is estopped from claiming that they are not liable as corporate officers for illegal recruitment under the corporation by estoppel doctrine under Sec. 25 of Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof.

Lozano v. De Los Santos274 SCRA 452 (1997)

The corporation by estoppel doctrine cannot override jurisdictional requirements for SEC under P.D. 902-A. 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.

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Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness, and applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel.

Lim v. Philippine Fishing Gear Industries317 SCRA 728 (1999)

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 benefit.

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 benefit from the transaction 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. . . Clearly, under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners."


An individual should be held personally liable for the unpaid obligations of the unincorporated association in whose behalf he entered into such transactions. "It is a settled principle in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent."


The corporation by estoppel doctrine cannot be employed by a person acting as President of an unincorporated corporation to escape personal liability on the ground that the other party "cannot deny the corporate existence of the Federation because it had contracted and dealt with the Federation in such a manner as to recognize and in effect admit its existence." The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. In the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract.

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f. Public Corporation - one formed or organized for the government of a portion of the State. Its purpose is for the general good and welfare. (Sec. 3, Act 1456)


While public benefit and public welfare, particularly, the promotion of the economic and social development of Central Luzon, may be attributable to the operation of the Bases Conversion and Development Authority (BCDA), yet it is certain that the functions performed by the BCDA are basically proprietary in nature-the promotion of economic and social development of Central Luzon, particularly, and the country's goal for enhancement, in general, do not make the BCDA equivalent to the Government. The BCDA is not a mere agency of the Government but a corporate body performing proprietary functions. Therefore, the rule that prescription does not run against the State will not apply to BCDA, it being said that when title of the Republic has been divested, its grantees, although artificial bodies of its own creation, are in the same category as ordinary persons.

Polytechnic Univ. of the Philippines v. Court of Appeals368 SCRA 691 (2001)

Beyond cavil, a government owned and controlled corporation has a personality of its own, distinct and separate from that of the government, and the intervention in a transaction of the Office of the President through the Executive Secretary does not change the independent existence of a government entity as it deals with another government entity.

g. Private Corporation - one formed for some private purpose, benefit, aim or end. (Ibid.)

Baluyot v. Holganza325 SCRA 248 (2000)

The test to determine whether a corporation is government-owned or -controlled, or private in nature, is if a corporation is created by its own charter for the exercise of a public function, or by incorporation under the general corporation law. The Philippine National Red Cross is a government owned and controlled corporation, with an original charter under Rep. Act. 95. Consequently, the its employees are under the jurisdiction of the Civil Service Commission and are compulsorily covered by GSIS.

h. Corporation Sole - one organized for purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church.[38]

The corporation sole is an exception to the general rule that at least 5 members are required for a corporation to exist. Here there is only one incorporator. This is applicable to religious communities the regulations of which provide that the

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community's properties are to be placed in the name of the head and administered by him.[39]

A corporation sole has no nationality. Roman Catholic Apostolic, etc. v. Register of Deeds of Davao City, 102 Phil. 596 (1957); Republic v. Villanueva, 114 SCRA 875 (1982).

j. Domestic Corporation - a corporation formed, organized or existing under the laws of the Philippines.

k. Foreign Corporation - a corporation formed, organized or existing under any laws other than those of the Philippines and whose laws allows Filipino citizens and corporations to do business in its own country or state.[40]

11. Corporators and Incorporators, Stockholders and Membersa. Incorporators - are those stockholders or members mentioned in the articles of

incorporation as originally forming and composing the corporation and who are signatories thereof.[41] The general rule is that only natural persons (as provided by Sec. 10) may be incorporators of a corporation, or at least 5 of them should be individuals.

Reason Behind Rule: The incorporator (aside from the fact that he gives part of the capital) guarantees to the world that the articles of incorporation are true and if it turns out that there is falsity, the incorporator may be held liable for the damages caused thereby. If a corporation is allowed to become an incorporator, it can only be limitedly liable in such case. Thus, the law seeks to make only natural persons who are unlimitedly liable as the only ones qualified to be incorporators.

b. Corporators - those who compose the corporation, whether as stockholders or members.[42]

c. Stockholders or Shareholders - owners of shares in a corporation which has a capital stock.

d. Members - corporators of a corporation which has no capital stock.

12. SHARES OF STOCKa. General Rule on Classification of Shares - The shares of stock in a corporation may

be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions thus must be stated in the articles of incorporation in order to be valid.[43]

EXCEPTIONS:

(i) No share may be deprived of voting rights except those classified and issued as "preferred," or "redeemable" shares.

(ii) There shall always be a class or series of shares which have complete voting rights.

(iii) Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation, except that banks, trust companies, insurance

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companies, public utilities, and building and loan associations shall not be permitted to issue no par value shares of stock.

NOTE: There can be no privilege or restriction on any share other than what is provided for in the articles of incorporation.[44]

Castillo v. Balinghasay440 SCRA 442 (2004)

Section 6 of Corporation Code which prohibits the classification of shares as non-voting, except when they are expressly classified as preferred or redeemable shares, will apply to corporation organized under the old Corporation Law. Section 148 of Corporation Code expressly provides that it shall apply to corporations in existence at the time of the effectivity of the Code.

b. Common Shares - a stockholder, owner of at least one common share has the following rights:

§ right to vote at meetings;

§ right to dividends;

§ right to examine corporate books.

A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits.Commissioner of Internal Revenue v. CA, 301 SCRA 152 (1999).

c. Preferred Shares - may enjoy a right of preference in:

§ dividends;§ voting (particularly in election of directors);§ corporate property upon dissolution.

Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution.Commissioner of Internal Revenue v. CA, 301 SCRA 152 (1999).

LIMITATIONS:(1) Preferred shares can only be issued with par value;(2) Preference must be:

(i) Stated in the articles of incorporation; or(ii) May be fixed by Board of Directors when authorized by

articles of incorporation, Provided, such terms and conditions shall be effective upon filing of a SEC certificate.

Republic Planters Bank v. Agana269 SCRA 1 (1997)

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A preferred share of stock entitles the holder thereof to certain preferences over the holders of common stock, designed to induce persons to subscribe to the shares of a corporation.

Preferred shares take a multiplicity of forms, 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 entitled to receive dividends on said shares to the extent agreed upon before any dividends at all are paid to the holders of common stock.

There is no guaranty, however, that the share will receive any dividends. . . Similarly, the present Corporation Code provides that the Board of Directors of a stock corporation may declare dividends only out of unrestricted retained earnings. Section 43 of the Code, adopting the change made in accounting terminology, substituted the phrase "unrestricted retained earnings," which may be a more precise term, in place of "surplus profits arising from its business" in the former law. The declaration of dividends is dependent upon the availability of surplus profit 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 nor 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.


Although the certificates of stock granted the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Both Sec. 16 of Corporation Law and Sec. 43 of present Corporation Code prohibit issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only.

Commissioner of Internal Revenue v. CA301 SCRA 152 (1999)

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Both common and preferred shares are part of the corporation's capital stock. 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.

d. Par Value Shares - Their value is fixed in the articles of incorporation, which nominal value remains the same regardless of the profitability of the corporation. This gives rise to financial stability and is the reason why banks, trust corporations, insurance companies and building and loan associations must always be organized with par value shares.

e. No-Par Value Shares - They have no assigned value, their value being dependent on the changes in the profits of the corporation and the market value of the shares themselves at the time the shares are issued. Minimum consideration: P5.00.

The following cannot issue no-par value shares:

§ Banks;§ Insurance Companies;§ Trust Companies;§ Building & Loan Associations;§ Public Utilities.

REASON: Above-types of corporations deal with the public and most of

them manage the savings of the people; thus, the law seeks to protect the investing public by making sure that such corporations have sufficient funds in the form of capital so that the public could determine the financial viability of such corporations.

Three Ways of Determining Value of No-Par Value Shares:(1) By majority vote of the outstanding shares (issued shares) in a

meeting called for that purpose;(2) By Board of Directors pursuant to authority conferred upon it by the

articles of incorporation; or(3) By amendment of articles of incorporation.[45]

f. Redeemable Shares - Redeemable shares can only be issued when expressly authorized by the articles of incorporation.

The terms and conditions affecting redeemable shares are required to be provided for in the articles of incorporation and to be stated on the certificates of stock.


Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the

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acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends.


When the corporation redeems shares coming from those issued upon establishment of the corporation or from initial capital investment, the redemption to their concurrent value of acquisition would not be subject to tax, because that would constitute merely a return of investment.

On the other hand, if the redemption is from previously declared stock dividends, the proceeds of the redemption constitute additional wealth, for it is no longer merely a return of capital but a gain thereon, and subject to tax. The Court has recognized that the redemption of stock dividends previously issued is used in commercial practice as a veil for the constructive distribution of cash dividends, and therefore subject to income tax.


Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings.

However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature.

Optional Redemption - When the certificates of stock recognizes redemption, but the option to do so is clearly vested in the corporation, the redemption is clearly the type known as "optional" and rest entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Republic Planters Bank v. Agana, 269 SCRA 1 (997).

g. Founders' Shares - These must be provided for in the articles of incorporation, which would be entitled to vote and be voted directors to the Board of Directors. But such privilege is good only for 5 years, which period shall begin from the date of the approval thereof by SEC.

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When the articles of incorporation provide expressly a class of shares to have the exclusive right to vote and be voted for into the Board of Directors, that such shares would essentially be founder's share was raised but not resolved by the Court.

h. Treasury Stocks - They are shares of stock which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation or through some other lawful means.

The definition is defective because it requires that such shares be previously issued as fully paid, whereas, under Sec. 68 of the Code, which deals with delinquent stocks, not fully paid shares that become treasury stocks upon bid of the corporation in absence of other bidders, become treasury shares. Treasury stocks may again be disposed of for a reasonable price to be fixed by the Board of Directors.

i. Escrow Shares - Shares that have been issued subject to a condition.

13. Reclassification versus Exchange of Shares


Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest. But the exchange is different-there would be a shifting of the balance of stock features like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se yields income for tax purposes. . . In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber's rights and privileges-which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interests and not when there is still maintenance of proprietary interest.

II. ARTICLES OF INCORPORATION: INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

1. Nature of Articles of Incorporation

Government of P.I. v. Manila Railroad Co.52 Phil. 699 (1929)

The charter of a corporation is in the nature of a contract between the corporation and the Government, and both sides are bound by its valid provisions.

Lanuza v. Court of Appeals454 SCRA 54 (2005)

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The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationship between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders. There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation, but also on its shareholders.

2. Corporate Name - No corporate name may be allowed by SEC if it is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws.[46]

Industrial Refractories Corp. v. Court of Appeals390 SCRA 252 (2002)

Section 18 of Corporation Code expressly prohibits the use of a corporate name which is "identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws." The policy behind the foregoing prohibition is to avoid fraud upon the public that will occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations.[47]

a. Guidelines in Use of Corporate Names:

Philips Export B.V. vs. Court of Appeals206 SCRA 457 (1992)

To fall within the prohibition of the SEC's Revised Guidelines in the Approval of Corporate and Partnership Names, two requisites must be proven, to wit:

(a) The complainant corporation acquired a prior right over the use of such corporate name; and

(b) The proposed name is either:

• identical

• deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law

• patently deceptive, confusing or contrary to existing laws.

As regards the first requisite, it has been held that the right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption.

Anent the second requisite, in determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary case and discrimination and the Court must look to the record as well as the names themselves. And it can even cover words that are deemed generic.[48]

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Ang Mga Kaanib sa Iglesia ng Dios v. Iglesia ng Dios Kay Kristo Hesus

372 SCRA 171 (2001)Facts: Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng

Katotohanan is a non-stock religious corporation registered in 1936. A group headed by Eliseo Soriano dissociated themselves from such society and succeeded in registering in March, 1977, a new religious corporation named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan. When the first corporation filed a protest with SEC against the use of a similar name by the second corporation, the Soriano group caused the registration in April, 1980 of a new corporation named Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K., Sa Bansang Pilipinas, Inc.

Issue: Can the second corporation keep its registered name against the protest of the first corporation?

Held: No. SEC has authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to spawn confusion. It is the duty of SEC to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public. This power of SEC is mandated under Sec. 18 of Corporation Code. Likewise, rules pertaining to such confusingly similar corporate names are provided for in SEC Guidelines on Corporate Names.

Parties organizing a corporation must choose a name at their peril; the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the suit for injunction against the new corporation to prevent the use of the name.

Certainly, ordering second corporation to change its name is not a violation of its constitutional right to religious freedom, since they are merely compelled to abide by one of the SEC guidelines which was willingly signed.

Laureano Investment v. Court of Appeals272 SCRA 253 (1997)

A corporation has no right to intervene in a suit using a name other than its registered name; if a corporation legally and truly wants to intervene, it should have used its corporate name as the law requires and not another name which it had not registered.

b. Change of Corporate Name:

P.C. Javier & Sons, Inc. v. Court of Appeals462 SCRA 36 (2005)

A change in corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on identity of corporation, or on its property, rights, or liabilities. The

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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 a different name, and its character is in no respect changed. Consequently, the change in the name of the bank does not grant to its borrowers the right to refuse to pay their loans on the ground that they have not been informed formally of such change of name.

Republic Planters Bank v. CA216 SCRA 738 (1992)

Amendment in articles of incorporation changing its corporate name does not extinguish the personality of the original corporation. The corporation upon such change of its name, is in no sense a new entity, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. Consequently, the "new" corporation is still liable for the debts and obligations of the "old" corporation.[49]

c. SEC Still Has Jurisdiction Over Issues Involving Corporate Names:

Industrial Refractories Corp. v. Court of Appeals390 SCRA 252 (2002)

Not only Sec. 5 of P.D. 902-A is the source of quasi-judicial powers of SEC, as in fact the "absolute jurisdiction" language of Sec. 3 thereof over all corporations is the basis to affirm such quasi-judicial power of SEC to hear and decide a controversy between two corporations as to who has a better right to the use of a particular corporate name: "The jurisdiction of the SEC is not merely confined to the adjudicative functions provided in Section 5 of P.D. 902-A, as amended. By express mandate, it has absolute jurisdiction, supervision and control over all corporations [P.D. 902-A, Section 3]."

It also exercises regulatory and administrative powers to implement and enforce Sec. 18 of Corporation Code. It is SEC's duty to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public, and it has authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to generate confusion. Clearly, therefore, the present case falls within the ambit of SEC's regulatory powers.

3. Purpose Clauses - Articles of incorporation must state expressly what is it primary purpose, as distinguished from its secondary and other purposes.[50]

Gala v. Ellice Agro-Industrial Corp.418 SCRA 431 (2003)

Best proof of corporation's purpose is its articles of incorporation and by-laws. The articles of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation, which, in turn, is supposed

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to insure or facilitate the accomplishment of said purpose." Against this, there is little merit in the contention that the corporations were organized to illegally avoid the provisions on land reform and to avoid the payment of estate taxes, as being prohibited collateral attack.

" . . . a perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the allegedly illegal purposes that petitioners are complaining of. It is well to note that, if a corporation's purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation."

NOTE: Under Sec. 42, if funds are to be diverted from the primary purpose to a secondary purposes, this can be done only by a 2/3 votes of the outstanding shares and cannot be done by mere resolution of the Board of Directors. Dissenting minority stockholders may exercise their appraisal right.

4. Principal Place of Business -

Hyatt Elevators and Escalators Corp. v. Goldstar Elevators, Phils., Inc.473 SCRA 705 (2005)

Residence of the Corporation - Well established is the rule that the residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation. . . . It now becomes apparent that the residence or domicile of a juridical person is fixed by "the law creating or recognizing" it. Under Sec. 14(3) of Corporation Code, the principal office of the corporation is to be located is one of the required contents of the articles of incorporation, which shall be filed with SEC.

Hyatt Elevators and Escalators Corp. v. Goldstar Elevators, Phils., Inc.

473 SCRA 705 (2005)Petitioner argues that the Rules of Court do not provide that when the plaintiff is a corporation, the complaint should be filed in the location of its principal office as indicated in its articles of incorporation. Jurisprudence has, however, settled that the principal place of business of a corporation is located, as stated in its articles, indeed establishes its residence. This ruling is important in determining the venue of an action by or against a corporation, as in the present case.[51]

5. Corporate Term - A corporation shall exist for a period not exceeding 50 years from the date of incorporation unless sooner dissolved or unless said period is extended.[52] Exception: condominium corporations can be organized for 200 years.

A corporation commences to have corporate existence and juridical personality and is deemed incorporated only from date SEC issues a certificate of incorporation.[53]

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Such extension of corporate life cannot be made earlier than 5 years before the end of its original term. Exception: unless there are justifiable reasons for an earlier extension as may be determined by SEC.

If the life of the corporation is to be extended, then there must be an amendment of the articles of incorporation. Under Sec. 16, such amendment requires the 2/3 votes of the outstanding capital stocks. Those stockholders who oppose such extension of corporate life have a right to exercise their appraisal right under Sec 37.

Alhambra Cigar v. SEC24 SCRA 269 (1968)

[Interpreting what is now the equivalent of Sec. 122 of the Code:] When the term of the corporation ends, that corporation does not automatically cease to exist; it will continue to exist for a 3-year period to wind-up its affairs. But it cannot seek to extend its corporate term during that period because that will mean new business.

NHA v. Court of Appeals456 SCRA 17 (2005)

Under Article 605 of the Civil Code a usufruct cannot be constituted in favor of a corporation for more than 50 years: "The law clearly limits any usufruct constituted in favor of a corporation or association to 50 years. A usufruct is meant only as a lifetime grant. Unlike a natural person, a corporation or association's lifetime may be extended indefinitely. The usufruct would then be perpetual. This is especially invidious in cases where the usufruct given to a corporation or association covers public land.".

6. Incorporators - At least 5, but not more than 15, natural persons may be incorporators of a corporation, who must own at least one share of stock in a stock corporation.[54]

The names, nationalities and residences of the incorporators must be provided for in the articles of incorporation.[55]

a. When Incorporators Merely Nominee Shareholders:

Nautica Canning Corp. v. Yumul473 SCRA 415 (2005)

Yumul, who was elected director, was not allowed to inspect corporate records on the ground that he is merely a nominal stockholder, and that the evidence was clear that the shares registered in his name were actually paid for by Dee at the time of the incorporation of the company.

Held: Yumul is a qualified stockholder of record, his election into the Board was lawful, and he the right to inspect corporate records. It is possible for a business to be wholly owned by one individual, and the validity of its incorporation is not affected when he gives nominal ownership of only one share of stock to each of the other four incorporators. This arrangement is not necessarily illegal, but it valid only

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between and among the incorporators privy to the agreement. It does not bind the corporation which will consider all stockholders of record as the lawful owners of their registered shares. As between the corporation on the one hand, and its stockholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are.

7. Minimum Capital Stock Required of Stock Corporations - At the organization of a corporation, at least 25% of the totalauthorized capital stock must be subscribed; then 25% of the total subscribed stock must be paid-up. No minimum capital is required, except if specifically provided by special law, as long as the paid-up capital, should not be less than P5,000.00.[56]

8. Incorporating Board of Directors - The names, nationalities and residences of the persons who shall act as directors or trustees until the regular Board members are duly elected shall be stated in the articles of incorporation,[57] which cannot be less than 5 nor more than 15.[58]

a. Concept of "Capital Stock" and "Paid-Up Capital Stock":

PLDT v. NTC539 SCRA 365 (2007)

"Capital" refers to the value of the property or assets of a corporation. The "capital subscribed" is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums, if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account.It is the same amount that can be lossely termed as the "trust fund" of the corporation.


The "Outstanding Capital Stock" is defined under Section 137 of the Corporation Code as "the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is binding subscription agreement) except treasury shares." Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be founders' shares or common shares.

MSCI-NACUSIP Local Chapter v. National Wages and Productivity Commission

269 SCRA 173 (1997)By express provision of Sec. 13 [of Corporation Code], paid-up

capital is that portion of authorized capital stock which has been both subscribed and paid. Not all funds or assets received by the corporation can be considered paid-up capital, for this term has a technical

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signification in Corporation Law. Such must form part of authorized capital stock, subscribed and then actually paid-up.

9. Procedure for Amendment of Articles of Incorporation:(a) Majority vote of the Board; and

(b) Vote (in a meeting) or mere written assent (no meeting) of 2/3 of the outstanding capital stock, or in case of non-stock corporation, by the members.

Once the amendment is approved, dissenting stockholders may exercise their rights of appraisal, but only if it involves diminishing of substantial rights previously granted or creating a new set of shares with priority rights.[59]

NOTE: There are cases when articles of incorporation can be amended, but the dissenting stockholders have no right of appraisal (change of name, increase in the number of directors or trustees) because such amendments do not affect their substantial rights.

Amendment of articles of incorporation will be effective only upon SEC approval; but should no action be taken by SEC within 6 months from the date of filing, then automatically amendment is deemed effective, provided that delay be not attributable to the corporation.[60]

a. When Other Agency Certification Required:

A certificate of authority is required for the following:

(1) Insurance companies - Insurance Commission(2) Banks, Building & Loan Association, Finance Companies - Monetary

Board(3) Educational institutions - Secretary of Education or CHED(4) Public Utilities - Land Transportation Commission, Civil Aeronautics

Board, National Telecommunications Commission, etc.

b. Grounds When Articles of Incorporation or Amendment May Be Rejected or Disapproved:

(1) Non-compliance with the form prescribed;

(2) Purpose is illegal or immoral;

(3) Treasurer's Affidavit is false; or

(4) Non-compliance with percentage requirement of ownership required by the Constitution.

The incorporators must be given notice of the grounds for rejection or disapproval and they must be given opportunity to make the appropriate modifications.[61]

10. Effects of Non-use of Corporate Charter and Continuous Inoperation of Corporation:[62]

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Two Situations Contemplated Under Section 22:

(a) Non-User 2 Years - When corporation does not formally organize and commence the transaction of its business or the construction of its works within two years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved (automatic).

"Formal organization" may consist in the election of new board directors or trustees and corporate officers.

"Commencement of business" may take the form of contracting for lease or sale of properties to be used as business site of the corporation and other preparatory acts geared towards fulfillment of the purpose for which the corporation was established.

(b) Non-User 5 Years - when the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five years.

The same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation (not automatic). Notice and hearing are required.

NOTE: The last paragraph provides for non-application of the effects of non-use or inactivity for reasons beyond the control of the corporation as when the mineral lands to be developed by the corporation as per its purpose, are the object of court litigation and a court injunction against the corporate activities has been issued.

The obiter expressed in the case of Perez v. Balmaceda, (40 OG, No. 9, p. 114), that forfeiture was automatic, has been repealed by Sec. 22.

III. BY-LAWS1. Nature of By-Laws

Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals

276 SCRA 681 (1997)By-laws may be necessary for the "government" of the corporation

but these are subordinate to the articles of incorporation, as well as to the Corporation Code and related statutes. There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers.

San Miguel Corp. v. Mandaue Packing Products Plants Union-FFW

467 SCRA 107 (2005)By-laws has traditionally been defined as regulations, ordinances,

rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling

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meetings and the like. If those key by-law provisions on matters such as quorum requirements, meetings, or on the internal governance of the local/chapter are themselves already provided for in the constitution, then it would be feasible to overlook the requirements for by-laws. Indeed in such an event, to insist on the submission of a separate document denominated as "By-Laws" would be an undue technicality, as well as a redundancy.

Loyola Grand Villas Homeowners (South) Association v. Court of Appeals

276 SCRA 681 (997)As the "rules and regulations or private laws enacted by the

corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it," by-laws are indispensable to corporation in this jurisdiction, although they may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporation. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation.

China Banking Corp. v. Court of Appeals270 SCRA 503 (1997)

By-laws signify the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the directions, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities.

Purpose of by-laws is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law.

2. Period of Adoption of By-Laws - Within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by SEC, the corporation must adopt a code of by-laws for its government.

By-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to SEC, together with the articles of incorporation.

Loyola Grand Villas Homeowners (South) Association v. Court of Appeals

276 SCRA 681 (997)Section 46 of Corporation Code which provides that the corporation

"must" adopt a set of by-laws within one (1) month after receipt of notice

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of the issuance of the certificate of incorporation, reveals the legislative intent to attach a directory, and not mandatory, meaning for the word "must" in the first sentence thereof, since second paragraph of section allows the filing of the by-laws even prior to incorporation. Therefore, the failure to file the by-laws within that period does not imply "demise" of the corporation, but merely constitute a ground by which SEC may seek forfeiture of the franchise of the corporation as provided in P.D. 902-A.

Sawadjaan v. Court of Appeals459 SCRA 516 (2005)

A corporation which has failed to file its by-laws within prescribed period does not ipso facto lose its powers as such, and may be considered a de facto corporation whose right to exercise corporate powers may not be inquired into collaterally in any private suit to which such corporations may be a party.

3. How By-Laws Adopted:(a) By-laws filed together with articles of incorporation -

(i) must be approved and signed by all incorporators; and

(ii) must be submitted to SEC with articles.

(b) Filed with SEC within one (1) month from notice of issuance of certificate of incorporation -

(i) affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or at least a majority of the members, in case of a non-stock corporation; and

(ii) by-laws shall be signed by stockholders or members voting for them.

• one copy kept in office of corporation

• another copy sent to SEC:(1) certified by majority of directors or trustees.(2) countersigned by Secretary of the corporation.

4. Effectivity of By-Laws - By-laws shall be effective only upon issuance by SEC of a certification that the by-laws are not inconsistent with the Code.

NOTE: SEC shall not accept for filing by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law.

5. Contents of By-Laws - The place of meeting of stockholders is already provided for by law in Sec. 51 (city or municipality where the principal office of the corporation is located); but the place for meeting of directors or trustees may be provided for in the by-laws; place

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of meeting of directors or trustees may be outside the Philippines if so provided for in the by-laws.

Other matters may be included in the by-laws, provided they abide by the following rules:

(a) They are not contrary to law, morals or public policies;

(b) They cannot contravene provisions of the articles of incorporation (even when the matter is one that should be found in the by-laws); and

(c) The must not be discriminatory, or be unreasonable, because by-laws are meant to regulate and not restrict rights.

Tayag v. Benguet Consolidated, Inc.26 SCRA 242 (1968)

By-law provisions providing for the manner and procedure when certificates of stocks are deemed lost and replaceable cannot be used by the corporation to defy the order of the State, through its courts, to consider certificates lost and new ones to be issued to the ancillary administrator of the entity of the foreign-decedent stockholder.

Grace Christian High School v. Court of Appeals281 SCRA 133 (1997)

A provision sought to be included in the By-laws granting to a stockholder a permanent representation in the Board of Directors of the corporation is contrary to the provisions of Corporation Code requiring all members of the Board to be elected by the stockholders or members. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law.

Peña v. Court of Appeals193 SCRA 717 (1991)

By-laws are the corporation's own private laws which substantially have the same effect as the laws of the corporation. They are, in effect, written into the charter. In that sense, they become part of the fundamental law of the corporation with which the corporation and its directors and officers must comply.

Therefore, when the by-law provisions require the attendance of four (4) members of the five-man board for a special meeting, the attendance of only three (3) members, although constituting the majority, makes any resolution adopted therein void as to affect the contract entered into by the corporation with a third party.

Thomson v. Court of Appeals298 SCRA 280 (1998)

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Authority granted to a corporation to regulate the transfer of its stock does not empower the corporation to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. By-law provisions cannot restrict the property rights of stockholders with respect to their shares.

Salafranca v. Philamlife (Pamplona) Village Homeowners Association

300 SCRA 469 (1998)The amendment of a by-law provision to undermine the right to

security of tenure of a regular employee of the corporation cannot be allowed. "Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment. However this right, extensive as it may be, cannot impair the obligation of existing contracts or rights. . . A contrary interpretation would find no justification in the laws or the Constitution. If we were to rule otherwise, it would enable an employer to remove any employee from his employment by the simple expediency of amending its by-laws and providing that his/her position shall cease to exist upon the occurrence of a specified event."

6. Binding Effect of By-Laws to Third Parties:


The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. Therefore, it is the generally accepted rule that third persons are not bound by the by-laws, except when they have knowledge of the provisions either actually or constructively.


Facts: A pledge of shares of stock was duly registered with the corporation, which sent out a letter acknowledging the pledge. Later on, due to non-payment of secured loan, the shares were sold at public auction, with the pledgee being the highest bidder. The corporation refused to register the notice of sale in its books, and in fact declared the share as being delinquent for non-payment of monthly dues and proceeded with delinquency sale, all pursuant to the terms and conditions set forth in the by-laws. In insisting on its prior claim on the share, the corporation relied upon the provision of its by-laws which provides for the delinquency sale, and held the provision to be binding upon the pledgee.

Held: In order that by-law provisions can be binding upon third parties, such third-parties must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party

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and the shareholders was entered into, in this case, at the time the pledge agreement was executed. The corporation could have easily informed pledgee of its by-laws when it sent notice formally recognizing pledgee of its shares registered in the name of a stockholder of record. The corporation's belated notice of said by-laws at the time of foreclosure will not suffice.

PMI Colleges v. NLRC277 SCRA 462 (1997)

PMI Colleges seeks to avoid liability under a contract of services which was not signed by the Chairman of the Board contrary to the requirements under its by-laws.

Held: The contract cannot be invalidated just because the signatory thereon was not the Chairman, which allegedly violated the corporation's by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same.

7. How By-laws May Be Repealed or New By-laws Adopted:(a) With stockholders or members approval:

(i) Majority vote of the members of the Board;(ii) Majority of the outstanding capital stock or majority of the members in case of non-stock corporation, in a meeting duly called for the purpose.

(b) By the Board of Directors/Trustees:

(i) 2/3 of the outstanding capital stock; or(ii) 2/3 of the members in a non-stock corp. may delegate to the board the power to amend or repeal any by-laws or adopt new by-laws.

• Such power of the Board may be revoked by majority vote of the outstanding capital stock or majority of the members in a non-stock corporation.

• The power to adopt the first original by-laws cannot be delegated to the board of directors or trustees; only the power to adopt new by-laws that will supplant the old by-laws can be validly delegated.

NOTE: In all other respects, the procedure for adopting the original by-laws shall be the same in amending or repealing by-laws or adoption of a new set of by-laws.

IV. BOARD OF DIRECTORS OR TRUSTEES, CORPORATE OFFICERS1. "CENTRALIZED MANAGEMENT" DOCTRINE: The Board Is Seat of Corporate

Powers - Unless otherwise provided in the Corporation Code, the corporate powers of all corporations shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified.[63]

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Filipinas Port Services v. Go518 SCRA 453 (2007)

Section 23 of the Corporation Code explicitly provides that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all business conducted and all property of the corporation shall be controlled and held by a board of directors. The raison d'etre behind the conferment of corporate powers on the board of directors is not lost on the Court-indeed, the concentration in the board of the powers of control of corporate business and appointment of corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the conduct of corporate business.

As can be gleaned from Sec. 23 of Corporation Code "It is the board of directors or trustees which exercises almost all the corporate powers in a corporation." (Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 [2003]). Consequently, under the doctrine of cetralized management, it cannot be said that the Board acts as agents of the stockholders, since their source of power originally vested by law and not delegated by the stockholders.

The exercise of the corporate powers of the corporation rested in the Board of Directors save in those instances where the Corporation Code requires stockholders' approval for certain specific acts. (Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 [2002]). Consequently, there can be no valid contract that can be enforced on behalf of the corporation over an alleged sale of a parcel of land, when there is no showing that there was approval of the purchase by the Board of Directors, which exercises almost all the corporate powers in a corporation. (Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 [2003]).

Tan v. Sycip499 SCRA 216 (2006)

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.[64]

Hornilla v. Salunat405 SCRA 220 (2003)

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In this jurisdiction, a corporation's Board of Directors is understood to be that body which (a) exercises all powers provided for under the Corporation Code; (b) conducts all business of the corporation; and (c) controls and holds all property of the corporation. Its members have been characterized as trustees or directors clothed with a fiduciary character. It is clearly separate and distinct from the corporate entity itself.[65]

ABS-CBN Broadcasting Corp. v. Court of Appeals301 SCRA 572 (1999)

Under Corporation Code, unless otherwise provided by said Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers. The delegation, except for the executive committee, must be for specific purposes. The delegation to officers makes the latter agents of the corporation; accordingly, the general rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so.

People's Aircargo v. Court of Appeals297 SCRA 170 (1998)

General rule is that, in the absence of authority from the Board of Directors, no person, not even its officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct from its stockholders and members, having powers, attributes and properties expressly authorized by law or incident to its existence. Being a juridical entity, a corporation may act through its Board of Directors, which exercises almost all corporate powers, lays down all corporate business policies and is responsible for the efficiency of management, as provided in Sec. 23 of Corporation Code.


The power to borrow money is one of those cases where even a special power of attorney is required under Art. 1878 of New Civil Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors to authorize an officer to obtain a loan on behalf of the corporation. The argument that the obtaining of loan was in accordance with the ordinary course of business usages and practices of the corporation is devoid of merit because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation.

Boyer-Roxas v. Court of Appeals211 SCRA 470 (1992)

The commitment by the former corporate officer allowing parties to remain in possession of properties registered in the name of the corporation, without board approval or contract entered into in the name

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of the corporation, does not bind the corporation to such commitment and insisting that such parties vacate corporate premises.

Ramirez v. Orientalist Co.38 Phil. 634 (1918)

Where a corporate contract has been effected with the approval of the Board of Directors, a resolution adopted by the stockholders refusing to recognize the contract or repudiating it is without legal effect. Contracts between a corporation and third persons must be made by the directors and not by the stockholders. A meeting of the stockholders called for the purpose of passing on the propriety of making a corporate contract, the resolution adopted at such meeting is at most advisory and not in any wise binding on the Board.

Lingayen Gulf Electric v. Baltazar93 Phil. 404 (1953)

In the hands of the Board of Directors, acting as a body, lies the management of the corporation. As such the stern rules on trust apply to their actuations as they must manage the corporate affairs in trust for stockholders. Thus, if the by-laws are silent as to per diems, the President, who at the same time is a member of the Board of Directors, must serve the corporation free of charge.

PNCC v. Pabion320 SCRA 188 (1999)

The directors of a government-owned or controlled corporation, which is not created by special law, owe their offices to their shareholders and not to the presidential fiat; and SEC can compel such corporation to hold a stockholders' meeting for the purpose of electing members of the Board of Directors.

a. Requirement that the Board Must Act as a Body:

AF Realty & Dev., Inc. v. Dieselman Freight Services Co.373 SCRA 385 (2002)

Contracts or acts of a corporation must be made either by the Board of Directors or by a corporate agent duly authorized by the Board. Absent such valid delegation or authorization, the rule is that the declarations of an individual director or officers relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director or officer are held not binding on the corporation.[66]

b. Principle on Delegation of Board Power:


Under Sec. 23 of Corporation Code, the power and the responsibility to decide whether the corporation should enter into a contract is lodged in the Board, subject to the articles of incorporation, by

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laws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the Board of Directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business.

San Juan Structural and Steel Fabricators v. CA296 SCRA 631(1998)

The general principles of Agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. A corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added 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 the officer or agent to believe that it has conferred.[67]

2. BUSINESS JUDGMENT RULE:Section 23 of Corporation Code embodies the essence of the "business judgement

rule," that unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in the Board of Directors. Consequently, the rule has two consequences:

(a) The resolution, contracts and transactions of the Board, cannot be overturned or set aside by the stockholders or members and not even by the courts under the priciple that the business of the corporation has been left to the hands of the Board; and

(b) Directors and duly authorized officers cannot be held personally liable for acts or contracts done with the exercise of their business judgment.

EXCEPTION : (a) When the Corporation Code expressly provides otherwise;

(b) When the Directors or officers acted with fraud, gross negligence or in bad faith; and

(c) When Directors or officers act against the corporation in conflict of interest situation.

Montelibano v. Bacolod Murcia Milling Co.5 SCRA 36 (1962)

The Board of Directors of a milling company has the authority to modify the proposed terms of the milling contract for the purpose of making the terms more acceptable to the other contracting parties. As long as the resolution was passed upon in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or

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decrease the profits of the corporation, the court has no authority to review them.

Ong Yong v. Tiu401 SCRA 1 (2003)

No court of law can, as an integral part of the judgment resolving the issues between squabbling stockholders, order the corporation to undertake certain corporate acts, since it would be in violation of the business judgment rule: ". . . it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file at SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a corporation's authorized capital stock is an amendment of the Articles of Incorporation. It is a decision that only the stockholders and the directors can make, considering that they are the contracting parties thereto. In this case, the Tius are actually not just asking for a review of the legality and fairness of a corporation decision. They want this Court to make a corporate decision for FLADC. We decline to intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and directors. Trust to tell, a judicial order to decrease capital stock without the assent of FLADC's directors and stockholders is a violation of the "business judgment rule" which states that:

xxx (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a transaction among themselves as will result in serious injury to the plaintiffs stockholders.[68]

"The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, as esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the business of business, and the laissez fair rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the court of the corporate business has been vested in the board and not with the courts.[69]

Philippine Association of Stock Transfer and Registry Agencies, Inc. v. Court of Appeals 536 SCRA 61 (2007)

The SEC is without authority to substitute judgment for the corporation's board of directors on business matters so long as the board of directors act in good faith but has the power to cases where there is involved an act which if pursued may cause grave or irreparable injury or prejudice to the investing public.

PSE v. Court of Appeals281 SCRA 232 (1997)

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Issue: May SEC, as the administrative agency granted supervision over the registration of securities under the Revised Securities Act, order the reversal of the decision of PSE Board denying the listing of the shares of the applicant issuer on the ground that there were questions of proper ownership over the bulk of the real estate assets of said applicant.

Held: SEC has no power to overturn the decision of the PSE Board to deny listing of securities.

It is true that SEC is the agency with the primary say as to whether or not securities, including shares of stock of a corporation, may be traded or not in the stock exchange. This is in line with SEC's mission to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and disposition of securities in the country.

Nevertheless, questions of policy and of management are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.

The management prerogatives of PSE are not under the absolute control of SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly approved business; and management decisions, so long as done in good faith, are not reviewable by the courts. Thus, notwithstanding the regulatory powers of SEC over the PSE, and the resultant authority to reverse the PSE's decision in matters of application for listing in the market, SEC may exercise such power only if PSE's judgment is attended by bad faith, which does not only connote bad judgment or negligence, but imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest of ill will, partaking of the nature of fraud.

a. Consequences of "Bogus" Board:

Islamic Directorate of Philippines v. Court of Appeals272 SCRA 454 (1997)

Facts: In an earlier case, SEC had declared two contending groups as neither being legitimate Board of Trustees of the Islamic Directorate of the Philippines (IDP), with SEC setting down the procedure for the proper election of the Board. Without complying with SEC directives, the Carpizo group represented themselves as the IDP Board and passed a resolution authorizing the sale of two (2) parcels of land in Quezon City to the Iglesia ni Cristo (INC). Is the sale valid or at least voidable?

Held: The sale is void. SEC declaration that the Carpizo group is not a duly elected nor constituted IDP Board would mean that the Board was "bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of the IDP property." Consequently, "all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora property, allegedly in the name of the IDP, have to be struck down

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for having been done without the consent of the IDP thru a legitimate Board of Trustees." The contract is void under Art. 1318 of Civil Code because of the lack of "consent."

b. Remedies in Case of Mismanagement - In case of mismanagement or abuse of powers, the remedy of stockholders shall be:

(a) Receivership;

(b) Injunction if the act has not yet been done;

(c) Dissolution if abuse amounts to a ground for quo warranto but Solicitor General refuses to act;

(d) Derivative suit or complaint filed with SEC (now the RTC). (Pres. Decree 902-A).

2. Qualifications and Disqualifications of Board Members:(a) He must own at least one (1) share in his name and if he ceases to own at

least one share in his own name, he automatically ceases as a director.

EXCEPTION: Trustee in a voting trust may be elected director/trustee.

(b) Majority of corporate directors must be Philippine residents.

(c) He must not have been convicted (not mere commission) by final judgment of an offense carrying an imprisonment exceeding 6 years, or an offense constituting a violation of the Code, 5 years prior to his election or appointment.[70]

NOTE: It is the commission (not the conviction) that must take place within 5 years prior to election or appointment under the above section. It is, therefore, generally required that corporate directors, trustees or officers must be morally upright and honest.

Lee v. Court of Appeals205 SCRA 752 (1992)

Under old Corporation Law, the eligibility of the director, strictly speaking, could not be adversely affected by the simple act of that director entering in a Voting Trust Agreement (VTA), in as much that he remains the beneficial owner of such shares assigned in trust. This is because the old Law used the phrase "in his own rights."

Consequently, the omission of the phrase "in his own right" under the present Corporation Code means that in order to be eligible to be elected to the Board and to remain a member thereof, what is material is legal title thereto, beneficial ownership being insufficient. Directors who therefore transfer all their shares to a trustee under a VTA automatically cease to be direcors of the corporation.

3. Election of Directors or Trustees:a. Required Attendance at Meeting for Election:

(1) Stock corporation - majority of outstanding capital stock

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(2) Non-stock corporation - majority of members entitled to vote

b. Manner of Election:

(1) In any form; or

(2) By ballot when requested by any voting stockholder or member;

(3) Voting may be in person or by proxy.

c. Time to Determine Voting Right:

(1) Share standing in one's name at the time fixed in by-laws.

(2) Where by-laws silent, at time of election.

d. Cumulative Voting - At a stockholders' meeting, where the election for Board of Directors takes place, a stockholder shall have as many votes as he has number of shares times the number of the directors up for election. This is a device to enable minority, by concentrating their cumulative votes on at least one candidate, to have a representative in the Board of Directors.

Cumulative voting is mandatory for election of the Board of Directors in a stock corporation. Members of the board in a non-stock corporation shall not be voted cumulatively unless specifically provided for in the by-laws.

In determining how many shares are needed to vote for the desired number of directors (this will be necessary when one campaigns for proxies), the following formula may be followed:

[Outstanding Shares] x [Desired No. of Directors] + 1______________________________________________

[Total No. of Directors] + 1

Cumulative voting of directors in a stock corporation is mandatory and cannot be dispensed with in the articles of incorporation nor in the by-laws. Being a statutory right, the stockholders cannot be deprived of the use of cumulative voting. (SEC Opinion, 2 Oct. 1964).

d. Report of Election of Directors, Trustees and Officers - Within 30 days after the election of the directors, trustees and officers of the corporation, secretary, or any other officer of the corporation, shall submit to SEC, the names, nationalities and residences of the directors, trustees and officers elected.

Should a director, trustee or officer or officers die, resign or in any manner cease to hold office, his heirs in case of his death, secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to SEC.[71]

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Sec. 26 of Corporation Code is deemed to be mandatory and jurisdictional, and the determination of who are the legal directors and officers of the corporation is conditioned upon the reports submitted to SEC pursuant to said section.

Premium Marble Resources v. Court of Appeals,264 SCRA 11 (1996)

By the express mandate of Sec. 26, all corporations duly organized pursuant thereto are required to submit within the period therein stated (30 days) to SEC the names, nationalities and residences of the directors, trustees and officers elected. "Evidently the objective sought to be achieved by Section 26 is to give the public information, under sanction of oath of responsible officers, of the nature of business, financial condition and operational status of the company together with information on its key officers or managers so that those dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporations financial resources and business responsibility."

Only the directors and officers of the corporation whose names appear in the report submitted to SEC are deemed legally constituted to bind the corporation in bringing any suit in behalf of the corporation.

Monfort Hermanos Agricultural Dev. Corp. v. Monfort III434 SCRA 27 (2004)

Corporations are required under Sec. 26 of Corporation Code to submit to SEC within 30 days after the election the names, nationalities, and residences of the directors, trustees and officers. In order to keep stockholders and the public transacting business with domestic corporation properly informed of their organization operational status, SEC has issued the rule requiring the filing of the General Information Sheet (GIS).

When the names of some of the directors who signed the board resolution does not appear in the GIS filed with SEC, then there is doubt whether they were indeed duly elected members of the Board legally constituted to bring suit in behalf of the Corporation.

e. No Permanent Un-elected Seat in the Board of Directors:

Grace Christian High School v. Court of Appeals281 SCRA 133 (1997)

Any provision in the by-laws or the practice of the corporation giving a stockholder a permanent seat in the Board of Directors of the corporation would be against the provision of Secs. 28 and 29 of Corporation Code which require member of the board of corporations to be elected. In addition, Sec. 23 which provides for the powers of the Board of Directors expressly requires them "to be elected from among the holders of stock, or where there is no stock, from among the members of the corporation."

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4. Removal of Directors or Trustees[72] - Any director or trustee of a corporation may be removed from office, with or without cause, by a vote of the stockholders holding or representing 2/3 of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of 2/3 of the members entitled to vote.

HOWEVER: When a director has been elected by virtue of the minority's exercise of cumulative voting rights, then such director may be removed only for cause.[73]

NOTE: Such removal shall take place either at a regular meeting or at a special meeting called for the purpose of removal of directors or trustees, with previous notice of the time and place of such meeting, as well as of the intention to propose such removal. If the officers refuse to call a meeting to consider the removal of the director, it may called at the instance of any stockholder or member, but with due notice.

BUT: Directors who have been elected by minority stockholders exercising cumulative voting can only be removed for cause.

Raniel v. Jochico517 SCRA 221 (2007)

Outside of the application of the provisions of Section 28 of the Corporation Code which empowers the stockholders, by a vote of two-thirds (2/3) of the outstanding capital stock, there is no other way by which to remove a director who fails to attend the board of directors' meetings.[74]

Velarde v. Lopez419 SCRA 422 (2004)

The issues arising from the dismissal of the general manager of the subsidiary corporation, including the question of remuneration involving a person who is not a mere employee but a stockholder and officer of the corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and management and is in fact a corporate controversy in contemplation of Corporation Code. A corporate officer's claim for unpaid salaries, unpaid share in net income, reasonable return on the stock ownership plan and other benefits for services rendered in the subsidiary corporation falls within the jurisdiction of SEC (now the RTC) and not the NLRC.

a. Vacancy - Vacancy resulting from removal pursuant may be filled by election at the same meeting without further notice, or at any regular or at any special meeting called for the purpose, after giving notice.

Outside of the application of the provisions of Sec. 28 of Corporation Code which empowers the stockholders, by a vote of two-thirds (2/3) of the outstanding capital stock, there is no other way by which to remove a director who fails to attend the board of directors' meetings. (SEC Opinion No. 21, series of 2003, addressed to Atty. Juan de Ocampo).

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5. Vacancies in Board - Any vacancy occurring in the Board of Directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled:

(a) If still constituting quorum, by the vote of at least a majority of the remaining directors or trustees;

(b) Otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose.

NOTE : A director or trustee so elected to fill a vacancy shall only for the unexpired term of his predecessor in office.


Issue: The By-laws of the corporation provides expressly that specific mode of filling up existing vacancies in the board of directors: by majority vote of the remaining members of the Board. Can the vacancies be filled-up by majority vote of the members in a membership meeting called for the purpose?

Held: No. While a majority of the remaining corporate members were present, however, the "election" of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not unmindful of the fact that the members, not of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the remaining members. In other words, these remaining member-trustees must sit as a board in order to validly elect the new ones. Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the constituent members of the corporation. The board of trustees must act, not individually or separately, but as a body in a lawful meeting. On the other hand, in their annual meeting the members may be represented by their respective proxies, as in the contested annual members' meeting of GCHS.

a. Increase in Board Seats - 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.

6. Meetings of the Board:a. Types of Board Meetings:

(1) Regular meetings - shall be held monthly, unless the by-laws provide otherwise.

(2) Special meetings - may be held at any time upon the call of the President or as provided in the by-laws.

b. Notice - Notice of regular or special meetings stating date, time and place of meeting must be sent to every director or trustee at least one (1) day prior to scheduled

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meeting, unless by-laws provide otherwise. A director or trustee may waive requirement, either expressly or impliedly.

c. Place of Meetings - Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise.

d. Quorum of Board[75] - In the absence of stipulations in the by-laws, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum. As a matter of practice, the Board meets once a month and pass only resolutions which lay down policies which will govern the running of the corporation by the corporate officers.

e. Requisites of Board Meetings:(1) Meeting of the Board duly assembled;

(2) Existence of quorum (majority of the board members); and

(3) Decision of the majority of the quorum duly assembled.

NOTE: Directors in board meeting, cannot be represented or vote by proxy.

Calica v. Labatique(CA) 55 OG 647

A resolution to be valid must be passed by the Board of Directors acting as a body in a meeting. They cannot act upon it individually, if they do so, the resolution is null.

f. Teleconferencing

Expertravel & Tours, Inc. v. Court of Appeals459 SCRA 147 (2005)

In the Philippines, teleconferencing and videoconferencing of members of the board of directors of private corporations is a reality in light of Rep. Act 8792. The SEC issued Memorandum Circular No. 15 (30 Nov. 2001), providing the guidelines to be complied with related to such conferences.

7. Compensation of Directors - In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, except for reasonable per diems.

Any such compensation (other than per diems) may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting.

LIMIT: In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year.[76]

Western Institute of Technology v. Salas278 SCRA 216 (1997)

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Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation.

Under Sec. 30 of Corporation Code, there are two (2) ways by which members of the Board can be granted compensation apart from reasonable per diems:

(a) when there is a provision in the by-laws fixing their compensation; and

(b) when the stockholders representing a majority of the outstanding capital stock at a regular or special meeting agree to give them compensation. From the language of Section 30, it may also be deduced that members of the board may also receive compensation, when they render services to the corporation in a capacity other than as directors or trustees of the corporation.

Chairman and Vice-Chairman, like that of Treasurer and Secretary, are considered as not mere directorship position, but officership position that would entitle the occupants to compensation. Likewise, the limitation placed under Sec. 30 of Corporation Code that directors cannot receive compensation exceeding 10% of the net income of the corporation, would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members.

Central Cooperative Exchange v. Enciso162 SCRA 706 (1988)

The resolution of the Board of Directors setting their compensation is void for it is the stockholders who have the power to set such compensation.

8. Executive Committee - The by-laws of a corporation may create an Executive Committee, composed of not less than three members of the board to be appointed by the Board.

Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws, or on a majority vote of the board,

EXCEPT With Respect To: (a) Approval of any action for which shareholder's approval is also required;

(b) Filling of vacancies in the Board;

(c) Amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; and

(d) Distribution of cash dividends.

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The purpose of the Executive Committee is to take off part of the work from the Board during the periods when the Board does not meet.

Filipinas Port Services v. NLRC177 SCRA 203 (1989)

Notwithstanding the silence in Filport's bylaws on the matter, we cannot rule that the creation of the executive committee by the board of directors is illegal or unlawful. One reason is the absence of a showing as to the true nature and functions of said executive committee considering that the "executive committee" referred to in Section 35 of the Corporation Code which is as powerful as the board of directors and in effecting acting for the board itself, should be distinguished from other committees which are within the competency of the board to create at anytime and whose actions require ratification and confirmation by the board. Another reason is that, ratiocinated by both the two (2) courts below, the Board of Directors has the power to create positions not provided for in Filport's by-laws since the board is the corporation's governing body, clearly upholding the power of its board to exercise its prerogatives in managing the business affairs of the corporation.

9. CORPORATE OFFICERS - Immediately after their election, the directors of a corporation must formally organize by the election of:

(a) President, who shall be a director;(b) Treasurer who may or may not be a director;(c) Secretary who shall be a resident and Filipino citizen; and(d) Such other officers as may be provided for in the By-laws.

NOTE: Any two (2) or more positions may be held currently by the same person,

EXCEPT: No one shall act as President and Secretary or as President and Treasurer, at the same time.[77]

In a stock corporation, the power to determine who the officers should be and the power to elect them are lodged in the Board; in those matters, the stockholders have no say. Corporate officers are elected by a majority of all the members of the Board.

In a non-stock corporation, unless otherwise provided for in the articles of incorporation or the by-laws, officers of a non-stock corporation may be elected by the members.[78]

a. Coverage of "Corporate Officer" for Purpose of Determining Extent of Business Judgment of the Board to Hire and Fire:

Gurrea v. Lezama103 Phil. 553 (1958)

For purposes for determining who is a corporate "officer" falling within the business judgment power of the Board of Directors to determine whom to hire and to fire, it shall cover only:

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(a) The officers provided by the Corporation Law, namely, the President, Treasurer and Secretary; and

(b) Those provided for in the by-laws of the corporation.

General Manager, when his position is not provided for in the by-laws, is not a corporate officer in spite of the importance of his duties and functions, and therefore would not fall within the provision of the by-laws that provides that corporate officers can only be terminated with the confirmation of two-thirds (2/3) vote of the outstanding capital stock.

Mita Pardo de Tavera v. Tuberculosis Society112 SCRA 243 (1982)

Since the position of Executive Secretary is not provided in the By-laws of the association, the incumbent is not a corporate officer under the law and is not subject to the business judgment discretion of the Board of Directors to terminate. Being a non-officer, she enjoys the constitutional right to security of tenure, and cannot be dismissed nor terminated from service except fvor cause.

Ongkingco v. NLRC270 SCRA 613 (1997)

When a condominium corporation's by-laws specifically include in its roster of corporate officers the position of "Superintendent/Administrator," then such position is clearly a corporate officer position and issues of reinstatement are deemed to be intra-corporate disputes and within the jurisdiction of SEC [now RTC] and not NLRC, since it falls within the exercise of the Board of Directors of their business judgment.

Tabang v. NLRC266 SCRA 462 (1997)

When the corporation's by-laws provide that one of the powers of the Board of Trustees is "[t]o appoint a Medical Director, Comptroller/ Administrator, Chiefs of Services and such other officers as it may deem necessary and prescribe their powers and duties," then such specifically designated positions should be considered "corporate officers" position. The determination of the rights and the concomitant liability arising from any ouster from such positions, would be intra-corporate controversy subject to the jurisdiction of SEC [now the RTC] and not the NLRC.

An "office" is created by the charter of the corporation and the officer is elected by the directors or stockholders. (2 Fletcher Cyc. Corp. Ch. II, Sec. 266). On the other hand, an "employee" usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. (Ibid) . . . A corporate officer's dismissal is always a corporate act, or an intra-corporate controversy, and the nature is not altered by the reason or wisdom with which the Board of Directors may have in taking such action.[79]

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The president, vice-president, secretary and treasurer are commonly regarded as the principal or executive officers of a corporation, and modern corporation statutes usually designate them as the officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may be empowered under the by-laws of a corporation to create additional offices as may be necessary.

Pamplona Plantation Company v. Acosta510 SCRA 249 (2006)

Under Section 25 of the Corporation Code, three officers are specifically provided for which a corporation must have: president, secretary, and treasurer. The law, however, does not limit corporate officers to these three; Section 25 gives corporations the widest latitude to provide for such other officers, as they may deem necessary, and the by-laws may and usually do provide for such other officers, e.g., vice-president, cashier, auditor, and general manager. A mere manager not so named in the by-laws does is not an officer of the corporation.[80]

b. Corporate Officer Privileges:

Kwok v. Philippine Carpet Manufacturint Corp.457 SCRA 465 (2005)

While the Court agrees that those who belong to the upper corporate echelons would have more privileges, it cannot be presume the existence of such privileges or benefits - he who claims the same is burdened to prove not only the existence of such benefits but also that he is entitled to the same.

c. The President

Secosa v. Heirs of Erwin Suarez Fancisco433 SCRA 273 (2004)

The President of the corporation which becomes liable for the accident caused by its truck driver cannot be held solidarily liable for the judgment obligation arising from quasi-delict, since the fact alone of being President is not sufficient to hold him solidarily liable for the liabilities adjudged against the corporation and its employee.

Rovels Enterprises, Inc. v. Ocampo391 SCRA 176 (2002)

The President of a corporation is considered as the corporation's agent, and as such, his knowledge of the repeal of a resolution in another juridical person in which his corporation has an interest, is ascribed to his principal under the theory of imputed knowledge.

Safic Alcan & Cie v. Imperial Vegetable Oil Co.355 SCRA 559 (2001)

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Facts: The by-laws of IVO specifically stated that the President would have direct and active management of the business and operations of the corporation "conducting the same according to the orders, resolutions and instruction of the Board of Directors and according to his own discretion whenever and wherever the same is not expressly limited by such orders, resolutions and instructions." Safic seeks to make IVO liable for the speculative coconut oil contracts entered into by IVO's President, where no evidence showed that there was Board authority.

Held: IVO cannot be held liable on the speculative contracts. It is the Board of Directors, not the President, which exercises corporate powers. The evidence showed that that the IVO Board knew nothing of the contracts, and that it did not authorize the President to enter into speculative contracts. That in fact, the President had earlier proposed that the corporation engage in such transactions but the IVO Board rejected his proposal. The speculative contracts entered into with Safic departed sharply from the past IVO transactions, and consequently Safic should have obtained from the President the prior authorization of the IVO Board. Safic cannot rely on the doctrine of implied agency because before the controversial 1986 contracts, IVO did not entere into identical contracts with Safic. The basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent.

There is no application of the doctrine of ratification in this case because: when the President entered into the speculative contracts, he did not secure the IVO Board approval; he also did not submit the contracts to the Board after their consummation so there was, in fact, no occasion at all for ratification; the contracts were not reported in IVO's books and records.

d. Vice-PresidentIlusorio v. Ilusorio

540 SCRA 182 (2007)The Vice-President and Assistant Vice-President of a corporation,

as such officers, would, ostensibly, have the right and authority to freely enter and perform acts of maintenance of the office premises, which right includes breaking opon the door and replacing its locks, apparently due to loss of the keys.

e. Corporate Secretary

Civil Service Commission v. Javier546 SCRA 485 (2008)

A primarily confidential position is characterized by the close proximity of the positions of the appointer and appointee as well as the high degree of trust and confidence inherent in their relationship; The position of Corporate Secretary of GSIS, or any Government-Owned or Controlled Corporation (GOCC), for that matter, is a primarily confidential position.

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Board Members must have the highest confidence in the secretary to ensure that their honest sentiments are always and fully expressed, in the interest of the corporation-the nature of the corporate secretary's work is akin to that of a personal secretary of a public official, a position long recognized to be primarily confidential in nature.

Lim Tay v. Court of Appeals293 SCRA 634 (1998)

The duty of the corporate secretary to record transfers of stock is ministerial. However, he cannot be compelled to do so when the transferee's title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge. Similarly, SEC does not acquire jurisdiction over a dispute when a party's claim to being a shareholder is, on the face of the complaint, invalid or inadequate or is otherwise negated by the very allegations of such complaint. Mandamus will not issue to establish a right, but only to enforce one that is already established.[81]

Esguerra v. Court of Appeals267 SCRA 380 (1997)

When a Secretary's Certificate is regular on its face, it can be relied upon by a third party who does not have to investigate the truths of the facts contained in such certification; otherwise, business transactions of corporations would become tortously slow and unnecessarily hampered.

f. Corporate Treasurer/Comptroller


A corporate Treasurer's function have generally been described as to receive and keeps funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers. Unless duly authorized, a treasurer, whose power are limited, cannot bind the corporation in a sale of its assets. Selling is obviously foreign to a corporate treasurer's function. When the corporation categorically denies ever having authorized its treasurer to sell the subject parcel of land, the buyer had the burden of proving that the treasurer was in fact authorized to represent and bind the allegedly selling corporation in the transaction. And failing to discharge such burden, and failing to show any provision of the articles of incoporation, bylaws or board resolution to prove that the treasurer possessed such power, the sale is void and not binding on the alleged selling corporation.

Atrium Management Corp. v. Court of Appeals353 SCRA 23 (2001)

A corporate treasurer whose negligence in signing a confirmation letter for rediscounting of crossed checks, knowing fully well that the

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checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated, resulted in damages to the corporation, may be personally liable therefor.

Nacpil v. International Broadcasting Corp.379 SCRA 653 (2002)

Even when the position of Comptroller is not expressly mentioned in the by-laws does not undermine the appointment to such position since under Sec. 25 of Corporation Code, the Board of Directors is authorized to appoint such other officers as it may deem necessary. In this case the by-laws provided "and such other officers as the Board of Directors may from time to time deems fit to provide for. Said officers shall be elected by majority vote of the Board of Directors". By-laws may and usually do provide for such other officers, and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the Board of Directors may also be empowered under the by-laws to create additional officers as may be necessary.

An "office" has been defined as a creation of the charter of a corporation, while an "officer" as a 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.

As petitioner's appointment as comptroller required the approval and formal action of the Board of Directors to become valid, it is clear therefore that petitioner is a corporate officer whose dismissal may be subject of a controversy cognizable by SEC under Section 5(c) of P.D. 902-A which includes controversies involving the election and appointment of corporate directors, trustees, officers and manager. Had petitioner been an ordinary employee, such board action would not have been required.

It is likewise of no consequence that petitioner's complaint for illegal dismissal includes money claims, for such claims are actually part of the requisites of his position in, and therefore linked with his relation with, the corporation. The inclusion of such money claims does not convert the issue into a simple labor problem.

g. External Auditor

Visitacion v. Libre459 SCRA 398 (2005)

Judicially appointed external auditors need not be accredited by SEC as they are not covered by SEC Circular requiring such accreditation.

Bank of P.I. v. Case Montessori Internationale430 SCRA 261 (2004)

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The major purpose of an independent audit is to investigate and determine objectively if the financial statements submitted for audit by a corporation have been prepared in accordance with the appropriate financial reporting practices of private entities. The relationship that arises therefrom is both legal and moral. It begins with the execution of the engagement letter that embodies the terms and conditions of the audit and ends with the fulfilled expectation of the auditor's ethical and competent performance in all aspects of the audit.

Bank of P.I. v. Case Montessori Internationale430 SCRA 261 (2004)

The financial statements are representations of the client; but it is the auditor who has the responsibility for the accuracy in the recording of data that underlies their preparation, their form of presentation, and the opinion expressed therein. The auditor does not assume the role of employee or of management in the client's conduct of operations and is never under the control or supervision of the client.

10. DUTIES AND LIABILITIES OF DIRECTORS, TRUSTEES OR OFFICERS -

a. Duty of Obedience - The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and by the by-laws of the corporation.[82]

b. Duty of Diligence - Directors or trustee 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 shall be liable jointly and severally for all damages resulting thereform suffered by the corporation, its stockholders or members and other persons.[83]


Meaning of "Bad Faith". - If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable. For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obligquity 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.[84]

Aratea v. Suico518 SCRA 501 (2007)

Issue: Can the controlling stockholders and/or representatives of a corporation to which loans were extended be held solidarily liable by the lender?

Held: While generally directors and officers cannot be held personally liable for loans that were extended clearly to the corporation, nevertheless when the officers who extracted the loans acted in bad faith

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or with gross negligence, under Sec. 31 they can be made solidarily liable with the corporation. In this case, aside from making promises to the lender, they were in bad faith in carrying out the business of the corporation, but not agreeing with the valid transactions from which the lender could have been paid the loans, while other similar transactions that benefit the corporation were allowed to push through. "Petitioners Aratea and Canonigo acted in bad faith when they, as officers of SAMDECO, unreasonably prevented Suico from selling his part of the coal-produce of the mining site, in gross violation of their MOA. This resulted in Suico not being unable (sic) to realize profits from his 50% share of the coal produce, from which Suico could obtain part of the ayment of the loans and advances he made in favor of SAMDECO. Moreover, petitioners also acted in bad faith when they sold, transferred and assigned their proprietary rights over the mining area in favor of SPMI and Dy, thereby causing SAMDECO to grossly violate its MOA with Suico. Suico suffered grave injustice because he was prevented from acquiring the opportunity to obtain payment of his loans and cash advances, while petitioners Aratea and Canonigo profited from the sale of their shareholdings in SAMDECO in favor of SPMI and Dy."

H.R. Carlos Construction, Inc. v. Marina Properties Corp.421 SCRA 428 (2004)

When the records of the case are bereft of any evidence that an officer acted in bad faith with gross or inexcusable negligence, or that he acted outside the scope of his authority as company president, he cannot be held liable under Sec. 31 of Corporation Code.

c. Duty of Loyalty - When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confience, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.[85]

Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits which should belong to the corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock.[86]

NOTE: Sec. 34 applies only to a director (and not to a trustee or officer as in the case of Sec. 31, and the implication is that only ratificatory vote of the stockholders would allow a director who violates his duty of loyalty to keep the profits from the venture; while for trustees or officers who violate such duties, it is within the business judgment of the Board to ratify the act.

Sections 31 and 34 contain the doctrine of corporate opportunity. In case of such conflict-of-interests, and the director acts against the good of the corporation, he shall be accountable for the profits he obtained, even if he had risked his own funds.

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Gokongwei v. SEC89 SCRA 336 (979)

If there is presented to a corporate officer or a director a business opportunity which the corporation is financially able to undertake, is from its nature in the line of corporation's business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself, and if he does, the corporation may elect to claim all the benefits of the transaction for itself.

d. Rules on Liability of Directors, Trustees and Officers

Directors or trustees shall be liable solidarily for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons when:

(1) They 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

(2) They acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.

Cebu Country Club, Inc. v. Elizagaque542 SCRA 65 (2008)

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 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.

Carag v. NLRC520 SCRA 28 (2007)

For 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 unlawful act. Mere failure to comply with the notice requirement of labor laws on company closure or dismissal of employees does not amount to a patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the act.

Palay, Inc. v. Clave124 SCRA 638 (1983)

Unless sufficient proof exist on record that the President (who is also a controlling stockholder) has used the corporation to defraud a

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party, such officer cannot be made personally liable for corporate liabilities. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock is not of itself sufficient ground for disregarding the separate corporate personality.

Toh v. Solid Bank Corp.408 SCRA 544 (2003)

There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts.

Consolidated Bank and Trust Corp. v. Court of Appeals356 SCRA 671 (2001)

It is hornbook law that corporate personality is a shield against personal liability of its officers-a corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity.

Paradise Sauna Massage v. Ng181 SCRA 719 (1990)

An officer-stockholder who is a party signing in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate juridical entity.

Tramat Mercantile v. Court of Appeals238 SCRA 14 (1994)

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:

(a) He assents: (i) to a patently unlawful act of the corporation, or (ii) for bad faith or gross negligence in directing its affairs, or (iii) for conflict of interest resulting in damage to the corporation, its stockholders or other persons;[87]

(b) He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto (Sec. 65, Corporation Code);

(c) He agrees to hold himself personally and solidarily liable with the corporation (De Asis and Co., Inc. v. CA, 136 SCRA 599 [1985]);

(d) He is made by a specific provision of law, to personally answer for his corporate action (exemplified in Sec. 144, Corporation Code; also Sec. 13 of P.D. 115 or the Trust Receipts Law).[88]

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Malayang Samahan ng mga Manggagawa sa M. Greenfields v. Ramos

326 SCRA 428 (2000)Corporate officers cannot be held personally liable for damages on

account of the employees dismissal because the employer corporation has a personality separate and distinct from its officers who merely acted as its agents.

Heirs of Trinidad de Leon Vda. De Roxas v. CA422 SCRA 101 (2004)

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.

e. Liability of Corporation for Acts of Officers:

National Power Corp. v. Court of Appeals273 SCRA 419 (1997)

The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said director and officers that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties.

Moreso, when corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personally for the judgment rendered against the corporation.

BA Finance Corp. v. CA211 SCRA 112 (1992)

When a contract of guaranty is entered by a corporate officer in behalf of a corporation under whose articles and by-laws it does not possess power to grant such a guaranty, and such contract was without board authority, then the corporation cannot be held liable therefor. A person dealing with an assumed agent is bound at his peril if they would hold the principal liable to ascertain not only the act of the agency but also the nature and extent of the authority.[89]

Francisco v. GSIS7 SCRA 577 (1963)

When Corporate Secretary, who is a responsible officer of the corporation, makes a mistake, or does an act contrary to the resolution passed by the Board of Directors, the corporation will be bound by such act to bind the corporation to an innocent third party who acted in good faith.

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f. JSS Practice in the Banking Industry:

Security Bank and Trust Company v. Cuenca341 SCRA 781, 804 (2000)

It is a common banking practice to require the JSS ("joint and solidary signature") of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditor's recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.

g. Corporate Officers' Liability for Labor Claims:

A.C. Ransom Labor Union v. NLRC142 SCRA 269 (1986)

[Interpreting Art. 212(c) of Labor Code which defined "employer" to "include any person acting in the interest of an employer, directly or indirectly"]:

Since a corporation is an artificial person, it must have an officer who can be presumed to be the employer. Therefore, the responsible officer of the employer corporation can be held personally liable for the non-payment of backwages; and in the absence of definitive proof as to the identity of an officer or officers of the corporation directly liable for failure to pay backwages, the responsible officer is the President of the corporation, jointly and severally with other (past) presidents of the corporation.

Chua v. NLRC182 SCRA 253 (1990)

Vice-President may be held personally liable for being the highest and most ranking officer of the corporation for the claims of the President who had been dismissed.

Uichico v. NLRC273 SCRA 35 (1997)

In labor cases, directors and officers are solidarily liable with the corporation for the termination of employment of employees done with malice or in bad faith. In this case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking officers and directors of the corporation, signed the Board Resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Income Statement which, to repeat, had no evidentiary value whatsoever. This is indicating bad faith on the part of the corporate officers for which they can be held jointly and severally

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liable with the corporation for all the money claims of the illegally terminated employees.

Reahs Corporation v. NLRC271 SCRA 247 (1997)

[The Court reviewed the A.C. Ransom doctrine of imposing solidary liability on the highest officers of the corporation for judgment on labor claims rendered against the corporation pursuant to Art. 283 of the Labor Code, and reviewed its application in subsequent cases of Maglutac, Chua, Gudez and Pabalan.]

The main doctrine of separate personality of a corporation should remain as the guiding rule in determining corporate liability to its employees, and that at the very least, to justify solidary liability, "there must be an allegation or showing that the officers of the corporation deliberately or maliciously designed to evade the financial obligation of the corporation to its employees," or a showing that the officers indiscriminately stopped its business to perpetuate an illegal act, as a vehicle for the evasion of existing obligations, in circumvention of statutes, and to confuse legitimate issues.

While there was no sufficient evidence to conclude that the officers have indiscriminately stopped the entity's business, at the same time, they have opted to abstain from presenting sufficent evidence to establish the serious and adverse financial condition of the company. "This uncaring attitude on the part of the officers of Reahs' gives credence to the supposition that they simply ignored the side of the workers who, more or less, were only demanding what is due them in accordance with law. In fine, these officers were conscious that they corporation was violating labor standard provisions but they did not act to correct these violations; instead, they abruptly closed business. Neither did they offer separation pay to the employees as they conveniently resorted to a lame excuse that they suffered serious business losses, knowing fully well that they had no substantial proof in their hands to prove such losses."

Asionics Philippines, Inc. v. NLRC290 SCRA 198 (1998).

When there is nothing on record to indicate that the President and majority stockholder acted in bad faith or with malice in carrying out the retrenchment program of the company, he cannot be held solidarily and personally liable with the corporation.

Restaurante Las Conchas v. Llego314 SCRA 24 (1999)

Although as a rule, the officers and members of a corporation are not personally liable for acts done in the performance of their duties, this rule admits of exceptions, one of which is when the employer-corporation is no longer existing and is unable to satisfy the judgment in favor of the employee, the officers should be held liable for acting on behalf of the corporation. In that case, the restaurant business had to be closed down

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because possession of the premises had been lost through an adverse decision in an ejectment case.

"In the present case, the employees can no longer claim their separation benefits and 13th month pay from the corporation because it had already ceased operation. To require them to do so would render illusory the separation and 13th month pay awarded to them by NLRC. Their only recourse is to satisfy their claim from the officers of the corporation who were, in effect, acting in behalf of the corporation."

(1) Reiteration of the A.C. Ransom Doctrine:

NYK International Knitwear Corp. Phil. V. NLRC397 SCRA 607 (2003)

Since a corporation is an artificial person, it must have an officer who can be presumed to be the employer, being the "person acting in the interest of the employer"-the corporation, in the technical sense only, is the employer. The manager of the corporation falls within the meaning of an "employer" as contemplated by the Labor code, who may be held jointly and severally liable for the obligation of the corporation to its dismissed employees.

Malayang Samahan ng mga Manggagawa sa M. Greenfields v. Ramos

326 SCRA 428 (2000)Corporate officers cannot be held personally liable for damages on

account of the employees dismissal because the employer corporation has a personality separate and distinct from its officers who merely acted as its agents.

(2) Contrary Rulings to the A.C. Ransom Doctrine:

Acesite Corp. v. NLRC449 SCRA 360 (2005)

Unless they have exceeded their authority, corporate officers are, as a general rule, not personally liable for their official acts, because a corporation, by legal fiction, has a personality separate and distinct from its officers, stockholders and members. However, this fictional veil may be pierced whenever the corporate personality is used as a means of perpetuating fraud or an illegal act, evading an existing obligation, or confusing legitimate issue. In cases of illegal dismissal, corporate directors and officers are solidarily liable with the corporation, where terminations of employment are done with malice or bad faith.[90]

h. Dealings of Directors, Trustees or Officers with Corporation[91] - A contract of the corporation with one or more of its directors or trustees or officers is voidable at the option of such corporation, unless all the following conditions are present:

(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;

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(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; and

(d) In case of an officer, the contract with the officer has been previously authorized by the Board of Directors.

In the case of a contract with a director or trustee, where any of the first two conditions set forth is absent, such contract may be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or of 2/3 of the members in a meeting called for the purpose; Provided, That full disclosure of the adverse interest of the director or trustee involved is made at such meeting and the contract is fair and reasonable under the circumstances.[92]

Yao Ka sin Trading v. Court of Appeals209 SCRA 763 (1992)

When a distributorship agreement for the cement company, covering a long period under a fixed amount, has been entered into with one of the directors, which was not authorized by the Board of Directors, and which in fact disapproved the contract subsequently, cannot be binding on the corporation, being essentially a disadvantageous contract involving a director.

i. Contracts Between Corporations with Interlocking Directors:[93]

RULE: Contracts between corporations with interlocking directorates are valid so long as there is no fraud and the contract is fair and reasonable under the existing facts.

LIMIT: If the director's interest is nominal in one of the contracting corporations (i.e., not exceeding 20% of outstanding capital stock), then the contract must comply with the requisites provided for under Sec. 32, otherwise, the contract is voidable at the option of the corporation.


The rule under Sec. 33 of Corporation Code allowing annulment of contracts between corporations with interlocking directors resulting in the prejudice to one of the corporation, has not application to cases where fraud is alleged to have been committed to third parties.

V. POWERS OF CORPORATIONS1. Underlying Theory on Power of Corporation

Precisely because the corporation is such a prevalent and dominating factor in the business life of the country, the law has to look carefully into the exercise of powers by these artificial persons it has created. Reynoso IV v. Court of Appeals, 345 SCRA 335 (2000).

Reynoso, IV v. Court of Appeals

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345 SCRA 335 (2000)A corporation has no power except those expressly conferred on it

by Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its Board of Directors and/or its duly authorized officers and agents. 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.[94]

2. Express Powers of Corporations - Section 36 of Corporation Code enumerates some of the express powers of corporations (many of which even if not expressly provided for by law would constitute implied powers of every entity):

(a) To sue and be sued;(b) Power of succession by its corporate name for the term of its existence;(c) To adopt and use a corporate seal;(d) To amend its articles of incorporation;(e) To adopt by-laws not contrary to law, morals or public policy, and to

amend or repeal the same;(f) In case of stock corporations, to issue or sell stocks; for non-stock

corporations, to admit members;(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,

mortgage and otherwise deal with all types of properties;(h) To enter into merger or consolidation;(i) To make reasonable donations, provided that no corporation shall give

donations in aid of any political party or candidate or for purpose of partisan political activity;

(j) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and

(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.

Section 36 enumerates 10 powers that a corporation enjoys in addition to the special powers that may be provided for in the purpose clause of the articles of incorporation, which would also constitute express powers. Hence, there are two sources of express powers of a corporation, to wit:

• Those provided for in the law (Corporation Code); and

• Purpose clause of the articles of incorporation, specifically.

But Sec. 45 recognizes also implied powers of every corporate entity emanating from its express powers: "No corporation . . . shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred."

Montelibano v. Bacolod Murcia Milling Co.5 SCRA 36 (1962)

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The rule is that in each case it is a question 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, and is reasonably tributary to the promotion of those end, in a substantial, and not in a remote and fanciful sense, it may fairly be considered within a charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business, fairly incidental to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise no.

a. Power to Sue and Be Sued:


The power of the corporation to sue and be sued in any court is lodged with the Board of Directors that exercises its corporate powers. No person, not even its officers, could validly sue in behalf of a corporation in the absence of any resolution from the Board of Directors authorizing the filing of such suit.[95]


The failure of petitioner to attach a certified copy of the board resolution authorizing the filing of a petition for certiorari in the Court of Appeals is fatal to the case. Courts are not expected to take judicial notice of corporate board resolutions or a corporate officer's authority to represent a corporation.

Gonzales v. Climax Mining Ltd.452 SCRA 607 (2005)

If the petitioner is a corporation, a board resolution authorizing a corporate officer to execute the certification against forum shopping is necessary - a certification not signed by a duly authorized person renders the petition subject to dismissal.[96]

BPI Leasing Corp. v. Court of Appeals416 SCRA 4 (2003)

Although a lawyer may sign the certification on behalf of the corporation, such lawyer must specifically be authorized by the Board of Directors to so sign.[97]

Bitong v. Court of Appeals292 SCRA 304 (1998)

In the absence of a special authority from the Board of Directors to institute a derivative suit, the president or Managing Director is disqualified by law to sue in her own name or on behalf of the corporation. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the Board of Directors that exercises its corporate powers and not in the President.

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Tam Wing Tak v. Makasiar350 SCRA 475 (2001)

A minority stockholder, even when he is a member of the Board of Directors, has no such power or authority to sue on the corporation's behalf.

Nor can we uphold this as a derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit.

Pet Plans, Inc. v. Court of Appeals443 SCRA 510 (2004)

Where the President of a corporation was impleaded in his official capacity as such and no specific claim or charge against him, in his personal capacity, was alleged in the complaint filed with the NLRC but the Labor Arbiter's decision made him jointly and solidarily liable with the corporation, he then becomes a real party-in-interest whose stake have become distinct from those of the corporation, and, as such, it became inevitable for him to sign the verification and certificate of non-forum shopping.

Omictin v. Court of Appeals512 SCRA 70 (2007)

The validity of the essential prior demand (to constitute the crime of estafa) for the delivery of the subject vehicles rest upon the authority of the person making such a demand on the company's behalf. If the person making the demand on behalf of the corporation is not authorized officer, then the demand is void.

b. Power to Sell Land:

Firme v. Bukal Enterprises and Dev. Corp.414 SCRA 190 (2003)

It is the Board of Directors or Trustees which exercises almost all the corporate powers in a corporation, as indicated clearly under Sec. 23 of Corporation Code. Section 36 also confirms the power to purchase and sell property to be vested with the corporation through its board. "Under these provisions, the power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will hae to be with the board, whose approval will finalize the transaction. A corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or its by-laws.

AF Realty & Dev., v. Dieselman Freight Services 373 SCRA 385 (2002)

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Since sale of corporate land can only be effected through an agent, the Law on Agency takes precedence. Under Article 1409 of Civil Code, when a sale of land is effected through an agent, the lack of written authority of the agent, would make the sale void and the principles of corporate ratification cannot be given effect to save the contract.


When the corporation's primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Likewise, Arts. 1874 and 1878 of Civil Code require that when land is sold through an agent, the agent's authority must be in writing, otherwise the sale is void.

c. Power to Obtain Bank Loans:


The power to borrow money is one of those cases where even a special power of attorney is required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors. The argument that the obtaining of loan was in accordance with the ordinary course of business usages and practices of the corporation is devoid of merit, because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation.[98]

3. ULTRA VIRES DOCTRINE - A corporation is a being of express powers; a creature of the law and may only exercise such powers as the law creating it has granted. Acts performed by it in excess of its corporate powers are ultra vires, which are generally not binding on the corporation. A person dealing with a corporation is charged with inquiry as to corporate powers, because the corporation, being a creature of law, has necessarily limited powers and acts done beyond those are ultra-vires.

There are three (3) types of ultra vires acts, namely:

• First type: those which are outside of the express, implied or incidental powers of the corporation (Sec. 43);

• Second type: those which are effected by corporate representatives who act without authority, (even though the contract is within the express/implied/inciental powers of the coproration they represent;[99]

• Third type: those which are contrary to laws or public policy.

The term "ultra vires" refers to an act outside or beyond corporate powers, including those that may ostensibly be within such powers but are, by general or special laws, prohibited or declared illegal. Twin Towers Condominium Corp. v. Court of Appeals, 398 SCRA 203 (2003).

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Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc.436 SCRA 235 (2004)

Ultra Vires of Second Type - Generally, the acts of the corporate officers within the scope of their authority are binding on the corporation. However, under Art. 1910 of Civil Code, acts done by such officers beyond the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or is estopped from denying them. Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation.

Atrium Management Corp. v. Court of Appeals353 SCRA 23 (2001)

Issue: Can the corporation be held liable for the issuance of a check by a corporate officer who was granted no authority to accommodate a third party?

Held: No. An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law. The term "ultra vires" is "distinguished from an illegal act from the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.

It is, owever our view that there is basis to the rule that the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act.

Tuason & Co. v. Bolanos95 Phil. 106 (1954)

Facts: Tuason & Co. as owner of large tracts of real estate, entered into a contract with Araneta, Inc. for the development and subdivision of its real property. The two corporations brought an action to oust Bolanos, a squatter on the land. Bolanos asked for the dismissal of the case by questioning their capacity to sue alleging that the two corporations have formed a partnership (otherwise, ultra vires because only natural persons may be partners is partnerships).

Held: Bolano is correct. If two corporations try to form a partnership, none would be created thereby. But when the arrangement is actually a joint venture, it would be valid since corporations have legal capacity to form a joint venture, i.e., one with a limited purpose and duration.

NOTE: The reason behind the rule that corporations cannot validly enter into a partnership is because in a partnership all the other partners can bind the partners and partnership under the principle of "mutual agency," which would be violative of the principle of "centralized management) under Sec. 23 of Corporation Code which provides that only the Board of Directors can bind the corporation.

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a. Doctrine of Ratification:

Yasuma v. Heirs of Cecilio S. De Villa499 SCRA 466 (2006)

The corporation may ratify the unauthorized acts 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 unauthoarized 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 ca 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 thereform.

National Power Corp. v. Alonzo-Legasto443 SCRA 342 (2004)

Acts done in excess of corporate officers' scope of authority cannot bind the corporation. However, when subsequently a compromise agreement was on behalf of the corporation being represented by its President acting pursuant to a Board of Directors' resolution, such constituted as a confirmatory act signifying ratification of all prior acts of its officers.

Pirovano v. Dela Rama Steamship96 Phil. 335 (1954)

For valid ratification of an ultra-vires act, the following requisites must concur:

(a) Act or contract must be consummated, not merely executory;

(b) The creditors are not prejudiced, or all of them have given their consent;

(c) The rights of the public or the State are not involved; and

(d) All the stockholders must give their consent.

The following rules are well-settled on the effects of ultra-vires acts:

(a) A wholly executory ultra vires contract or act cannot be enforced nor can damages be recovered for its breach.

(b) A wholly executed ultra vires contract or act shall not be interfered with as between the parties or persons whose rights are derived therefrom; but the State can always question said contract or act.

(c) When an ultra vires act is executed on one side but executory contract or on the other side who received benefits therefrom, recovery can be had by the former.

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(d) The title of a corporation to property cannot be questioned on the ground that it acquired the property through an ultra vires contract of transfer. (7 Fletcher pp. 537-574).

Ayala Corp. v. Rosa-Diana Realty346 SCRA 663 (2000)

The defense of the corporation that the acting officers in a particular corporate transaction had no authority to act for or bind the corporation should be raised at the onset, otherwise it cannot be proved. Thus, where a corporation's special and affirmative defenses never mentioned any allegation that its President and Chairman were not authorized to execute a particular undertaking, it would be inappropriate for the trial court to rule that in the absence of any authority or confirmation from the Board of Directors, its Chairman and President cannot validly enter into such undertaking.

Lao v. Court of Appeals325 SCRA 694 (2000)

Under procedural law, the lack of authority of an officer to bind the corporation should be specially pleaded by the corporation; the failure of the corporation to interpose such defense could only mean that the action, transaction or representation was with the consent and authority of the corporation.


As a general rule, 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 it has ratified such acts or is estopped from disclaiming them. The officer acting without proper authority cannot by his act be the basis upon which to bind the corporation of ratification. Such ratification can come only from the act or omission of the Board of Directors.

b. Doctrine of Estoppel:

Lipat v. Pacific Banking Corp.402 SCRA 339 (2003)

The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction entered into by its officer with a third party who in good faith, relied on the officer's authority to act on behalf of the corporation. "While the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in its board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law, yet as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees, or agent. The authority of such individuals to bind

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the corporation is generally derived from law, corporate by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course of business." [100]

People's Aircargo v. CA297 SCRA 170 (1998)

Even when the contract entered into in behalf of the corporation is outside the usual powers of the corporate officer, the corporation's ratification of the contract and acceptance of the benefits arising therefrom have made such contract binding upon the corporation. The enforceability of contracts made under Art. 1403(2) of Civil Code, where there has been no authority by the principal, is ratified "by acceptance of benefits under them" under Art. 1405 of Civil Code.

Republic v. Acoje Mining3 SCRA 361 (1963)

Facts: The employees of Acoje Mining who were living within the company compound in the mining demanded the installation of a post office branch to facilitate postal services. The Postmaster General who agreed to open a branch there provided the company post a surety bond to answer for any malversation that the postmaster in the newly created office may commit. The bond was posted, and subsequently, the postmaster malversed public funds. The Postmaster General sued on the bond but the company raised the defense of ultra-vires act, alleging that it was not authorized to file a bond for a public officer and, therefore, such act did not bind the corporation.

Held: The filing of the surety bond, which may be ultra-vires, but not illegal per se, and which was ratified by the acceptance by the mining company of the benefits attendant to the opening of a post office in the mining compound, is binding on the corporation.

c. Doctrine of Apparent Authority:

Soler v. Court of Appeals358 SCRA 57 (2001)

"It is a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of 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."[101]

Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc. 436 SCRA 235 (2004)

It bears stressing that apparent authority is based on estoppel and can arise from two instances:

(a) The principal may knowingly permit the agent to so hold himself out as having such authority, and in this way, the

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principal becomes estopped to claim that the agent does not have such authority; or

(b) The principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to believe that he actually has such authority.

"There can be no apparent authority of an agent without acts or conducts on the part of the principal and such acts or conduct of the principal must have been known and relied upon in good faith as a result of the exercise of reasonable prudence by a third person as claimant and such must have produced a change of position to its detriment. The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent."

Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc.436 SCRA 235 (2004)

For the principle of apparent authority to apply, the petitioner is burdened to prove the following:

(a) the acts of the purported corporate officer or agent justifying belief in the agency by the principal corporation;

(b) knowledge thereof by the principal corporation (i.e., its Board of Directors) which is sought to be held; and

(c) reliance thereon by the principal corporation (i.e., its Board of Directors) consistent with ordinary care and prudence.


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 possessing the power to so 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.

Apparent authority is derived not merely from practice. Its existence may be ascertained through:

(a) The general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or

(b) The acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.

It requires presentation of evidence of similar acts executed either in its 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 the power to bind the corporation.[102]

Safic Alcan & Cie. V. Imperial Vegetable Co.

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355 SCRA 559 (2001)Doctrine Favors Only Those Who Deal In Good Faith - Under Art.

1898 of Civil Code, the acts of an agent beyond the scope of his authority do no bind the principal unless the latter ratifies the same expressly or implied. It also bears emphasizing that when the third person knows that the agent was acting beyond his power or authority, the principal can not be held liable for the acts of the agent. If the said third person is aware of such limits of authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal's ratification.


Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation liable (Art. 1883, Civil Code).

(1) Applications of the Doctrine of Apparent Authority:

Lapulapu Foundation, Inc. v. Court of Appeals421 SCRA 328 (2004)

The circumstance found in the case to support the application of the doctrine were as follows: The President has presented himself as duly authorized by the Foundation to represent it, having opened savings and current accounts in the name of the corporation, signed the application for as well as the necessary specimen signature cards, submitted a notarized Secretary's Certificate from the corporation, attesting that he has been authorized.

Inter-Asia Investment Ind. v. Court of Appeals403 SCRA 452 (2003)

Inter-Asia sold to Asia Industries all its shares in Farmacor, with warranty that Farmacor, after audit of its books, will have a guaranteed Net Worth of P12.0 Million. When the audit revealed that Farmacor had Net Worth shortfall of P1.2 Million, Inter-Asia, through its President, proposed in writing to refund P4.0 Million of the price paid, which was accepted by Asia Industries. Later, Inter-Asia refused to give the refund on the ground that the President was not authorized by the Board of Directors to give the settlement proposal.

Held: Inter-Asia industries is liable on the settlement offer concluded by its President. Although the general rule is that absence of authority from the Board of Directors does not authorize any officer to bind the corporation, nevertheless, under the doctrine of apparent authority, Inter-Asia is bound by the contract of the President. By authorizing the President to sign the Purchase Agreement on its behalf, the Inter-Asia Board is deemed to have clothed the President with apparent capacity to perform all acts which are expressly implied and inherent under the agreement, including the manner of payment of the purchase price.

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"A corporate officer or agent, however, may represent and bind the corporation in transaction with third persons to the extent of the authority to do so has been conferred upon him, and this includes powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused person dealing with the officer or agent to believe it has conferred."

Safic Alcan & Cie. v. Imperial Vegetable Co.355 SCRA 559 (2001)

Facts: An officer entered into speculative contracts with Safic without securing the Board's approval. He also did not submit the contracts to the Board after their consummation. The contracts were not reported nor recorded in the books of the corporation. Can the corporation be held liable for the losses sustained on such contracts?

Held: No. It must be pointed out that the Board of Directors, not the officer, exercises corporate power. There was no occasion by which it can be shown that the Board of Directors ratified the contracts. Under Art. 1898 of Civil Code, the acts of an agent beyond the scope of his authority do no bind the principal unless the latter ratifies the same expressly or implied.

Likewise, when the third person knows that the agent was acting beyond his power or authority, the principal can not be held liable for the acts of the agent. If the said third person is aware of such limits of authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal's ratification.

Aguenza v. Metropolitan Bank271 SCRA 1 (1997)

When counsel admits on behalf of the corporation that the latter admitted culpability for personal loans obtained by its corporate officers, such admission cannot be given legal effect to the detriment of the corporation. Admission made in the answer by counsel for the corporation was "without any enabling act or attendant ratification of corporate act," as would authorize or even ratify the same; in the absence of Board ratification or authority, such admission does not bind the corporation.

Also, the letter issued by the corporate officers who obtained the loan "as indicating the corporate liability of the corporation," cannot also serve to make the corporation liable. The documents and admissions cannot have the effect of a ratification of an unauthorized act. Ratification can never be made on behalf of the corporation by the same persons who wrongfully assume the power to make the contract; but the ratification must be by officers as governing body having authority to make such contract.

Francisco v. GSIS7 SCRA 577 (1963)

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Facts: Francisco, a government employee, borrowed money from GSIS, secured by a mortgage on her house. Upon failure to pay the installments due, GSIS threatened to foreclose the security. Francisco answered that she could not keep up with the installment and she submitted a proposal whereby she could liquidate the debt. Said proposal was rejected by GSIS Board. However, the Corporate Secretary erroneously sent her a wire that the proposal was accepted. Subsequently, when she received summons for foreclosure, she brought action for damages against GSIS.

Held: The Corporate Secretary is the custodian of corporate records and if he certifies that a certain action had been taken by the Board, such certification is binding upon the corporation although the same may have been erroneously made. The reason for this is that the corporate secretary is clothed with apparent authority.

d. How Corporation Bound or Not Bound by Its President:

Kwok v. Philippine Carpet Manufacturing Corp.457 SCRA 465 (2005)

Corporate policies need not be in writing. Contracts entered into by a corporate officer or obligations or prestations assumed by such officer for and in behalf of such corporation are binding on the said corporation only if such officer acted within the scope of his authority or if such officer exceeded the limits of his authority, the corporation has ratified such contracts or obligations.

Nevertheless, a verbal promise given by the Chairman and President of the company to the general manager and chief operating officer to give the latter unlimited sick leave and vacation leave benefits and its cash conversion upon his retirement or resignation, when not an integral part of the company's rules and policies, is not binding on the company when it is without the approval of the Board of Directors.

Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., Inc.

436 SCRA 235 (2004)Facts: The board resolution authorizing the President to sell a

particular company parcel of land was with authority to sell "on such terms and conditions which he deems most reasonable and advantageous."

Issue: Does the clause include, and can the buyer reasonably expect that, the clause include the power to grant a right of way or sell a portion of the adjacent land of the company?

Held: No. The resolution issued by the Board relied upon the buyer did not contain an express authority to sell or encumber the adjacent property. Moreover, Art. 1878 of Civil Code provides that a special power of attorney is required to convey real rights over immovable property. Article 1358 requires that contracts which have for their object the creation of real rights over immovable property must appear in a public

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document. The buyer cannot feign ignorance of the need for the President to have been specifically authorized in writing by the Board of Directors to be able to grant a right of way and agree to sell a portion of the adjacent lot. The rule is that if the act of the agent is one which requires authority in writing, those dealing with him are charged with notice of that fact.


Facts: The President of People's Aircargo, in order to obtain a license from the Bureau of Customs, solicited and obtained from Saño the preparation of a feasibility study and another contract as consultant for the preparation of the operations' manual and the conduct of seminar workshop for the employees. The works of Saño were submitted to Bureau of Customs and became the basis by which the Company was issued license to operate bonded warehouses. After the President sold his shares and resigned, the Board refused to pay Saño, on the ground that the President entered into the contract without board authorization.

Held: Company liable for the full amount. The Company had previously allowed its President to enter into the first Contract for feasibility study without a board resolution expressly authorizing him, "clothing" its President with the power to bind the Company. The first contract was consummated, implemented and paid without a hitch. Therefore, Saño should not be faulted for believing that Punsalan's conformity to second contract was also binding on the Company. Likewise, by having accepted the benefits from the services of Saño, the Company is estopped from denying the enforceability of Second Contract.

Nyco Sales Corp. v. BA Finance Corp.200 SCRA 637 (1991)

A corporation cannot disown its President's act of applying to the bank for credit accommodation, simply on the ground that it never authorized the President by the lack of any formal board resolution.

Firstly, the corporate by-laws clearly provides for the powers of the President, which includes, inter alia, executing contracts and agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of the corporation.

Secondly, the records show that there were already previous transaction of discounting the checks involving the same personalities wherein any enabling resolution from the Board was dispensed with and yet the bank was able to collect from the corporation.

Such effectively places the corporation and its Board of Directors in estoppel in pais which arises when one, by his acts, representations or admissions, or by his silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such beliefs, so that he will be prejudiced if the former is permitted to deny the existence of such

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facts. The corporation remained silent in the course of the transaction and spoke out only later to escape liability. This cannot be countenanced.

e. Bank Bound by Its Manager and Officer:

BPI Family Savings Bank v. First Metro Investment Corp.429 SCRA 30 (2004)

What transpires in the corporate board room is entirely an internal matter.

Therefore, if a banking corporation knowingly permits its officer, or any other agent, to perform acts within the scope of an apparent authority, holding him out to the public as possessing power to do those acts, the corporation will, as against any person who has dealt in good faith with the corporation through such agent, be estopped from denying such authority. This is so the case in terms of bank managers, where the public has a right to rely on the trustworthiness of bank managers and their acts.

Premiere Dev. Bank v. Court of Appeals427 SCRA 686 (2004)

In a banking corporation, when an officers arranges a credit line agreement and forwards the same to the legal department at its Head Office, and the bank did no disaffirm the contract, then it is bound by it.

When the officers or agents of a corporation exceed their powers in entering into contract or doing other acts, the corporation, when it has knowledge thereof, must promptly disaffirm the contract or act and allow the other party or third person to act in the belief that it was authorized or has been ratified. If it acquiesces, with knowledge of the facts, or fails to disaffirm, ratification will be implied or else it will be estopped to deny ratification.

Rural Bank of Milaor (Camarines Sur) v. Ocfemia325 SCRA 99 (2000)

A bank is liable to innocent third parties where representation is made in the course of its normal business by an agent even though such agent is abusing her authority. Bank is estopped from questioning the authority of the bank manager to enter into the contract of sale done in the normal course of business. When a bank, by its acts and failure to act, has clearly clothed its manager with apparent authority to sell an acquired asset in the normal course of business, it is legally obliged to confirm the transaction by issuing a board resolution to enable the buyers to register the property in their names. It has a duty to perform necessary and lawful acts to enable the other parties to enjoy all benefits of the contract which it had authorized.

DBP v. Ong460 SCRA 170 (2005)

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Bank Cannot Be Bound by Mere Clerk -The acceptance of the offer to purchase by the clerk of the branch of the bank, and the representation that the manager had already approved the sale (which in fact was not true), cannot bind the bank to the contract of sale, it being obvious that such a clerk is not among the bank officers upon whom putative authority may be reposed by a third party. There is, thus, no legal basis to bind the bank into any valid contract of sale with the buyers, given the absolute absence of any approval or consent by any responsible officer of the bank.

f. Doctrine of Laches or "Stale Demands"

Rovels Enterprises, Inc. v. Ocampo391 SCRA 176 (2002)

The principle of laches or "stale demands" provides that the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been done earlier, or the negligence or omission to assert a right within a reasonable time, warrants a presumption that the party entitled to assert it either has abandoned it or declined to assert it.

4. Power to Extend or Shorten Corporate Term - The requirements for extending or shortening corporate life:

(a) Majority vote of the Board of Director/Trustees;

(b) Ratification in a meeting by 2/3 of outstanding capital stock or 2/3 of the members, as the case may be.

The extension or shortening of the corporate life actually requires the amendment of the articles of incorporation. But whereas, in general amendments of the articles can be made by written assent of the stockholders or members, without need of meeting, in the case provided for under Sec. 37, a meeting must be duly called for the purpose.

NOTE: A dissenting stockholder may exercise his right of appraisal in case of extension of the life of the corporation.

But such right is not available to a dissenting stockholder if the corporate term is shortened as can be gleaned from Sec. 37, although Sec. 81(1) of Code provide for both extension and shortening.


The extension of corporate life cannot be made within the 3-year liquidation period, because that would constitute new business.

a. Power to Temporary Cease Corporate Operations:The temporary stoppage of the operations of the corporation cannot be

classified as an ordinary business transaction such as to limit its approval to the Board of Directors. The cessation of business operations, though temporary, is a fundamental concern which should be decided not only by the Board but also by the stockholders themselves who stand to be primarily affected by such event. Considering the critical

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nature of the issue, which is not mere exercise of management prerogative, the 2/3 vote of the outstanding capital stock is required either prior to the voting of the board or by subsequent ratification in a meeting of the stockholders called for the purpose. (SEC Opinion No. 04-43, dated 26 October 2004, addressed to Ms. Shirly M. Malapote).

5. Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness - The requirements for the increase or decrease of the capital stock of a corporation are as follows:

(a) Majority vote of the members of the Board of Directors;

(b) Ratification by 2/3 vote of the outstanding capital stock, in a meeting duly called for that purpose with notice previously given;

(c) Certificate of said corporate act shall be signed by majority of the members of the Board and the Chairman and Secretary of the stockholders' meeting;

§ Corporate act shall take effect from and after SEC approval

(d) Certificate must be accompanied by the Treasurer's Affidavit certifying compliance with the 25%-25% requirements as to stock subscription;

§ No decrease in capital stock shall be approved by SEC if it will prejudice corporate creditors.

§ Bonds issued by the corporation shall be registered with SEC which is given the power to determine the sufficiency of the terms of such bonds.

NOTE: (1) Where a corporation increases capital stock, stockholders are entitled to a pre-emptive right to subscribe to a sufficient number of shares in order to maintain their previous relative voting power.

(2) Dissenting stockholders cannot exercise the right of appraisal in this case.

6. Disposition of All or Substantially All Corporate Assets:a. Requirements:

(a) Majority vote of the members of the Board;

(b) 2/3 votes of the outstanding capital stock or members, as the case may be, in a meeting called for the purpose.

§ Dissenting stockholder may exercise the right to appraisal.

§ Despite approval by the stockholders or members it is not mandatory for the Board to continue with the disposition.

NOTE : (a) A sale or other disposition shall be deemed to cover substantially all the

corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

(b) However, disposition of properties in the regular course of the business does not need approval by or authority of stockholders or members.

b. Effect of Non-Compliance

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Islamic Directorate of Philippines v. CA272 SCRA 454 (1997)

Sale by the Board of Trustees of the only property of the corporation without compliance with the provisions of Sec. 40 of Corporation Code requiring the ratification of members representing at least two-thirds of the membership, would make the sale null and void.

Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp.498 SCRA 400 (2006)

The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property and assts, if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated. Such a sale or disposition must be understood as valid only if it does not prejudice the creditors of the assignor, which necessarily implies that the assignee assumes the debts of the assignor.

7. Power to Acquire Own Shares - The power of the corporation to acquire its own shares is now expressly authorized by the Code, for legitimate business purposes and subject to the condition that there be unrestricted retained earnings to cover the shares purchased or acquired.

Outside of such circumstances, the purchase would be in violation of the trust fund doctrine.

a. Instances When Corporation May Buy Its Own Stocks:(a) To complete fractional shares;(b) To collect indebtedness or in case of delinquency sales; and(c) The exercise of right of appraisal.

b. TRUST FUND DOCTRINE - Under Sec. 43 of Code, the corporation can declare dividends only out of "unrestricted retained earnings;" and that under Sec. 122, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.

These provisions in essence provide for the "trust fund doctrine" where the "subscription to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims." Philippine Trust Co. v. Rivera, 44 Phil. 469 (1923).


"The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera,[103] provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. [104] This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of

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Incorporation to reduce the authorized capital stock,[105] (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings,[106] and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefore are complied with."

Steinberg v. Velasco52 Phil. 953 (1929)

The creditors of a corporation have the right to assume that so long as there are debts and liabilities, the Board of Directors will not use corporate assets to purchase its own shares of stock or to declare dividends to its stockholders when the corporation is insolvent.

Boman Environmental Dev't Corp. v. CA167 SCRA 540 (1988)

The requirement of unrestricted retained earning to cover the acquisition of shares is based on the trust fund doctrine, which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors.


Under the trust fund doctrine, the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors.

8. Power to Invest Funds in Another Corporation or Business For Non-Primary Purpose - Investment for purposes other than primary or investment in another corporation or business engaged in a different business can be done by a corporation by majority vote of the board of directors or trustees and duly ratified by 2/3 vote of outstanding capital stock or 2/3 of the members of a non-stock corporation.

In such case, the dissenting stockholders may exercise their rights of appraisal.

Where the investment (even in another corporation) is reasonably necessary to accomplish the primary purpose, a board resolution is sufficient.

De la Rama v. Ma-ao Sugar Central Co., Inc.27 SCRA 247 (1969)

The investment by a sugar company in another corporation engaged in the manufacture of sacks for sugar does not require the 2/3 vote approval of the stockholders, since such was done pursuant to the primary purpose of the investing corporation. It is only when the purchase of shares of another corporation is done solely for control or participation in management and not to accomplish the purpose of its incorporation that the 2/3 vote of stockholders required.

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9. Power to Enter into Management Contract[107] - Requirements of management contract are as follows, for coth the managed and managing corporation:

(a) Resolution of the Board of Directors/Trustees; and

(b) Majority vote of the outstanding capital stock or members, as the case may be, in a meeting called for the purpose.

EXCEPT: That 2/3 votes shall be necessary if:

(i) Stockholder(s) represents the interests of both corporations owns 1/3 of outstanding stocks of the managing corporation.

(ii) Majority of the members of the Board of managing corporation compose also majority of the members the board of the managed corporation.

Management contracts are now regulated by the above section. Such contract is also a device for tax avoidance, resulting in splitting of income. But when the conditions above are complied with, there should be no legal basis to pierce the veil of corporate entity.

VI. RIGHTS OF STOCKHOLDERS AND MEMBERS

Asia's Emerging Dragon Corp. v. Department of Transportation and Communications

549 SCRA 44 (2007)The interest of a stockholder, if any, is indirect, contingent and

inchoate in so far as the structure was built by the corporation is concerned. Consequently, the stockholders cannot intervene in the case in which the corporation is a party under the rule that if parties with a conjectural, collateral, consequential, expectant, and remote interest were allowed to intervene, proceedings would become unnecessarily complicated, expensive and interminable.


The rights that flow from stock ownership are as follows: (a) the registration of shares in a stockholder's name; (b) the issuance of stock certificates; and (c) the right to receive dividends which pertain to the shares.[108]

Mobilia Products, Inc. v. Umezawa452 SCRA 736 (2005)

As early as in Fisher v. Trinidad, the Court already declared that "[t]he distinction between the title of a corporation, and the interest of its members or stockholders in the property of the corporation, is familiar and well-settled. The ownership of that property is in the corporation, and not in the holders of shares of its stock. The interest of each stockholder consists in the right to a proportionate part of the profits whenever dividends are declared by the corporation, during its existence under its

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charter, and to a like proportion of the property remaining, upon the termination or dissolution of the corporation, after payment of its debts."

1. Right to Attend Stockholders' Meetings

Price and Sulu Dev. Co. v. Martin58 Phil. 707 (1933)

Until challenged successfully in proper proceedings, a registered stockholder has a right to participate in any meeting, and in the absence of fraud the action of the stockholders' meeting cannot be collaterally attacked on account of such participation, even if it be shown later on that the shares had been previously sold (but not recorded).

a. Types of Meetings:(1) Regular Meetings - Regular meetings of stockholders of members shall be held

annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the Board of Directors or Trustees:

PROVIDED: Written notice of regular meeting must be sent at least two (2) weeks, unless a different period is required by the by-laws.[109]

(2) Special meeting of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws:

PROVIDED: That at least one (1) week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws.[110]

NOTE: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.[111]

b. Place and Time of Meetings - The meetings of stockholders or members must be held in the city or municipality where the principal office of the corporation is located, preferably in the principal office itself. Any provision in the by-laws changing such place shall be illegal.[112]

c. Who May Call Meetings - Whenever for any cause there is no person authorized to call a meeting, SEC upon petition of a stockholder/member, and on the showing of good cause therefore, may issue an order to petitioner to call a meeting by giving proper notice, with the petitioner presiding thereat until at least a majority of stockholders/members present have chosen a presding officer.[113]

d. Quorum in Meetings[114] - Majority of the outstanding capital stock, or of the members, shall constitute a quorum.

EXCEPT: In cases where greater vote for an act or business is required by law as when the required vote is 2/3 of the outstanding stock, or membership as the case may be.

Tan v. Sycip 499 SCRA 216 (2006)

For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks.

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For nonstok corporations, only those who are actual, living members withvoting rights shall be counted in determining the existence of a quorum during members' meetings. Dead members shall not be counted.

In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by Section 137 of the Corporation Code.

When the principle for determining quorum for stock corporations is applied by analogy to nonstick corporations, only those who are actual members with voting rights should be counted.


Grace Christian High School (GCHS) is a nonstick, nonprofit educational corporation with fifteen (15) regular members, who also constitute the board of trustees. During the annual members' meeting, there were only eleven (11) living member-trustees, as 4 had already died. Out of the 11, seven (7) attended the meeting through their proxies, and in that meeting they elected four members to replace the deceased member-trustees.

Issues: (a) Was there valid quorum? (b) Was there valid replacement of the vacancies in the board, considering that the by-laws provided that any vacancy shall be replaced by the remaining members of the board while constituting a quorum?

Held: (a) There was valid quorum. In the absence of an express charter or statutory provision to the contrary, the general rule is that every member of a nonstock corporation has a right to be present and to vote in all corporate meetings. The voting rights attach to membership, and members vote as persons, in accordance with the law and the bylaws of the corporation. Under Section 89 of the Corporation Code, each member shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or bylaws. We hold that when the principle for determining the quorum for stock corporations is applied by analogy to nonstick corporations, only those who are actual members with voting rights should be counted. Dead members no longer should be counted for determining quorum.

(b) There was no valid filling-up of vacancies in the Board. While a majority of the remaining corporate members were present, however, the "election" of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees as mandated in the company bylaws. Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the constituent members of the corporation.


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Quorum is based on the totality of the shares which have been subscribed and issued whether it be founders' shares or common shares. To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and completely disregarding the issued and outstanding shares indicated in the articles of incorporation would work injustice to the owners and/or successors in interest of the said shares. The stock and transfer book cannot be used as the sole basis for determining the quorum when it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book.

2. Right to Vote -

a. Nature of the Right to Vote


In stock corporation, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor. On the other hand, membership in and all rights arising from a nonstick corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of whether or not "dead members" are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws.


One of the rights of a stockholder is the right to participate in the control and management of the corporation that is exercised through his vote. The right to vote is a right inherent in and incidental to the ownership of corporate stock, and as such is a property right.

Cojuangco Jr. v. Roxas195 SCRA 797 (1991)

The sequestration of shares does not entitle the government to exercise acts of ownership over the shares; even sequestered shares may be voted upon by the registered stockholder.[115]

Republic v. Cocofed372 SCRA 462 (2001)

The right to vote sequestered shares of stock registered in the names of private individuals or entities andalleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the registered

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owner. The PCGG may, however, be granted such voting right provided it can:

(a) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and

(b) demonstrate imminent danger of dissipation of the assets, thus necessitating their continued sequestration and voting by the government until a decision, ruling with finality on their ownership, is promulgated by the proper court.

Nevertheless, the foregoing "two-tiered" test does not apply when the funds that are prima facie public in character or, at least, are affected with public interest. Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character, then the right to vote them shall be exercised by the PCGG. In sum, the "public character" test, not the "two-tiered" one, applies.


Only stock actually issued and outstanding may be voted-neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders, or, having so passed, have again been purchased by the corporation.

b. Limitations That May Be Placed on Right to Vote - Under Sec. 6, although shares, by specific provision in the articles of incorporation, may be deprived of voting rights, nevertheless:

(1) No share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares; and

(2) There shall always be a class or series of shares which must have complete voting rights;

(3) Even shares classified as "non-voting" would have power to vote in the following corporate acts:

• Amendment of the articles of incorporation;• Adoption/amendment of by-laws;• Sale, lease, or encumbrance of all or substantilly all of the corporate

property;• Incurring/creating/increasing bonded indebtedness;• Increase/decrease of capital stock;• Merger or consolidation• Investment of corporate funds in another corporation or business

enterprise; and• Dissolution of the corporation.

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c. Right to Vote of Pledgors, Mortgagors, and Administrators - Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy.[116]

Under Sec. 55, the general rule is that the stockholder, even if he has pledged or mortgaged his shares, can still vote on those shares. The exception is when such right is granted to the pledgee or mortgagee, then the latter can vote, but such right must be recorded in the corporate books.


Rules of Court, while permitting an executor or administrator to represent or to bring suits on behalf of the deceased, do no prohibit the heirs from representing the deceased. When no administrator has been appointed, there is all the more reason to recognize the heirs as the proper representatives of the deceased on the shares of stock registered in his name.


When shares of stocks are pledged by means of endorsement in blank and delivery of the covering certificates to secure a mortgage loan, the pledgee does not become the owner of the shares simply by the failure of the registered stockholder to pay his loan; otherwise, it would be equivalent to the prohibited pactum commissorium. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name.

d. Voting in Case of Joint Ownership of Stock[117] - In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy, signed by all the co-owners, authorizing one or some of them or any other person to vote such shares or shares:

PROVIDED: That when the shares are owned in an "and/or" capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.

e. Voting Right for Treasury Shares - Treasury shares shall have no voting right as long as such stock remains in the treasury.[118]

f. Proxies - Stockholders and members may vote in person or by proxy in all meetings of stockholders or members.

(1) Form - Proxies shall be:

• In writing

• Signed by the stockholder or member

• Filed with corporate secretary before the scheduled meeting.[119]

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NOTE: When form requirements not complied with, the proxy cannot be enforced nor exercised.

(2) Period of Validity - Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than 5 years at any one time.[120]

Proxies are good only for one meeting duly designated. It is possible to make the proxy good for several meetings; but there must be an express stipulation to this effect, but the period cannot be longer than 5 years.

(3) Proxy Voting - The voting trustee(s) may also vote by proxy unless the agreement provides otherwise.[121]

Lee v. Court of Appeals205 SCRA 752 (1992)

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 on the books of the corporation. Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director.

The clear intent is that in order to be eligible as a director, what is material is the legal title to, not the beneficial ownership of, the stock as appearing on the books of a corporation. Therefore, a director who executes a voting trust agreement over all his shares, remains only a beneficial owner, and therefore is automatically disqualified from his directorship.

g. Voting Trusts[122] - One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any one time.

HOWEVER : In the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding 5 years but shall automatically expire upon full payment of the loan.

(1) Form:

• Must be in writing and notarized, and shall specify the terms and conditions thereof;

• Certified copy shall be filed with corporation and SEC - otherwise said agreement shall be ineffective and unenforceable.

• Covered stock certificates shall be cancelled and new ones issued in trustee's name, indicating that they are issued pursuant to said agreement;

• Notation in corporate books of the transfer in trustee's name;• Trustee shall to transferors voting trust certificates, which

shall be transferable in the same manner and with the same effect as certificates of stock.

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(2) Examination Right - The voting trust agreement filed with the corporation shall be subject to examination by any stockholder in the same manner as any other corporate book or record. Both the transferor and the trustee may exercise the right of inspection of all corporate books and records.

NOTE: But reservation of only the right of inspection in the person of transferor, it means that the original owner-transferor-beneficiary is deprived of other rights, such as the right to vote, appraisal right, etc., which now pertain to the trustee as the registered owner of the shares.

(3) Prohibited VTA - No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combination in restrain of trade or used for purposes of fraud.

(4) Termination of VTA - Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.

Everett v. Asia Banking Corp.49 Phil. 512 (1927)

Trustor has right to terminate voting trust agreement when the trustee has committed a breach of trust.

3. Pre-emptive Right - A pre-emptive right is the shareholder's right to subscribe to all issues or disposition of shares of any class in proportion to his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the retained earnings, and also in the net assets in the event of dissolution.

a. Stock Transactions Covered by Right - Sec. 39 has widened the coverage of pre-emptive right which now includes re-issuance of treasury shares because of the use of the words "disposition of shares," which would cover the following instances:

(1) Increase in the Authorized Capital Stock;

(2) Opening for subscription the unissued portion of existing capital stock; and

(3) Disposition of treasury shares.

b. Pre-emptive Right Not Available:(1) Shares to be issued to comply with laws requiring stock offering or

minimum stock ownership by the public;(2) Shares issued in good faith in exchange for property needed for

corporate purposes;(3) Shares issued in payment of previously contracted debts;(4) In case the right is denied in the articles of incorporation.[123]

4. Right of First Refusal - Except in the case of close corporations where the right of first refusal is required to be a feature to be found in the articles of incorporation, the right of

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first refusal can only arise in Corporate Law by means of a contractual stipulation, or when it is provided for in the articles of incorporation. The nature and purpose of by-laws would not allow rights of first refusal to be found in its provisions.

PCGG v. SECG.R. No. 82188, 30 Jun3 1988 (unrep.)

The "right of first refusal" is primarily an attribute of ownership. Conversely, a waiver thereof is an act of ownership. To allow the PCGG to vote the sequestered shares for this purpose would be sanctioning its exercise of an act of strict ownership.


The agreement of co-shareholders to mutually grant the right of first refusal to each other, by itself, does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations; if the foreign shareholdings of a landholding corporation exceed 40%, it is not the foreign stockholders' ownership of the shares which is adversely affected by the capacity of the corporation to own land-that is, the corporation becomes disqualified to own land. This finds support under the basic corporate law principle that the corporation and its stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the corporation.


In a landholding corporation which by constitutional mandate is limited to 40% foreign equity, and where there exists a right of first refusal agreement between the co-shareholders, the fact that the corporations owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.

Thomson v. Court of Appeals298 SCRA 280 (1998)

Authority granted to a corporation to regulate the transfer of its stock does not empower the corporationthrough its by-laws to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer. By-laws cannot operate to restrict property rights of stockholders.

Rural Bank of Salinas v. Court of Appeals210 SCRA 510 (1992)

When restrictions on the transfer of shares are provided for only in the by-laws, they are void. Restrictions on the transfers of shares must be provided for by law or by the charter of the corporation.

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Lambert v. Fox26 Phil. 588 (1914)

A contract entered into between the two majority stockholders of the corporation providing for a suspension of the right to dispose shareholdings during the limited period provided for in the agreement and imposes a penalty if any of the parties should dispose of their shareholdings within the limited period, is a valid agreement and not violative of the policy against restraint of trade since it is reasonable in purpose (to ensure the stability of the corporate operations during the critical period of development) and is reasonable in period.

Fleischer v. Botica Nolasco47 Phil. 583 (1925)

The by-laws of a corporation should not be contrary to laws, and by their nature they cannot be the proper source to limit the rights of a stockholder to transfer shares of stocks which are personal property which the Corporation Law recognizes the stockholders can transfer. Restrictions on transfer of shares can be provided only in the law or the charter of the corporation, and would be invalid if provided for in the by-laws.

Hodges v. Lezama62 O.G. 6823

When the by-laws provide a right of first option in favor of the corporation only, this is null and void because it unduly inhibits the stockholders' right to dispose of their shares in the manner they desire. There is no authority to create property restrictions in by-law provisions.

The waiver in the subscription agreement is, however, valid because this has been individually and freely bargained for; waiver of a right is valid and is not prohibited by law. What is prohibited is the blanket restriction in the by-laws.

5. Right to Receive Dividends - Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock,

EXCEPT:(a) When justified by definite corporate expansion projects or programs

approved by the board of directors;

(b) When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or

(c) When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.[124]

a. Form of Dividends: Cash, Property or Stock(1) Cash Dividends -

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• Can be declared by mere Board from unrestricted retained earnings

• Can be payable to holders of delinquent stock but to be applied to the unpaid balance on the subscription plus cost and expenses while such holders of delinquent stock may likewise be entitled to stock dividends issuance of which shall be withheld from the delinquent stockholder until the latter fully pays his unpaid subscription.[125]

• Revocable before announcement to the shareholders.

(2) Property Dividends -

(3) Stock Dividends -

• Can declared by the Board but requires the approval of 2/3 of the Outstanding Capital Stock at a regular or special meeting duly called for such purpose.[126]

• Declaration may be revoked prior to actual issuance.

NOTE: No dividends can be declared out of capital, except liquidating dividends distributed at dissolution.[127]

Dividends (whether cash or stock) can be declared only out of the unrestricted retained earnings, although stock dividends may be issued out of premium surplus (since in the latter case, it is nothing but a book-entry procedure).

Cyanamid Philippines, Inc. v. Court of Appeals322 SCRA 639 (2000)

The tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that said earnings by shareholders could, in turn, be taxed.

Lincoln Philippine Life v. Court of Appeals293 SCRA 92 (1998)

Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporation's books. "A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly only out of surplus profits. So, a stock dividend is actually two things: (1) a dividend and (2) the enforced used of the dividend money to purchase additional shares of stock at par."


Although stock certificates grant the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. Sec. 43 of Corporation Code prohibits the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock, which underscores the fact that payment of

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dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only.

Nielson v. Lepanto Consolidated Mines26 SCRA 540 (1968)

Stock dividends cannot be issued to non-stockholders even for services rendered.

Commissioner of Internal Revenue v. Lincoln Philippines Life Insurance Co.

379 SCRA 423 (2002)The basis for determining the documentary stamps due on stock

dividends declared would be their book value as indicated in the latest audited financial statements of the corporation, and not the par value thereof.

6. RIGHT TO INSPECT AND COPY CORPORATE RECORDS

a. Books Required to Be Kept:

(1) Books that record all business transactions of the corporation which shall include contract, memoranda, journals, ledgers, etc.;

(2) Minute book for meetings of the stockholders/members;(3) Minute book for meetings of the board;(4) Stock and transfer book.

NATU v. Secretary of Labor109 SCRA 139 (1981)

Minutes of meetings without the signature of the corporate secretary have no probative value, and therefore cannot be demanded for inspection or examination.

b. Right of Inspection, Examination and Copying - Under Sec. 74 of the Code, the stockholder has a right to examine the books of the corporation on the following conditions:

(1) That it be done during business hours on a business day;

(2) For good purpose, which may be:§ to investigate acts of management§ to investigate financial conditions§ fix value of shares§ mailing list for proxies§ information for litigation

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(3) The following are not good and honest purposes:

§ obtain corporate secrets (e.g., formula)§ nuisance suit§ to embarrass the company

W.G. Philpotts v. Philippine Mfg. Co.40 Phil. 471 (1919)

The right to inspect corporate books may be done with the assistance of technical men and it may be delegated. The right includes the right to copy or take notes.

The right to inspect corporate books may not be availed of if it can be proven that the stockholder, in exercising the right, is seeking information to be published to embarrass the business or assist a rival company. The right to inspect cannot extend to a formula or process not generally known which has proved of utility the corporation.

Veraguth v. Isabela Sugar Co.57 Phil. 266 (1932)

A wrongful denial of the right to inspect corporate books and records may be enforced by mandamus.

Gokongwei v. SEC89 SCRA 336 (1979)

A stockholder has the power to inspect the corporate books of a controlled subsidiary of the mother corporation of which he is the stockholder.

Pardo v. Hercules Lumber Co.47 Phil. 964 (1924)

A Board resolution restricting the exercise to inspect and examine corporate records to limited number of days before the annual stockholders' meeting is an unreasonable restriction and violates the statutory right of stockholders to examine corporate records "at reasonable hours."

c. Liability for Refusal to Allow Inspection - If the director or officer unjustly refuses to allow stockholder to inspect the corporate books, he can be held liable for damages and for criminal offense punished under Sec. 144 of Corporation Code.

He Can Put Up as Defenses:

(i) Improper use of the information obtained in the past;

(ii) There was bad faith; or

(iii) Use the information for an illegitimate purpose.

Gonzales v. PNB122 SCRA 489 (1983)

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Section 74 of Corporation Code has been interpreted by the Supreme Court as no longer allowing theunqualified right of inspection of stockholder of corporate records and that the person making the demand has to show that he is acting in good faith and for a legitimate purpose.

d. Right to Financial Statements[128] - Within 10 days from receipt of a written request of any stockholder or member, corporation shall furnish him most recent financial statement, which shall include the balance sheet and profit or loss statement.

At the regular meeting of stockholders or members, the Board of Directors or Trustees shall present a financial report of corporate operations for the preceding year, which shall include financial statements duly certified by a CPA.

HOWEVER: If Paid-up Capital less than P50,000.00, financial statements may be certified by Treasurer or any responsible officer.

7. RIGHT TO FILE DERIVATIVE SUITS - The legal standing of stockholders to bring derivative suits for and in behalf of their corporation is not a civil law right, nor does the Corporation Code contain any provision recognizing or regulating the filing of derivative suits.

It is a common law right of stockholders and members and exists by virtue of Philippine jurisprudence adopting American jurisprudence on the matter, originally regulated under the Rules of Court, and now covered under the Interim Rules of Procedure of Intra-Corporate Controversies promulgated by the Supreme Court.

a. Nature and Definition of Derivative Suit:

Filipinas Port Services v. Go518 SCRA 453 (2007)

Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or because they hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party.

R.N. Symaco Trading Corp v. Santos 467 SCRA 312 (2005)

The whole purpose of the law authorizing a derivative suit is to allow the stockholders/member to enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action.

Chua v. Court of Appeals443 SCRA 259 (2004)

A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit, and the relief which is granted is a judgment against a third person in favor of the

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corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation.

Western Institute of Technology, Inc. v. Salas278 SCRA 216 (1997)

A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority.

Commart [Phils.], Inc. v. SEC198 SCRA 73 (1991)

A derivative suit has been the principal defense of the minority shareholders against the abuses of the majority. It is a remedy designed by equity for those situations where the management, through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the corporation's rights.

Angeles v. Santos64 Phil. 697 (1937)

Theory of Delegated Authority As Basis for the Right of Stockholders to File Derivative Suit - The Board of Directors of a corporation is a creation of the stockholders and controls and directs the affairs of the corporation by delegation of the stockholders. But the Board of Directors, or majority thereof, in drawing themselves the powers of the corporation, occupies a position of trusteeship in relation to the minority of the stock in the sense that the Board should exercise good faith, care and diligence in the administration of the affairs of the corporation and should protect not only the affairs of the majority but also those of the minority of the stock. Where a majority of the Board of Directors wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra vires acts, the courts, in the exercise of its equity jurisdiction, and upon showing that intra-corporate remedy is unavailing, will entertain a suit filed by the minority members of the Board of Directors, for and in behalf of the corporation, to prevent waste and dissipation and the commission of a illegal acts and otherwise redress the injuries of the minority stockholders against the wrongdoings of the majority.

NOTE: Derivative suit is founded on equity and does not apply to overcome "business judgment" rule; and therefore is available only in instances when the Board of Directors is incapable of exercising business judgment on behalf of the corporation [such as when the majority of the members of the Board are the culprit to the corporate malfeasance], or when the Board acts in violation of its duty of diligence (i.e., guilty of fraud, bad faith or gross negligence, or agrees to a patently unlawful act), or duty of loyalty (i.e., the Board is in a conflict-of-interests situation).

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It is well settled that where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation, and indirectly upon the stockholders. The stockholder's right to institute a derivative suit is not based on any express provision of Corporation Code but is impliedly recognized when the law makes corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties.


Facts: A stockholder of Siena Realty Corp. filed as a private complainant a criminal case against spouses-respondents for falsification of corporate document. The respondents questioned the participation of private prosecutor for the private complainant on the ground that she had no civil interests in the criminal complaint.

Issue: Does the criminal suit amount to a derivative suit, when there is no showing that there was board resolution authorizing the filing thereof?

Held: Since the prevailing rule is that when a criminal action is filed, the civil action for the recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action, and since the criminal complaint in the case concerns corporate projects, clearly therefore Siena Realty is an offended party and has a cause of action. Consequently, the civil case for the corporate cause of action is deemed instituted in the criminal action. However, the Board of Directors did not cause the institution of the suit, and would not be a derivative suit.

Not every suit filed in behalf of the corporation is a derivative suit. For derivate suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in the complaint that she is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join her in the suit. It is a condition sine qua non that the corporation be impleaded as a party because not only is the corporation an indispensable party, but it is also the present rule that it must be served with process. The judgment must be made binding upon the corporation in order that the corporation may get the benefit of the suit and may not bring subsequent suit against the same defendants for the same cause of action. In other words, the corporation must be joined as party because it is its cause of action that is being litigated and because judgment must be a res adjudicata against it.

In the criminal complaint filed, nowhere is it stated that she is filing the same in behalf and for the benefit of the corporation. Thus, the

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criminal complaint including the civil aspect thereof could not be deemed in the nature of a derivative suit.

[CLV: Not being a derivative suit, the civil action was deemed filed without Board of Director's authority in violation of the business judgment rule]


Issue: In filing the petition for certiorari under Rule 65 from an order of the trial court in the said criminal case covering corporate transaction but not expressly stating that it was brought for and in behalf of the corporation, can the petition for certiorari under Rule 65 filed with the Court of Appeals, properly include Sienna Realty as a petitioner?

Held: The recourse of the complainant, whereby the petition was brought in her own name and in behalf of the corporation, was proper. Although the corporation was not a complainant in the criminal action, the subject of the falsification was the corporation's project and the falsified documents were corporate documents. Therefore, the corporation is a proper party in the petition because the proceedings in the criminal case directly and adversely affected the corporation.

[CLV: Chua ruling fails to consider the basic principle that a derivative suit is available only when it cannot be expected under the prevailing circumstances that the Board of Directors, to which the power to determine whether or not to file a suit is lodged, is not in a position to exercise its business judgment on the matter]

b. Requisites for Filing of Derivative Suit:

San Miguel Corp. v. Kahn176 SCRA 447 (1989)

The requisites for the proper filing of a derivative suit are:

(a) The party bringing suit should be a shareholder as of the time of the act or transaction complained of;

(b) He has exhausted intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plead; and

(c) The cause of action actually devolves on the corporation, the wrongdoing or harm having been caused to the corporation and not to the particular stockholder bringing the suit.

(1) Who May File a Derivative Suit?


The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution. The most important of these is the bona fide ownership by a

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stockholder of a stock in his own right at the time of the transaction complained of which invests him with standing to institute a derivative action for the benefit of the corporation. The mere trustee of shares registered in her name cannot file a derivative suit for she is not a stockholder in her own right.

R.N. Symaco Trading Corp v. Santos467 SCRA 312 (2005)

A derivate suit will not prosper if it is filed by a person who is not a stockholder or member of the corporation.

On the other hand, once a derivative suit is properly filed, it does not require for its decision that the entire membership of the association are not indispensable parties in a derivative suit - it is enough that a member or a minority of such members file a derivative suit for and in behalf of the corporation, after all, the members/stockholders who file a derivative suit are merely nominal parties, the real party-in-interest being the corporation itself for and in whose behalf the suit is filed.


Under Sec. 36 of Corporation Code, read in relation to Sec. 23, where a corporation is an injured party, its power to sue is lodged with its Board of Directors or Trustees. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest.


Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders. This is what is known as a derivative suit, and settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation's behalf is only nominal party. The corporation should be included as a party in the suit.


The petitioners have the capacity to file a derivative suit in behalf of and for the benefit of the corporation, since the allegations of the complaint make them out as stockholders at the time the questioned

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transaction occurred, as well as the time the action was filed and during the pendency of the action.

The allegations of injury to the petitioning stockholders does not disqualify them from bringing a derivative suit on behalf of the corporation, since their personal claims can coexist with those pertaining to the corporation. The additional allegation of personal injury suffered by the petitioning stockholders merely gives rise to an additional cause of action for damages against the erring directors, which cause is also included in the Complaint filed before SEC.


Under Sec. 36 of Corporation Code, in relation to Sec. 23, it is clear that where a corporation is an injured party, its power to sue is lodged with its Board of Directors. Petitioner failed to show any proof that he was authorized or deputized or granted specific powers by the corporation's Board of Directors to sue the defendant for and on behalf of the firm. Clearly, petitioner as a minority stockholder and member of the Board of Directors had no such power or authority to sue on the corporation's behalf. Nor can we uphold this as a derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is now showing that petitioner has complied with the foregoing requisites.

Western Institute of Technology, Inc. v. Salas278 SCRA 216 (1997)

For a derivative suit to prosper, it is required that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join.

Republic Bank v. Cuaderno19 SCRA 671 (1967)

Whether in a derivative suit filed by a stockholder, the corporation should be joined as a plaintiff or a defendant is not important; what is important is that the corporation should be made a party in order to make the court's judgment binding upon it and thus bar future relitigation of the issues.

Pascual v. Del Saz Orozco19 Phil. 82 (1911)

A stockholder in a corporation who was not such at the time when alleged objectionable transactions took place, or whose shares of stock have not since devolved upon him by operation of law, can not maintain a derivative suit, unless such transactions continue and are injurious to such stockholder or affect him specially or specifically in some other way.

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(2) Exhaustion of Intra-Corporate Remedies:

DBP v. Pundogar218 SCRA 118 (1993)

A derivative suit to question the validity of the foreclosure of the mortgage on corporate assets can be filed without prior demand upon the Board of Directors where the legality of the constitution of the Board lies at the center of the issues.

Reyes v. Tan3 SCRA 198 (1961)

Where corporate directors are guilty of breach of trust - not just mere error of judgment or abuse of discretion - and intra-corporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation, and therefore does not need to priorly comply with the requisite of exhaustion of corporate remedies.

Everett v. Asia Banking Corp.49 Phil. 512 (1927)

When the relator-stockholder has tried to exhaust intra-corporate remedies by making formal demands on the Board of Directors for the appropriate relief, but the latter has failed to refused to heed his plea, then he then allowed to bring the appropriate derivative suit on behalf of the corporation.[129]

(3) Grounds or Basis for Filing Derivative Suit; Nature of the Reliefs Prayed for:

R.N. Symaco Trading Corp v. Santos467 SCRA 312 (2005)

In a derivative suit, any monetary benefits under the decision of the court shall pertain to the corporation and not to the stockholders or members.


In this case, the complaint alleges all the components of a derivative suit. The allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors.

Lim v. Lim-Yu352 SCRA 216 (2001)

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In a derivative action, the real party in interest is the corporation itself, not the shareholders who actually instituted it. A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a temporary restraining order enjoining a person from representing the corporation will not bar such action, because it is instituted on behalf and for the benefit of the shareholder, not the corporation.


For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is no showing that petitioner has complied with the foregoing requisites.


A stockholder may bring a derivative suit for mismanagement, waste or dissipation or corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measure for its protection.

Evangelista v. Santos86 Phil. 387 (1950)

A derivative suit filed by stockholders on behalf of the corporation will be dismissed when the reliefs sought for under the petition pertain to the stockholders and not the corporation.

c. Corporation's Retained Counsel Disqualified to Defend the Directors


A lawyer engaged by a corporation cannot defend members of the Board of Directors in a derivative suit filed by a minority stockholder. "In other jurisdictions, the prevailing rule is that a situation wherein a lawyer represents both the corporation and its assailed directors unavoidably gives rise to a conflict of interest. The interest of the corporate client is paramount and should not be influenced by any interest of the individual corporate officials. The rulings in these cases have persuasive effect upon us. After due deliberations on the wisdom of this doctrine, we are sufficiently convinced that a lawyer engaged as counsel for a corporation cannot represent members of the same corporation's board of directors in a derivative suit brought against them. To do so would be tantamount to

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representing conflicting interests, which is prohibited by the Code of Professional Responsibility."

d. Provisions of the Interim Rules on Intracorporate Controversies - The following provisions apply to derivative suits covered by corporate cases falling under Sec. 5 of Pres. Decree No. 902-A on intra-corporate controversies, thus:

(1) Provide for the additional requisites for a derivative suit that:

• no appraisal rights are availabel for the act(s) complained of; and

• the suit is not a nuisance or harassment suit;

(2) Allows the courts "as an incident to the suit to create a management committee or to appoint a receiver;[130]

(3) A "derivative action shall not be discontinued, compromised or settled without the approval of the court;"

(4) "During the pendency of the action, any sale of shares of the complaining stockholders shall be approved by the court;"

(5) "If the court determines that the interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interest it determines will be so affected."

8. APPRAISAL RIGHT

a. When Right of Appraisal May Be Exercised:

(1) Extend or shorten corporate term;[131]

(2) Restriction of rights or privileges of shares through the amendment of the articles of incorporation;[132]

(3) Sale of all or substantially all corporate assets;[133]

(4) Equity investment in non-primary purpose business enterprise[134] (this is not mentioned in Sec. 81 above);

(5) Merger or consolidation (Sec. 77 et seq.).

NOTE: (a) All the above instances require the 2/3 votes of the outstanding capital stock;

(b) The appraisal right pertains only to stockholders who have actually dissented from the above-enumrated transactions.

b. Outline on Exercise of Appraisal Right:(1) The dissenting stockholder must submit written demand on the corporation

for payment of the fair value of the shares within 30 days from the date on which the vote was taken. (Failure to do so means waiver of the right).

EFFECT: He loses all rights as stockholder including dividend rights; only one right remains and that is the right to receive payment of the fair value of his shares.

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(2) Ten (10) days from demand, the dissenting stockholder must submit his certificates of stocks for notation that such certificates represent dissenting shares. (Failure to do means waiver of the appraisal right)

NOTE: If such shares are subsequently disposed of and new certificates are issued to the transferee, the right of appraisal is automatically extinguished, the transferee becomes a regular stockholder of the corporation.

(3) Within 60 days from the date the stockholders approved the corporate action, the corporation and the dissenting stockholders shall agree as to the fair value of the dissenting shares.

If after the 60-day period no agreement is reached, then it shall be determined and appraised by 3 disinterested persons:

(i) one appointed by the stockholder;

(ii) second appointed by the corporation; and

(iii) third to be chosen by the two thus appointed.

(4) Findings of the majority of the appraisers shall be final and the award shall be payable within 30 days after it is made.

(5) Dissenting stockholder can only be paid the fair value of his shares only if there are unrestricted earnings.

ALWAYS: If the dissenting stockholder is not paid within 30 days from after the award, he shall automatically be restored to all his rights as stockholder.

c. Summary of Instances When Right of Appraisal Is Lost:(1) Failure to make written demand within 30 days after the vote was taken

on the corporate act;

(2) Failure to surrender certificate of stock within 10 days from demand for notation;

(3) Non-existence of unrestricted profit to cover payment of the fair value of dissenting shares within 30 days from date of award;

(4) Subsequent transfer of the shares which have been annotated when new certificates of stock are issued;

(5) When the corporation consents a demanding stockholder to withdraw the exercise of appraisal right;

(6) Abandonment of corporate action;

(7) Disapproval of action by SEC.

d. Cost of Appraisal Shall be Borne:(a) By the corporation, where the value as determined by the appraisers is

higher than what was offered by the corporation to the dissenting stockholder.

(b) By dissenting stockholder, if the value determined by appraisers is approximately the same as the price offered by the corporation.

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(c) By corporation, if action is filed to recover the fair value of the shares and the stockholder's refusal to receive payment is justified.

(d) By dissenting stockholder, where an action to recover is filed and the refusal of such stockholder to receive payment is unjustified.

9. Right to Receive Proportionately the Net Assets of the Corporation After Dissolution:a. Stockholders and Stock Corporations - Except by decrease of capital stock and as

otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property to its stockholders except upon lawful dissolution and after payment of all its liabilities.[135]

President of PDIC v. Reyes460 SCRA 473 (2005)

In the liquidating of a corporation, after the payment of all corporate debts and liabilities, the remaining assets, if any, must be distributed to the stockholders in proportion to their interests in the corporation. The share of each stockholder in the assets upon liquidation is what is known as liquidating dividend.


"The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the courta quo 'to prevent further squabbles and future litigations' unless the indispensable conditions and procedures for the protection of the corporate creditors are followed. Otherwise, the 'corporate peace' laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors' turn to engage in 'squabbles and litigations' should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine."

Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila

6 SCRA 373 (1962)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, but the holder is not the owner of any part of the capital [properties] of the corporation, nor is he entitled to the possession of any definite portion of its assets. The stockholder is not a co-owner of corporate property.

b. Members and Foundations - Upon dissolution of the a non-stock corporation, all liabilities and obligations must first be paid, and assets received and held subject to limitations permitting their use for specified eleemonysary purposes shall be properly transferred or returned, then the net assets remaining, if any, shall be distributed to the members, or any class or classes of members, to the extent that the articles of incorporation or by-laws provide for a plan of distribution.[136]

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OTHERWISE: A plan of distribution may be adopted in the process of dissolution by:

• Majority vote of the Board of Trustees;

• Adopted by at least 2/3 of the members having voting rights.[137]

VII. SHARE OF STOCKS, STOCK CERTIFICATES AND SUBSCRIPTION AGREEMENTS

Discussion herein actually cover the basic right of stockholders to the property they hold - the shares - their right to dispose, encumber, or deal with them as owners thereof, and their right to receive a covering certificate of stock.

Section 63 of Corporation Code provides that shares of stock issued by the corporation "are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer."

The section therefore covers the implementation of the basic corporate principle of "free-transferability of the units of ownership."

1. Principles on Shares under Code - The following principles cover shares of stock under Sec. 12 of Corporation Code:

(a) In the absence of any provision in the articles of incorporation to the contrary, all shares of stock of a corporation are equal in features, and have equal voting rights; and

(b) Any additional right, privilege or even disadvantageous features or restrictions pertaining to any share or class of shares, shall be valid only if expressly provided for in the articles of incorporation.

President of PDIC v. Reyes460 SCRA 473 (2005)

An "investment" is the placing of capital or laying out of money in a way intended to secure income or profit from its employment. "To invest" is to purchase securities of a more or less permanent nature, or to place money or property in business ventures or real estate, or otherwise lay it out, so that it may produce a revenue or income.

An investment, being in the nature of equity, and unlike a deposit of money or a loan that earns interest, cannot be assured of a dividend or an interest on the amount invested, for dividends on investments are granted only after profits or gains are generated.

When an investment is placed in a business enterprise, the closure of the business due to losses or insolvency is equivalent to force majeure and cannot be construed to be equivalent to breach of contract as to entitle the investors to recovery of damages.

Commissioner of Internal Revenue v. CA

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301 SCRA 152 (1999)Preferred and common shareholders participate in the same

venture, willing to share in the profits and losses of the enterprise. Under the doctrine of equality of shares - all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the articles of incorporation is silent on such differences.

Garcia v. Lim Chu Sing59 Phil. 562 (1934)

Shareholders are not creditors of the corporation with respect to their shareholdings thereto, and the principle of compensation or set-off has no application.

2. Subscription Agreement -a. Not Governed by Ordinary Sales Contract Doctrine - The Code prohibits the

distinction between the sale of unissued stock or subscription of such stock; all contracts for the subscription or sale of unissued stock shall be governed solely by the rules pertaining to subscription agreement.[138]

Therefore, the distinctions between a subscription agreement and sales agreement over shares discussed in Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 (1942), are no longer applicable, thus:

(1) Unlike in an ordinary sale, any condition or clause which effectively renders unenforceable the obligation of the subscriber to pay his subscription would be considered void;

(2) Mutual withdrawal allowed in sale is not allowed for a subscription agreement, such that any action by the corporation absolving the subscriber from the payment of his shares, would be void;

(3) Upon insolvency of the corporation, which under ordinary sale would allow the buyer of shares to rescind the contract, but in a subscription agreement, the insolvency makes all the subscription receivables due and demandable even when the stipulated date of payment has not arrived.

HOWEVER: (a) Transfer for consideration of treasury shares is a sale by the corporation.

(b) A transfer of fully paid shares by a stockholder to a third person is a sale.

NOTE: The purpose of removing all contracts dealing with unissued shares from the coverage of "sale" is to exclude them from the operations ordinary contract principles, such as rescission by reason of breach, waiver, condonation or mutual withdrawal, and the effects of the happening and non-happening of conditions; to ensure that subscriptions due thereon will be paid for the protection of corporate creditors under the trust fund doctrine.

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Even when the agreement is denominated as a "Pre-Subscription Agreement," it will still be governed by Sec. 60 of Corporation Code as a subscription agreement, since it covered an agreement to subscribe to the increase in the authorized capital stock of the corporation, which in fact was effected. Since the subject matter of the contract was unissued shares of the corporation allotted to one party, the coverage would be under Sec. 60, which allows only the corporation as the party who can rescind the contract.


A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation - its unissued shares of stock. Therefore, the original stockholders who entered into the "Pre-Subscription Agreement," did not contract in their personal capacities with the other party as subscriber, since they were not selling any of their own shares to them, but those unissued shares that pertain to the corporation. A civil case brought about in the stockholders' personal capacities to rescind such agreement will therefore not prosper


A subscription agreement cannot be rescinded on the ground that the contractual undertaking to allow the aggrieved parties to assume corporate officer position was not complied with. The Corporation Code, SEC rules and even the Rules of Court, provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal personality to do so and the requirements of the law therefore have no been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of Corporation Code, which would also violate the trust fund doctrine.

b. Contractual Nature of a Subscription Agreement - A subscription agreement is nevertheless a species of the genus sale in that it involves the transfer of ownership to a property right (share) for valuable consideration (Art. 1458, Civil Code), as therefore has the same essential characteristics of sale, i.e., consensual, onerous, commutative, with bilateral/reciprocal obligations.

EXCEPT: (i) Any feature or doctrine pertaining to sales that would undermine the ability of the corporation to enforce payment of the subscription would not apply to subscription agreements; and:

(ii) Although a subscription agreement is perfected and becomes binding upon perfection (i.e., meeting on the minds on the shares and the

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subscription amount to be paid, and does not require payment of the subscription for the tranfer of ownership), nevertheless it is perfection of subscription agreement that subscriber assumes all the rights of ownership to the shares subscribed.

3. Pre-incorporation Subscription[139] - A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription.

UNLESS: (a) All of the other subscribers consent to the revocation; or(b) Incorporation of said corporation fails to materialize within said period or

within a longer period as may be stipulated in the contract of subscription:

PROVIDED: No pre-incorporation subscription may be revoked after the submission of articles of incorporation to SEC.

4. Consideration for Stocks[140] - Consideration for the issuance of stock may be any or a combination of any two or more of the following:

(a) Actual cash paid to the corporation;

(b) Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued;

(c) Labor performed for or services actually rendered to the corporation;

(d) Previously incurred indebtedness by the corporation;

(e) Amounts transferred from unrestricted retained earnings to stated capital; and

(f) Outstanding shares exchanged for stocks in the event of reclassification or conversion.

NOTE: When consideration agreed upon is either cash or property, it is not necessary for the subscription agreement to be valid that same must be delivered at perfection, for a subscription agreement is a consensual (not real) contract, being a species of genus sale.

The use of terms "actual ¨ paid" and "actually received" in Sec. 62 is meant to indicate that eventually the consideration must be paid and cannot be given as a discount or amount to watered stock.

Where consideration is other than actual cash, or consists of intangible property such as patents or copyrights, the valuation thereof shall initially be determined by the incorporators or the Board of Directors, subject to final SEC approval.

EXPRESS PROHIBITION: Shares of stock shall not be issued in exchange for promissory notes or future services, for that would convert the legal relationship into an ordinary mutuum or account receivable, and covered by the ordinary rules pertaining to contracts in general, which may then be invoked to undermine the trust fund doctrine.

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5. Issued Price or Par Value - Stocks shall not be issued for a consideration less than the par or issued price thereof. The issued price of no-par value shares may be fixed:

(a) In the articles of incorporation;

(b) By the Board of Directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws; or

(c) In the absence thereof by the stockholders at a meeting duly called for the purpose representing at least a majority of the outstanding capital stock.[141]

NOTE: "Issuance" of shares of stock pertains to the corporation, while "subscription" thereof pertains to the stockholder, but represent exactly the same transaction.

a. Shares Are Personal Property - Shares of stock when issued are personal property of the stockholder and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer.[142]

6. Certificate of Stock - The capital stock shall be divided into shares for which certificates signed by the President or Vice-President, countersigned by Secretary or Assistant Secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws.[143]


A formal certificate of stock could not be considered issued in contemplation of law unless signed by the President or Vice-President and countersigned by Secretary or Assistant Secretary.

a. Rule on Issuance of Certificate of Stock - No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares) if any due, has been paid.[144]

This section has repealed the doctrine laid down in the case of Baltazar v. Lingayen Gulf Electric Power Co., Inc., 14 SCRA 552 (1965), which held that if the shares of stock have a par value, the stockholder is entitled to the issuance of a certificate of a stock to the extent of the shares that have been fully paid by him; thus, there is division.[145] In case of no par value shares, the whole subscription has to be paid before the stockholder can demand the issuance of the certificate of stock.

Tan v. SEC206 SCRA 740 (1992)

Where a corporation unjustifiably refuses to issue a certificate of stock to the registered stockholder,mandamus is the proper remedy.

b. Certificates Only Evidence of the Shares Covered - Certificate of stock is the best evidence that a person is a stockholder, but it should be noted that generally if a subscription has not been paid and has not been declared delinquent, then the subscriber is deemed a stockholder for the full number of shares subscribed by him

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and he may vote such shares at a stockholders' meeting even though he may not have been issued a certificate of stock.

Pacific Basin Securities v. Oriental Petroleum & Minerals 531 SCRA 667 (2007)

The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks-the only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred.

Republic v. Estate of Hans Menzi475 SCRA 20 (2005)

The fact that the stock certificates registered in the name of one person are found in the possession of another stockholder does not prove that the possessor is the owner of the covered shares. A stock certificate is merely a tangible evidence of ownership of shares of stock. Its presence or absence does not affect the right of the registered owner to dispose of the shares covered by the stock certificate.

Ponce v. Alsons Cement Corp.393 SCRA 602 (2002)

Nature of Certificate of Stock - One may own shares of corporate stock without possessing a stock certificate. . . a certificate of stock is not necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence of the holder's interest and status in the corporation ,his ownership of the share represented thereby. The certificate is in the law, so to speak, an equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. In fact, it rests on the will of the stockholder whether he wants to be issued stock certificates, and a stockholder may opt not to be issued a certificate.

Lincoln Philippine Life v. Court of Appeals293 SCRA 92 (1998)

A stock certificate is merely evidence of a share of stock and not the share itself.

c. Quasi-Negotiable Character of Stock Certificate


The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer, shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. The delivery of the stock certificate

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duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee.

For a valid transfer of stocks, the requirements are as follows:

(a) There must be delivery of the stock certificate;

(b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and

(c) To be valid against third parties, the transfer must be recorded in the books of the corporation.[146]

Rural Bank of Lipa City v. Court of Appeals366 SCRA 188 (2001)

Thus, even when a formal Deed of Assignment covering the shares was duly executed, without the endorsement and delivery of the covering certificates of stocks, the covered shares cannot be deemed to transferred and registered in the names of the assignees.

Bachrach Motors v. Lacson Ledesma64 Phil. 681 (1937)

Once a certificate of stock is issued, it is quasi-negotiable in character because it is payable to a specified person, but ownership over the shares passes by indorsement coupled with delivery of the certificate.

d. Manner of Dealing with, Transfer or Assignment of, Stock Certificate


Facts: The registered stockholder of fully-paid shares where no certificates were issued, transferred before his death the shares through a "Deed of Undertaking" and "Indorsement," whereon the registered owner acknowledged that they assignee is the owner of said shares and that he was indorsing them so said assignee. The assignee sought to have corresponding certificates issued to him, but the corporation refused through the corporate secretary. In the mandamus action the main issue decided upon was: Did assignee's complaint fail to state a cause of action because of the absence of any allegation that the transfer of the shares was registered in the stock and transfer book?

Held: Petition denied. A transfer of shares not recorded in the stock and transfer book is non-existent as far as the corporation is concerned, and consequently a mandamus compelling it to issue the corresponding certificates in the name of the transferee would be without basis. It is clear from Sec. 63 that "As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its

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stockholders. From this time, the consequent obligations on the part of the corporation to recognize such right as it is mandated by law to recognize arises."[147]

Rural Bank of Lipa City, Inc. v. Court of Appeals366 SCRA 188 (2001)

When shares of stock are covered by certificates of stock, then pursuant to the provisions of Sec. 63 of Corporation Code, the mere execution of the Deed of Assignment covering the shares "would not be sufficient to effect the transfer of shares since there was no endorsement and delivery of the certificates of stock by the registered owners thereof, their attorneys-in-fact or any other person legally authorized to make the transfer. The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. Thus, title may be vested in the transferee only by delivery of the duly indorsed certificate of stock."[148]

e. Limits of Value of Certificate of Stock on Determining Stockholders:

Rural Bank of Lipa City, Inc. v. Court of Appeals366 SCRA 188 (2001)

In a suit that seeks to render the meeting of the stockholders as void for failure to recognize and give notice to a stockholder of record who has already assigned the shares, but not endorsed nor delivered the covering stock certificates, the assignment of the shares cannot be recognized as valid and binding. Although "[i]t may be argued that despite non-compliance with the requisite endorsement and delivery, the assignment was valid between the parties, meaning the private respondents as assignors and the petitioners as assignees. While the assignment may be valid and binding on the petitioners and private respondents, it does not necessarily make the transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entit5led to dividends, insofar as the assigned shares are concerned. Parenthetically, the assigning stockholder cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and transfer of the shares in question is resolved with finality.


Certificate of stock itself once issued is a continuing affirmation or representation that the stock described therein is valid and genuine and is at least prima facie evidence that it was legally issued in the absence of evidence to the contrary. However, this presumption may be rebutted. Similarly, books and records of a corporation which include even the stock and transfer book are generally admissible in evidence in favor of or against the corporation and its members to prove the corporate acts, its financial status and other matters including one's status as a stockholder. They are ordinarily the best evidence of corporate acts and proceedings.

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However, the books and records of a corporation are not conclusive even against the corporation but prima facieevidence only. Parol evidence may be admitted to supply omissions in the records, explain ambiguities, or show what transpired where no records were kept, or in some cases where such records were contradicted. The effect of entries in the books of the corporation which purport to be regular records of the proceedings of its board of directors or stockholders can be destroyed by testimony of a more conclusive character than mere suspicion that there was an irregularity in the manner in which the books were kept.

The foregoing considerations are founded on the basic principle that stock issued without authority and in violation of law is void and confers no right on the person to whom it is issued and subjects him to no liabilities. Where there is an inherent lack of power in the corporation to issue the stock, neither the corporation nor the person to whom the stock is issued is estopped to question its validity since estoppel cannot operate to create stock which under the law cannot have existence.

f. Assignment of Stock Certificate by Way of Security (Equitable Mortgage)

Asset Privatization Trust v. Sandiganbayan341 SCRA 551, 560 (2000)

It seems that the assignment of voting shares as security for a loan operates to give the assignee not only the right to vote on the shares, but would also treat the assignee as the owner of the shares (not just an equitable mortgage): "It is true that the assignment was predicated on the intention that it would serve as security vis-à-visDBP's financial accommodation extended to PJI, but it was a valid and duly executed assignment, subject to a resolutory condition, which was the settlement of PJI's loan obligation with DBP."

7. Transfer of Shares - No transfer of shares of stock shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.[149]

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.[150]

Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga362 SCRA 635 (2001)

The view that under Sec. 63 of Corporation Code, the sale of the stocks shall not be recognized as valid unless registered in the books of the corporation is valid only insofar as third persons, including the corporation, are concerned -as between the parties to the sale, the transfer shall be valid even if not recorded in the books of the corporation.


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Sec. 63 of Corporation Code envisions a formal certificate of stock which can be issued only upon compliance with the following requisites:

(a) The certificate must be signed by the President or Vice-President, countersigned by Secretary or Assistant Secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a stockholder of the extent of his ownership in a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock.

(b) Delivery of the certificate is an essential element of its issuance. Hence, there is no issuance of a stock certificate where it is never detached from the stock books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the company.

(c) The full subscription must first be fully paid.

(d) The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder.

China Banking Corp. v. Court of Appeals 270 SCRA 503 (1997)

Sec. 63 of Corporation Code which provides that "no share of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by the corporation to refuse to recognize ownership over pledged shares purchased at public auction. The term "unpaid claims" refers to "any unpaid claims arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transactions. Obligations arising from unpaid monthly dues do not fall within the coverage of Sec. 63.


". . . a mere indorsement by the supposed owners of the stock, in the absence of express instructions from them, cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. That Hager and Rivera involved petitions for mandamus to compel the registration of the transfer, while this case is one for issuance of stock, is of no moment. It has been made clear, thus far, that before a transferee may ask for the issuance of stock certificates, he must first cause the registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation is concerned. A corporate secretary may not be compelled to register transfers of shares on the basis merely of an indorsement of stock certificates. With more reason, in our view, a corporate secretary may not be compelled to issue stock certificates without such registration."

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A transfer of shares is not valid unless recorded in the books of the corporation. A person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books-until the transfer is registered, the transferee is not a stockholder but an outsider.

Nava v. Peerless Marketing74 SCRA 65 (1976)

In the stock and transfer book of the corporation, only transfers of stock certificates can be recorded. The sale of subscription agreements cannot be recorded in the stock and transfer book.

Fernandez v. De Tagle(CA) 61 O.G. 541

Facts: De Tagle sold his shares to Fernandez and delivered the same certificate to Fernandez. Fernandez informed the corporation of the sale but the same was not recorded. Later, De Tagle died and his widow included the shares in the inventory of his estate. De Tagle's widow claims preference over the shares because her husband's name is the one that appears in the stock and transfer book.

Held: Fernandez is the owner of the shares. Ownership passed to him as soon as the certificate of stock was indorsed and delivered to him.

NOTE: Although as between the contracting parties, ownership is transferred upon indorsement and delivery; however, by express provision of law, as far as the corporation is concerned, there is transfer of ownership only upon its recording in the stock and transfer book.

Chua Guan v. Samahan Magsasaka62 Phil. 472 (1935)

If a chattel mortgage has been executed over shares of stock, a double registration would be necessary for effectivity against third persons:

(a) Register with the Register of Deeds where the debtor resides; and

(b) Register with the Register of Deeds where the corporation has its principal place of business.

Registration on the stock and transfer book of the corporation would be of no effect.

Tayag v. Benguet Consolidated26 SCRA 242 (1968)

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The situs of shares of a domestic corporation is the Philippines. Thus, if a stockholder resides in New York and has certificates of stock issued in her favor and these certificates are with her, in the event that these shares form part of an intestacy which is being liquidated in a Philippine court and there is a need to sell some of these shares for the payment of debts of the deceased in the Philippines, the administrator may petition the probate court to order the cancellation of such certificates and order the corporation in the Philippines to issue duplicate certificates of stock.

Garcia v. Jomouad323 SCRA 424 (2000)

Issue: Whether a bona fide transfer of the shares of a corporation, not registered or noted in the books of the corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not.

Held: Affirmed the ruling in Uson v. Diosomito, that all transfers of shares not entered in the stock and transfer book are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith and to all persons interested, except the parties to such transfers.

In this case, the transfer of the stock certificate was not valid as to the judgment creditors, as the same still stood in the name of judgment debtor at the time of the levy on execution. In addition, the entry in the minutes of the meeting of the Club's board of directors noting the resignation of assignor-judgment debtor as proprietary member does not constitute compliance with Sec. 63 of Corporation Code which strictly requires the recording of the transfer in the books of the corporation, and not elsewhere, to be valid as against third parties.

a. Non-Exclusivity of Section 63 on Modes of Registration:

Rural Bank of Lipa City v. Court of Appeals366 SCRA 188 (2001)

Facts: The suit was filed to render the meeting of the stockholders as void for failure to recognize and give notice to a stockholder of record who has already assigned the shares, but not endorsed nor delivered the covering stock certificates.

Held: The assignment of the shares cannot be recognized as valid and binding. Although it may be argued that despite non-compliance with the requisite endorsement and delivery, the assignment was valid between the parties, it does not necessarily make the transfer effective. Consequently, the assignees cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares are concerned. The assignor cannot, as yet, be deprived of their rights as stockholders, until the issue of ownership and transfer of the shares in question is resolved with finality.

Torres v. Court of Appeals

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278 SCRA 793 (1997) The stockholder who transfers shares has no authority to effect

their entries in the stock and transfer book, even when the corporate secretary happens to be at odds with such stockholders, and even if he has possession thereof. It is the Corporate Secretary's duty and obligation to register valid transfers of stock and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance. In other words, there are remedies within the law that the transferor-stockholder could have availed of, instead of taking the law in his own hands. The transfers effected were therefore void under Sec. 74 of Corporation Code which provides that in the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records; and corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein.


Until registration is accomplished, the transfer of shares, though valid between the parties, cannot be effective as against the corporation. The unrecorded transferee, the Bitanga group in this case, cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder.

Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders' resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider.

Rural Bank of Lipa v. Court of Appeals366 SCRA 188 (2001)

When shares of stock are covered by certificates of stock, then pursuant to the provisions of Sec. 63 of Corporation Code, the mere execution of the Deed of Assignment covering the shares would not be sufficient to effect the transfer of shares since there was no endorsement and delivery of the certificates of stock by the registered owners thereof, their attorneys-in-fact or any other person legally authorized to make the transfer. The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. Thus, title may be vested in the transferee only by delivery of the duly indorsed certificate of stock.

8. STOCK AND TRANSFER BOOK:

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Provident International Resources Corp. v. Venus554 SCRA 540 (2008)

Registration and Monitoring of the Stock and Transfer Books. - We find that SEC has the primary competence and means to determine and verify whether the subject 1979 stock and transfer book (STB) presented by the incumbent assistant corporate secretary was indeed authentic, and duly registered by the SEC as early as of September 1979. As the administrative agency responsible for the registration and monitoring of STBs, it is the body cognizant of the STB registration procedures, and in possession of pertinent files, records and specimen signatures of authorized officers relating to the registration of STBs. The evaluation of whether a STB was authorized by the SEC primarily requires an examination of the STB itself and the SEC files. This function necessariuly belongs to the SEC as part of its regulatory jurisdiction. Contrary to the allegations of the respondents, the issues involved in this case can be resolved without going into the intra-corporate controversies brought up respondents before the trial court.


A stock and transfer book is the book which records the names and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof, a statement of every alienation, sale or transfer of stock made the date thereof and by and to whom made, and such other entries as may be prescribed by law. A stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein.

However, a stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein. In fact, it is generally held that the records and minutes of a corporation are not conclusive even against the corporation but are prima facie evidence only, and may be impeached or even contradicted by other competent evidence. Thus parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to contradict such records.

A stock and transfer book is necessary as a measure of precaution, expediency and convenience since it provides the only certain and accurate method of establishing the various corporate acts and transactions and of showing the ownership of stock and like matters.

Torres, Jr. v. Court of Appeals278 SCRA 793 (1997)

Entries made on the stock and transfer book by any person other than the Corporate Secretary, such as those made by the President and Chairman, cannot be given any valid effect.

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In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a period within which the registration [of purchase of shares in the stock and transfer book] should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer.


Facts: The articles of incorporation indicated that at the time of incorporation there were 700 founders' shares and 76 common shares, or a total of 776 shares issued and outstanding. On the other hand, the stock and transfer book (STB), shows a much lower figure for the issued shares.

Issue: In determining the existence of quorum, particularly in determining the outstanding capital stock, which figure should prevail?

Held: Although the STB is considered the main basis to determine what shares have been issued and outstanding, nevertheless, its contents are not conclusive and parol evidence may be introduced to explain ambiguities, or to contradict its entries. Since the article of incorporation show that at the time of incorporation there were already 776 shares outstanding, and no proof has been adduced as to any transaction effected on these shares, then the figures appearing in the articles of incorporation, being binding not only on the corporation but on the stockholders as well, shall prevail.


Indeed, until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee, the Bitanga group in this case, cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders' resolution was approved, despite the claim of the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider.

Ponce v. Alsons Cement Corp.

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393 SCRA 602 (2002)Pursuant to Sec. 63 of Corporation Code, a transfer of shares of

stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such right as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Sec. 64 of Corporation Code [i.e., full payment of the subscription]. This is the import of Section 63 which states that "No transfer, however, shall be valid, except between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificates and the number of shares transferred. The situation would be different if the petitioner was himself the registered owner of the stock which he sought to transfer to a third party, for then he would be entitled to the remedy of mandamus.

9. Shares Held in Trust:


Even when it is shown that the registered owner of shares of stock holds the share in trust for the benefit of the principal, it is necessary nevertheless that the trustee must still endorse the stock certificate to validate the cancellation of her share and to have the transfer recorded in the books of the corporation in favor of the principal or another trustee.

Neugene Marketing v. Court of Appeals303 SCRA 295 (1999)

When the certificates of stock have been endorsed in blank for purposes of showing the nominee relations, the eventual delivery and registration of the shares in violation of the trust relationship and after their having been stolen, would be void, even when such transfers have been registered in the stock and transfer book. Likewise, the approval by the beneficial owners of the shares is necessary for the validity and effectivity of the transfer of the stock certificates. Finally, the lack of consideration for the transfer would make such transfers void and inexistent.

10. Liability of Directors for Watered Stocks - Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value

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or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same.[151]

"Watered stocks" are shares issued as fully paid-up when in fact the consideration agreed to an accepted by the directors of the corporation was something known to be much less than the par value or issued value of the shares. The term has also been defined as stocks issued by a corporation for which it has in fact intentionally or knowingly received or agreed to receive nothing at all for them or less than their par value either in money, or in property or in service.

Note that the "water" in the stock refers to the difference between the fair market value at the same time of the issuance of the stock (not at the time of discovery of the inadequate consideration or at the time of demand for payment) and the par or issued value of said stock. Subsequent increase in the value of the property used in paying the stock does not do away with the "water" in the stock. The existence of such "water" is determined at the time of the issuance of the stock.

11. Liability for Unpaid Subscription:(a) Interest on Unpaid Subscriptions - Subscribers for stock shall pay to the corporation

interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in, the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate.[152]

(b) Payment of Balance of Subscription - Subject to the provisions of the contracts of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage of said unpaid subscriptions, in either case with interest accrued, if any, as it may deem necessary.

Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise.[153]

12. Share Delinquency - A stock declared delinquent shall be denied the right to vote, or be represented in meetings, the right to examine books, pre-emptive right or any other right except the right to dividends in the manner authorized by the Code, which under Sec. 43 shall be applied to the payment of this subscription.[154]

a. Delinquency Sale - Sections 67 to 70 give the two ways by which a corporation can collect from the stockholders the balance of their subscriptions: extra-judicially or judicially.

(1) Extrajudicial Remedy; Delinquency Sale:

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Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 (1953), held that in exercising extrajudicial remedy, a literal compliance with the requisites laid down by law is necessary because it is equivalent to deprivation of property, hence, due process must be complied with, thus:

(a) Board of Directors must make a call by resolution demanding the payment of the balance of the subscription. This is called the "notice of call."

(b) The notice of call shall be served on each stockholder either personally or by registered mail (now there is no need for publication).

(c) If the stockholder does not pay the amount due on the date designated in the notice, the Board shall issue, by resolution, a "notice of delinquency".

(d) Notice of delinquency shall be served on the non-paying subscriber either personally or by registered mail, PLUSpublication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a week for two (2) consecutive weeks. The notice shall state the amount due on each subscription plus accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent.

NOTE: Such notices are jurisdictional.

(e) In the public auction, the highest bidder is the one who is willing to pay the amount of the balance of the subscription for the least number of shares.

After the bidding, the corporation will give the highest bidder the certificate of stock in the number of his bid, the remaining number, if any, will be issued a certificate of stock in favor of the original subscriber as fully paid.

On the other hand, if there are no bidders, then the corporation must bid for the whole number of shares (regardless of how much the stockholder has paid), which shall then pertain to the corporation as fully paid treasury stocks.

(2) When Sale May Be Questioned - No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within 6 months from the date of sale.[155]

(3) Judicial Remedy - The corporation brings an action against the stockholder for the collection of the sum of money.[156]

13. Lost or Destroyed Certificates[157]- The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed:

(a) The registered owner of certificates of stock or his legal representative shall file with the corporation an affidavit setting forth, if possible:

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(i) The circumstances as to how the certificates were lost, stolen or destroyed;

(ii) The number of shares represented by each certificate, the serial numbers of the certificates;

(iii) The name of the corporation which issued the same;(iv) He shall also submit such other information and evidence which he

may deem necessary.(b) The corporation shall publish a notice in a newspaper of general circulation

published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the registered owner.

(c) However, instead of waiting for one (1) year, the registered owner may file a bond or other security, running for a period of one (1) year for a sum and in such form and with such sureties as may be satisfactory to the board of directors in which case a new certificate may be issued even before the expiration of the one (1) year period provided;

(d) Provided that if there is a pending contest regarding the ownership of said certificates of stock the issuance of the new certificates of stock in lieu thereof shall be suspended until the final decision by the court.

NOTE: Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificates of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.[158]

VIII. ACQUISITIONS AND TRANSFERS, MERGERS AND CONSOLIDATIONS

1. ACQUISITIONS AND TRANSFERS:a. General Rule on Obligation of Transferee/Buyer/Assignee of Assets/Business-

Enterprise for Debts and Obligations of Transferor/Seller/Assignor:

Edward J. Nell Co. v. Pacific15 SCRA 415 (1965)

As a rule, a corporation that purchases the assets of another corporation will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present:

(a) where he purchaser expressly or impliedly agrees to assume the debts;

(b) where the transaction amounts to a consolidation or merger of the corporations;

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

(d) where the transaction is fraudulently entered into in order to escape liability for those debts.[159]

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b. "Assets-Only" Transfers - Under the general principle of relativity of contracts, the sale of asset or property by the seller to the buyer would not make the buyer liable for the obligations incurred by the seller in previously acquiring the asset; as to the creditors of the seller, the buyer has no privity.

(1) Effects on Assets-Only Transfers on Employees of the Transferor

Sundowner Development Corp. v. Drilon180 SCRA 14 (1989)

Mabuhay Hotel, Inc. which was leasing the hotel premises it was operating, by way of amicable settlement in an ejectment case, surrendered the premises to the lessor and sold its assets to the new lessee, Sundowner Development Corporation (Sundowner). The employees of Mabuhay Hotel subsequently sought labor rights against Sundowner.

Issue: Is Sundowner obliged to hire or absorb the employees of Mabuhay Hotel which has completely ceased operations?

Held: No. Unless expressly assumed, labor contracts such as employment contracts and collective bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in personam, thus binding only between the parties. A labor contract merely creates an action in personam and does not create any real right which should be respected by third parties. This conclusion draws its force from the right of an employer to select his employees and to decide when to engage them as protected under our Constitution, and the same can only be restricted by law through the exercise of the police power.

As a general rule, there is no law requiring a bona fide purchaser of assets of an on-going concern to absorb in its employ the employees of the latter.

However, although the purchaser of the assets or enterprise is not legally bound to absorb in its employ the employees of the seller of such assets or enterprise, the parties are liable to the employees if the transaction between the parties is colored or clothed with bad faith.

MDII Supervisors & Confidential Employees Assn. v. Pres. Assistance of Legal Affairs

79 SCRA 40 (1977)Effects of Employees. - Where a corporation engaged in the

manufacture of dairy products, sold the plant and part of its assets to another company, the buyer of the assets cannot be held liable for the labor claims interposed against the corporate-seller, thus: "There is no law requiring that the purchaser of MDII's assets should absorb its employees. As there is no such law, the most that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer] to give preference to the qualified separated employees of MDII in the filling up of vacancies in the facilities. . ."

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c. Business Enterprise Transfers - The "business enteprise" of a corporation represents, more than just the assets, but that which allows the corporation the capacity to earn profits. In corporate parlance, it is often referred to as "all or substantially all of the assets of the corporation," and the disposition of which the corporation "would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated."[160]

The common law rule (i.e., not expressed in statutory language) is that in a business enteprise transfer, the buyer or assignee thereof becomes liable for the corporate debts and liabilities arising from such business enterprise.

(1) Rationale for the Business Enterprise Rule - It is the business-enteprise (the ability to earn profit) or the "going concern" upon which suppliers and other business creditors extend credit, and the basis upon which they expect to be repaid; consequently, their lien on the business enteprise upon which they extended credit would follow such business enterprise in the hands of a transferee or assignee thereof.

Likewise, the Supreme Court has ruled that the mere change of the medium of holding the same business enterprise(e.g., from a partnership to a corporation) would authorize piercing to enforce the obligations incurred. A.D. Santos v. Vasquez, 22 SCRA 1156 (1968); Laguna Transp. Co., Inc. v. SSS, 107 Phil. 83 (1960); San Teodoro Dev. Ent., Inc. v. SSS, 8 SCRA 96 (1963).

(2) Nature of Business Enterprise; Application of Doctrine

Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp.498 SCRA 400 (2006)

Facts: Under an "Agreement of Assumption of Obligations," LUSTEVECO transferred, conveyed and assigned to PSTC all of its business, properties and assets pertaining to its tanker and bulk business "together with all the obligations relating to the said business, properties and assets. Caltex seeks to enforce a judgment debt it obtained against LUSTEVECO against PSTC. PSTC claims no privity over the debt of LUSTEVECO, and lack of standing of Caltex to sue based on the Agreement of Assumption of Obligations.

Held: Caltex may recover the judgment debt from PSTC not because of a stipulation in Caltex's favor but because the Agreement provides that PSTC shall assume all the obligations of LUSTEVECO. PSTC is bound by the terms of the Agreement; it cannot accept its benefits and refuse to assume the consequent liabilities.

Even without the Agreement, PSTC is still liable to Caltex. The disposition is a sale of all or substantially all of the assets of a corporation covered under Section 40 of the Corporation Code, which is understood to be allowed without prejudice to the creditors of the assignor: "The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor's liabilities,[161]unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground that it was done in fraud of their interests.

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Garcia v. Social Security Commission Legal and Collection

540 SCRA 459 (2007)Following the doctrine laid down in Laguna Transporation Co., Inc.

v. Social Security Systemt,, 107 Phil. 833 (1960), this Court rules that although a corporation once formed is conferred a juridical personality separate and distinct form the persons comprising it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice. The concept cannot be extended to a point beyond its reasons and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts.

Cagayan Valley Enteprises v. Court of Appeals179 SCRA 218 (1969)

When a single proprietorship is incorporated into family corporation, being managed by the same manager under the old set-up, and continues in the same line of business, with its factories being the same as under the single proprietorship set-up, the corporation is deemed merely a continuation of the single proprietorship and its separate juridical personality can be pierced.

Buan v. Alcantara127 SCRA 845 (1984)

When the transportation business belonging to the estate of the deceased spouses was duly incorporated by the administratrix, with the estate originally owing the entire outstanding capital stock of the corporation, even if subsequently the estate's shareholdings have been diluted by additional subscription by the administratrix and her husband, then for all intents and purposes the obligations and claims for damages filed against the estate arising from the transportation business, can also be claimed against the corporation formed. "It should be rather clear that, as between the estate and the corporation, the intention of incorporation was to make the corporation liable for past and pending obligations of the estate as the transportation business itself was being transferred to and placed in the name of the corporation. That liability on the part of the corporation, vis-à-vis the estate, should continue to remain with it even after the percentage of the estate's shares of stock in the corporation should be diluted."

Oromeca Lumber Co. v. Social Security System4 SCRA 1188 (1962)

Where a new corporation absorbs and continues the business of the partnership, and even when the latter is dissolved stating as the reason thereof was the desire of its partners to have a corporation take over to expand business operations, and since the corporation assumed all the assets and liabilities of the partnership, then the corporation cannot be regarded, for purposes of the SSS Law, as having come into being only on the date of its incorporation but from the date the partnership started the business.

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Rivera v. Litam & Company, Inc.4 SCRA 1072 (1962)

When a new corporation was organized with an express provisions in its articles of incorporation that it was taking over the assets and properties of a corporation that was dissolved, then the new corporation is bound to assume the obligations and liability of the dissolved corporation, when it turned out that the old corporation was part of a fraudulent scheme to exclude from the estate of a deceased stockholder the shares held in the old corporation.

(3) Employees Have No Equity Claim Against the Business Enterprise:

Barayoga v. Asset Privation Trust473 SCRA 690 (2005)

Furthermore, under the principle of absorption, a bona fide buyer or transferee of all, or substantially all, the properties of the seller or transferor is not obliged to absorb the latter's employees. The most that the purchasing company may do, for reasons of public policy and social justice, is to give preference of reemployment to the selling company's qualified separated employees, who in its judgment are necessary to the continued operation of the business establishment.

Barayoga v. Asset Privation Trust473 SCRA 690 (2005)

In the case of a transfer of all or substantially all of the assets of a corporation (i.e., business enterprise transfers), the liabilities of the previous owners to its employees are not enforceable against the buyer or transferee, unless (a) the latter unequivocally assumes them; or (b) the sale or transfer was made in bad faith.

Sunio v. NLRC127 SCRA 390 (1984)

Where two (2) sister corporations sold their ice plant to another corporation, the "sale of a business of a going concern does not ipso facto terminate the employer-employee relations insofar as the successor-employer [the transferee] is concerned, and that change of ownership or management of an establishment or company is not one of the just causes provided by law for termination of employment." Nevertheless, the case did not just involve a "simple change of ownership" since before the sale of the business enterprise, the transferors-corporations had already terminated their employees and the latter had voluntarily accepted the payment of their termination pay.

Pepsi-Cola Bottling Co. v. NLRC210 SCRA 277 (1992)

Although a corporation may have ceased business operations and an entirely new company has been organized by a new set of owners to take over the same type of operations, it does not necessarily follow that

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no one may now be held liable for illegal acts committed by the earlier firm. The new corporation, which undertakes the same business enterprise for exactly the same product, is bound by the obligations incurred for such business operations.

National Federation of Labor Union v. Ople143 SCRA 124 (1986)

Business-Enteprise Transfer Rule as an Aspect of Piercing Doctrine. - Where a corporation is closed for alleged losses and its equipment are transferred to another company which is engaged in the same operations, the separate juridical personality of the latter can be pierced to make it liable for the labor claims of the employees of the closed company.

Central Azucarera del Danao v. Court of Appeals137 SCRA 295 (1985)

Issue: Whether or not a change of ownership or management of an establishment or corporation by virtue of the sale or disposition of all or substantially all of its properties and assets operates to insulate the selling corporation from its obligation to its employees.

Held: Although the change of ownership or management of a business establishment or enterprise is not one of the just causes under the law, and cannot be construed as synonymous with nor analogous to closing or cessation of operation of an establishment or enterprise and therefore cannot exempt the transferor from liability for separation pay; however, it recognized as well-established the principle "that it is within the employer's legitimate sphere of management control of the business to adopt economic policies to make some changes or adjustments in their organization or operations that would insure profit to itself or protect the investments of its stockholders. As in the exercise of such management prerogative, the employer may merge or consolidate it business with another, or sell or dispose all or substantially all of its assets and properties which may bring about the dismissal or termination of its employees in the process," provided it is done in good faith, and in which case it is not liable for terminated employees to claim for termination pay.[162]

Pepsi Cola Distributors v. NLRC210 SCRA 277 (1992)

Can the claims for reinstatement of dismissed officers against the Pepsi Cola Distributor (PCD), which had ceased to operate because of business losses, be pursued against an entirely different corporate entity, Pepsi-Cola Products Philippines, Inc. (PCPPI), which subsequently acquired the franchise to sell Pepsi-Cola products in the Philippines?

Held: Yes. PCD may have ceased business operations and PCPPI may be a new company but it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier PCD. The complaint was filed when PCD was still in existence. Pepsi-Cola never

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stopped doing business in the Philippines. The same soft drinks products sold in 1988 when the complaint was initiated continue to be sold now. The sale of products, purchases of materials, payment of obligations, and other business acts did not stop at the time PCD bowed out and PCPPI came into being. There is no evidence presented showing that PCPPI, as the new entity or purchasing company is free from any liabilities incurred by the former corporation. More importantly, the fact that the surety bond put to cover the appeal, both PCD and PCPPI bound themselves to answer the monetary awards of the private respondent in case of an adverse decision of the appeal, which clearly implies that PCPPI as a result of the transfer of the franchise bound itself to answer for the liability of PCD to its employees.[163]

c. Equity Transfers - The immediatee subject matter of the transfer are really the controlling equity or shares of stock in the corporation, and the transaction is really between the seller and buyer of such controlling share. The buyer, merely stepping into the shoes of the seller, does not become personally liable for the corporation's debts and obligations under the corporate doctrines of separate juridical personality and limited liability.

HOWEVER: Supreme Court recognizes the reason why a buyer purchasing the controlling interest in a corporation is because of the ability to control, through the Board of Directors, the underlying business enteprise, and this is reflected in the rulings of the Court.

Philippine Veterans Investment Dev. Corp. v. Court of Appeals

181 SCRA 669 (1990)Although generally the sale by a mother company of its controlling

shares in a subsidiary does not make the mother company liable for the subsidiary's liabilities, nevertheless, when the selling mother company executes a "free and harmless" clause in favor of the buying company, then the selling company is deemed to have assumed liabilities of the subsidiary.

(1) Special Rules Pertaining to Termination of Employees:

DBP v. NLRC186 SCRA 841 (1990)

When the bank, instead of foreclosing on the mortgaged assets, convert its loans to equity in the company, making it the controlling stockholder and thereby electing the majority of the Board, nevertheless the same did not make the bank an employer of the company employees, nor did it make the bank liable for the wage claims of the company's employees.

Manlimos v. NLRC242 SCRA 145 (1995)

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Where such transfer of controlling equity ownership is in good faith, the transferee is under no legal duty to absorb the transferor's employees as there is no law compelling such absorption. The most that the transferee may do, for reasons of public policy and social justice, is to give preference to the qualified separated employees in the filling of vacancies in the facilities of the purchaser."[164]

2. MERGERS AND CONSOLIDATIONS:a. Outline on Consolidation or Merger:

(1) The Boards of each corporation shall draw-up a plan of merger or consolidation setting forth:

(i) Names of corporations involved;

(ii) Terms and mode of carrying it out;

(iii) Statement of changes, if any in the present articles of surviving corporation; or the articles of the new corporation to be formed in case of consolidation.

(2) Plan for merger or consolidation shall be approved by majority vote of each of the Boards of the concerned corporations at separate meetings;

(3) The same shall be submitted for approval by the stockholders or members of each such corporations at separate corporate meetings duly called for the purpose.

NOTE: Notice should be given to all stock or member at least 2 weeks prior to date of meeting, either personally or by registered mail.

(4) Affirmative vote of 2/3 of the outstanding capital stock in case of stock corporation, or 2/3 of the members of a non-stock corporation shall be required.

(5) Dissenting stockholders may exercise the right of appraisal.

BUT: If Board abandons plan to merge or consolidate, such right is extinguished.

(6) Any amendment to the plan must be approved by the same votes of the board members or trustees and stockholders or members required for the original plan.

(7) After such approval, Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations, signed by president or vice-president and certified by secretary or assistant secretary, setting forth:

(i) Plan of merger or consolidation;

(ii) In stock corporation, number of shares outstanding; in non-stock, number of members;

(iii) As to each corporation, number of shares or member voting for and against such plan, respectively.

(8) Four copies of articles or merger or consolidation shall be submitted to SEC for approval. Special corporations, like banks, insurance companies, building and loan associations, etc., need the prior approval of the respective government agency concerned.

(9) If SEC satisfied that merger or consolidation is legal, it shall issue Certificate of Merger or the Certificate of Consolidation .

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(10) If SEC is not satisfied, it shall set a hearing, given due notice to all the corporations concerned.

Poliand Industrial Ltd. V. NDC467 SCRA 500 (2005)

As specifically provided under Sec. 79 of Corporation Code, the merger shall only be effective upon the issuance of a certificate of merger by SEC, subject to its prior determination that the merger is not inconsistent with the Code or existing laws. Where a party to the merger is a special corporation governed by its own charter, the Code particularly mandates that a favorable recommendation of the appropriate government agency should first be obtained. The issuance of the certificate of merger is crucial because not only does it bear out SEC's approval but also marks the moment whereupon the consequences of a merger take place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights, and properties as well as liabilities shall be taken and deemed transferred to and vested in the surviving corporation.

b. Effects of Merger of Consolidation:

(1) If there is merger, then one of the constituent corporations remains as an existing juridical person, whereas, the other corporation shall cease to exist. Merger is the disappearance of one of the corporations with the other corporation acquiring all the assets, rights of action, and assuming all the liabilities of the disappearing corporation.

(2) If there is consolidation, there will be disappearance of both the constituent corporations with the emergence of a new corporate entity which shall obtain all the assets of the disappearing corporations, and likewise shall assume all their liabilities.

Poliand Industrial Ltd. V. NDC467 SCRA 500 (2005)

Ordinarily, in the merger of two or more existing corporations, one of the combining corporation survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. The merger shall only be effective upon the issuance of a certificate of merger by SEC, subject to its prior determination that the merger is not inconsistent with Corporation Code. In the absence of SEC approval, there is no effective transfer of the shareholdings in one corporation to another.


Consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. The merger, however, does not become effective upon the mere agreement of the constituent corporations. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express

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provision of law authorizing them. For a valid merger or consolidation, the approval by SEC of the articles of merger or consolidation is required. These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations.[165]


When the procedure for merger or consolidation prescribed under Title IX of Corporation Code are not followed, there can be no merger or consolidation, and corporate separateness between the constituent corporations remains, and the liabilities of one entity cannot be enforced against another entity.

Babst v. Court of Appeals350 SCRA 341 (2001)

It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. The surviving corporation therefore has a right to institute a collection suit on accounts of one of one of the constituent corporations.

Associated Bank v. Court of Appeals291 SCRA 511 (1998)

Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities.

The merger, however, does not become effective upon the mere agreement of the constituent corporations, since Sec. 79 of Corporation Code requires the approval by SEC of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist: and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation.

The surviving corporation is entitled to collect on a promissory note issued in the name of the absorbed corporation even when the note was issued after the merger.

(1) Rulings Involving Employees:


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Employees of a predecessor-constituent corporation can avail of their previous tenure when determining their termination benefits with the surviving corporation in the merger, and that the employees have a right to their retirement benefits computed from the time worked with the predecessor-constituent corporations, since there was considered to be no break in the employer-employee relationship.

National Union Bank Employees v. Lazaro156 SCRA 123 (1988)

The legal effects of Section 80 of Corporation Code is that the surviving corporation in a merger would be considered as the successor employer with respect to the claims of employees of the constituent corporation, even with respect to CBA deadlock situations which existed right before the merger of the companies.

3. SPIN-OFFS - The purpose of a spin-off process is for the corporation to segregate a line of business or a separate business enterprise into a new corporate entity, which then may become its subsidiary.

SMC Employees Union-PTGWO v. Confessor262 SCRA 81 (1996)

Facts: San Miguel Corp. spun-off its Magnolia ice cream division to a new Magnolia Corporation, and the feeds and livestock division into the San Miguel Feeds, Inc. Will the employees in the spun-off divisions continue to be considered within the SMB bargaining unit?

Held: No. Since the spin-offs were done for valid business cause and in good faith, and therefore valid spin-offs, there is no reason to allow SMC union's petition to include the employees in the spun-off divisions to be within the SMC bargaining unit; the employees in the new corporations constitute new bargaining units.

IX. NON-STOCK CORPORATIONS

1. Definition - a non-stock corporation is one organized for an eleemosynary purpose and where no part of its income is distributable to its members, trustees, or officers, subject to the provisions on dissolution.

PROVIDED: That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.[166]

Manila Sanitarium v. Gabuco7 SCRA 14 (1963)

The incurring of profit or losses does not determine whether an activity is for profit or non-profit, and the courts will consider whether dividends have been declared to its members or that its property, effects

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or profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise.

Collector of Internal Revenue v. Club Filipino5 SCRA 321 (1962)

A club organized to develop and cultivate sports for the healthful recreation and entertainment of its stockholders, where it is provided that upon dissolution the remaining assets would be donated to a charitable institution, and there was in fact no cash dividend distribution to its stockholders, cannot be treated as taxable stock corporation on whatever it derived on its sales from its bar and restaurant which was used to defray its overall overhead expenses and to improve its golf course. In spite of having capital stock, the same is for purpose of taxation a non-stock corporation.

Collector v. University of the Visayas1 SCRA 669 (1961)

The mere realization of profits out of the operations of a non-stock corporation does not automatically result in the loss of its exemption from income taxation as long as no part of its profits inures to the benefit of any stockholder or individual. It is not earning of incidental profits that make the entity non-stock, but the actual or legal authority to distribute such profits to the officers, and members.

2. Eleemosynary Purposes - Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agriculture, and like chambers, or any combination thereof.[167]

a. Eleemosynary Purpose and Non-Distribution of Profits:

People v. MenilG.R. Nos. 115054-66, 12 September 2000 (unrep.)

A non-stock corporation may only be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes.

b. Non-Applicability of the Nationalization LawsA foreigner may a member or an officer of a non-stock corporation. Save for the

position of the Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign citizens becoming officers in corporations engaged in business does not apply to the activities of a non0-stock corporation which do not fall within the coverage of a nationalized industry or area of business, which is reserved by law exclusively to Filipino citizens. It is of primary importance to note that the purposes enumerated under Section 88 of Corporation Code for which a non-stock corporation may be organized do not partake of the nature of a nationalized business activity which

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would disqualify an alien from holding management positions, save for the position of the Corporation Secretary. (SEC Opinion No. 12, series of 2002, 21 November 2002.)

3. Right to Vote - The right of the members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote.

Unless otherwise provided by the articles of incorporation or the by-laws, a member may vote by proxy.[168] Consequently, in a non-stock corporation, it is possible by specific provision to deny proxy representation to the members.

Voting by mail or other similar means by members of non-stock corporations may be authorized by the by-laws of non-stock corporations with the approval of, and under such conditions which may be, prescribed by, SEC.[169]

Member of a non-stock corporation are entitled to only one vote; there is no cumulative voting in non-stock corporations, unless the same is expressly provided in the articles of incorporation.

Republic v. COCOFED372 SCRA 462 (2001)

The general rule is that the registered owner of shares exercises the right and the privilege of voting. This principle applies even to shares that are sequestered by the government over which the PCGG as a mere conservator cannot, as a general rule, exercise acts of dominion. On the other hand, it is authorized to vote these sequestered shares registered in the names of private persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered test devised by the Court in Cojuangco v. Calpo and PCGG v. Cojuangco, Jr., as follows: (1) Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to the State? (2) Is there an imminent danger of dissipation, thus necessitating their continued sequestration and voting by the PCGG, while the main issue is pending with the Sandiganbayan?

4. Non-transferability of Membership - Membership in a non-stock corporation, and all rights arising therefrom, are personal and non-transferrable, unless the articles of incorporation or the by-laws otherwise provide.[170]

5. Termination of Membership - Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property unless otherwise provided in the articles of incorporation or the by-laws.[171]

The general rule is that if you are a member of a non-stock corporation, then your rights as members are personal to you and cannot be transferred to another.

EXCEPTION: When the articles of incorporation expressly provide that membership can be transferred from person to person.

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Termination of membership generally carries with the termination of all rights in the corporation and in its property. The exception is when the articles or by-laws provide otherwise.


Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of the incorporation or the bylaws. Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner for the cause provided for in the By-Law of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members' meeting. With 11 remaining members, the quorum in the present case should be 6. therefore, there being a quorum, the annual members' meeting, conducted with six members present, was valid

6. Election and Term of Trustees - Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than 15 in number, shall classify themselves that the term of office of 1/3 of their number shall expire every year; and subsequent elections of trustees shall be held annually and trustees so elected shall have a term of 3 years.

(a) Vacancies - Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for unexpired period.

(b) Qualification - No person shall be elected as trustee unless he is a member of the corporation.

(c) Election of Officers - Unless otherwise provided for in the articles of incorporation or the by-laws, officers of a non-stock corporation may be elected by the members.

7. Place of Meetings - The by-laws may provide that the members of a non-stock corporation may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located: Provided, That proper notice is sent to all members indicating the date, time and place of the meeting, provided that the place of meeting shall be within the Philippines.[172]

8. Rules of Distribution of Assets in Case of Dissolution:(a) All debts of the corporation must be paid, or adequately provided for.

(b) All assets held under condition of being returned in case of dissolution should be returned.

(c) All assets held subject to specific use (e.g., for charitable, education, scientific, etc.) must be transferred to other corporations, societies, or organizations having the same purpose as the corporation is dissolved.

(d) All other assets not included in the above, if any, shall be distributed to the members in accordance with the stipulations in the articles of incorporation or the by-laws.

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(e) Any other remaining assets may then be distributed to such persons, societies, organizations or corporations, profit or non-profit, as may be specified in the plan of distribution.

9. Procedure for Plan for Distribution:(a) The Board of Trustees, by majority vote in a resolution, shall adopt a plan for

distribution of the assets of the corporation.

(b) Written notice for a meeting must be sent to all members entitled to vote, stating the time and place of such meeting and the purpose thereof.

(c) At such meeting, such plan of distribution must be approved by 2/3 votes of the members having the right to vote, who are present or represented by proxy.

10. Conversion of Non-Stock Corporation to Stock Corporation

Firstly, the conversion of a non-stock educational institution into a stock corporation is not legally feasible. Pursuant to Sec. 87 of Corporation Code, no part of the income of a non-stock corporation may be distributable as dividends to its members, trustees or officers. "Thus, the Commission has previously ruled that a non-stock corporation cannot be converted into a stock corporation by a mere amendment of the Articles of Incorporation. For purposes of transformation, it is fundamental that the non-stock corporation be dissolved first under any of the methods specified Title XIV of Corporation Code. Thereafter, the members may organize as a stock corporation directed to bring profits or pecuniary gains to themselves. (SEC Opinion dated 24 February 2003, addressed to Benedicta P. Bello; SEC Opinion dated 10 December 1992, Mr. Efren Valiente).

Secondly, in the event of dissolution of a non-stock corporation such as your school, its assets shall be distributed in accordance with the rules as provided for under Secs. 94 and 95 of Corporation Code. Unless, it is so provided in the Articles of Incorporation or By-Laws, the members are not entitled to any beneficial or vested interest over the assets of the non-stock corporation. In other words, non-stock, non-profit corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in its charter. (SEC Opinion dated 24 February 2003, addressed to Benedicta P. Bello; SEC Opinion dated 13 May 1992, Mr. Versoza, Jr.)

11. Foundations - SEC Memorandum Circular No. 1, series of 2004, embodies the new Guidelines on Foundations, thus:

(a) A "Foundation" is a non-stock, non-profit corporation with funds established to maintain or aid charitable, religious, educational, athletic, cultural, literary, scientific, social welfare or similar activities primarily through extending grants or endowments.

(b) Foundations applying for registration with the Commission shall submit the following:

(1) Modus Operandi or Plan of Operation, executed, under oath, by the President of such Foundation, setting forth the mode of its operation, source of its funds, the proposed application of said funds, and the prospective beneficiaries of grants or endowments; and

(2) Certificate of Bank Deposit in the amount of not less than P1,000,000.00, representing the funds to be used for extending grants or endowments.

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(c) In addition to the reportorial requirements for ordinary non-stock, non-profit corporations, the registered Foundation shall submit to the Commission, together with the Financial Statements, a Statement of Funds Application, executed, under oath, by the President of the Foundation, setting forth in detail the sources and amount of funds established and the names of beneficiaries and the corresponding amounts of funds granted or endowed thereto by the Foundation.

X. CLOSE CORPORATIONS

1. Concept of Close Corporation:

Gala v. Ellice Agro-Industrial Corp.418 SCRA 431 (2003)

The concept of a close corporation organized for the purpose of running a family business or managing family property has formed the backbone of Philippine commerce and industry. Through this device, Filipino families have been able to turn their humble, hard-earned life savings into going concerns capable of providing them and their families with a modicum of material comfort and financial security as a reward for years of hard work. A family corporation should serve as a reward for years of hard work. A family corporation should serve as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves with the concepts of mutual aid and security that are the original driving forces behind the formation of family corporations and use these tenets in order to facilitate more civil, if not more amicable, settlements of family corporate disputes.

2. Requirements for Close Corporation:[173]

Articles of incorporation must expressly provide for the following:

(a) Number of stockholders not to exceed 20;

(b) Restriction: right of first refusal in favor of the stockholder or the corporation; and

(c) The stocks cannot be listed in the stock exchange nor should they be publicly offered.

Special Rule on Stock Ownership - A corporation is not deemed a close corporation whenever two-thirds (2/3) of the voting stocks or voting rights is owned or controlled by another corporation which is not a close corporation.

The following cannot be close corporations

(a) mining companies;

(b) oil companies;

(c) stock exchanges;

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(d) banks;

(e) insurance companies;

(f) public utilities;

(g) educational institutions;

(h) other corporations declared to be vested with public interest.

Manuel R. Dulay Ent. v. Court of Appeals225 SCRA 678 (1993)

Facts: The family corporation, which owned the Dulay Apartments, through its President, sold the apartments to Veloso, who mortgaged the property to Torres, who eventually foreclosed on the property and was the highest bidder at foreclosure sale. The corporation seeks to have the mortgage and foreclosure annulled on the ground that the sale was made without Board authority.

Held: [The Supreme Court without determining, whether the requirement of Sec. 96 have been complied with to determine whether the family Corporation qualified as a close corporation:] The sale by the President of the Dulay Apartments was valid under Sec. 101 of Corporation Code which does not require a formal board resolution to bind a close corporation, and binds action done with knowledge of the Board which does not have to formally meet at meeting.


Just because the treasurer and her husband together own 99.866% of the outstanding capital stock of the corporation does not justify a conclusion that it is a close corporation which can be bound by the acts of its principal stockholder who need no specific authority. The determination of when a corporation is a close corporation is determined by the requisites provided in Sec. 96 of Corporation Code. In this case, the articles of incorporation do not contain any provision stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is prohibited.

The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities. So, too, a narrow distribution of ownership does not, by itself, make a close corporation.

The principle in Manuel R. Dulay Enteprises, Inc. v. Court of Appeals, 225 SCRA 678 (1993) [which treated the family corporation as a close corporation even without looking into the provisions of the articles of incorporation], do not apply because in Dulay the sale of real property

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was contracted by the President of a close corporation with the knowledge and acquiescence of its Board of Directors.

3. Restrictions on Transfers[174]- The restrictions in the transfer of the stocks must appear:

(a) in the articles of incorporation;

(b) in the by-laws; and

(c) on the stock certificates.

The restriction shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such terms, conditions or period stated therein.

Whenever any person to whom stock of a close corporation has been issued or transferred who is not entitled under any provision of the articles of incorporation to be a holder of record of stock, he is conclusively presumed to have notice either that:

(a) He is a person not eligible to be a holder of stock of the corporation;

(b) Transfer of stock to him would cause the stock of the corporation to be held more than the number of persons permitted by its articles of incorporation to hold stock of the corporation; or

(c) With the transfer of stock, the corporation's restrictions on transfer is violated, then the corporation may, at its option refuse to register the transfer of the stock in the name of the transferee. But these restrictions may be waived by consent of all the stockholders or by amendment of the articles of incorporation.[175]

4. Pre-emptive Right in Close Corporations - The pre-emptive right of stockholders in close corporations shall extend to all stocks to be issued, including reissuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.[176]

5. Management by Stockholders - The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders; in such case, no directors need be elected; and the stockholders shall be deemed directors and be subject to the same liabilities as directors. The articles may also provide that officers or employees of the corporation shall be elected or appointed by the stockholders.

Torres v. Court of Appeals278 SCRA 793 (1997)

Facts: The majority stockholders in a family corporation effected the cancellation of the certificates of stock and effected the issuance of new ones without coursing the same through the Corporate Secretary. On the issue that the new certificates of stock were void, the majority stockholders argued that they could not course the same through the Corporate Secretary who was adverse to them, and that being a family corporation, the act of issuance should be valid having been acted upon and approved by the majority stockholders.

Held: The cancellation of the old certificates and issuance of a new one are void actions because they do not comply with the requirement of Corporation Code requiring the same to be coursed through and signed

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by the Corporate Secretary. "All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple family corporation is not an exemption. Such corporations cannot have rules and practices other than those established by law."

6. Agreements by Stockholders:[177]

(a) Pre-incorporation agreements by and among stockholders shall survive the incorporation of the corporation and shall continue to be valid and binding between and among them:

• If such be their intent; and

• To the extent that such agreements are not inconsistent with the articles of incorporation.

(b) An agreement between two or more stockholders, if in writing and signed by the parties thereto, would be valid and binding:

• Even when it provides that in exercising any voting rights, the shares held by them all be voted as therein provided, or as they may agree, or as determined in accordance with a procedure agreed upon by them;

• Even though relating to any phase of the corporate affairs, and even if the effect is to make them partners among themselves;

• Even if it relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the Board of Directors;

NOTE: Such agreement shall impose on the parties-stockholders the liabilities for managerial acts imposed by the Code on directors.

NOTE ALSO: To the extent that stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves.

Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

7. When Board Meeting Is Unnecessary - Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if:

(a) Before or after such action is taken, written consent thereto is signed by all the directors; or(b) All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or(c) The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or(d) All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.

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NOTE: If a directors' meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with Secretary of the corporation after having knowledge thereof.

8. Corporate Tort for Close Corporations:

Sergio F. Naguiat v. NLRC269 SCRA 564 (1997)

Issue: Can the officers of the corporation be held personally liable for the tort liabilities of the corporation?

Held: The President and Vice-President, respectively of the Naguiat Enterprises, with Sergio Naguiat also being the President of the Clark Field Taxis, Inc. Both officers admitted that the two corporations were "close family corporations" owned by the Naguiat family. The two officers are liable solidarily with the Clark Field Taxis, Inc. for employment compensation awarded to the employees of Clark Field Taxis. Section 100, paragraph 5, (under Title XII on Close Corporations) of Corporation Code provides that to the extent that the stockholders are actively engaged in the management or operation of the business and affairs of the close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves; said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance.

Since nothing in the records show whether Clark Field Taxis, Inc. obtained "reasonably adequate liability insurance;" thus, what remains is to determine whether there was corporate tort.

9. Deadlocks - Under Sec. 104 of the Code, if the stockholders split into camps, and there is a deadlock with the result that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders in general, then any stockholder can petition SEC which is empowered to take the steps necessary to break the deadlock, even by amending the articles or the by-laws and to the extent of appoint a 3rd party as a provisional director.

Under Sec. 105, so long as the close corporation has unrestricted profits, it can be compelled to buy out the stockholder.

A stockholder may also petition to SEC to compel the dissolution of the close corporation whenever affairs are being carried out for illegal, fraudulent or dishonest or oppressive purpose, or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted.

10. Amendment of Articles of Incorporation - Any amendment to the articles of incorporation which seeks:

(a) Seeks to delete or remove any provisions required by the Corporation Code to be contained in the articles of incorporation;

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(b) To reduce a quorum or voting requirement stated in said articles of incorporation; shall not be valid or effective unless approved by the affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose.[178]

XI. SPECIAL CORPORATIONS1. Educational Corporations:

(a) The Board of Directors or Trustees -

(i) Non-stock, not less than 5 nor more than 15 trustees, but always multiples of five.

- staggered succession, every year, 1/5 shall be elected.

(ii) Stock - same as ordinary stock corporation.

2. Religious Corporations:a. Classes of Religious Corporation - Religious corporations may be incorporated by

one or more persons. Such corporations may be classified into: (i) corporations sole; and (ii) religious societies.[179]

Long v. Basa366 SCRA 113 (2001)

Facts: The Church By-law provision on expulsion does not provide for prior notice to be given to an erring member before he can be expelled. The expelled members contest the validity of his expulsion on the ground that the by-law provision are void.

Held: Expulsion valid. That is how peculiar the nature of a religious corporation is vis-à-vis an ordinary corporation organized for profit. The basis of the relationship between a religious corporation and its members is the latter's absolute adherence to a common religious or spiritual belief. Once this basis ceases, membership in the religious corporation must also cease. Thus, generally, there is no room for dissension in a religious corporation. And where, as here, any member of a religious corporation is expelled the membership of espousing doctrines and teachings contrary to that of his church, the established doctrine in this jurisdiction is that such action from the church authorities is conclusive upon the civil courts.

Obviously recognizing the peculiarity of a religious corporation, Corporation Code leaves the matter of ecclesiastical discipline to the religious group concerned.

Moreover, the petitioners really have no reason to bewail the lack of prior notice in the By-laws. As correctly observed by the Court of Appeals, they have waived such notice by adhering to those By-laws. They became members of the CHURCH voluntarily. They entered into its covenant and subscribed to its rules. By doing so, they are bounded by their consent.

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3. Corporation Sole - For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church.[180]

The formation of a corporation sole is only applicable to a religious group the rules of which provide that the property of the group shall be placed in the name of the head of the group who shall have the power to dispose of said property. Example: Iglesia ni Cristo.

a. Articles of incorporation - The articles of incorporation of a corporation sole must be verified by the head of the religious group who is "organizing" himself into such. Such head shall then become a trustee for the religious group.

If he wants to sell, dispose or mortgage the property of the group, he must obtain the approval of the RTC in which he resides.

EXCEPTION: If the rules and regulation of the religious group regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules and regulations shall control and intervention of the courts shall not be necessary.

b. Acquisition and Alienation of Property - Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent for such purposes.

Such corporation may mortgage or sell real property held by it upon obtaining an order for that purpose from the Regional Trial Court of the province where the property is situated; but before the order is issued, proof must be made to the satisfaction of the court that notice of the application for leave to mortgage or sell has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to mortgage or sell should be granted.

c. Filling of Vacancies - The successors in office of any chief archbishop, bishop, priest, minister, rabbi, or presiding elder in a corporation sole shall become the corporation sole on their accession to office; and shall be permitted to transact business as such on the filing with SEC of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public.

d. Dissolution - A corporation sole may be dissolved and its affairs settled voluntarily by submitting to SEC a verified declaration of dissolution. The declaration of dissolution shall set forth:

(a) The name of the corporation;(b) The reason for dissolution and winding up;(c) The authorization for the dissolution of the corporation by the

particular religious denomination, sect or church;(d) The names and addresses of the persons who are to supervise

the winding up of the affairs of the corporation.

Upon approval of such declaration of the dissolution by SEC, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs.[181]

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4. Religious Societies - Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect, or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of 2/3 of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate.

The following must be filed with SEC:

(a) That the religious society or religious order or diocese, synod, or district organization is a religious organization of some religious denomination, sect, or church;

(b) That 2/3 of its membership have given their written consent or have voted to incorporate at a duly convened meeting of the body;

(c) That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part;

(d) That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate;

(e) The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and

(f) The names, nationalities, and residences of the trustees, elected by the religious society or religious order, or diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or the diocese, synod, or district organization, the board of trustees to be not less than 5 nor more than 15.

5. Condominium Corporations:

a. Condominium Corporations Not Per Se Engaged in For-Profit Activities -

Yamane v. BA Lepanto Condominiun Corp.474 SCRA 258 (2005)

We can elicit from the Condominium Act that a condominium corporation is precluded by statute from engaging in corporate activities other than the holding of the common areas, the administration of the condominium project, and other acts necessary, incidental or convenient to the accomplishment of such purposes. Neither the maintenance of livelihood, nor the procurement of profit, fall within the scope of permissible corporate purposes of a condominium corporation under the Condominium Act. . . . Even though the Corporation is empowered to levy assessments or dues from the unit owners, these amounts collected are not intended for the incurrence of profit by the Corporation or its members, but to shoulder the multitude of necessary expenses that arise from the maintenance of the Condominium Project. . . .The City Treasurer nonetheless contends that the collection of these assessments and dues are "with the end view of getting full appreciative living values" for the condominium units, and as a result, profit is obtained once these units are

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sold at higher prices. The Court cites with approval the two counterpoints raised . . . First, if any profit is obtained by the sale of the units, it accrues not to the corporation but to the unit owner. Second, if the unit owner does not obtain profit from the sale of the corporation, the owner is already required to pay capital gains tax on the appreciated value of the condominium unit. . . . Accordingly, and with a significant degree of comfort, we hold that condominium corporations are generally exempt from local business taxation under the Local Government Code, irrespective of any local ordinance that seeks to declare otherwise.

Yamane v. BA Lepanto Condominiun Corp.474 SCRA 258 (2005)

Still, we can note a possible exception to the rule. It is not unthinkable that the unit owners of a condominium would band together to engage in activities for profit under the shelter of the condominium corporation. Such activity would be prohibited under the Condominium Act, but if the fact is established, we see no reason why the condominium corporation may be made liable by the local government unit for business taxes. Even though such activities would be considered as ultra vires, since they are engaged in beyond the legal capacity of the condominium corporation, the principle of estoppel would preclude the corporation or its officers and members from invoking the void nature of its undertaking for profit as a means of acquitting itself of tax liability.

b. Master Deed of Restrictions:

Twin Towers Condominium. Corp. v. Court of Appeals398 SCRA 203 (2003)

The Master Deed binds all members in a condominium corporation since it is annotated on the condominium certificate of title of each of the units. The Master Deed is a member's contract with all condominium members who are all co-owners of the common areas and facilities of the condominium. Contracts have the force of law between the parties and are to be complied with in good faith. From the moment the contract is perfected, the parties are bound to comply with what is expressly stipulated as well as with what is required by the nature of the obligation in keeping with good faith, usage and the law. Thus, when a party purchased its unit, it was bound by the terms and conditions set forth in the contract, including the stipulation in the House Rules.

c. Association Dues:


Condominium Act expressly provides that the master deed of a condominium project may authorize the condominium corporation to collect "reasonable assessments to meet authorized expenditures" (Sec. 9, R.A. 4726), and for that purpose, each unit owner "may be assessed separately for its share of such expenditures in proportion (unless otherwise provided) to its owner's fractional interest in the common

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areas;" (Ibid), and finally Sec. 20 thereof declares that "An assessment upon any condominium made in accordance with a duly registered declaration of restrictions shall be an obligation of the owner thereof at the time the assessment is made."Consequently, when the master deed restrictions duly registered contains such express authority, the condominium corporation's right to collect assessments and dues from its members and the corollary obligation of its members to pay are beyond dispute.


Registered owner of a unit is necessarily a member of the condominium corporation pursuant to the automatic exclusive membership clause in the master deed governing the condominium project, and as such it assumes the compulsory obligation to share in the common expenses of the. A buyer of condominium unit in such a condominium project is legally bound to pay the condominium corporation assessments and dues to maintain the common areas and facilities of the condominium project, and and such obligation arises from both the law and its contract with the condominium developer and other unit owners.


The obligation of a member of the condominium corporation to share in the common expenses of the condominium project pursuant to the terms of the master deed does not depend on the use or non-use by the member of the common areas and facilities of the condominium. Whether or not a member uses the common areas or facilities, these areas and facilities will have to be maintained. Expenditures must be made to maintain the common areas and facilities whether a member uses them frequently, infrequently or never at all.


The denial by the condominium corporation of the use of the condominium facilities as a consequence of the non-payment by the member of the assessments and dues, does not deprive the condominium corporation from the right to collect on such sums.

d. Validity of House Rules:


Does a condominium corporation have legal power to adopt a house rule that restricts delinquent members from the use and enjoyment of the condominium facilities? Yes. The Condominium Act clearly provides that the master deed may expressly empower the management body to enforce all provisions in the master deed and declaration of restrictions. Likewise, the provisions of the By-laws which expressly authorize the

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Board of Directors of the condominium corporation to promulgate rules and regulations on the use and enjoyment of the common areas, is also a source by which house rules may be adopted.


The condominium corporation would be unable to carry out its main purpose of maintaining the Condominium common areas and facilities if the members refuse to pay their dues and yet continue to use these areas and facilities. To impose a temporary ban on the use of the common areas and facilities until the assessments and dues in arrears are paid is a reasonable measure that the condominium corporation may undertake to compel the prompt payment of assessments and dues.


A delinquent member has no right to a reduction of its assessments and dues to the extent of its non-use of the Condominium facilities. The delinquent member also cannot offset damages against its assessments and dues from its own violation of its contract. Such a breach of contract cannot be the source of rights or the basis of a cause of action. To recognize the validity of such claim would be to legalize the delinquent member's breach of its contract.

e. Agency With Proper Jurisdiction Over Condominium Matters -

Manila Bankers Life Insurance Corp. v. Ng Kok Wei418 SCRA 454 (2003)

Complaint for specific performance with damages by a lot or condominium unit buyer against the owner or developer falls under the exclusive jurisdiction of the HLURB.

XII. CORPORATE DISSOLUTION, LIQUIDATION AND REINCORPORATION

1. CORPORATE DISSOLUTIONa. Nature of Dissolution

Republic v. Tancinco394 SCRA 386 (2002)

Dissolution, or the official termination of the life of a juridical entity for purpose of commercial endeavors, does not by itself cause the extinction or diminution of the rights and liability of such entity. Usually such entity, after dissolution, is allowed to continue as a juridical entity for 3 years for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property, and to distribute its assets.

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Vesagas v. Court of Appeals371 SCRA 509, 516 (2002)

A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity. The Corporation Code establishes the procedure and other formal requirements a corporation needs to follow in case it elects to dissolve and terminate its structure voluntarily and where no rights of creditors may possibly be prejudiced. For dissolution to be effective the requirements mandated by Corporation Code should have been strictly complied with.

Gonzales v. Sugar Regulatory Administration174 SCRA 377 (1989)

Juridical persons, whether incorporated or not, whether owned by the government or the private sector, may come to an end at one time or another for a variety of reasons, e.g., the fulfillment or the abandonment of the business purposes for which a corporation was set up. Thus, the Corporation Code provides for termination of corporate life, the dissolution of the corporation, the winding up of its operations, the liquidation of its assets, the payment of its obligations and distribution of any residual assets to its stockholders.

b. Methods of Corporate Dissolution -

(1) Voluntarily dissolution: by filing the proper papers with SEC. No hearing is required if there are no debts, but hearing is required where creditors are affected (Secs. 118 and 119).

(2) Involuntarily dissolution: upon verified complaint filed with SEC on grounds authorized by law like when there is serious dissension in the corporation, non- user of franchise, etc.[182]

(3) Expiration of the term of the corporation.[183]

(4) Shortening of corporate term.[184]

(5) Failure to organize and commence business within two years from date of issuance of certificate of incorporation; or

(6) Legislative dissolution.

PNB v. Court of First Instance of Rizal, Pasig, Br. XXI209 SCRA 294 (1992)

When the period of corporate life expires, the corporation is automatically dissolved, and it ceases to be a body corporate for the purpose of continuing the business for which it was organized.

c. VOLUNTARY DISSOLUTION -

(1) Without Debts:[185] Simply by administrative proceedings -(i) Majority vote of the Board, by resolution;(ii) Affirmative vote of 2/3 of the outstanding capital stock or 2/3 of the

members, as the case may be;

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PROVIDED: Notice of such meeting was published in principal office; if none, then in a newspaper of general circulation in the Philippines, with notice sent to each stockholder or member at least 30 days prior to meeting;

(iii) Copy of resolution certified by majority of directors or trustees and countersigned by secretary and filed with SEC;

(iv) SEC must issue certificate of dissolution.

(2) With Debts:[186] Quasi-judicial proceedings - (i) Formal petition filed with SEC

• Signed by majority of the directors/trustees or officers having management of its affairs, verified by president or secretary or one director/trustee;

• Set forth all claims and demands against it;• Set forth that dissolution was resolved upon affirmative vote of

2/3 of the outstanding capital stock or 2/3 of the members, as the case may be;

(ii) SEC shall issue order reciting purpose of petition and shall fix date before which objections may be filed, which shall not be less than 30 days nor more than 60 days after the entry of order;

(iii) Order shall be published once a week for three consecutive weeks in a newspaper published in the municipality or city where the principal office of the corporation is situated; if none, in a newspaper of general circulation in the Philippines, and a copy is to be posted for 3 consecutive weeks in 3 public places in such municipality or city;

(iv) After 5 days' notice from expiry date, SEC shall hear the petition and the objections thereto;

(v) If lawful, it shall order the corporation dissolved, provide for the disposition of properties, and may appoint receiver.

(3) Shorten Corporate Term[187] - By vote of 2/3 of the outstanding shares or 2/3 of the members, the articles may be amended to shorten the corporate life.

SEC internal rules[188] require the following:

• Notice of the dissolution to be be published in a newspaper of general circulation for 3 consecutive weeks;

• List of corporate creditors, with their consent to the shortening of corporate term;

• Submission by majority stockholders/principal officers an Undertaking to personally answer for any outstanding corporate bligations of the corporation; and

• Latest audited financial statements which must not be earlier than the date of the stockholders' meeting approving amendment to the articles of incorporation, and a BIR clearance on the tax liabilities of the corporation.

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Under Section 120 of the Corporation Code, it is only upon approval of the amended articles of incorporation by the SEC that the corporation shall be deemed dissolved. This means that if the shortened term, as proposed in the amendment of the articles of incorporation, expires before the approval by the SEC, the corporation will not be automatically dissolved upon such expiration but only upon SEC approval of the amendment. On the other hand, if the SEC gives its approval before such shortened term expires, the dissolution can take effect only upon the expiration of such shortened term. SEC Opinion No. 06-20, 13 March 2006.

d. Final Returns for Dissolving Corporations - SEC rules on corporate dissolution requires that there be obtained a BIR clearance that all tax liabilities of the corporate venture have been fully settled.

BPI v. Court of Appeals363 SCRA 840 (2001).

When a corporation is contemplating dissolution, it must submit with the BIR a tax return on the income earned from the beginning of the year up to the date of its dissolution and pay the corresponding tax due.

e. INVOLUNTARY DISSOLUTION - A corporation may be dissolved by SEC upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations.[189]

(1) Grounds for Involuntary Dissolution:• Fraud or misrepresentation as to the paid-up capital of the corporation

(25%-25% requirements);

• Misinterpretation;

• Ultra vires - mala prohibita, but too numerous infractions, which is persistent despite SEC warnings. Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 (1967).

• Continuous inactivity of the corporation for at least 5 years.

• Refusal to adopt or approve by-laws (P.D. 902-A).

2. CORPORATE LIQUIDATION - After the dissolution of the corporation, "shall nevertheless be continued as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enalbing it to settle and close it affairs, to dispose of and ocnvey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established."[190]

a. Nature of Corporate Liquidation:

PVBank Employees Union-N.U.B.E. v. Vega360 SCRA 33 (2001)

Liquidation, in corporation law, connotes a winding up or setting with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of

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reducing assets to cash, discharging liabilities and dividing surplus or loss.

On the opposite end of the spectrum is rehabilitation which connotes a reopening or reorganization. Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency.

It is crystal clear that the concept of liquidation is diametrically opposed or contrary to the concept of rehabilitation, such that both cannot be undertaken at the same time. To allow the liquidation proceedings to continue would seriously hinder the rehabilitation of the subject bank.

Chua v. NLRC190 SCRA 558 (1990)

A liquidation proceeding is a proceeding in rem so that all other interested persons whether or not known to the parties may be bound by such proceedings.


A dissolved corporation cannot extend corporate life during the 3-year period by amendment of its articles of incorporation.

b. Methods of Corporate Liquidation:(1) With the Board of Directors supervising the liquidation process, but their

authority is good only within a period of three years from corporate dissolution;

(2) By transferring all of the assets to a trustee or receiver who handles the liquidation process.

c. Liquidation Effected by the Board of Directors and Officers of the Dissolved Corporation:

De Guzman v. NLRC211 SCRA 723 (1992).

When Corporate Officers Liable Personally for Corporate Debts After Dissolution - Although a corporate officer is not liable for corporate obligations, such as claims for wages, however, when such corporate officer ceases corporate property to apply to his own claims against the corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well that certain creditors had similarly valid claims, he took advantage of his position as general manager and applied the corporation's assets in payment exclusively to his own claims.

Republic v. Marsman Dev. Co.44 SCRA 418 (1972)

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Cause of Action Against Persons Who Hold Corporate Assets Even After the Lapse of the Three-Year Period - There is nothing in Sec. 122 which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. "It immaterial that the present action was filed after the expiration of the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation."

National Abaca Corp. v. Pore2 SCRA 89 (1961)

If a corporation has a pending case which it filed during the three-year period, and it is still pending after said period, then under Sec. 122, the stockholders should meet and transfer all the rights of action to the trustee so that he can continue the case until its termination. Failure to take this step will result in the dismissal of a pending case for lack of corporate personality.

Tan Tiong Bio v. BIR100 Phil. 86 (1956)

Even after the lapse of the 3-year liquidation period, the officers and directors of the defunct corporation are proper parties in interest insofar as they may be held personally liable for the unpaid deficiency tax assessment made against the defunct corporation.

China Banking Corp. v. M. Michelin & Cie58 Phil. 261 (1933)

There can be no doubt that under Secs. 77 and 78 of Corporation Law, the Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, though there is the alternative method of assigning the property of the corporation to the trustees for the benefit of its creditors and shareholders. "While the appointment of a receiver rests within the sound judicial discretion of the court, such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business."

d. Liquidation Effected by Transferring the Corporate Assets to a Trustee or Receiver - At any time during the said three (3) years, a dissolved corporation is autorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors and other persons in interest.[191]

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Pepsi-Cola Products Phils., Inc. v. Court of Appeals443 SCRA 580 (2004)

Under Section 11 of the Corporation Code, a corporation whose corporate existence is terminated in any manner continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustee) itself, may be permitted to continue as "trustees" by legal implication to complete the corporation liquidation.

Republic v. Tancinco394 SCRA 386 (2002)

If and when a pending case against a dissolved corporation cannot be terminated within the 3-year liquidation period, then any person, agency or entity appointed by law to supervise the closing of its affairs is considered a trustee which shall continue to prosecute and defend suits filed by or against it. It is not necessary in such case as a condition precedent that there must be proof that the trustee is holding the assets of the dissolved corporation, what is provided is that the claimants can recover from such trustee to the extent of the dissolved corporation's being held by such trustee.

The trustee in such case cannot be made jointly and severally liable for the dissolved corporation's obligations, since being a mere trustee, its liability under the arrangement should merely be co-extensive with the amount of the assets it took over from the dissolved corporation: "to the extent of the fair value of assets actually taken over by the SRAa from Philsucom, if any."

Knecht v. United Cigarette Corp.384 SCRA 48 (2002)

The dissolution of the corporation and the expiration of the three-year liquidation period, is not a bar to the enforcement of its judgment right, which includes seeking from the court the execution of a valid and final judgment, for the benefit of its stockholders, creditors and any other person who may have legal claims against it.The trustee who commenced the suit, which term may include counsel of record, may continue to act for the dissolved corporation even after the expiration of the three-year liquidation period. Otherwise it would allow the judgment debtor to unjustly enrich himself at the expense of the dissolved corporation.

Reburiano v. Court of Appeals301 SCRA 342 (1999)

In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case ofClemente v. Court of Appeals [242 SCRA 717 (1995)], we held that the Board of Directors may

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be permitted to complete the corporate liquidation by continuing as "trustees" by legal implication. Under Section 145 of the Corporation Code, "No right of remedy in favor or against any corporation . . . shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof." This provision safeguards the rights of a corporation which is dissolved pending litigation.

Since the law specifically allows a trustee to manage the affairs of the corporation in liquidation, any supervening fact, such as the dissolution of the corporation, repeal of the law, or any other fact of similar nature, would not serve as an effective bar to the enforcement of such right.

Gelano v. Court of Appeals103 SCRA 90 (1981)

Even if no trustee is appointed or designated during the 3-year period of the liquidation of the corporation, a suit pending prior to the expiration of the period may still be prosecuted with the counsel of record being considered as the "trustee" required by law. Debtors of the corporation may not take advantage of the failure of the corporation to transfer its assets to a trustee; otherwise it would constitute undue enrichment to dismiss the case as against the defendant.

e. Escheat to the Government - Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be excheated to the city or municipality where such assets are located.[192]

3. REINCORPORATION

Chung Ka Bio v. Intermediate Appellate Court163 SCRA 534 (1988)

The Board of Directors may file a new set of articles of incorporation to reincorporate what otherwise would be a dissolved corporation, provided that they obtain the ratificatory vote of at least two-thirds (2/3) of the outstanding capital stock from stockholders approving such process.

"While we agree that the board of directors is not normally permitted to undertake any activity outside of the usual liquidation of the business of the dissolved corporation, there is nothing to prevent the stockholders from conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old. Winding up is to the sole activity of a dissolved corporation that does not intend to incorporate anew. If it does, however, it is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders have given their consent. This was not prohibited by the Corporation [Law]. In fact, it was expressly allowed by Section 28-1/2."

XIII. FOREIGN CORPORATIONS

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1. Definition - Section 123 of the Corporation Code defines a foreign corporation as a corporation that is organized other than under the laws of the Philippines (i.e., organized under the laws of a foreign country), provided said foreign country allows Filipinos and Philippine corporations to do business there.

Avon Insurance PLC v. Court of Appeals278 SCRA 312 (1997)

A foreign corporation is one which owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign.

European Resources and Technologies, Inc. v. Ingenieuburo Birkhanh + Nolte

435 SCRA 246 (2004)A corporation has legal status only within the state or territory in

which it was organized. For this reason, a corporation organized in another country has no personality to file suits in the Philippines. In other to subject a foreign corporation doing business in the country to the jurisdiction of our courts, it must acquired a license from SEC and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines.

2. Necessity to Obtain License to Do Business - A foreign corporation shall have the right to transact business in the Philippines after it has obtained a license to do business.[193]


The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, is to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts.

Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp.427 SCRA 593 (2004)

A foreign corporation without a license is not ipso facto incapacitated from bringing an action in Philippine courts. A license is necessary only if a foreign corporation is "transacting" or "doing business" in the country.

3. Suability of Foreign Corporations - No foreign corporation transacting business in the Philippines without a license, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines.[194]

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Nevertheless, such foreign corporation may be sued or proceeded against before Philippine courts or administrative tribunal on any valid cause of action recognized under Philippines laws.[195]

Summary Outline:(a) Doing Business in (a) May sue and can be sued

Philippines, With a License in Philippinessued in the Philippines.

(b) Doing Business in (b) Cannot sue, but may be sued

Philippines, Without license. in Philippines.[196]

(c) Not Doing Business (c) May sue

in Philippines, on (c-1) May be sued (FacilitiesIsolated Transactions. Management v. dela Osa,

89 SCRA 131 [1979].).

B. Van Zuiden Bros., Ltd v. GTVL Manufucaturing Industries523 SCRA 233 (2007)

An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine courts; an unlicensed foreign corporation not doing business in the Philippines can sue before Philippine courts.


The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements:

(1) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;

(2) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction;

(3) if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation's corporate personality in a suit brought before the Philippine courts; and

(4) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.

MR. Holdings, Ltd. V. Bajar380 SCRA 617 (2002)

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The principles governing a foreign corporation's right to sue in local courts can be condensed in three statements, to wit: (a) if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippin courts; (b) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; and (c) if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. Apparently, it is not the absence of the prescribed license but the "doing (of) business" in the Philippines without such license which debars the foreign corporation from access to our courts.

Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corp.

470 SCRA 650 (2005)Even if the challenge to a foreign corporation's capacity to sue is

raised in the preliminary stage that a motion to dismiss is, the demand for a clear factual finding to justify the dismissal cannot be dispensed with. Sec. 2, Rule 16 of 1997 Rules of Civil Procedure allows not only a hearing on the motion to dismiss, but also for the parties to submit their evidence. Evidently, the factual question of whether an unlicensed foreign corporation is indeed suing merely on an isolated transaction may be litigated extensively at the hearing on the motion to dismiss. The parties are allowed to submit their respective evidence, and even rebut the opposing parties' evidence.

4. Definition of "Doing Business" - Sec. 3(d) of Foreign Investment Act of 1991 (R.A 7042) enumerates what "doing business" covers:

(a) Soliciting orders;

(b) Service contracts;

(c) Opening offices, whether called "liaison" offices or branches;

(d) Appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling 180 days or more;

(e) Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines;

(f) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent, performance normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. [Taken from Mentholatum v. Mangaliman, 72 Phil. 524 (1941)]

PROVIDED: The phrase "doing business" shall not be deemed to include:

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(a) mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business and/or the exercise of rights as such investor;

(b) having a nominee director or officer to represents its interests in such corporation; and

(c) appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.

Mavest (U.S.A.), Inc. v. Sampaguita Garment Corp. 470 SCRA 440 (2005)

Domestice Liaison Office - Where a foreign corporation appears to have constituted a domestic liaison office as its representative and fully subsidized extension office in the country, the latter can be charged for the liabilities incurred by the former in the country.


The challenge to Agilent's legal capacity to sue hinges on whether or not it is doing business in the Philippines. However, there is no definitive rule on what constitutes "doing", "engaging in", or "transacting" business in the Philippines, as this Court observed in the case of Mentholatum v. Mangaliman. The Corporation Code itself is silent as to what acts constitute doing or transacting business in the Philippines. Jurisprudence has it, however, that the term "implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to or in progressive prosecution of the purpose and subject of its organization."

The case law definition has evolved into a statutory definition, having been adopted with some qualification in various pieces of legislation. The Foreign Investments Act of 1991 (the "FIA"; Republic Act No. 7042, as amended), defines "doing business" under Section 3(d).


435 SCRA 246 (2004)There is no general rule or governing principle laid down as to what

constitutes "doing" or "engaging in" or "transacting" business in the Philippines. A foreign consortium, by participating in the bidding for the operation of a waste management center, exhibited its intent to transact business in the Philippines and is thus considered doing business in the Philippines.


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435 SCRA 246 (2004)The act of participating in a bidding process constitutes "doing

business" because it shows the foreign corporation's intention to engage in bujsiness in the Philippines. In this regard, it is the performance by a foreign corporation of the acts for which it was created, regardless of volume of business, that determines whether a foreign corporation needs a license or not."


The question whether or not a foreign corporation is doing business is dependent principally upon the facts and circumstances of each particular case, considered in the light of the purposes and language of the pertinent statute or statutes involved and of the general principles governing the jurisdictional authority of the state over such corporations.

(1) Service Contracts May Not Be "Doing Business" in the Philippines:

Agilent Technolgies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp.

427 SCRA 593 (2004)Facts: The assailed acts purportedly in the nature of "doing

business in the Philippines," are following: (1) mere entering into the VAASA, which is a "service contract"; (2) appointment of a full-time representative in Integrated Silicon, to "oversee and supervise the production" of Agilent's products; (3) the appointment by Agilent of six full-time staff members, who were permanently stationed at Integrated Silicon's facilities in order to inspect the finished goods for Agilent; and (4) Agilent's participation in the management, supervision and control on Integrated Silicon, including instructing Integrated Silicon to hire more employees to meet Agilent's increasing production needs, regularly performing quality audit, evaluation and supervision of Integrated Silicon's employee, regularly performing inventory audit of raw materials to be used by Integrated Silicon, which was also required to provide weekly inventory updates to Agilent, and providing and dictating Integrated Silicon on the daily production schedule, volume and models of the products to manufacture and ship for Agilent.

Issue: Is Agilent deemed to be engaged in business in the Philippines, and therefore should have obtained a license, when it entered into a "service contract," and undertook activities pursuant thereto, evening assigning personnel in the Philippines?

Held: An analysis of the relevant case law, in conjunction with Sec. 1 of IRR of FIA '91, would demonstrate that the acts enumerated in the VAASA do not constitute "doing business" in the Philippines, since the following are expressly deemed not "doing business":

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(a) Mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;

(b) Having a nominee director or officer to represent its interest in such corporation;

(c) Appointing representative or distributor domiciled in Philippine which transacts business in its own name and account;

(d) Publication of general advertisement through any print or broadcast media;

(e) Maintaining stock of goods in Philippines solely for the purpose of having same processed by another entity in Philippines;

(f) Consignment by foreign entity of equipment with a local company to be used in processing of products for export;

(g) Collecting information in Philippines; and

(h) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, manufactured or exported to the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.

(2) Execution of Assignment Contracts Per Se Do Not Determine Doing Business:


The expression "doing business" should not be given such a strict and literal construction as to make it apply to any corporate dealing whatever. For example the mere fact that a foreign corporation participated under an "Assignment Agreement," but which it acquired the mining properties, facilities and equipment, of a local company, does not by itself prove that it has engaged in business in the Philippines. At such early stage and with the foreign corporation's act or transaction limited to the assignment contract, it cannot be said that it had performed acts intended to continue the business for which it was organized; especially when nothing has been alleged as to the purpose or business of such foreign corporation. Thus, whether the assignment contracts were incidental to the foreign corporation's business or were continuation thereof is beyond determination.


Significantly, a view subscribed upon by many authorities is that the mere ownership by a foreign corporation of a property in a certain state, unaccompanied by its active us in furtherance of the business for which it was formed, is insufficient in itself to constitute doing business.

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In Mentholatum, this Court discoursed on the two general tests to determine whether or not a foreign corporation can be considered as 'doing business" in the Philippines. The first of these is "the subsequent test,"thus: The true test [for doing business, however, seems to be whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another.

The second test is "the continuity test," expressed thus: The term [doing business] implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in the progressive prosecution of the purpose and object of its organization.

Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding principles for the application of these tests.[197]


"By and large, to constitute 'doing business,' the activity to be undertaken in the Philippines is one that is for profit-making."[198]

Far East International v. Kogyo6 SCRA 725 (1962)

There is an element of continuity when the officers of the foreign corporation gets a room in a hotel with the intention of using the room as an office to receive further purchase; the present purchase is not isolated transaction because there is the element of continuity.

General Corp. of Phil. v Union Insurance Society87 Phil. 313 (1950)

A foreign insurance corporation engages in regular marine insurance business here by issuing marine insurance policies abroad to cover foreign shipments to the Philippines, said policies being made payable in the Philippines, and said insurance company appoints and keeps an agent in the Philippines to receive and settle claims flowing from said policies, then said foreign corporation will be regarded as doing business in the Philippines.

The provisions of Sec. 14, Rule 14 of the Rules of Court providing for the methods of service of summons employing the phrase "doing business in the Philippines" makes no distinction as to whether said business was being done or engaged in legally with the corresponding authority and license of the Government, or perhaps, illegally, without the benefit of any such authority or license. As long as a foreign corporation

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engages in business in this jurisdiction, it should and will be amenable to process and the jurisdiction of the local courts, this for the protection of the citizens, and service upon any agent of said foreign corporation constitutes personal service upon the corporation and accordingly judgment may be rendered against said foreign corporation."

Pacific Vegetable Oil Corp. v. SingzonAdvanced Supreme Court Decisions

April 1955Facts: A suit was filed by a foreign corporation against the

defendant to recover damages suffered as a consequence of the failure of the defendant to deliver copra which was ordered through a contract negotiated and perfected in the United States, under "c.i.f. Pacific Coast" terms. The lower court dismissed the complaint holding that plaintiff had no personality to institute the case because at the time the case was filed the plaintiff had no license to do business in the Philippines, and even if it afterwards obtained such license, the belated act did not have the effect of curing the defect that existed when the case was instituted.

Held: Plaintiff was not doing business in Philippines under the contract, and there was no necessity for it to obtain a license before it can maintain the suit. The subject contract was entered into in the United States by the parties; that payment of the price was to be made at San Francisco, California, through a letter of credit to be opened at a bank thereat; and with respect to the delivery of the copra, it likewise was stipulated to be at "c.i.f., Pacific Coast" which meant that delivery is to be made only at the port of destination since the seller (defendant) obliged himself to take care of the freight until the goods have reached destination.

B. Van Zuiden Bros., Ltd v. GTVL Manufacturing Industries 523 SCRA 233 (2007)

To be doing or "transaction business in the Philippines" for purposes of Section 133 of the Corporation Code, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in its own name and for its own account.

The series of transactions between petitioner and respondent cannot be classified as "doing business" in the Philippines under Section 3(d) of RA 7042. An essential condition to be considered as "doing business" in the Philippines is the actual performance of specific commercial acts within the territory of the Philippines for the plaint reason that the Philippines has no jurisdiction over commercial acts performed in foreign territories. Here, there is no showing that petitioner performed within the Philippine territory the specific acts of doing business mentioned in Section 3(d) of RA 7042. Petitioner did not also open an office herein the Philippines, appoint a representative or distributor, or manage, supervise or control a local business. While petitioner and respondent entered into a series of transactions implying a continuity of

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commercial dealings, the perfection and consummation of these transations were done outside the Philippines. Citing VILLANUEVA, PHILIPPINE CORPORATE LAW 813 (2001).

Columbia Pictures, Inc. v. Court of Appeals261 SCRA 144 (1996)

Although Sec. 1(g) of IRR of Omnibus Investments Code lists among others the "soliciting orders, purchases (sales) or service contracts, and the appointing of representative or distributor who is domiciled in the Philippines," as constituting doing business, the mere fact that foreign movie companies are copyright owners or owners of exclusive distribution rights in the Philippines of motion pictures or films did "not convert such ownership into an indicium of doing business which would require them to obtain a license before they can sue upon a cause of action in local courts, such as in this case seeking protection for the intellectual properties."

As a general rule, a foreign corporation will not be regarded as doing business in the State simply because it enters into contracts with residents of the State, where such contracts are consummated outside the State. In fact, a view is taken that a foreign corporation is not doing business in the State merely because sales of its products are made there or other business furthering its interest is transacted there by an alleged agent, whether a corporation or a natural person, whether such activities are not under the direction and control of the foreign corporation but are engaged in by the alleged agent as an independent business.

It is generally held that sales made to customers in the State by an independent dealer who has purchased and obtained title from the corporation of the products sold are not a doing of business by the corporation. Likewise, a foreign corporation which sells its products to person styled "distributing agents" in the State, for distribution by them, is not doing business in the State so as to render it subject to service of process therein, where the contract with these purchasers is that they shall buy exclusively from the foreign corporation such goods as it manufactures and shall sell them at trade prices established by it."

The act of a foreign corporation in engaging an attorney to represent it in court is not doing business within the scope of the minimum contract test. The mere institution and prosecution or defense of a suit, do not amount to the doing business in the State.

(3) Reinsurance Does Not Per Se Constitute Doing Business:


When no sufficient evidence has been presented to show that the foreign corporations, being foreign reinsurance companies, are doing business in the Philippines, the service of summons upon them through the Office of the Insurance Commissioner, cannot be cured by the issuance and service of alias summons, as in the absence of showing

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that the foreign corporations had been doing business in the country, they cannot be summoned to answer for the charged leveled against them. The reason for this is that a contract of reinsurance is generally a separate and distinct arrangement for the original contract of insurance, whose contracted risk is insured in the reinsurance agreement. Hence, the original insured has generally no interest in the contract of reinsurance.

5. Issuance of License - SEC will issue a license to the foreign corporation to do business in the Philippines, provided, the following conditions are met:

(a) Appointment of Resident Agent:(i) Either a Filipino or domestic corporation; and

(ii) Power of Attorney for SEC to receive process.(b) Must prove that the foreign corporation's country grants

reciprocal rights to Filipinos and Philippine corporation.(c) Establish an office in the Philippines.

(d) Bring in its assets.(e) In the event of insolvency-undertaking that Filipino creditors will

be preferred.(f) Notice of six months should desire to terminate operations.

(g) Franchise and patents must remain the Philippines, if this is possible

(h) Must file a bond of P100,000.00, which may be in the following form:

(i) surety bond;(ii) government securities;

(iii) securities of political subdivisions;(iv) shares of stock of registered enterprises with SEC;

(v) shares of stock of any corporation being sold at the stock exchange.

That within 6 months after each fiscal year, SEC shall require the deposit of additional securities equivalent to 2% of the amount in excess of P5,000,000.00 of the gross income.

6. Grounds of Revocation of License - SEC may cancel certificate or license of a foreign corporation on any of the following grounds:

(a) failure to file annual reports required by Code.(b) failure to appoint or maintain resident agent(c) failure to inform SEC of change of resident agent or the latter's

change of address.(d) Failure to submit copy of amended articles or by-laws; or

articles of merger or consolidation.

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(e) a misrepresentation in material matters in reports.(f) failure to pay taxes, impost, assessments.(g) engaged in business not authorized by SEC.(h) acting as dummy of a foreign corporation not(i) licensed to do business in the Philippines.

7. Consequences of Not Obtaining License - Sec. 133 of Code provides that "a foreign corporation doing business in the Philippines without first obtaining the license to do business shall not be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines, but such foreign corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws."

In addition, Sec. 134 makes it a ground for revocation of license, when a foreign corporation transacts business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines.

a. Why Foreign Corporations Not Doing Business Not Required to Obtain License:


A foreign corporation not doing business in the Philippines is not required to obtain a license, since the same dangers do not pertain to them as in the case of foreign corporations actually engaged in business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the State's regulation. As we observed, in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the courts' jurisdiction would violate the essence of sovereignty.

b. Status of Contracts Entered Into Without Requisite License to Do Business:

Home Insurance Co. v. Eastern Shipping Lines123 SCRA 424 (1983)

The failure to obtain a license by a foreign corporation doing business in the Philippines does not affect the validity of contracts entered into by such foreign corporation, but merely removes its legal standing to sue in local tribunals. However, the defect may even be cured by subsequent registration by the foreign corporation to obtain the necessary license to do business in the Philippines.

Top-Weld Manufacturing v. ECED, S.A.138 SCRA 118 (1985)

Pari Delicto Doctrine: Although the law does not declare as void or invalid the contracts entered into by a foreign corporation with a local without the foreign corporation first securing a license or certificate to do

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business in the Philippines, "[t]here is no denying, though that an 'illegal situation,' as the appellate court has put it, was created when the parties voluntarily contracted without such license."

The parties therefore cannot obtain relief on the contracts entered into because they are charged with the knowledge of the existing law at the time they entered into such contract and at the time it is to become operative. "The parties in this case being equally guilty of violating R.A. No. 5455, they are in pari delicto, in which case it follows as a consequence that petitioner is not entitled to the relief prayed for in this case."

c. Doctrine of Estoppel:

Merrill Lynch Futures, Inc. v. CA211 SCRA 824 (1992)

Facts: In that case, Merrill Lynch Futures, Inc., through a domestic corporation, was found to be engaging in business (commodity futures) in the Philippines without obtaining the proper license. It brought a suit in Philippine courts to enforce a claim against local investors. The local defendants filed a motion to dismiss the suit on the ground that Merrill Lynch has no standing to file a suit in the Philippines since it has done business without obtaining the proper license.

Held: Although the foreign corporation has engaged in business in the Philippines without license, the dismissal of the suit would not be proper on the ground that if the local investors knew that the foreign corporation had no license to do business in the Philippines, then they are estopped from using the lack of license to avoid their obligations.

[The ruling in Merrill Lynch achieves contrary results from the pari delicto ruling of Top-Weld Manufacturing.]

Communication Materials and Design, Inc. v. Court of Appeals

260 SCRA 673 (1996)A foreign corporation doing business in the Philippines may sue in

Philippine courts although not authorized to do business here against a Philippine citizen or entity who had contracted with and benefited by said corporation. To put it another way, a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. And the doctrine of estoppel to deny corporate existence applies to a foreign as well as to domestic corporations. One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity. The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract.

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In a number of cases, however, we have held that an unlicensed foreign corporation doing business in the Philippines may bring suit in Philippine courts against citizen or entity who had contracted with and benefited from said corporation. Such a suit is premised on the doctrine of estoppel. A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it. This doctrine of estoppel to deny corporate existence and capacity applies to foreign as well as domestic corporations. The application of this principle prevents a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases where such person has received the benefits of the contract.


435 SCRA 246 (2004)"Hence, the party is estopped from questioning the capacity of a

foreign corporation to institute an action in our courts where it had obtained benefits from its dealings with such foreign corporation and thereafter committed a breach of or sought to renege on its obligations. The rule relating to estoppel is deeply rooted in the axiom ofcommodum ex injuria sua non habere debet-no person ought to derive any advantage from his own wrong. x x x. To rule that the German Consortium has the capacity to institute an action against petitioners even when the latter have not committed any breach of its obligation would be tantamount to an unlicensed foreign corporation gaining access to our courts for protection and redress. We cannot allow this without violating the very rationale for the law prohibiting a foreign corporation not licensed to do business in the Philippines from suing or maintaining an action in Philippine courts. The object of requiring a license is not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose of business without taking the steps necessary to render it amendable to suits in the local courts. In other words, the foreign corporation is merely prevented from being in a position where it takes the good without accepting the bad."


470 SCRA 650 (2005)After contracting with a foreign corporation, a domestic firm can no

longer deny the former's capacity to sue. Estoppel is deeply rooted in the axion of commodum ex injuria sua non habere debet-no person ought to derive any advantage from his own wrong.


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470 SCRA 650 (2005)In the case of Antam Consolidated, Inc. v. CA , this Court noted that

it is a common ploy of defaulting local companies which are sued by unlicensed foreign corporations not engaged in business in the Philippines to invoke the latter's lack of capacity to sue. This practice of domestic corporation is particularly reprehensible considering that in requiring a license, the law never intended to prevent foreign corporations from performing single or isolated acts in this country, or to favor domestic corporations who renege on their obligations to foreign firms unwary enough to engage in solitary transactions with them. Rather, the law was intended to bar foreign corporations from acquiring a domicile for the purpose of business without first taking steps necessary to render them amenable to suits in the local courts. It was to prevent the foreign companies from enjoying the good while disregarding the bad.


470 SCRA 650 (2005)As a matter of principle, this Court will not step in to shield defaulting

local companies from the repercussions of their business dealings. While the doctrine of lack of capacity to sue based on failure to first acquire a local license may be resorted to in meritorious cases, it is not a magic incantation. It cannot be called upon when no evidence exists to support its invocation or the facts do not warrant its application. In this case, that the respondent is estopped from challenging the petitioners' capacity to sue has been conclusively established, and the forthcoming trial before the lower court should weigh instead on the other defenses raised by the respondent.

d. Legal Standing of Foreign Corporations to Sue on Corporate Names, Tradenames and Trademarks:

General Garments v. Directors of Patents41 SCRA 50 (1971)

A foreign corporation although not doing business in the Philippines has a personality to sue to oppose the registration of trademark when it is shown that its products using such trademark are being imported and sold in the Philippines, pursuant to the terms of Section 21-A of Rep. Act No. 166.

Converse Rubber v. Universal Rubber Products147 SCRA 154 (1987)

A foreign corporation has a right to maintain an action in Philippine courts even if it is not licensed to do business and is not actually doing business on its own therein to protect its corporate and tradenames, since it is a property right in rem, which it may assert to protect against all the world, in any of the courts of the world-even in jurisdiction where it does not transact business-just the same as it may protect its tangible property, real or personal, against trespass, or conversion.

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This is in consonance with the Convention of the Union of Paris for the Protection of Industrial Property to whch the Philippines became a party on 27 September 1965. Article 8 thereof provides that "A trade name shall be, protected in all the countries of the Union without the obligation of filing or registration, whether or not it forms part of the trademark." The mandate of the Convention finds its implementation in Section 37 of Rep. Act No. 166, otherwise known as the Trademark Law.[199]

e. Allegation in Pleadings Filed By Foreign Corporations:

Atlantic Mutual Insurance v. Cebu Stevedoring17 SCRA 1037 (1966)

Facts: Two foreign insurance corporations sued the Cebu Stevedoring Co., Inc. for recovery of sum of money by way of subrogation over the insurance claims on a local insured company. The trial court, on motion, dismissed the complaint for failing to state that the plaintiffs were duly licensed foreign corporation to transact business in the Philippines. On appeal, the plaintiffs contended that the requirement for allegation of licensed being obtained is required only if the plaintiff foreign corporation is engaged in business in the Philippines; but that if a foreign corporation is not doing business in the Philippines, it is not barred from seeking redress in Philippine courts in proper cases, as when it sues on an isolated transaction.

Held: Although the Supreme Court sustained the principle upon which the plaintiffs appealed the dismissal, it nevertheless upheld the dismissal since the complaint filed with the lower court only alleged that the plaintiffs are foreign corporation, without further indicating that they are exempt from the requisite of a license because they are not engaged in business in the Philippines. Such averment conjures two alternative possibilities: either they are engaged in business in the Philippines or they are not so engaged. In the first, they must have been duly licensed in order to maintain this suit; second, if the transaction sued upon is singular and isolated, no such license is required. In either case, the qualifying circumstances is an essential part of the element of plaintiffs' capacity to sue and must be affirmatively pleaded.

Commissioner of Customs v. K.M.K. Gani182 SCRA 591(1990)

The fact that a foreign corporation is not doing business in the Philippines must be disclosed if it desires to sue in Philippine courts under the 'isolated transactions rule.' Without this disclosure, the court may choose to deny it the right to sue.

New York Marine Managers v. CA249 SCRA 416 (1995)

A complaint filed by a foreign corporation is fatally defective for failing to allege its duly authorized representative or resident agent in the Philippine jurisdiction.

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French Oil Mills Machinery v. Court of Appeals295 SCRA 462 (1998)

The mere allegation in the complaint that a local company is the agent of the foreign corporation is not sufficient to allow proper service to such alleged agent. Although there is no requirement to first substantiate the allegation of agency, yet it is necessary that there must be specific allegations in the complaint that establishes the connection between the principal foreign corporation and its alleged agent with respect to the transaction in question. Nowhere in the case of Signetics Corporation v. Court of Appeals, did the Court state that if the "complaint alleges that defendant has an agent in the Philippines, summons can validly be served thereto even without prior evidence of the truth of such factual allegation; it is only in the headnote of the reporter which is not part of the decision.

f. "Isolated Transactions"


Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business. Typical examples of these are the making of a single contract, sale, sale with the taking of a note and mortgage in the state to secure payment thereof, purchase, or note, or the mere commission of a tort. In these instances, there is no purpose to do any other business within the country.

Lorenzo Shipping v. Chubb and Sons, Inc.431 SCRA 266 (2004)

Sec. 133 of Corporation Code is clear in depriving foreign corporations which are doing business in the Philippines without a license from bringing or maintaining actions before, or intervening in Philippines courts. The law does not prohibit foreign corporations from performing single acts of business. A foreign corporation needs no license to sue before Philippine courts on an isolated transactions.

Even a series of transactions which are occasional, incidental and casual-not of a character to indicate a purpose to engage in business-do not constitute the doing or engaging in business as contemplated by law.

8. Suits Against Foreign Corporation Not Doing Business in Philippines:

Although foreign corporations not doing business in the Philippines would have no "presence" here and therefore cannot generally be subject to our laws and jurisdiction, much less to our judicial processes, doctrines have been enunciated by the Supreme Court making them susceptible to Philippine jurisdiction either by consent, stipulation as to venue, estoppel, or by the principle of equity.

Times, Inc. v. Reyes39 SCRA 303 (1971)

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The "fundamental rule of international jurisdiction [is] that no state can by its laws, and no court which is only a creature of the state, can by its judgments or decrees, directly bind or affect property or persons beyond the limits of that state."

A foreign corporation may, by writ of prohibition, seek relief against the wrongful assumption of jurisdiction by a trial court which refuses to dismiss an action filed against said foreign corporation where no proper jurisdiction has been obtained.

Hahn v. Court of Appeals266 SCRA 537 (1997)

The purpose of having summons served on a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines.

Avon Insurance PLC v. Court of Appeals278 SCRA 312, 327 (1997)

If the appearance of a foreign corporation to a suit is precisely to question the jurisdiction of the said tribunal over the person of the defendant, then this appearance is not equivalent to service of summons, nor does it constitute an acquiescence to the court's jurisdiction.

Linger & Fisher GMBH v. IAC125 SCRA 522 (1983)

When a contract between a local and a foreign corporation stipulates venue to be within the proper courts in the Philippines, such stipulation shall be considered to be consent to being sued in the Philippines even when the foreign corporation does no business in the Philippines.

Far East Int'l Import v. Nankai Kogyo Co., Ltd.6 SCRA 725 (1962)

Facts: A suit was filed against a Japanese corporation in Philippine courts for specific performance, damages and issuance of a writ of injunction. The Japanese company, by special appearance, filed a motion to dismiss the complaint and dissolve the preliminary injunction on the ground that the court had no jurisdiction over said foreign corporation and over the subject matter and failure to state a cause of action. When the motion to dismiss was overruled on the ground that it did not appear indubitable, an answer was filed and invoked defenses and grounds for dismissal of the complaint other than lack of jurisdiction.

Held: In deciding that proper jurisdiction was obtained over the defendant foreign corporation, the Supreme Court held that when the defendant foreign corporation filed an answer which invoked grounds other than lack of jurisdiction, the act vested upon the trial court jurisdiction to take cognizance of the case.

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(This affirmed the ruling in General Corporation of the Philippine v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 [1950], that the participation of counsel for a foreign corporation in the trial process, including the cross-examination of witnesses, agreement and objection to documentary evidence, and the introduction of witnesses and documentary evidence would prevent the plea of lack of jurisdiction over the person of such foreign corporation.)

Facilities Management Corp. v. De la Osa89 SCRA 131 (1979)

"Indeed, if a foreign corporation, not engaged in business in the Philippines, is not barred from seeking redress from courts in the Philippines a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines."[200]

Signetics Corp. v. Court of Appeals225 SCRA 737 (1993)

The fact of a foreign corporation doing business in the Philippines need not first be established by evidence in order that summons may be made and jurisdiction acquired over a foreign corporation.

Firstly, the fact of doing business may itself be alleged in the complaint as the basis for serving summons against a defendant foreign corporation.

Secondly, even when a foreign corporation is not engaged in business in the Philippines, since it may still look upon local courts for relief, reciprocally, such corporation may likewise be sued in Philippine courts for acts done against a person or person in the Philippines. Provided, that in the latter case, it would be not impossible for court processes to reach the foreign corporation, a matter that can later be consequential in the proper execution of judgment. "Verily, a State may not exercise jurisdiction in the absence of some good basis (and not offensive to traditional notions of fair play and substantial justice) for effectively exercising it whether the proceedings are in rem, quasi in rem or in personam."

a. Why Facilities Management Decision Does Not Always Apply:

Avon Insurance PLC v. Court of Appeals278 SCRA 312, 324 (1997)

"In the alternative, private respondents submits that foreign corporation not doing business in the Philippines are not exempt from suits leveled against them in courts, citing the case of Facilities Management Corporation vs. Leonardo Dela Osa, et al.,. . . We are not persuaded by the position taken by the private respondent. In Facilities Management case, the principal issue presented was whether the petitioner had been doing business in the Philippines, so that service of summons upon its agent as under Section 14, Rule 14 of the Rules of Court can be made in order that the Court of First Instance could assume

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jurisdiction over it. The Court ruled that the petitioner was doing business in the Philippines, and that by serving summons upon its resident agent, the trial court had effectively acquired jurisdiction. In that case, the court made no prescription as the absolute suability of foreign corporations not doing business in the country, but merely discounts the absolute exemption of such foreign corporations from liabilities particularly arising from acts done against a person or persons in the Philippines."

9. Domicile and Residence of Foreign Corporations

Northwest Orient Airlines v. Court of Appeals241 SCRA 192 (1995)

The domicile of a corporation belongs to the state where it was incorporated, and in a strict technical sense, such domicile as a corporation may have is single in its essence and a corporation can have only one domicile which is the state of its creation; whereas, the residence of a corporation is necessarily where it exercises corporate functions or the place where its business is done.

FBA Aircraft v. Zosa110 SCRA 1 (1981)

Under our jurisprudence, pending extraterritorial service of summons to a foreign corporation, an attachment of a foreign corporation's properties in the Philippines may be maintained.

10. Resident Agent (Secs. 127 and 128):A resident agent may be either an individual residing in the Philippines, must be

of good moral character and of sound financial standing, or a domestic corporation lawfully transacting business in the Philippines.

SEC shall require as a condition precedent to the issuance of the license that the foreign corporation file a written power of attorney designating some person who must be resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home.

Whenever such service of summons or other process is made upon SEC, it must, within 10 days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by SEC is a necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made. In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing SEC.

Expertravel & Tours, Inc. v. Court of Appeals459 SCRA 147 (2005)

Being a resident agent of a foreign corporation does not mean that he is authorized to execute the requisite certification against forum shopping-while a resident agent may be aware of actions filed against his

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principal (a foreign corporation doing business in the Philippines), he may not be aware of actions initiated by its principal, whether in the Philippines against a domestic corporation or private individual, or in the country where such corporation was organized and registered, against a Philippine registered corporation or a Filipino citizen.

H.B. Zachry Company International v. Court of Appeals232 SCRA 329 [1994])

When a corporation has designated a person to receive service of summons pursuant to the Corporation Code, that designation is exclusive and service of summons on any other person is inefficacious.

11. Laws Applicable to Foreign Corporations:[201]

Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class.

EXCEPT: The laws of the place of incorporation shall continue to govern the creation,

formation, organization or dissolution of foreign corporations or such as fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation.

Grey v. Insular Lumber Co.67 Phil. 139 (1938)

Facts: The foreign corporation doing business in the Philippines was organized under the laws of New York. According to the then Stock Corporation Law of New York, only stockholders owning at least 3% of the shares of the corporation may inspect the books and records of the corporation. Plaintiff Grey held less than 3% of defendant corporation stockholdings. Grey invoked the provision of Philippine Corporation Law which allowed stockholders owning less than 3% of shares to inspect books and records of a corporation.

Held: Intramural matters such as the qualification to inspect corporate records are governed by the laws where the corporation was incorporated.

12. Amendment of Articles of Incorporation:[202]

Whenever the articles of incorporation or the by-laws of a foreign corporation authorized to transact business in the Philippines are amended, such foreign corporation shall, within sixty (60) days after such amendment becomes effective, file with SEC, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or state of incorporation.

The filing thereof shall not itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines.

13. Merger and Consolidation:[203]

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One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation. However, the requirements on merger or consolidation as provided in the Corporation Code have to be complied with.

Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within 60 days after such merger or consolidation becomes effective, file with SEC, and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper officials or officials of the country or state under the laws of which such merger or consolidation was effected. If the absorbed corporation is the foreign corporation doing business in the Philippine, the latter shall at the same time file a petition for withdrawal of its license.

14. Revocation of License to Do Business:[204]

The license of a foreign corporation may be revoked or suspended by SEC upon any of the following grounds:

(a) Failure to file its annual report or pay any fees as required by

the Code;(b) Failure to appoint and maintain a resident agent in the

Philippines as required by this Title;(c) Failure, after change of its resident agent or of his address, to

submit to SEC a statement of such change as required by the Code;

(d) Failure to submit to SEC an authenticated copy of any amendment to its articles of merger or consolidation within the time prescribed by the Code;

(e) A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to the Code;

(f) Failure to pay any and all taxes, impost, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions;

(g) Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license;

(h) Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or

(i) Any other ground as would render it unfit to transact business in the Philippines.

Upon the revocation of any such license to transact business in the Philippines, SEC shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. SEC shall also mail to the

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corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation.

15. Withdrawal[205] - If a foreign corporation duly licensed to do business desires to withdraw, it must file a petition for withdrawal, and must meet the following requirements:

(a) All claims accrued in the Philippines must be settled.

(b) All taxes must be paid.

(c) Petition must be published once a week for three (3) consecutive weeks.

-oOo-

UPDATED: 31 OCTOBER 2008

[1]The author is the Dean of the ATENEO DE MANILA LAW SCHOOL, Rockwell Center, Makati City, Philippines, and its professorial lecturer inCorporate Law and Sales. He is the Chairman of the Commercial Law Department of the PHILIPPINE JUDICIAL ACADEMY, a member of its Academic Council, and Executive Director of its Consultants Group. He is also a member of the MCLE Governing Committee. He is a fellow of both the AUSTRALIAN INSTITUTE ON COMPANY DIRECTORS and the INSTITUTE OF CORPORATE DIRECTORS (Makati). He has authored the following books: PHILIPPINE CORPORATE LAW, LAW ON SALE and COMMERCIAL LAW REVIEW. He is a Senior Partner in the Law Firm ofVILLANUEVA GABIONZA & DE SANTOS, 20/f 139 CORPORATE CENTER, 139 Valero Street, Salcedo Village, Makati City 1200, Philippines,[email protected].

[2]Sec. 2, Corporation Code.

[3]Sec. 45.

[4] Pilipinas Loan Company v. SEC, 356 SCRA 193 (2001)

[5]Reiterated in De Liano v. Court of Appeals, 370 SCRA 349 (2001)

[6]Sec. 19.

[7]Reiterated in Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005); Remo, Jr. v. IAC, 172 SCRA 405 (1989); Secosa v. Heirs of Erwin Suarez Francisco, 433 SCRA 273 (2004); Martinez v. Court of Appeals, 438 SCRA 139 (2004); Jardine Davis, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Union Bank v. Ong, 491 SCRA 581 (2006); Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); McCleod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Garcia v. SSS Legal and Collection, 540 SCRA 456 (2007); Saludaga v. Far Eastern University, 553 SCRA 741 (2008).

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[8]Reiterated in Pascual and Santos, Inc. v. Members of the Tramo Wakas Neighborhood Assn., 442 SCRA 438 (2004); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).

[9]Veterans Federation of the Philippines v. Reyes, 483 SCRA 526 (2006).

[10]Reiterated in Martinez v. Court of Appeals, 438 SCRA 130 (2004).

[11] Sec.23.

[12]Reiterated in Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005); Prudential Bank v. Alviar, 464 SCRA 353 (2005); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).

[13]Reiterated in Martinez v. Court of Appeals, 438 SCRA 139 (2004).

[14]Republic v. Sandiganbayan, 346 SCRA 760 (2000); Asionics Philippines, Inc. v. NLRC, 290 SCRA 164 (1998).

[15]Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); San Juan Structural and Steel Fabricators v. Court of Appeals, 296 SCRA 631 (1998).

[16]Suldao v. Cimech System Construction, Inc, 506 SCRA 256 (2006); McCleod v. NLRC, 512 SCRA 222 (2007).

[17]General grounds for piercing reiterated in Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Velarde v. Lopez, 419 SCRA 422 (2004); Francisco v. Mejia, 362 SCRA 738 (2001).

[18]The limited use and effect of the piercing doctrine reiterated in Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992); Diatagon Labor Federation v. Ople, 101 SCRA 534 (1980).

[19]Citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed.) at 576.

[20]Reiterated in Heirs of the Late Panfilo V. Pajarillo v. Court of Appeals, 537 SCRA 96 (2007);

[21]Similar rundowns on instances allowing the application of piercing reiterated in Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002);

[22]See similar rundowns on instances for application of the piercing doctrine in Prudential Bank v. Alviar, 464 SCRA 353 (2005); First Philippine International Bank v. CA, 252 SCRA 259 (1996).

[23]Suldao v. Cimech System Construction, Inc., 256 SCRA 256 (2006);

[24]McCleod v. NLRC, 512 SCRA 222 (2007); Francisco v. Mejia, 362 SCRA 738 (2001).

[25]Del Rosario v. NLRC, 187 SCRA 777 (1990); Jardine Davies, Inc. V. JRB Realty, Inc., 463 SCRA 555 (2005);

[26]Reiterated in Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005).

[27]Reiterated in DBP v. Court of Appeals, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001).

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[28]Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Velarde v. Lopez, 419 SCRA 422 (2004); PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Manila Hotel Corporation v. NLRC, 343 SCRA 1 (2000); Child Learning Center, Inc. v. Tagorio, 475 SCRA 236 (2205); Nisce v. Equitable PCI Bank, Inc., 516 SCRA 213 (2007); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Yamamoto v. Nishino Leather Industries, Inc., 551 SCRA 447 (2008); Lim v. Court of Appeals,323 SCRA 102 (2000).

[29]Reiterated in MR Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).

[30]A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (986); NAMARCO v. Associated Finance Co., 19 SCRA 962 (1967).

[31]Sec. 123.

[32]SEC Letter-Opinion, 14 December 1989, SEC Quarterly Bulletin, Vol. XXIV, No. 2 (June 1990); SEC Letter-Opinion, 6 November 1989, SEC Quarterly Bulletin Vol. XXIV, No. 1 (March 1990); see also Palting v. San Jose Petroleum Inc., 18 SCRA 924 (1966).

[33]Also, Ong v. Court of Appeals, 401 SCRA 678 (2003).

[34]LBC Express Inc. v. Court of Appeals, 236 SCRA 602; Acme Shoe Ruber v. Court of Appeals, 260 SCRA 714).

[35]Sec. 3.

[36]Sec. 20.

[37] Sec. 21.

[38]Sec. 110.

[39]Sec. 111[2].

[40]Sec. 123.

[41]Sec. 5.

[42]Sec. 5.

[43]Sec. 6.

[44]Sec. 6.

[45]Sec. 62.

[46] Secs. 14[1] and 18.

[47]citing Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).

[48]Reiterated in Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002).

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[49]Reiterated in Philippine First Insurance v. Hartigan, 34 SCRA 252 (1970).

[50]Sec. 14([2].

[51]citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998), p. 162.

[52]Sec. 11.

[53]Sec. 19.

[54]Sec. 10.

[55]Sec. 14[5].

[56]Sec. 13.

[57]Sec. 14[7].

[58]Sec. 14[6].

[59]Sec. 81.

[60]Sec. 16.

[61]Sec. 17.

[62]Sec. 22.

[63]Sec. 23.

[64]Yasuma v. /heirs of Cecilio S. De Villa, 499 SCRA (2006); Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006).

[65]Reiterated in Raniel v. Jochico, 517 SCRA 221 (2007)

[66]Manila Metal Container Corp. v. PNBM, 511 SCRA 444 (2006); Yamamoto v. Nishino Leather Industries, Inc., 551 SCRA 447 (2008)l Cagayan Valley Drug Corp. v. Comm. Of Internal Revenue, 545 SCRA 10 (2008).

[67]Litonjua v. Eternit Corp., 490 SCRA 204 (2006); Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA (2006).

[68]Gamboa vs. Victoriano, 90 SCRA 40 [1979].

[69]CESAR L. VILLANUEVA, PHILIPPINE CORPORATE LAW, 1998 Ed., p. 228.

[70]see Sec. 27.

[71]Sec. 26.

[72]Sec. 28.

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[73]Sec. 28.

[74]Also SEC Opinion No. 21, series of 2003, addressed to Atty. Juan de Ocampo.

[75]Sec. 25.

[76]Sec. 30.

[77]Sec. 25)

[78]Sec. 92.

[79]Reiterated in Uy v. Villanueva, 526 SCRA 73 (2007).

[80]Also Easycall Communications Phils., Inc. v. King, 478 SCRA 102 (2005).

[81]Reiterated in TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).

[82] Sec. 26.

[83]Sec. 31.

[84]Carag v. NLRC, 520 SCRA 28 (2007).

[85]Sec. 31.

[86]Sec. 34.

[87]Sec. 31, Corporation Code

[88]Reiterated in H.R. Carlos Construction, Inc. v. Marina Properties Corp., 421 SCRA 428 (2004); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001); FCY Construction Group v. Court of Appeals, 324 SCRA 270 (2000) Santos v. NLRC, 254 SCRA 673, Uichico v. NLRC, 273 SCRA 35 (1997); McCleod v. NLRC, 512 SCRA 222 (2007); Garcia v. SSS Legal and Collection, 540 SCRA 459 (2007).

[89]Reiterated in Woodchild Holdings, Inc.

[90]Reiterated in Bogo-Medellin Sugarcane Planters Asso., Inc. v. NLRC, 296 SCRA 108 (1998); Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999); Malayang Samahan ng Mga Manggagawa sa M. Greenfields v. Ramos, 326 SCRA 428 (2000); Land Bank of the Philippines v. Court of Appeals, 364 SCRA 375 (2001); Coca-cola Bottlers, Inc. v. Daniel, 460 SCRA 494 (2005); Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); McCleod v. NLRC, 512 SCRA 222 (2007); Supreme Steel Pipe Corp. v. Bardaje, 552 SCRA 155 (2007)

[91]Sec. 32

[92]Sec. 32.

[93]Sec. 33.

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[94]Reiterated in Shipside Inc. v. Court of Appeals, 352 SCRA 334 (2001).

[95]Reiterated in SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638 (2006).

[96]Reiterated in Mariveles Shipyard Corp. v. Court of Appeals, 415 SCRA 573 (2003); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Public Estates Authority v. Uy, 372 SCRA 180 (2001); Eslaban, Jr. v. Vda. De Onorio, 360 SCRA 230 (2001). Metro Drug Distribution, Inc. v. Narciso, 495 SCRA 286 (2006).

[97]Reiterated in Athena Computers, Inc. v. Reyes, 532 SCRA 343 (2007).

[98]Reiterated in Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006).

[99]Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).

[100]Reiterated in Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Reyes v. RCPI Employees Credit Union, Inc., 499 SCRA 319 (2006).

[101]Reiterated in Lapulapu Foundation, Inc. v. Court of Appeals, 421 SCRA 328 (2004); People's Aircargo and Warehousing Co., Inc. v. Court of Appeals, 297 SCRA 170 (1998).

[102]Reiterated in Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003); Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).

[103]44 Phil. 469 (1923).

[104]Id; Garcia vs. Lim Chu Sing, 59 Phil. 562 [1934); Boman Environmental Dev't Corp. vs. Court of Appeals, 167 SCRA 540 [1988].



[107]Sec. 44.

[108]Reiterated in TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).

[109]Sec. 50.

[110]Sec. 50.

[111]Sec. 50.

[112]Sec. 51.

[113]Sec. 50.

[114]Sec. 52.

[115]Reiterated in Trans Middle East (Phils) v. Sandiganbayan, 490 SCRA 455 (2006); Pacific Basin Securities Co., Inc. v. Oriental Petroleum and Minerals Corp., 531 SCRA 667 (2007).

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[116]Sec. 55.

[117]Sec. 56.

[118]Sec. 57.

[119]Sec. 58.

[120]Sec. 58.

[121]Sec. 59.

[122]Sec. 59.

[123]Sec. 39.

[124]Sec. 43.

[125]Sec. 43.

[126]Sec. 43.

[127]Sec. 122.

[128]Sec. 75.

[129]Angeles v. Santos, 64 Phil 697 (1937)

[130]Previously recognized as available ancillary remedies in Chase v. CFI of Manila , 18 SCRA 602 (1966); Angeles v. Santos, 64 Phil. 697 (1937).

[131]Sec. 11.

[132]Sec. 16.

[133]Sec. 40.

[134]Sec. 42.

[135]Sec. 122.

[136]Sec. 94.

[137]Sec. 95.

[138]Sec. 60.

[139]Sec. 61.

[140]Sec. 62.

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[141]Sec. 62.

[142]Sec. 63.

[143]Sec. 63.

[144]Sec. 64.

[145]SEC Opinion No. 06-13, 06 March 2006.

[146]Enumeration reiterated in Rural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001).[147]Reiterated in Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005).

[148]Reiterated in Rivera V. Florendo, 144 SCRA 643, (1986)

[149]Sec. 63

[150]Sec. 63.

[151]Sec. 65.

[152]Sec. 66.

[153]Sec. 67.

[154]Sec. 71.

[155]Sec. 69.

[156]Sec. 70.

[157]Sec. 73.

[158]Sec. 73.

[159]Reiterated in PNB v. Andrada Electric, 381 SCRA 244 (2002); McCleod v. NLRC, 512 SCRA 222 (2007).


[161]Citing Rivera v. Litam & Co., Inc., 4 SCRA 1072 (1962).

[162]Reiterated in Yu v. NLRC, 245 SCRA 134 (1995); Sunio v. NLRC, 127 SCRA 390 (1984); San Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991).

[163]Reiterated in Pepsi-Cola Distributors of the Philippines, Inc. v. NLRC, 247 SCRA 386 (1995); Corral v. NLRC, 258 SCRA 704 (1996).

[164]Reiterated in Coral v. NLRC, 258 SCRA 704 (1996); Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 (1995); Robledo v. NLRC, 238 SCRA 52 (1994); DBP v. NLRC, 186 SCRA 841 (1990).

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[165]Reiterated in McCleod v. NLRC, 512 SCRA 222 (2007).

[166]Sec. 87.

[167]Sec. 88.

[168]Sec. 89.

[169]Sec. 89.

[170]Sec. 90.

[171]Sec. 91.

[172]Sec. 93.

[173]Sec. 96.

[174]Sec. 98.

[175]Sec. 99.

[176]Sec. 102.

[177]Sec. 100.

[178]Sec. 103.

[179]Sec. 109.

[180]Sec. 110.

[181]Sec. 115.

[182]Sec. 121.

[183]Sec. 122.

[184]Sec. 120.

[185]Sec. 11

[186]Sec. 119.

[187]Sec. 120

[188]SEC Opinion, 5 July 1979, the XIII SEC QUARTERLY BULLETIN 3 (No. 4, Oct. 1979).

[189]Sec. 121.

of 208

[190]Sec. 122.

[191]Sec. 122.

[192]Sec. 122.

[193]Sec. 123.

[194]Sec. 133.

[195]Sec. 133.

[196]Sec. 133.

[197]citing VILLANUEVA, PHILIPPINE CORPORATE LAW 596 et seq. (1998 ed.).

[198]citing VILLANUEVA, PHILIPPINE CORPORATE LAW 590 (1998 ed.).

[199]To the same effect were the rulings in Converse Rubber Corporation v. Jacinto Rubber & Plastic Co., Inc., 97 SCRA 158 (1980); Universal Rubber Products, Inc. v. Court of Appeals, 130 SCRA 104 (1984); Puma Sportsahuhfabriken Rudolf Dassler, K.G. v. Intermediate Appellate Court, 158 SCRA 233 (1988); Philips Export B.V. v. Court of Appeals, 206 SCRA 457 (1992).

[200]The ruling making foreign corporations not doing business in the Philippines subject to suits in local courts has been reiterated in FBA Aircraft, S.A. v. Zosa 110 SCRA 1 (1981); Wang Laboratories, Inc. v. Mendoza, 156 SCRA 44 (1987); and Royal Crown Internationale v. NLRC, 178 SCRA 569 (1989).

[201]Sec. 129.

[202]Sec. 130.

[203]Sec. 132.

[204]Secs. 134 and 135.

[205]Sec. 136.

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