Jurists Lecture (Corporation Code)

1. Bar Advice:
a. Knowing the law is very important. But addressing the time is equally important.
b. If you are grounded on the terms, that is one thing.
c. When the question is being read and the stock knowledge kicks in, your mind should have a concept already because you are running on a limited time.

2. Areas of concern
a. BOD (29 questions)
b. Incorporation and organization (25)
c. Capital structure (25)
d. Stockholders and members (25)
e. Corporate powers (23)
f. Corporate juridical personality (14)
g. Corporation (9)
h. Dissolution and liquidation (8)
i. Nationality (5)
j. Classes (3)

3. BOD
a. Fiduciary duties and liability rules
b. Elections
c. Tenure, qualifications and disqualifications of directors or trustees
d. Meetings
e. Doctrine of Centralized Management (Section 23)
f. Removal

4. Incorporation and Organization

a. Articles of incorporation
b. Number and qualifications of incorporators
c. Minimum capital stock and subscription requirements
d. Adoption of BL
e. Corporate name: limitations on the use of corporate names
f. Registration and issuance of Certificate of Incorporation

5. Capital structure
a. Consideration for stocks
b. Stock and Transfer Book
c. Payment of balance of subscription
d. Shares of stock
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 e. Certificate of stock

6. Stockholders and members

a. Proprietary rights (those are enjoyed by stockholders and members by virtue of being a member)
b. Participation in management
c. Rights of a stockholder and members (particularly on the right to vote)
d. Remedial rights (derivative suits)
e. Obligation of a stockholder
f. Meetings

7. Corporate powers
a. Specific Powers, Theory of Specific Capacity
b. How exercised
c. Trust Fund Doctrine
d. Dividend Payment
e. Doctrine of Apparent Authority

8. Corporate juridical personality

a. Doctrine of separate juridical personality
b. Doctrine of piercing the corporate veil

9. Corporation (do not expect this question; concentrate more on the implications of the attributes)
a. Attributes
b. Definition

10. Dissolution and liquidation

a. Actions after dissolution

11. Nationality of corporations

a. Place of incorporation test
b. Control test (Grandfather Rule)

12. Basic Doctrines and Principles

a. Doctrine of Separate Personality
i. Nature of the Doctrine:
Pioneer Insurance ISSUE: Whether or not to hold the shareholders and other owners of the travel agency liable for the corporation’s obligation?
Surety Corporation vs. As a general rule, a corporation has a separate and distinct personality from those who represent it. Its officers are solidarily liable only when
Morning Star Travel exceptional circumstances exist, such as those in Section 31.
and Tours, 2015  Those who willfully and knowingly vote to or assent to patently unlawful acts of the corporation
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  Those who are guilty of gross negligence or BF in directing the affairs of the corporation
 Those who acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees

Zambrano vs. FACTS: There is a workers’ claim in one company charged from the affiliate company.
Philippine Carpet You cannot charge another company for the obligations of the affiliate company.
Manufacturing, 2017 A corporation 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.

ii. Consequence of the doctrine:

Bustos vs. Millians FACTS: There is a property owned by Spouses Chua. They were not able to pay their RPL. LGU of Marikina auctioned off their property. Bustos
Shoe, 2017 acquired this property. While he was transferring the TCT to his name, there was a lis pendens and an issue as to whether the property can be
transferred to him. During the pendency of the transfers, there was a petition for corporate rehabilitation by Millians Shoes. They wanted to
include the property in the rehabilitation case. Hence, there was a stay order issued by the RTC to prevent the creditors from patching the
corporate properties. Bustos questioned this.

Can the property be included in the stay order issued by the court on the property of the corporation? No. It cannot be included in the Stay
Order because Millian Shoes has a separate personality from the Spouses Chua. By virtue of the doctrine, stockholders of a corporation enjoy
limited liability. The corporate debt is not the debt of the stockholder.

Shrimp Specialists vs. FACTS: There was a contract for supply of shrimp feeds in favor of Shrimp Specialists. Shrimp Specialists could not pay Fuji-Triumph. They said
Fuji-Triumph, 2009 that the feeds were contaminated. There were discussions between both corporations’ representatives. The President of Shrimp Specialists
promised to settle it. When the obligation was not settled, the President was included in the case.

Can the President be made liable for the obligation incurred by the corporation? No.
Ownership by a single or small group of stockholders of nearly all of the capital stock of the corporation is not by itself a sufficient ground to
disregard the separate corporate personality. Thus, obligations incurred by corporate officers, acting as corporate agents, are direct
accountabilities of the corporation they represent.

Obligations incurred by corporate officers acting as corporate agents are not theirs but direct accountabilities of the corporation they
represent.
To hold Eugene Lim (the President) solidarily liable should be more than just signing on behalf of the corporation because artificial entities can
only act through natural persons. If the corporate officer signs a document or contract in behalf of the corporation, (since it is part of his
functions) and obligations were incurred because of the signing of that agreement, that corporate officer will not be personally liable.

Edsa Shangrila Hotel FACTS: BF sued Shangrila for the purpose of collecting unpaid bills in connection with the construction of Edsa Shangrila Hotel. They sued not
vs. BF Corporation, only Edsa Shangrila Inc. but also the corporate agents including the directors. The court allowed the claim even to the ones including the
2008 directors.

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 The acts of corporate agents, in relation to what is expected of them, will not incur a corresponding obligation on their part. Whatever
obligations that they will incur will be against the corporation.
 EX: When the President signs a voucher to purchase a particular item or property in the name of the corporation. The corporation will
pay for the purchase although the one who acted is the corporate agent or the President.

Even if Roxas-Del Castillo, at the time ESHRI defaulted in paying BF’s monthly progress bill, was still a director, it must be shown that she acted
in a manner and under the circumstances contemplated in Section 31.
 When we look at liability, we always look on who may be liable with the corporation?
o GR: Separate personality will apply to the following:
 Corporation and corporate officers (cite Shrimp Specialists)
 Corporate directors (cite Edsa Shang if this is asked in the Bar)

iii. Subsidiary or affiliate corporations

1. Supposed a corporation incurs a liability, can that liability be passed on to a subsidiary corporation or to another entity owned by the
same stockholders?
Pantranco Employees FACTS: Pantranco employees were suing the subsidiary company because same ownership. There were two companies owned by the
Association vs. NLRC, Gonzales Family—one in engaged in realty and the other in transportation. The realty company was given to one of the creditors (PNB) as part
2009 of their pay off on existing obligations while Pantranco had a labor problem. There was a judgment in favor of the workers and the judgment
needed execution. Where will you execute it since there are no more problems left in Pantranco? The employees wanted to run after the
problems at Madicor (with PNB; the realty) claiming that it was owned by the Gonzales Family? Can this be done to claim on a subsidiary
company?

Even if there is 100% ownership on these two companies, that alone will not be enough to impose liability on a subsidiary company. Even if
they are so closely related because of ownership structure, that alone will not enough as basis to hold the other corporation liable for the
obligations of the other.
The 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 shall be respected , and the liability of the parent
corporation as well as the subsidiary will be confined to those arising in their respective businesses.

iv. Owners and stockholders

Espiritu vs. Petron, FACTS: There was a refilling station and they were charged for illegal refilling as well as trademark infringement and unfair competition. The
2009 fiscal filed a criminal information against the owners and stockholders.

The owners of the corporation are stockholders and they are to be distinguished from directors and officers. It must be noted that in a
corporation, the management of its business is generally vested in its BOD and not to its stockholders. Stockholders are basically investors in

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 the corporation. They do not have a hand in the running of the day-to-day business operation of the corporation unless they are of the same
time directors and officers of the corporation.

Before a stockholder may be held criminally liable for the acts committed by the corporation, it must be shown that he had knowledge of the
criminal act committed in the name of the corporation, that he took part in the same or gave his consent to its commission whether by action
or by inaction.
 This is an important case insofar as attributing criminal liability upon the stockholders or owners of a corporation is concerned.
 What is the implication of this?
o If one has ownership or stocks and that corporation commits a criminal offense, that stockholder just by virtue of his
stockholdings will not be liable for the criminal acts committed by the corporation. The criminal liability would only apply if
he took part in the commission of the criminal offense. Mere ownership of shares is not sufficient to hold the owner
criminally liable unless there is separate evidence to show that he allowed the crime to be committed or that he is part of
the commission of the crime.

b. Doctrine of Piercing the Veil of Corporate Fiction

Queensland-Tokyo FACTS: Here, Thomas was lured to put an investment in Queensland only to find out that Queensland has employed unauthorized salesmen to
Commodities, Inc. vs. do securities trading. When SEC issued a CDO, Thomas asked Queensland to reimburse his investment which Queensland denied. Thomas
George, 2010 wanted to sue not only Queensland but also certain corporate officers such as the President and Treasurer.

May this be allowed? Yes. It is necessary because of the presence of fraud since Queensland employed unauthorized and unlicensed salesmen.
Under the Doctrine of Piercing the Veil of Corporate Fiction, the court looks at the corporation as a mere collection of individuals or an
aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group.
 “Mere collection of individuals or an aggregation of persons undertaking business as a group.”

Livesey vs. Binswager, The Doctrine of Piercing the Veil of Corporate Fiction is a legal precept that allows a corporation’s separate personality to be disregarded
2014 under certain circumstances, so that a corporation and its stockholders or members, or a corporation and another related corporation could
be treated as a single entity.

The Doctrine is an equitable principle; it being meant only to apply in situations where the separate corporate personality of a corporation is
being abused or being used for wrongful purposes. There must be a showing that the separate personality principle is being used and abused
by the defendant. If the one hiding behind the separate personality rule is already abusing the principle, the court will pierce the corporate
fiction.

i. What is the rationale for the Doctrine?

1. It is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used
for wrongful purposes.

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Livesey vs. Binswager, Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for non-legitimate purposes, such as to
2014 evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other
unjustifiable aims or intentions, in which cases, the action will be disregarded and the individuals composing it and the two corporations will
be treated as identical.
 Situations contemplated:
o To evade a just and due obligation
o To justify a wrong
o To shield or perpetrate fraud
o To carry out similar or inequitable considerations, other unjustifiable aims or intentions

2. When the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or
is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate
fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another
corporation.
a. SC is not limited on the general statement that there must be showing of abuse of the separate personality rule. Instead, the
SC inserted another principle which is the “Alter-Ego Principle”.
Pacific Rehouse Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of
Corporation vs. CA, the other, the fiction of corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not majority
2014 or even complete stock control control but such domination of finances, policies and practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is but a conduit for its principal.
 For the Alter-Ego Principle to apply, it is not necessary that the two corporations are owned 100% by a common stockholder, or one
corporation is owned by the other totally. It is merely dominance—the power to influence to decisions of the officers in the other
corporation.

It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place . Moreover, the
control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.

3. What is the effect if the veil of corporate fiction is pierced?

Pacific Rehouse The principle shall result in the treatment of two related corporations as one and the same juridical person with respect to a given transaction.
Corporation vs. CA, As such, the liability of one may be imposed on the other.
2014  If there the application of Separate Personality, the two corporations are treated separately. The liability of one cannot be imposed
on the other.
 Suppose we apply the Piercing Principle, these two corporations become one. The liability of one in a given transaction can be passed
on to the other.

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 4. What factors should be considered by the Court in piercing the veil of two corporations?
Pacific Rehouse For the Court to pierce, the confluence of the following factors would be necessary:
Corporation vs. CA, 1) The first corporation should be dissolved.
2014 2) Assets of the first corporation is transferred to the second corporation to avoid a financial liability of the first corporation.
3) Both corporations are owned and controlled by the same persons such as that the second corporation should be considered as a
continuation and successor of the first corporation.

5. What factors of identity that may be considered in the application of the doctrine?
Heirs of Fe Tan Uy vs. In certain cases, particularly NLRC cases, you will see that the worker cannot collect because the corporation he is suing is already dissolved
International but in the same office where they previously work, there is a new entity there with the same set up and officers but only in a different name.
Exchange Bank, 2013 That is a situation where you say that the current corporation is the same as the previous one. In that particular instance, you will appreciate
that there is an identity of these two corporations and therefore piercing the veil may rightfully apply.
1) Stock ownership by one or common ownership of both corporations (ownership of two corporations)
2) Identity of directors and officers (interlocking directorship)
3) Manner of keeping corporate books and records
4) Methods of conducting the business

6. Alter-Ego Test
Pacific Rehouse Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of
Corporation vs. CA, the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not
2014 majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is but a conduit for its principal.
 If one corporation is so organized, so intertwined, with another entity, such that the other entity has no mind of its own but is
complete dependent on the other, that corporation is merely an alter-ego of the other corporation.
 If one corporation is so closely handled or managed by one group of persons, Alter-Ego Concept may come in.
o Control must have been exercised at the time the acts complained of took place.
o That control and the breach of duty must be the proximate cause for the injury or unjust loss for which the complaint is
made.

a. Three-Pronged Tests to establish the alter-ego doctrine

i. The absence of any one of these elements prevents “piercing the corporate veil” in applying the “instrumentality” or
“alter-ego” doctrine, the courts are concerned with reality and not form, with how the corporation operated and the
individual defendant’s relationship to that operation. All elements should concur for the Alter-Ego Doctrine to apply.
1. Control of policy and business policy
2. Control must have been used for fraud

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 3. It must be the proximate cause of injury.
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.
Most Alter-Ego cases used the Control Test.

Fraud Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive
legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right.

Injury The control and breach of duty must have proximately caused the injury or unjust loss complained of.

PNB vs. Hydro Mere ownership by a single stockholder or by another corporation of all or nearly all capital stock of a corporation is not a sufficient ground for
Resources disregarding separate corporate personality. There is no automatic presumption that the other corporation is an alter-ego of the other.
Contractors, 2013
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.

7. Is Piercing the Veil the general rule or the exception?

a. Rationale for this rule:
i. The wrongdoing must be clearly and convincingly established. It cannot be presumed. Otherwise, an injustice that
was never unintended may result from an erroneous application.

Umali vs. CA, 1990 It is more of an exception to the general rule.

The mere fact that the business of two or more corporations are interrelated is not a justification for disregarding their separate personalities,
without sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights.

Heirs of Fe Tan Uy vs. Piercing of veil is frowned upon and can only be done if it has been clearly established that the separate and distinct personality is used to
International justify a wrong, protect fraud, or perpetrate a deception.
Exchange Bank, 2013 SC will not apply the piercing unless there would be basis to apply it premised on existence of fraud.

Any application of Doctrine of Piercing should be done with caution.

The court must be certain that the corporate fiction was misused to an extent that injustice, fraud or crime was committed against another, in
disregard of its rights.

b. Can the doctrine of piercing be used to determine jurisdiction?

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 i. Piercing is only applied to determine established liability. It is not available to confer jurisdiction it has not acquired
over a party not impleaded in a case.
Pacific Rehouse No. Piercing the veil applies to determination of liability not of jurisdiction. This is so because the doctrine complies into play only during the
Corporation vs. CA, trial of the case after the court has already acquired jurisdiction over the corporation. Hence, before this doctrine can be applied, based on
2014 evidence presented, it is imperative that the court must first have jurisdiction over the corporation.

The corporation must be impleaded first so it can have the opportunity to participate in the proceedings. Otherwise, there will be a violation
of due process. If the court has no jurisdiction over the corporation, it follows that the court has no business in piercing its veil of corporate
fiction because such action offends the corporation’s right to due process.

A corporation not impleaded in a suit cannot be subject to the court’s process of piercing the veil. In that situation, the court has not acquired
jurisdiction over the corporation. Hence, any proceeding taken against the corporation and its property would infringe its right to due process.

8. Comparative analysis of jurisprudence:

a. Can a corporation be made liable for an obligation of an affiliate company under the Doctrine of Piercing?
Livesey vs. Binswager, 2014 Zambrano vs. Philippine Carpet Manufacturing Corporation, 2017
Answer Yes, a corporation can be made liable for an obligation of an affiliate company No, a corporation cannot be made liable for the obligation of an affiliate
under the Doctrine of Piercing the Veil. company under the Doctrine of Piercing.

Facts Livesey was hired by CBB (a company engaged in realty business) as one of The workers in a carpel manufacturing company were told that the
their marketing directors. Because of problems with how to be compensated, company is having a hard time doing their business because of
Livesey filed a resignation letter which also claims for unpaid salaries and slowdown in the demand of carpels. The company initially looked at
benefits in the amount of $23,000. He went to NLRC and filed a case. their business model and decided to stop manufacturing carpets. Even
then, the company is still incurring losses. Upon advice of management,
CBB denied any obligation and claimed that they have no unpaid salaries due to BOD decided to cease operating as a company.
Livesey. The Labor Arbiter ruled in favor of Livesey. While the case is at the LA
level, there was a settlement between Livesey and CBB whereby CBB In the process, they settled the claims of the workers (separation pay).
acknowledged the obligation and will pay in installments. It was approved by Despite signing the quitclaim, the workers when to NLRC and filed a a
the LA. labor case for illegal dismissal because they were not properly informed
of the cessation of business. They learned that the former customers of
Right after the agreement was signed, CBB suddenly disappeared. In the same Philippine Carpet Manufacturing have been endorsed to an affiliate
office where it was holding business, a new corporation came out—Binswanger company which is Pacific Carpet (at that time, still operating).
Philippines. It has the same set of officers and they notified their previous
customers to inform that CBB will now be called Binswanger. There was also a sale of machineries from Philippine Carpet
Manufacturing to Pacific Carpet. These are related companies.

The workers filed a claim with NLRC. They lost until they reached the SC.
They claimed that the personality of these two manufacturing
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 companies should be pierced based on bad faith in the establishment of
the Pacific Carpet as an entity.

Ruling It has long been settled that the law vests a corporation a personality distinct Pacific Carpet has a personality separate and distinct from Philippine
and separate from its stockholders or members. In the same vein, a Carpet.
corporation is an entity shielded by a protective mantle and imbued by law A corporation is an artificial being created by operation of law. It
with a character alien to the persons comprising it. possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence. It has
Nonetheless, the shield is not at all times impenetrable and cannot be a personality separate and distinct from the persons composing it, as
extended to a point beyond its reason and policy. Circumstances might deny well as from any other legal entity to which may be related.
the claim for separate personality under the Doctrine of Piercing the Veil.
Corporate mask may be removed or the corporate veil pierced when
Piercing the Veil is an equitable doctrine developed to address situations where the corporation is just an alter-ego of a person or of another
the separate corporate personality of a corporation is abused or used for corporation. For reasons of public policy and in the interest of justice,
wrongful purposes. the corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third persons.
Under the doctrine, the corporate existence may be disregarded where the
entity is formed or used for non-legitimate purposes, such as to evade a just Hence, any application of the Piercing should be done with caution. A
and due obligation (here, it was the LA ruling), or to justify a wrong, to shield court should be mindful of the milieu where it is to be applied. It must
and perpetrate fraud or to carry out similar or inequitable considerations, be certain that the corporate fiction was misused to such an extent that
other unjustifiable aims or intentions, in which case, the fiction will be injustice, fraud or crime was committed against another, in disregard of
disregarded and the individuals composing it and the two corporations will be rights. The wrongdoing must be clearly and convincingly established. It
treated as identical. cannot be presumed. Otherwise, an injustice that was never unintended
may result from an erroneous application.
In the present case, there is a indubitable link between the CBB’s closure and
Binswanger’s incorporation. CBB ceased to exist only in name. It re-emerged in
the person of Binswanger for an urgent purpose—to void payment by CBB of
its last 2 installments of its monetary obligation to Livesey, as well as its other
financial liabilities. Freed of CBB’s liabilities, especially that owing to Livesey,
Binswanger can continue, as it did continue, CBB’s real estate brokerage
business.

b. Case comparison:
i. The ruling of Zambrano did not overturn the doctrine laid down in Livesey. The court merely clarified the general rule
and applied the exception to prevent the abuse of the doctrine fo separate personality.
1. In the case of Livesey, there was bad faith and fraud employed in order to avoid liability. This was not
present of Zambrano because there, SC noted a transfer of machineries but this transfer cannot be the sole

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 indicia that there was fraud. There was also receipts to prove it which serve as basis of the transaction. It is
also natural for 2 entities to be endorsing their customers to one another.
a. If there is no statement concerning fraud or bad faith, Separate Personality shall apply.
b. If there is a statement concerning fraud or bad faith, Piercing will apply.
ii. When you are confronted with a case concerning application of Separate Personality or Piercing, first look for the
indicia—fraud or bad faith. If it is present, Piercing will apply as an exception.

Livesey vs. Binswager, 2014 Zambrano vs. Philippine Carpet Manufacturing Corporation, 2017
Liability for A corporation can be made liable for the obligation of an affiliate company A corporation cannot be made liable for the obligation of an affiliate
affiliate under Piercing. company under the Piercing.
Ratio When one corporation is closed and in order to organize another for the It cannot be said that the Pacific Carpet was set up to evade Philippine
decidendi purpose of evading its liabilities, there is obvious bad faith. This wrongful Carpet’s liabilities. As the transfer of Philippine Carpet’s machine to
intent cannot and must not condone, for it will give a premium to an Pacific Carpet, settled is the rule that “Where one corporation sells or
iniquitous business strategy where a corporation is formed or used for a non- otherwise transfers all its assets to another corporation for value, the
legitimate purpose such as to evade a just and due obligation. latter is not, by that fact alone, liable for debts and liabilities of the
transferor”.

ii. What if the case already pending when the corporation suddenly disappeared and a new corporation is now doing business in the same address
where the former corporation was occupying? What will be the proper step in order to implead the new corporation which is supposedly an
adjunct of the other?
1. In practice, you file a motion to implead the new corporation. By bringing in the third party to the case, issue of jurisdiction will be
settled.
2. If the court would notice that fraud is patent or obvious and evidence in the records of the case, the SC can set aside Pacific Rehouse
Case and the corporate fiction is automatically pierced.
3. If the case has not yet reached the SC, you ask for leave of court to implead the third party.

c. Principle of Apparent Authority

i. This can also be asked in the liability of corporate officers.
ii. Nature:
Advance Paper FACTS: President and corporate secretary were all acting in behalf of the corporation. They borrowed money in its name. Their authorities
Corporation vs. Arma were questioned when the demand for payment was already with them. Can the corporation deny the authority of the corporate officers to
Traders, 2013 act on behalf of the corporation when at that time, the officers were supposedly acting on behalf of the corporation?

The Doctrine of Apparent Authority provides that a corporation will be estopped from denying the agent’s authority if it knowingly permits
one of the officers or any other agent to act within the scope of an apparent authority, and it holds him out to the public as possessing the
power to do those acts.
 What is important insofar as this principle is concerned is the understanding that a corporate officer is presumed by the other party,
believe in good faith, that he has the authority to act and bind the corporation.
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  In reality, one needs to examine whether the officer was clothed with an apparent authority—where he can say that he is
representing the corporation and the corporation is validating his actions. If that corporate officer has shown in public that he has the
authority to bind that corporation, and the corporation did not deny such authority, the corporation cannot later on deny the
authority it granted in that particular officer.

Citystate Savings Bank The Doctrine of Apparent Authority or what it is sometimes referred to as “the holding out theory” or the Doctrine of Ostensible Agency
vs. Tobias, 2018 imposes liability, NOT as “the result of the reality of a contractual relationship”, but rather “because of the actions of a principal or an
employer in somehow misleading the public into believing that the relationship or the authority exists”.

What you have to look at is how the principal demonstrated in public its approval or acquiescence on the action of the corporate officer. Do
not look at the actions of the agent but instead on how the principal reacts in the manner by which the agent represents himself.
If a particular officer assumes that he has a particular authority demonstrated to the public, and that authority is not disputed by that
principal, that particular authority is deemed to be present.
 EX: The President has been signing vouchers for certain items for the longest time. The suppliers and sellers were made to believe
that the President was duly authorized to sign all these contracts and vouchers. One time, the President purchased a vehicle for
himself. The dealer delivered the vehicle and the President has been using it. When the demand came, the BOD disowned the action
of the President. Is that Doctrine of Apparent Authority present?
o Yes, because in previous instances, the President has been signing vouchers and purchase orders for the company. The
corporation has not disowned the acts of the President and therefore subsequent actions of the President will be presumed
done with apparent authority. BOD cannot later on question the acts of the President.

iii. Foundation of the Rule:

Rural Bank of Milaor Corporate transactions would speedily come to a standstill were every person dealing with a corporation held duty-bound to disbelieve every
vs. Ocfemia, 2000 act of its responsible officers, no matter how regular they should appear on their face.
If the officer has been doing that function for the longest time, without the corporation question his actions, that becomes a valid act done in
apparent authority.
 Why do you ned this doctrine? If for every act of the President or officers, the other party will require a Board Resolution or BOD
approval, then nothing will happen.
 It will be different if it is the purchase of real property since there must be an SPA (through board authority). If purchasing non-
essentials, you do not need a board resolution.

iv. When will the doctrine apply?

Rural Bank of Milaor If the corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds the agent
vs. Ocfemia, 2000 out to the public as possessing the power to do those acts. Thus, the corporation will be estopped from denying the agent’s authority as
against anyone who has in good faith dealt with it through such agent.
Once the corporation has demonstrated to the whole world that they are validating the actions of its corporate officers and these officers are

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 doing it for the longest time, the corporation cannot just question the action of its officers.

Prudential Bank and A banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting
Trust (now BPI) vs. within the general scope of his authority even though the agent is secretly abusing his authority and attempting to perpetuate fraud upon his
Abasolo, 2010 principal or some person for his own ultimate benefit.
This case is instructive in cases involving banks.
In a situation where what is involved is a bank, the degree of leniency of the court is very thin because banks act with fiduciary capacity such
that any action of bank personnel especially the officers of the bank is construed as a valid act or authorized action.
 EX: Officer of the bank dealing with customers who bring in money because there was a promise an interest rate higher than what
other banks are giving. But this interest rate is not authorized by the bank itself because it just came out in the mind of that officer.
This means he has no authority to give it.
o In this particular instance, even if that officer of the bank has already exceeded his authority, the court looks at it as one
done in an apparent authority such that if the officer offers high interest for the purpose of getting as much customers as
possible, the court will look at that offer as one coming from the bank.

1. Authority of the President

Advance Paper Inasmuch as a corporate president is often given general supervision and control over the corporate operations, the strict rule that the said
Corporation vs. Arma officer has no inherent power to act for the corporation is slowly giving way to the rule that the President has certain (inherent but) limited
Traders, 2013 powers if the transaction is of usual and ordinary business of the corporation.
If the President has been this practice for the longest time, the corporation can no longer question his actions.

In the absence of a charter or bylaw provision to the contrary, the President is presumed to have the authority to act within the domain of
general objectiveness of its business and within scope of his or her usual duties. The President, being the Chief Executive Officer, is clothed
with authority to bind the corporation. If the corporation also has allowed him to perform a similar action in previous instances, this authority
can be deemed as one declared to the public and for which reason the public may rely on the actions taken by the President.

v. When will the Doctrine of Apparent Authority not apply?

Banate vs. Philippine It does not apply if the principal did not commit any acts or conduct which a third party knew and relied upon in GF as a result of the exercise
Countryside Rural of reasonable prudence.
Bank, 2010 Moreover, the agent’s acts or conduct must have produced a change of position to the third party’s detriment.
 Always look at the actions of the principal and not of the agent.
o If the agent supposedly acts beyond the scope of his authority, he is actually acting on his own and therefore, should not
bind the corporation.
o But the moment that the principal validates the agent, the moment it has declared to the public his conformity or
acquiescence, that agent binds the corporation.

13
 vi. Which act should be considered in the application of the doctrine?
Sargasso Construction Apparent authority is determined only by the acts of the principal and not by the acts of the agent—the principal is not responsible for the
and Development vs. agent’s own conduct and statements have created the apparent authority.
PPA, 2010
Banate vs. Philippine Apparent authority is determined only by the acts of the principal and not by the acts of the agent.
Countryside Rural
Bank, 2010

1. Comparative analysis of jurisprudence:

a. On the application of apparent authority, will the action of the branch manager be considered an authorized act of the bank
under the Doctrine of Apparent Authority?
Banate vs. Philippine Countryside Rural Bank, 2010 Citystate Savings Bank vs. Tobias, 2018
Answer No, the action of a branch manager cannot be considered an authorized act of the bank Yes, the action of the branch manager can be considered an
under the Doctrine of Apparent Authority. authorized act of the bank under the Doctrine of Apparent
Authority.
Facts There is a buyer of a certain property but such property mortgaged to the bank is The branch manager went to the stall of the customer to collect
accompanied by other properties that secure many obligations (Dragnet Clause). Not the daily deposits. The customer became one of the favored
one collateral is used to secure a particular obligation. Instead, all these collaterals are customers of Citystate. After some time, the branch manager
made to secure many obligations. If one obligation is paid, it does not follow that one would bring the interests in his placements. At one point, the
collateral is taken out from the pool of collaterals. branch manager offered an investment scheme where he will
transform some of his investment into a hybrid form of deposit
The owner of the property (mortgagor) went to the bank and asked to release the so that it will incur higher interests.
property because he intends to sell it. The branch manager agreed to release the real
property on the condition that he will pay the obligation (referring to the obligation Lured by the higher interest, the customer signed all the
being secured by the property). The owner looked for a buyer and brought him to the documents provided by the branch manager. It turned out that
branch manager. The obligation was paid and the branch manager released the title. the money never reached the bank. It was diverted and used by
However, the title still contains annotations that it is still securing other obligations. the branch manager himself.

When the buyer saw it, he went to court claiming the Doctrine of Apparent Authority When the customer learned about this, he complained to the
on the ground that the branch manager verbally agreed that he is going to release the Bank and the Bank disowned the authority of the branch
title. When the title is released, it should be clean. manager

Ruling Branch manager has no authority to cause the novation of the contract and release the The business of banking is one imbued with public interest. As
property to cancel the mortgage. The Doctrine of Apparent Authority will not apply. such, banking institutions are obliged to exercise the highest
degree of diligence as well as high standards of integrity and
Under the doctrine, the acts and contracts of the agent are within the apparent scope performance in all its transactions.
of authority conferred upon him, even if he has no actual authority to do such acts or to
make such contracts in order to bind the principal. The law expressly imposes upon the bank a fiduciary duty

14
 towards its clients and to treat its accounts with meticulous
The principal’s liability, however, is limited only to third persons who have been led care. Banking institutions may be held liable for damages for
reasonably to believe by the conduct of the principal that such actual authority exists, damages for failure to exercise the diligence required of it
although none was given. In other words, apparent authority is determined only by the resulting to contractual breach or where the act or omission
acts of the principal and not by the acts of the agent. complained of constitutions an actionable tort.

There can be no apparent authority of an agent without acts or conduct on the part of The bank, in its capacity as principal, may also be adjudged
the principal. The principal’s acts or conduct must be known and relied upon in good liable under the Doctrine of Apparent Authority. However, its
faith as a result of the exercise of reasonable prudence by a third party as claimant, and liability in this case is solidary with that of its employee.
these acts or conduct must have produced a change of position to the third party’s
detriment. The doctrine imposes liability, not as the result of the reality of
a contractual relationship, but rather because of the actions of
Further, SC will be unduly stretching the doctrine of apparent authority if they consider a principal or an employer in misleading the public into
the power to undo or nullify solemn agreements validly entered into as within the believing that the relationship or authority exists.
Doctrine’s ambit.
The power to affect the legal relations of another person by
Although a branch manager is the general agent and is in general charge of the transactions with third persons such that the liability of the
corporation (with apparent authority as to ordinary business and usual course of principal for the acts and contracts of his agent extends to
business entrusted upon him), the power to modify or nullify corporate contracts those which are within the apparent scope of the authority
remains generally in the BOD. Thus, in this case, the SC did not apply the Doctrine of conferred on him, although no actual authority to do such acts
Apparent Authority because what is involved is the power to modify or nullify corporate or to make such contracts has been conferred.
contracts which are way beyond the authority of the branch manager.

Being a mere branch manager alone is insufficient to support the conclusion that he has
been clothed with “apparent authority” to verbally alter terms of written contracts,
especially when viewed against the telling circumstances of this case—the unequivocal
provision in the mortgage contract, PCRB’s vigorous denial that any agreement to
release the mortgage was never entered into by it, and the fact that the purported
agreement was not even reduced into writing considering the legal effects of the
parties’ interests.

b. Case comparison
i. The ruling in Citystate Savings did not overturn the doctrine in Banate case. The court only clarified the general rule in
realtion to an exception. The ruling in Banate was not deemed abandoned.
1. Take a look at the function being performed:
a. If the officer, in no way, could not have been perceived to have apparent authority, Banate Ruling.

15
 b. If it is within the authority of the bank manager (deposits, interests), we can assume that even if he
goes beyond the scope of his authority, we can hold the bank liable under the Principal of Apparent
Authority.
2. Always look at the principal and not of the agent.
a. If the principal has upheld the authority of the agent in public, Apparent Authority.
b. If the agent exceeds his authority purely, no Apparent Authority.

Banate vs. Philippine Countryside Rural Bank, 2010 Citystate Savings Bank vs. Tobias, 2018
Answer Action of a branch manager cannot be considered an authorized act of the bank under Action of a branch manager can be considered an
Doctrine of Apparent Authority. authorized act under the Doctrine of Apparent Authority.

Ratio Acts or conduct of the agent must have been known and relied upon in good faith as a result Liability of the principal of acts and contracts of his agent
decidendi of the exercise of reasonable prudence by a third party as claimant. extends only to those which are within the apparent
scope of the authority conferred on him.
SC said that the bank customer was not in GF because he should have known that the branch If the act of the branch manager is within the scope of his
manager cannot set aside a mortgage duly entered into by the customer with the bank. It is apparent authority (e.g. collecting deposits, providing for
way beyond the authority of the branch manager especially that he is not even a signatory to investment alternatives like offering bank products and
the contract entered into by the bank and the borrower. investment instruments), the act is within the authority of
the branch manager unlike cancelling loan obligations or
Thus, even if the branch manager commits verbally that he will cause the release of the title mortgages.
and even assuming the obligation is likewise released, that act of the branch manager may
not be relied upon because the branch manager does not have that authority at all and it will
not be correct for the customer to rely on his verbal assurance.

d. Doctrine of Equality of Shares

CIR vs. CA, 1999 Under the doctrine of equality of shares, all stocks issued by the corporation are presumed equal within the same privileges and liabilities,
provided that the AOI is silent on such differences.
Unless there is a statement to the contrary, all shares will have the same privileges and benefits as well as liabilities.
If you have issued a series of shares of stocks, the presumption of the law is that these shares (no matter how you call them) will have the
same benefits and liabilities. It may differ in the series (time of issuance) but it shall have the same benefits conferred by the AOI.

e. Doctrine of Corporate Opportunity

Sanchez vs. Republic, The Corporation Code expressly lays down the officers’ liability for damages arising from their gross negligence or bad faith in directing
2009 corporate affairs. This applies when the officers abuse their position to the detriment of the corporation.

Section 31 lays down the “Doctrine of Corporate Opportunity” and holds personally liable corporate directors found guilty of gross negligence

16
 or bad faith in directing the affairs of the corporation, which results in damage or injury to the corporation, its stockholders or members and
other persons.

f. Trust Fund Doctrine

i. Note: this talks about the original capital stock and capital stocks (since dividends are only paid from unrestricted retained earnings).
Halley vs. Printwell, This enunciates a rule that the property of the corporation is a trust fund for the payment of creditors, but such property can be called a trust
2011 fund “only by way of analogy or metaphor”.

As between the corporation itself and its creditors, it is a simple debtor.

As between its creditors and stockholders, its assets are in equity a fund for payment of its debts.

All the assets of the corporation are made in trust for the creditors of the corporation. Therefore, whatever amount of money or property is
delivered to the corporation and becoming part of the corporation, stays with the corporation. It cannot be given to the stockholders by way
of dividends. Otherwise, it violates the principle of Trust Fund.
 Supposed the group of investors decided to form a corporation. When they put up their corporation, they decided to put their
respective payments for the subscription. The original subscribers will put in the required capital. Original subscribers have already
put their money in the common fund, deposited in the funds of the corporation. 3 days after the certificate of incorporation was
issued, one of the subscribers asked to return his money. Can that be done?
o No. Whatever amount is put in the corporation, stays in the corporation. That subscription becomes money of the
corporation and you cannot take it back as if it is your money since it now belongs to the corporation to pay for the
obligations of the corporation to the creditors.
o Remember that it should be in connection with payment of dividends. Can the corporation pay dividends out of the funds of
the corporation (capital of the corporation)? No. Therefore, dividends can only be paid out of unrestricted earnings.

Velasco vs. Poizat, It is established doctrine that subscriptions to the capital of the corporation constitute a fund to which creditors have a right to look for
1918 satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts.

ii. Scope of the doctrine:

Velasco vs. Poizat, Trust Fund Doctrine is not limited to reaching the stockholder’s unpaid subscriptions. The scope of the doctrine when the corporation is
1918 insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts.
In a situation where the corporation has loans extended by corporate officers and directors, these loans are funds belonging to the
corporation. That is why when the corporation accumulates obligations, the limitation of the Trust Fund Doctrine not only applies to the
properties of the corporation as they are identified. If there are corporate properties in the hands of the stockholders, directors or officers,
that can also be considered party of the Trust Fund and the such officers or directors cannot claim that it is separate because these remain to

17
 be the properties of the corporation.

Turner and Turner vs. The Trust Fund Doctrine considers the subscribed capital as a trust fund for the payment of debts of the corporation, to which the creditors
Lorenzo Shipping, may look for satisfaction. The Trust Fund Doctrine backstops the requirement of unrestricted retained earnings to fund the payment of shares
2010 of the withdrawing stockholders. Under the doctrine, the capital stock, property and other assets are regarded as equity in trust for the
payment of corporate creditors who are preferred in the distribution of corporate assets.

The creditors of the corporation have the right to assume that the BOD will not use the corporate assets to purchase their own stock for as
long as the corporation has outstanding debts and liabilities. There can be no distribution of assets among stockholders without first paying
corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void.

Halley vs. Printwell, All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of
2011 stockholders may be reached by the creditor in satisfaction of his claim regardless of full payment of subscriptions.
In cases where the corporation has unpaid obligations, or where it is declared as a judgment debtor, the creditors can reach out to whatever
assets the corporation has erroneously paid or deliberately given to its officers and directors. These officers and directors cannot argue that
they were given by the corporation or are not part of the corporate assets.
When we talk about Trust Fund Doctrine, it encompasses all assets of the corporation.

iii. Doctrine of Limited Liability (in relation to or in application to Trust Fund Doctrine)
Halley vs. Printwell, The prevailing rule is that a stockholder is personally liable for the financial obligations of the corporation up to the extent of his unpaid
2011 subscription.
A stockholder’s obligation is limited only up to the subscription to the shares of stock issued by the corporation. You cannot hold the
stockholder for more liability beyond it.
 If the corporation incurs liability, the judgment creditor can collect upon the assets of the corporation. If the corporation’s assets
would not be sufficient to pay these claims, the judgment creditor can run after the stockholders but only up to the extent of the
unpaid subscription. Beyond the unpaid subscription, the judgment creditor can no longer run for deficiency.
 If the stockholder has unpaid subscription to the corporation (let’s say, 10M), the corporation

A stockholder is personally liable for financial obligations of the corporation only to the extent of his unpaid subscription. While stockholders
are generally not liable, they may be liable if they have not fully paid the subscription price.

Halley vs. Printwell, FACTS: Here, corporation acknowledged the payment of a stockholder of his unpaid subscriptions. There was a simulated receipt of payment
2011 supposedly made by the stockholder for his unpaid subscription. In a situation where there is a judgment creditor and he naturally looked at
the outstanding claims of the corporation, the stockholder may be able to foresee that the creditor will run after him since he has unpaid
subscription. Can he just ask the corporation to issue a receipt to make it seem like he already paid it? No.

Such is an illegal payment so to speak. The court cannot accept the supposed payment of an obligation for the unpaid subscription if an

18
 amount will not go to the corporation. The mere issuance of a simulated receipt will not cure the defect.
Also, under the Trust Fund Doctrine, a corporation as no legal capacity to release an original subscriber to its capital stock from the obligation
of paying for his shares (capital stock), in whole or in part, without valuable consideration or fraudulently, to the prejudice of creditors.
The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps in to the shoes of the corporation of the
satisfaction of its debt.
 There is a judgment creditor that runs after the corporate assets.
 If there are no more assets left, he can run after the other assets.
 If there are no other assets, they will consider looking at the unpaid subscriptions.
 If there are unpaid subscriptions, these stockholders are deemed borrowers of the corporation (due to their unpaid obligations to the
corporation) and even without a call from the BOD, these obligations are deemed to be obligations to the corporation.
o Normally, the unpaid subscription will just be there if there is no call from the BOD. Here, the stockholder is not yet
delinquent because a call from the BOD is needed in order to declare delinquency and to force the stockholder to pay. They
are still stockholders in good standing (and may still receive dividends).
 If there is a claim against the corporation, that unpaid subscription becomes an automatic obligation to the corporation whether
or not there is a call. That stockholder will not be duty bound to pay the judgment creditor this time (not the corporation).

Halley vs. Printwell, To make out a prima facie case in a suit against the stockholders of an insolvent corporation to compel them to contribute to the payment of
2011 its debts by making good unpaid balances upon their subscriptions, it is necessary to establish that the stockholders have not paid in GF the
par value of the corporation’s stocks.

1. Rationale for the Doctrine of Limited Liability:

Espiritu vs. Petron, The “owners” of a corporate organization are its stockholders and they are to be distinguished from its directors and officers. In a corporation,
2009 the management of its business is generally vested in its BOD, not its stockholders. Stockholders are basically investors in a corporation. They
do not have a hand in running the day-to-day business operations of the corporation unless they are at the same time directors or officers of
the corporation.

Before a stockholder may be held criminally liable fro acts committed by the corporation, therefore it must be shown that he had knowledge
of the criminal act committed in the name of the corporation and that he took party in the same or gave his consent to its commission,
whether by action or inaction.

g. Business Judgment Rule (VIP)

PSE vs. CA, 1997 The Business Judgment Rule provides that the BOD (or trustees) has the sole authority to determine policies, enter into contracts, and conduct
the ordinary business of corporation within the scope of its charter.

As to its corporate and management decisions, the State will generally not interfere with the same. 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

19
 for the judgment of the board of directors. The board is the business manager of the corporation, and as long as it acts in GF, its orders are not
reviewable by the courts.

i. Rationale for the Business Judgment Rule:

PSE vs. CA, 1997 Courts and other tribunals will not override the business judgment of the board mainly because courts are not in the business of businesses,
and the laissez faire 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 business; especially so, when courts are ill-equipped to make business decisions.

h. Legal basis for the rule:

Filipinas Port Services The rule is founded on Section 23 of the Corporation Code which explicitly provides that unless otherwise provided therein, the corporate
vs. Go, 2007 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 BOD.
Business Judgment Rule is the same is Management Prerogative.

More importantly, the social contract in the corporate family ot decide the course of the corporate business has been vested in the board and
not with the courts.

i. What is the legal consequence of the application of this rule?

Association of The well-known rule is that courts cannot undertake to control the discretion of the BOD about administrative matters as to which they have
International Shipping legitimate power of action. Thus, the court has no jurisdiction to interfere with the management of the corporation by the BOD, and the
vs. Philippine Ports, enactment of a resolution by the members of the BOD of the corporation.
2005
Ching vs. Quezon City FACTS: This case involves a dispute within a sports club. One of their members was defying the resolution issued by the board. The sports club
Sports Club, 2016 lost a labor case to which they were assessed by the NLRC. In order to pay for that obligation, since they do not have funds to pay that labor
award, the board decided to impose a special assessment for all the members of the sports club to raise funds to pay it. Ching question the
resolution and did not pay it. She continued to pay for her monthly dues but not the special assessment. The board suspended Ching’s
privileges as a member. The son of Ching (who also uses the privileges) was refused from enjoying the sports club. Ching sued the BOD.

Questions of policy and management are left to the honest decision of the officers and directors of a corporation, and courts are without
authority to substitute their judgment for that of the BOD unless said judgment had been attended with bad faith. The RTC found no evidence
of bad faith on the part of respondents in adopted Board Resolution 7-2001, imposing the special assessment of 2,500 on all members of the
respondent Club.

j. Comparative analysis of jurisprudence:

i. Can the courts set aside the decision of the BOD of a corporation?
PSE vs. CA, 1997 Balinghasay vs. Castillo, 2015

20
Answer No, the courts cannot interfere in the decision of the BOD of a corporation. Yes, courts can interfere in the decision of BOD.

Facts Puerto Azul Land is engaged in resort management. They have real properties as well. They The board decided to allow certain investors to an
decided to sell their shares to the public and they went through the SEC to sell their ultrasound machine. They will operate the ultrasound and
shares. SEC authorized to sell it to the public. rent its services to patients of Paranaque Medical for the
purpose of business. The owners of the machine will get
In order expedite the sell of shares, they applied for listing at PSE. While their application is 60% while the 40% will go to the hospital.
being reviewed, the heirs of Marcoses gave a letter claiming the Puerto Azule Land shares
are part of the properties of the late President Marcos. They came out with an MOA in which the BOD approved. 8
of the investors in that ultrasound machine are also
Because the BOD of PSE thought that it would not be for the best interests to allow the directors. One of the stockholders complained. After that,
listing of the shares, they declined Puerto Azule’s application. Puerto Azule went to SEC to the stockholder went to the court and questioned the
oppose PSE’s decision since SEC already authorized them. actions of the BOD by virtue of a derivative suit.

SEC ordered PSE to list Puerto Azule since SEC has authority over PSE. PSE invoked the
Business Judgment Rule.

Ruling The role of SEC in our national economy cannot be minimized. The legislature, through the SC noted the conflict of interest on the part of the investors-
Revised Securities Act, PD 902-A, and other pertinent laws, has entrusted to it the serious BOD. Their decision to approve the MOA is the issue.
responsibility of enforcing all laws affecting corporations and other forms of associations
not otherwise vested in some other government office. Applying the Business Judgment Rule, the BOD can enter
into any form of MOA with anyone since it is within their
This is not to say, however, that PSE’s management prerogatives are under the absolute discretion as part of their authority is part of the board.
control of SEC. After all, PSE is a corporation authorized by its corporate franchise to The directors, who are also ultrasound investors, acquired
engage in its proposed and duly approved business. an interest adverse to the corporation when they entered
into the ultra sound contract. By doing so, they have
One of PSE’s main concerns is still the generation of profit for its stockholders. Moreover, unjustly profited from the transaction which otherwise
the PSE has all the rights pertaining to corporations, including the right to sue and be sued, would have accrued to MCPI.
to hold property in its own name, to enter or not to enter into contracts with third
persons, and to perform all other legal acts within its allocated express or implied powers. In fact, as reflected in the ultrasound income for 1997-2001,
the ultrasound investors earned a net share of 4M. These
As to its corporate and management decisions, the State will generally not interfere with directors/ultrasound investors failed to inhibit themselves
the same. Questions of policy and management are left to the honest decision of the from participating in the meeting and from voting with
officers of a corporation, and the courts are without authority to substitute their judgment respect to the decision to proceeding with the signing of the
for the judgment of the BOD. MOA. Certainly, they have dealt in their behalf and took an
interest adverse to MCPI.
Thus, notwithstanding the regulatory power of SEC over PSE, the resultant authority to
reverse PSE’s decision in matters of application for listing in the market, the SEC may In the same manner, the ultrasound equipment was
exercise such power only if the PSE’s judgment is attended by bad faith. purchased and had been in operation since 1997, but the
21
 matter was only brought up for ratification by the
The board is the business manager of the corporation, and so long as it acts in GF, its stockholders in the annual meetings held in 2000-2003.
orders are not reviewable by the courts.

ii. Case comparison

1. The ruling in Balinghasay did not overturn the doctrine in PSE case. The court only clarified the general rule in relation to an exception
to prevent actions of the board that is attended with BF from being validated. The ruling in PSE was not deemed abandoned by
Balinghasay.
2. The key term is bad faith.
a. The moment you see the presence of BF in the facts, there can be no valid exercise of Business Judgment. But if it is done in
GF, the court will respect the decision of the board.

PSE vs. CA, 1997 Balinghasay vs. Castillo, 2015

Answer Courts cannot interfere in the decision of the BOD. Courts can interfere in the decision of the BOD.

Ratio The Court applied the business judgment rule since there was no BF The Court noted the existence of BF in the action taken by the BOD.
decidendi established on the action of the BOD of PSE.

13. De Facto Corporation and Corporation by Estoppel

De Jure De Facto Corporation by Estoppel

Definition Created in strict or substantial conformity Organized with a colorable compliance Group of persons that assumes to act as a corporation
with the mandatory statutory requirements with requirements of a valid law. knowing that it does not have authority to do so. It enters
for incorporation. into a transaction with a person on the strength of such
appearance.
Existence Its right to exist as a corporation cannot be Its existence cannot be inquired It cannot be permitted to deny its existence in an action
successfully attacked or questioned by any collaterally but such inquiry may be under the said transaction.
party even in a direct proceeding for that made by the Solicitor General in a quo
purpose by the State. warranto proceeding

a. De Facto Corporation
i. A group of persons attempt to incorporate in GF but discovers later on that they have not substantially complied with requirements.
ii. Once they discovery the anomaly, they can no longer claim to be a corporation in good faith.
1. EX: They failed to submit their by-laws within the period prescribed.
2. SEC Rules on Suspension and Revocation of Certificate of Registration require that there must first be a notice and hearing before the
license is revoked or suspended. However, a corporation that has grounds for revocation or suspension is deemed a de fact until the
decision of the complaint.

22
 iii. Therefore, the acts they did before the anomaly are valid.

Incorporators signed an AOI, immediately YES. Sec 19 which states that dissolution can only be ordered through a Quo Warranto proceeding does not apply in this
proceeded to adopt by-laws and election of case because there must be Certificate of Incorporation filed for de facto corporations. The fact that the incorporates
officers. A civil case was then filed alleging proceeded to its corporate affairs without a certificate of registration belies the notion that it is in GF. Thus, it can be
that the corporation was unregistered. Can questioned collaterally.
the civil case prosper?
The donee-corporation did not have a NO. Donations must be accepted in order to be valid and a donation cannot be accepted if the entity does not exist nor
certificate of incorporation during the time does it have juridical personality or capacity to receive it.
of donation. Can there still be a valid If the donee was not registered with SEC nor did it even attempt to organize or comply with its requirements at the time
donation? of the donation, it cannot be a de jure or even a de facto corporation.
Corporate existence begins only from the moment a certificate of incorporation is issued.

A corporation was created by special law. NO. Requisites for its existence is absent. There is no valid law under which it was organized and there would be no
Later on, a law creating it was declared continuity of good faith.
invalid. Can the corporation claim that it is This is specially true if the corporation that was created was a private corporation which was not GOCC. Private
a de facto corporation? corporations can only be created by special law if it is a GOCC.

b. Corporation by Estoppel
i. This applies in relation only to third parties.
ii. An unincorporated association, which represented itself to be a corporation cannot deny its corporate capacity if a third person relies on its
representation in GF. The association cannot later on evade the responsibilities in incurred.
1. EXCEPTION: If the third party treats the association as a corporation and receives benefits from it, it cannot deny the association’s
corporate existence because it knew the legal defects.
iii. Consequences:
1. The corporation will be seen as a partnership.
2. Since it does not have separate personality, the persons who compose it shall be liable as general partners provided they knew that the
corporation does not have valid existence.
Those to assume to act as a corporation Liable as general partners (meaning up to their personal properties)
The person who acts as agent without authority or principal is regarded as a principal himself.
Those not aware of the defect Liable only up to their investment
Those who delivered benefits despite the knowledge on defects Liable for contracts they implied approved or took advantage of
Those who benefited or represented it may not be privy to the transaction but are deemed
party of the association.

Amihan was invited by her friends to invest in A-CORP. She became the NO. These defenses are not valid because these are not available to Amihan.

23
president and purchased a big number of computer typewriters from B-CORP on
installment basis. There was no de facto corporation because AOI was not filed with SEC. There can
be no attempt in GF to incorporate if no AOI was filed. Amihan cannot also raised
A-CORP paid the down payment and B-CORP issued the receipt. the defense of de facto corporation to defeat the claim. Until the personality is
attacked by the State, a de facto corporation can continue as a corporation.
Amihan discovered that A-CORP’s AOI has not been filed with SEC. so she
hurriedly attended to the matter. Soon, a certificate of incorporation as issued. The allegation that there was a corporation by estoppel may be correct but it is not
a defense against claimants. The concept of corporation by estoppel is for the
After 3 months, A-CORP became bankrupt. B-CORP sued Amihan in her personal purpose of protecting third persons or creditors that the corporation deals with
capacity and she raised doctrines of de facto corporation and corporations by and not those who represent the corporation itself when there is in fact no
estoppel. Are these two defenses valid? corporation.

However, Amihan can raise her GF as a defense and claim that her liability is only
up to the extent of her investment. SEC 21 makes liable a general partner only
those who assume to act as a corporation knowing it to be without authority.

14. Corporate Nationality and Residence

a. Tests to determine the nationality of corporations:
Incorporation Test Nationality of the corporation is determined by the State where the corporation is incorporated, regardless of the nationality of the
stockholders.
This is the most common test concerned.

Domiciliary Test Nationality of the corporation is determined by the principal place of business of the corporation.
This is not very much observed in the Philippines since we are not federal.

Control Test Nationality is determined by the controlling stockholders or members. It is the nationality of the owners and not the place where the
corporation is incorporated.
Most authors would say that this is used only in times of war but in recent years, SC has been using it for the purpose of determining
Nationality particularly in the 60-40 Rule.

Grandfather Rule Nationality is attributed to the percentage of equity in the corporation used in nationalized or partly nationalized area. In this test, we do not
only look at the nationality of stockholders but beyond them. The corporate layering will be set aside in favor of determining who are the
beneficial owners of these interests so that if a corporation is presented as one of the stockholders of another corporation, this juridical
stockholder will be further drilled on as to who is the beneficial owner of that corporate vehicle.
This is the stricter version of the Control Test. You go one step down.

i. Incorporation Test:
1. The nationality of the private corporation is that of the State under whose laws such corporation was organized.
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 a. We check where corporation incorporated because we would like to know what law governs the existence of this corporation.
b. This is the basic and fundamental test.

ii. Control Test (one of the most asked questions in the Bar)
1. You only go to the Control Test when the corporation is in a nationalized or partly nationalized business.
2. Only in cases where there is fraud or an attempt to evade the Constitutional requirement with respect to percentage ownership of a
corporation engaged in nationalized or partly nationalized business will you go to the Grandfather Rule.

Narra Nickel Mining Under the Control Test, the nationality of the private corporation is determined by the citizenship of the controlling stockholders.
vs. Redmont, 2014 Under the Liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholders of the Investing
Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

3. Nationalized or partly nationalized businesses:

No foreign stockholder 1. Mass media
is allowed. a. : Recording
2. Retail trade enterprises with paid-up capital of less than $2.5M
3. Private security agencies
4. Small-scale mining
5. Utilization of natural resources
6. Cockpits
7. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
8. Manufacture of firecrackers and other pyrotechnic devices

15% foreign equity 1. Private recruitment, whether local or overseas

2. Construction and repaid of locally funded works
3. Construction of defense-related structures

20% foreign equity Private radio communications network

40% foreign equity 1. Exploration, development and utilization of natural resources

2. Realty companies and other corporations that own private lands
3. Operation and management of public utilities
4. Culture, production, milling, processing, trading
a. : Retail of rice and corn and by-products
5. Adjustment companies
6. Sauna and steam bath houses, massage clinics and similar transactions
7. Domestic market enterprises with paid-in capital stock of less than $200,000. However, threshold paid-in capital is $100,000 if

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 enterprise involve advanced technology or they employ at least 50 direct employees

(Thus, a corporation can be owned 100% by foreigners if engaged entirely in export).

60% foreign equity 1. Financing companies

2. Investment houses

4. For the purposes of determining the Constitutional requirement, the 60-40 ratio shall be:
If a corporation issues both common and preferred “60% ownership of shares” covers both common and preferred, not just covered.
shares This is because preferred shares still have right to vote in other matters even if they did not have a right to
vote in the election of officers.
If there are common and preferred non-voting shares 60% of each kind
If thre is only one class of shares 60% of that single class.

iii. Grandfather Rule

1. When to use this: When one of the shareholders is a corporation.
2. The general rule is still the Control Test and this is only applied in case of doubt.
a. Only if there exists a doubt, that the law is being circumvented in order to breach the constitutional requirement will this
apply.
b. Indicators of dummy status:’
i. If foreign investors provide all the funds for the Filipino corporation and foreign partner’s joint venture.
ii. If they provide all the technological support.
iii. If they manage the company and prepare all the economic viability studies even if they are the minority.
c. Presumption: if some subscribers in a partly nationalized company do not pay, extent of control and ownership is doubtful.

3. The court held in Narra Nickel case that corporate layering is allowed. It is the intention behind the corporate layering that makes
the court apply the Grandfather Test. Absent fraud, do not apply the Grandfather Test.
Narra Nickel Mining The Grandfather Rule is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly
vs. Redmont, 2014 nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where corporate
stockholders are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the
corporate shareholder.

Under the Strict Control Test or the Grandfather Rule, the combined totals in the Investing Corporation and the Investee Corporation must be
traced to determine the total percentage of Filipino ownership.

b. Residence of a Corporation
i. One can be a national of a country but not necessarily a resident.

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Hyatt Elevators vs. Well established in our jurisprudence is the rule that the residence of a corporation is the place where its principal office is located, as stated in
Goldstar Elevators, its AOI.
2005 The Corporation Code states, “as stated in the AOI”.
 If a corporation has been issued a certification by SEC, and AOI says that it has a principal office address located in Mandaluyong but
during the conduct of business, the corporation moved to Makati, where is the residence of the corporation?
o Mandaluyong, because it is the one indicated in the AOI.
o This determines the venue of action.

15. Moral damages

a. Comparative analysis of jurisprudence:
i. Can a corporation be awarded moral damages?
ABS-CBN vs. CA, 1999 Filipinas Broadcasting Network vs. Ago Medical, Ren Transport vs. NLRC, 2016
2005
Answer No, a corporation is not entitled to an award of moral Yes, a corporation may be entitled to an award of No, a corporation is not entitled to an award
damages. moral damages. of moral damages.
Facts ABSCBN was sued for damages because they caused an Filipinas Broadcasting is engaged in broadcasting The labor organization was suing the
injunction against Viva Films which is supposed to be business. They have radio programs. One corporation for alleged union busting and
shown with RBS. Viva Films offered movies to ABS. broadcaster lambasting Ago Medical. Ago accordingly, demanding for moral damages.
Because nothing came from the negotiation, Viva Medical filed a claim for moral damages.
offered its movies with RBS. ABS invoked the right to
first refusal.

Since there was already an arrangement between RBS

and Viva, ABS enjoined them in an injunction case.
When ABS’s action was eventually dismissed, Viva sued
for damages.

Ruling The award of moral damages cannot be granted in A corporation may have a good reputation which, Being a mere artificial being, it is incapable
favor of a corporation because, being an artificial if besmirched, may also be a ground for award of of experiencing physical suffering or
person and having existence only in legal moral damage. Therefore, a juridical person such sentiments like wounded feelings, serious
contemplation, it has no feelings, no emotions, no as a corporation can validly complain for libel or anxiety, mental anguish or moral shot.
senses. It cannot, therefore, experience physical any other form of defamation and claim for moral
suffering and mental anguish which can be damages.
experienced only by one having a nervous system.

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 i. Case comparison
a. The ABS case was not abandoned by Filipinas Broadcasting. Likewise, Filipinas Broadcasting was not abandoned by Ren Transport
when it returned to the ABS ruling.
i. Bad faith must be established before an award of moral damages can be given.
ii. If ever a claim is to be made, it should not be based on hurt feelings, physical suffering etc. It must always be anchored on
besmirched reputation.

ABS-CBN vs. CA, 1999 Filipinas Broadcasting Network vs. Ago Medical, Ren Transport vs. NLRC, 2016
2005
Answer No, a corporation is not entitled to an award of moral Yes, a corporation may be entitled to an award of Same as ABS case.
damages. moral damages.
Ratio There was no attendant bad faith on the part of the The existence of BF was duly established. Also, Same as ABS case.
decidend defendant. Also, the basis of the claim was not clearly the claim for moral damages was anchored on
i established. the besmirched reputation that was sufficiently
proven.

16. Powers of the Corporation

a. Two basic kinds of powers:
i. Why are these two separated? In order to highlight the approval requirement for powers that are extraordinary or not in the usual course of
business.
General corporate powers Extraordinary corporate powers
Legal basis Those enumerated in Section 36. Those enumerated in Sections 37-44.

Powers 1) To sue and be sued. 1) To extend or shorten the corporate term (under the
2) To succeed by its corporate name for the period of time stated in the New Corporation Code, term is now perpetual)
AOI and Certificate of Incorporation. 2) To increase or decrease capital stock
3) To adopt and use a corporate seal. 3) To incur, create or increase bonded indebtedness
4) To amend its AOI 4) To deny pre-emptive right
5) To adopt by-laws and to amend or repeal it. 5) To sell or dispose corporate assets
6) To issue or sell stocks to subscribers and to sell treasury stocks (in case 6) To acquire its own shares
of stock corporations). 7) To invest corporate funds in another corporation,
7) To admit members (if case of non-stock corporation) another business or for any other purpose
8) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, 8) To declare dividends
mortgage and otherwise deal with such real and personal property, 9) To enter into management contracts
including securities and bonds of other corporations as part of ordinary
business, subject to limitations of the Constitution.
9) To merge or consolidate with other corporations.

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 10) To donate (except if in aid of any political party or candidate or for
partisan political activity)
11) To establish pension, retirement and other plans for its directors,
officers and employees
12) To exercise essential and necessary powers to carry out its business
purpose in the AOI

Special need No need. Only a general power from the Board is enough. There is a need for ratification of stockholders.
for authority of This means the corporation does not only need the conformity of
stockholders the board but 2/3 OCS indicating the fact that the power to be
exercised is extraordinary.

ii. General powers:

1. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations as part of ordinary business, subject to limitations of the Constitution.
a. This is limited only to the sale of properties of the corporation in the ordinary course of business. This should not include the
sale of all or substantially all the assets of the corporation because this may be considered as an extraordinary corporate
action.
iii. Extraordinary powers:
1. To extend or shorten the corporate term (under the New Corporation Code, term is now perpetual)
2. To incur, create or increase bonded indebtedness
a. What is a bonded indebtedness? Corporations may obtain loans or financial obligations and in the process, they will issue a
bond.
b. These are not secured by a collateral (which we normally do when we borrow from the bank).
c. When the corporation borrows from a bank, it puts up a collateral.
d. If the corporation wants to have additional capital but they do not want to issue additional shares nor increase their capital,
nor borrow money by way of ordinary loan, they can issue bonded indebtedness in a form of loan but not secured by normal
collateral.
e. If the corporation wants to issue bonds for the general public to invest in, they need to the required 2/3 vote of OCS since this
is an bonded indebtedness.
3. To deny pre-emptive right
a. This is a statutory right granted to all stockholders such that if the AOI is silent on Pre-Emptive Right, this right still exists. If it is
not discussed in the AOI, this right still exists by virtue of law.
b. If the majority of owners would like to deny that Pre-Emptive Right, they need to put that in the AOI. That is where this power
is coming in. But for that to be placed in the AOI, there must be stockholder’s buy-in—they need to authorized or approve the
proposal to deny this Pre-Emptive Right.
4. To sell or dispose corporate assets
a. Disposition of assets would be the transfer of all or substantially all of the corporate assets.
b. If the corporation will sell its properties, in the ordinary course of business, it only needs a board approval.
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 c. A corporation has several properties. They wanted to sell an old furniture to their employees.
i. Will that require stockholders’ approval? No, because it is only a sale in the ordinary course of business.
ii. If the same involves all properties of the corporation, except those old furniture? It requires a stockholder’s approval
because the sale of all or substantially all properties is a step towards dissolution. That is why there must be a
stockholders’ buy in.
iv. To acquire it sown shares
1. This is only allowed in certain circumstances. It is not for any and all situations.
2. Can the corporation be prohibited from acquiring the shares it sells outside?
a. No, provided it can only buy using its unrestricted retained earnings.
b. If one stockholder is exercising his appraisal right, the exercise of such is anchored on the existence of unrestricted retained
earnings. In this particular instance, the corporation may be allowed to acquire its own shares coming from the stockholder
exercising his appraisal right. This exercise is always condition on the presence of unrestricted retained earnings.

v. To invest corporate funds in another corporation, another business or for any other purpose
1. If the corporation is engaging in a function not among those enumerated in the AOI or for the purpose for which it was organized, it is
ultra vires because it is not one of the powers under the AOI.
a. What is the difference if the corporation invests in another corporation where the second corporation is engaged in other
business such not one of those enumerated in the AOI of the acquiring corporation?
i. If the corporation itself will engage in an activity outside the purpose for which it is organized, it is ultra vires.
ii. If the corporation will invest in another corporation engaged in a business not among those enumerated in the
investing corporation’s AOI, that is allowed.
b. Since this power is enumerated under the Corporation Code as an extraordinary corporate power, it will require stockholders’
buy in. The stockholders must agree to such an investment initiative.

vi. To declare dividends

1. There is nothing in the Code that mandates a corporation to declare a dividend.
a. What the Corporation Code says is that the corporation has the power to declare dividends. But that recognition of power is
not a mandate to pay dividends.
b. Is a corporation required to pay dividends?
i. No. There is on requirement.
ii. The Corporation only has the option to declare it since it has the power to do so.
iii. The limitation to such is that there must be unrestricted retained earnings and concurrence of the stockholders.

vii. To enter into management contracts

1. Why is this extraordinary? You passed the power to manage to another entity.

b. Ultra Vires Rule (Section 45)

i. No corporation shall possess or exercise any corporate powers except those conferred by the Corporation Code or by its AOI and except such as
are necessary or incidental to the exercise of the powers so conferred.
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 1. Sources of corporate powers:
a. Those conferred by the Corporation Code.
b. Those conferred by the corporation’s AOI.
c. Those that are necessary or incidental to the powers conferred.
i. If the corporation will perform an act and this is not sanctioned by the law, is it already ultra vires?
1. Not yet, look at the AOI first.
2. If it is not in the AOI, is it ultra vires already? Not yet, check if it is necessary or incidental.
a. EX: A corporation is engaged in trading business. Since it is engaged in trading, buying bond papers
is not not included in its AOI. Is this incidental or necessary? Yes. When the corporation purchases
office supplies, that is not ultra vires.
2. The corporation cannot perform more than the powers given to it.
Atrium Management 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
vs. CA, 2001 beyond the power conferred upon it by law.
The term “ultra vires” is different from an illegal act.
Ultra vires acts are only voidable and may be enforced by performance, ratification or estoppel while illegal acts are void and cannot be
validated

Pilipinas Loan vs. SEC When the thrust of the complaint is on the ultra vires act of a corporation (that the complained act is contrary to the corporation’s declared
and Filipinas corporate purposes), SEC has jurisdiction to entertain the complaint before it.
Pawnshop, 2001  If the action is an intra corporate controversy and will entail exercise of rights by and among the stockholders, it is under RTC’s
jurisdiction as a commercial law court.
 If the ultra vires act will be a basis for a corresponding administrative sanction to be made by the SEC, SEC has jurisdiction over the
issue.

The term “ultra vires” refers to an act outside or beyond corporate powers, including those that may ostensibly be within such powers but are
prohibited or declared illegal by general or special laws.

Twin Towers If the Master Deed authorizes the management body to enforce the provisions of the Master Deed in accordance with the condominium
Condominium corporation’s by-laws, then BOD is authorized to determine the reasonableness of the penalties and interests to be imposed against those
Corporation vs. CA, who violate the Master Deed. Such action shall not be considered as ultra vires.
2003
Woodchild Holdings  Suppose the condominium corporation imposes penalty over failure to pay dues, the Board of Trustees may sanction you. What if the
vs. Roxas Electric, power to impose penalty is not one of those enumerated in the by-laws of the corporation, can the Board impose sanctions?
2004 Conversely, can the Board impose sanctions without being considered ultra vires?

The Board cannot impose sanctions. Under the Condominium Act, a condominium corporation is precluded from engaging in corporate
activities other than the holding of common areas, administration of 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

31
 permissible corporate purposes of a condominium corporation under the Condominium Act. Thus, contracts entered into by corporate officers
beyond the scope of authority are unenforceable against the corporation unless ratified by the corporation.
 Condominium corporations cannot engage in corporate actions (e.g. putting a canteen open to everyone)
 An ultra vires act can be ratified. If it is ratified, it becomes a valid act of the corporation. It is not like an illegal act which cannot be
ratified.

.
ii. Can the Doctrine of Estoppel override an ultra vires act?
1. Will Estoppel come as a defense in the event there is an ultra vires act?
Acebedo Optical vs. No. The Doctrine of Estoppel cannot operate to give effect an act which is otherwise null and void or ultra vires.
CA, 2000 Note that null and void acts are different from ultra vires acts. Nevertheless, Estoppel cannot validate it.

iii. Can a corporation raise its own ultra vires act to escape liability?
1. This time, the corporation does not want to perform its obligation and in not performing it, it was raising the defense that it was ultra
vires so that it does not need to perform its obligation?
International Hotel vs. No. The corporation cannot now put up its own ultra vires act as an excuse to escape obligation to the plaintiff.
Joaquin, 2013 This is to foreclose the argument the corporation committing an ultra vires act from raising a defense in order to escape liability.

iv. Extent of ultra vires doctrine

Magallanes FACTS: Magallanes Watercraft is an association provided services to tourists using watercrafts. The tourists pay their membership to the
Watercraft association. Auguis did not pay the membership dues. The Association imposed sanctions on them. Auguis questioned the action because the
Association vs. by-laws does not permit or include the power to sanction the members for non-payment of dues.
Margarito Auguis,
2016 The fact alone that neither the AOI nor the by-laws of MWAI granted its Board the authority to discipline members does not make the
suspension of rights and privileges of the respondents ultra vires. The Court stressed that an act might be considered within corporate powers,
even if it was not among the express powers, if the same served the corporate ends.
Note that this does not involve a condominium corporation. SC held that it is not an ultra vires act.
If you take a look at it really, the action of the Board in sanctioning their erring members would also be necessary for the corporation to
maintain its operation. This time, the SC did not use this as an argument. Rather, it expanded the concept of necessity by saying that it “served
the corporate ends”.

v. What is the difference between an ultra vires act and an illegal act of the corporation?
1. When you look at the concept of Ultra Vires, you tie it up with the concept of Ratification.
2. Since it can be ratified, it means it is not void.
3. If the act of the corporation is only ultra vires, connect it with the power of the corporation to ratify the acts of its management (in
particular, the stockholders’s participation in the ratification of the ultra vires act).
4. When ratified, it becomes a valid act.

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 Ultra vires acts Illegal acts
Jose Bernas vs. These are not illegal or void ab initio, but are merely not within the scope of AOI. It contemplates the doing of an act which are contrary to law,
Cinco, 2015 These are voidable and may become binding and enforceable when ratified by morals or public policy or public duty and are like similar
the stockholders. transactions between individuals, void. They cannot serve as
basis of a court action nor acquire validity by performance,
ratification or estoppel.

17. Board of Directors or Trustees and Officers

a. Role of Board of Directors
i. Unless otherwise provided, the Board of Directors or Trustees shall exercise the corporate powers, conduct all business and control all
properties of the corporations (ECC)
1. Exercise corporate powers
2. Conducts all business
3. Controls all properties
a. When you talk about the corporation, it is actually the Board.
i. Management are merely acting pursuant to the direction set by the Board.

ii. “Unless otherwise provided in this Code”

1. This means, there are corporate matters that cannot be done by the BOD alone because there should be concurrence by the
shareholders.

iii. Doctrine of Centralized Management

1. All businesses of the corporation shall be conducted and all corporate properties shall be controlled by the Board. The Board can act
only through its directors and officers.
a. Concentration of powers and control of the corporate businesses and properties is necessary to efficient management.
b. Stockholders are too many and are unfamiliar with management. Hence, they must choose their directors who will supervise
the corporation.
2. Instances when corporate powers can be exercised by persons other than the BOD:
a. If there is an Executive Committed authorized by the by-laws.
b. If a manager (individual, partnership or another corporation) has been contracted and delegated to some functions.
c. In a close corporation, stockholders may directly management the business if the AOI provides it.

b. Role of Corporate Officers

i. Officers shall manage the corporation and perform duties as may be provided in the by-laws and/or as resolved by the Board.
1. When you talk about corporate officers, there are 3 mentioned:
a. President
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 b. Treasurer
c. Secretary
2. A person may occupy two posses (e.g. you can be Treasurer and Secretary), except for the one occupying the position of President (he
cannot be President and Treasurer or President and Secretary at the same time)

President Treasurer Secretary

Qualifications He must also be a director, owning at least 1 share.  May not be a director  May not be a director
 Although there is nothing in Code that directly  Must be a Philippine resident  Must be a Philippine resident
expresses that he should own 1 share,  Must be a Philippine citizen
indirectly it is required because of his Corporate secretary is different from
membership in the Board. secretary of the President.
The distinction is necessary to determine
whether or not that officer is covered by
the Corporation Code or by the Labor
Code.

ii. Personal Liability

1. What is the rule on the personal liability of corporate director, trustee or officer?
a. Take note of the concept and retrieve of understanding of Piercing the Veil.
Laborte vs. Pagsanjan As a general rule, the officer cannot be held personally liable with the corporation, whether civilly or otherwise, for the consequences of his
Tourism Consumers, acts, if acted for and in behalf of the corporation, within the scope of his authority and in good faith.
2014  If we are talking about liability of corporate officers and we are trying to say that the corporate officer is liable personally for his act in
behalf of the corporation, we are actually tying it the idea of piercing the veil.
 If we are looking at the general rule concerning the liability of officers and directors, and we are saying that they should not be held
liable for the acts of the corporation, we are tying up the non-liability concept of these corporate agents with the principal of
separate personality.

2. When will personal liability attach?

a. As a general rule, directors/trustees and officers are not liable for their corporate actions. Their acts done for the corporation
is the sole liability of the corporation. They should not be held liable.
b. Exceptions (VIP, note the exceptions):
i. He assets:
1. To a patently unlawful act of the corporation (he did not oppose such an action)
2. For bad faith or gross negligence in directing its affairs (negligence must be gross. If not, no personal
liability; simple omission cannot amount to personal liability)
3. For conflict of interest (disloyalty of corporate directors), resulting in damages to the corporation, its
stockholders or other persons

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 ii. He consents to the issuance of watered stocks or who does not file with the corporate secretary is written
objection if he has knowledge of the issuance of watered stocks.
1. What are watered stocks?
iii. He agrees to hold himself personally and solidarily liable with the corporation
1. There is no basis to claim separate personality if the director or officer performs an act for the corporation
but he personally guarantees the obligation of the corporation.
a. Suppose the corporation signs a loan and the corporate director signs as a co-obligor to the
obligation of the corporation through the JSS or joint and solidary statement (note that the word
is “co-obligor” and not “guaranteed” since guaranty is different from solidary liability brought by
the execution of a JSS) and the corporation failed to comply with its obligation, can the corporate
obligor be made liable? Yes, because he made himself personally and solidarily liable with the
corporation.
iv. He is made to personally answer answer for his corporate action by a specific provision of law (came out in the Bar
Exams a few years back)
1. Q: A corporate officer signed a Trust Receipt in behalf of the corporation. But the corporation was unable
to pay the obligation for which the trust receipt was issued. The obligee charged both the corporation and
the individual who signed the trust receipt. He was even sued for Estafa. Can the individual argue that
under the Separate Personality Rule, he cannot be made liable for his act?
a. Note that in this case, the individual signed in behalf of the corporation and it was not a personal
loan. Yet, the corporate officer is being charged. Is it proper?
b. Yes. The PD 115 (Trust Receipts Law) expressed that those who signed the trust receipt are liable
in case of non-fulfillment of obligations under the Trust Receipt agreement.
v. He is disloyal.
Ient vs. Tullet, 2017 Under Section 34, a director of a corporation is prohibited from competing with the business in which his corporation is engaged in as
otherwise he would be guilty of disloyalty where profits that he may realize will have to go to the corporate funds except if the disloyal act
is ratified.
You have a situation where the disloyal director would arrogate to himself the benefits of a transaction which rightfully should go to the
corporation but because of his being a director and taking advantage of his position, he was able to get that particular benefit—the rule is,
the director will be holding this benefit (funds) in trust for the corporation. He must return it to the corporation,

3. What are the requisites before a corporate officer or director be held personally liable for corporate obligations?
Heirs of Fe Tan Uy vs. Before a director or officer can be held personally liable for corporate obligations, the following requisites must all be present:
International 1) The complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or
Exchange Bank, 2013 that the officer was guilty of gross negligence or bad faith. It has to be alleged.
2) The complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.
It is the obligation of the complainant to prove that the director or officer has committed such acts.

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 iii. Corporate officers and employees
1. What is the difference between a corporate officer and an employee?
Corporate officers Corporate employees
Gloria Gomez Corporate officers are those elected or appointed by the directors Ordinary company employees are generally employed not by action of the
vs. PNOC, 2009 or stockholders, and are those who are given that character either directors and stockholders but by that of the managing officer of the
by the Corporation Code, or the corporation’s by-laws. corporation who also determines the compensation to be paid such
There are two kinds: employees.
1) Those mentioned in the Corporation Code (President, All those working in that corporation outside the Corporation Code and by-
Treasurer and Secretary) laws are considered employees.
2) Those mentioned in the by-laws If the position (no matter how high) is not among those mentioned under the
Corporation Code and by-laws, he is not a corporate officer but an employee.

2. Though the BOD may create appointive positions other than the positions of corporate officers, the persons occupying such cannot
be viewed as corporate officers under Section 25.
a. There might instances where the Board may appoint an employee in a position that could be considered as corporate officer.
If there was no change made by-laws or stated in Corporation, he is still considered a corporate employee.
b. EX: in the hierarchy of the organization, the President has executive VP, VP, managers and supervisors, and rank-and-file
employees. All, but the President, are corporate employees.
c. Remember that the title “director” is not automatically associated to the membership of the Board because there are
companies that only call the position director (director or manager of human resources) but the position is not of the
corporate director’s. Title is not important. What is important is the function they perform.
Okol vs. Slimmer’s Previously, the SC held that an “office” is created by the charter of the corporation and the officer is elected by the directors or stockholders.
World, 2009 On the other hand, an “employee” usually occupies no office and generally is employed not by action of directors or stockholders but by the
managing officer of the corporation who also determines the compensation to be paid to such employee.
There might be certain circumstances where the employee can be transformed into a corporate officer. If you enter a corporation, you are one
of the young lawyers of the company. You were promoted to the head of legal. Under the by-laws of the corporation, the head of legal is a
corporate officer. In that case, from an employee, he becomes a corporate officer.

March II Marketing In view thereof, unless and until the corporation’s by-laws is amended for the inclusion of General Manager in the list of corporate officers,
vs. Joson, 2011 such position cannot be considered a corporate office within the realm of Section 25. Therefore, just because the appointment is done by the
directors does not mean that the position is of a corporate officer’s.
If one is appointed directly by the board without amending the by-laws, it will not have any bearing on the status of the employee.

3. Rationale of the distinction:

a. If the person is an employee, what are the implications?
Matling vs. Coros, It is necessary to determine:

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2010 1) If the officer or employee is covered by the safeguards of the constitutionally enshrined right to security of tenure
a. If the corporate officer is removed from office, he may not be able to claim the rights due under the Labor Code. The Labor
Code will provide the benefits and rights accorded to employees.
b. A corporate officer is covered by his contract with the corporation. This will indicate that he is not subject to rights bestowed
upon on an ordinary employee.
2) Jurisdiction
a. The corporate employee is covered by the NLRC.
b. The corporate officer is covered by RTC as the special commercial court.
3) Applicable Law
a. The corporate employee is covered by the Labor Code.
b. The corporate officer is covered by the Civil Code (on contracts).

18. Intra-Corporate Dispute (possible area for Bar question)

a. When does intra-corporate controversy exist? (Two-Tier Test)
Relationship Test The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC, regardless of the subject matter of
the dispute.
This was the first test observed by the SC.
If the dispute is not one among them, the relationship test would fail and it cannot be an intra-corporate dispute.

If the relationship and its incidents are merely incidental to the controversy or if there will still be conflict even if the relationship does not exist,
then no intra-corporate controversy exits.

Heirs of Fe Tan Uy Intra-corporate dispute or controversy exists when the controversy is:
vs. International 1) Between the corporation, partnership or association and the public
Exchange Bank, 2) Between the corporation and its stockholders or officers
2013 3) Between the corporation and State (as far as its franchise, permit or license to operate is concerned)
4) Among stockholders, partners or associates themselves.

In this concept, you are just listing those relationships that may bring about intra-corporate dispute (only relationship
issues).
EX: The President has an issue with the BOD (intra-corporate insofar as the relationship between the President and BOD is
concerned).
If there is an among stockholders themselves (e.g. preferred vs. common shares; majority stockholders vs. minority
stockholders
Nature of It is not the mere existence of an intra-corporate relationship that gives rise to an intra-corporate controversy.
Controversy Test To rely on the Relationship Test alone will divest the regular courts of their jurisdiction for the sole reason hat the dispute involves a corporation,
(Two-Tier Test) its directors, officers or stockholders. There is no legal sense in disregarding or minimizing the value of the nature of the transaction which gave

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 rise to the dispute (discarding the Relationship Test).

Under the Nature of Controversy Test, the incidents of that relationship must also be considered for the purpose of determining whether the
controversy itself is intra-corporate. The controversy must not only rely in the existence of an intra-corporate controversy, but must also pertain
to the enforcement of the parties’ correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory
rules of the corporation.

 Will a conflict between stockholders automatically give rise to an intra-corporate controversy? (possible Bar question)
Belo Medical FACTS: Vicki Belo had a previous partner, Jose Santos who is also a doctor. They had a relationship and Vicki alleged that
Group vs. Santos she was the one who put up the funds for the establishment of the Belo Medical Clinic. All the shares were supposedly
and Belo, 2017 under her. But because of her relationship with Jose Santos, she gave some of the shares to him in trust for her. When
things turned sour, Santos was no longer invited in the meetings. Santos demanded to exercise the right to inspect
corporate books. This was opposed by Vicki Belo because she claimed that the shares were actually hers. Hence, there
was a dispute to who is the owner of the shares. Belo Medical Group’s corporate secreatary filed an interpleader in court
instead of allowing the inspection of corporate books (it is a great move because if it denies Santos, he will be charged for
denial of inspection and if it allows that, Vicki Belo might get angry him).

No, a conflict between 2 stockholders of a corporation does not automatically render their dispute as intra-corporate. The
nature of the controversy must also be examined. Previously, we only look in the relationship. The moment it is satisfied,
there is an intra-corporate dispute. But the SC rectified its previous ruling by looking at the Two-Tier Test.

Cosare vs. FACTS: The stockholder is, at the same time, an employee who was illegally dismissed.
Broadcom Asia,
2014 Mere fact that the employee was a stockholder at the time of the case’s filing did not necessarily make the action an
intra-corporate controversy. Not all conflicts between the stockholders and corporation are classified as intra-corporate.
Here, his being a stockholder has no relationship with his illegal dismissal as employee. Therefore, the Relationship will
not be appreciated.

Considering that the pending dispute particularly relates to Cosare’s rights and obligations as a regular officer of
Broadcom, instead of as a stockholder of the corporation, the controversy cannot be deemed intra-corporate.

b. What can be the possible questions for the Two-Tier Test?

i. Enumerate the two tests in identifying an intra-corporate dispute.
ii. Explain the concepts of Relationship Test and Controversy Test (Two-Tier Test).

c. Comparative analysis of jurisprudence:

i. Will a dispute between and among stockholders, directors, officers and the corporations be deemed an intra-corporate dispute?
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 Tabang vs. NLRC, 1997 Reyes vs. RTC Makati, 2008 Belo Medical Group vs. Jose Santos, 2017
Answer Yes, an intra-corporate controversy covers all No, an intra-corporate controversy cannot cover all Same as Reyes vs. RTC Makati.
disputes between and among stockholders, kinds of controversies between stockholders and
directors, officers and corporations. corporations.

Ruling A corporate officer’s dismissal is always a The Court combined the two tests and declared that No, a conflict between 2 stockholders of a
corporate act, or an intra-corporate controversy, jurisdiction should be determined by considering not corporation does not automatically render
and the nature is not altered by the reason or only the status of relationship of the parties, but also their dispute as intra-corporate. The nature
wisdom with which the BOD may have in taking the nature of the question under controversy. of the controversy must also be examined.
such action. 1) Relationship of the parties
2) Nature of the dispute (Is it dispute that This Court now uses both the relationship
Also, an intra-corporate controversy is one which arose of the relationship of the parties?) test and the nature of the controversy test to
arises between a stockholder and the corporation. determine if an intra-corporate controversy
There is no distinction, qualification, nor any is present.
exemption whatsoever. The provision is broad and
covers all kinds of controversies between
stockholders and corporations.

ii. Case comparison

1. Reyes and subsequent cases abandoned the ruling in Tabang case.
Tabang vs. NLRC, 1997 Reyes vs. RTC Makati, 2008 Belo Medical Group vs. Jose Santos, 2017
Answer An intra-corporate controversy covers all disputes An intra-corporate controversy cannot cover all kinds Same as Reyes vs. RTC Makati.
between and among stockholders, directors, of controversies between stockholders and
officers and corporations. corporations.

Ratio There is no distinction, qualification nor any The Court applied the “better policy” which was the Same as Reyes case.
decidend exemption whatsoever in determining the application of the two tests to determine the
i existence of intra-corporate controversy such that existence of intra-corporate controversy.
if what is involved is a corporate officer, such
dismissal is automatically considered an intra-
corporate dispute.

19. Stockholders and Members

a. Pre-Emptive Right (Bar question)
i. Nature
1. It was provided by the Code to maintain a semblance of status quo in the ownership structure in the corporation.

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 2. Its purpose is to maintain the interest of the existing shareholders in the corporation, that no machinations can be made to dilute the
ownership of the existing stockholders.
a. What do you mean by this?
i. The corporation cannot issue new shares of stock without first offering it to the existing stockholders.
ii. If the corporation will do that and it is allowed to do that, it can try to look for favored stockholders to become the
majority by selling these new shares to the favored stockholders.
b. Illustration:
i. If the corporation will issue new shares to the public, the corporation must first offer it to the existing stockholders
in proportion to their current ownership.
1. If a stockholder owns 51% of the outstanding shares of the corporation and the corporation would like to
issue an additional 100% of the current stockholdings, then 51% of those new issuance must first be
offered to the current stockholder that owns that 51%.
2. If the current stockholder would refuse to buy that, that is the only time that the new shares can be
offered to other stockholders or to the public.

Majority Pre-Emptive Right under Section 39 refers to the right of the stockholder of a stock corporation to subscribe to all issuances or disposition of
Stockholders of shares of any class, in proportion to their respective shareholdings.
Ruby Industrial vs. We look at Section 39 at the legal basis and Pre-Emptive Right is a statutory right as opposed to a right to file a derivative action.
Lim, 2011 Right of First Refusal is not the same as Pre-Emptive Right because in Right of First Refusal, you do not have a legal basis to anchor it.
 In Pre-Emptive, there is a provision under the Code telling us that this right exists for all stockholders (it only applies to stock
corporations) and there is no need to indicate the presence of this right in the AOI so that stockholders can avail it.
 Right of First Refusal must be stated in the AOI or in the stock certificate in order to exist.

The right may be restricted or denied under the AOI, and subject to certain exceptions and limitations. The stockholder must be given reasonable
time within which to exercise their pre-emptive rights. Upon expiration of such period, any stockholder who has not exercised it will be deemed to
have waived it.

SEC Opinion, 1997 The grant of pre-emptive right under the Corporation Code is designed to protect both the proprietary and voting rights of a stockholder in a
corporation.
The proportionate interest of a stockholder in a corporation determines his proportionate power to vote in the corporate affairs where the law
gives the stockholders a right to affirm or deny board actions.

Legal basis, All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or dispositions of shares of any class, in proportion to
Section 39 their respective shareholdings, unless such right is denied by the AOI or an amendment thereto.
(MEMORIZE)

ii. Denial of Pre-Emptive Right can be done in 2 ways:

1. Before the constitution of the corporation (at the time of submission of AOI, it is already specified that Pre-Emptive Right will be
waived).
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 2. After the constitution of the corporation (by amendment of the AOI)

b. Right of First Refusal

i. This allows the stockholder to buy the shares of a fellow stockholder before the selling stockholder offers it to another party.
ii. This right is only available if it is stated in the AOI or in the agreement between shareholders.

Right of First Refusal Pre-Emptive Right

Definition When a stockholder intends to sell his shares, he must offer it first to a fellow When a corporation issues new shares, it must offer it first to the
stockholder before offering it to the public (or third party). existing stockholders in proportion to their current ownership
before offering it to the public.
Legal basis If stated in the AOI or in the agreement between stockholders. Granted by law.
Shares involved Shares of the selling stockholder (which are already issued by the corporation) Shares of the corporation that has not yet been offered to the
public for subscription.

iii. If a foreign stockholder buys shares from a landholding corporation which in effect increases the corporation’s foreign equity, it does not violate
the Constitution limiting land ownership to Filipino corporations because what is prohibited there is the foreign corporation’s buying of land.
iv. The transfer does not also violate the Anti-Dummy Law because there is no fraudulent intent. A stockholder has the right to transfer his shares
to another stockholder with whom he feels comfortable doing business with.

c. Right to Inspect Corporate Records

Ang-Abaya vs. The stockholder’s right of inspection of the corporation’s books and records is based upon their ownership of assets and property of the
Ang, 2008 corporation.
Therefore, it is an incident of ownership of corporate property whether this ownership or interest be termed an equitable ownership, a beneficial
ownership, or a quasi-ownership. The right to inspect pertains to the identified stockholders whether they are merely holding on to the shares in
trust for another person. What is important in the exercise of this right is the identity of the stockholder as appearing in the Stock and Transfer
Books of the corporation. If his name appears in the Stock and Transfer Book, he can exercise this right.

This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such as must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation.

In other words, the inspection has to be germane to the petitioner’s interest as a stockholder, and has to be proper and lawful in character and
not inimical to the interest of the corporation.

i. Right to inspect corporate records is not something without limit. This right admits of certain limitations:
1. When the stockholder is already using this right to the prejudice of the corporation (because there were previous instances where his
inspection was done to get the confidential information and passed this on the corporation’s competitors)
a. This is why if there is a a prior infraction by the stockholder, the corporation can deprive the stockholder of this right.
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 ii. What are the requirements for filing a criminal case for violation of right to inspect?
1. The denial of the right can lead to criminal prosecution for violation of the Corporation Code.
Ang-Abaya vs. 1) A director, trustee, stockholder or member has made a prior demand in writing (formal demand) for the copy of excerpts from the
Ang, 2008 corporation’s records or minutes.
2) Any officer or agent shall refuse to allow him to examine and copy the said excerpts. There must be an act to refuse the exercise.
3) If such refusal is made pursuant to a resolution or order of BOD, liability shall be imposed upon the directors or trustees who voted for
such refusal.
4) If the offer or agent sets up the defense that the person demanding has improperly used any information secured through any prior
examination or for any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand, the contrary
must be shown or proved.

iii. Can the right to inspect be exercised beyond dissolution?

1. If the corporation is already in the process of liquidation, can the stockholder still demand to exercise his right for inspection?
Chua vs. People, Yes. The rights and remedies against, or liabilities of, the officers shall not be removed or impaired by reason of the corporation’s dissolution.
2016 Corollarily then, a stockholder’s right to inspect subsists even during the period of liquidation.
Why? Because even at that time, the stockholders may still want to know what happened to the corporation. The fact that the corporation is
already in dissolution or liquidation will not free the officer from observing and recognizing the right to inspect by a stockholder.

iv. Can a stockholder with “insignificant holding” be allowed to inspect corporate books and records?
Teralay Yes. The Corporation Code has granted to all stockholders the right to inspect the corporate books and records, and in so doing has not required
Investment vs. any specific amount of interest for the exercise of the right to inspect.
Yulo, 2015 We are not only limited to those stockholders holding a significant amount of interest. Even those with insignificant holdings or token
stockholders are entitled to exercise this right. This right is available to all stockholders regardless of their interest in the corporation.

d. Right to File Derivative Suit

Ang vs. Ang, 2013 A derivative suit is an action brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporation’s directors,
officers or other insiders.
Here, the real party in interest is the corporation, while the stockholder is a mere nominal party. The suit really is that of the corporation’s.

i. Objective for granting this right:

1. Is the right to file a derivative suit granted to all stockholders?

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 a. In reality, the jurisprudence did not distinguish who can exercise this right. A plain reading of the rulings of the court will give
you the impression that this right is available to all stockholders. However, this right is actually directed to a certain segment in
the corporate organization which is the minority.
b. Although granted across all stockholders, it is principally a tool designed to help the minority against the abuses of those in the
majority.

2. Why is this a tool for the minority? Why can this right be considered limited to the minority and not available to the majority?
a. The majority does not need this right.
b. The decision of the corporation is always anchored on the collective decision of the majority. Therefore, they do not need to
question their own actions.
c. It is not that it is not available to the majority but the majority does not need it. All they need to do is to reverse the decision
instead of going to court.

Ching vs. Subic It is an effective remedy of the minority against the abuses of management. Thus, an individual stockholder is permitted to institute a derivative
Bay, 2014 suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever 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 the nominal party, while the corporation as the party in interest.

ii. When does this apply?

1. When the officials refuse to sue.
2. When officials are the holds who control the corporation.

iii. Is there a legal basis for exercise of the right?

1. This is actually born from jurisprudence.
2. It is implied recognized when the law makes directors and officers liable for violation of fiduciary duties to the damage of the
corporation and its stockholders.
Legaspi Towrse vs. None. The stockholder’s right to file a derivative suit is not based on any express provision of the Corporation Code, but is impliedly recognized
Muer, 2012 when the law makes corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their
fiduciary duties.
When you talk about derivative suit, the complaining stockholder is the nominal party and the corporation is the one charging those in the
majority. Note that Corporation Code is not invented in the Philippines. This came from Great Britain. The concept of Corporation Law is England’s
best legacy to the world.
As such, the concept is depicted just like common law. There, the people vote the Parliament. The parliament chooses their Minister. The relation
of that is that the derivative suit is more of a common law application and that is why it is not provided in a statute. Since we are not a common
law country, jurisprudence allows to solidify that concept.

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 iv. Requisites for filing derivative suits:
Florete vs. 1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed.
Florete, 2016 He must be a stockholder both at the time:
a. Transaction or the decision of the Board subject of his complaint
b. Filing of the complaint itself.
2) He exerted all reasonable efforts and alleges it with particularity in the complaint, to exhaust all remedies available under the AOI, BL or
rules governing the corporation or partnership to obtain the relief he desires.
a. This is significant in cases where the corporation has specific provisions concerning grievance of stockholders. Supposed the
corporation has a mechanism whereby concerns of stockholders can be addressed through it, the stockholder must first go
through that process before filing a derivative suit. The failure to observe that process (sometimes they call it an ADR), the
derivate suit is premature.
b. All reasonable efforts:
i. AOI
ii. BL
iii. Rules
c. He must have alleged all reasonable efforts with particularity.
3) No appraisal rights are available for the acts complained of.
a. Appraisal Right is the right of the stockholder with respect to the right to disagree and to demand the payment of fair value of
his shares. He should have a dissent and a demand (for return of investment).
b. In this instance, there is a decision of the board to observe are particular action which is already approved by the Board. The
stockholder thought that such action is inimical to the interest of the corporation and yet the members of the Board still wanted
to continue.
4) The suit must not be a nuisance or harassment suit.
5) In case of nuisance or harassment suits, the court shall dismiss the case.
a. This 5th requisite, while not included in the enumeration, is implied in the first paragraph of Rule 8 Interim Rules: “the action
brought by the stockholder or member must be in the name of the corporation or association”

The key takeaway here, the one filing should always remember that he is not the one suing the majority. He is only an instrumentality of the
corporation. It is not his case.

v. Individual suit vs. Class suit vs. Derivative suit

Florete vs. A stockholder may suffer from a wrong done to or involving a corporation, but this does not vest in the aggrieved stockholder a sweeping license
Florete, 2016 to sue in his or her own capacity.
The determination of the stockholder’s appropriate remedy—whether it is an individual suit, a class suit, or a derivative suit—hinges on the object
of the wrong done.

1. Why is there a need to differentiate the suits? Because of the requirements in filing a derivative suit.
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 Individual suit Class suit Derivative suit
Legaspi Where a stockholder or a member is denied the The wrong is done to a group of stockholders, as Where the wrong is done on the corporation
Towers right of inspection, his suit would be individual where preferred stockholder’s rights are violated, a itself, the cause of action belongs to the
vs. Muer, because the wrong done to him is personal (wrong class or representative suit will be proper for the corporation and not to the stockholder.
2012 done to him as a stockholder) and not done to the protection of all stockholders belonging to the same
others or to the corporation. group.

e. Right to dividends
Florete vs. Under the Corporation Coe, there is no categorical mandate on the part of the corporation to declare a dividend. However, once a final dividend is
Florete, 2016 declared on a shareholder’s share, that shareholder is entitled to payment and in the event of non-payment can sue the company for arrears in
the same way as any ordinary credited may sue for debt.
There is nothing in the Corporation Code that requires the corporation to pay dividends. What the Code does is to provide a provision authorizing
the corporation to pay.

The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in
property, or in stock to all stockholders on the basis of outstanding stocks they are holding. When we talk about right to dividends, there is no
right until the board declares it. In case of stock dividends, even approval of stockholders will be necessary. In reality, one of the ways to push
minority stockholders out of the corporation is to deny them dividends.

Always relate this to Trust Fund Doctrine because the corporation cannot pay dividends out of its capital. It can only pay dividends out of the
unrestricted retained earnings. Why does it have to be unrestricted? Because some earnings, although already in the books of the corporation, are
being restricted.

In case of any cash dividends due on the delinquent stock, it shall first be applied to the unpaid balance on the subscription plus costs and
expenses. Meanwhile, stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid. This is a
guidance given to the corporation that if there are delinquent shares, they are not deprived of getting dividends but before they get it, they have
to address their delinquency.
If it is cash, the corporation will only do an accounting entry whereby the cash goes into the corporation as payment for the delinquency.
If it is stock dividends, the corporation will not give it until the stockholder settles his delinquency.
 When is a stockholder considered delinquent? He has shares in the books of the corporation that has remained unpaid despite the
demand of the Board.
o When the corporation was formed, certain stockholders will subscribe to the number of shares they believe they want to hold.
But the Code also allows them into paying their subscriptions in installments.
o If the corporation demands payment of their subscription because it needs money, the Board will call (resolution) all unpaid
subscription to pay. If at that time the stockholder was unable to pay up to the extent demanded by the board, there is a
delinquency. It is only at that time that delinquency will start. This is also when the interest will come in.

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 No stock dividend shall be issued without the approval of stockholders representing not less than 2/3 OCS at a regular or special meeting duly
called for that purpose.
This same requirement does not apply to cash dividend payouts. You do not need the 2/3 OCS to ratify or approve cash dividends.
 Why is it different? Payment of stock dividends increases the authorized stock capital of the corporation so much so that if there are
stockholders who will receive these stock dividends, they may later on sell these to those other stockholders wanting their holdings in the
corporation. That is why if this is the scenario, they may not be able to maintain the status quo in relation to the current ownership
structure in that corporation, which is why there is a need for approval from 2/3 OCS.

Note that if stock dividends are issued, these are NOT covered by the Pre-Emptive Rule.
 Such that, if it is issued out, this may go to buyers who may steal the majority holdings.
 Suppose there is a dividend payout, all you need to do is to identity those stockholders who will most likely sell their shares (delinquent).

Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock. This is the mechanism
incorporated in the Corporation Code to somehow check the abuse of those in majority in depriving the minority of dividends.
 Exceptions:
o When justified by definite corporate expansion projects or programs approved by the BOD
o When the corporation is prohibited under any loan agreement with any financial institution or creditor (whether local or
foreign) from declaring dividends without its consent, and the consent has not yet been secured. This applies primarily in big
corporations. This provision will allow the corporation to retain the unrestricted retained earnings even beyond the threshold
of 100% paid-in capital.
o 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 to have a special reserve for probable contingencies. This normally happens in the corporation where
reserved capital is required, not only by the BOD but even by the regulators (Banks, Insurance Companies)

20. Mergers and Consolidations (do not expect an easy question in mergers and consolidation)
a. Concept
Bank of It is the re-organization of two or more corporations that results in their consolidating into a single corporation, which one of the constituent
Commerce vs. corporations, one disappearing or dissolving and the other surviving.
Radio Philippines, “One disappearing and the other surviving” will tell you if it is a merger or a consolidation.
2014 If one disappears, it is a merger.
If both disappears and a new entity is formed, it is a consolidation.

To put it in another way, merger is the absorption of one or more corporations by another existing corporation, which retains its identity and
takes over the rights, privileges, franchises, properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing corporation
continues its existence while the life or lives of the other corporations are terminated.
In mergers, the absorbing corporation continues its existence while the other corporations are terminated. This is critical in appreciating a merger
or consolidation.

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 b. Merger vs. Sale of Assets (Chinabank vs. Dyne-Sem Electronics, 2006)
Merger Sale of Assets (this is not the sale in the regular course of business. It is
the sale of assets as a prelude to dissolution)
Definition A sale of assets is always involved. A merger is not always involved.
Assumption of The surviving corporation automatically assumes the liabilities of the The purchasing corporation is not generally liable for the debts and
liabilities constituent corporation. liabilities of the selling corporation.

Why generally? In some instances, the buyer of the assets can be made
liable for the obligations of the seller if the sale was done in fraud of
creditors.

Continuance of There is a continuance of enterprise (business) and the stockholders The selling corporation ordinarily contemplates liquidation of the
enterprise continues to be there although in an altered form (meaning their enterprise.
interests become smaller since the corporations are combined; since
there are more stockholders, the shares are diluted).

Title to assets The title to the assets of the constituent is transferred to the new Transfer of title is by virtue of contract or assignment by the transferor.
corporation by operation of law.

Dissolution The constituent corporations are automatically dissolved. The selling corporation is not dissolved by mere transfer of all its
property.

i. If there is a sale of assets, it is not automatic that it will result to a merger.

1. EX: The sale of Mang Inasal to Jollibee is not a merger because Mang Inasal is still existing. It is more of a share sale in favor of another
investor.
2. EX: Where the corporation decided to retire from business like in Philippine Carpet case. When they retired from business, they needed
to liquidate their remaining assets. The way to liquidate is to sell them as a prelude to dissolution.
ii. If there is merger, there is always a sale of the assets.

c. Transfer of Assets (Nell Doctrine; Nell vs. Pacific, 1965)

i. It states the general rule that the transfer of all the assets of a corporation to another shall not render the latter liable to the liabilities of the
transferor.
ii. Exceptions to the Nell Doctrine (was asked in the Bar)

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 1. Where the purchaser expressly or impliedly agrees to assume such debts.
2. Where the transaction amounts to a consolidation or merger of corporations (one of the consequences of merger is the automatic
assumption of the liabilities of the dissolved corporation)
3. Where the purchasing corporation is merely a continuation of the selling corporation (relate to Alter Ego)
4. Where the transaction is entered into fraudulently in order to escape liability for such debts (relate to Alter Ego; in fraud of
creditors)
a. The Bar may give a problem to apply the exceptions, not necessary ask for the enumeration.
i. EX: When a corporation sold all its assets to a counter party and the counter party purchased those assets without
any knowledge that the transferor is heavily indebted. When the transfer was made, the transferor disappeared. The
creditors would like the transferee to return the assets of the corporation that sold all these. Can the transferee be
compelled to return these assets?
1. Yes, under Nell vs. Pacific Farms case.
a. This is connected to the concept of merger and this is a very good material for a possible question
of the Bar.

d. Procedures for a valid merger:

Bank of 1) The board for each corporation draws up a plan for a merger or consolidation.
Commerce vs. a. In that stage, the constituent corporation will need to agree on this requirement.
Radio Philippines, 2) The plan for merger or consolidation shall be submitted to the stockholders or members of each corporation for approval.
2014 a. The number of votes necessary to effect a merger or consolidation is important. Although it is under an ordinary corporate
action, mergers and consolidations will require an extraordinary act (2/3 OCS of each constituent voting separately).
3) Execution of the formal agreement, referred as the Articles of Merger or Consolidation, by the corporate officers of each constituent
corporation.
4) Submission of the Articles to the SEC for approval.
5) If necessary (although not required), SEC shall set a hearing, notifying all corporations concerned at least 2 weeks before.
6) Issuance of certificate of merger or consolidation
a. The merger can come in only the moment the SEC issues a certificate of merger. In a long line of cases, the SC decision was
stable such that any merger can take effect only the moment the SEC issues a certificate of merger and/or consolidation.
b. Even if there was already an approval of the respective constituent corporation, there was already an approval by the 2/3 of the
OCS of each constituent corporations and drafting of Articles and even up to the filing, there is yet no merger if SEC does not
take action of it.

e. Effectivity of Merger:
i. The Articles, signed and certified, shall be submitted to the SEC for its approval.
ii. If the SEC is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of Corporation Code
and existing laws, it shall issue a Certificate of Merger or Consolidation , at which time the merger or consolidation shall be effective.
1. Until the SEC issues the Certificate of Merger, there can be no valid merger yet.

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Mindanao Savings vs. The merger does not become effective upon the agreement of the constituent corporations.
Willkom, 2010
BPI vs. BPI Employees By law and jurisprudence, a merger becomes only effective upon approval by the SEC of the Articles of Merger.
Union, 2010

f. Significance of Certificate of Merger

Mindanao Savings Issuance of certificate of merger is crucial because not only does it bear out SEC’s approval but it also marks the moment when the consequences
vs. Willkom, 2010 of merger take place. By operation of law, upon 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.

The time of issuance of the Certificate is just the date. We are more interested in what will happen and that is where the questions are coming
from.
The questions always link it up to the date when the merger took place. Hence, we always go back to the date of issuance of certificate of merger.
The moment the certificate of merger kicks in, the claims against a dissolved corporation can now be charged on the surviving corporation by
operation of law.

What if the merger is incomplete—meaning there was no certificate issued? There is no merger. If there is no merger, you cannot hold the
surviving entity liable for the obligations of the supposedly dissolved entity.

g. Effects of a valid merger or consolidation

Section 80 1) The constituent corporations shall become a single corporation which shall be the surviving corporation designated in the Plan of
Merger.
a. In case of consolidation, it shall be the consolidated corporation (a new entity) designed in the Plan of Consolidation.
2) The separate existence of the constituent corporations shall cease, except that of the surviving or consolidated corporation.
3) The surviving or consolidated corporation shall possess all the rights, privileges, immunities and powers, and shall be subject to all duties
and liabilities of a corporation organized under the Corporation Code.
4) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and franchises of each of the constituent
corporations; and all real and personal properties, all receivables due on whatever account, including subscriptions to shares and other
choses in action, and all and every other interest of or belong to, or due to each constituent corporation, shall be deemed transferred to
and vested in such surviving or consolidated corporation with further act or deed.
5) The surviving or consolidated corporation shall be responsible and liable for all liabilities and obligations of each of the constituents in
the same manner as if the surviving had itself incurred such.
a. Any pending claim, action or proceeding brought by or against any of such constituent may be prosecuted by or against the
surviving or consolidated corporation.
i. In many cases, you will see the surviving entity continuing as the party litigant in a case which started with the
dissolved corporation. All the cases will now be prosecuted or defended by the surviving entity.
ii. In BPI vs. Sarabia (FRIA Case), it was started by FarEast Bank trying to collect on the obligation of Sarabia Manor. During
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 the course of the case, FarEast merged with BPI. When the merger happened, FarEast was dissolved and the surviving
entity was BPI. That is why, it became BPI vs. Sarabia Manor.
b. Rights of creditors or liens upon the property of any of such constituent shall not be impaired by such merger or consolidation.

Sumifru Jurisprudence states that “in the merger of two existing corporations, one of them survives and continues the business, while the other is
Philippines vs. dissolved and all its rights, properties and liabilities are acquired by the surviving corporation”.
Baya, 2017
Philippine The merger with another does not operate to dismiss the employees of the absorbed corporation.
Geothermal vs. This is in keeping with the nature and effects of a merger as provided under law and the constitutional policy protecting the rights of labor. The
Unocal, 2016 employment of the absorbed employees subsists. Necessarily, these absorbed employees are not entitled to separate pay on account of such
(possible Bar merger in the absence of any other ground for its award.
Question)

21. Corporate Dissolution

a. Certificate of Dissolution
Premiere Printing FACTS: The workers were asking for payment of labor-related claims. The corporation averred that it is already dissolved however it was
vs. Aglubat, 2017 unsubstantiated. Can you still hold the corporation liable for labor claims?

If the corporation failed to present a certificate of dissolution duly issued by the SEC as proof of its claim that it is already dissolved and has ceased
its business operations, it is still presumed to be in business. Absent a certificate of dissolution from the SEC, the corporation is deemed legally
existing and may not evade liability for valid claims against it such as the respondents’ backwages and other monetary claims.

b. There can be no corporate action after the dissolution.

i. The corporation cannot enter into a valid contract unless the contract has something to do with the liquidation of the corporation. To continue
the business is already void because it no longer has corporate existence.

c. Corporate action after dissolution

i. Comparative analysis of jurisprudence:
1. Can a dissolved corporation pursue a legal claim beyond dissolution?
Gelano vs. CA, 1981 Alabang Development vs. Alabang Hills, 2014
Answer Yes, a dissolved corporation can still pursue its legal claim. No, a dissolved corporation can no longer pursue its legal claim.

Facts There was a corporation that lent money to its lessor (he is an individual). When Alabang Development is the developer of Alabang Hills. They turned it
the lessor failed to pay the obligation, the corporation sued him for collection of over to the village association. There were still some areas unsold still
sum of money. in the name of the developer. There were some common areas (roads,
parks) which are supposedly owned by the association but Alabang

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 While it was on-going, the corporation’s license was revoked. There was already Development still claims to own up until that time.
a judgment in favor of the corporation and the case was already in appeal when
the license was revoked. However, their corporate license was revoked by SEC. When it was
After learning that the license was revoked, the lessor’s lawyer filed a motion to revoked, no action was taken by the developer. Alabang Hills also did
dismiss the case arguing that the corporation can no longer pursue a legal claim not move until after 3 years.
on account of its dissolution.
After 3 years, the association started constructing structures on areas
supposedly owned by Alabang Development. Alabang Development
filed a case. Alabang Hills filed a motion to dismiss since it was past
the 3-year period.

Ruling SC did not allow the lawyer’s motion to prosper. Alabang Development filed its complaint not only after its corporate
Under Section 77, when the corporate existence is terminated in any legal existence was terminated but also beyond the 3-year period allowed
manner, the corporation shall nevertheless continue as a body corporate for 3 by Section 122. Thus, it is clear that at the time of filing of subject
years after the time when it would have been dissolved. complaint petitioner lacks the capacity to sue as a corporation.

There was already a decision prior to the dissolution of corporation. Therefore, it To allow it to initiate the subject complaint and pursue it until final
was just on the winding stage of the case. The subsequent dissolution should not judgment, on the ground that such complaint was filed for the sole
prevent the corporation from pursuing its complaint and obtaining relief on the purpose of liquidating its assets, would be to circumvent Section 122.
basis of the judgment.

Any litigation filed by or against it instituted within the period, but which could
not be terminated, must necessarily prolong that period until the final
termination of said litigation as otherwise corporations in liquidation would lose
what should justly belong to them or would be exempt from the payment of just
obligations through a mere technicality, something that courts should prevent.

ii. Case comparison:

1. The doctrine laid in the Gelano case was not abandoned by Alabang Development. The application of the doctrine was merely clarified
in Alabang Development.
Gelano vs. CA, 1981 Alabang Development vs. Alabang Hills, 2014
Answer Yes, a dissolved corporation can still pursue its legal claim. No, a dissolved corporation can no longer pursue its legal claim.

Ratio The corporation filed the case before its dissolution although the case was The suit was filed long after the corporation was dissolved and even
decidendi terminated after its dissolution. beyond the liquidation period.

22. Foreign Corporation

a. We look at the entity and determine if they can file claims in local courts.
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Section 123 A foreign corporation is one formed, organized or existing under laws other than those of the Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country or state.
What test was used by the framers in this concept? The Incorporation Theory.

b. Condition precedent before a foreign corporation can legally engage in business in the Philippines
Section 124 Every foreign corporation is authorized to do business in the Philippines under a license therefore issued to it by the appropriate government
agency.
There must be a license.
How would you know if it is a foreign corporation at first instance? If it says (Phils.), it is a foreign corporation licensed to do business in the
Philippines.

i. GR: Unlicensed foreign non-resident corporations cannot file suits in the Philippines. If they are doing business in the Philippines, they must
have a licensed given by the SEC.
Section 133 No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative agency of the Philippines, but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

European A corporation has legal status only within the state or territory in which it was organized.
Resources vs. For this reason, a corporation organized in another country has no personality to file suits in the Philippines. In order to subject it (foreign
Ingeniueuburo corporation doing business in the country) to the jurisdiction of our courts, it must acquire a license from SEC and appoint an agent for service of
Birkhahn, 2004 process. Without such license, it cannot institute an action in the Philippines.

ii. Exceptions:
1. If at the time the suit was brought, the suing foreign entity already has license, the suit will be allowed even if it did not have a license
at the time the transaction was made. The remedial defect is cured.
a. If a first suit was dismissed because of lack of capacity to sue and the foreign corporation sues again, this time with a license,
there is no res judicata because the first dismissal is not an adjudication on the merits. The subsequent license will cure the
lack of capacity at the time of execution of contract.

2. If the insured (foreign corporation without a license) is incapacitated to sue, its insurer does not suffer the same incapacity once it
subrogates because what it inherits is the rights and obligations of the subrogee and not its capacity. Incapacity is personal to the
insured because it is conferred by law and not by agreement of parties.

3. Instances when foreign corporation corporation has license to sue even when unlicensed:
a. Case for unfair competition because it is a public crime punishable under Article 189 RPC. Since it is an act against the State,
capacity to sue is immaterial.
b. Redress for an isolated transaction
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 c. Protect corporate reputation, name and good will
d. Infringement of trademark
e. Enforcing a right not arising out of a business transaction (e.g. tort that occurred in the Philippines)
f. Parties have contractually stipulated that the Philippines shall be the venue of actions
g. Recovery of misdelivered property

4. Doctrine of Isolated Transaction:

a. Foreign corporations can sue even if unlicensed if the transaction subject to the complaint is not part of their common
business in a sense that they have no intention to engage in a progressive pursuit of business purpose and object of business
transaction.

c. “Doing business”
i. If a foreign corporation is doing business without a license, they cannot sue.
1. In order for the foreign corporation to be required to get a license, it must have an actual transaction in the Philippines. If it does not
transact in the Philippines, court have no jurisdiction to even require a license even if it exports in products in the Philippines.
Cargill Inc. vs. A foreign company that merely imports goods from a Philippine expert, without opening an office or appointing an agent in the Philippines is not
Intra Strata, 2010 doing business in the Philippines.
Courts give emphasis to the importance of the element of continuity of commercial activities to constitute doing business in the Philippines.

i. Under the Foreign Investments Act, “doing business” means a continuity of commercial dealings or arrangements to the extent that
performance of any act, work or function is incidental to and progressive with the commercial gain or business purpose of the foreign
corporation.
2. There are two Tests:
Substance Test Continuity Test
Define If the foreign corporation maintains a body of business for which it was If there is a continuity of commercial dealings and arrangements to
organized or if it has substantially retired from it and turned it over to another. some extent that performing works, acts or functions are normally
incidental or progressive with its business purpose.

3.
Examples of “doing business:
a. Soliciting orders, service contracts, opening offices such as liaison officers or branches.
b. Appointing representatives or distributions that must be domiciled in the Philippines or stay in the Philippines for 180 days or
more.
c. Participating in the management, supervision or control of any domestic corporation.
d. Any other acts that imply a continuity of commercial dealings or arrangements that are normally incidental to its commercial
gain.
Engagement of Filipino national to run a It is “doing business”. The act of negotiating to employ a Filipino national to run a foreign company’s pre-mixed concrete
foreign company’s premixed concrete operations are managerial and operation in directing and establishing commercial operations in the Philippines.
operations in the Philippines. There are not mere acts of a passive investor.
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Selling of tickets even if there is no It is “doing business”.
aircraft landing.

4. An agent can also be a distributor assigned in the Philippines. If they appoint a distributor, are they already doing business in the
Philippines?
a. Under the Foreign Investment Act, Yes. The appointment of a distributor can be an indication of doing business in the
Philippines.
Steelcase vs. The appointment of a distributor in the Philippines is not sufficient to constitute “doing business”, unless it is under the full control of the foreign
Design corporation.
International If the distributor is an independent entity which buys and distributes products other than those of the foreign corporation, for its own name and
Selections, 2012 its own account, the latter cannot be considered to be doing business in the Philippines. Doing business by distributor is qualified, such that if it is
not on an exclusive basis, the appointment cannot be considered as doing business in the Philippines. Therefore that foreign corporation is not
allowed to initiate an action in the Philippines.

5. Examples of “not doing business”:

a. Mere investment as a shareholder in a domestic corporation.
b. Appointing a representative or distributor in the Philippines which transacts business in its own name and for its own account.
c. Publication of general advertisement.
d. Maintaining stock of goods in the Philippines only to have it processed by another entity in the Philippines.
e. Consignment of equipment for processing products to be exported.
f. Collecting information in the Philippines
g. Performing services auxiliary to an existing isolated contract.

On several occasions, company This is not “doing business”. To be doing business, foreign corporation must actually transact business in the Philippines
purchased products with instruction to such as performing specific business functions within Philippine territory on a continuing basis in its own name and for its
deliver the goods to HK based company. own account.
Upon receipt of goods in HK, products
were considered sold. HK-based Actual transaction within Philippine territory is an essential requisite to require a Philippine license. If a foreign
company in turn had obligation to corporation does not transact in the Philippines, courts have no jurisdiction to require a license, even if it exports its
deliver the products to the Philippines. products in the Philippines.

A foreign company is importing goods This is not “doing business”. A foreign company that merely imports goods from a Philippine exporter without opening an
from a Philippine exporter. It did not office or appointing an agent is not doing business in the Philippines.
open an office ore appoint an agent in
the Philippines. In order to be doing business, activity must involve profit-making.

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 d. Foreign corporation suing in the Philippines
i. Comparative analysis of jurisprudence:
1. Can a foreign corporation doing business in the Philippines without a license sue in the Philippine courts?
European Resources vs. Ingeniueuburo Birkhahn, 2004 Global Business Holdings vs. Surecomp Software, 2010
Answer No, the foreign corporation doing business in the Philippines without a license cannot sue in Yes, a foreign corporation doing business in the
Philippine courts. Philippines without a license can sue in Philippine
courts.
Facts The German concessionaire filed a case for injunction but he was deemed by the court as Surecomp is a vendor of software. They contract
doing business in the Philippines. companies who would like a software for use in
business. Global questioned and did not pay Surecomp.

Ruling A corporation has legal status only within the state or territory in which it was organized. For A foreign corporation doing business in the Philippines
this reason, a corporation organized in another country has no personality to file suits in the without license may sue in Philippine courts a Filipino
Philippines. citizen or a Philippine entity that had contracted with
and benefited from it. A party is estopped from
In order to subject a foreign corporation doing business in the country to the jurisdiction of challenging the personality of a corporation after having
court courts, it must acquire a license from the SEC and appoint an agent for service of acknowledged the same by entering into a contract with
process. Without such license, it cannot institute a suit in the Philippines. it.

The act of participating in the bidding process constitutes doing business because it shows the The principle is applied to prevent a person contracting
foreign corporations intentions to engage in business in the Philippines. In this regard, it is the with a foreign corporation from later on taking
performance by a foreign corporation of the acts for which it was created, regardless of advantage of its noncompliance with the statutes,
volume of business, that determines whether a foreign corporation needs a license or not. chiefly in case where such person has received the
benefits of the contract.
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.

2. Case comparison:
a. Can a foreign corporation doing business in the Philippines without a license sue in the Philippine courts?
i. The ruling in Global Business Holdings case did not overturn the doctrine laid down in the European Resources case. It
only clarified the general rule and applied the exception to prevent an abuse against foreign corporations. The ruling
in the European Resources case was not abandoned.
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 European Resources vs. Ingeniueuburo Birkhahn, 2004 Global Business Holdings vs. Surecomp Software, 2010
Answer No, the foreign corporation doing business in the Philippines without a license Yes, a foreign corporation doing business in the Philippines without a
cannot sue in Philippine courts. license can sue in Philippine courts.

Ratio The Court applied the general rule that a foreign corporation doing business in A party is estopped from challenging the personality of a foreign
decidendi the country must acquire a license from the SEC. Without such license, it cannot corporation after having acknowledged the same by entering into a
institute a suit in the Philippines. contract with it.
The fact that the Filipino corporation has already acquired the benefits
coming from that system led the court to say that the it cannot take
advantage of the non-compliance of the foreign corporation to abuse
its right to litigate.

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