ATENEO

DE MANILA LAW SCHOOL

PHILIPPINE CORPORATE LAW 1 DEAN CESAR L. VILLANUEVA
ATTY. TERESA VILLANUEVA - TIANSAY
2ND SEMESTER, SY 2021-2022

_______________________________________________________________________________________

MODULE 1
STRUCTURE OF PHILIPPINE CORPORATE LAW
(1ST WEEK: FEBRUARY 8 AND 10)

Asynchronous Study: Chapters 1 and 2 of TEXTBOOK 2

I. CORPORATE CONCEPTS AND DOCTRINES

1. The Revised Corporation Code (Sec. 1)
a. Common Law Nature of the RCC and Philippine Corporate Law
b. Repeal of the Old Corporation Code (Secs. 184 and 187)
c. Applicability of the RCC to Corporations Created under Special Laws (Sec. 4)

2. Definition and Essence of the “Corporation” (Sec. 2)

A corporation is an artificial being created by operation of law, invested by law upon coming into
existence with a personality separate and distinct from the persons composing it, and from any other
legal entity to which it may be related. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244
(2002).3

3. FOUR CORPORATE ATTRIBUTES BASED DEFINITION UNDER SEC. 2 OF RCC:

a. An Artificial Being: “A corporation is granted a juridical capacity to own properties, to contract and
to enter into legal relationships.”
b. Creature of the Law: “Each corporation is created by operation of law pursuant to a covenant to
pursue a business enterprise.”
c. With a Right of Succession: “A corporation has a juridical personality separate and distinct from
its shareholder or members, officers and directors or trustees.”
A corporation is invested by law with a personality separate and distinct from the persons
composing it, and from that of any other entity to which it may be related. Its artificial being makes
possible the assembling of huge amounts of capital upon which big business depends. It also has
the advantage of non-dependence on the lives of those who compose it, even as it enjoys certain
rights and conducts activities of natural persons. Reynoso IV v. Court of Appeals, 345 SCRA 335
(2000).

d. Creature of Limited Powers: “A corporation has only such powers, attributes and properties as
are expressly authorized by law or incident to its existence.”
A corporation has no powers except for those expressly conferred on it by the Corporation
Code, and those found in its charter and those incidental to its existence. It exercises its powers
through its Board of Directors and/or its duly authorized officers and agents. Pascual and Santos,
Inc. v. Members of the Tramo Wakas Neighborhood Assn. Inc., 442 SCRA 438 (2004).4
A corporation as a creature of the State is presumed to exist for the common good; and the
special privileges and franchises it receives are subject to the laws of the State and the limitations of
its charter. The State reserves it right to inquire how these privileges had been employed, and
whether they have been abused. PAGCOR therefore has no power to grant franchise on internet
1
Unless indicated otherwise, all references to sections pertain to the Revised Corporation Code of the Philippines,
Republic Act No. 11232.
2
VILLANUEVA & TIANSAY, PHILIPPINE CORPORATE LAW , Rex Book Store, 2021 edition.
3
CDCP v. Cuenca, 466 SCRA 714 (2005); EDSA Shangri-La Hotel and Resorts, v. BF Corp., 556 SCRA 25 (2008).
4
De Liano v. Court of Appeals [“CA”], 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004); United
Paragon Mining Corp. v. CA, 497 SCRA 638 (2006); Cebu Bionic Builders Supply, v. DBP, 635 SCRA 13 (2010); Esguerra v. Holcim Phils., 704 SCRA 490
(2013).
 gambling, which power finds no basis in its charter. Jaworski v. PAGCOR, 419 SCRA 317 (2004).

4. “ TRI-LEVEL CORPORATE EXISTENCE ”

a. “ASSETS-ONLY” LEVEL: “The corporation is an aggregation of property and assets.”

b. “BUSINESS ENTERPRISE” LEVEL: “The corporation’s primary purpose is to pursue a business

enterprise.”
“When one buys the business of another as a going concern, he usually wishes to keep it
going; he wishes to get the location, the building, the stock in trade, and the customers. He wishes
to step into the seller's shoes and to enjoy the same business relations with other men. He is willing
to pay much more if he can get the goodwill of the business, meaning by this the good will of the
customers, that they may continue to tread the old footpath to his door and maintain with him the
business relations enjoyed by the seller.” Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).5

c. “JURIDICAL ENTITY” LEVEL: “The corporation’s juridical personality is primarily a medium through
which to pursue a business enterprise.”

5. “ TRI-LEVEL CORPORATE RELATIONSHIPS ”

a. “JURIDICAL ENTITY” RELATIONSHIP: Treats of the legal consequences arising from the relationship
between the State as the creator, and the corporation as its
creature.
b. “INTRA-CORPORATE” RELATIONSHIPS: Treat of the legal consequences arising from “corporate
contractual relationships:”
(1) Between the corporation and its agents (directors/trustees and officers) to act in the real
world, governed by Law on Agency transmuted into Corporate Law doctrines;
(2) Between the corporation and its shareholders/members, governed primarily by
Corporate Law and Property Law transmuted into Corporate Law doctrines;
(3) Between shareholders/members and the directors/trustees and officers, governed by
the Law on Business Trusts transmuted into Corporate Law doctrines;
(4) Among the shareholders or members in common venture, governed by Corporate Law
implementing Contract Law doctrines.
 Underpinned by the “Doctrine of Maximization of Shareholder Value”

c. “EXTRA-CORPORATE” RELATIONSHIPS: Deals with legal consequences arising from the relationships
of the corporation with the public it deals with or those affected by its business enterprise:
(1) Between the corporation and those it contracts with, governed by various Laws on Contracts;
(2) Between the corporation and its employees, governed by Labor Laws;
(3) Between the corporation and those affected by its enterprise, governed by Law on Torts
 Underpinned by the emerging “Stakeholder Theory”

6. Power to Create a Corporation Is Legislative in Character (Sec. 16, Art. XII, 1987
Constitution)
Since Congress cannot, under the Constitution, enact a special law creating a private corporation,
except when it is a GOCC, it follows then that Congress can create corporations with special charters
only if such are GOCCs. Thus, all water districts which are pursuant to P.D. 198, and not under the
Corporation Code, are GOCCs within COA’s jurisdiction. Feliciano v. COA, 419 SCRA 363 (2004).6
P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on the formation of a
private corporation by special legislative act, as it is not a GOCC, since NDC was merely required to
extend a loan to the new corporation, and the new stocks of the corporation were to be issued to the old
investors and shareholders upon proof of their claims against the abolished corporation. National
Development Corporation v. Philippine Veterans Bank, 192 SCRA 257 (1990).

7. THEORIES ON THE FORMATION OF CORPORATIONS

a. Theory of State Concession:
A corporation’s claim of a juridical personality of its own and to transact business as such, is not
a matter of absolute right, but a privilege which may be enjoyed only under such terms as the State

5
Footnote 35: Recent cases have enlarged the concept of good will over the behavioristic resort of old customers to the old place of business. It is now
recognized that “It may include in addition to those factors all that goes with a business in excess of its mere capital and physical value; such as reputation
for promptness, fidelity, integrity, politeness, business sagacity and commercial skill in the conduct of its affairs, solicitude for the welfare of customers and
other tangible elements which contribute to successful commercial venture.”
6
Veterans Federation of the Phils. v. Reyes, 483 SCRA 526 (2006).
2
 may deem necessary to impose.cf Ang Pue & Co. v. Sec. of Commerce & Industry, 5 SCRA 645
(1962).
“There is thus a rejection of Gierke’s genossenchaft theory, the basic theme of which … ‘is the
reality of the group as a social and legal entity, independent of state recognition and concession.’ A
corporation as known to Philippine jurisprudence is a creature without any existence until it has
received the imprimatur of the state acting according to law. It is logically inconceivable therefore that
it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot
legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary,
whenever called upon to do so.” Tayag v. Benguet Consolidated, 26 SCRA 242 (1968).
All corporations, big or small, must abide by the provisions of the [Revised] Corporation Code;
even a simple family corporation cannot claim an exemption, nor can it have rules and practices
other than those established by law. Torres v. Court of Appeals, 278 SCRA 793 (1997).
“It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act,” and the procedure and
conditions provided under the law for the acquisition of such juridical personality must be complied
with. Although the statutory grant to an association of the powers to purchase, sell, lease and
encumber property can only be construed the grant of a juridical personality to such an association,”
nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a
finding that such association acquired a juridical personality, even when it adopts a constitution and
a set of bylaws. Int’l Express Travel & Tour Services v. Court of Appeals, 343 SCRA 674 (2000).

b. Theory of Enterprise Entity: BERLE, 47 COLUMBIA LAW REV. 343 (1947)

A corporation is but an association of individuals, allowed to transact business under a
corporate name with a distinct legal personality. In organizing itself as a collective body, the group or
its members waives no constitutional immunities and perquisites appropriate to such a body.
Philippine Stock Exchange (PSE) v. Court of Appeals, 281 SCRA 232 (1997).
Corporations are composed of natural persons and their separate corporate personality is no
shield for the commission of injustice and inequity, such as to avoid the execution of the property of a
sister company. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).

8. ADVANTAGEOUS ATTRIBUTES AND DISADVANTAGES OF THE CORPORATION

a. PRIMARY ATTRIBUTES OF THE CORPORATION:
(1) Strong/Solemn Juridical Personality (Sec. 2; Arts. 44[3], 45 and 46, Civil Code)
While not in fact a person, the corporation is treated through legal fiction as though it were
a person—an artificial person distinct and separate from its shareholders. Remo, Jr. v. IAC, 172
SCRA 405 (1989).
Since a corporation has a separate juridical personality, its shareholders are not co-owners
of corporate assets; the transfer of corporate assets to the shareholders by way of dissolution is
an act of conveyance and not a partition among co-owners. Stockholders of F. Guanzon and
Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
Execution pending appeal may be allowed when “the prevailing party is already of
advanced age and in danger of extinction,” but not in this case a corporation whose “juridical
entity’s existence cannot be likened to a natural person —its precarious financial condition is not
by itself a compelling circumstance warranting immediate execution and does not outweigh the
long-standing general policy of enforcing only final and executory judgment.” Manacop v.
Equitable PCIBank, 468 SCRA 256 (2005).

(2) Centralized Management (Sec. 22)

Under what is now Sec. 22 of RCC, save in those instances where the Code requires
shareholders’ approval for certain specific acts, it is the Board of Directors which exercises all
the corporate powers in a corporation. Great Asian Sales Center Corp. v. CA, 381 SCRA 557
(2002).7

(3) Limited Liability to Shareholders and Non-Liability to Directors/Trustees

and Officers for the Liabilities of the Corporation
An important advantage of the corporation is the limitation of an investor’s liability to the
amount of investment, which flows from the legal theory that a corporate entity is separate and
distinct from its shareholders. San Juan Structural and Steel, Inc. v. CA, 296 SCRA 631 (1998).
It is hornbook law that corporate personality is a shield against personal liability of its
officers—a corporate officer and his spouse cannot be made personally liable under a trust
receipt where he entered and signed the contract clearly in his official capacity. Consolidated
Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).8

7
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
8
Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224 , 672 SCRA 562 (2012); Gotesco
Properties v. Fajardo, 692 SCRA 319 (2013).
3
 Obligations incurred by the corporation through its directors and officers are its sole
liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77
(2001).
Where the creditor sues not only the company but also all shareholders to reach their
unpaid subscription which appear to be the only visible assets of the company, the controlling
doctrine is that “a stockholder is personally liable for the financial obligations of the corporation
to the extent of his unpaid subscription.” Halley v. Printwell, Inc. 649 SCRA 116 (2011).
By virtue of the principle separate juridical personality, the corporate debts or credits are
not the those of the shareholders. This protection from corporate liability for shareholders is the
principle of limited liability. PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013).9
Under the general doctrine of separate juridical personality, stockholders of a corporation
enjoy the principle of limited liability: the corporate debt is not the debt of the stockholder. Here,
it was the corporation who has been impleaded in the labor case, and any judgment on
employees’ claim must be pursued against the corporation even when it has been dissolved and
undergoing liquidation proceedings. Atienza v. Saluta, 904 SCRA 320 (2019).
It is basic in Corporation Law that a corporation is an artificial being invested by law with a
personality separate and distinct from its stockholders and from other corporations to which it
may be connected.  Inferred from a corporation's separate personality is that “consent by a
corporation through its representatives is not consent of the representative, personally.” The
corporate obligations, incurred through official acts of its representatives, are its own. Corollarily,
a stockholder, director, or representative does not become a party to a contract just because a
corporation executed a contract through that stockholder, director, or
representative. Spouses Fernandez v. Smart Communications, Inc., 909 SCRA 293 (2019).

(4) Free-Transferability of “Units of Ownership (Shares)” (Sec. 62)

It is the inherent right of the shareholder to dispose of his shares, which he owns as any
other property, anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).10
No corporation can restrict the right of a shareholder to transfer shares, but merely has
authority to adopt regulations on the formalities and procedure to be followed in effecting such
sale or transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).

b. Disadvantages of the Corporate Medium:

(1) Agency Costs: Abuse of Management; Breach of Trust
(2) Abuse of Limited Liability Feature
(3) High Cost of Maintenance of the Corporate Medium
(4) Double Taxation

9. COMPARED WITH OTHER BUSINESS MEDIA

a. Sole Proprietorships
A sole proprietorship, although regulated separately from its owner for purpose of taxation and
regulation, is not vested with juridical personality to file or defend an action. Excellent Quality
Apparel v. Win Multiple-Rich Builders, 578 SCRA 272 (2009).11
A sole proprietorship does not possess a juridical personality separate and distinct from that of
the owner of the enterprise. Thus, the owner has unlimited personal liability for all the debts and
obligations of the business, and it is against him that a decision for illegal dismissal is to be enforce.
ALPS Transportation v. Rodriguez, 698 SCRA 423 (2013).
Although a sole proprietorship uses a trade name to conduct its business: (a) it still has no
separate juridical personality by which to sue and be sued under such trade name, S.C. Megaworld
Constructions and Dev. Corp. v. Parada, 705 SCRA 584 (2013); NEA v. Maguindanao Electric
Cooperative, Inc., 861 SCRA 1 (2018); (b) it would be the owner of the sole proprietorhship who would
have standing to in any suit arising from the conduct of the business or arising from claims of employees,
Stanley Fine Furniture v. Gallano, 743 SCRA 306 (2014); and (c) it would not shield the owner thereof
from the debts and obligations of the business, Tan v. United Coconut Planters Bank, 910 SCRA 616
(2019).

b. Business Trusts (Art. 1442, Civil Code)

c. Partnerships (Arts. 1768 and 1775, Civil Code)
d. Joint Ventures

9
Aboitiz Equity Venture v. Chiongbian, 729 SCRA 580 (2014).
10
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).
11
;
4
 Joint venture is an association of persons or companies jointly undertaking some commercial
enterprise; generally, all contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy in connection therewith, and
agreement to share both in profits and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110
(1994).

e. Joint Accounts or Cuentas en Participacion (Arts. 239-243, Code of Commerce)

Cuentas en participacion is an accidental partnership constituted in a manner that its existence
was only known to those who had an interest in the same, there being no mutual agreement
between the partners, and without a corporate name indicating to the public in some way that there
were other people besides the one who ostensibly managed and conducted the business, governed
under Art. 239 of the Code of Commerce. Those who contract with the person under whose name
the business of such partnership of cuentas en participacion is conducted, shall have only a right of
action against such person and not against the other persons interested, and the latter, on the other
hand, shall have no right of action against third person who contracted with the manager unless such
manager formally transfers his right to them. Bourns v. Carman, 7 Phil. 117 (1906).
A joint account is when a third person is financially interested in the business of a merchant but
does not give rise to the creation of a juridical person. CIR v. Cojuangco, 109 Phil. 443 (1960).
f. Cooperatives (Art. 3, R.A. No. 6938)

10. x CLASSIFICATION OF CORPORATIONS

a. In Relation to the State:
(1) Private Corporations (Sec. 3, Act 1459)
(2) Public Corporations (LGUs) (Sec. 3, Act No. 1459)
(3) Quasi-Public Corporations
(4) GOVERNMENT-OWNED-OR-CONTROLLED CORPORATIONS (GOCCS) –SEE R.A. 10149;
Villanueva & Reyes, The Great Restructuring of the Public Corporate Sector, 59 ATENEO L.J. 41
(2014).
Local water districts created under P.D. 198 by the different local legislative bodies, with the
primary function to sell water to residents within their territory, under such schedules of rates and
charges as may be determined by their boards are considered quasi-public corporations, performing
public services and supplying public wants, Marilao Water Consumers Assn. v. IAC, 201 SCRA 437
(1991); they are clearly GOCCs, and their Board of Directors and personnel are government
employees subject to civil service laws and anti-graft laws. Feliciano v. COA, 419 SCRA 363 (2004).
A GOCC has a personality of its own, distinct and separate from that of the government, and the
intervention of the Executive Secretary does not change the independent existence of a government
entity as it deals with another government entity. PUP v. Court of Appeals, 368 SCRA 691 (2001).
The doctrine that employees of GOCCs, whether created by special law or formed as
subsidiaries under the general corporation law are governed by the Civil Service Law and not by the
Labor Code, has been supplanted by the 1987 Constitution which provides that GOCCs created by
special charter are subject the Civil Service Law. Therefore, GOCCs incorporated under the
[Revised] Corporation Code are governed by the Labor Code. PNOC-EDC. v. NLRC, 201 SCRA 487
(1991).1
NOW: The GOCC Governance Act (R.A. 10149), which governs compensation and position
classification systems within the GOCC Sector, does not distinguish between chartered and
nonchartered GOCCs, and its provisions apply equally to both. GSIS Family Bank Employees Union
v. Villanueva, 891 SCRA 206 (2019).
A GOCC is a government agency when it is organized as a stock or nonstock corporation and
complies with three requisites: (a) it has a capital stock, (b) the capital stock is divided into shares,
and (c) it is authorized to distribute dividends and allotments of surplus and profits to its
stockholders. As for non-stock corporations, they must have members and must not distribute ay
part of their income to said members. However, the is now formal administrative and statutory
recognition of “government instrumentalities with corporate powers/government corporate entities,”
which may not fall within the definition of stock and non-stock corporations but are government
instrumentalities that are vested with corporate powers. LRTA v. Quezon City, 922 SCRA 588 (2019).
Under the Constitution, the COA has audit jurisdiction over both GOCCs with original charters
(subject to COA pre-audit) and those without original charters (those organized under the
Corporation Code—subject to post-audit). Alejandrino v. COA, G.R. No. 245400, 12 November 2019.
Because the capital stock of BCDA does not qualify it to be either a stock or non-stock
corporation under the Revised Corporation Code, and what the charter of BCDA merely endows it
“with all or full corporate powers so that it can enjoy operation autonomy, it is an
Instrumentality under Section 2(10) of the Introductory Provisions of the Administrative Code, as well
as Government Instrumentality with Corporate Powers (GICP)/Government Corporate Entity

1
Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).
5
(GCE) under Section 3(n) of the GOCC Governance Act (R.A. 10149). Republic v. Heirs of Bernabe,
G.R. No. 237663, 6 October 2020.

(i) Charterred GOCCs (Created under Special Laws)

Although Boy Scouts of the Philippines does not receive any government financial subsidy, and
its funds and assets are not considered government in nature and not subject to COA audit, the fact
that it received a special charter, its governing board are appointed by the Government, and that its
purpose are of public character, for they pertain to the educational, civic and social development of
the youth which constitute a very substantial and important part of the nation, it is not a public
corporation in the same sense that local governments are public corporation since its does not
govern a portion of the state, but it also does not have proprietary functions in the same sense that
the functions or activities of GOCCs, is may still be considered as such, or under the 1987
Administrative Code as an instrumentality of the Government, and it employees are subject to the
Civil Service Law. Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
Although it has a special charter, the Chairman of the Philippine National Red Cross is not
appointed by the President. Although Camporendodo v. NLRC had ruled that PNRC is GOCC
because it is constituted under a special charter, it failed to consider the definition of a GOCC as
provided under Sec. 2(13) of the 1987 Administrative Code, which requires that a GOCC to be such
must be owned by the government, and in the case of a stock corporation, at least a majority of its
capital stock must be owned by the government. Liban v. Gordon, 593 SCRA 68 (2009).
When the law vests corporate powers to government instrumentality, it does not become
necessarily a corporation. A GOCC must be organized as a stock or nonstock corporation. The MIAA
is not a GOCC because it is not constituted of capital divided into shares, and neither is it a nonstock
corporation because it has no members. MIAA is a government instrumentality vested with corporate
powers to perform efficiently its government functions. MIAA v. Court of Appeals, 495 SCRA 591
(2006).
What is now Sec. 30 of the RCC is applicable to corporations which have been organized by
special charters since Sec. 4 thereof renders the provisions supplementary to all corporations,
including those with special or individual charters, such as cooperatives organized under P.D. 269.
Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
While public benefit and welfare may be attributable to the operation of the Bases Conversion
and Development Authority (BCDA), yet it is certain that the functions it performs are basically
proprietary in nature—the promotion of economic and social development and the country’s goal for
enhancement. Therefore, the rule that prescription does not run against the State will not apply to
BCDA—when title of the Republic has been divested, its grantees, although artificial bodies of its
own creation, are in the same category as ordinary persons. Shipside Inc. v. Court of Appeals, 352
SCRA 334 (2001).
In order to qualify as a GOCC, one must be organized either as a stock or nonstock corporation.
Section 3 of RCC defines a stock corporation as one whose “capital stock is divided into shares and
… authorized to distribute to the holders of such shares dividends.” Although BCDA has an
authorized capital of P100 Billion, however, it is not divided into shares; it has no voting shares; and
has no provision which authorizes the distribution of dividends and allotment of surplus and profits to
BCDA’s shareholders. It cannot qualify also as a nonstock corporation because its primary purpose
does not fall within the purposes enumerated under Section 88. Nonetheless, BCDA is a government
instrumentality vested with corporate powers. BCDA v. CIR, 867 SCRA 179 (2018).
(ii) Noncharterred GOCCs (Organized under the Revised Corporation Code)
Government’s majority shares do not make an entity a public corporation, for it remains a
“private corporation” having been organized under the Corporation Law. National Coal Co., v.
Collector of Internal Revenue, 46 Phil. 583 (1924).
Being a GOCC makes a private corporation liable for laws applicable to the Government and
subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952).
A private corporation is created by operation of law under the [Revised] Corporation Code while
a government corporation is normally created by special law referred to often as a charter. Bliss Dev.
Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).
Whether a corporation is GOCC or private in nature is simple: Is it created by its own charter for
the exercise of a public function, or by incorporation under the general corporation law? Those with
special charters, are government corporations subject to its provisions, and its employees are under
the jurisdiction of the Civil Service Commission and are compulsory members of the GSIS.
Camparedondo v. NLRC, 312 SCRA 47 (1999).
On the other hand, we have no doubt that SEC has jurisdiction over GOCCs established or
organized under the [Revised] Corporation Code. These GOCCs are regarded as private
corporations despite common misconceptions, inn spite of the fact that the government may own
the controlling shares in the corporation. PNCC v. Pabion, 320 SCRA 188 (1999).
That Corregidor Foundation, Inc. was organized as nonstock corporation under the old
Corporation Code, does not make it a private and non-government corporation. Firstly, R.A. 10143
includes within the statutory definition of GOCCs those that are nonstock corporations. Secondly, it is
immaterial whether a government corporation is private or public for purposes of exercising COA’s
6
 audit—so long as the government owns or controls the corporation, the COA may audit the
corporation’s accounts. Secondly, just because its employees are not under Civil Service jurisdiction,
does not exempt it from COA jurisdiction. Oriondo v. Commission on Audit, 903 SCRA 71 (2019).

b. As to Legal Status:
(1) De Jure Corporation
(2) De Facto Corporation (Sec. 19)
(3) Corporation by Estoppel (Sec. 20)

c. As to the Nature of Its Business Enterprise:

(1) Corporation Whose Business Only Affects Private Interests
(2) Corporation Whose Business Is Vested with Public Interests

d. As to Existence of Shares:
(1) Stock Corporation (Sec. 3)
(2) Nonstock Corporation (Secs. 3, 86 and 87)

e. As to Purpose of Incorporation:
(1) Business (For-Profit) Corporations
(2) Nonstock and Nonprofit Corporations: Charitable, Scientific or Vocational
Corporations
(3) Educational Corporations (Secs. 105; Sec. 25, B.P. Blg. 232)
(4) Religious Corporation (Sec. 107)
Decisions on purely ecclesiastical matters by proper church tribunals are conclusive upon
civil courts—a church member who is expelled or a priest or minister who is deprived of his
office by church authorities, is without remedy in the civil courts. Long v. Basa, 366 SCRA 113
(2001).
(5) Other Special Corporations (Sec. 4)

f. As to Number of Corporators:
(1) Aggregate Corporation—no limit of shareholders or members
(2) Close Corporation—not more than 20 shareholders of records (Sec. 95)
(3) One Person Corporation—available only for stock corporations (Secs. 10 and 116)
(4) Corporation Sole—religious corporation (Secs. 108)
A corporation sole has no nationality being an institution that existed prior to the Republic; but if
any nationality is to be accorded to it, it is to be judged from the nationality of the majority of the
faithfuls thereof. Roman Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of
Deeds of Davao City, 102 Phil. 596 (1957).
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982), and Republic v. Iglesia ni Cristo,
127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the
public domain because of the constitutional prohibition qualifying only individuals to acquire land and
the provision under the Public Land Act which applied only to Filipino citizens or natural persons, has
been expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986); Republic v. Iglesia ni
Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168 SCRA 165 (1988).

g. As to Place of Incorporation:
(1) Domestic Corporation

(2) Foreign Corporation (Sec. 140)

MODULE 2

NATURE AND ATTRIBUTES OF THE CORPORATION

The Role of the Corporation in Business and Society
(2ND WEEK: FEBRUARY 15 AND 17)

Asynchronous Study: Chapters 2 and 3 of TEXTBOOK

7
II. CORPORATION AS A CIVIL PERSON
1. CORPORATION AS A “PERSON BEFORE THE LAW ” (Arts. 44[3], 45 and 46, Civil Code)
a. Entitled to Invoke the Due Process and Equal Protection Clauses
The due process clause has universal application and covers private corporations insofar as
their properties are concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136 (1920).2
The failure to formally implied a corporation in a suit for recovery of ill-gotten wealth against its
shareholders cannot bind the corporation itself; otherwise, the corporation’s fundamental right to due
process will be violated. COCOFED v. Republic, 805 SCRA 1 (2016).3

b. Protected under the Unreasonable Searches and Seizure Clause

A corporation is protected by the constitutional guarantee against unreasonable searches and
seizures, but its officers have no cause of action to assail the legality of the seizures, regardless of
the number of shares held by each in said corporation because the corporation has a personality
distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967).
A corporation is but an association of individuals under an assumed name, with a distinct legal
entity. In organizing itself as a collective it waives no constitutional immunities appropriate for such
body. Its property cannot be taken without compensation; it can only be proceeded against by due
process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37
SCRA 823 (1971).

c. Not Entitled to Invoke the Right Against Self Incrimination

“It is elementary that the right against self-incrimination has no application to juridical persons.”
Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987).
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, a corporation, vested with special privileges and franchises by the State, may not
refuse to comply when charged with an abuse of such privilege. Hale v. Henkel, 201 U.S. 43 (1906).4

2. Corporation Can Engage in Practice of Profession When Authorized by Law (Sec. 10)
Corporations cannot engage in the practice of a profession since they lack the moral and technical
competence required by the PRC. ULEP v. The Legal Clinic, 223 SCRA 378 (1993).
A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in
the practice of optometry. Samahan ng Optometrists v. Acebedo Int’l Corp., 270 SCRA 298 (1997).5
SEE: Section 37 of the ARCHITECTURE ACT OF 2004 (R.A. 9266), allows the registration with the SEC of
“Architectural professional corporations”.

3. Generally, Corporations Not Entitled to Moral Damages

Minority School of Thought: Being an artificial person, a corporation cannot experience physical
sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation
which are bases for moral damages under Art. 2217 of Civil Code. However, a corporation may have a
good reputation which, if besmirched, may be a ground for the award of moral damages . Mambulao
Lumber Co. v. PNB, 22 SCRA 359 (1968); People v. Manero, 218 SCRA 85 (1993); Asset Privatization
Trust v. Court of Appeals, 300 SCRA 579 (1998); San Fernando Regala Trading v. Cargill Philippines,
707 SCRA 187 (2013); Chevron Philippines, Inc. v. Mendoza, 905 SCRA 67 (2019).
BUT: The statements in Manero and Mambulao Lumber that a corporation may recover moral damages
if it “has a good reputation that is debased, resulting in social humiliation” are obiter dictum. Recovery of
a corporation would be under Articles 19, 20 and 21 of the Civil Code, which requires a clear proof of
malice or bad faith. ABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).
NONETHELESS: A corporation’s claim for moral damages arising from libel falls under Article 2219(7) of
the Civil Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or
any other form of defamation, and does not qualify whether the plaintiff is a natural or juridical person. A
juridical person can validly complain for libel or any other form of defamation and claim for moral
damages. Filipinas Broadcasting Network v. Ago Medical and Educational Center, 448 SCRA 413
(2005).
Majority School of Thought: A corporation, being an artificial person, has no feelings, emotions
nor senses; it cannot experience physical suffering and mental anguish. Mental suffering can be
experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life—
all of which cannot be suffered by an artificial person. MERALCO. v. Nordec Philippines, 861 SCRA 515
(2018).6

2
White Light Corp. v. City of Manila, 576 SCRA 416 (2009).
3
Citing earlier rulings in PCGG v. Sandiganbayan, 290 SCRA 639 (1998); Palm Holding Co. v. Sandiganbayan, 732 SCRA 156 (2014.
4
Wilson v. United States, 221 U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).
5
Alfafara v. Acebedo Optical Co., 381 SCRA 293 (2002).
6
Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993); LBC Express, Inc. v. CA, 236 SCRA 602 (1994); Acme Shoe, Rubber & Plastic Corp. v.
8
4. Corporations Can Be Held Liable for Torts/Quasi-Delicts
A corporation is civilly liable for torts in the same manner as natural persons because the rules
governing the liability of a principal for a tort committed by an agent are the same whether the principal
be a natural person or a corporation, and whether the agent be a natural or artificial person. Philippine
National Bank v. Court of Appeals, 83 SCRA 237 (1978).
“Corporate tort” consists in the violation of a right given or the omission of a duty imposed by law; a
breach of a legal duty. The failure of the corporate employer to comply with the duty under the Labor
Code to grant separation pay to employees in case of cessation of operations constitutes tort and its
shareholder who was actively engaged in the management or operation of the business should be held
personally liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).

5. Corporate Criminal Liability

a. General Rule: No Criminal Suit Can Lie Against a Corporation

(1) Prior to the RCC: Philippine courts have no common law jurisdiction. Consequently,
corporations cannot be held criminally liable under Philippine jurisdiction since at this time there
is no law relating to the practice and procedure in criminal actions whereby a corporation may
be brought to court to be proceeded against criminally. West Coast Life Ins. Co. v. Hurd, 27
Phil. 401 (1914).
Prior to the Trust Receipts Law, a corporate officer who signs the trust receipt could not be
held criminally liable for estafa punished under the Revised Penal Code, for his criminal liability
could not be proven beyond reasonable doubt under the doctrine that “the corporation was [not]
directly required by law to do an act in a given manner, and the same law makes the person
who fails to perform the act in the prescribed manner expressly liable criminally.” Sia v. CA, 121
SCRA 655 (1983).
Now, the Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation, hence, the law makes the officers or employees responsible for
the offense liable to suffer the penalty of imprisonment. Ong v. Court of Appeals, 401 SCRA 647
(2003).7
The Trust Receipts Law specifically makes the officers, employees or other officers or
persons responsible for the offense, without prejudice to the civil liabilities of such corporation
and/or board of directors, officers, or other officials or employees responsible for the offense.
The rationale is that such officers or employees are vested with the authority and responsibility
to devise means necessary to ensure compliance with the law and, if they fail to do so, are held
criminally accountable. A corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment; however, it may be charged and prosecuted
for a crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined.
Ching v. Secretary of Justice, 481 SCRA 602 (2006).

(2) “Corporate Criminal” under the Revised Corporation Code:

(1) SEC. 165: A corporation conducts its business through fraud.

(2) SEC. 166: A corporation used for committing or concealing fraudulent, graft
and corrupt practices.
(3) SEC. 167: A corporation appoints an intermediary who engages in graft and
corrupt practices.
(4) SEC. 170: A corporation that violates any provision of the RCC not specifically
penalized.

b. Shareholders Per Se Cannot Be Held Liable for a Corporate Criminal Act: Shareholders,
being “owners” of the corporation or being basically investors in the corporation, and with the
management of its business generally vested in the Board of Directors, cannot be held liable for the
criminal offense committed on behalf of the corporation, unless they personally took part in the
same. Espiritu v. Petron Corp., 605 SCRA 245 (2009).

c. Directors/Trustees Per Se Not Personally Liable for a Corporate Criminal Act (Sec. 171):
A criminal statute that forbids the corporation from doing an act extends to the Board, and to each
director individually, through which the corporation acts, and upon whom shall befall the criminal
penalty for violation thereof. People v. Concepcion, 43 Phil. 653; 44 Phil. 129 (1922).
OUTLIER: Veritably, Board members, being in direct control and supervision in the management and
conduct of the corporate affairs, must have known or were aware that the corporation is engaged in
trademark infringement and unfair competition. The existence of the corporate entity does not shield

CA, 260 SCRA 714 (1996); Solid Homes v. CA 275 SCRA 267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001); Flight Attendants and
Stewards Assn. of the Phils. v. PAL, 559 SCRA 252 (2008); Employees Union of Bayer Phils. v. Bayer Philippines, Inc., 636 SCRA 473 (2010).
7
Crisologo v. People, 686 SCRA 782 (2012).
9
 from prosecution the corporate agent who knowingly and intentionally caused the corporation to
commit a crime. Republic Gas Corp. v. Petron Corp., 698 SCRA 666 (2013).
GENERAL RULE: The Board being generally a policy-making body, directors as such cannot be held
liable under a criminal statute making those in charge of the management of the corporation liable for
the criminal acts done in pursuit of corporate operations. Even if the corporate powers of a
corporation are reposed in the Board under what is now Sec. 22 of RCC, it is of common knowledge
and practice that the Board is not directly engaged or charged with the running of the recurring
business affairs of the corporation. The members of the Board generally do not concern themselves
with the day-to-day affairs of the corporation, except those corporate officers who are charged with
the running of the business of the corporation and are concomitantly members of the Board, like the
President. Federated Dealers Assn. v. Del Rosario, 808 SCRA 272 (2016).8
A corporation’s personality is separate from its officers, directors, and shareholders. To be held
criminally liable for the acts of a corporation, there must be a showing that its officers, directors, and
shareholders actively participated in or had the power to prevent the wrongful act. Here, there was
no allegation of the specific acts of the corporate officers for which they could be indicted for
violations of the SRC and the Revised Penal Code. SEC v. Price Richardson Corp., 832 SCRA
560 (2017).

d. General Rule: Acting Directors, Officers, Shareholders or Employees Shall Be Criminally

Liable for the Criminal Corporate Act
A corporation can act only through its officers and agents, and where the business itself
involves a violation of the law, the correct rule is that all who participate in it are liable. Thus, when
the manager of a corporation made a false tax return of the total amount of sales made by said
corporation in violation of law, it is such manager, as the author of the illegal act, who must
necessarily answer for the criminal penalties for its consequences. People v. Tan Boon Kong, 54
Phil. 607 (1930).
Although all corporate powers are vested in the Board of Directors, it does not mean that the
officers other than directors cannot be made criminally liable for their criminal acts if it can be proven
that they participated therein. Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005).
Apart from its sweeping allegation petitioner failed to establish the particular role, or actual
participation, of directors in the criminal act; neither was it shown that they assented to its
commission. Only officers shown to have participated in the alleged anomalous acts may be held
criminally liable. Cruzvale, Inc. v. Eduque, 589 SCRA 534 (2009).
Rule on Employees to Be Held Criminally Liable: The existence of the corporate entity does not
shield from prosecution the corporate agent who knowingly and intentionally causes the corporation
to commit a crime. The corporation obviously can act only by and through its human agents, and it is
their conduct which the law must deter. The employee of a corporation engaged in unlawful business
naturally aids and abets in the carrying on of such business and will be prosecuted as principal if,
with knowledge of the business, its purpose and effect, he consciously contributes his efforts to its
conduct and promotion, however slight his contribution may be. Where it is shown that the employee
was merely acting under the direction of his superiors and was unaware that his acts constituted a
crime, he may not be held criminally liable for an act done for and in behalf of his employer.
People v. Chowdury, 325 SCRA 572 (2000).

e. Civil Liability Emanating from the Criminal for the Account of the Corporation:
Although a criminal case can only be filed against the officers and not against the corporation
itself, it does not follow that the corporation cannot be a real-party-in-interest for the purpose of
bringing a civil action for malicious prosecution for the damages incurred by the corporation for the
criminal proceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA 459 (1999).
It is hornbook law that corporate personality is a shield against personal liability of its officers—a
corporate officer and his spouse cannot be made personally (civilly) liable under a trust receipt where
he entered and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp.
v. Court of Appeals, 356 SCRA 671 (2001).
Corporate officers who signed a trust receipt in behalf of the corporation cannot be held
personally liable therefore when there is no indication therein that they guaranteed personally the
payment of the corporation’s debt: “Debts incurred by directors, officers and employees acting as
such corporate agents are not theirs but the direct liability of the corporation they represent. As an
exception, directors or officers are personally liable for the corporation’s debt if they so contractually
agree or stipulate.” Tupaz IV v. Court of Appeals, 475 SCRA 398 (2005).
Under SSS Law, even a corporate employer can be held liable for the non-remittance of SSS
contributions; but it is the head, directors or officers responsible for the non-remittance who shall
suffer the personal criminal liability. Although a corporation is invested with a personality separate
from that of the persons composing it, the corporate veil is pierced when a director, trustee or officer
is made personally liable by specific provision of law. Thus, a corporation cannot invoke its separate

8
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); Ty v NBI Supervising Agent de Jemil, 638 SCRA 671 (2010)
10
 judicial entity to escape its liability for non-payment of SSS contributions. Ambassador Hotel, Inc.
v. Social Security System, 827 SCRA 641 (2017).
As a general rule, when an officer issues a worthless check in the corporation’s name, he or she
may be held criminally liable for violating the Bouncing Checks Law (B.P. 22);   however, such
officer can only be held civilly liable when he or she is convicted, and that conversely, once acquitted
of the offense of violating B.P. 22, an officer is discharged of any civil liability arising from the
issuance of the worthless check in the name of the corporation he or she represents. In the case
however, the officer was made civilly liable on the bounced checks in spite of his acquittal because
he had voluntarily bound himself to the personally liable for the amounts covered by the checks.
Ongkingco v. Sugiyama, 920 SCRA 110 (2019).

6. CORPORATE NATIONALITY
a. Primary “Place of Incorporation Test” (Sec. 140): The corporation is a national of the country
under whose laws it is organized or incorporated.

b. Ancillary “Control Test: ” In cases involving properties, business or industries reserved for
Filipinos, in addition to the place of incorporation test, the nationality of a corporation is determined
by the nationality of the “controlling shareholders”.

c. Subsets of the Control Test:

(1) Original DOJ-SEC Grandfather Rule: For purposes of determining the nationality of
investment holdings in an operating company, shares belong to corporations at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality; but
if the percentage of Filipino ownership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. 9
(2) Foreign Investment Act (FIA) Test of “Philippine National” : Section 3 of R.A. 7042
considers for purpose of investment a “Philippine National ” as a corporation organized under
the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to
vote is owned and held by Filipino citizens, or a trustee of funds for pension or other employee
retirement/separation benefits, where the trustee is a Philippine National and at least 60% of the
fund will accrue to the benefit of Philippine nationals. 10
(3) New SEC Control Test : The Constitution “provides for the Filipinization of public utilities by
requiring that any form of authorization for the operation of public utilities should be granted only
to ‘citizens of the Philippines or to corporation or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such citizens.’ The provision
is [an express] recognition of the sensitive and vital position of public utilities both in the
national economy and for national security.” The evident purpose of the citizenship
requirement is to prevent aliens from assuming control of public utilities, which may be inimical
to the national interest. The term “capital” in Sec. 11, Art. XII of the Constitution should (a) the
control test that covers only shares entitled to vote in the election of directors, and (b) the
beneficial interest test that shall apply to each and every class of shares, voting and non-voting.
Gamboa v. Teves, 652 SCRA 690 (2011); expanded in 682 SCRA 397 (2012).
As a result of the Gamboa rulings, SEC Memorandum Circular No. 8, s. 2013, was
issued and provides that: All covered corporations shall, at all times, observe the constitutional
or statutory ownership requirement in that “the required percentage of Filipino ownership shall
be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.” Roy III v. Herbosa, 810 SCRA 1 (2016).
The definition of “beneficial owner or beneficial ownership in the SRC-IRR, which is in
consonance with the concept of “full beneficial ownership” in the FIA-IRR, is relevant is resoling
only the question of who is the beneficial owner or has beneficial ownership of each “specific
stock” of the public utility whose stocks are under review. If the Filipino has the voting power of
the “specific stock”, i.e., he can vote the stock or direct another to vote for him, or the Filipino
has the investment power over the “specific stock”, i.e., he can dispose of that “specific stock”
or direct another to vote or dispose it for him, then such Filipino is the “beneficial owner” of that
“specific stock.” Being considered Filipino, that “specific stock” is them to be counted as part of
the 60% Filipino ownership requirement under the Constitution. The right to the dividends, jus
fruendi—a right emanating from ownership of that “specific stock” necessary accrues to its
Filipino “beneficial owner.” Roy III v. Herbosa, 823 SCRA 133 (2017).
(4) Beneficial Test Through “Corporate Layering”: The grandfather rule can only extend to
such levels of corporate layering as to those who have actual control of the affairs of the
corporation. Palting v. San Jose Petroleum Inc., 18 SCRA 924 (1966).
Although the control test is the prevailing mode of determining whether a corporation is a
Filipino corporation entitled under Sec. 2, Art. II of 1987 Constitution to undertake the
9
DOJ Opinion No. 18, s.1989, 19 Jan. 1989; SEC Opinion, 6 Nov. 1989, XXIV SEC QUARTERLY BULLETIN (No. 1- March 1990); SEC Opinion, 14 Dec.
1989, XXIV SEC QUARTERLY BULLETIN (No. 2 -June 1990).
10
Affirmed in Unchuan v. Lozada, 585 SCRA 421 (2009).
11
 exploration, development and utilization of the natural resources of the Philippines, when there
is doubt in the minds of the courts, based on the attendant facts and circumstances of the case,
in the 60%-40% Filipino-foreign equity of the corporation, they may apply the grandfather rule.
Narra Nickel Mining Corp. v. Redmont Consolidated Mines, 722 SCRA 382 (2014).
The “grandfather rule” does not eschew, but in fact supplements the “control test”, as the
latter implements Filipinization provisions of the Constitution. There should be a distinction
between the “beneficial ownership” test from the “control test”. As further defined by Dean Cesar
Villanueva, the grandfather rule is “the method by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized areas of activities, provided for
under the Constitution and other nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder.” Narra Nickel Mining
Corp. v. Redmont Consolidated Mines Corp., (Resolution), 748 SCRA 455 (2015), citing
VILLANUEVA, PHILIPPINE CORPORATE LAW (2011 ed.).

d. APPLICATIONS OF THE CONTROL TEST

(1) In Times of War – Domestic corporations under the control of nationals of the enemy country
are deemed foreign enemy corporations. Haw Pia v. China Banking Corp., 80 Phil. 604 (1948).11
(2) Exploitation of Natural Resources (Sec. 2, Art. XII, 1987 Constitution)
(3) Ownership of Private Land (Sec. 7, Art. XII, 1987 Constitution)
The donation of land to an unincorporated religious organization, whose trustees are foreigners,
would violate constitutional prohibition and the refusal would not be in violation of the freedom of
religion clause. The fact that the religious association “has no capital stock does not suffice to
escape the constitutional inhibition, since it is admitted that its members are of foreign nationality …
and the spirit of the Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens.” Register of Deeds of Rizal v. Ung Sui Si
Temple, 97 Phil. 58 (1955).
BUT: A corporation sole being a creature prior to the constitution, has no nationality. If a nationality
is sought to be determined, the same depends on the nationality of the majority of the lay members
and not on the nationality of the sole corporator. Roman Catholic Apostolic Administrator of
Davao, Inc. v. LRC and the Register of Deeds of Davao, 102 Phil. 596 (1957).
If foreign equity in a landholding corporation exceeds 40%, it is not the foreign shareholders’
ownership of the shares which is adversely affected by the capacity of the corporation to own land—
that is, the corporation becomes disqualified to own land. The prohibition in the Constitution applies
only to ownership of land; it does not extend to immovable or real property as defined under Article
415 of the Civil Code. Otherwise, we would have a strange situation where the ownership of
immovable property such as trees, plants and growing fruit attached to the land would be limited to
Filipinos and Filipino corporations only. J.G. Summit Holdings, Inc. v. Court of Appeals, 450 SCRA
169 (2005).
Radstock, a foreign corporation with unknown owners whose nationalities are also unknown, is
not qualified to own land in the Philippines, and therefore also disqualified to own the rights to
ownership of lands in the Philippines—it is basic that an assignor or seller cannot assign or sell
something he does not own at the time the ownership, or the rights to the ownership, are to be
transferred to the assignee or buyer. The assignment by PNCC of the real properties to a nominee
to be designated by Radstock is a circumvention of the constitutional prohibition against a private
foreign corporation owning lands in the Philippines. Strategic Alliance Dev. Corp. v. Radstock
Securities Ltd., 607 SCRA 413 (2009).
The nationality of a nonstock corporation in relation to land acquisition is computed not on
membership contribution but that the 60-40 minimum Filipino requirement applies to both the
nationality of the members, and their voting powers. SEC Opinion No. 16-15, 1 June 2016.
(4) Public Utilities (Sec. 11, Art. XII, Constitution)
The nationality test for public utilities applies not at the time of the grant of the primary franchise
that makes a corporation a juridical person, but at the grant of the secondary franchise that
authorizes the corporation to engage in a nationalized industry. People v. Quasha, 93 Phil. 333
(1953).
The primary franchise, that is, the right to exist as such, is vested in the shareholders or
members and not in the corporation itself and cannot be conveyed in the absence of a legislative
authority to do so. The secondary franchises are vested in the corporation and may ordinarily be
conveyed or mortgaged under a general power granted to a corporation to dispose of its property,
except such special or secondary franchises as are charged with a public use. J.R.S. Business
Corp. v. Imperial Insurance, 11 SCRA 634 (1964).
The Constitution requires a franchise for operating a public utility; however, it does not require a
franchise before one can own the facilities needed to operate a public utility so long as it does not
11
Filipinas Compania de Seguros v. Christern, Huenefeld & Co., 89 Phil. 54 (1951); Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952).
12
 operate them to serve the public. There is a clear distinction between “operation” of a public utility
and ownership of the facilities used to serve the public. Tatad v. Garcia, Jr., 243 SCRA 436 (1995).
(5) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)
(6) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution; P.D. 36, amended by P.D.s 191 and
197; Sec. 2, P.D. 576; DOJ Opinion 163, s.1973; DOJ Opinion No. 120, s.1982; SEC Opinion,
24 March 1983; SEC Opinion, 15 July 1991, XXV SEC QUARTERLY BULLETIN No. 4, p. 31.)
a. Cable Industry: “Cable TV operations shall be governed by E.O. No. 205 (s.1987). If CATV
operators offer public telecommunications services, they shall be treated just like a public
telecommunications entity.” NTC Memo Circular No. 8-9-95.
Cable TV is “a form of mass media which must, therefore, be owned and managed by
Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed
by Filipino citizens pursuant to the mandate of the Constitution.” DOJ Opinion No. 95, s.
1999, citing Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F.2d 70.

e. NEDA May Set Stock Ownership Limitations in Corporations Vested with Public
Interests (Sec. 176)

7. THE GOOD CORPORATE CITIZEN

a. Corporations Vested With Public Interest (Sec. 22)

The banking system is an indispensable institution in the modern world and plays a vital role in
the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and
saving of money or as active instruments of business and commerce, banks have become
ubiquitous presence among the people, who have come to regard them with respect and even
gratitude and, most of all, confidence. The point is that as a business affected with public interest
and because of the nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In
the case at bar, it is obvious that the respondent bank was remiss in that duty and violated that
relationship. What is especially deplorable is, having been informed of its error in not crediting the
deposit in question to the petitioner, the respondent bank did not immediately correct it but did so
only one week later or twenty-three days after the deposit was made. Simex International, Inc. v.
CA, 183 SCRA 360 (1990).
Since the banking business is impressed with public interest, of paramount importance is the
trust and confidence of the public in general. The diligence required of banks is more than that of a
good father of a family, but the highest degree of diligence, and high standards of integrity and
performance are even required. The nature of bank’s functions require it “to treat its depositors’
accounts with meticulous care, always having in mind the fiduciary nature of their relationship.” 12
Here, even if withdrawals were effected before passage of GBL, nonetheless, its Sec. 2 categorical
declaration of the “fiduciary nature of banking that requires high standards of integrity and
performance,” is only a statutory affirmation of Supreme Court decisions in esse at time of such
withdrawals. PNB v. Pike, 470 SCRA 328 (2005).13
While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes
doctors, surgeons and medical practitioners in the conduct of its business of facilitating medical and
surgical treatment. Within that reality, three legal relationships crisscross: (1) between the
hospital and the doctor practicing within its premises; (2) between the hospital and the patient
being treated or examined within its premises; and (3) between the patient and the doctor.
Regardless of its relationship with the doctor, the hospital may be held directly liable to the patient for
its own negligence or failure to follow established standard of conduct to which it should conform as
a corporation. Professional Services, Inc. v. Court of Appeals, 611 SCRA 282 (2010).
Meralco’s argument that the degree of diligence imposed upon it was beyond the
prevailing law which only required it to test metering devices once every two (2) years and to
be penalized for taking four (4) months to rectify and repair the defective meter, was
tantamount to judicial legislation is without merit. Distribution utilities are public utilities
vested with public interest, and thus, are held to a higher degree of diligence. Should a
distribution utility not exercise the standard of care required of it due to its negligence in the
inspection and repair of its apparatus, then it can no longer recover the amounts of allegedly
used but uncharged electricity. “To summarize, it is worth emphasizing that it is not our
intention to impede or diminish the business viability of MERALCO, or any public utility
company for that matter. On the contrary, we would like to stress that, being a public utility
vested with vital public interest, MERALCO is impressed with certain obligations towards its
customers and any omission on its part to perform such duties would be prejudicial to its
12

Philippine Bank of Commerce v. Court of Appeals [“CA”], 269 SCRA 695 (1997); Bank of P.I. v. CA, 326 SCRA 641 (2000); Bank of P.I. v. Casa
Montessori Internationale, 430 SCRA 261 (2004); Bank of P.I. v. Lifetime Marketing Corp., 555 SCRA 373 (2008); Philippine Savings Bank v. Chowking
Food Corp., 557 SCRA 318 (2008); Bank of America v. Philippine Racing Club, 594 SCRA 301 (20019); Metropolitan Bank v. Mariñas, 625 SCRA 511
(2011).
13
Associated Bank v. Tan, 446 SCRA 282 (2004); Sandejar v. Ignacio, 541 SCRA 61 (2007); Bank of P.I. v. Lifetime Marketing Corp., 555 SCRA 373
(2008); PNB v. Velasco, 564 SCRA 512 (2008); Security Bank v. RCBC, 577 SCRA 407 (2009); Equitable PCI Bank v. Tan, 628 SCRA 346 (2010);
Citibank v. Dinopol, 635 SCRA 649 (2010); PCI Bank v. Balmaceda, 658 SCRA 33 (2011); Metropolitan Bank v. Tobias III, 664 SCRA 165 (2012);
Metropolitan Bank v. Centro Dev. Corp., 672 SCRA 325 (2012); Comsaving Bank v. Capistrano, 704 SCRA 72 (2013).
13
 interest. For in the final analysis, the bottom line is that those who do not exercise such
prudence in the discharge of their duties shall be made to bear the consequences of such
oversight” citing Ridjo Tape & Chemical Corp. v. Court of Appeals, 350 Phil. 184 (1998).
Manila Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018).

MODULE 3

ATTRIBUTE OF “SEPARATE JURIDICAL PERSONALITY”

The Corporation as Primarily a Medium for Commercial Pursuits
(3RD WEEK: FEBRUARY 22 AND 24)

Asynchronous Study: Chapter 4 of TEXTBOOK

III. SEPARATE JURIDICAL PERSONALITY AND THE

DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION
1. MAIN DOCTRINE: A Corporation Has a Personality Separate and Distinct from Its Directors/
Trustees, Officers, Its Shareholders/Members (Sec. 2; Art. 44, Civil Code)
A corporation is a juridical entity with a legal personality separate and distinct from the people
comprising it, hence:
 Assets of the shareholders may not be considered as assets of the corporation, and vice-
versa. Situs Dev. Corp. v. Asiatrust Bank, 677 SCRA 495 (2012).
 A corporation may not be made to answer for personal acts and liabilities of its
shareholders or those of legal entities to which it may be connected, and vice versa.
General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).14

Such legal fiction is only for purposes of convenience and to subserve the ends of justice—it
cannot be extended to a point beyond its reason and policy. Where, as in this case, the corporate fiction
was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the
legitimate issues, it would be discarded and the two corporations would be merged as one, the first
being merely considered as the instrumentality, agency, conduit or adjunct of the other. Azcor
Manufacturing Inc. v. NLRC, 303 SCRA 26 (1999).15

a. DOCTRINES EMANATING FROM THE PRIMARY ATTRIBUTE OF SEPARATE JURIDICAL PERSONALITY:

(1) Doctrine of Limited Liability: Shareholders/Members Cannot Be Held Liable for the
Liabilities of the Corporation, Except to the Extent of
Their Investments or Promised Investments.
(2) Agency Law Principle: Directors/Trustees, Officers and Other Corporate Agents Do
Not Become Personally Liable for Corporate Contracts That
They Enter in Behalf of the Corporation.
Corporate debt or credit is not the debt or credit of the shareholder nor is the shareholder’s debt
or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989).
Debts incurred by directors, officers, and employees acting as corporate agents are not their
direct liability but of the corporation they represent. Crisologo v. People, 686 SCRA 782 (2012).16
The obligations of a shareholder in one corporation cannot be offset from the obligation of the
shareholder in a second corporation since the corporation has a separate juridical personality. CKH
Industrial and Dev. Corp v. Court of Appeals, 272 SCRA 333 (1997).
A consequence of a corporation’s separate personality is that its consent made through its
representatives is not consent of the representative, personally. Its obligations, incurred through
official acts of its representatives, are its own. A director or officer does not become a party to a
contract just because a corporation executed a contract through such individual. Hence, a
corporation’s representatives are generally not personally bound by the terms of the contract
executed in behalf of the corporation. Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014).17

14
McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA
598 (2009); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Saverio v. Puyat, 710 SCRA 747 (2013).
15
Martinez v. CA 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts v. BF Corp., 556 SCRA
25 (2008); Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
16
Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519 (2013); Land Bank of the Philippines v. Belle Corp., 769 SCRA 46 (2015); Ferro
Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016).
17
Land Bank of the Philippines v. Belle Corp., 769 SCRA 46 (2015).
14
 b. APPLICATION OF THE RULES EMANATING FROM THE PRIMARY DOCTRINE:

(1) Majority or Interlocking Equity Ownership, Directorship, or Officership:

Mere ownership by a single shareholder or by another corporation of all or nearly all of the
capital stocks is not, by itself, a sufficient ground for disregarding the separate corporate
personality. Other circumstances showing that the corporation is being used to commit fraud or
proof of existence of absolute control over the corporation have to be proven. In short, before
the corporate fiction can be disregarded, alter-ego elements must first be sufficiently
established. Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).18
Ownership of a majority of the capital stock and the fact that majority of directors of a
corporation are the directors of another corporation creates no employer-employee relationship
with the latter’s employees. DBP v. NLRC, 186 SCRA 841 (1990);19 nor would it justify the tacking
of the years of services with both corporations to determine employment rights and benefits.
Freyssinet Filipinas Corp. v. Lapuz, 897 SCRA 265 (2019).
The majority shareholder cannot be held personally liable for the attorney’s fees charged
by a lawyer for representing the corporation. Laperal Dev. Corp. v. CA, 223 SCRA 261 (1993).
Having interlocking directors, corporate officers and shareholders is not enough justification
to pierce the veil of corporate fiction in the absence of fraud or other public policy
considerations. Velarde v. Lopez, 419 SCRA 422 (2004).20

(2) On Being a Corporate Officer and Shareholder:

Being an officer or shareholder of a corporation does not by itself make one’s property also
that of the corporation, and vice-versa, for they are separate entities, and that shareholders who
are officers are in no legal sense the owners of corporate property which is owned by the
corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991).21
The mere fact that one is President does not render the property he owns the property of
the corporation, since the president, as an individual, and the corporation are separate entities.
Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA 279 (2001).
The President of the corporation which is liable for the accident caused by its truck driver
cannot be held solidarily liable for the judgment obligation arising from quasi-delict, since the
fact alone of being President is not sufficient to hold him solidarily liable for the liabilities
adjudged against the corporation. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273
(2004).
When the compulsory counterclaim filed against corporate officers for their alleged
fraudulent act indicate that such corporate officers are indispensable parties in the litigation, the
original inclusion of the corporation in the suit does not thereby allow the denial of a specific
counterclaim being filed to make the corporate officers personally liable. Lafarge Cement Phils.,
Inc. v. Continental Cement Corp., 443 SCRA 522 (2004).
(3) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation cannot be
extended to, nor be enjoyed even by the controlling shareholders. Manila Gas Corp. v. CIR, 62
Phil. 895 (1936).

(4) On Suits For, or Against, the Corporation:

A corporation has no legal standing to file a suit for recovery of certain parcels of land
owned by its members in their individual capacity, even when the corporation is organized for
the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 (1976).
Shareholders have no standing to intervene in a collection case covering the loans of the
corporation since shareholders’ interest in corporate property is purely inchoate. Saw v. CA, 195
SCRA 740 (1991); and vice-versa. Francisco Motors Corp. v. CA, 309 SCRA 72 (1999).
A corporate defendant against whom a writ of possession has been issued, cannot use the
fact that it has obtained controlling equities in the corporate plaintiffs to suspend enforcement of
the writ, for they are separate juridical persons, and thus their separate business and proprietary
interests remain. Silverio, Jr. v. Filipino Business Consultants, Inc., 466 SCRA 584 (2005).
Shareholders have no standing to recover damages arising from the wrongful attachment
of the corporation’s assets. Stronghold Insurance Co. v. Cuenca, 692 SCRA 473 (2013).

18
Sunio v. NLRC, 127 SCRA 390 (1984); Asionics Phils., Inc. v. NLRC, 290 SCRA 164 (1998); Francisco v. Mejia, 362 SCRA 738 (2001); Matutina
Integrated Wood Products v. CA, 263 SCRA 490 (1996); Manila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); Secosa v. Heirs of Erwin Suarez Fancisco, 433
SCRA 273 (2004); EDSA Shangri-La Hotel v. BF Corp., 556 SCRA 25 (2008); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598
(2009); Situs Dev. Corp. v. Asiatrust Bank, 677 SCRA 495 (2012); Saverio v. Puyat, 710 SCRA 747 (2013); Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528
(2016); Mayor v. Tiu, 810 SCRA 256 (2016); Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018).
19
Suldao v. Cimech System Construction, Inc., 506 SCRA 256 (2006); Union Bank of the Phils. v. Ong, 491 SCRA 581 (2006); Shrimp Specialists, Inc.
v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Hacienda Luisita, Inc. v. Presidential Agrarian Reform Council, 660 SCRA 525 (2011).
20
Sesbreno v. CA, 222 SCRA 466 (1993); “G” Holdings, Inc. v. National Mines and Allied Workers Union Local, 604 SCRA 73 (2010); Malixi v. Mexicali
Phils., Inc., 792 SCRA 586 (2016); Malixi v. Mexicali Philippines, Inc., 792 SCRA 586 (2016); Zaragoza v. Tan, 847 SCRA 437 (2017).
21
Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Saverio v.
Puyat, 710 SCRA 747 (2013).
15
2. COMMON LAW DOCTRINE OF “PIERCING THE VEIL OF CORPORATE FICTION”
a. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
The notion of corporate entity will be pierced or disregarded and the individuals composing it will
be treated as identical, if the corporate entity is being used as a cloak or cover for fraud or illegality;
as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit
of the shareholders. Gochan v. Young, 354 SCRA 207 (2001).22
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising for a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to
cover up an otherwise blatant violation of the prohibition against forum shopping. Only is these and
similar instances may the veil be pierced and disregarded. PNB v. Andrada Electric &
Engineering Co., 381 SCRA 244 (2002).
The legal fiction of separate corporate existence is not at all times invincible; it may be pierced
when employed as a means to perpetrate a fraud, confuse legitimate issues, used as a means to
promote unfair objectives, or to shield an otherwise blatant violation of the prohibition against forum-
shopping. While piercing of the corporate veil has to be done with caution, the corporate fiction may
be disregarded when necessary for the interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391
SCRA 176 (2002).
When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud,
or defend crime, the law will regard the corporation as an association of persons. The corporate
entity may also be disregarded in the interest of justice in such cases as fraud that may work
inequities among members internally, involving no rights of the public or third persons. In both
instances, for the separate juridical personality of a corporation to be disregarded, the wrongdoing
must be clearly and convincingly established; it cannot be presumed. Suldao v. Cimech System
Construction, Inc., 506 SCRA 256 (2006).

b. Classification of Piercing Cases:

 FRAUD PIERCING: When corporate entity is used to commit a crime, to undertake fraud or
do a wrong, or that the corporate veil is used as a means to evade the consequences of
one’s criminal or fraudulent acts.

 ALTER-EGO PIERCING: When the corporate entity merely a farce since the corporation is
merely the alter ego, business conduit, or instrumentality of a person or another entity.

 DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the separate
corporate personality would be inconsistent with the business purpose of the legal fiction or
would merely confuse legitimate issues, or when piercing the corporate fiction is necessary
to achieve justice or equity for those who deal in good faith with the corporation.
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the
law covers and isolates the corporation from any other legal entity to which it may be related, is
allowed: (1) defeat of public convenience, as when the corporation is used as vehicle for the
evasion of existing obligation; (2) fraud cases or when the corporate entity is used to justify wrong,
protect fraud, or defend a crime; or (3) alter ego cases, where the corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. General Credit Corp. v. Alsons Dev. and
Investment Corp., 513 SCRA 225 (2007),23 citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed.), at p. 576.

c. Legal Objectives and Effects of the Application of the Piercing Doctrine

The main effect of disregarding the corporate fiction is that shareholders will be held personally
liable for the acts and contracts of the corporation, whose existence, at least for the purpose of the
particular situation involved, is ignored. Considering that We find it justified to pierce the corporate
veil in this case, MPEI must, perforce, be treated as a mere association of persons whose assets are
unshielded by corporate fiction. Such persons’ individual liability shall now be determined with
respect to the matter at hand. Republic v. Mega Pacific eSolutions, Inc., 794 SCRA 414 (2016).24
When two business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction

22
DBP v. CA, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); R&E Transport v. Latag, 422 SCRA
698 (2004); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. CA, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222
(2007); Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
23
Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590
(2010); Sarona v. NLRC, 663 SCRA 394 (2012); PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013); Lanuza, Jr. v. BF Corp., 77 SCRA
275 (2014); De Castro v. CA, 805 SCRA 265 (2016); Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018); Montealegre v. Spouses De Vera, 908
SCRA 269 (2019); ABS-CBN Broadcasting Corp. v. Hilario, 908 SCRA 203 (2019).
24
Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009);
Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014).
16
 that two corporations are distinct entitled and treat them as identical or one and the same. General
Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007).25

(1) Recent Attempts to Narrow the Objectives for Availing of Piercing: Piercing is not
allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable
for corporate debts, unlike here were it is resorted to determine proper jurisdiction of the court.
(?) Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).
The rationale for piercing in a given case is to remove the barrier between the corporation
and the persons comprising it to thwart the fraudulent schemes of those who use the corporate
personality as a shield for undertaking proscribed activities. In the case at bar, however, instead
of holding certain individuals or person responsible for an alleged corporate act, the situation
has been reversed: it is the corporation that is being ordered to answer for the personal liability
of certain directors and officers. Hence, it appears that the doctrine has been turned upside
down because of its erroneous invocation. Francisco Motors Corp. v CA, 309 SCRA 72
(1999).

BUT SEE: Reverse Piecing of the Corporate Veil: Int’l Academy of Management and
Economics v. Litton and Co., Inc., 848 SCRA 437 (2017).
(2) Applicable to “Third-Parties”: That respondents are not shareholders of record does not
make them non-parties, since it is alleged that the corporations are mere alter egos of the
directors-petitioners, and that the sister corporations acquired the properties sought to be
reconveyed to FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The notion
of corporate entity will be pierced and the individuals composing it will be treated as identical if
the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a
wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the
shareholders. Gochan v. Young, 354 SCRA 207 (2001).
(3) Piercing Has Only Res Judicata Effect : Application of the doctrine to a particular case does
not deny the corporation of legal personality for any and all purposes, but only for the particular
transaction or instance, or the particular obligation for which the doctrine was applied. Koppel
(Phil.) Inc. v. Yatco, 77 Phil. 496 (1946).26

d. PIERCING DOCTRINE AS AN “EQUITABLE REMEDY:” Piercing the corporate veil is an equitable

doctrine developed to address situations where the separate corporate personality of a corporation is
abused or used for wrongful purposes. PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).27
CONSEQUENTLY:

(1) It Is a Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not
available when other remedies are still available. Umali v. CA, 189 SCRA 529 (1990).

(2) Available Only to Prevent Fraud or to Achieve an Equitable End: Piercing doctrine is
meant to prevent fraud and cannot be employed when the net result would be to perpetrate
fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor
to shield them. Villanueva v. Adre, 172 SCRA 876 (1989).
The creation by DBP as the mother company of the three mining corporations to manage
and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and
lose their value, does not indicate fraud or wrongdoing, and will not constitute application of the
piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307 (2001).

(3) Party Invoking Piercing Doctrine Must Have a “Victim Standing”: The bank cannot
successfully invoke the piercing doctrine when it was proven that the assignment of the
securities by the subsidiary company was contrary to existing rules of the Central Bank of the
Philippines, which were well-known to the officers of the lending bank. Being merely an
equitable remedy, employment of the piercing doctrine can only be for the “protection of the
interests of innocent third persons dealing with the corporate entity which the law aims to protect
by this doctrine.” Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997).

(4) Not Applicable to Theorize or to Advance/Create New Rights or Interest :

Piercing of the veil of corporate fiction cannot be resorted under a theory of co-ownership
to justify continued use and possession by shareholders of corporate properties. Boyer-
Roxas v. Court of Appeals, 211 SCRA 470 (1992).
Piercing cannot be availed of to dislodge from SEC’s jurisdiction a petition for suspension
of payments filed under P.D. 902-A, on the ground that the petitioning individuals should be
treated as the real petitioners to the exclusion of the petitioning corporate debtor: “doctrine only

25
Marques v. Far East Bank, 639 SCRA 312 (2011); Sarona v. NLRC, 663 SCRA 394 (2012); De Castro v. CA, 805 SCRA 265 (2016); Lee v.
Samahang Manggagawa ng Super Lamination, 809 SCRA 313 (2016).
26
Tantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959); Francisco v. Mejia, 362 SCRA 738 (2001).
27
Commissioner of Customs v. Oilink Int’l Corp., 728 SCRA 469 (2014).
17
 applies when such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime.” Union Bank v. Court of Appeals, 290 SCRA 198 (1998).
Application of the piercing of the subsidiary company to merge it with the holding company
cannot be allowed to support a theory of set-off or compensation, there being no allegation
much less any proof of fraud. Nisce v. Equitable PCI Bank, Inc., 516 SCRA 231 (2007).
An employee who retires and avails of her retirement benefits, but continued as a
consultant with affiliate companies, cannot employ piercing to treat her stint with the affiliate
companies as part of her employment with the main company she retired from—there is no
fraud or employment of unfair shielding. Rivera v. United Laboratories, Inc., 586 SCRA 269
(2009).
BUT SEE: Where clear evidence supports the fact that a corporation’s affiliates have received
large amounts which became the consideration for the company’s execution of a real estate
mortgage over its properties, then the piercing doctrine shall be applied to support the fact that
the real estate mortgage was valid and supported by proper consideration. Siain Enterprises
v. Cupertino Realty Corp., 590 SCRA 435 (2009).
Piercing of the veil of corporate fiction cannot be used to justify service of summons on the
subsidiary to be binding on the parent company. A wholly owned subsidiary is a distinct and
separate entity from its mother company and the fact that the latter exercises control over the
firm does not justify disregarding their separate personality. The complaint, taken as a whole,
should be able to convey that the subsidiary is but a business conduit of the principal or that by
reason of fraud, their separate and distinct and separate personalities should be disregarded.
Luzon Iron Dev. Group Corp. v. Bridgestone Mining and Dev. Corp., 813 SCRA 583 (2016).

(5) Piercing Must Therefore Be Based on Clear Evidence : To disregard the separate juridical
personality, it is elementary that the wrongdoing cannot be presumed and must be clearly and
convincingly established. Application of the doctrine of piercing should be done with caution.
Otherwise, an injustice that was never intended may result from an erroneous application.
PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).28 CONSEQUENTLY:
 Organizing the corporation when relationship between landowner and developer were still
cordial cannot be used as a basis to hold the corporation liable later on for landowner’s
obligations to the developer under the mere allegation that the corporation is being used to
evade the performance of obligation by its major shareholders. Luxuria Homes, Inc. v. Court
of Appeals, 302 SCRA 315 (1999).
 The Court finds that the Remington failed to discharge its burden of proving bad faith on the
part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject
properties to justify the piercing of the corporate veil. DBP v. CA, 363 SCRA 307 (2001).29
 Neither has it been alleged or proven that Merryland is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency conduit or adjunct of
Cardale. Even assuming that the businesses of Cardale and Merryland are interrelated, this
alone is not justification for disregarding their separate personalities, absent any showing that
Merryland was purposely used as a shield to defraud creditors and third persons. Francisco
v. Mejia, 362 SCRA 738 (2001).30
 The mere assertion by a Filipino litigant against the existence of a “tandem” between two
Japanese corporations cannot be the basis for piercing, which can only be applied by showing
wrongdoing by clear and convincing evidence. Marubeni Corp. v. Lirag, 362 SCRA 620
(2001).
 Whether a corporation is a mere alter ego is a purely a question of fact, and the party seeking
to pierce has the burden of presenting clear and convincing evidence to justify the setting
aside of the separate corporate personality rule. Concept Builder, Inc. v. NLRC, 257
SCRA 149 (1996).31

(6) Piercing Is a Power Belonging to the Courts and Cannot Be Assumed Improvidently
by a Sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).32

3. FRAUD PIERCING CASES:

a. Corporate Fiction Used to Do Wrong or Evade Consequences Thereof:
Where a shareholder, who has absolute control over the affairs of the corporation, entered in a
contract with another corporation through fraud and false representations, such shareholder shall be
28
Lim v. CA, 323 SCRA 102 (2000); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Pantranco Employees Assn.
(PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Halley v. Printwell, Inc. 649 SCRA 116 (2011); Ferro Chemicals, Inc. v. Garcia, 804 528 (2016); Tan v.
Tan, G.R. No. 233172, 14 July 2021.
29
McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
30
Ramoso v. CA, 347 SCRA 463 (2000); Guatson Int’l Travel and Tours v. NLRC, 230 SCRA 815 (1990).
31
Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002); Ramirez v. Mar Fishing Co., 672
SCRA 137 (2012); Pacific Rehouse Corp. v. CA, 719 SCRA 665 (2014); Commissioner of Customs v. Oilink Int’l Corp., 728 SCRA 469 (2014); WPM Int’l
Trading v. Labayen, 735 SCRA 299 (2014); Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016).
32
D.R. CATC Services v. Ramos, 477 SCRA 18 (2005).
18
 liable solidarily with co-defendant corporation even when the contract sued upon was entered into on
behalf of the corporation. NAMARCO v. Associated Finance Co., 19 SCRA 962 (1967).
Piercing is allowed where the corporation is used as a means to appropriate a property by fraud
which property was later resold to the controlling shareholders. Heirs of Ramon Durano, Sr. v. Uy,
344 SCRA 238 (2000).
Fraud and bad faith on the part of certain corporate officers or shareholders may warrant the
piercing of the veil of corporate fiction so that the said individual may not seek refuge therein, but
may be held individually and personally liable for his or her actions, Lafarge Cement Phils., Inc. v.
Continental Cement Corp., 443 SCRA 522 (2004);33 however, mere allegation of fraud or bad faith,
without evidence supporting such claims cannot warrant the piercing of the corporate veil. DBP v.
Court of Appeals, 357 SCRA 626; 358 SCRA 501; 363 SCRA 307 (2001) .
The attempt to make the security agencies appear as two separate entities, when in reality they
were but one, was a devise to defeat the law, i.e., in this case to avoid liabilities under labor laws,
and should not be permitted. Enriquez Security Services, Inc. v. Cabotaje, 496 SCRA 169 (2006).
Piercing will be applied when there is an indubitable link between CBB’s closure and
Binswanger’s incorporation: CBB ceased to exist only in name; it re-emerged in the person of
Binswanger to avoid payment by CBB of the last two installments of its monetary obligation to
Livesey, as well as its other financial liabilities. Livesey v. Binswanger Philippines, 719 SCRA 433
(2014).
While courts have authority to wield the sword which pierces through the veil of corporate
fiction, the remain primarily responsible to uphold the doctrine of separate entity, when rightly so, as
it has for so long encouraged businessmen to enter into economic endeavors fraught with risks and
where only a few dared to venture. Hence, any application of the doctrine of piercing the corporate
veil should be done with caution, and mindful of the milieu where it is to be applied. It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never unintended may result
from an erroneous application. Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665
(2014).34

b. Shell or Fictitious Company: “Fictitious companies are by definition fraudulent and may also
serve as fronts for government officials. The typical scheme involves corrupt government officials
creating a fictitious company that will serve as a ‘vehicle’ to secure contract awards. Often, the
fictitious—or ghost—company will subcontract work to lower cost and sometimes unqualified firms.
The fictitious company may also utilize designated losers as subcontractors to deliver the work, thus
indicating collusion.” They have no significant assets, staff or operational capacity. They pose a
serious red flag as a bidder on public contracts, because they often hide the interests of project or
government officials, concealing a conflict of interest and opportunities for money laundering.
Republic v. Mega Pacific eSolutions, Inc., 794 SCRA 414 (2016), citing VILLANUEVA & TIANSAY,
PHILIPPINE CORPORATE LAW, p. 105 (2013 ed.)

c. Guiding Principles in Fraud Cases: Why is there inordinate showing of alter-ego elements?
 There must have been fraud or an evil motive in the affected transaction, and the mere proof of
control of the corporation by itself would not authorize piercing;
 Corporate fiction is used as a means to commit the fraud or avoid the consequences thereof;
and
 The main action should seek for the enforcement of pecuniary claims pertaining to the
corporation against corporate officers or shareholders.

Probative Factors for Fraud Piercing: The corporate fiction must be the very means by which
to commit fraud or avoid the consequences of ones unlawful or wrongful acts. Concept Builders,
Inc. v. NLRC, 257 SCRA 149 (1996).35 The absence of these elements prevents piercing the
corporate veil. Lim v. Court of Appeals, 323 SCRA 102 (2000).36
Two corporations may engage in the same business, share the same address, or have
interlocking incorporators, directors or officers, but in the absence of fraud or other public policy
consideration, does not warrant piercing the corporate veil. McLeod v. NLRC, 512 SCRA 222 (2007).37
Mere substantial identity of incorporators does not necessarily imply fraud, nor warrant the
piercing of the corporate veil. In the absence of clear and convincing evidence to show that the

33
Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005).
34
Dimson v. Chua, 811 SCRA 630 (2016).
35
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555
(2005); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Malarayat Rural Bank, 719 SCRA 565 (2014); Pacific Rehouse Corp.
v. Court of Appeals, 719 SCRA 665 (2014); Olongapo City v. Subic Water and Sewerage Co., 732 SCRA 133 (2014); Dutch Movers, Inc. v. Lequin, 824
SCRA 310 (2017); Veteran Federation of the Philippines v. Montenejo, 847 SCRA 1 (2017).
36
Child Learning Center, v. Tagorio, 475 SCRA 236 (2005); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Nisce
v. Equitable PCI Bank, 516 SCRA 231 (2007); Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018).
37
Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992); Del Rosario v. NLRC, 187 SCRA 777 (1990); Park Hotel v. Soriano, 680 SCRA
328 (2012); Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013).
19
 corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to
be rightly treated as distinct and separate from each other. Laguio v. NLRC, 262 SCRA 715 (1996).38
That a corporation owns all of the stocks of another corporation does not amount to fraud per
se, and does not justify their being treated as one entity. If used to perform legitimate functions, a
subsidiary’s separate existence shall be respected, and the liability of the parent corporation, as well
as the subsidiary shall be confined to those arising in their respective business. Nisce v. Equitable
PCI Bank, 516 SCRA 231 (2007).39

4. ALTER EGO PIERCING CASES:

a. Using the Corporation as a Mere Conduit or Alter Ego:
Where the capital stock is owned by one person and it functions only for the benefit of such
individual owner [rather than the business interest for which the corporation was formed], the
corporation and the individual should be deemed the same. Arnold v. Willets and Patterson,
Ltd., 44 Phil. 634 (1923).
When corporation is merely an adjunct, business conduit or alter ego of another corporation
[i.e., operated for the benefit of the business enterprise of the other corporation, and not for its own
benefit], the fiction of separate and distinct corporation entities should be disregarded. Tan Boon
Bee & Co. v. Jarencio, 163 SCRA 205 (1988).40
Unlike in fraud piercing, alter ego piercing does not require establishing fraud or wrongdoing,
but only that the corporate personality has been used as an instrumentality for the personal agenda
of its controlling shareholder. Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).

c. Mixing-up Operations of Two Companies; Disrespect to the Separate Corporate

Enterprise
Employment of same workers; single place of business, etc., may indicate alter ego situation
and justify the Court of Industrial Relations to retain jurisdiction over the labor case. La Campana
Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).
Mixing of personal accounts with corporate bank accounts would authorize piercing to protect
the judgment creditors. Ramirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).
Where two business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third persons, disregard their separate
legal fictions and treat them as identical. Sibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).41
The fact that the majority shareholder had used his own money to pay part of the loan of the
corporation cannot be used as the basis to pierce: “It is understandable that a shareholder would
want to help his corporation to assure that his stakes in the said corporation are secured.” LBP v.
Court of Appeals, 364 SCRA 375 (2001).
The fictive veil of corporate personality holds lesser sway for subsidiary corporations whose
shares are wholly if not almost wholly owned by its parent company. The structural and systems
overlap inherent in parent and subsidiary relations often render the subsidiary as mere local branch,
agency or adjunct of the foreign parent. Thus, when the foreign parent company leased a large
parcel of land purposely for the benefit of its subsidiary, which took over possession of the leased
premises, the subsidiary was a mere alter ego. Mariano v. Petron Corp., 610 SCRA 487 (2010).
When a corporation lawfully terminates its employees based on ceasing of operations, the
terminated employees cannot make a sister company liable for their claims. Although ownership by
one corporation of all or a great majority of stocks of another corporation and their interlocking
directorates may serve as indicia of control, by themselves and without more, they are insufficient to
establish an alter ego relationship that will justify the puncturing of the latter's corporate cover.
Zambrano v. Philippine Carpet Manufacturing Corp., 828 SCRA 144 (2017).
A subsidiary company's separate corporate personality may be disregarded only when the
evidence shows that such separate personality was being used by its parent or holding corporation
to perpetrate a fraud or evade an existing obligation. Concomitantly, employees of a corporation
have no cause of action for labor-related claims against another unaffiliated corporation, which does
not exercise control over them.||  Maricalum Mining Corp. v. Florentino, 872 SCRA 572 (2018).
The present case falls under the third instance where a corporation is merely a farce since it is
a mere alter ego or business conduit of another corporation. By looking at the circumstances
surrounding the creation, incorporation, management, closure and cessation of business operations
of CCI, it cannot be denied that CCI's existence was dependent upon Ty and petitioner. First, the
internal Scenic Department which initially handled the props and set designs of petitioner was
abolished and shut down and CCI was incorporated to cater to the props and set design
requirements of petitioner, thereby transferring most of its personnel to CCI. Petitioner clearly
38
Martinez v. Court of Appeals, 438 SCRA 130 (2004).
39
Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997); Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).
40
General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Sarona v. NLRC, 663 SCRA 394 (2012).
41
Shoemart v. NLRC, 225 SCRA 311 (1993).
20
 exercised control and influence in the management and closure of CCI's operations, which justifies
the ruling of the appellate court and labor tribunals of disregarding their separate corporate
personalities and treating them as a single entity. ABS-CBN Broadcasting Corp. v. Hilario, 908
SCRA 203 (2019).

d. Guiding Principles in Alter-Ego Cases:

 Doctrine applies even in the absence of evil intent, because of the direct violation of a central
corporate law principle of separating ownership from management;
 Doctrine in such cased is based on estoppel: if shareholders do not respect the separate
entity, others cannot also be expected to be bound by the separate juridical entity;
 Piercing in alter ego cases may prevail even when no monetary claims are sought to be
enforced against the shareholders or officers.
Probative Factors in Alter Ego Piercing: The instrumentality or control test requires not mere
majority or complete stock control, but complete domination of finances, policy and business
practices with respect to the transaction in question. California Manufacturing Co., Inc. v.
Advanced Technology System, Inc., 824 SCRA 295 (2017).42
The mere existence of a parent-subsidiary relationship between two corporation, or that one
corporation is affiliated with another company does not by itself allow the application of the alter ego
piercing doctrine. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946).43
Just because two foreign companies came from the same country and closely worked together
on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the
veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).
Use of a controlling shareholder’s initials in the corporate name is not sufficient reason to pierce,
since by that practice alone does it mean that the said corporation is merely a dummy of the
individual shareholder, provided such act is lawful. LBP v. Court of Appeals, 364 SCRA 375 (2001).
If used to perform legitimate functions, a subsidiary’s separate existence shall be respected,
and the liabilities of the parent corporation and the subsidiary will be confined to those arising in their
respective businesses. Even when the parent corporation agreed to the terms to support a standby
credit agreement in favor of the subsidiary, does not mean that its personality has merged with that
of the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).44

5. EQUITY PIERCING: “DEFEAT OF PUBLIC CONVENIENCE”

a. Corporate Fiction Is Raised to Confuse Legitimate Issues:
In a situation where employee in the mother company was detailed/assigned to a sister
company whereat the employee died by reason of work-related illness, and workmen’s
compensation benefits were sought against the sister company, there would be proper basis to
pierce the veil of corporate fiction to treat the two companies as one to allow jurisdiction over the
case to be retained by the Workmen’s Compensation Commission to rule on the defense of the lack
of employer-employee relationship. The separate juridical personality should not be used to confuse
legitimate issues. Telephone Engineering and Service Co. v. WCC, 104 SCRA 354 (1981).

b. Raise Legal Technicalities:

A complaint for unfair labor practice was filed not against the employer-corporation but against
the President and controlling shareholder, field supervisor and manager, all in their official capacity;
but that the final judgment for reinstatement and damages was in the name of the company. The
judgment can be enforced against the company and its properties on the ground of equity piercing:
“No benefit can be attained if this case were to be remanded to the court a quo merely in response to
a technical substitution of parties for such would only cause an unwarranted delay that would work to
Honorata’s prejudice. This is contrary to the spirit of the law which enjoins a speedy adjudication of
labor cases disregarding as much as possible the technicalities of procedure.” Emilio Cano
Enterprises v. CIR, 13 SCRA 291 (1965).
Where the main purpose in forming the corporation was to evade one's subsidiary civil liability
for damages in a criminal case, the corporation may not be heard to say that it has a personality
separate and distinct from its members, because to allow it to do so would be a shield to further an
end subversive of justice. The Supreme Court can even substitute the real party in interest in place
of the defendant corporation in order to avoid multiplicity of suits and thereby save the parties
unnecessary expenses and delay. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962).
Where a debtor registers his residence to a family corporation in exchange of shares, and
continues to live therein, then the separate juridical personality may be disregarded. PBCom v. Court
of Appeals, 195 SCRA 567 (1991).

42
Virata v. Ng Wee, 830 SCRA 271 (2017).
43
PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990); Jardine Davies, Inc. v. JRB Realty, Inc., 463 SCRA 555 (2005); Mendoza and Yotoko v.
Banco Real Dev. Bank, 470 SCRA 86 (2005).
44
Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).
21
 Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade
obligations or confuse the legitimate issues (as in this case where the actions of management of the
two corporations created confusion as to the proper employer of claimants), the two corporations
would be merged as one. Azcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
We have applied the piercing doctrine in cases where the employees are put in a
disadvantageous position as a result of the employers’ separate juridical personalities, pursuant to
the fundamental doctrine that corporate fiction should not be used as a subterfuge to commit
injustice and circumvent labor laws. While there is no prohibition on the mere act of engaging in a
work-pooling scheme as sister companies, that act will not be tolerated, and the sister companies’
separate juridical personalities will be disregarded, if they use that scheme to defeat the workers
right to collective bargaining. Lee v. Samahang Manggagawa ng Super Lamination, 809 SCRA 313
(2016).

6. The Case for Thinly-Capitalized Corporations:

a. Alter Ego Piercing: The judgment debt against the corporation can be pursued against the
controlling shareholder when it has been shown that the corporation had no existing assets of its
own and the operation of the corporation was so merged with those of the shareholders as to be
practically indistinguishable. Furthermore, they had the same office, the funds were held by the
shareholders, and the corporation had no visible assets. McConnel v. CA, 1 SCRA 722 (1961).

b. Fraud Piercing: The DOJ Resolution explicitly identified the false pretense, fraudulent act or
fraudulent means perpetrated upon the investing public who were made to believe that ASBHI had
the financial capacity to repay the loans it enticed petitioners to extend, despite the deficient
capitalization evidenced by its articles of incorporation, the treasurer’s affidavit, the audited
financial statements. “Moreover, respondent’s argument assumes that there is legal obligation on
the part of petitioners to undertake an investigation of ASBHI before agreeing to provide the loans.
There is no such obligation. It is unfair to expect a person to procure every available public record
concerning an applicant for credit to satisfy himself of the latter’s financial standing. At least, that is
not the way an average person takes care of his concerns.” Gabionza v. Court of Appeals, 565
SCRA 38 (2008).

c. Equity Piercing: Where the corporation was under the control of its shareholders who ran-up
quite a high obligation with the printing company knowing fully well that their corporation was not in
a position to pay for the accounts, and where in fact they personally benefited from the operations
of the company to which they never paid their subscription in full, would constitute piercing of the
veil to allow the creditor to be able to collect what otherwise were debts owed by the company
which has no visible assets and has ceased all operations. Halley v. Printwell, Inc. 649 SCRA
116 (2011).

7. Evasion, Avoidance or Minimization of Taxes

Use of dummies to constitute the corporation for the benefit of the controlling shareholder who
sought to avoid payment of war profit taxes would allow the tax authorities to levy upon the corporate
properties to enforce the tax assessment against the controlling shareholder [under the principles of
alter ego piercing]. Marvel Building v. David, 9 Phil. 376 (1951).
A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or
altogether avoid them by means which the law permits, which therefore would only constitute tax
avoidance which would allow piercing even in the absence of fraud (i.e., tax evasion) under the guise
that the use of the separate corporate veil was a means to defeat public convenience. However, when
the maintenance of the separate juridical entities serves only to minimize the collective taxes that the
corporations are paying, whereas in their operations they are operated in overlapping and informal
manner, would justify the piercing of the corporate veil based on alter ego considerations for purposes
of collecting the proper taxes. Yutivo Sons Hardware v. Court of Tax Appeals, 1 SCRA 160 (1961).45
The plea to pierce the veil of corporate fiction on the allegation that the corporations’ true purpose
is to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the
corporations: “With regard to their claim that [the companies] Ellice and Margo were meant to be used
as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to
reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the
law permits, cannot be doubted.” Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
The Court has, in a number of cases, shredded the veil of corporate identity and ruled that where a
corporation is merely an adjunct, business conduit or alter ego of another corporation or when they
practice fraud on internal revenue laws, the fiction of their separate and distinct corporate identities shall
be disregarded, and both entities treated as one taxable person, subject to assessment for the same
taxable transaction. Comm. of Internal Revenue v. Menguito, 565 SCRA 461 (2008).

8. DUE PROCESS CLAUSE CONSIDERATIONS IN PIERCING CASES

45
Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961); CIR v. Norton and Harrison, 11 SCRA 704 (1964).
22
 a. Suit Against Controlling Shareholder Is Not a Suit Against the Corporation That Would
Allow the Piercing Doctrine to Be Applied Against the Latter:
Failure to implead the corporations as defendants and merely annexing a list of such
corporations to the complaints is a violation of due process for it would in effect be disregarding their
distinct and separate personality without a hearing. PCGG v. Sandiganbayan, 365 SCRA 538 (2001).
Although both trial and appellate courts found sufficient basis for the conclusion that PKA and
Phoenix Omega were one and the same, and the former is merely a conduit of the other, We hold
void the application of a writ of execution on a judgment held only against PKA, since the RTC
obtained no jurisdiction over the person of Phoenix Omega which was never summoned as formal
party to the case. The general principle is that no person shall be affected by any proceedings to
which he is a stranger, and strangers to a case are not bound by the judgment rendered by the court.
Padilla v. Court of Appeals, 370 SCRA 208 (2001).
Piercing the veil of corporate fiction is applied only to determine established liability; it is not
available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in the case. The doctrine comes into play only during the trial of the case after the court
has already acquired jurisdiction over the corporation. Hence, before this doctrine can be even
applied based on the evidence presented, it is imperative that the court must first have jurisdiction
over the corporation. Mayor v. Tiu, 810 SCRA 256 (2016).
BUT SEE: Piercing of the corporate veil is premised on the fact that the corporation concerned must
have been properly served with summons or properly subjected to the jurisdiction of the court a quo.
Corollary thereto, it cannot be subjected to a writ of execution meant for another in violation of its
right to due process. There exists, however, an exception to this rule: if it is shown "by clear and
convincing proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings.” Int’l Academy of Management and Economics v. Litton and Co., Inc., 848 SCRA
437 (2017).
HOWEVER: A suit brought against the corporate officers sued in their official capacity would allow the
application of the piercing doctrine to make the corporation liable since the corporation, although not
made a formal party to the case, was not denied due process. Emilio Cano Enterprises v. CIR,
13 SCRA 291 (1965).

b. To Make Acting Officers Personally Liable under the Piercing Doctrine, Is There a Need
to Bring a New Case Against the Officer?
Application of the piercing doctrine may be made even during the enforcement of the judgment
debt of the corporation against the controlling shareholders. McConnel v. CA, 1 SCRA 723 (1961).
There is no denial of due process to hold officers liable under the piercing doctrine, provided
that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court
of Appeals, 198 SCRA 211 (1991).
We suggested as much in Arcilla v. Court of Appeals, 215 SCRA 120 (1992), where we found
lawful the Court of Appeal’s application of the piercing doctrine to hold the President liable for the
obligations incurred in the name of the corporation although it was not a party to the collection suit
before the trial court. Violago v. BA Finance Corp., 559 SCRA 69 (2008).
The elements of “control” laid down in Concept Builders to allow the application of the piercing
doctrine must be properly pleaded and proved during the hearing on the merits, and cannot be
merely raised for the first time in the motion for the issuance of an alias writ of execution. Pacific
Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).

MODULE 4

CORPORATE CONTRACT LAW

The Contract Law Underpinning in the
Formation and Commercial Pursuits of the
Corporation
(4TH WEEK: MARCH 1 AND 3)

Asynchronous Study: Chapters 5, 6 and 7 of TEXTBOOK

IV. CONTRACTS WITH A NON-EXISTING/DEFECTIVE CORPORATION

1. Pre-Incorporation/Promoter’s Contracts
a. Who Is a Promoter?

23
 “Promoter” is a person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer [i.e., corporate enterprise whose shares are
subscribed by investors] and receives consideration therefor. Sec. 3.10, Securities Regulation Code
(R.A. 8799)
b. Pre-incorporation Subscription Agreements (Secs. 59 and 60)
c. Liability Rules for Promoter’s Contracts:
A corporation, until organized, has no being, franchise or faculties, nor do those engaged in
bringing it into being have any power to bind it by contract—it is, as it were, a child in ventre sa
mere. The acts of promoters of a corporation may be ratified by the corporation if and when
subsequently organized, but under the peculiar facts and circumstances of the present case we
decline to extend the doctrine of ratification which would result in the commission of injustice or fraud
to the candid and unwary. Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223
(1937).
A franchise granted to a corporation still in the process of incorporation would nevertheless
constitute a valid contractual commitment, with the acceptance subsequent to the completion of
incorporation. Rizal Light & Ice Co. v. Public Service Commission, 25 SCRA 285 (1968).
Promoter’s contracts can be pursued against the investors who were the venture’s “moving
spirit”, but not against those who were merely convinced to invest in the corporate venture on the
basis of the feasibility study undertaken by the promoters. Caram, Jr. v. CA, 151 SCRA 372
(1987).

2. De Facto Corporation Doctrine (Sec. 19)

a. Elements: Arnold Hall v. Piccio, 86 Phil. 634 (1950).
By its failure to submit its bylaws on time, the AIIBP may be considered a de facto corporation
whose right to exercise corporate powers may not be inquired into collaterally in any private suit to
which such corporations may be a party. Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).
The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation. In fine, it is the act of registration with SEC
through the issuance of the Certificate of Incorporation that marks the beginning of an entity’s
corporate existence. Thus, a donation made in favor of the corporation after the filing of its
incorporation papers with the SEC, but before the issuance of the SEC Certificate of Incorporation
requires the application, not of the de facto corporation doctrine, but rather of the corporation by
estoppel doctrine under Sec. 21. Missionary Sisters of Our Lady of Fatima v. Alzona, 876
SCRA 309 (2018).
The insistence that HSBC was privy to the Mortgage Agreement for its interests are so
intertwined with those of HSBC-SRP that they have become identical — constitutes a collateral
attack on the corporate personality of HSBC-SRP which is prohibited by the Corporation Code. 
Such an inquiry into the legal personality of a corporation may only be made by the Solicitor General
in a quo warranto proceeding. HSBC, Ltd. Staff Retirement Plan v. Spouses Galang, G.R. Nos.
199565 & 199635, 30 June 2021.

3. Corporation by Estoppel Doctrine (Sec. 20)

a. Jurisprudential Background:
In the absence of fraud, a person who has contracted or otherwise dealt with an association in
such a way as to recognize and in effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of or involving such contract. Asia
Banking Corp. v. Standard Products, 46 Phil. 145 (1924).46
The corporation by estoppel doctrine cannot be applied against the claims of an innocent third-
party who seeks to enforce the contract against the person who entered to a contract on behalf of a
non-existent corporation on the ground of separate juridical personality. The doctrine that is
application is one found in the Law on Agency, i.e., a purported agent who enters to a contract in the
name of the non-existing principal shall be personally liable for contract so entered into. Vda. De
Salvatierra v. Garlitos, 103 Phil. 757 (1958).
We reiterate Salvatiera in that one who has induced another to act upon his willful
misrepresentation that a corporation was duly organized and existing under the law, cannot
thereafter set up against his victim the principle of corporation by estoppel. For even when there is
an existing corporate entity, we have applied the doctrine of piercing of the veil of corporate fiction to
make the actors behind the corporation personally liable for the contract entered in the name of the
corporation. Albert v. University Publishing Co., 13 SCRA 84 (1965).
b. Nature of Doctrine: Founded on principles of equity and designed to prevent injustice and
unfairness, the doctrine applies when persons assume to form a corporation and exercise corporate
functions and enter to business relations with third persons. Where no third person is involved in the

46
Citing Behn Meyer & Co. v. Rosatzin, 5 Phil. 660 (1906); Chamber of Commerce v. Pua Te Choing, 14 Phil. 222 (1909).
24
 conflict, there is no corporation by estoppel. A failed consolidation therefore cannot result in a
consolidated corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997).
A party cannot challenge the personality of the plaintiff as a duly organized corporation after
having acknowledged same when entering to the contract with the plaintiff as such corporation for
the transportation of its merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).47
A person who accepts employment in an unincorporated charitable association is estopped from
alleging its lack of juridical personality. Christian Children’s Fund v. NLRC, 174 SCRA 681 (1989).
What is now Sec. 20 of RCC explicitly provides that one who assumes an obligation to an
ostensible corporation cannot resist performance thereof on the ground that there was in fact no
corporation. Clearly, petitioner is bound by his obligation under the MOA not only on estoppel but by
express provision of law. Paz v. New Int’l Environmental Universality, Inc., 756 SCRA 284
(2015).
The corporation by estoppel doctrine rest on the idea that if the Court were to disregard the
existence of an entity which entered into a transaction with a third party, unjust enrichment would
result as some form of benefit that have already accrued on the part of one of the parties. Thus, in
that instance, the Court affords upon the unorganized entity corporate fiction and juridical personality
for the sole purpose of upholding the contract or transaction. Missionary Sisters of Our Lady of
Fatima v. Alzona, 876 SCRA 309 (2018).
Respondent allegation that it would be unjust for a third person to be allowed to circumvent
labor laws by claiming that a person or company who acted as an employer is a non-juridical entity
which cannot sue or be sued. To be sure, the Court, in the interest of preventing injustice and
unfairness, has previously prevented non-existent corporations from raising its lack of juridical
personality to avoid fulfillment of its contracts or obligations by applying the doctrine of corporation by
estoppel. This doctrine has been codified in what is now Section 19 of the Revised
Corporation Code, which provides that all persons who assume to act as a corporation knowing it to
be without the authority to do so shall be liable as general partners for all debts, liabilities, and
damages incurred or arising as a result thereof. TESDA v. Abragar, G.R. No. 201022, 17 March 2021.
c. Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
When the incorporators represent themselves to be officers of the corporation which was never
registered with SEC, and engaged in the name of the purported corporation in illegal recruitment,
they are estopped from claiming that they are not liable as corporate officers under what is now Sec.
20 of RCC which provides that all persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all the debts, liabilities and damages
incurred or arising as a result thereof. People v. Garcia, 271 SCRA 621 (1997).
Application of the doctrine applies to a third party only when he tries to escape liabilities on a
contract from which he has benefited on the irrelevant ground of defective incorporation. In the case
at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming
from the contract. However, one who deals with an unincorporated association is not estopped to
deny its corporate existence when his purpose is not to avoid liability, but precisely to enforce the
contract against the action for the purported corporation. Int’l Express Travel & Tour Services v.
Court of Appeals, 343 SCRA 674 (2000).
d. Can a Defective Attempt to Form a Corporation Result at Least into a Partnership?
While ordinarily persons who attempt, but fail, to form a corporation and who carry on business
under the corporate name occupy the position of partners inter se; such a relation, however, does
not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners when
their purpose is that no partnership shall exist, and it should be implied only when necessary to do
justice between the parties. Thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with other subscribers who
engage in business under the name of the pretended corporation, so as to be liable as such in an
action for settlement of the alleged partnership and contribution. A partnership relation between
certain shareholders and other shareholders, who were also directors, will not be implied in the
absence of an agreement, so as to make the former liable to contribute for payment of debts illegally
contracted by the latter. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).
Under the law on estoppel including that under Sec. 21, those acting on behalf of an ostensible
corporation and those benefited by it, knowing it to be without valid existence, are held liable as
general partners. Lim Tong Lim v. Phils. Fishing Gear Industries, Inc., 317 SCRA 728 (1999).

V. ARTICLES OF INCORPORATION
1. Nature of Charter: The charter is in the nature of a contract between the corporation and the State.
Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).
Articles of incorporation defines the corporation’s charter and the contractual relationships between
the State and the corporation, the shareholders and the State, and between the corporation and its
shareholders. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
47
The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 (1911), but that case pertained to a commercial partnership which
required registration in the registry under the terms of the Code of Commerce).
25
 a. Commencement of Corporate Existence (Sec. 18)
2. Procedure and Documentary Requirements (Sec. 13 and 14)
a. SEC Guidelines on Authentication of Articles of Incorporation (SEC Memo Circular No. 16-
2020)
b. As to Who May Be and the Number of Incorporators (Sec. 10; SEC Guidelines on
Incorporators – SEC Memorandum Circular No. 16-2019)
It is possible for a corporation to be wholly owned by one individual, and the validity of its
incorporation is not affected when he gives nominal one share of stock to each of the other four
incorporators. This arrangement is not necessarily illegal, but it valid only between and among the
incorporators who are privy to the agreement. It does not bind the corporation that will consider all
shareholders of record as the lawful owners of their registered shares. As between the corporation
on the one hand, and its shareholders and third persons on the other, the corporation looks only to
its books to determine who its shareholders are. Nautica Canny Corp. v. Yumul, 473 SCRA 415
(2005).

c. Corporate Name (Secs. 14[a], 17 and 18)

The name of a corporation is essential not only for its existence as a juridical person, but also in
manner of dealing with it, and in the exercise of its juridical capacities; it cannot be changed except
in the manner provided for by law. Red Line Trans. v. Rural Transit, 60 Phil. 549 (1934).
A corporation has no right to intervene in a suit using a name, not even its acronym, other than
its registered name, as the law requires and not another name which it had not registered. Laureano
Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253 (1997).
HOWEVER: There is no denial of due process when a corporation is sued and judgment is rendered
against it under an unregistered name: “A corporation may be sued under the name by which it
makes itself known to its workers.” Pison-Arceo Agri. Dev. Corp. v. NLRC, 279 SCRA 312 (1997).
A corporate name is a property right, a right in rem, which it may assert and protect against the
world in the same manner as it may protect its tangible property, real or personal, against trespass or
conversion. The policy under what is now Sec. 17 of RCC on “identical or deceptively or confusing
similar” corporate name is the avoidance of fraud upon the public which would have occasion to deal
with the entity concerned, the evasion of legal obligation and duties, and the reduction of difficulties
of administration and supervision over corporations. De La Salle Montessori Int’l of Malolos, Inc. v.
De La Sale Brothers, Inc., 855 SCRA 38 (2018).

(1) Guidelines on the Use of Corporate Names (SEC Memo Circular No. 13-2019)
Similarity in corporate names between two corporations would cause confusion to the
public especially when the purposes stated in their charter are also the same type of business.
Universal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 (1977).
To fall within the prohibition of the law Revised Guidelines in the Approval of Corporate and
Partnership Names, two requisites must be proven, to wit: (a) That the complainant corporation
acquired a prior right over the use of such corporate name; and (b) the proposed name is either:
(i) identical, or (ii) deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law; or (iii) patently deceptive, confusing or contrary to existing
laws. Philips Export B.V. v. Court of Appeals, 206 SCRA 457 (1992).
Incorporators must choose a name at their peril; and the use of a name similar to the one
adopted by another corporation, whether a business or a nonprofit organization, if misleading or
likely to injure the exercise of its corporate functions, regardless of intent, may be prevented by
the corporation having a prior right. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus v.
Iglesia ng Dios Kay Kristo Jesus, 372 SCRA 171 (2001).
The policy behind Sec. 18 which expressly prohibits the use of a corporate name which is
“identical or deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to existing laws,”
is to avoid fraud upon the public that will occasion to deal with the entity concerned, the evasion
of legal obligations and duties, and the reduction of difficulties of administration and supervision
over corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002).48
Enforcement of protection accorded by Sec. 18 to corporate names is lodged exclusively in
the SEC which has absolute jurisdiction, supervision and control over all corporations. It is the
SEC’s duty to prevent confusion in the use of corporate names not only for the protection of the
corporations involved, but more so for the protection of the public. It has authority to de-register
at all times, and under all circumstances corporate names which in its estimation are likely to
generate confusion.” GSIS Family Bank v. BPI Family Bank, 771 SCRA 284 (2015).

(2) No Corporate Name Shall Be Allowed If: SEC Memo Circular No. 13-2019
 “Not Distinguishable from that Already Reserved or Registered ”

48
Also Lyceum of the Phils. v. Court of Appeals, 219 SCRA 610 (1993).
26
  “Name Already Protected by Law”
 “When Use of Name is Contrary to Law”

(3) SEC Power to Adjudicate on the Use of Corporate Name (Sec. 17)
By express mandate of law, the SEC has absolute jurisdiction, supervision and control over
all corporations. It is the SEC’s duty to prevent confusion in the use of corporate names not
only for the protection of the corporation involved, but more so for the protection of the public. It
has the authority to de-register at all times, and under all circumstances, corporate names which
in its estimation are likely to generate confusion. Indian Chamber of Commerce Phils., Inc. v.
Filipino Indian Chamber of Commerce in the Philippines, Inc., 799 SCRA 27 (2016).

(4) Effect of Change of Corporate Name: A corporation may change its name by the
amendment of its articles of incorporation, but the same is not effective until approved by the
SEC. Phil. First Insurance Co. v. Hartigan, 34 SCRA 252 (1970).
A change in the corporate name does not make a new corporation and has no effect on the
identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v.
Court of Appeals, 216 SCRA 738 (1992).49

(5) Use of Corporate Names of Dissolved Corporations – A dissolved corporation’s name

shall not be allowed to be used within 3 years after approval of dissolution by the SEC, unless
allowed by the last shareholders representing at least majority of the outstanding capital stock.
Indian Chamber of Commerce Phils. Inc. v. Filipino Indian Chamber of Commerce in the Phils. ,
799 SCRA 27 (2016).

d. Purpose Clauses (Secs. 14[b] and 41)

The primary purpose clause in the articles of incorporation is meant to protect shareholders so
they will know the main business of the corporation and file derivative suits if the corporation
deviates from the primary purpose. Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541
(1919).
“The best proof of the purpose of a corporation is its articles of incorporation and bylaws. The
articles of incorporation must state the primary and secondary purposes of the corporation, while the
bylaws outline the administrative organization of the corporation, which, in turn, is supposed to insure
or facilitate the accomplishment of said purpose.” Therefore, the allegation that the corporations
were organized to illegally avoid the provisions on land reform and to avoid the payment of estate
taxes, constitute prohibited collateral attack. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431
(2003).

e. Corporate Term (Sec. 11; SEC Memo Circular No. 22-2020):

(1) DEFAULT RULE: Perpetual Term
(2) Retention/Choosing of Definite Corporate Term
(3) Extension of Definite Corporate Term: No term extension can be effected once dissolution
s has been reached, as it constitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269
(1968).
Article 605 of Civil Code “clearly limits any usufruct constituted in favor of a corporation or
association to 50 years. A usufruct is meant only as a lifetime grant. Unlike a natural person, a
corporation’s lifetime may be extended indefinitely. The usufruct would then be perpetual. This
is especially insidious in cases where the usufruct given to a corporation covers public land.”
National Housing Authority v. Court of Appeals, 456 SCRA 17 (2005).
(4) Revival of Expired Corporations: SEC Memo Circular No. 23-2019
 “Reincorporation” mandated in xChung Ka Bio v. IAC, 163 SCRA 534 (1988) no longer
applies.
f. Principal Place of Business (Secs. 13[c] and 50): Place of residence of the corporation is the
place of its principal office. Clavecilla Radio System v. Antillon, 19 SCRA 379 (1967).
The residence of its President is not the residence of the corporation because a corporation has a
personality separate and distinct from that of its officers and shareholders. Sy v. Tyson Enterprises,
Inc., 119 SCRA 367 (1982).
Although the Rules of Court do not provide expressly, jurisprudence has settled that the place
where the principal office of a corporation is located, as stated in the articles, indeed establishes its
residence. This ruling is important in determining the venue of an action by or against a corporation, as
in the present case. Hyatt Elevators and Escalators Corp. v. Goldstar Elevators, Phils., Inc., 473 SCRA
705 (2005), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998), p. 162.

g. No Minimum Capitalization (Sec. 12)

49
P.C. Javier & Sons v. CA, 462 SCRA 36 (2005); Zuellig Freight and Cargo Systems v. NLRC, 701 SCRA 562 (2013).
27
  Why Is Authorized Capital Stock Required to Be Stated under Sec. 13(h)?
h. No More Subscription and Paid-Up Requirements (Sec. 13 of old Corporation Code)
 BUT SEE: 25% Subscription – 25% Paid-up Requirement under Section 37 for Increasing the
Authorized Capital Stock

3. Grounds for Disapproval of the Articles (Sec. 16)

When the proposed articles show that the object is to organize a barrio into a separate corporation
for the purpose of taking possession and having control of all municipal property within the incorporated
barrio and administer it exclusively for the benefit of the residents, the object is unlawful, and the articles
can be denied registration. Asuncion v. De Yriarte, 28 Phil. 67 (1914).

4. Amendments to the Articles of Incorporation (Sec. 15)

VI. BYLAWS
1. Nature and Function and Contents of Bylaws (Sec. 46)
The power to adopt bylaws is an inherent power on the part of those forming a corporation or any
other form of association. Gokongwei, Jr. v. SEC, 89 SCRA 337 (1979).
As the “rules and regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders/members and directors and officers
with relation thereto and among themselves in their relation to it,” bylaws are indispensable to
corporations. These may not be essential to corporate birth but certainly, these are required for an
orderly governance and management of corporations. Loyola Grand Villas Homeowners v. CA, 276
SCRA 681 (1997).
Bylaws are traditionally defined as regulations, ordinances, rules or laws adopted by a corporation
for its internal governance, including rules for routine matters such as calling meetings and the like. If
those key bylaw provisions on matters such as quorum requirements, meetings, or on the internal
governance of the local/chapter are themselves already provided for in the constitution, then it would be
feasible to overlook the requirements for bylaws. In such an event, to insist on the submission of a
separate document denominated as “Bylaws” would be an undue technicality, as well as a redundancy.
San Miguel Corp. v. Mandaue Packing Products Plants Union-FFW, 467 SCRA 107 (2005).
Bylaws are the self-imposed rules resulting from the agreement between the country club and its
members to conduct the corporate business in a particular way. In that sense, the bylaws are the private
“statutes” by which the country club is regulated. Bylaws constitute a binding contract as between the
country club and its members, and as among the members themselves. They are self-imposed private
laws binding on all members, directors, and officers of the country club. The prevailing rule is that the
provisions of the articles of incorporation and the bylaws must be strictly complied with and applied to
the letter. Ching v. Quezon City Sports Club, Inc., 807 SCRA 46 (2016).50

a. New Mandated Contents of the Bylaws (Sec 46):

 Mode by which a shareholder, member, director, or trustee may attend meetings and
cast their votes
 An arbitration agreement may be provided in the Bylaws pursuant to Section 181

2. Adoption Procedure for Bylaws (Sec. 45)

a. Section 45 Removed the One Month from Incorporation Period to Adopt Bylaws, and has
rendered the following decisions irrelevant:
There can be no automatic dissolution simply because the incorporators failed to file the
required bylaws under Sec. 46 of old Corporation Code. Proper notice and hearing are cardinal
components of due process in any democratic institution, agency or society. In other words, the
incorporators must be given the chance to explain their neglect or omission and remedy the same.
Loyola Grand Villas Homeowners Assn. v. Court of Appeals, 276 SCRA 681 (1997).
A corporation which has failed to file its bylaws within the prescribed period does not ipso facto
lose its powers as such, and may be considered a de facto corporation whose right to exercise
corporate powers may not be inquired into collaterally in any private suit to which such corporations
may be a party. Sawadjaan v. Court of Appeals, 459 SCRA 516 (2005).
b. Failure to Adopt and Maintain the Bylaws Now Specifically Criminally Punishable and
Subject to SEC’s Contempt Power (Sec. 161)

3. COMMON LAW INTRAMURAL LIMITATIONS ON BYLAWS

a. Bylaws Cannot Be Contrary to Law, Public Policy or the Charter
50
Forest Hills Golf and Country Club v. Gardpro, Inc., 739 SCRA 28 (2014).
28
 A bylaw that empowers the Board of Directors to cancel the shares of any member and return
the value thereof is void for being in violation of the Corporation Law that provides that capital can
only be returned after dissolution. Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
A bylaw granting to a shareholder permanent seat in the Board of Directors is void, even when
formally adopted by the members of the association, because it is contrary to the provision of the
[Revised] Corporation Code requiring all members of the Board to be elected by the shareholders.
Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).
Bylaws cannot be such or be amended to be able to go around the security of tenure clause of
employees nor impair the obligation of existing contracts or rights; otherwise, it would enable an
employer to remove any employee from his employment by the simple expediency of amending its
bylaws and providing that his/her position shall cease to exist upon occurrence of a specified event.”
Salafranca v. Philamlife (Pamplona) Village Homeowners Assn., 300 SCRA 469 (1998).
Board of Directors should act in the manner and within the formalities, if any, prescribed in its
charter or bylaws. Thus, Board must act as a body in a meeting called pursuant to the law or the
corporation’s bylaws; otherwise, any action taken therein may be questioned by the objecting
director or shareholder. Certainly, the rules set in the bylaws are mandatory for every member to
respect; they are the fundamental law with which the corporation and its officers and members must
comply. It is on this score that we cannot sustain the Bernas Group’s stance that the subsequent
annual shareholders’ meetings were valid. Bernas v. Cinco, 761 SCRA 104 (2015).

b. Bylaws Cannot Be Unreasonable or Be Contrary to their Very Nature

Bylaws are intended merely for the protection of the corporation, and prescribe regulation, not
restrictions on property rights of shareholders; they are always subject to the charter of the
corporation. Fleisher v. Botica Nolasco, 47 Phil. 583 (1925).
Authority granted to a corporation to regulate the transfer of its stock does not empower the
corporation to restrict the right of a shareholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be followed in effecting transfer.
Thomson v. Court of Appeals, 298 SCRA 280 (1998).

c. Bylaws Cannot Discriminate Among Its Shareholders or Members

4. Binding Effect of Bylaws on Members of the Nonstock Corporation

In Bel Air Village Association, Inc. v. Dionisio, 174 SCRA 589 (I1989), we had held that the
constitutional guarantee of freedom of association can only be invoked against the State, and does not
apply to private transactions, like a sale, where a condition was validly imposed by the vendor. Finally,
Padcom Condominium Corp. v. Ortigas Center Association, Inc., 382 SCRA 222 (2002), reiterated that
the automatic membership in a homeowners’ association does not violate lot owners’ right to freedom of
association because they were not forced to buyer their lots from the developer. Cesar Yatco Real
Estate Services, Inc. v. Bel-Air Village Association, Inc., 886 SCRA 351 (2018).

5. Generally, Bylaws Are Not Binding on the Dealing Public

Bylaw provisions on the required quorum for special meetings of the Board have the force of law
and are binding even on third parties who deal with the properties of the corporation. Peña v. Court
of Appeals, 193 SCRA 717 (1991).
The nature of bylaws being intramural instruments would mean that they are not binding on third
parties, except those who have actual knowledge of their contents. China Banking Corp. v. Court of
Appeals, 270 SCRA 503 (1997).
Contracts entered into on behalf of the corporation not signed by the Chairman in violation of the
specific bylaw provision are not void, since bylaws operate merely as internal rules among the
shareholders, they cannot affect or prejudice third persons who deal with the corporation, unless they
have knowledge of the same.” PMI Colleges v. NLRC, 277 SCRA 462 (1997).

6. Amendments and Revisions of Bylaws (Sec. 47)

VII. TRUST FUND DOCTRINE

a. Common Law Premise: Creditors Preferred Over Equity-holders to the Assets of the
Business Enterprise (Art. 2236, Civil Code)
The subscriptions to the capital stock of a corporation constitute a fund to which the creditors
have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription to realize assets for the payment of its debts. Any
resolution by the shareholders or the Board releasing shareholders from the payment of their unpaid
subscription without going to the formalities provided for decrease in capital stock would be
ineffectual and void. Phil. Trust Co. v. Rivera, 44 Phil. 469 (1923); Lumanlan v. Cura, 59 Phil. 746
(1934).
A share of stock is not an indebtedness of the company to the owner, and therefore, it is not a
credit. Shareholders are not, as to their shares, creditors of the company, which can be off-setted
29
 against their liabilities to the company. The capital stock of a corporation is a trust fund to be used
more particularly for the security of its creditors. Garcia v. Lim Chu Sing, 59 Phil. 562 (1934).
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which provides that the capital stock, property and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors. Reason: creditors of a corporation
are preferred over the shareholders in the distribution of corporate assets. There can be no
distribution of assets among the shareholders without first paying corporate creditors; any disposition
of corporate funds to the prejudice of creditors is null and void. Boman Environmental Dev.
Corp. v. Court of Appeals, 167 SCRA 540 (1988).51
Even when foreclosure on corporate assets was wrongful done, shareholders have no standing
to recover for themselves moral damages; otherwise, it would amount to the appropriation by, and
the distribution to, such shareholders of part of the corporation’s assets before the dissolution and
the liquidation of its debts and liabilities. APT v. Court of Appeals, 300 SCRA 579 (1998).
The “trust fund” doctrine considers the subscribed capital stock as a trust fund for the payment
of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of
the corporation, no part of the subscribed capital stock may be turned over or released to the
shareholder (except in the redemption of the redeemable shares) without violating this principle.
Thus dividends must never impair the subscribed capital stock; subscription commitments cannot be
condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the
consideration therefore. NTC v. Court of Appeals, 311 SCRA 508 (1999).
We clarify that the trust fund doctrine is not limited to reaching the shareholders’ unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the
capital stock, but also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts. All assets and property belonging to the corporation held in trust for the
benefit of creditors that were distributed or in the possession of the shareholders, regardless of full
payment of their subscriptions may be reached by the creditors in satisfaction of its claim. Halley v.
Printwell, Inc. 649 SCRA 116 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2001), p. 558.
From the foregoing disquisition, it is clear that a corporate creditor cannot immediately invoke
the trust fund doctrine to proceed against unpaid subscriptions of stockholders of the debtor
corporation without alleging and proving the corporation's insolvency or any of the other acceptable
grounds where the trust fund doctrine, theory or principle has been applied. The observation that a
corporation has the beneficial or equitable as well as the legal title of its capital stock and is in
business to make money for itself and its stockholders and not for its creditors is well-taken.   As well,
the capital stock of a corporation is a trust to be managed during its corporate life for the benefit of
stockholders. It is only in the event of its dissolution or insolvency, does the capital stock become a
trust fund for the benefit of its creditors. Enano-Bote v. Alvarez, G.R. No. 223572, 10 November
2020.

b. Power to Purchase Own Shares (Secs. 8, 9, 40, 42 and 139, last paragraph)
Under common law, there were conflicting views on whether a corporation had the power to
purchase its own stocks. Only a few American jurisdictions adopted the strict English rule forbidding
a corporation from purchasing its own shares. In some American states where the English rule used
to be adopted, statutes granting authority to purchase out of surplus funds were enacted, while in
others, shares might be purchased even out of capital provided the rights of creditors were not
prejudiced. The reason underlying the limitation of share purchases sprang from the necessity of
imposing safeguards against the depletion by a corporation of its assets and against the impairment
of its capital needed for the protection of creditors. Turner v. Lorenzo Shipping Corp., 636 SCRA 13
(2010).
The Corporation Code clearly sets out the parameters when a corporation may reacquire its
shares and convert them into treasury shares. According to Section 9, “treasurer share are shares of
stock which have been issued and fully paid for, but subsequently reacquired through some lawful
means, but that reacquisition of shares requires that the corporation must have unrestricted retained
earnings in its books to cover the shared to be purchased or acquired. In addition, in cases where
the reason for reacquiring the shares is because of the unpaid subscription, the Corporation Code is
likewise explicit that the corporation must purchase the same during a delinquency sale. Salido, Jr.
v. Aramaywan Metals Dev. Corp., G.R. No. 233857, 18 March 2021.
c. Rescission of Subscription Agreement
Violation of terms embodied in a Subscription Agreement, with are personal commitments, do
not constitute legal ground to rescind the underlying subscription agreement: “In the instant case, the
rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of
the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since the rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed.” Distribution of corporate
assets among the shareholders cannot even be resorted to achieve “corporate peace.” Ong Yong
v. Tiu, 401 SCRA 1 (2003).

51
CIR v. Court of Appeals, 301 SCRA 152 (1999).
30
VIII. ULTRA VIRES DOCTRINE
1. Ultra Vires of the First Type: Classic Ultra Vires Acts (Secs. 2 and 44)
An ultra vires act is one committed outside the object for which a corporation is created as defined
by the law of its organization and therefore beyond the power conferred upon it by law. The term “ultra
vires” is “distinguished from an illegal act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated.” Atrium
Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
A corporation has no power except those expressly conferred on it by the [Revised] Corporation
Code, its charter, and those that are implied or incidental to its existence. In turn, a corporation
exercises said powers through its Board of Directors and/or its duly authorized officers and agents.
Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004).
From a reading of what is now Sec. 44 of the RCC, it is clear that a corporation has: (1) express
powers, which are bestowed upon by law or its articles of incorporation; and (2) necessary or incidental
powers to the exercise of those expressly conferred. An act which cannot fall under a corporation's
express or necessary or incidental powers is an  ultra vires act. Magallanes Watercraft Assn. v. Auguis,
791 SCRA 445 (2016).

a. General Judicial Attitude Towards the Ultra Vires Doctrine: The plea of “ultra vires” will not be
allowed to prevail, whether interposed for or against a corporation, when it will not advance justice
but, on the contrary, will accomplish a legal wrong to the prejudice of another who acted in good
faith. Zomer Dev. Corp. v. Int’l Exchange Bank, 581 SCRA 115 (2009).

b. Ratification of Ultra Vires Acts – Acts done by the Board of Directors which are ultra vires cannot
be set-aside if the acts have been ratified by the shareholders. Pirovano v. De la Rama
Steamship Co., 96 Phil. 335 (1954).
Even when a particular corporate act does not fall within the express or implied powers of the
corporation, it will not be set aside when, not being malum prohibitum, the corporation, through its
senior officers or its Board of Directors, are estopped from questioning the legality of such act,
contract or transaction. Carlos v. Mindoro Sugar Co., 57 Phil. 343 (1932).52

2. Ultra Vires of the Second Type: Doctrine of Centralized Management (Sec. 22)
Acts done in excess of the officers’ scope of authority cannot bind the corporation. However, when
subsequently a compromise agreement was on behalf of the corporation being represented by its
President acting pursuant to a Board of Directors’ resolution, such constituted as a confirmatory act
signifying ratification of all prior acts of its officers. NPC v. Alonzo-Legasto, 443 SCRA 342 (2004).
Contracts or acts of a corporation must be made either by the Board of Directors or by a corporate
agent duly authorized by the Board—absent such valid delegation/authorization, the rule is that the
declaration of an individual directors relating to the affairs of the corporation, but not in the course of, or
connected with, the performance of authorized duties of such director, are held not binding on the
corporation. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
Application of the First and Second Types of Ultra Vires – Third persons dealing with
corporations must determine the corporation’s competence as expressly defined by the law and their
articles of incorporation. Corporate acts that are outside those express definitions under the law or
articles of incorporation or those “committed outside the object for which a corporation is created” are
ultra vires. The only exception to this rule is when acts are necessary and incidental to carry out a
corporation's purposes, and to the exercise of powers conferred by the [Revised] Corporation Code and
under a corporation's articles of incorporation. This exception is specifically included in the general
powers of a corporation under what is now Sec. 35 of Revised Corporation Code. University of
Mindanao v. BSP, 778 SCRA 458 (2016).

3. Ultra Vires of the Third Type: Although arrangements between the two mining companies was
prohibited under the terms of the old Corporation Law, the Supreme Court did not declare the nullity of
the agreements on the ground that only private rights and interests, not public interests, were involved
in the case.Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 (1933).

MODULE 5

CORPORATE POWERS AND CAPACITY

(5TH WEEK: MARCH 8 AND 11)

Asynchronous Study: Chapter 8 of TEXTBOOK

52
Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. CA, 177 SCRA 594 (1989).
31
IX. CORPORATE POWERS AND CAPACITY
1. Corporate Power and Juridical Capacity to Act (Arts. 44(3) and 46, Civil Code; Secs. 35 and
44)
A corporation has no power except those expressly conferred by the [Revised] Corporation Code
and those that are implied or incidental to its existence. In turn, a corporation exercises said powers
through its Board of Directors and/or its duly authorized officers. In turn, physical acts of the corporation,
like the signing of documents, can be performed only by natural persons duly authorized for the purpose
by corporate bylaws or by a specific act of the Board. Shipside Inc. v. CA, 352 SCRA 334 (2001).53
A corporation has only such powers as are expressly granted by law and its articles of
incorporation (express powers), those which may be incidental to such conferred powers, those
reasonably necessary to accomplish its purposes (implied powers), and those which may be incident to
its existence as a juridical entity (incidental powers). Pilipinas Loan Co. v. SEC, 356 SCRA 193 (2001).54

a. Express Powers Enumerated in SECTION 35

b. Implied Powers: When the articles expressly provide that the purpose was to “engage in the
transportation of person by water,” such corporation cannot engage in the business of land
transportation, which is an entirely different line of business. Luneta Motor Co. v. A.D. Santos, Inc., 5
SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority to
undertake stevedoring services to unload coal into its pier since it is not reasonably necessary for the
operation of its power plant. National Power Corp. v. Vera, 170 SCRA 721 (1989).
A corporation organized to engage as a lending investor cannot engage in pawnbroker.
Pilipinas Loan Co. v. SEC, 356 SCRA 193 (2001).
A mining company has not power to engage in real estate development. Heirs of Antonio Pael
v. Court of Appeals, 372 SCRA 587 (2001).

c. Incidental Powers: The act of issuing checks is within the ambit of a valid corporate act, for it as
for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium
Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).

2. EXPRESS POWERS THAT REQUIRE SHAREHOLDERS’ RATIFICATION

a. Extend or Shorten Corporate Term (Secs. 11, 36 and 80[a])
b. Increase or Decrease Capital Stock (Sec. 37)
Despite the Board resolution approving increase in capital stock and the receipt of payment on
the future issues of the shares from the increased capital stock, such funds do not constitute part of
the capital stock of until approval of the increase by SEC. Central Textile Mills v. NWPC, 260 SCRA
368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of union members,
amounts to nothing but a premature and plain distribution of corporate assets to obviate a just
sharing to labor of the vast profits obtained by its joint efforts with capital through the years, and
would constitute unfair labor practice. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987).
c. Incur, Create or Increase Bonded Indebtedness (Sec. 37)
d. Sell, Dispose, Mortgage or Encumber All or Substantially All Assets (Sec. 39; SEC Memo
Circular No. 12-2020)
Corporate property is not property of the shareholders or members, and as such, may not be
sold without express authority from the Board of Directors. Litonjua v. Eternit Corp., 490 SCRA 204
(2006).
Sale by Board of the only corporate property without compliance with Sec. 40 requiring
ratification of members representing at least two-thirds of the membership, would make the sale null
and void. Islamic Directorate v. CA, 272 SCRA 454 (1997); Peña v. Court of Appeals, 193 SCRA 717
(1991).
The Corporation Code defines a sale or disposition of substantially all assets and property of a
corporation as one by which the corporation “would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated” – any sale or disposition short
of this will not need shareholder ratification and may be pursued by the majority vote of the Board of
Directors. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
e. Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 41)
Investment by a sugar central in the equity of a jute-bag manufacturing company used in
packing sugar falls within the implied powers of the sugar central as part of its primary purpose; it
53
Salenga v. CA, 664 SCRA 635 (2012); Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012); Ignacio v. Home Bankers Savings and Trust Co.,
689 SCRA 173 (2013).
54
Magallanes Watercraft Assn. v. Auguis, 791 SCRA 445 (2016).
32
 does not need shareholders’ ratification. De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247
(1969).

f. Enter into Management Contracts (Sec. 43)

A management contract is not an agency contract, and therefore is not revocable at will.
Nielson & Co. v. Lepanto Consolidated Mining, 26 SCRA 540 (1968); Ricafort v. Moya, 195 SCRA 247
(1991).

3. OTHER CORPORATE POWERS (Sec. 35)

a. Sell Land and Other Properties
When the corporation’s primary purpose is to market, distribute, export and import merchandise,
the sale of land is not within the actual or apparent authority of the corporation acting through its
officers, much less when acting through the treasurer. Articles 1874 and 1878 of Civil Code requires
that when land is sold through an agent, the agent’s authority must be in writing, otherwise the sale
is void. San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998).55

b. Borrow Funds
The power to borrow money is one of those cases where even a special power of attorney is
required under Art. 1878 of Civil Code. There is invariably a need of an enabling act of the
corporation to be approved by its Board of Directors. The argument that the obtaining of loan was in
accordance with the ordinary course of business usages and practices of the corporation is devoid of
merit because the prevailing practice is to the effect that the Board must explicitly authorize an officer
to contract loans on behalf of the corporation. China Banking Corp. v. Court of Appeals, 270 SCRA
503 (1997).

c. Power to Sue and Be Sued

When the power to sue is delegated by the bylaws to a particular officer, such officer may
appoint counsel to represent the corporation in a pre-trial hearing without need of a formal board
resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
As a creature of the law, the powers and attributes of a corporation are those set out, expressly
or implied, in the law. Among the general powers granted by law to a corporation is the power to sue
in its own name. This power is granted to a duly organized corporation, unless specifically revoked
by another law. Umale v. ASB Realty Corp., 652 SCRA 215 (2011).
Under what are now Sec. 35 in relation to Sec. 22 of RCC, where a corporation is an injured
party, its power to sue is lodged with its Board of Directors. A minority shareholder who is a member
of the Board has no such power or authority to sue on the corporation’s behalf. Tam Wing Tak v.
Makasiar, 350 SCRA 475 (2001).56
(1) xCertificate of Non-Forum Shopping
Where petitioner is a corporation, a Board resolution authorizing an officer to execute the
certi-ficate against forum shopping is necessary—a certification not signed by a duly authorized
person renders the petition dismissable, Gonzales v. Climax Mining Ltd., 452 SCRA 607 (2005);57
such as the administrator or project manager, Esteban, Jr. v. Vda. de Onorio, 360 SCRA 230
(2001); or the General Manager, Central Cooperative Exchange Inc. v. Enciso, 162 SCRA 706
(1988).
The corporate veil cannot be used to blatantly violate the prohibition against forum-shopping.
Where the corporation itself has not been remiss in vigorously prosecuting or defending corporate
causes and in using and applying remedies available to it, then shareholders, whether suing as
the majority in direct actions or as the minority in a derivative suit, cannot be allowed to pursue
the same claims. First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
For counsel to sign the certification for the corporation, he must specifically be authorized by
the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003). 58 Nonetheless, such lack of
authority may be cured: even if the counsel executed the verification and certificate of non-forum
shopping before the board authorized him, the passing of the board resolution of authorization
before the actual filing of the complaint. Median Container Corp. v. Metropolitan Bank and Trust
Co., 561 SCRA 622 (2008); the submission in the motion for reconsideration of the authority to
sign the verification and certification constitutes substantial compliance with the procedural
requirements. Asean Pacific Planners v. City of Urdaneta, 566 SCRA 219 (2008).

55
AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003);
Cosco Phils. Shipping v. Kemper Insurance Co., 670 SCRA 343 (2012).
56
Shipside Inc. v. CA, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. CA, 497 SCRA 638 (2006);
Mediserv, Inc. v. CA, 617 SCRA 284 (2010); Cebu Bionic Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010); Ellice Agro-Industrial Corp. v. Young, 686
SCRA 51 (2012); Swedish Match Phils v. Treasurer of Manila, 700 SCRA 428 (2013); Esguerra v. Holcim Phils., 704 SCRA 490 (2013); Philippine
Numismatic and Antiquarian Society v. Aquino, 816 SCRA 161 (2017).
57
DBP v. CA, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); PAL v. Flight Attendance and Stewards Assn. of the Phils.
(FASAP), 479 SCRA 605 (2006); Metro Drug Distribution v. Narcisco, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. CIR, 545 SCRA 10 (2008)
Mediserv, Inc. v. CA, 617 SCRA 284 (2010); Cosco Phils. Shipping v. Kemper Insurance Co., 670 SCRA 343 (2012); Almeda v. Heirs of Ponciano Almeda,
839 SCRA 630 (2017); BSP v. BG Homes, Inc., G.R. No. 228239, 10 June 2019.
58
Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003); Nissan Car Lease Phils. v. Lica Management Inc., 780 SCRA 400 (2016); Steamship Mutual
Underwirting Assn. (Bermuda) Ltd. v. Sulpicio Lines, Inc., 840 SCRA 203 (2017).
33
 When a corporate officer has been granted express power by the Board of Directors to
institute a suit, the same is considered broad enough to include the power of said corporate
officer to execute the verification and certification against forum shopping required in initiatory
pleadings under the Rules of Court. Cunanan v. Jumping Jap Trading Corp., 586 SCRA 620
(2009).
A President can sign the verification and certification against non-forum shopping on behalf
of the corporation without the benefit of a board resolution. South Cotabato Communications
Corp. v. Sto. Tomas, 638 SCRA 566 (2011).
However, the following officials or employees of the company can sign a verification and
certification against forum-shopping without need of a board resolution: (1) the Chairperson of the
Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting General
Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case. While the
above cases do not provide a complete listing of authorized signatories to the verification and
certification required by the rules, the determination of the sufficiency of the authority was done
on a case-to-case basis. Pasos v. PNCC, 700 SCRA 608 (2013).
(2) xService of Summons on Corporations
Section 11, Rule 14 of the Rules of Civil Procedure uses the term “general manager” and
unlike the old provision in the Rules of Court, it does not include the term “agent”. Consequently,
the enumeration of persons to whom summons may be served is “restricted, limited and
exclusive” following the rule on statutory construction expressio unios est exclusio alterius.
Therefore, the earlier cases that uphold service of summons upon a construction project
manager;59 a corporation’s assistant manager;60 ordinary clerk of a corporation;61 private secretary
of corporate executives;62 retained counsel;63 officials who had charge or control of the operations
of the corporation, like the assistant general manager; 64 or the corporation’s Chief Finance and
Administrative Officer;65 no longer apply since they were decided under the old rule that allows
service of summons upon an “agent”66 of the corporation. E.B. Villarosa & Partners Co., Ltd. v.
Benito, 312 SCRA 65 (1999).67

d. Hire Employees and Appoint Agents

Except where the authority of employing servants and agents is expressly vested in the board of
directors or trustees, an officer or agent who has general control and management of the
corporation’s business, or a specific part thereof, may bind the corporation by the employment of
such agents and employees as are usual and necessary in the conduct of such business. But the
contracts of employment must be reasonable. Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924).
e. Provide Gratuity Pay for Employees (Sec. 35[j])
Providing gratuity pay for employees is an express power of a corporation under the [Revised]
Corporation Code and cannot be considered to be ultra vires to avoid any liability arising from the
resolution granting such gratuity pay. Lopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).
f. To Make Reasonable Donations (Sec. 35[i])
g. To Enter Into a Partnership, Joint Venture and other commercial agreements with
natural and juridical persons (Sec. 35[h])
Overturns: SEC Opinion, 29 February 1980
SEC Opinion No. 16-22. 04 October 2016
While a corporation has no inherent power to enter into a partnership, it may enter into a joint
venture arrangement. Tuason & Co. v. Bolaños, 95 Phil. 106 (1954).

MODULE 6

ATTRIBUTE OF “CENTRALIZED MANAGEMENT”

(6TH WEEK: MARCH 15 AND 17)

Asynchronous Study: Chapter 9 of TEXTBOOK

59
Kanlaon Construction Enterprises Co. v. NLRC, 279 SCRA 337 (1997).
60
Gesulgon v. NLRC, 219 SCRA 561 (1993).
61
Golden Country Farms, Inc. v. Sanvar Dev.t Corp., 214 SCRA 295 (1992); G&G Trading Corp. v. CA, 158 SCRA 466 (1988).
62
Summit Trading and Dev. Corp. v. Avendaño, 135 SCRA 397 (1985); Vlason Enterprises Corp. v. CA, 310 SCRA 26 (1999).
63
Republic v. Ker & Co., 18 SCRA 207 (1966).
64
Villa Rey Transit v. Far East Motor Corp., 81 SCRA 298 (1978).
65
Far Corp. v. Francisco, 146 SCRA 197 (1986).
66
Filoil Marketing Corp. v. Marine Dev. Corp. of the Phils., 177 SCRA 86 (1982).
67
Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012).
34
X. BOARD OF DIRECTORS / TRUSTEES AND OFFICERS (Sec. 174)
Whatever may be the term used in the company charter, the “Board of Directors” is the body which (1)
exercises all powers provided for under the [Revised] Corporation Code; (2) conducts all business of the
corporation; and (3) controls and holds all properties of the corporation. Its members have been
characterized as clothed with a fiduciary character. Hence, the corporation’s general counsel cannot
represent the members of the Board who have been sued by the shareholders in a derivative suit, for clearly
the Board is separate and distinct from the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003).
Nonstock and other special corporations may, through their articles of incorporation or their bylaws,
designate their Governing Board by any name other than as “Board of Trustees.” (Sec. 174)

1. DOCTRINE OF CENTRALIZED MANAGEMENT (Sec. 22)

The raison d’etre behind conferment of corporate powers on the Board is not lost on the Court –
indeed, the concentration in the Board of the powers of control of corporate business and appointment
of corporate officers and managers is necessary for efficiency in any large organization. Shareholders
are too numerous, scattered and unfamiliar with the corporate business to conduct its affairs directly—
so the plan of corporate organization is for the shareholders to choose the directors who shall control
and supervise the conduct of corporate business. Filipinas Port Services v. Go, 518 SCRA 453
(2007).
What is now Sec. 22 of RCC provides that the corporate powers of all corporations shall be
exercised by the Board of Directors. Just as a natural person may authorize another to do certain acts in
his behalf, so may the Board validly delegate some of its functions to individual officers or agents
appointed by it. Thus, contracts or acts of a corporation must be made either by the Board of Directors
or by a corporate agent duly authorized by the Board. Absent such valid delegation/authorization, the
rule is that the declarations of an individual director relating to the affairs of the corporation, but not in
the course of, or connected with the performance of authorized duties of such director, are held not
binding on the corporation. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).68
A corporation is an artificial being and can only exercise its powers and transact its business
through the instrumentalities of its Board of Directors, and through its officers and agents, when
authorized by resolution or by its bylaws. Consequently, when legal counsel was clothed with authority
through formal board resolution, his acts bind the corporation. De Liano v. Court of Appeals, 370 SCRA
349 (2001).69
Although the best proof of the authority of the officer to represent or bind the corporation would be
the board resolution itself, the Court has considered a Secretary’s Certificate of the existence of such
board resolution as sufficient proof of authority for a person named in it to represent the corporation.
Meatworld Int’l Inc. v. Hechanova, 842 SCRA 620 (2017).

a. Theories on Source of Board Power

(1) Theory of State-Vested Powers: The Board of Directors generally has a right to ignore the
resolutions of the shareholders on corporate matters, for contracts between a corporation and
the public must be made by the Board in the exercise of its business judgment, and not by the
shareholders. A Director-Treasurer has no power to bind the company even in transactions that
are pursuant to the primary purpose its corporation, especially when the bylaws specifically
provided that the acts can only be done by the Board of Directors. Ramirez v. Orientalist Co.,
38 Phil. 634 (1918).
The powers granted to the Board of Directors are directly vested to them by law pursuant
to what is now Sec. 22 of RCC. Thus, the MOA executed among the feuding shareholders that
arranges that the affairs of the corporation shall be in the hands of one set of shareholders
would be void and cannot serve to oust the duly elected Board of Directors from the exercise of
corporate powers. Toms v. Rodriguez, 761 SCRA 679 (2015); 797 SCRA 60 (2016).

(2) Theory of Shareholder-Delegated Powers: The Board of Directors is a creation of the

shareholders and controls and directs the affairs of the corporation by delegation of the
shareholders. By drawing themselves the powers of the corporation, they occupy positions of
trusteeship in relation to the shareholders. Angeles v. Santos, 64 Phil. 697 (1937).
One of the most important rights of a shareholder is the right to vote for the directors who
are to manage the corporate affairs. The right to choose the persons who will direct and
manage the corporation is significant because it is the main way in which a shareholder can
have a voice in the management of corporate affairs or can have a say on how the purposes
and goals of the corporation may be achieved. Once the directors are elected, the shareholders
relinquish corporate powers to the Board in accordance with law. Tan v. Sycip, 499 SCRA 216
(2006).

b. Board Must Act as a Body to Bind the Corporation (Sec. 52)

68
Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924); Gamboa v. Victoriano, 90 SCRA 40 (1979); Reyes v. RCPI Employees Credit Union, 499 SCRA 319
(2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v. Jochico, 517 SCRA 221 (2007); Republic v. Coalbrine Int’l, 617 SCRA 491
(2010); Olongapo City v. Subic Water and Sewerage Co., 732 SCRA 132 (2014); Philippine Stock Exchange (PSE) v. Litonjua, 812 SCRA 121 (2016);
Colegio Medico-FGarmaceutico de Filipinas, Inc. v. Lim, 869 SCRA 298 (2018).
69
Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v. CA, 352 SCRA 334 (2001); Lanuza, Jr. v. BF Corp., 737 SCRA
275 (2014).
35
 Exercise of powers by the Board of Directors may be express and formal through the adoption
of a board resolution in a meeting called for the purpose; or it may be implied where the Board
collectively and knowingly allows the President to enter into important contracts in the pursuit of the
corporate business. Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 (1967).
COMPARE: Where the President enters into speculative contracts without prior nor subsequent Board
approvals, nor were the transactions included in the reports to the Board, such contracts do not bind
the corporation. It must be pointed out that the Board of Directors, not the President, exercises
corporate powers. Safic Alcan & Cie v. Imperial Vegetable Oil Co., 355 SCRA 559 (2001).
A corporation, through its Board of Directors, should act in the manner and within the formalities
prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting
called pursuant, otherwise, any action taken therein may be questioned by any objecting director or
shareholder. Be that as it may, jurisprudence tells us that an action of the Board during a meeting,
which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in
subsequent legal meeting, or impliedly, by the corporation’s subsequent course of conduct. Lopez
Realty v. Fontecha, 247 SCRA 183 (1995).

c. Effects of Acts by a “Bogus” Board : The acts or contracts effected by a bogus Board would be
void pursuant to Art. 1318 of Civil Code because of the lack of “consent”. Islamic Directorate of the
Philippines v. Court of Appeals, 272 SCRA 454 (1997).
d. Executive and Other Board Committees (Sec. 34): It is within the power of the Board of
Directors to authorize any person or committee to undertake corporate acts. The board has power to
constitute even an executive committee, even when no such committee is provided for in the articles
and bylaws of the corporation. Filipinas Port Services, Inc. v. Go, 518 SCRA 453 (2007).

2. BUSINESS JUDGMENT RULE

a. BJR FIRST BRANCH: On the Transactions Entered Into: When resolutions are passed in good
faith by the Board of Directors, it is valid and binding, and whether it will cause losses or decrease
the corporation’s profits, the courts have no authority to review them. Questions of policy or
management are left solely to the honest decision of officers and directors of a corporation, and the
court is without authority to substitute its judgment for that of the Board. The Board is the
corporation’s business manager, and so long as it acts in good faith its orders are not reviewable by
the courts. Montelibano v. Bacolod-Murcia Milling Co., 5 SCRA 36 (1962).70
While SEC is the agency with the primary say as to whether securities, including shares of a
corporation, may be traded or not in the stock exchange, it does not mean that PSE’s management
prerogatives are under the absolute control of the SEC. The PSE is, after all, a corporation
authorized by its corporate franchise to engage in its proposed and duly approved business. One of
the PSE’s main concerns, as such, is still the generation of profit for its shareholders. Philippine
Stock Exchange v. Court of Appeals, 281 SCRA 232 (1997).
No court can, in resolving the issues between squabbling shareholders, order the corporation to
undertake certain corporate acts, since it would be in violation of the business judgment rule. Ong
Yong v. Tiu, 401 SCRA 1 (2003), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (1998 ed), p. 288.

b. BJR SECOND BRANCH: On the Personal Liability of the Acting Directors and/or Officers:
Directors and officers who purport to act for the corporation, keep within the lawful scope of their
authority and act in good faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts, which are properly attributed to the corporation alone. Benguet Electric
Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
If the cause of the losses is merely error in business judgment, not amounting to bad faith or
negligence, directors and/or officers are not liable. For them to be held accountable, the
mismanagement and the resulting losses must be proven to have resulted from bad faith and with
malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a
known duty through some motive or interest or ill-will partaking of the nature of fraud. Filipinas Port
Services, Inc. v. Go, 518 SCRA 453 (2007).
It is elementary in Corporation Law that the business judgment rule, which prohibits the courts
from interfering in the judgment made by the Board and its officers, admits of exceptions: bad faith
being one of them, gross negligence, another. Virata v. Ng Wee, 830 SCRA 271 (2017).

3. COUNTERVAILING DOCTRINES TO PROTECT CORPORATE CONTRACTS

a. Doctrine of Ratification or Estoppel (Art. 1910, Civil Code)
Between the act of the Board as a body affirming informally the perfection of a contract entered
into on behalf of the corporation by a senior officer, and the subsequent formal board resolution
rejecting the same contract, the former must prevail under the doctrine of estoppel. Acuña v. Batac
Producers Cooperative Marketing Assn., 20 SCRA 526 (1967).

70
Estacio v. Electric Cooperative, Inc., 596 SCRA 542 (2009); Cua, Jr. v. Tan, 607 SCRA 645 (2009).
36
 Ratification means that the principal voluntarily adopts, confirms and gives sanction to some
unauthorized act of its agent on its behalf. The substance of the doctrine is confirmation after
conduct, amounting to a substitute for a prior authority. Ratification can be made either expressly or
impliedly. Implied ratification may take various forms—like silence or acquiescence, acts showing
approval or adoption of the act, or acceptance and retention of benefits flowing therefrom. Lopez
Realty v. Spouses Tanjangco, 739 SCRA 644 (2014).
Cua, v. Tan held that by virtue of ratification, the acts of the Board of Directors become the acts
of the shareholders themselves, even if those acts were, at the outset, unauthorized. To declare the
Board resolution null and void will serve no practical use or value, or affect any of the rights of the
parties, because the subsequent shareholders’ resolution approving and ratifying said acquisition
and the manner in which PRCI shall constitute the JTH Board of Directors, will still remain valid and
binding. Lopez Realty, Inc. v. Spouses Tanjangco, 739 SCRA 644 (2014).
In order to ratify the unauthorized act of an agent to bind the corporation, it must be shown that
the Board or officer authorized to ratify had full and complete knowledge of all the material facts
connected with the transaction to which it relates. Ratification can never be made by the same
person who wrongfully assume the power to make the contract, but the ratification must be by the
officer or governing body having authority to make such contract. Vicente v. Geraldez, 52 SCRA 210
(1973).
The admission by counsel on behalf of the corporation of the latter’s culpability for personal
loans obtained by its corporate officers cannot be given legal effect when the admission was “without
any enabling act or attendant ratification of corporate act,” as would authorize or even ratify such
admission. In the absence of such ratification or authority, such admission does not bind the
corporation. Aguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).
Doctrine of Laches or Stale Demands: The failure or neglect, for an unreasonable and
unexplained length of time, to do that which by exercising due diligence could or should have been
done earlier, or the negligence or omission to assert a right within a reasonable time, warrants a
presumption that the party entitled to assert it either has abandoned it or declined to assert it. Rovels
Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).71
When an officer in a bank arranges a credit line agreement and forwards the same to the legal
department at its head office, and the bank did not disaffirm the contract, then it is bound by it.
Premier Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004).
Under Art. 1910 of Civil Code, acts done by such officers beyond the scope of their authority
cannot bind the corporation unless it has ratified such acts expressly or tacitly or is estopped from
denying them. Contracts entered by corporate officers beyond the scope of authority are
unenforceable against the corporation unless ratified by the Board. Woodchild Holdings, Inc. v.
Roxas Electric Constructions Co., 436 SCRA 235 (2004).
Acts done in excess of officers’ scope of authority cannot bind the corporation; however, when
subsequently a compromise agreement was on behalf of the corporation being represented by its
President acting pursuant to a Board resolution, such constituted as ratification of all prior acts of its
officers. National Power Corp. v. Alonzo-Legasto, 443 SCRA 342 (2004).
b. Doctrines of Apparent Authority (Art. 1883, Civil Code): If a corporation permits an officer to act
within the scope of an apparent authority, it holds him out to the public as possessing the power to
do those acts, the corporation will, as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority. Francisco v. GSIS, 7 SCRA 577 (1963).72
A corporation cannot disown its President’s act of obtain a loan from the bank, on the ground
that it never authorized the President by the lack of any formal Board resolution. The following
placed the Board in estoppel in pais: (a) bylaws provides for the powers of the President, which
includes executing contracts and agreements, borrowing money, signing, endorsing and delivering
checks; (b) there were already previous transaction of discounting the checks involving the same
personalities wherein any enabling resolution from the Board was dispensed with and yet the bank
was able to collect from the corporation. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637
(1991).
The authority of a corporate officer dealing with third persons may be actual or apparent . . . the
principal is liable for the obligations contracted by the agent. The agent’s apparent representation
yields to the principal’s true representation and the contract is considered as entered into between
the principal and the third person. First Philippine Int’l Bank v. Court of Appeals, 252 SCRA 259
(1996).
Persons who deal with corporate agents within circumstances showing that the agents are
acting in excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v.
Court of Appeals, 269 SCRA 601 (1997).
Estoppel precludes a corporation’s Board from denying the validity of the transaction entered by
its officer with a third party who in good faith, relied on the authority of the former as manager to act
on behalf of the corporation. Lipat v. Pacific Banking Corp., 402 SCRA 339 (2003).

71
Engineering Geoscience, Inc. v. Philippine Savings Bank, 890 SCRA 199 (2019).
72
Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000); Soler v. CA, 358 SCRA 57 (2001); United Coconut Planters Bank v.
Planters Products, Inc., 672 SCRA 285 (2012).
37
 Naturally, the third person has little or no information as to what occurs in corporate meeting,
since what transpires in the Board room is entirely an internal matter and must necessarily rely upon
the external manifestations of corporate consent. The integrity of commercial transactions can only
be maintained by holding the corporation strictly to the liability fixed upon it by its agents in
accordance with law. Hence, petitioner may not impute negligence on the part of the respondents in
failing to find out the scope of Atty. Soluta’s authority. Indeed, the public has the right to rely on the
trustworthiness of bank officers and their acts. Associated Bank v. Pronstroller, 558 SCRA 113
(2008).
The general rule remains that, in the absence of authority from the Board of Directors, no
person, not even its officers, can validly bind a corporation. If a corporation, however, consciously
lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be
estopped from denying such officer’s authority. … Unmistakably, the Court’s directive in Yao Ka Sin
Trading is that a corporation should first prove by clear evidence that its corporate officer is not in
fact authorized to act on its behalf before the burden of evidence shifts to the other party to prove,
by previous specific acts, that an officer was clothes by the corporation with apparent authority.
Westmont Bank v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009).73
The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope of
an apparent authority, and it holds him out to the public as possessing the power to do those acts.
The doctrine does not apply if the principal did not commit any acts or conduct which a third party
knew and relied upon in good faith as a result of the exercise of reasonable prudence. Moreover, the
agent’s acts or conduct must have produced a change of position to the third party’s
detriment. Advance Paper Corp. v. Arma Traders Corp.,  712 SCRA 313 (2013).
The existence of apparent authority may be ascertained through (1) the general manner by
which the corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope
of his ordinary powers. Georg v. Holy Trinity College, Inc., 797 SCRA 550 (2016).74
A corporation exercises its corporate powers through its board of directors. This power may be
validly delegated to its officers, committees, or agencies. “The authority of such individuals to bind
the corporation is generally derived from law, corporate bylaws or authorization from the board,
either expressly or impliedly by habit, custom or acquiescence in the general course of business.”
Apparent or implied authority "can be measured by his or her prior acts which have been ratified by
the corporation or whose benefits have been accepted by the corporation.” Terp Construction Corp.
v. Banco Filipino Savings and Mortgage Bank, 920 SCRA 163 (2019).
Although the corporate officer was not duly authorized by the Board to enter into the
compromise agreement, nonetheless when the corporation itself availed of the provisions thereof
there is the proper application of the doctrine of apparent authority, plus the fact that the Board
questioned the authority of the corporate officer to sign the compromise agreement only after 12
years, laches had already set in. Engineering Geoscience, Inc. v. Philippine Savings Bank , 890
SCRA 199 (2019).

4. MANAGEMENT AND OTHER CORPORATE OFFICERS

a. Board Power to Delegate Its Authority: Management Handles the Day-to-Day Affairs of
the Company (Sec. 24)
The Board of Directors is generally a policy making body. Even if the corporate powers of a
corporation are reposed in the Board under what is now Sec. 22 of RCC, it is of common knowledge
and practice that the Board does not directly engage or take charge with the running of the recurring
business affairs of the corporation; its members generally do not concern themselves with the
corporation’s day-to-day affairs, except those officers who charged with running the corporate
business and are concomitantly members of the Board, like the President. Federated Dealers Assn.
v. Del Rosario, 808 SCRA 272 (2016).
Just as natural person may authorize another to do certain acts for and on his behalf, the Board,
as the repository of corporate powers, may validly delegate some of its functions and powers to
officers, committees, or agents. The authority of such individuals to bind the corporation is generally
derived from law, bylaws or authorization from the Board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business. Colegio Medico-Farmaceutico de
Filipinas, Inc. v. Lim, 869 SCRA 298 (2018).

b. Rules on Corporate Officer’s Power to Bind the Corporation

Insofar as the public is concerned, a corporation may not distance itself from the acts of a senior
officer: “the dual roles of Romulo F. Sugay should not be allowed to confuse the facts.” R.F. Sugay
v. Reyes, 12 SCRA 700 (1961).

73
Calubad v. Ricarcen Dev. Corp., 838 SCRA 303 (2017); Ayala Land, Inc. v. ASB Realty Corp., 881 SCRA 56 (2018); Engineering Geoscience, Inc.
v. Phil. Savings Bank, 890 SCRA 199 (2019); Vive Eagle Land, Inc. v. NHMFC, 918 SCRA 87 (2019).
74
Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003).
38
 Doctrine of Implied Authority: An officer who is authorized to purchase the stock of another
corporation has implied power to perform all other obligations arising therefrom such as payment of
the shares. Inter-Asia Investments Industries v. Court of Appeals, 403 SCRA 452 (2003).
Even though a judgment or order is addressed to the corporation only, the officers as well as the
corporation itself, may be punished for contempt for disobedience to its terms, at least if they
knowingly disobey the court’s mandate, since a lawful judicial command to a corporation is in effect a
command to the officers. Heirs of Trinidad de Leon Vda. De Roxas v. CA, 422 SCRA 101 (2004).
While those who belong to the upper corporate echelons would have more privileges, it cannot
be presume the existence of such privileges or benefits—he who claims the same is burdened to
prove not only the existence of such benefits but also that he is entitled to the same. Kwok v.
Philippine Carpet Manufacturing Corp., 457 SCRA 465 (2005).
Corporate policies need not be in writing. Contracts entered into by a corporate officer or
obligations assumed by such officer on behalf of such corporation are binding on the said
corporation only if such officer acted within the scope of his authority or if such officer exceeded the
limits of his authority, the corporation has ratified such contracts or obligations. Hence, a verbal
promise given by the Chairman and President to the General Manager and COO to give the latter
unlimited sick and vacation leave benefits and cash conversion upon his retirement or resignation,
when not an integral part of the company’s rules and policies, is not binding on the company when it
is without the approval of the Board of Directors. Kwok v. Philippine Carpet Manufacturing Corp., 457
SCRA 465 (2005).
The acceptance of the offer to purchase by the clerk of the branch, and the representation that
the manager had already approved the sale (in fact not true), cannot bind the bank to the contract of
sale, it being obvious that such a clerk is not among the bank officers upon whom putative authority
may be reposed by a third party. There is, thus, no legal basis to bind the bank into any valid
contract of sale with the buyers, given the absolute absence of any approval or consent by any
responsible officer of the bank. DBP v. Ong, 460 SCRA 170 (2005).
The general principles of agency govern the relation between the corporation and its officers or
agents, subject to the articles of incorporation, bylaws, or relevant provisions of law—when
authorized, their acts bind the corporation; otherwise, their acts cannot bind it. Yasuma v. Heirs of
Cecilio S. De Villa, 499 SCRA 466 (2006); Litonjua v. Eternit Corp., 490 SCRA 204 (2006).
As a general rule, the acts of corporate officers within the scope of their authority are binding on
the corporation, but when these officers exceeded their authority, their actions cannot bind the
corporation, unless it has ratified such acts or is estopped from disclaiming them. Reyes v. RCPI
Employees Credit Union, Inc., 499 SCRA 319 (2006).
While it is a general rule that, in the absence of authority from the Board, no person, not even its
officers, can validly bind a corporation; however, just as a natural person may authorize another to
do certain acts for and on his behalf, the Board may validly delegate some of its functions and
powers to officers, committees or agents—the authority of such individuals to bind the corporation is
generally derived from law, corporate bylaws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general course of business. Cebu Mactan
Members Center Inc. v. Tsukahara, 593 SCRA 172 (2009). 75
The general principles of agency govern the relationship between a corporation and its
representatives. Article 1317 of the Civil Code similarly provides that the principal must delegate the
necessary authority before anyone can act on his or her behalf. Nonetheless, law and jurisprudence
recognize actual authority and apparent authority as the two types of authorities conferred upon a
corporate officer or agent in dealing with third persons: Actual authority can either be express or
implied. Express actual authority refers to the power delegated to the agent by the corporation, while
an agent's implied authority can be measured by his or her prior acts which have been ratified by the
corporation or whose benefits have been accepted by the corporation. On the other hand, apparent
authority is based on the principle of estoppel, as provided under Articles 1431 and 1869 of the Civil
Code. Calubad v. Ricarcen Dev. Corp., 838 SCRA 303 (2017).
(1) President: In the absence of a charter or bylaw provision to the contrary, the President is
presumed to have the authority to act within the domain of the general objectives of the
corporation’s business and within the scope of his usual duties. The president of the corporation
possesses the power to enter into a contract for the corporation, when the “conduct on the part
of both the president and the corporation [shows] that he had been in the habit of acting in
similar matters on behalf of the company and that the company had authorized him so to act
and had recognized, approved and ratified his former and similar actions.” People’s Aircargo
v. Court of Appeals, 297 SCRA 170 (1998).76
Since what is now Section 24 of the RCC mandates that the President shall be a
director, it follows that a person who cannot qualify to be a director cannot validly be
appointed President. Lim v. Moldex Land, Inc., 815 SCRA 619 (2017).
It is the Board of Directors, not the President, that exercises corporate powers. It must be
emphasized that the basis for agency is representation and a person dealing with an agent is
75
Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924); Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-Roxas v. CA, 211 SCRA 470 (1992); Associated
Bank v. Pronstroller, 558 SCRA 113 (2008); Pasos v. PNCC, 700 SCRA 608 (2013).
76
Advance Paper Corp. v. Arma Traders Corp., 712 SCRA 313 (2013).
39
 put upon inquiry and must discover upon his peril the authority of the agent. Safic Alcan & Cie v.
Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
The President, as the corporation’s agent, his knowledge of the repeal of a resolution in
another juridical person in which his corporation has an interest, is ascribed to his principal
under the theory of imputed knowledge. Rovels Enterprises v. Ocampo, 392 SCRA 176 (2002).
The President of the corporation which becomes liable for the accident caused by its truck
driver cannot be held solidarily liable for the judgment obligation arising from quasi-delict, since
being President is not sufficient to hold him solidarily liable for the liabilities adjudged against the
corporation and its employee. Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004).
The President is a corporate officer under what is now Section 24 of the RCC, and issues
of dismissal relating to him would be considered an intra-corporate dispute, not a labor dispute.
Malcaba v. ProHealth Pharma Phils., Inc., 864 SCRA 518 (2018).

(2) Vice-President: The law does not require that a Vice-President be a shareholder. Baguio v.
Court of Appeals, 226 SCRA 366 (1993).
When bylaws provide that the Vice-President and Secretary must have the same
qualifications as those of the President (i.e., must be a member of the Board), then the
appointment of persons who are not members to such positions would also be unlawful.
Lim v. Moldex Land, Inc., 815 SCRA 619 (2017).
(3) Corporate Secretary: The Corporate Secretary is the custodian of corporate records—he
keeps the stock and transfer book and makes proper and necessary entries therein. It is his
duty and obligation to register valid transfers of stock in the corporate books; and in the event
he refuses to comply with such duty, the transferor-shareholder may rightfully bring suit to
compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
A sale that fails to comply with what is now Sec. 39 of RCC, cannot be invalidated when
the buyer relies upon a Secretary’s Certificate confirming authority. A Secretary’s Certificate
regular on its face can be relied upon by a third party who does not have to investigate the
truths of the facts contained in such certification; otherwise, corporate business transactions
would become tortuously slow and unnecessarily hampered. Esguerra v. Court of Appeals, 267
SCRA 380 (1997).
Although the Corporate Secretary’s duty to record transfers of stock is ministerial, he
cannot be compelled to do so when the transferee’s title to said shares has no prima facie
validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not
acquire ownership rights over the pledged shares and thus cannot compel the corporate
secretary to record his alleged ownership of such shares on the basis merely of the contract of
pledge. Mandamus will not issue to establish a right, but only to enforce one that is already
established. Lim Tay v. Court of Appeals, 293 SCRA 634 (1998).
Per its Secretary’s Certificate, the Foundation had given its President ostensible and
apparent authority to inter alia deal with the respondent bank, and therefore the Foundation is
estopped from questioning the President’s authority to obtain the subject loans from the
respondent bank. Lapulapu Foundation, Inc., v. Court of Appeals, 421SCRA 328 (2004).
The proper evidence of a Board resolution approving the sale of a piece of land can only
the Secretary’s Certificate embodying such resolution, since it serves as the corporation’s
official document showing the corporate actions approved by its Board of Directors, as well as
the extent and scope of authority necessarily conferred to its agents for the execution and
implementation of such actions. Lim v. People, 862 SCRA 405 (2018).

(4) Corporate Treasurer: A Corporate Treasurer’s functions have generally been described as “to
receive and keeps funds of the corporation, and to disburse them in accordance with the
authority given him by the board or the properly authorized officers.” Unless duly authorized, a
treasurer, whose power are limited, cannot bind the corporation in a sale of its assets, which
obviously is foreign to a corporate treasurer’s function. San Juan Structural v. CA, 296 SCRA
631 (1998).
A Corporate Treasurer whose negligence in signing a confirmation letter for rediscounting
of crossed checks, knowing fully well that the checks were strictly endorsed for deposit only to
the payee’s account and not to be further negotiated, may be personally liable for the damaged
caused the corporation. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).

(5) Compliance Officer (Sec. 24): For corporations vested with public interests, the Board shall
appoint a compliance officer.
(6) Manager: Although a branch manager of a bank, within his field and as to third persons, is the
general agent and is in general charge of the corporation, with apparent authority
commensurate with the ordinary business entrusted him and the usual course and conduct
thereof, yet the power to modify contracts of the bank remains generally with the Board. Being a
branch manager alone is insufficient to support the conclusion that he has been clothed with

40
 “apparent authority” to verbally alter terms of the bank’s written contract, such the mortgage
contract. Bañate v. Philippine Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21 (2010).

b. BOARD POWER TO APPOINT AND TERMINATE CORPORATE OFFICERS:

(1) Who Is a “Corporate Officer” under the Power of the Board to Hire and Fire? (Sec. 25):
“Corporate officers” in the context of being the business judgment powers of the Board to hire
and fire are those officers who are given that character by the [Revised Corporation Code] or by
the bylaws. Gurrea v. Lezama, 103 Phil. 553 (1958).77
The position of Executive Secretary provided for in the bylaws is an “officer” position. Since
the appointment of the incumbent did not contain a fix term, the implication was that the
appointee held the appointment at the pleasure of the Board, such that when the Board opted to
replace the incumbent, technically there was no removal but only an expiration of the term.
Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 (1982).78
One who is included in the bylaws in its roster of corporate officers is an officer and not a
mere employee. The removal of a corporate officer is an intra-corporate dispute cognizable by
the SEC and not by the NLRC. Ongkingco v. NLRC, 270 SCRA 613 (1997).79
To determine applicability of the “security of tenure” clause under Labor Laws, one who
holds a position, no matter how high in the organization, which is not provided for by law or
defined in the bylaws, is considered still to be an employee and not an officer, the latter being
within the business judgment power of the Board to hire and fire. Pamplona Plantation Co. v.
Acosta, 510 SCRA 249 (2006).80
Ordinary employees are generally employed not by action of the directors and
shareholders but by that of the Management who also determines the compensation to be paid
such employees. Corporate officers, on the other hand, are elected or appointed by the
directors or shareholders, and are those who are given that character either by the [Revised]
Corporation Code or by the bylaws. Gomez v. PNOC Dev. and Management Corp., 606 SCRA
187 (2009).81
Even if bylaws provide expressly that the Board of Directors “shall have full power to create
new offices and to appoint the officers thereto,” any office created, and any officer appointed
pursuant to such clause does not become a “corporate officer,” but is an employee and the
determination of the rights and liabilities relating to his removal are within NLRC’s jurisdiction—
they do not constitute intra-corporate controversies. “A different interpretation can easily leave
the way open for the Board of Directors to circumvent the constitutionally guaranteed security of
tenure of the employee by the expedient inclusion in the Bylaws of an enabling clause on the
creation of just any corporate officer position.” The rulings in Tabang v. NLRC, 266 SCRA 462
(1997), and Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002), “should no longer
be controlling.” Matling Industrial and Commercial Corp. v. Coros, 633 SCRA 12 (2010).82
Where the bylaws expressly provide for the positions of “one or more vice-president”, then
the appointment of the Executive Vice-President pursuant to said bylaw provision would make
the appointee a corporate officer within the contemplation of our ruling in Matling Industrial and
commercial Corp v. Coros. Cacho v. Balagtas, 855 SCRA 11 (2018).
Under what is now Sec. 24 of RCC, the President is considered a corporate officer;
whereas, “Assistant Vice President” is not among the officers stated therein, must less is it
provided for in the bylaws. The dismissal of the President is therefore an intra-corporate dispute
that is beyond the jurisdiction of the NLRC, while the dismissal of the Assistant Vice President
was well within NLRC’s jurisdiction to resolve. Malcaba v. ProHealth Pharma Phils., Inc., 864
SCRA 518 (2018).

(2) Nature of Exercise of Power to Terminate Officers: An officer’s removal is a corporate act,
its nature is not altered by the reason or wisdom, or lack thereof, with which the Board of
Directors might have in taking such action. Perforce, the matter would come within the area of
corporate affairs and management, and such a corporate controversy would call for SEC
adjudicative expertise [now RTC Special Commercial Courts], not that of NLRC. De Rossi v.
NLRC, 314 SCRA 245 (1999); Okol v. Slimmers World Int’l, 608 SCRA 97 (2009).
The President, Vice-President, Secretary and Treasurer are commonly regarded as the
principal or executive officers of a corporation, usually designated as the officers;
however, other officers are sometimes created by the charter or bylaws, or the Board may be
empowered under the bylaws of a corporation to create additional offices as may be necessary.
This Court expounded that an “office” is created by the charter and the officer is elected by the
directors or shareholders, while an “employee” usually occupies no office and generally is
77
Garcia v. Eastern Telecommunications Phils., 585 SCRA 450 (2009); WQPP Marketing Communications v. Galera, 616 SCRA 422 (2010).
78
PSBA v. Leaño, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986); Visayan v. NLRC, 196 SCRA 410 (1991); Easycall Communications
Phils., v. King, 478 SCRA 102 (2005); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, 715 SCRA 534 (2014).
79
Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).
80
WPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Loreche-Amit v.
Cagayan de Oro Medical Center, Inc., 902 SCRA 375 (2019).
81
Okol v. Slimmers World Int’l, 608 SCRA 97 (2009); FVR Skills and Services Exponents v. Seva, 739 SCRA 271 (2014).
82
Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, Inc.,
715 SCRA 534 (2014); Ellao y Dela Vega v. Batanga I Electric Cooperative, 871 SCRA 227 (2018).
41
 employed not by action of the directors or shareholders but by the managing officer who also
determines the compensation to be paid to such employee. The creation of the position is under
the charter or by-aws, and that the election of the officer is by the Board must concur in order for
an individual to be considered a corporate officer, as against an ordinary employee or officer. It
is only when the officer claiming to have been illegally dismissed is classified as such corporate
officer that the issue is deemed an intra-corporate dispute. Wesleyan University-Philippines
v. Maglaya, Sr., 815 SCRA 171 (2017).

MODULE 7

FIDUCIARY DUTIES AND RESPONSIBILITIES

OF DIRECTORS, TRUSTEES AND OFFICERS
( 7TH WEEK: MARCH 22, AND 24 )

Asynchronous Study: Chapters 10 and 11 of TEXTBOOK

XI. CG PRINCIPLES OF “COMPETENCE AND INDEPENDENCE ”

1. Qualifications and Disqualifications of Directors/Trustees (Secs. 22 and 26)
The qualifications provided for in the law are only minimum qualifications; additional qualifications
and disqualifications can be provided for but only by proper provisions in the bylaws. Gokongwei, Jr.
v. SEC, 89 SCRA 336 (1979).
A director must own at least one share of stock. Peña v. Court of Appeals, 193 SCRA 717 (1991).83
Beneficial ownership under VTA no longer qualifies as a director owning at least one share of stock
in his name. Lee v. Court of Appeals, 205 SCRA 752 (1992).
Thus, while a corporate shareholder or member may rightfully designate proxies or representatives,
the latter, however, cannot be elected as directors or trustees. First, the [Revised] Corporation Code
clearly provides that a director or trustee must be a member of record of the corporation. Further, the
power of the proxy is merely to vote. If said proxy is not a member in his own right, he cannot be elected
as a director or proxy. Lim v. Moldex Land, Inc., 815 SCRA 619 (2017).

a. Implied Obligation of the Board to Remove Disqualified Director or Trustee (Sec. 27)

b. SEC’s Power to Remove Disqualified Director or Trustee (Sec. 27)

2. Election of Directors and Trustees (Secs. 23 and 25; Secs. 91)

A bylaw or company practice of giving a shareholder a permanent seat in the Board would be
against the provisions of the [Revised] Corporation Code which requires member of the Board to be
elected annually. Grace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).
The underlying policy of the [Revised] Corporation Code is that the business and affairs of a
corporation must be governed by a Board of Directors whose members have stood for election, and
who have actually been elected by the shareholders, on an annual basis. Only in that way can the
directors’ continued accountability to the shareholders, and the legitimacy of their decisions that bind the
corporation’s shareholders, be assured. The shareholder vote is critical to the theory that legitimizes the
exercise of power by the directors or officers over properties that they do not own. This theory of
delegated power of the Board explains why, under what is now Sec. 28 of RCC, the remaining Board
can fill a vacancy—it recognizes the shareholders’ right to elect the members of the Board by limiting
the period during which the successor shall serve only to the “unexpired term of his predecessor in
office.”Valle Verde Country Club, Inc. v. Africa, 598 SCRA 202 (2009).
Since under what is now Sec. 25 of RCC all corporations are mandated to submit a formal report to
the SEC on the changes in their directors and officers, then only those directors and officers appearing
in the General Information Sheet to the SEC are deemed legally constituted to bind the corporation,
especially in the bringing of suits on behalf of the corporation. Premium Marble Resources v. CA,
264 SCRA 11 (1996); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27
(2004).

a. CUMULATIVE VOTING (Sec. 23; Cumulative Voting in Corporate Elections: Introducing

Strategy in the Equation, 35 SOUTH CAROLINA L. REV. 295)
b. Election Contests (Rule 6, Interim Rules of Procedure for Intra-Corporate Controversies)

83
Detective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 (1969).
42
 The proper remedy to question the legality and proper qualification of persons elected to the
board is a quo warranto proceeding. Ponce v. Encarnacion, 94 Phil. 81 (1953). – Now an election
contest under the Interim Rule of Procedure for Intra-Corporate Controversies
All election contests over directors and trustees fall within the original and exclusive jurisdiction
of the RTC Special Commercial Courts and no longer with the SEC. GSIS v. CA, 585 SCRA 679
(2009).
SEC retains its regulatory power over proxy issues on matters other than election of directors or
trustees, but not on matters relating to elections of directors or trustees. The test is whether the
controversy relates to such election. All matters affecting the manner and conduct of the election of
directors are properly cognizable by the regular courts. Otherwise, these matters may be brought
before the SEC for resolution based on the regulatory powers it exercises over corporations,
partnerships and associations. SEC v. Court of Appeals, 739 SCRA 99 (2014).
Under the Interim Rules, an election contest should be dismissed when filed beyond the 15-day
prescriptive period allowed. In substance, the main issues herein are on all fours with Yujuico v.
Quiambao, 513 SCRA 243 (2007), where we expressly ruled that where one of the reliefs sought in
the complaint is to nullify the election of the Board of Directors as the annual shareholders’ meeting,
the complaint involves an election contest. Ricafort v. Dicdican, 787 SCRA 163 (2016).
An action seeking to hold void the action of the Board of Directors suspending a member on the
ground that they did not have valid quorum at the time the action was taken since they invalidly
constituted themselves as the new members of the Board is actually an election contest, which
under the Interim Rules of Procedure would be available only within a period of 15 days from the
time the alleged election or constitution of the new Board took place. Eizmendi Jr., v. Valle Verde
Country Club, Inc., 879 SCRA 379 (2018).

c. Report of Election and Non-Holding of Election of Directors and Officers (Sec. 25)

3. INDEPENDENT DIRECTORS (Sec. 22): The Board of the following corporations “vested with public
interests” shall have independent directors constituting at least 20% of such Board:
(1) Securities Regulation Code Companies: publicly-held and publicly-listed companies,
and those whose securities are registered with the SEC;
(2) Financial Intermediaries: Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, preneed, trust and insurance companies, and
other similar corporations;
(3) Other Corporations Engaged in Business Vested with Public Interests Similar to
Above, as may be determined by SEC based on given factors (see also Sec. 95)

4. Directors’ Term of Office, Holdover Principle and Removal

a. One-Year Term of Office for Directors (Sec. 22)
b. Director Ipso Facto Ceases to Hold Office in Event He Ceases to Hold Shares (Sec. 22)
c. Removal of Directors or Trustees (Sec. 27)
A shareholders’ meeting called for the removal of a director is valid only when called by at least
two-thirds of the outstanding capital stock. Roxas v. De la Rosa, 49 Phil. 609 (1926).
Only shareholders or members have the power to remove directors or trustees elected by them,
as laid down in what is now Sec. 27 of RCC. Raniel v. Jochico, 517 SCRA 221 (2007).

5. Vacancies in the Board (Secs. 28 and 25)

a. Vacancy Occurring by Removal
b. Vacancy Occurring by Expiration of Term
c. Increase in the Number of the Board
d. All Vacancies Occurring Other than by Removal or Expiration of Term
e. Emergency Board (Sec. 28)
Directors may lawfully fill vacancies occurring in the Board, and such officials, as well as the
original directors, hold-over until qualification of their successors. Gov’t v. El Hogar Filipino, 50 Phil. 399
(1927).
The remaining members of the Board cannot elect another director to fill in a vacancy caused by
the resignation of a hold-over director. The hold-over period is not part of the term of office of a member
of the board of directors. Consequently, when during the hold-over period, a director resigns from the
board, the vacancy can only be filled-up by the shareholders, since there is no term left to fill-up
pursuant to the provisions of Section 29 which mandates that a vacancy occurring in the board of
directors caused by the expiration of a member’s term shall be filled by the corporation’s shareholders.
That a director continues to serve after one year from his election (i.e., on a holdover capacity) cannot
43
 be considered as extending his term. This hold-over period, however, is not to be considered as part of
his term, which, as declared, had already expired. Valle Verde Country Club, Inc. v. Africa, 598
SCRA 202 (2009).

6. Directors’ or Trustees’ Meetings (Secs. 48, 52, 53 and 91)

a. Quorum: For stock corporations, the “quorum” referred to in what is now Sec. 51 of the RCC is
based on the number of outstanding voting stocks. For nonstock corporations, only those who are
actual, living members with voting rights shall be counted in determining the existence of a quorum
during members’ meetings. Dead members shall not be counted. Tan v. Sycip, 499 SCRA 216
(2006).84

b. Chairman Presides Over Board and Shareholders’/Members’ Meetings (Sec. 52)

c. Modern Means of Participation in Board Meetings (Sec. 52)
Abstention: In a Board meeting, an abstention is presumed to be counted as an affirmative vote
insofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but
such presumption, being merely prima facie would not hold in the face of clear evidence to the
contrary. Lopez v. Ericta, 45 SCRA 539 (1972).

 SEC Memo Circular No. 06-2020: Guidelines on Attendance and Participation of

Directors/Trustees in Meetings
d. Recusal of Directors/Trustees with Potential Interest in RPTs (Sec. 52)
e. Minutes of Meetings: There is no provision in [Revised] Corporation Code that requires that the
minutes of the meeting should be signed by all the members of the Board—the signature of the
corporate secretary gives the minutes the probative value and credibility. The entries contained in
the minutes are prima facie evidence of what took place during the meeting, pursuant to Sec. 44,
Rule 130 of the Revised Rule on Evidence. People v. Dumlao, 580 SCRA 409 (2009).
When there is evidence to show that other directors and the corporate secretary refused to sign
the minutes, then the presumption in Dumlao does not prevail. Lopez Realty, Inc. v. Spouses
Tanjangco, 739 SCRA 644 (2014).
Resolution versus Minutes: A resolution is distinct and different from the minutes of the meeting.
A Board resolution is a formal action by a corporate board of directors or other corporate body
authorizing a particular act, transaction, or appointment; while minutes are a brief statement not only
of what transpired at a meeting, usually of shareholders/members or directors/trustees, but also at a
meeting of an executive committee. People v. Dumlao, 580 SCRA 409 (2009).

7. Compensation of Directors (Sec. 29)

Directors and trustees are not entitled to salary or other compensation when they perform nothing
more than the usual and ordinary duties of their office, founded on the presumption that directors and
trustees render service gratuitously, and that the return upon their shares adequately furnishes the
motives for service, without compensation. But they can receive remunerations for acting as executive
officers, such as Chairman, President or Corporate Secretary. Western Institute of Technology, Inc.
v. Salas, 278 SCRA 216 (1997).85
It is well settled that directors presumptively serve without compensation. Hence, even though
director assigning themselves additional duties which still fall within their power much less do they
amount to extraordinary or unusual services to the company, they would then be acting in excess of
their authority by voting for themselves compensation for such additional duties. Thus, transfer of
corporate properties by way of payment of compensation amounts to self-dealing covered by what is
now Sec. 31 of RCC. Agdao Landless Residents Assn. v. Maramion, 806 SCRA 74 (2016).

XII. CG PRINCIPLES OF “TRANSPARENCY, ACCOUNTABILITY AND RESPONSIBILITY

”

1. FIDUCIARY DUTIES OF DIRECTORS, TRUSTEES AND OFFICERS

a. Directors as Fiduciaries
The following provisions in the corporate charter are unlawful under the old Corporation Law:
that contracts and transactions with other corporations shall not be affected by the fact that any of
the directors or officers of the company may be interested in or are directors or officers of such other
corporations; that persons who may become directors or officers this the company are hereby
relieved of all responsibilities which they would otherwise incur by reason of any contracted entered
into which this company either for their own benefit or for the benefit of any person, firm, or
corporation to which they may be interested. The impact of these provisions upon the traditional

84
Lim v. Moldex Land, Inc., 815 SCA 619 (2017).
85
Singson v. COA, 627 SCRA 36 (2010).
44
 fiduciary relationship between the directors and the shareholders of the company is too obvious to
escape notice by the SEC which is called upon to protect the interests of investors. Palting v. San
Jose Petroleum, 18 SCRA 924 (1966).
In Philippine jurisdiction, members of the Board of Directors have a three-fold duty: duty of
obedience, duty of diligence, and the duty of loyalty. Accordingly, the Board members (1) shall direct
the affairs of the corporation only in accordance with the purpose for which it was organized; (2)
shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act
in bad faith or with gross negligence in directing the affairs of the corporation; and (3) shall not
acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.
Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW, 2001, p. 318.

b. Duty of Obedience (Sec. 24)

The Board of Directors should act in the manner and within the formalities, if any, prescribed by
its charter or by the general law. Lopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995).

c. Duty of Diligence (Sec. 30)

The directors shall be personally liable to reimburse the corporation for the amounts of
dividends wrongfully declared and paid to shareholders, when they failed to consider that the
recorded retained earnings in the corporate books was illusory considering the various accounts
receivables that had to be written off as uncollectible. Steinberg v. Velasco, 52 Phil. 953 (1929).
To make a director personally liable for corporate debts, the wrongdoing approved or assented
to by the director must be a patently unlawful act. Mere failure to comply with the notice
requirement of labor laws on company closure or dismissal of employees does not amount to a
patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes
penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and
penalizing the act. Carag v. NLRC, 520 SCRA 28 (2007).86
Under what is now Sec. 30 of the RCC, personal liability will attach to a director or officer only
when guilty of any of the following: (1) willfully or knowingly voting or assenting to patently unlawful
acts of the corporation; (2) gross negligence; or (3) bad faith. It is only in these exceptional cases
when officers are solidarily liable. PCGG v. Gutierrez, 871 SCRA 148 (2018); Kho, Sr. v. Manganua,
911 SCRA 366 (2019).
Violation of what is now Sec. 30 of the RCC involves purely civil liability, i.e., “all damages resulting
from is violation suffered by the corporation, its stockholders or members and other persons,” and the
criminal penalty imposed under what is now Section 170 of the RCC is not imposable at all. United
Coconut Planters Bank v. Secretary of Justice, G.R. 209601, 12 January 2021.

d. Duty of Loyalty (Secs. 30, 31 and 33)

(1) Doctrine of Corporate Opportunity: It is well established that corporate officers are not
permitted to use their position of trust and confidence to further their private interests. The
“doctrine of corporate opportunity” s precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing
interest. The doctrine rest fundamentally on the unfairness, in particular circumstances, of an
officer or director taking advantage of an opportunity for his personal profit when the interest of
the corporation justly calls for protection. Gokongwei v. SEC, 89 SCRA 336 (1979).
(2) Using Inside Information: When a director and majority shareholder, who is the administrator
of corporate affairs directly negotiating the sale of corporate landholdings to the Government at
great prices, purchases the stocks of a shareholder without informing the latter of the on-going
negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of
deceit practiced by means of concealing his knowledge of important corporate affairs. Strong v.
Repide, 41 Phil. 947 (1909).
Doctrine of corporate opportunity applies to confidential employees of the corporation. cf.
Sing Juco v. Llorente, 43 Phil. 589 (1922).
(3) Self-Dealings of Directors and Officers (Sec. 31)
What is now Sec. 31 of RCC on self-dealings by directors and officers merely incorporate
well-established principles in Corporate Law. A director who enters into a distributorship
agreement with the corporation would make the contract voidable at the option of the
corporation especially when the terms are disadvantageous to the corporation. Such director
cannot claim the same doctrine as an outsider dealing in good faith with the corporation.
Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).
(4) Material Related Party Transactions for PLCs (Sec. 31; SEC Memo Circular No. 10-
2019)

e. Contracts Between Corporations with Interlocking Directors (Sec. 32)

86
Dy-Dumalasa v. Fernandez, 593 SCRA 656 (2009); Montealegre v. Spouses De Vera, 908 SCRA 269 (2019).
45
 The rule under what is now Sec. 32 of RCC allowing annulment of contracts between
corporations with interlocking directors resulting in the prejudice to one of the corporations, has no
application to cases where fraud is alleged to have been committed to third parties. DBP v. CA, 363
SCRA 307 (2001).

f. Duty to Maintain Records and Report on Salient Corporate Data (Sec. 161)
(1) To Adopt, Maintain and Allow Inspection of the Bylaws under Sec. 45
(2) To Keep, Maintain and Allow Inspection of Articles of Incorporation and Other
Corporate Books and Records under Sec. 73
 See Reporting in the GIS of Beneficial Ownership (SEC Memo. Circular No. 15-
2019)
(3) To Keep and Update the List of Members and Proxies for Nonstock Corporations
under Sec. 92
(4) To Keep, Maintain and Update the Minutes Book for One Person Corporations (OPC)
under Section 128
(5) To Annually Submit to the SEC the General Information Sheet (GIS) and Audited
Financial Statements under Sec. 177;
 For Corporations Vested with Public Interests: Also Submit Director
Compensation Report and Director Appraisal and Performance Report
This Court takes judicial notice of the fact that audited financial statements submitted by
corporations, as required by what is now Sec. 177 of RCC, are made available to the public.
Hence, the Court fails to see how Atty. Castillon violated any law when he attached a copy of
Ready Form’s audited financial statements in the Petition for Blacklisting he filed with the
National Publishing Office (NPO). Ready Form, Inc. v. Castillon, Jr., 859 SCRA 531 (2018).
The underlying prosecution is for the alleged violation of Section 74 of
the Corporation Code, in relation to Section 144  thereof. Collectively, these provisions create
the duty on the part of the corporation to keep and preserve a record of all business
transactions and minutes of all meetings of stockholders, members, or the board of directors or
trustees, along with the duty to make such record available to its stockholders or members upon
written request therefor; a violation of these duties invites criminal prosecution against the erring
officers to allow the eventual application of the prescribed penalties. Keh v. People, G.R. Nos.
217592-93, 13 July 2020.

g. Duty/Obligations to Creditors and Other Stakeholders (Secs. 22 and 30)

(1) Who are “Stakeholders” of a Corporation? CODE OF CORPORATE GOVERNANCE FOR
PUBLICLY-LISTED COMPANIES (SEC Memo. Circular No. 19, s.2016)
Under the trust fund doctrine, it would be a violation of the right of creditors to return to the
shareholders of any portion of their capital or declare dividends outside of the unrestricted
retained earnings, and that upon the corporation’s insolvency, the Board of Directors are duty
bound to hold its assets primarily for the payment of the creditors. Mead v. McCullough, 21
Phil. 95 (1911).
The Board of Directors is expected to be more than a mere rubber stamp of the corporation
and its subordinate departments. It wields all corporate powers bestowed by the [Revised]
Corporation Code, including the control over its properties and the conduct of its business.
Being stewards of the company, the Board is primarily charged with protecting the corporate
property and assets in behalf of its stakeholders. Although it cannot be shown that the (two)
directors approving the credit line where unaware of the fraudulent intent for such transactions,
nevertheless, they were still liable for the defrauded investors for gross negligence in managing
the affairs of the company in not exercising more circumspection based on the facts already
known to them that resulted to the prejudice of its clients and stakeholders. Neither can the
business judgment rule apply herein for it is elementary in Corporation Law that the doctrine
admits of exception: bad faith being one of them, gross negligence, another. Virata v. Ng
Wee, 830 SCRA 271 (2017); 860 SCRA 49 (2018).
It is well-settled that electricity distribution utilities, which rely on mechanical devices and
equipment for the orderly undertaking of their business, are duty-bound to make reasonable and
proper periodic inspections of their equipment. If they are remiss in carrying out this duty due to
their own negligence, they risk forfeiting the amounts owed by the customers affected. It must
be emphasized that electricity is “a basic necessity whose generation and distribution is imbued
with public interest, and its provider is a public utility subject to strict regulation by the State in
the exercise of police power;” it is a business vested with public interests. The serious
consequences on a consumer, whose electric supply has been cut off, behoove a distribution
utility to strictly comply with the legal requisites before disconnection may be done. This is all

46
 the more true considering Meralco's dominant position in the market compared to its customers'
weak bargaining position. Manila Electric Co. v. Nordec Philippines, 861 SCRA 515 (2018).

(2) Formal Recognition of the Duty of Directors/Trustees to Good Corporate

Governance:
 Directors/Trustees elected shall perform their duties as prescribed by law, rules of
good corporate governance, and bylaws (Sec. 23)
 Qualifications and disqualifications rules imposed by SEC to promote good
corporate governance (Sec. 26)
 Contents of Bylaws for the promotion of good corporate governance (Sec. 46[k])
 Duty to present to shareholders/members at annual meetings reports, records
and such other items that the SEC may require in the interest of good corporate
governance and the protection of minority shareholders (Sec. 49[f])87

2. CIVIL LIABILITIES OF DIRECTORS, TRUSTEES AND OFFICERS (Sec. 30)

a. GENERAL RULE: Corporate Officers Not Liable for Corporate Debts: Since a corporation has a
juridical personality separate and distinct from its directors/trustees and officers, the obligations
incurred as a result of the directors’ and officers’ acts as corporate agents, are not their personal
liability but the direct responsibility of the corporation they represent. Heirs of Fe Tan Uy v. Int’l
Exchange Bank, 690 SCRA 519 (2013).88
ERGO: Unless they have exceeded their authority, corporate officers are not personally liable for
their official acts, because a corporation, by legal fiction, has a personality separate and distinct from
its officers, shareholders and members. Price v. Innodata Phils., Inc., 567 SCRA 269 (2008).89
Mere ownership by an officer (President) of majority of the equity of the corporation do not
warrant a piercing of the veil of corporate fiction to make such officer personally liable for the debts of
the corporation. Palay, Inc. v. Clave, 124 SCRA 638 (1993).90
A corporation has a personality separate and distinct from the persons composing or
representing it; hence, personal liability attaches only in exceptional cases, such as when the
director, trustee, or officer is guilty of bad faith or gross negligence in directing the affairs of the
corporation. Continental Cement Corp. v. Asea Brown Boveri, Inc., 659 SCRA 137 (2011).91

b. Directors/Trustees or Officers May Contractually Obligating Oneself to Corporate Debts

While the limited liability doctrine is intended to protect the shareholder by immunizing him from
personal liability for the corporate debts, a corporate officer may nevertheless divest himself of this
protection by voluntarily binding himself to the payment of the corporate debts. Toh v. Solid Bank
Corp., 408 SCRA 544 (2003).
Officers signing as corporate representative did not undertake to guarantee personally the
payment of the corporation’s debt embodied in the trust receipts. Debts incurred by directors,
officers and employees acting as corporate agents are not theirs but the direct liability of the
corporation. As an exception, directors or officers are personally liable for the corporation’s debt if
they so contractually agree or stipulate. Tupaz IV v. Court of Appeals, 476 SCRA 398 (2005).
Where the Chairman & President has made himself accountable in the promissory note “in his
personal capacity and as authorized by the Board Resolution,” and in the absence of any
representation on the part of corporation that the obligation is all its own because of its separate
corporate identity, we see no occasion to consider piercing the corporate veil as material to the
case.” Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010).

c. Breach of Duty of Diligence Vis-à-vis Section 30: When Directors/Trustees or Officers

Personally Liable for Corporate Transactions:
(1) Directors/Trustees or Officers Personally Liable in Limited Instances: Tramat
Mercantile, Inc. v. Court of Appeals, 238 SCRA 14 (1994).92
(2) Requisites to Hold Directors/Trustees or Officers Personally Liable

87
Integrated Annual Corporate Governance Report under SEC Memo Circular No. 15-2017; Sustainability Reporting Guidelines for PLCs under SEC
Memo Circular No. 04-2019.
88
Polymer Rubber Corp. v. Salamuding, 702 SCRA 153 (2013).
89
Republic Planters Bank v. CA, 216 SCRA 738 (1992); Lowe, Inc. v. CA 596 SCRA 140 (2009); Marc II Marketing v. Joson, 662 SCRA 35 (2011); St.
Tomas v. Salac, 685 SCRA 245 (2012); Cosare v. Broadcom Asia, 715 SCRA 534 (2014).
90
Pabalan v. NLRC, 184 SCRA 495 (1990); Sulo ng Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 (1976); Mindanao Motors Lines, v. CIR, 6 SCRA 710
(1962).
91
Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban Ban, Inc. v. Peña, 659 SCRA 418 (2011) ; Gotesco Properties, v.
Fajardo, 692 SCRA 319 (2013); Olivarez Realty Corp. v. Castillo, 729 SCRA 544 (2014).
92
MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. CA, 311 SCRA 700 (1999); Atrium Management Corp. v. CA, 353 SCRA 23 (2001); Malayang
Samahan ng mga Manggawgawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); H.L.
Carlos Construction v. Marina Properties Corp., 421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Abott Laboratories Phils. V. Alcaraz, 701
SCRA 682 (2013); SPI Technologies v. Mapua, 720 SCRA743 (2014); Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014); Montallana v. La Consolacion
College Manila, 744 SCRA 163 (2014); Bank of Commerce v. Nite, 763 SCRA 520 (2015); PCGG v. Gutierrez, 871 SCRA 148 (2018).
47
 The general rule is that a corporation is invested by law with a personality separate and
distinct from that of the persons composing it, or from any other legal entity that it may be
related to. Therefore, to hold a director or officer personally liable for corporate obligations, the
following requisites must concur: (1) complainant must allege in the complaint that the director
or officer assented to a patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith. Mactan Rock Industries v. Germo, 850 SCRA 532
(2018).93
Finding of solidary liability on officers and directors would be baseless when the decision
contains no allegation or finding regarding particular acts committed by said officers and director
that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in
their personal dealings with third parties. When corporate officers and directors are sued merely
as nominal parties in their official capacities as such, they cannot be held liable personal for the
judgment rendered against the corporation. NPC. v. Court of Appeals, 273 SCRA 419 (1997).94

(3) Bad Faith

To hold a director personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director must be established clearly and
convincingly. Bad faith is never presumed. Bad faith does not connote bad judgment or
negligence. Bad faith imports a dishonest purpose. Bad faith means a breach of a known duty
through some ill motive or interest. Bad faith partakes of the nature of fraud. Carag v. NLRC, 520
SCRA 28 (2007).95
“Bad faith” does not arise just because a corporation fails to pay its obligation, because the
inability to pay one’s obligation is not synonymous with fraudulent intent not to honor the
obligations. In order to pierce the veil of corporate fiction, for reasons of negligence by the
director, trustee or officer in the conduct of the transactions of the corporation, such negligence
must be “gross”. Magaling v. Ong, 562 SCRA 152 (2008).

(4) Fraud
An office who signs a fraudulent contract on behalf of the corporation cannot claim the
benefit of separate juridical entity: “Thus, being a party to a simulated contract of management,
petitioner Uy cannot be permitted to escape liability under the said contract by using the
corporate entity theory. This is one instance when the veil of corporate entity has to be pierced
to avoid injustice and inequity.” Paradise Sauna Massage Corp. v. Ng, 181 SCRA 719 (1990).
(5) Section 30 Does Not Encompass All of “Breach of Duty of Diligence”
Officers of a corporation may become liable for its loans when they have breached their
duty of diligence under what is now Sec. 30 of RCC. Aratea v. Suico, 518 SCRA 501 (2007).96
Holding an officer personally liable for gross negligence or in bad faith in directing the
corporate affairs does not amount to an application of the doctrine of piercing the veil of
corporate fiction, for such personal liability is imposed directly under what is now Sec. 30 of
RCC to directors and officers who are guilty of violating their duty of diligence . Sanchez v.
Republic, 603 SCRA 229 (2009).
BUT SEE: Virata v. Ng Wee, 830 SCRA 271 (2017).

d. xJURISPRUDENCE IN LABOR LAW: Under Article 283 of the Labor Code, since a corporate employer
is an artificial person, it must have an officer who can be presumed to be the employer, “acting in
the interest of (the) employer” and therefore the highest officer becomes personally liable for labor
claims. A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986).

(1) Overturning the A.C. Ransom Ruling: Only the responsible officer who had a hand in illegally
dismissing an employee should be held personally liable for the corporate obligations arising
from such act. Maglutac v. NLRC, 189 SCRA 767 (1990);97 for the separate juridical personality
of a corporation to be disregarded as to make the highest corporate officer personally liable on
labor claims, the wrongdoing must be clearly and convincingly established. Del Rosario v.
NLRC, 187 SCRA 777 (1990).

93
Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013); Abott Laboratories Phil. v. Alcaraz, 701 SCRA 682 (2013); Polymer Rubber Corp.
v. Salamuding, 702 SCRA 153 (2013); Ico v. Systems Technology Institute, 729 SCRA 439 (2014); FVR Skills and Services Exponents v. Seva, 739 SCRA
271 (2014); Bank of Commerce v. Nite, 763 SCRA 620 (2015); Dimson v. Chua, 811 SCRA 630 (2016); Zaragoza v. Tan, 847 SCRA 437 (2017);
Montealegre v. Spouses De Vera, 908 SCRA 269 (2019); Total Petroleum Philippines Corp. v. Lim, G.R. No. 203566, 23 June 2020.
94
Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965); Arcilla v. CA, 215 SCRA 120 (1992).
95
Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949); EPG Constructions Co. v. CA, 210 SCRA 230 (1992); Rustan Pulp & Paper Mills
v. IAC, 214 SCRA 665 (1992); Western Agro-Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Laborte v. Pagsanjan Tourism Consumers’
Coop., 713 SCRA 536 (2014); Olivarez Realty Corp. v. Castillo, 729 SCRA 544 (2014); Pioneer Insurance & Surety Corp. v. Morning Star Travel & Tours,
762 SCRA 283 (2015).
96
Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
97
Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997)
48
 Corporate officers are not personally liable for money claims of discharged employees
unless they acted with evident malice and bad faith in terminating their employment.
AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996).98
In labor cases, directors and officers are solidarily liable for the termination of employment
of employees done with malice or in bad faith. In this case, it is undisputed that the officers have
a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking
officers and directors, signed the Board resolution retrenching the employees on the feigned
ground of serious business losses that had no basis apart from an unsigned and unaudited
Income Statement. Uichico v. NLRC, 273 SCRA 35 (1997).
A corporation, being a juridical entity, may act only through its directors, officers and
employees and obligations incurred by them, acting as corporate agents, are not theirs but the
direct accountabilities of the corporation. In labor cases, directors and officers are solidarily
liable with the corporation for the termination of employment of employees done with malice or
bad faith. Brent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).99
Officers cannot be held personally liable for damages on account of employees’ dismissal
because the employer corporation has a personality distinct from its officers who merely acted
as agents. Malayang Samahan… sa M. Greenfields v. Ramos, 357 SCRA 77 (2001).100
(2) Limiting the A.C. Ransom Ruling to Insolvent Corporation: A.C. Ransom is not in point
because there the corporation actually ceased operations after the decision of the court was
promulgated against it, making it necessary to enforce it against its former president. When the
corporation is still existing and able to satisfy the judgment in favor of the private respondent,
corporate officers cannot be held personally liable. Lim v. NLRC, 171 SCRA 328 (1989).
A.C. Ransom will apply only where the persons who are made personally liable for the
employees’ claims are shareholders-officers of employer corporation. Here, a mere general
manager while admittedly the highest-ranking corporate representative, is nevertheless not a
shareholder and much less a member of the Board nor an officer thereof. De Guzman v. NLRC,
211 SCRA 723 (1992).

(3) A.C. Ransom Reiterated in Restuarante Las Conchas v. Llego, 314 SCRA 24 (1999).101
(4) Definitive Overturning of A.C. Ransom Ruling: It is settled that in the absence of malice, bad
faith, or specific provisions of law, a shareholder or an officer of a corporation cannot be made
personally liable for corporate liabilities. McLeod v. NLRC, 512 SCRA 222 (2007).102
“Clearly, in A.C. Ransom, President organized ROSARIO to evade payment of backwages
to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of
Patricio, does not obtain in the present case. [What applies therefore is the ruling [i]n Santos v.
NLRC, [254 SCRA 673 (1996)].” McLeod v. NLRC, 512 SCRA 222 (2007).103
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McLeod v. NLRC, 512 SCRA
22 (2007), that Article 212(e) of Labor Code, by itself, does not make an officer personally liable
for corporate debts—the governing law on personal liability of directors or officers for debts of
the corporation is still what is now Sec. 30 of RCC. Pantranco Employees Assn. (PEA-PTGWO)
v. NLRC, 581 SCRA 598 (2009).104
As to the liability of the impleaded corporate officers, the Court equally finds error on the
part of the CA in holding them jointly and severally liable to respondent. Case law states that to
hold a director or officer personally liable for corporate obligations, two requisites must concur:
(1) it must be alleged in the complaint that the director or officer assented to patently unlawful
acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2)
there must be proof that the officer acted in bad faith.  Here, the twin requirements of allegation
and proof of bad faith necessary to hold the impleaded corporate officers liable for the monetary
awards are clearly lacking.||Freyssinet Filipinas Corp. v. Lapuz, 897 SCRA 265 (2019).

e. Personal Liability of Trustees and Officers of Nonstock Corporations: The nonstock

corporation acted in clear bad faith when it sent the final notice to a member under the pretense that
they believed him to be still alive, when in fact it had very well known that he had already died.
Nonstock corporations and their officers are not exempt from the obligation imposed by Articles 19,
98
Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and Stewards Assn. of the Phils. v. PAL, 559 SCRA 252 (2008); M+W Zander Phils. v.
Enriquez, 588 SCRA 590 (2009); AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, (2009); Lowe, Inc. v. CA, 596 SCRA 140 (2009); Peñaflor
v. Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010).
99
Culili v. Eastern Telecommunications Phils., 642 SCRA 338 (2011); Grandteq Industrial Steel Products v. Estrella, 646 SCRA 391 (2011); Alert
Security and Investigation Agency, v. Pasawilan, 657 SCRA 655 (2011); Lynvil Fishing Enterprises v. Ariola, 664 SCRA 679 (2012); Blue Sky Trading Co.
v. Blas, 667 SCRA 727 (2012); Polymer Rubber Corp. v. Salamuding, 702 SCRA 153 (2013); Ico v. STI, Inc., 729 SCRA 439 (2014); De Castro v. CA, 805
SCRA 265 (2016); Lozada v. Mendoza, 805 SCRA 673 (2016).
100
AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633 (2009).
101
Villanueva v. Adre, 172 SCRA 876 (1989); Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996); NYK
Int’l Knitwear Corp. Phil. v. NLRC, 397 SCRA 607 (2003).
102
LBP v. CA, 364 SCRA 375 (2001); Bogo-Medellin Sugarcane Planters Assn., Inc. v. NLRC, 296 SCRA 108 (1998); Complex Electronics Employees
Assn. v. NLRC, 310 SCRA 403 (1999); Acesite Corp. v. NLRC, 449 SCRA 360 (2005); Coca-Cola Bottlers Phils. v. Daniel, 460 SCRA 494 (2005); Suldao
v. Cimech System Construction, 506 SCRA 256 (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007); Culili v. Eastern Telecommunications
Phils., 642 SCRA 338 (2011). Grandteq Industrial Steel Products v. Estrella, 646 SCRA 391 (2011); Mirant (Phils.) Corp. v. Caro, 723 SCRA 465 (2014);
PNOC Energy Dev. Corp. v. Buenfiaje, 795 SCRA 79 (2016).
103
H.R. Carlos Construction v. Marina Properties Corp., 421 SCRA 428 (2004); Pamplona Plantation Co. v. Acosta, 510 SCRA 249 (2006); Elcee
Farms, Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
104
David v.National Federation of Labor Unions, 586 SCRA 100 (2009); Alert Security Investigation Agency v. Pasawilan, 657 SCRA 655 (2011).
49
 20 and 21 under the Chapter on Human Relations of the Civil Code, which provisions enunciate a
general obligation under law for every person to act fairly and in good faith towards one another.
Valley Golf and Country Club, Inc. v. Vda. De Caram, 585 SCRA 218 (2009).

3. ADMINISTRATIVE AND CRIMINAL SANCTIONS AGAINST DIRECTORS, TRUSTEES AND

OFFICERS

a. Confirmation of Powers, Functions and Jurisdiction of the SEC (Sec. 179)

b. SEC Has Been Granted the following Powers:

(1) To Investigate and Prosecute Offenses Defined under the RCC and to Publish Its
Findings, Orders, Opinions, Advisories or Information (Sec. 154)
(2) To Administer Oaths, Subpoena Witnesses and Documents (Sec. 155)
(3) To Issue Cease and Desist Orders (Sec. 156)
(4) To Hold in Contempt and Impose Fine (Sec. 157)
(5) To Impose Administrative Sanctions (Sec. 158):
(i) Impose a Fine ranging from P5,000 to P2 Million, and not more than
P1,000 for each day of continuing violation, but not to exceed P2
Million;
(ii) Issuance of a permanent CDO;
(iii) Suspension or revocation of the Certificate of incorporation; and
(iv) Dissolution of the corporation and forfeiture of its Assets under
conditions in Title XIV.

(6) SEC Granted Fiscal Autonomy to Collect, Retain and Use Fees, Fines, and Other
Chargers pursuant to the RCC and its IRR (Sec. 175)
(7) SEC’s Visitorial Powers and Confidential Nature of Examination Results (Sec. 178)

c. Willful Holding of Office Despite Knowledge of Disqualification or Willful

Concealing of Such Disqualification (Sec. 160)

d. Violation of Duty to Maintain Records, To Allow Their Inspection, or Reproduction ;

BUT: Without prejudice to the SEC Exercise of Contempt Powers (Sec. 161)
SEE: Guidelines in the Filing, Investigation and Resolution of Complaints for Violation of the
Right to Inspect and/Reproduce Corporate Records (SEC Memo Circular No. 25-2020)

e. Willful Certification of Incomplete, Inaccurate, False, Misleading Statements or

Reports (Sec. 162)

f. Independent Auditor’s Collusion with Directors or Representatives, Certifies to

Incomplete or Inaccurate Reports on the Corporation’s Conditions (Sec. 163)

g. Obtaining Corporate Registration Through Fraud: Those responsible for the

formation of a corporation through fraud, or who assisted directly or indirectly
therein, shall be punished with a fine. (Sec. 164)

h. Corporation’s Conduct of Its Business Through Fraud (Sec. 165)

i. Acting as Intermediaries for Graft and Corrupt Practices: Corporation Use for
Fraud, or For Committing or Concealing Graft and Corrupt Practices as Defined by
Pertinent Statutes (Sec. 166)

j. Engaging Intermediaries for Graft and Corrupt Practices: Corporation’s

Appointment of an Intermediary Who Engages in Graft and Corrupt Practices for
the Corporation’s Benefit or Interest (Sec. 167)

k. Tolerating Graft and Corrupt Practices: A Director, Trustee, or Officer Who

Knowingly Fails to Sanction, Report, or File the Appropriate Action, Allows or
Tolerates the Graft and Corrupt Practices or Fraudulent Acts Committed by a
Corporation’s Directors, Trustees, Officers, or Employees (Sec. 168)

50
l. Retaliation Against Whistleblowers: Any Person Who knowingly and With Intent to
Retaliate, Commits Acts Detrimental to a Whistleblower such as Interfering with the
Lawful Employment or Livelihood of the Whistleblower (Sec. 169)

m. Violations of the RCC Not Specifically Penalized: Violations of Any Other

Provisions of the RCC, its Amendments, Not Otherwise Specifically Penalized
Therein;
BUT: If Violation is Committed by a Corporation, it shall be dissolved in
appropriate proceedings with the SEC;
ALSO: Liability for the foregoing shall be separate from any other administrative,
civil, criminal liability under this Code and other laws. (Sec. 170)

(1) Historical Background of Sec. 170 (Sec. 144 of old Corporation Code; Sec. 190 of
the old Corporation Law)
Sec. 190 was not intended to make every casual violation of one of the (old) Corporation
Law provisions ground for involuntary dissolution of the corporation and that the court was
entitled to exercise discretion in such matters. Government of P.I. v. El Hogar Filipino, 50 Phil.
399 (1927).
Penalties imposed in Sec. 190(A) of the old Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. These proceedings can be maintained only by
the Solicitor General in representation of the Government. Harden v. Benguet Consolidated
Mining Co., 58 Phil. 141 (1933).

(2) Doctrine on the Coverage of Section 144 of the Old Corporation Code
Section 133 of the (old) Corporation Code, unlike its counterpart Sec. 69 in the old
Corporation Law which specifically provided for penal sanctions for foreign corporations
engaging in business in the Philippines without obtaining the requisite license, should be
deemed to have a penal sanction by virtue of Sec. 144 of the (old) Corporation Code.
Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).
The lack of language imposing criminal liability in what are now Secs. 30 and 33 of RCC
shows the legislative intent to limit the consequences of their violation to the civil liabilities
mentioned therein. If the drafters of the law intended to define as criminal offenses what are
now Secs. 30 and 33 of, they could have easily included similar language as that found in
what is now Sec. 73 of RCC. The old Corporation Code was intended as a regulatory
measure, not primarily as a penal statute. Ient v. Tullett Prebon (Phils.), Inc., 814 SCRA
184 (2017).

(3) Applicability of Section 170 of Directors’ Fiduciary Duty under Section 30

The present wordings of the RCC reinforces the Court’s interpretation that a violation of
Sec. 31 of the old Corporation Code, now Sec. 30 of the RCC, is not covered by Sec. 144 of
the old Corporation Code, now Section 170 of the RCC. While Sec. 170 of the RCC now
clarifies it applies to “Other Violations of the Code” or “[v]iolations of any of the other
provisions of this Code or its amendments not otherwise specifically penalized therein” and
provides for “Separate Liability” to the effect that “[l]iability for any of the foregoing offenses [or
such violations] shall be separate from any other administrative, civil, or criminal liability under
this Code and other laws,” such language is still consistent with the violations contemplated
under Sec. 144 of the old Corporation Code — “[v]iolations of any of the provisions of
this Code or its amendments not otherwise specifically penalized therein,” the operative
phrase “not otherwise specifically penalized therein” being retained. Also, the civil liability
provided under Sec. 31 of the old Corporation Code — “liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or members and
other persons” and “liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation” — is phrased similarly in Sec. 30 of
the RCC. In either Section, no administrative or criminal liability is provided. However, as
stated earlier, under the RCC, there is now Sec. 158 on administrative sanctions, above
quoted, that the Commission can impose if, after due notice and hearing, it finds that any
provision of the RCC has been violated. United Coconut Planters Bank v. Secretary of
Justice, G.R. No. 209601, 12 January 2021.

n. Liability of Directors, Trustees, Officers, or Other Employees: If offender is a

corporation, the penalty may, at the discretion of the court, be imposed upon the
corporation and/or upon its directors, trustees, shareholders, members, officers, or
employees responsible for the violation or indispensable to its commission. (Sec.
171)

o. Aiders and Abettors: “Anyone who shall aid, abet, counsel, command, induce, or
cause any violation of the [RCC, its IRR, or SEC orders] shall be punished with a
51
 fine not exceeding that imposed on the principal offenders, at the discretion of the
court, after taking into account their participation in the offense.” (Sec. 172)

[ MID-TERM EXAMINATIONS: 8TH AND 9TH WEEKS: MARCH 28 – APRIL 6]

MODULE 8

RIGHTS OF SHAREHOLDERS AND MEMBERS

( 10TH AND 11TH WEEKS: APRIL 12, 14, 19 AND 21 )

Asynchronous Study: Chapter 12 of TEXTBOOK

XIII. SHAREHOLDERS AND MEMBERS (Sec. 5)

1. What Does a “Share of Stock” Represent?

While shares constitute personal property, they are not the property of the corporation. They are
property of the shareholders to whom issued, and they represent an aliquot part to share in its proceeds
of the liquidation of the corporation properties when distributed according to law and equity. The
shareholder is not a co-owner of corporate property, nor is he entitled to any definite portion of its
assets. Stockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373
(1962).
The registration of shares in a shareholder’s name, the issuance of stock certificates, and the right
to receive dividends are all rights that flow from ownership. Lim Tay v. CA, 293 SCRA 634 (1998).105
As early as the case of Fisher v. Trinidad, We already declared that “[t]he distinction between the
title of a corporation, and the interest of its members or shareholders in the property of the corporation,
is familiar and well-settled. The ownership of that property is in the corporation, and not in the holders of
shares of its stock. The interest of each shareholder consists in the right to a proportionate part of the
profits whenever dividends are declared by the corporation, during its existence, under its charter, and
to a like proportion of the property remaining, upon the termination or dissolution of the corporation,
after payment of its debts.” Mobilia Products, Inc. v. Umezawa, 452 SCRA 736 (2005).
A person who desires to be recognized as shareholder to exercise shareholders’ right must secure
standing by having his ownership of share recorded on the stock and transfer book. Thus, only those
whose ownership of shares are duly registered in the stock and transfer book are considered
shareholders of record and are entitled to all rights of a shareholder.  Guy v. Guy, 790 SCRA 288 (2016).

2. The Preemptive Right (Sec. 38)

Pre-emptive right under what is now Section 38 of the RCC is the right of a shareholder of a stock
corporation to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. Although it can validly be withdrawn, it cannot be done in breach of fiduciary
duties such as to perpetuate control over the corporation. Majority Stockholders of Ruby Industrial
Corp. v. Lim, 650 SCRA 461 (2011).
“The broad phrase ‘all issues or disposition of shares of any class’ in what is now Section 38 of the
RCC includes not only new shares issued in pursuance of an increase of capital stock or from the
unissued shares which form part of the authorized capital stock, but also covers ‘treasury shares.’
Treasury shares would come under the term ‘disposition’. Likewise, considering that it is not included
among the exceptions enumerated therein, where pre-emptive right shall not extend, the intention is to
include it in its application.” SEC Opinion, 14 Jan. 1993, XXVII SEC QUARTERLY BULLETIN 16 (No. 2, June
1993).

3. Right to Transfer or Dispose of Shareholdings (Sec. 62)

a. Restriction on Transfers—In General
An agreement by which a person obliges himself not to engage in competitive trade for five
years is valid and reasonable and not an undue or unreasonable “restraint of trade,” and is obligatory
on the parties who voluntarily enter into such agreement. Ollendorf v. Abrahamson, 38 Phil. 585
(1918).
A contractual undertaking on restriction of transfer of shares that has a reasonable business
purpose and limited in coverage is valid and binding. Lambert v. Fox, 26 Phil. 588 (1914).

b. RIGHT OF FIRST REFUSAL

105
TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).
52
 What is now Section 62 of RCC contemplates no restriction as to whom the stocks may be
transferred. It does not suggest that any discrimination may be created by the corporation in favor of,
or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty
under said section to dispose of them in favor of whomever he pleases without limitation other than
the general provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).
The indication on the face of the stock certificate that it is “Nontranferable” alone does no
compel the corporation to buy back the shares from the shareholder and held that “in the absence of
a similar contractual obligation and of a legal provision applicable thereto, it is logical to conclude
that it would be unjust and unreasonable to compel the corporation to comply with a non-existent or
imaginary obligation.” Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 (1933).
The “right of first refusal” is primarily an attribute of ownership; and a waiver thereof is an act of
ownership. To allow the PCGG to vote the sequestered shares for this purpose would be sanctioning
its exercise of an act of strict ownership. PCGG v. SEC, G.R. No. 82188, 30 June 1988 (unrep.)
Pursuant to what is now Section 62 of the Revised Corporation Code, shares of stock constitute
personal property which the shareholders may freely dispose. A corporation cannot by its board, or
the act of its officers, create restrictions in stock transfers since the only limitation imposed by [what
is now Section 62 of the Revised Corporation Code] is when the corporation holds any unpaid claim
against the shares intended to be transferred. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
In a landholding corporation which by constitutional mandate is limited to 40% foreign equity,
where there is a right of first refusal between the co-shareholders, the fact that the corporation owns
land cannot deprive shareholders of their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign
equity, what the law disqualifies is the corporation from owning land. J.G. Summit Holdings v. Court
of Appeals, 450 SCRA 169 (2005).
c. Remedy If Registration Refused:
Mandamus will not lie to compel the Corporate Secretary to register the transfer of shares in the
corporate books when the petitioner is not the registered shareholder, nor does he hold a power of
attorney from the latter. The general rule is that as between the corporation and its shareholders, the
corporation looks only to its books for the purpose of determining who its shareholders are, so that a
mere endorsee of a certificate of stock, claiming to be the owner, will not necessarily be recognized
as such in absence of express instructions of the registered owner to make such transfer to the
endorsee, or a power of attorney authorizing such transfer. Hager v. Bryan, 19 Phil. 138 (1911).106
BUT SEE: It is settled jurisprudence that the registration of a transfer of shares is a ministerial duty on
the part of the corporation. A bona fide transferee who is able to establish a clear legal right to the
registration of the transfer may then resort to the remedy of mandamus to compel corporations that
wrongfully or unjustifiably refuse to record the transfer or to issue new certificates of stock. Andaya
v. Rural Bank of Cabadbaran, 799 SCRA 325 (2016).
A stipulation on the stock certificate that any assignment would not be binding on the
corporation unless registered in the corporate books as required under the bylaws and without
providing when registration should be made, would mean that the cause of action and the
determination of prescription period would begin only when demand for registration is made and not
at the time of the assignment of the certificate. Won v. Wack Wack Golf & Country Club, 104 Phil.
466 (1958).
Since the law does not prescribe a period within which the registration of purchase of shares
should be effected, the action to enforce the right does not accrue until there has been a demand
and a refusal concerning the transfer.” Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).107
The claim for damages of what the shares could have sold had the demand for their registration
in the name of the buyer been complied with is deemed to be speculative damage and non-
recoverable. Batong Buhay Gold Mines v. Court of Appeals, 147 SCRA 4 (1987).

4. Rights to Dividends (Sec. 42)

Dividends from retained earnings can only be declared to those who are shareholders of the
corporation; dividends cannot be declared to creditors as part of the settlement of debts. Nielson & Co.
v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968).
Stock dividend is the amount that the corporation transfers from its surplus profit account to its
capital account. It is the same amount that can loosely be termed as the “trust fund” of the corporation.
NTC v. Court of Appeals, 311 SCRA 508 (1999).
The term “dividend” in its technical sense and ordinary acceptation is that part of portion of the
profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division
among the holders of it capital stock—it is a payment, and the right thereto is an incident of ownership
of stock. Hence, when the Court directed that a total of 111,415 shares of PLDT be reconveyed to the
Republic as the rightful owner of said shares that necessarily included the reconveyance to the Republic
of the dividends and interest accruing thereto. Cojuangco v. Sandiganbayan, 586 SCRA 790 (2009).

106
Rivera v. Florendo, 144 SCRA 643 (1986); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
107
Interport Resources Corp. v. Securities Specialists, Inc., 792 SCRA 155 (2016).
53
 What is now Sec. 42 of RCC prohibits the issuance of any stock dividend without the approval of
shareholders, representing not less than two-thirds (2/3) of the outstanding capital stock, which
underscores the fact that payment of dividends to a shareholder is not a matter of right but a matter of
consensus. Furthermore, “interest bearing stocks”, on which the corporation agrees absolutely to pay
interest before dividends are paid to the common shareholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only. Republic Planters Bank
v. Agana, 269 SCRA 1 (1997).
The power to declare dividends under what is now Sec. 42 of RCC is with the Board of Directors
and can be declared only out of its unrestricted retained earnings. Assuming arguendo that Socorro
as corporate director was authorized by the Board to fix the monthly dividends of Sugiyama, it
appears that she committed an ultra vires act because dividends can be declared only out of
unrestricted retained earnings of a corporation, which earnings cannot obviously be fixed and pre-
determined 5 years in advance.” Ongkingco v. Sugiyama, 920 SCRA 110 (2019).

5. Right to Attend Shareholders’/Members’ Meetings (Secs. 6 and 88)

Until challenged successfully in proper proceedings, a registered shareholder has a right to
participate in any meeting, and in the absence of fraud the action of the shareholders’ meeting cannot
be collaterally attacked on account of such participation, even if it be shown later that the shares had
been previously sold (but not recorded). Price and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933).

a. Meetings of Shareholders or Members (Secs. 48 and 49)

 Recognition of Right to Propose the Holding of a Special Meeting and Items to Be
Included in the Agenda (Sec. 49; SEC Memo Circular No. 14-2020)
 Shareholders’ Right to Put Item on the Agenda (SEC Memo Circular No. 14-2020)
b. Place and Time of Meetings (Secs. 50 and 92)
c. Notices of Meetings (Sec. 50; SEC Memo Circular No. 03-2020)
 Specific Matters Accompanying the Notice (Sec. 50)
 Specific Rules on Waiver of Improper Notice (Sec. 49)
What is now Sec. 49 of RCC expressly allows a shorter period of notice of shareholders’
meetings that those provided under its default [21 days] period, provided the same is provided for in
the Bylaws, Ricafort v. Dicdican, 787 SCRA 163 (2016); such period set in the Bylaws is valid even
when the period is reckoned from the mailing of the notice rather than when it is actually received by
the shareholder of record, Guy v. Guy, 790 SCRA 288 (2016).

d. Pre-Meeting Procedures
 Closure of the Stock and Transfer Book: 20 days regular; 7 days special (Sec. 49)
 Postponing of Meeting: 2 weeks unless Bylaws provides otherwise (Sec. 49)

e. Conduct of Shareholders’ or Members’ Meetings (Secs. 51 and 52)

(1) Chairman (in his absence the President) Presides (Sec. 53)
(2) Quorum (Sec. 51)
Quorum is based on the totality of the shares which have been subscribed and issued
whether it be founders’ shares or common shares. To base the computation of quorum solely on
the obviously deficient, if not inaccurate STB, and completely disregarding the issued and
outstanding shares indicated in the articles of incorporation would work injustice to the owners
and/or successors in interest of the said shares. The STB cannot be used as the sole basis for
determining the quorum as it does not reflect the totality of shares which have been subscribed,
more so when the articles of incorporation show a significantly larger number of shares issued
and outstanding as compared to that listed in the stock and transfer book. Lanuza v. Court of
Appeals, 454 SCRA 54 (2005).
For stock corporations, “quorum” referred to in what is now Sec. 51 of RCC is based on the
number of outstanding voting stocks. For nonstock corporations, only those who are actual,
living members with voting rights shall be counted in determining the existence of a quorum
during members’ meetings; dead members shall not be counted. Tan v. Sycip, 499 SCRA 216
(2006).108

(3) Right to Participate Thru Remote Communication or In Absentia: When authorized in

Bylaws; EXCEPT: Corporations vested with public interests (Secs. 23 and 49)
 SEC Guidelines on Attendance and Participation of Stockholders or Members in
Regular and Special Meetings (SEC Memo Circular No. 06-2020)
(4) Matters That Board Shall Endeavor to Present to Shareholders/Members (Sec. 49)
108
Lim v. Moldex Land, Inc., 815 SCA 619 (2017); Villongco v. Yabut, 854 SCRA 132 (2018).
54
6. Right to Vote at Shareholders’ or Members’ Meetings
a. Right to Nominate Director or Trustee (Sec. 23)
b. Nature of the Right to Vote
One of the rights of a shareholder is the right to participate in the control and management of
the corporation that is exercised through his vote—a right inherent in and incidental to the ownership
of corporate stock, and as such is a property right. Castillo v. Balinghasay, 440 SCRA 442 (2004).
Sequestration of shares does not entitle the government to exercise acts of ownership, since
even sequestered shares may be voted upon by the registered shareholder. Cojuangco Jr. v.
Roxas, 195 SCRA 797 (1991). However, in as much as the subject UCPB shares in the present case
were undisputably acquired with coco levy funds which are public in character, then the right to vote
them shall be exercised by the PCGG. Republic v. COCOFED, 372 SCRA 462 (2001); Trans Middle
East v. Sandiganbayan, 490 SCRA 455 (2006).

c. Instances When Shareholders Entitled to Vote:

- Option to Maintain Fixed Term (Sec. 11)
- Extension or shortening of fixed term (Secs. 11 and 36)
- Amendment of articles of incorporation (Sec. 15)
- Election of directors or trustees (Sec. 23)
- Removal of directors or trustees and filling-up the vacancy (Sec. 27)
- Granting compensation to directors or trustees (Sec. 29)
- Approval of material contracts with directors/trustees (Sec. 31)
- Ratifying contracts between corporations with interlocking directors (Sec. 32)
- Investment in another business or corporation (Secs. 35 and 41)
- Increase or decrease of capital stock (Sec. 37)
- Incurring, or increasing bonded indebtedness (Sec. 37)
- Sale, disposition or encumbrance of all or substantially all of the corporate assets (Sec. 39)
- Declaration of stock dividends (Sec. 42)
- Entering into management contracts (Sec. 43)
- Adoption, amendment and repeal of bylaws (Secs. 45 and 47)
- Fixing of consideration of no par value shares (Sec. 61)
- Merger and consolidation (Sec. 76)

d. When Right to Vote Exercisable Thru Remote Communication or In Absentia (Sec. 23)
e. Right to Vote of Secured Creditors and Administrators (Sec. 54)
When shares are pledged by means of endorsement in blank and delivery of the covering
certificates to lender, the pledgee does not become the owner thereof simply by the failure of the
registered shareholder to pay his loan. Consequently, without proper foreclosure, the lender cannot
demand that the shares be registered in his name. Lim Tay v. CA, 293 SCRA 634 (1998).
Although the Rules of Court, while permitting an executor or administrator to represent or to
bring suits on behalf of the deceased, do no prohibit the heirs from representing the deceased. When
no administrator has been appointed, there is all the more reason to recognize the heirs as the
proper representatives of the deceased. Gochan v. Young, 354 SCRA 207 (2001).
e. Voting in Case of Joint Ownership (Sec. 55)
f. Treasury Shares Have No Voting Rights (Sec. 56) Tan v. Sycip, 499 SCRA 216 (2006).

7. Right of Appraisal (Secs. 80 to 85 and 104)

A shareholder who dissents from certain corporate actions has the right to demand payment of the
fair value of his shares, which right of appraisal is expressly recognized in Section 81. Clearly, the right
of appraisal may be exercised when there is a fundamental change in the charter or articles of
incorporation substantially prejudicing the rights of the shareholders. It does not vest unless
objectionable corporate action is taken. It serves the purpose of enabling the dissenting shareholder to
have his interest purchased and to retire from the corporation. Turner v. Lorenzo Shipping Corp., 636
SCRA 13 (2010).

8. Contracts and Agreement Affecting Shareholdings

a. PROXY (Sec. 57)
A proxy is a form of agency created in instances when a person is unable to personally case his
or her vote; hence, the act of voting is delegated to another person. Cesar Yatco Real Estate
Services, Inc. v. Bel-Air Village Association, Inc., 886 SCRA351 (2018).
Proxy solicitation involves the securing and submission of proxies, while proxy validation
concerns the validation of such secured and submitted proxies. It is possible that an intra-corporate
controversy may animate a disgruntled shareholder to complain to the SEC, corporation’s violations of
SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC of its
investigatory and regulatory powers, especially when such powers are exercisable on a motu proprio
basis. GSIS v. Court of Appeals, 585 SCRA 679 (2009).

55
 SEC’s power to pass upon the validity of proxies in election contests has effectively been
withdrawn, tied as it is to its abrogated jurisdictional powers. The fact that the jurisdiction of the regular
courts under Sec. 5(c) of P.D. 902-A is confined to the voting on election of officers, and not on all
matters which may be voted upon by shareholders, elucidates that the power of SEC to regulate
proxies remains extant and could very well be exercised when shareholders vote on matters other
than the election of directors. GSIS v. Court of Appeals, 585 SCRA 679 (2009).

b. VOTING TRUST AGREEMENTS (Sec. 58): A VTA separates the voting rights and other rights covered
of the stock from other attributes of ownership, intended to be irrevocable for a definite period of time
and the purpose of which is to give to the trustee to acquire voting control of the corporation. Lee
v. Court of Appeals, 205 SCRA 752 (1992).
The trustor has a right to terminate the voting trust agreement for breach thereof. Everett v. Asia
Banking Corporation, 49 Phil. 512 (1926).
Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).

c. POOLING AGREEMENTS OR SHAREHOLDERS’ AGREEMENTS (Sec. 99)

9. RIGHTS TO INSPECT AND COPY CORPORATE RECORDS

a. Basis of Right
The shareholder’s right of inspection of corporate books and records arises as an incident of
ownership of the assets and property of the corporation. It is therefore an incident of ownership of
the corporate property, whether such interest be termed an equitable ownership, a beneficial
ownership or a quasi-ownership. The right of inspection is predicated upon the necessity of self-
protection on the part of the shareholder. Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).109
The grant of legal personality to a corporation is conditioned on its compliance with certain
obligations. Among these are its fiduciary responsibilities to its shareholders. Providing
shareholders with access to information is a fundamental basis for their intelligent participation in
the governance of the corporation as a business organization that they partially own. The law is
agnostic with respect to the number of shares required. Generally, each individual shareholder
should be given reasonable access so that he or she can assess or share his or her assessment
of the management of the corporation with other shareholders. The separate legal personality of a
corporation is not so absolutely separate that it divorces itself from its responsibility to its
constituent owners. PASAR Corp. v. Lim, 804 SCRA 600 (2016).
The right to inspect remains valid and enforceable during the 3-year liquidation period
provided under what are now Secs. 139 and 184 of RCC. Violation of the right to inspect
corporate records is mala prohibita since it is imposed under what is now Sec. 73, in relation to
Sec. 170 of the RCC, a special law, and the existence of criminal intent (men rea) in not essential
in the offense. Chua v. People, 801 SCRA 436 (2016).110

b. Specified Records Covered (Secs. 73, 74 and 177)

c. Limitations and Conditions on Right of Inspection and Reproduction (Sec. 73)
 Rights Bound by Confidentiality Rules
 No Right to Non-Shareholder/member; Competitor or director, officer or controlling
shareholder or otherwise represents the interest of a competitor
As contrasted from the old Corporation Law, the old Corporation Code provided for (a) express
limitations on the right to inspect, and (b) now requires as a condition for such examination that one
requesting it must not have been guilty of using improperly any information secured through a prior
examination, and (c) that the person asking for such examination must be acting in good faith and for
a legitimate purpose in making his demand. The exercising shareholder must set forth the reasons
and the purposes for which he desires such inspection. Gonzales v. PNB, 122 SCRA 489 (1983).
The only express limitations on the right of inspection under what is now Sec. 734 of RCC are:
(a) it should be exercised at reasonable hours on business days; (b) the person demanding the right
to examine and copy excerpts from the corporate records and minutes has not improperly used any
information secured through any previous examination of records; and (c) the demand is made in
good faith or for a legitimate purpose. Africa v. PCGG, 205 SCRA 39 (1992).
What is now Section 73 of RCC places the burden of showing unlawful intention on the
corporate officers who refuse a registered shareholder from exercise his right to inspect. Republic v.
Sandiganbayan, 199 SCRA 39 (1999); Terelay Investment and Dev. Corp. v. Yulo, 765 SCRA 1
(2015).

Summary of Rulings: The right to inspect corporate books and records:

 Is exercisable through agents and representatives, otherwise it would often be useless to the
shareholder who does not know corporate intricacies. W.G. Philpotts v. Philippine Manufacturing Co.,
40 Phil. 471 (1919).
109
Puno v. Puno Enterprises, 599 SCRA 585 (2009).
110
Roque v. People, 826 SCRA 618 (2017).
56
  Cannot be denied on the ground that the director is on unfriendly terms with the officers of the
corporation whose records are sought to be inspected. Veraguth v. Isabela Sugar Co., 57 Phil. 266
(1932).
 Although it includes the right to make copies, does not authorize bringing the books or records
outside of corporate premises. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
 Does not include the right of access to minutes until such minutes have been written up and
approved by the directors. Veraguth v. Isabela Sugar Co., 57 Phil. 266 (1932).
 Cannot be limited to a period of ten days shortly prior to the annual shareholders’ meeting, as such
would be an unreasonable restriction and violates the legal provision granting the exercise of such
right “at reasonable hours.” Pardo v. Hercules Lumber Co., 47 Phil. 964 (1924).

d. Remedies If Right Denied

(1) SEC Power of Summary Investigation (Sec. 73)
(2) Mandamus
Refusal to allow shareholders to examine company books is not a ground for appointing a
receiver (or creating a management committee) since there are other adequate remedies, such
as a writ of mandamus. Misconduct of corporate directors or other officers is not a ground for
the appointment of a receiver where there is one or more adequate legal action against the
officers, where they are solvent, or other remedies. Ao-as v. Court of Appeals, 491 SCRA 339
(2006).111
The clear provision in what is now Sec. 73 of RCC is sufficient authority to conclude that an
action for injunction and, consequently, a writ of preliminary injunction filed by a corporation is
generally unavailable to prevent shareholders from exercising their right to inspection.
Specifically, shareholders cannot be prevented from gaining access to the (a) records of all
business transactions of the corporation; and (b) minutes of any meeting of shareholders or the
board of directors, including their various committees and subcommittees. PASAR Corp. v.
Lim, 804 SCRA 600 (2016).
(3) Criminal Sanction under Section 161
For a violation under what is now Sec. 73 of RCC and for which the penalty under what is
now Sec. 161 of RCC can be imposed, it is necessary that: (1) a director, trustee, shareholder
or member has made a prior demand in writing for a copy of excerpts from the corporations
records or minutes; (2) any officer or agent of the concerned corporation shall refuse to allow
the said director, trustee, shareholder or member to examine and copy said excerpts; (3) if such
refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability
under this section for such action shall be imposed upon the directors or trustees who voted for
such refusal; and (4) where the officer or agent of the corporation sets up the defense that the
person demanding to examine and copy excerpts from the corporation’s records and minutes
has improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand, the contrary must be shown or proved. Ang-Abaya
v. Ang, 573 SCRA 129 (2008).112
Officer’s refusal to allow a shareholder to review any corporate record, including the stock
and transfer book, provided for in what is now Sec. 73 of RCC would constitute a criminal
offense under what is now Sec. 161 of RCC, which anyway punishes all violations of the
[Revised] Corporation Code. Yujuico v. Quimbao, 724 SCRA 262 (2014).
While a cloud of doubt is cast upon the existence of criminal intent on the part of the
corporate officers, it is jurisprudentially settled that proof of malice or deliberate intent ( men rea)
is not essential in offenses punishable by special laws, which are mala prohibita. What are now
Sec. 73 in relation to Sec. 161 of RCC, provides for penalties relative to the commission of
offenses, which cannot be trivialized, lest the public purpose for which they are crafter be
defeated and put to naught. Chua v. People, 801 SCRA 436 (2016).
What are now Secs. 73 and 161 of the RCC collectively create the duty on the part of the
corporation to keep and preserve a record of all business transactions and minutes of all
meetings of stockholders, members, or the board of directors/trustees, along with the duty to
make such record available to its stockholders or members upon written request therefor; a
violation of these duties invites criminal prosecution against the erring officers to allow the
eventual application of the prescribed penalties. Keh v. People, G.R. No. 217592-93, 13 July
2020.

e. Criminal Sanction under Section 158 for Shareholder Who Abuse the Right of Inspection
or Reproduction (Sec. 73)

10. COMMON LAW RIGHT TO FILE DERIVATIVE SUITS

111
Spouses Hiteroza v. Cruzada, 794 SCRA 511 (2016).
112
Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009); Roque v. People, 826 SCRA 618 (2017).
57
 Derivative suits are governed by the “Interim Rules of Procedure Governing Intra-Corporate
Controversies” (A.M. No. 01-2-04-SC, 01 April 2001). Section 1, Rule 1 thereof expressly lists
derivative suits among the cases covered by it. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548
(2009).
A “family corporation” is not exempt from complying with the clear requirements and formalities of
the rules for filing a derivative suit. There is nothing in the pertinent laws or rules which distinguishes
between family corporations and other types of corporations in the institution by a shareholder of a
derivative suit. Ang v. Spouses Ang, 699 SCRA 272 (2013).

a. Nature of the Power to File Derivative Suit

A derivative suit is an action brought by minority shareholders in the name of the corporation to
redress wrongs committed against the corporation, for which the directors refuse to sue. It is a
remedy designed by equity and has been the principal defense of the minority shareholders against
abuses by the majority. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).113
The whole purpose of the law authorizing a derivative suit is to allow the shareholders/member
to enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of
action. R.N. Symaco Trading Corp v. Santos, 467 SCRA 312 (2005).114
While an individual suit is filed when the cause of action belongs to the shareholder personally,
such a denial of the right of inspection or denial of the right to dividends, a class suit can be filed
when the cause of action belongs to a group of shareholders, such as when the rights violated
belong to preferred shareholders. A derivative suit, on the other hand, is one which is instituted by a
shareholder or a member of a corporation, for and in behalf of the corporation for its protection from
acts committed by directors, trustees, corporate officers, and even third persons. Agdao Landless
Residents Assn., Inc. v. Maramion, 806 SCRA 74 (2016), citing VILLANUEVA & TIANSAY, PHILIPPINE CORPORATE
LAW, p. 474, 2013 ed.

b. Condition Precedent: When Board Cannot Properly Exercise Its Business Judgment
GENERAL RULE: In the absence of a special authority from the Board of Directors to institute a suit in
behalf of the corporation, the President or managing director is disqualified by law to sue in her own
name or for the corporation. The power to sue and be sued is lodged in the Board that exercises its
corporate powers and not in the President. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
Under what are now Sec. 35 in relation to Sec. 22 of RCC, a corporation’s power to sue is
lodged with its Board. An individual shareholder is permitted to institute a derivative suit on behalf of
the corporation in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such
actions, the suing shareholder is regarded as a nominal party, with the corporation as the real party
in interest. Chua v. Court of Appeals, 443 SCRA 259 (2004).115
Minority shareholders do not have any statutory right to override the business judgments of the
officers and Boards of Directors. It is settled that a shareholder's right to institute a derivative suit is
not based on any express provision of the [Revised] Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers
liable for damages suffered by the corporation and its shareholders for violation of their fiduciary
duties. Ching v. Subic Bay Golf and Country Club, Inc., 734 SCRA 569 (2014).116
While questions of policy and management are left to the honest decision of the officers and
directors of a corporation, and the courts are without authority to substitute their judgment for the
judgment of the Board of Directors; yet where the corporate directors are guilty of breach of trust—
not of mere error of judgment or abuse of discretion—and intra-corporate remedy is futile or useless,
a shareholder may institute a suit in behalf of himself and other shareholders and for the benefit of
the corporation. However, the corporation is the real party in interest in a derivative suit and the
suing shareholder is only a nominal party. A derivative suit must be differentiated from a class suit.
Cua, Jr. v. Tan, 607 SCRA 645 (2009).117
Grounded on equity, the derivative suit has proven to be an effective tool for the protection of
minority shareholders. Such actions have for their object the vindication of a corporate injury, even
though they are not brought by the corporation, but by its stockholders. That said, derivative suits
remain an exception. As a general rule, corporate litigation must be commenced by the corporation
itself, with the imprimatur of the board of directors, which, pursuant to the law, wields the power to
sue. Therefore, since the derivative suit is a remedy of last resort, it must be shown that the board, to
the detriment of the corporation and without a valid business consideration, refuses to remedy a
corporate wrong. A derivative suit may only be instituted after such an omission. Simply put,
derivative suits take a back seat to board-sanctioned litigation whenever the corporation is willing
and able to sue in its own name. Ago Realty & Dev. Corp. v. Ago, G.R. Nos. 210906 & 211203,
16 October 2019. & Dev.| 

113
Ang v. Ang, 699 SCRA 272 (2013).
114
Hi-Yield Realty v. CA, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
115
Filipinas Port Services v. Go, 518 SCRA 453 (2007); Yu v. Yukayguan, 589 SCRA 588 (2009); Hi-Yield Realty v. CA, 590 SCRA 548 (2009).
116
Yu v. Yukayguan, 589 SCRA 588 (2009); BSP v. Campa,r., 671 SCRA 461 (2012); Florete, Jr. v. Florete, Sr., 781 SCRA 285 (2016).
117
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
58
 c. Requisites of Derivative Suit
The foregoing requisites before a shareholder can file a derivative suit: (a) the party bringing suit
should be a shareholder during the time of the act or transaction complained of, the number of
shares not being material; (b) the party has tried to exhaust intra-corporate remedies, relief, but the
latter has failed or refused to heed his plea; and (c) the cause of action actually devolves on the
corporation; the wrongdoing or harm having been or being caused to the corporation and not to the
particular shareholder bringing the suit. San Miguel Corp. v. Kahn, 176 SCRA 447 (1989).118
Section 1, Rule 8 of the Interim Rules lays down the requirements for the proper filing a
derivative suit: (1) Relator was a shareholder/member at the time the acts or transactions subject of
the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and
alleges the same with particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the
relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The
suit is not a nuisance or harassment suit. Yu v. Yukayguan, 589 SCRA 588 (2009).119
(1) Who May Bring a Derivative Suit? The relators must be shareholders both at time of
occurrence of the events constituting the cause of action and at the time of the filing of the
derivative suit. Pascual v. Orozco, 19 Phil. 83 (1911).120
A minority shareholder can file a derivative suit against the President for diverting corporate
income to his personal accounts. Commart (Phils.) Inc. v. SEC, 198 SCRA 73 (1991).
A lawyer engaged as counsel for a corporation cannot represent members of its Board of
Directors in a derivative suit brought against them. To do so would be tantamount to
representing conflicting interests, which is prohibited by the Code of Professional
Responsibility.” Hornilla v. Salunat, 405 SCRA 220 (2003).
Since a derivative action is a suit by a shareholder to enforce a corporate cause of action,
the corporation is a necessary party to the suit, and the relief which is granted is a judgment
against a third person in favor of the corporation. Similarly, if a corporation has a defense to an
action against it and is not asserting it, a shareholder may intervene and defend on behalf of the
corporation. Chua v. Court of Appeals, 443 SCRA 259 (2004).121
In a derivative suit, a shareholder may validly institute a derivative suit to vindicate the
alleged corporate injury; in which case such shareholder is only a nominal party while the
corporation is the real party-in-interest. Filipinas Port Services v. Go, 518 SCRA 453 (2007).
A minority shareholder-director has no power or authority to sue on the corporation’s
behalf. Nor can we uphold this as a derivative suit, since it is required that the minority
shareholder suing for and on behalf of the corporation must allege in his complaint that he is
suing on a derivative cause of action on behalf of the corporation and all other shareholders
similarly situated who may wish to join him in the suit. There is now showing that petitioner has
complied with the foregoing requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).122
The status of heirs as co-owners of shares prior to the partition of decedent’s estate does
not necessarily make them shareholders—unless and until there is compliance with what is now
Sec. 62 of RCC on the manner of transferring shares, the heirs do not become registered
shareholders of the corporation. Puno and Puno Enterprises, Inc., 599 SCRA 585 (2009).123
(2) Exhaustion of Intra-Corporate Remedies: A condition precedent to the filing of a derivative
suit is that the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on
the Board of Directors for the appropriate relief, but the latter has failed or refused to heed his
plea. Everett v. Asia Banking Corp., 49 Phil. 512 (1927); Angeles v. Santos, 64 Phil. 697 (1937).
A derivative suit to question validity of foreclosure of the mortgage on corporate assets can
be filed without prior demand upon the Board of Directors where the legality of the constitution
of the Board lies at the center of the issues. DBP v. Pundogar, 218 SCRA 118 (1993).
The obvious intent behind the rule requiring the shareholder filing a derivative suit to first
exert all reasonable efforts to exhaust all remedies available under the articles of incorporation,
by laws, laws or rules governing the corporation to obtain relief he desires is to make the
derivative suit the final recourse of the shareholders, after all other remedies to obtain the relief
sought had failed. Yu v. Yukayguan, 589 SCRA 588 (2009).124
While it is true that the complaining shareholder must satisfactorily show that he has
exhausted all means to redress his grievances within the corporation, except when such remedy
is complete control of the person against whom the suit is being filed. The reason is obvious: a
demand upon the board to institute an action and prosecute the same effectively would have
been useless and an exercise in futility. Hi-Yield Realty, Inc. v. CA, 590 SCRA 548, 557 (2009).
118
Filipinas Port Services v. Go, 518 SCRA 453 (2007); Reyes v. RTC of Makati, 561 SCRA 593 (2008); Hi-Yield Realty v. CA, 590 SCRA 548 (2009).
119
Hi-Yield Realty v. CA, 590 SCRA 548, 556 (2009); Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009); Cua, Jr. v. Tan,
607 SCRA 645 (2009); Ang v. Ang, 699 SCRA 272 (2013).
120
Gochan v. Young, 354 SCRA 207 (2001).
121
Go v. Distinction Properties Dev. and Construction, Inc., 671 SCRA 461 (2012).
122
Hi-Yield Realty. v. CA, 590 SCRA 548 (2009).
123
Reyes v. RTC of Makati, Br. 142, 561 SCRA 593 (2008).
124
Ching v. Subic Bay Golf and Country Club, Inc., 734 SCRA 569 (2014).
59
 (3) Relief/Remedies Must Be for the Benefit of the Corporation: The complaint cannot
demand for the defendants to pay the suing shareholders the value of their respective
participation in the assets that have been damaged, for a derivative suit must have cause of
action for the benefit of the corporation. Evangelista v. Santos, 86 Phil. 387 (1950).125
Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v. CFI of
Manila, 18 SCRA 602 (1966).
A suit to enforce preemptive rights in a corporation is not a derivative suit, and therefore a
temporary restraining order enjoining a person from representing the corporation will not bar
such action, because it is instituted on behalf and for the benefit of the shareholder, not the
corporation. Lim v. Lim-Yu, 352 SCRA 216 (2001).
Allegations of injury to the relators can co-exist with those pertaining to the corporation—
such merely gives an additional cause of action against the erring directors. Gochan v. Young,
354 SCRA 207 (2001).
Where directors have committed a breach of trust either by their fraud, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a
shareholder may sue on behalf of himself and other shareholders and for the benefit of the
corporation, to bring about a redress of the wrong done directly to the corporation and indirectly
to the shareholders. In such derivative suit, the corporation is the real party in interest while the
shareholder filing suit is only nominal party. Hornilla v. Salunat, 405 SCRA 220 (2003).
Since it is the corporation that is the real party-in-interest in a derivative suit, then the
reliefs prayed for must be for the benefit or interest of the corporation. When the relief prayed for
does not pertain to the corporation, then it is an improper derivative suit. Legaspi Towers 300,
Inc. v. Muer, 673 SCRA 453 (2012),126 citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 1998 ed., p. 375.
A derivative suit presupposes that the corporation is the injured party and the individual
shareholder who files the suit seeks to protect or vindicate corporate rights whenever the
officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation. Here, the harm or injury that Aliño sought to be prevented pertains to properties
registered under Aliño and other third-party mortgagors. Furthermore, the prayer in the
complaint seeks for recovery of the properties belonging to Aliño and other third-party
mortgagors, some of whom are not shareholders of VR Holdings, who mortgaged their
properties to BSP. BSP v. Campa, Jr., 783 SCRA 476 (2016).
(4) Lack of Appraisal Right: An allegation that appraisal rights were not available for the acts
complained of is another requisite for filing derivative suits under Rule 8, Section 1(3) of the
Interim Rules. A distinction must also be made between an individual shareholder’s suit, a class
suit for shareholders from derivative suits. Villamor, Jr. v. Umale, 736 SCRA 325 (2014).127
(5) Must Not Be a Nuisance or Harassment Suit : Nuisance and harassment suits are
prohibited, and in determining whether a suit is a nuisance or harassment suit, the court shall
consider, among others, the follow: (a) The extent of the shareholding or interest of the initiating
shareholder or member; (b) subject matter of the suit; (c) legal and factual basis of the
complaint; (d) availability of appraisal rights for the act or acts complained of; and (e) prejudice
or damage to the corporation. In case of nuisance or harassments suits, the court may motu
proprio or upon motion dismiss the case. Ang v. Ang, 699 SCRA 272 (2013); BSP v. Campa,
Jr., 787 SCRA 476 (2016).

d. Venue for Derivative Suit – Under Section 5, Rule 1 of the Interim Rules, the proper venue for
derivative suit would be in the RTC which has jurisdiction over the principal office of the corporation.
Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).

11. Shareholders’ Right over change of External Auditor (SEC Memo Circular No. 08-2018)

12. Provision of Arbitration Agreement in the Articles or Bylaws (Sec. 181)

13. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 139)
In the liquidation of a corporation, after the payment of all corporate liabilities, the remaining assets,
if any, must be distributed to the shareholders in proportion to their interests in the corporation, which is
referred to as liquidating dividend. President of PDIC v. Reyes, 460 SCRA 473 (2005).

MODULE 9

ATTRIBUTE OF “FREE-TRANSFERABILITY OF SHARES”

125
Reyes v. Tan, 3 SCRA 198 (1961); Republic Bank v. Cuaderno, 19 SCRA 671 (1967).
126
R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005); Ang v. Ang, 699 SCRA 272 (2013).
127
Florete, Jr. v. Florete, Sr., 781 SCRA 285 (2016).
60
 The Corporation as the Medium by Which Shareholders’
Investments Are Promoted and Safeguarded
( 12TH AND 13TH WEEKS: APRIL 26, 28 AND 31, MAY 5 )

Asynchronous Study: Chapters 13 and 14 of TEXTBOOK

XIV. SHARES AND CAPITAL STOCK

A corporation may obtain funds for capital expenditures by floating either shares (equity) or bonds
(debt securities). Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
An “investment”, being in the nature of equity, is an expenditure to acquire property or other assets in
order to produce revenue. It is the placing of capital or laying out of money in a way intended to secure
income or profit from its employment. Unlike a deposit of money or a loan that earns interest, an investor
cannot be assured of a dividend or an interest on the amount invested, for dividends on investments are
granted only after profits or gains are generated. President of PDIC v. Reyes, 460 SCRA 473 (2005).
But once issued, shares are not owned nor are they assets of the corporation—they are owned by
the shareholders of record. The corporation whose shares are the subject of transfer transaction (through
sale, assignment, donation, or any other mode of conveyance) need not be a part to transaction for it to be
valid. However, to bind the corporation, it is necessary that the transfer is recorded in its books. Forest Hills
Golf & Country Club v. Vertex Sales and Trading, Inc., 692 SCRA 706 (2013).

1. Concept of “Capital Stock” (Sec. 173)

What is now Sec. 173 of RCC defines “Paid-up Capital” as that portion of the “Authorized Capital
Stock” which has been both subscribed and paid. Not all funds or assets received by the corporation
can be considered paid-up capital; such must form part of the Authorized Capital Stock that has been
subscribed and then actually paid up. Advances by shareholders as payment of future subscriptions do
not constitute part of the “Outstanding Capital Stock”. MSCI-NACUSIP v. NWPC, 269 SCRA 173
(1997).128
Under what is now Sec. 173 of RCC, the term “Capital Stock” excludes treasury shares. Thus,
quorum is based on the totality of the shares that have been subscribed and issued, whether it be
founders’ shares or common shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
The “Subscribed Capital” is the total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than,
the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the
premium if any, in consideration of the original issuance of the shares. NTC v. Court of Appeals, 311
SCRA 508 (1999).

2. Classification of Shares (Sec. 6)

a. Common Shares: “A common stock represents the residual ownership interest in the corporation.
It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and
entitles the shareholder to a pro rata division of profits.” CIR v. Court of Appeals, 301 SCRA 152
(1999).

b. Preferred Shares: Cumulative or Non-cumulative

(1)
(2) Participating or Non-participating
(3) Priority in Asset Distribution Upon Dissolution
(4) Par Value or No-Par Value
Preferred stocks are those which entitle the shareholder to some priority on dividends and asset
distribution. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
Shareholders of preferred shares issued with 1% dividend rate are not entitled to the payment
thereof as a matter of right without the necessity of a prior declaration of dividends which can only
come from existing retained earnings. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
It is not correct to say that holders of the non-voting preferred shares lose all their voting rights,
since Section 6 provides for the situations where non-voting shares like preferred shares are granted
voting rights. COCOFED. v. Republic, 600 SCRA 102 (2009).
In the absence of provisions in the articles denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders are merely investors in the corporation
for income in the same manner as bondholders. Under the [Revised] Corporation Code only
preferred or redeemable shares can be deprived of voting rights. Common shares cannot be
deprived of the right to vote, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid. Gamboa v. Teves, 652 SCRA 690 (2011).

128
Central Textile Mills v. NWPC, 260 SCRA 368 (1996); CIR v. First Express Pawnshop Co., Inc., 589 SCRA 253 (2009).
61
 c. Redeemable Shares
When the certificates of stock recognize redemption, but the option to do so is clearly vested in
the corporation, the redemption is clearly the type known as “optional” and rest entirely with the
corporation, and that the shareholder is without right to either compel or refuse the redemption of his
shares. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
“Redemption” is a repurchase or reacquisition of stock by the issuing corporation in exchange
for money or property, whether the acquired stock is cancelled, retired or held in the treasury.
Essentially, the corporation gets back some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in business as before. The redemption of stock
dividends previously issued is used as a veil for the constructive distribution of cash dividends, and
therefore subject to tax. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
d. Founders’ Shares (Sec. 7)129
Since Section 7 makes no distinction (and is found under General Provisions), then it must
mean that founders’ shares may be applied to both stock and nonstock corporations. Although what
is now Section 88 of the RCC allows in a nonstock corporation to limit, broaden or deny the right of
members of any class, the specific provision of Section 7 to founders’ share must prevail, and that
the nonstock corporation can lawfully suspend or define the voting rights of its members, but with
respect to founders’ share, the exclusive right to vote and be voted for of the founders’ share should
expire after five years from the approval of the SEC. Forest Hills and Country Club, Inc. v.
Kings Properties Corp., G.R. No. 212833, 07 August 2019.
e. Treasury Shares (Sec. 9): Treasury shares are stocks issued and fully paid for and re-acquired by
the corporation either by purchase, donation, forfeiture or other means, and do not have the status of
being outstanding shares and are not entitled to be voted upon nor participate in dividend
declarations. Comm. of Internal Revenue v. Manning, 66 SCRA 14 (1975).
A treasury share, either common or preferred, may be used for a variety of corporate purposes,
such as for a stock bonus plan for management and employees, or for acquiring another company. It
may be held indefinitely, resold or retired. While held in the company’s treasury, the stock earns no
dividends and has no vote in company affairs. COCOFED v. Republic, 600 SCRA 102 (2009).
f. Stock Warrants and Stock Options
g. Re-Classification and Exchange of Shares
“Reclassification of shares does not always bring any substantial alteration in the subscriber’s
proportional interest. But the exchange is different—there would be a shifting of the balance of stock
features like priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchange per se yields income for tax purposes. … In this case, the exchange of
shares, without more, produces no realized income to the subscriber. There is only a modification of
the subscriber’s rights and privileges—which is not a flow of wealth for tax purposes. The issue of
taxable dividend may arise only once a subscriber disposes of his entire interests and not when
there is still maintenance of proprietary interest.” Comm. of Internal Revenue v. CA, 301 SCRA 152
(1999).
Conversion of common shares into preferred shares through amendment of articles of
incorporation, is a legitimate exercise of corporate powers. Conversion does not amount to SMC
using its funds to effect conversion but would amount merely to a reconfiguration of said (common)
shares into preferred shares. COCOFED v. Republic, 600 SCRA 102 (2009).

4. Hybrid Securities: Government v. Phil. Sugar Estates, 38 Phil. 15 (1918).

5. Quasi-Reorganization
a. Reduction of Capital Stock (Sec. 37): Reduction of capital stock cannot be employed to avoid
the corporation’s obligations under the Labor Code. Madrigal & Co. v. Zamora, 151 SCRA 355 (1987).
b. Stock Splits versus Stock Consolidations

6. Subscription Agreements (Secs. 59 and 71)

a. No More Contract of Sale of “Unissued Shares”: Bayla v. Silang Traffic Co., Inc., 73 Phil.
557 (1942).

b. Assignment of Subscription Agreements

The assignment of the subscription agreement is a form of novation by substitution of a new
debtor, which requires the consent of the creditor.   In this case, the change of debtor took place
when R.C. Lee assigned the Oceanic shares under Subscription Agreement Nos. 1805, and 1808 to
1811 to SSI so that the latter became obliged to settle the 75% unpaid balance on the subscription.  
Interport Resources Corp. v. Securities Specialist, Inc., 792 SCRA 155 (2016).

129
In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position that when the articles of incorporation provide expressly a class of shares to have the
exclusive right to vote and be voted for into the Board of Directors, that such shares would essentially be founder’s share was raised but not resolved.
62
7. CONSIDERATION FOR SUBSCRIPTION (Sec. 61):
 Actual cash paid to the corporation
 Property, tangible or intangible, actually received by the corporation and necessary
or convenient for its use and lawful purposes at a fair valuation equal to the par
value or issued value of the stock issued
 Labor performed for or services actually rendered to the corporation
 Previously incurred indebtedness of the corporation
 Amount transferred from unrestricted retained earnings to stated capital
 Outstanding shares exchanged for stocks in the event of reclassification or
conversion
 Shares in another corporation; and/or
 Other generally accepted form of consideration
Stock dividends are in the nature of shares issued to the shareholders whereby the corresponding
amount of unrestricted retained earnings is converted into equity in the corporation’s books. Lincoln
Phil. Life v. Court of Appeals, 293 SCRA 92 (1998).130

a. Liability of Directors for Watered Stocks (Sec. 64)

b. Unpaid Subscription (Secs. 65 and 66)
Under the trust fund doctrine, a board resolution releasing the shareholders from payment of the
balance of their subscription is wholly ineffectual; and the trustee of the insolvent corporation has still
to recover the amounts waived. Philippine Trust Co. v. Rivera, 44 Phil. 469 (1923).
A stipulation that the subscription shall be payable from the first dividends to be paid on the
shares is unlawful in so far as it purports to relieve the subscriber from liability to be sued; and the
subscriber is liable for the par value of the stock to the same extent as if such stipulation had not
been inserted in the contract. National Exchange Co., Inc. v. Dexter, 51 Phil. 601 (1928).
A valid and binding subscription for shares cannot be cancelled so as to release the subscriber
from liability thereon without the consent of all the shareholders. From this rule, however, there are
exceptions: where it is given pursuant to a bona fide compromise, or to set off a debt due from the
corporation, a release, supported by consideration, will be effectual as against dissenting
shareholders and subsequent and existing creditors. Lingayen Gulf Elect Power v. Baltazar, 93 Phil.
404 (1953).
The doctrine is established that subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims. The corporation has no power to
release a subscriber to its capital stock from the obligation of paying for his shares without valuable
consideration for such release. Against creditors, a reduction of the capital stock can take place only
in the manner prescribed by the statute. PNB v. Bitulok Sawmill, 23 SCRA 1366 (1968).
The wages owed to the President who as a shareholder has not fully paid his subscription,
cannot be off-setted against his unpaid subscription, since this is not only prohibited by the Labor
Code, but more so because there has been no previous call made by the Board of Directors under
what is now Section 66 of the Revised Corporation Code, as to make the unpaid subscription due
and demandable to effect legal off-setting or compensation. Apodaca v. NLRC, 172 SCRA 442
(1989).

c. Delinquency on Subscription (Secs. 67 to 70)

A stock subscription is a subsisting liability from the time the subscription is made. The
subscriber is as much bound to pay the amount of share subscribed as he would be to pay any other
debt, and the right of the company to demand payment is non less incontestable, and that a
corporation has no legal capacity to release a subscriber to its capital stock from the obligation to
pay his shares, and any agreement to this effect would be invalid. Velasco v. Poizat, 37 Phil. 802
(1918).
In spite of a specific provision in the bylaws providing for the manner of collection of unpaid
subscriptions, the Board still has the business judgment prerogative to determine the best manner of
collecting unpaid subscriptions, which may include the filing of a collection suit. De Silva v. Aboitiz &
Co., 44 Phil. 755 (1923).
A stockholder cannot recover the amounts paid on the subscription on the ground that the
corporation has ceased to do business nor the fact that the other shareholders have not been made
to pay their subscriptions, and what is now Sec. 67 of the RCC that the power of the Board of
Directors to make a call on unpaid subscription cannot be limited by the provisions of the
subscription contract, but indicating that “this does not mean that the directors may not rely on the
subscription contract if they see fit to do so. Miranda v. Tarlac Rice Mill Co., 57 Phil. 619 (1932).
[NOTE: Section 67 of Revised Corporation Code now subjects the power of the Board to make a call
130
The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited
financial statements of the corporation, and not the par value thereof. CIR v. Lincoln Phil. Life Insurance Co., 379 SCRA 423 (2002).
63
 “subject to the provision of the subscription contractor,” but this does not apply in the event the
corporation becomes insolvent].
The old Corporation Law recognized that a stock subscription is a subsisting liability of the
subscriber from the time the subscription is made, since it requires the subscriber to pay interest
quarterly from that date unless he is relieved from such liability in the bylaws of the corporation. It is
established doctrine that subscriptions to the capital stock constitute a fund to which the creditors of
the corporation have a right to look for satisfaction of their claims and that the assignee in insolvency
can maintain an action upon any unpaid subscription to realize assets for the payment of its debts.
Lumanlan v. Cura, 59 Phil. 746 (1934).
Prescriptive period to recover on unpaid subscription commences not from the time of
subscription but from the time of demand by Board of Directors to pay the balance of subscription.
Garcia v. Suarez, 67 Phil. 441 (1939).

8. CERTIFICATE OF STOCK (Secs. 62 and 63)

a. Nature of Certificate: A stock certificate is a written instrument signed by the proper corporate
officers stating or acknowledging that the person named in the document is the owner of a
designated number of shares of its stock. It is prima facie evidence that the holder is a shareholder
of a corporation. Lao v. Lao, 567 SCRA 558 (2008).
A stock certificate is not necessary to render one a shareholder in a corporation; nevertheless, it
is the paper representative or tangible evidence of the share itself and the various interests therein.
The stock certificate expresses the contract between the corporation and the shareholder, but it is
not essential to the existence of a share in or the creation of the relationship with the shareholder.
Tan v. SEC, 206 SCRA 740 (1992).131
A stock certificate could not be considered issued in contemplation of law unless signed by the
president or vice-president and countersigned by the secretary or assistance secretary. Bitong v.
Court of Appeals, 292 SCRA 503 (1998).
A certificate, however, is merely a tangible evidence of ownership of shares, and without which
does not detract from the actual issuance of the shares of stock. The fact that the stock certificates
registered in the name of one person are found in the possession of another shareholder does not
prove that the possessor is the owner of the covered shares. A stock certificate is merely a tangible
evidence of ownership of shares. Its presence or absence does not affect the right of the registered
owner to dispose of the shares covered by the stock certificate. Republic v. Estate of Hans Menzi,
475 SCRA 20 (2005).
Certificates of stock are not the actual shares of stock in the corporation and merely expresses
the contract between the corporation and the shareholder. Therefore, when a buyer of shares gives
notice to original seller for the latter’s exercise of his right of first refusal and the original seller failed
to respond, there was already the valid offer by the buyer that triggered the running of the period for
the exercise of the right of first refusal in spite of the fact that no certificate of stock had been issued
yet in the name of the buyer. Makati Sports Club v. Cheng, 621 SCRA 103 (2010).
The shares evidenced by said certificates, meanwhile, are regarded as property and the owner
of such shares may, as a general rule, dispose of them as he sees fit, unless the corporation has
been dissolved, or unless the right to do so is properly restricted, or the owner's privilege of
disposing of his shares has been hampered by his own action. [Padgett v. Bobcat & Templeton, 59
Phil. 232 (1933)]. Teng v. SEC, 784 SCRA 216 (2016).
BUT SEE: Uncertificated or Scripless Shares Traded in Trading Markets (Sec. 62)

b. Quasi-Negotiable Character of Certificate of Stock: A stock certificate is merely a quasi-

negotiable instrument in the sense that it may be transferred by endorsement, coupled with delivery;
but it is not negotiable because the holder thereof takes it without prejudice to such rights or
defenses as the registered owners or transferor’s creditors may have under the law, except only
insofar as such rights or defenses are subject to the limitations imposed by the principles governing
estoppel. Delos Santos v. Republic, 96 Phil. 577 (1955).
The rule is that the endorsement of the stock certificate by the owner or his attorney-in-fact or
any other person legally authorized to make the transfer shall be sufficient to effect the transfer of
shares only if the same is coupled with delivery. The delivery of the stock certificate duly endorsed
by the owner is the operative act of transfer of shares from the lawful owner to the new transferee.
But to be valid against third parties, the transfer must be recorded in the corporate books. Bitong
v. Court of Appeals, 292 SCRA 503 (1998).132
Since physical delivery of stock certificates is one of the essential requisites for the transfer of
ownership of the stocks purchased, then the failure of the seller-registered owner to delivery the
stock certificates would constitute a material breach that warrants the rescission of the sale of the

131
C.N. Hodges v. Lezama, 14 SCRA 1030 (1965); Lincoln Phil. Life v. CA, 293 SCRA 92 (1998); Ponce v. Alsons Cement Corp., 393 SCRA 602
(2002); Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005); Makati Sports C;ib .
132
Rivera V. Florendo, 144 SCRA 643 (1986); Razon v. IAC, 207 SCRA 234 (1992); Rural Bank of Lipa City v. CA, 366 SCRA 188 (2001); Raquel-
Santos v. CA, 592 SCRA 169 (2009); Teng v. SEC, 784 SCRA 216 (2016); Tee Ling Kiat v. Ayala Corp., 857 SCRA 533 (2018).
64
 shares upon the option of the buyer. Fil-Estate Golf v. Vertex Sales and Trading, 698 SCRA 272
(2013).

c. Right to Stock Certificate for Fully Paid Shares (Sec. 63)

Board resolution which prohibited not-fully shares from voting (although certificates have been
issued) is void, since not fully paid shares which are not delinquent may not be denied their voting
rights. Unless prohibited by bylaws, stock certificates may be issued for less than the number of the
shares subscribed for provided the par value of each of the stocks represented by each of the
certificates has been paid. Baltazar v. Lingayen Gulf Elect. Power Co., 14 SCRA 522 (1965).
d. Lost or Destroyed Certificates (Sec. 72)
While what is now Sec. 72 of RCC appears to be mandatory, the same admits exceptions, such
that a corporation may voluntarily issue a new certificate in lieu of the original stock certificate which
has been lost without complying with the requirements under said section. It would be an internal
matter for the corporation to find measures in ascertaining who are the real owners of shares for
purposes of liquidation. It is well-settled that unless proven otherwise, the “ stock and transfer book”
is the best evidence to establish stock ownership. SEC Opinion 28 Jan. 1999, addressed to Ms. Ma.
Cecilia Salazar-Santos
e. Forged and Unauthorized Transfers
A bona fide pledgee or transferee of a share from the apparent owner is not chargeable with
knowledge of the limitations laced on said certificates by the real owner, or of any secret agreement
relating to the use which might be made of the stock by the holder. When a stock certificate has
been endorsed in blank by the owner thereof, it becomes a “street certificate” so that upon its face
the holder is entitled to demand its transfer into his name from the issuing corporation. As such the
certificate if quasi-negotiable and the transferee thereof is justified in believing that it belongs to the
older and transferor. J. Santamaria v. HSBC, 89 Phil. 780 (1951).
Since stock certificates are only quasi-negotiable instruments, a transferee in good faith under a
forged assignment acquires no title which can be asserted against the true owner, unless the true
owner’s own negligence has been such as to create an estoppel against him. Delos Santos v.
Republic, 96 Phil. 577 (1955).
When the stock certificates have been endorsed in blank for purposes of showing the nominee
relations, the eventual delivery and registration of the shares in violation of the trust relationship and
after they were stolen, would be void, even when such transfers have been registered in the stock
and transfer book. Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 (1999).
We uphold rule in Santamaria v. HSBC that when a stock certificate is endorsed in blank by the
owner it constitutes what is termed as “street certificate” so that upon its face, the holder is entitled to
demand its transfer into his name form the issuing corporation. The ruling in Neugene Marketing,
Inc. v. Court of Appeals, is merely an exceptional one borne out of the fact that the stock certificates
endorsed in blank were stolen from the possession of the beneficial owner (i.e., there was no
intention for the certificates to go into commercial negotiation). Indeed, in this case Gilberts blank
endorsement of the certificates was effective since they were in the possession and control of the
parents who were the beneficial owners over the underlying shares. Guy v. Guy, 680 SCRA 214
(2012).

9. SALES AND OTHER DISPOSITIONS OF SHARES: “Doctrine on Free-Transferability of Shares”

a. Share Dispositions and the Stock and Transfer Book (STB) (Secs. 62, 71 and 73)
Shares are not owned or are the assets of the corporation—they are owned by the
shareholders of record. The corporation whose shares are the subject of transfer transaction
(through sale, assignment, donation, or any other mode of conveyance) need not be a part to
transaction to be valid; however, to bind the corporation as well as third parties, it is necessary that
the transfer is recorded in the corporate books. Forest Hills Golf & Country Club v. Vertex
Sales and Trading, Inc., 692 SCRA 706 (2013).
Under what is now Sec. 62 of RCC, certain minimum requisites must be complied with for there
to be a valid transfer of stocks, to wit: (a) there must be delivery of the stock certificate; (b) the
certificate must have been endorsed by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and (c) to be valid against third parties, the transfer must be
recorded in the corporate books. Rural Bank of Lipa City v. Court of Appeals, 366 SCRA 188 (2001).
What is now Sec. 62 of RCC provides for the manner shares may be transferred. Said provision
is essentially the same as Section 35 of the old Corporation Law, which, as held in Fleisher v. Botica
Nolasco Co., defines the nature, character and transferability of shares. Fleisher also stated that the
provision on the transfer of shares contemplates no restriction as to whom they may be transferred
or sold. As owner of personal property, a shareholder is at liberty to dispose of them in favor of
whomsoever he pleases, without any other limitation in this respect, than the general provisions of
law. Teng v. SEC, 784 SCRA 216 (2016).
When the subscriber under a Subscription Agreement assigns the shares to another party, the
same partakes of the nature of a novation through the substitution of the person of the debtor, which
is effective only with the consent of the creditor; but that in the case of the corporation issuing the
65
 shares, such assignment would be valid and binding upon notice by the transferee of the transfer of
the shares coupled with a tender of the balance of the unpaid subscription pursuant to the call made
by the corporation. The provisions of what is now Sec. 62 of RCC to the effect that a transfer of
shares does not bind the corporation unless it is registered in the corporate books cannot apply in
this case since formal notice of the transfer was given to the corporation. Interport Resources
Corp. v. SSI, 792 SCRA 155 (2016).
(1) Nature of the STB: The STB records the names and addresses of all shareholders arranged
alphabetically, the installments paid and unpaid on all shares for which subscription has been
made, and the date of payment thereof, a statement of every alienation, sale or transfer of
shares made the date thereof and by and to whom made, and such other entries as may be
prescribed by law. A stock and transfer book, like other corporate books and records, is not in
any sense a public record, and thus is not exclusive evidence of the matters and things which
ordinarily are or should be written therein. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
As between the General Information Sheet and the corporate books, it is the latter that is
controlling as to the number of shares held by shareholders. Lao v. Lao, 567 SCRA 558 (2008).
Who May Make Entries in the STB – Entries made on the stock and transfer book by any
person other than the corporate secretary, such as those made by the President and Chairman,
cannot be given any valid effect. Torres, Jr. v. Court of Appeals, 278 SCRA 793 (1997).
Absence of a deed of sale evidencing sale of shares does not necessarily show irregularity
since what is now Sec. 62 of RCC itself does not require any deed for the validity of the transfer
of shares stock, it being sufficient that such transfer be effected by delivery of the stock
certificates duly endorsed. It has been held in Rural Bank of Lipa City, Inc. v. Court of Appeals,
366 SCRA 188 (2001); that the execution of a deed of sale does not necessarily make the
transfer effective. Republic v. Estate of Hans Menzi, 475 SCRA 20 (2005).
Sales and other dispositions of shares must be registered in the stock and transfer book: (a)
to enable the corporation to know at all times who are the actual shareholders, and who have
standing to exercise the rights pertaining to the shares; (b) to afford the corporation an
opportunity to object or refuse its consent to such transfer when it has claims against such
shares; and (c) to avoid fictitious or fraudulent transfers. Escaño v. Filipinas Mining Corporation,
74 Phil. 71 (1944).133

(2) Effects of Registration/Non-Registration of Transfers in the STB: The failure to register

a sale or disposition of shares in the corporate books would render the same invalid to all
persons, including the attaching creditors of the seller. Uson v. Diosomito, 61 Phil. 535
(1935).
Until challenged in a proper proceeding, a shareholder of record has a right to participate in
any meeting; his vote can be properly counted to determine whether a shareholders’ resolution
was approved, despite the claim of the alleged transferee. On the other hand, a person who has
purchased stock, and who desires to be recognized as a shareholder for the purpose of voting,
must secure such a standing by having the transfer recorded on the corporate books. Until the
transfer is registered, the transferee is not a shareholder but an outsider. Batangas Laguna
Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).134
A transfer of shares which is not recorded in the corporate books is valid only as between
the parties. Hence, the transferor has the right to dividends as against the corporation without
notice of transfer, but it serves as trustee of the real owner of the dividends, subject to the
contract between the transferor and transferee as to who is entitled to receive the dividends.
Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009).

10. PLEDGE, MORTGAGE AND OTHER ENCUMBRANCES ON SHARES

Shares for which no stock certificate has been issued may validly be mortgaged in whole (an not
just with respect to the portion paid-up) and the corporation receiving notice thereof is bound to respect
the security arrangement. The “unpaid claims” under what is now Sec. 62 of RCC refers to any unpaid
subscription, and not to any indebtedness which a shareholder may owe the corporation arising from
any other transactions, like unpaid monthly dues. Fua Cun v. Summers, 44 Phil. 704 (1923).135
When shares covered by a stock certificate issued in the name of the usufructuary by the original
owner with the agreement that they should not be disposed or sold, but the registered owner had
pledged the shares by endorsement and delivery of the certificate to one who took them in good faith
and for value, the latter shall be preferred since registration of a security arrangement covering shares
does not require for its validity to be registered in the stock and transfer book. Monserrat v. Ceron, 58
Phil. 469 (1933).
In order for the chattel mortgage on shares to be valid and binding on third parties, registration
thereof in the stock and transfer book is not required and not legally effective. What is necessary is that
the chattel mortgage over the shares be registered in the Registry of Deeds of the principal place of

133
Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).
134
Magsaysay-Labrador v. CA, 180 SCRA 266 (1989); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
135
China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
66
 business of the corporation, as well as in the Registry of Deeds of the shareholders’ domicile.
Therefore, when only one of the double-registration requirements has been complied with, the chattel
mortgage over the shares would not be valid and binding on the world, and any writ of attachment
served upon the corporation on behalf of the judgment creditor of the mortgagor-shareholder would
have priority over the earlier chattel mortgage effected on said shares. Chua Guan v. Samahang
Magsasaka, Inc., 62 Phil. 472 (1935).
The pledge of shares covered by a certificate is valid and binding on third parties, when the stock
certificate has been endorsed and delivered to the creditor, notwithstanding the fact that the contract
does not appear in a public instrument (chattel mortgage). “Certificates of stock … are quasi-negotiable
instruments in the sense that they may be given in pledge or mortgage to secure an obligation.”
Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937).
Only fully paid shares for which stock certificates have been issued are subject to the registration
requirement in the stock and transfer book in cases dealing with their sales and absolute disposition.
Nava v. Peers Marketing Corp., 74 SCRA 65 (1976).
The process of registering lis pendens is inapplicable to shares which are personal properties;
however, however, formal notice given to the Corporate Secretary of claims to the shall be deemed
equivalent of registration of an encumbrance or assignment of the shares on the corporate books; and
that by virtue of such registration through notice to the corporation, pending litigation, third parties, or
potential transferees pendente lite, may therefore be charged with constructive notice of claimants
lien/title over the subject shares and the pending litigation involving the same. MR Holdings, Ltd. V.
Bajar, 683 SCRA 336 (2012).
Equitable Mortgage Assignment: The assignment of voting shares as security for a loan
operates to give the assignee not only the right to vote on the shares, but would also treat the assignee
as the owner of the shares (not just an equitable mortgage): “It is true that the assignment was
predicated on the intention that it would serve as security vis-à-vis DBP’s financial accommodation
extended to PJI, but it was a valid and duly executed assignment, subject to a resolutory condition,
which was the settlement of PJI’s loan obligation with DBP.” APT v. Sandiganbayan, 341 SCRA 551
(2000).

11. ATTACHMENTS, EXECUTION AND OTHER INVOLUNTARY DEALINGS ON SHARES

Attachments of shares are not included in the term “transfer” as provided in what is now Sec. 62 of
RCC. Both the Revised Rules of Court and RCC do not require annotation in the stock and transfer
book for the attachment of shares to be valid and binding on the corporation and third parties.
Chemphil Export & Import Corp. v. Court of Appeals, 251 SCRA 257 (1995).
A Corporate Secretary’s obligation under what is now Sec. 62 of RCC to record in the stock and
transfer book alienations involving the shares, does not cover any obligation to record the attachment of
banks against the shares of a debtor, since attachments are not transfer of shares, but merely a burden
on the title of the owner. Only absolute transfers of shares are required to be recorded in the STB in
order to have “force and effect as against third persons.” Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528
(2016).
A bona fide transfer of shares, not registered in the corporate books, is not valid as against a
subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual
notice of said transfer or not. All transfers not so entered on the corporate books are absolutely void; not
because they are without notice or fraudulent in law or fact, but because they are made so void by
statute. Garcia v. Jomouad, 323 SCRA 424 (2000).

12. Situs of Shares of Stocks: Situs of shares is the domicile of the corporation that issued them. Wells
Fargo Bank and Union v. Collector, 70 Phil. 325 (1940).136

MODULE 10

SPECIAL CORPORATE UNDERTAKINGS

( 14TH AND 15TH WEEKS: MAY 10, 12, 17 AND 19 )

Asynchronous Study: Chapters 15 and 16 of TEXTBOOK

XV. ACQUISITIONS, MERGERS AND CONSOLIDATIONS

A. ACQUISITIONS AND TRANSFERS

1. “Assets-Only” Transfers

136
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).
67
 As a Rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets; EXCEPT: When any of the following circumstances is present: (1) where the purchasers
expressly or impliedly agrees to assume the debts; (2) where the selling corporation fraudulently enters
into the transactions to escape liability for those debts (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the transaction amounts to a consolidation or
merger of the corporations. Edward J. Nell Co. v. Pacific, 15 SCRA 415 (1965).137
The disposition of the assets of a corporation shall be deemed to cover substantially all the
corporate property and assets, if thereby the corporation would be rendered incapable of continuing the
business or accomplishing the purposes for which it was incorporated. Such a sale or disposition must
be understood as valid only if it does not prejudice the creditors of the assignor, which necessarily
implies that the assignee assumes the debts of the assignor. Even under the provisions of the Civil
Code, a creditor has a real interest to go after any person to whom the debtor fraudulently transferred its
assets. Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp., 498 SCRA 400 (2006).
PSALM took ownership over most of NPC’s assets by operation of law—these properties may be
used to satisfy the Court’s judgment, and such being the case, the employees may go after such
properties. NPC Drivers and Mechanics Assn. (NPC DAMA) v. NPC, 606 SCRA 409 (2009).

2. “BUSINESS ENTERPRISE” TRANSFERS

A business operated under a partnership and later incorporated, or where a corporation assumed
all the assets and liabilities of the partnership, then the corporation cannot be regarded, for purposes of
the obligations imposed under the SSS Law, as having come into being only from its incorporation but
from the date the partnership commenced. Laguna Trans. Co. v. SSS, 107 Phil. 833 (1960).138
The judgment in a suit for workmen’s compensation can be pursued against the corporation
organized by the controlling shareholder who as the sole proprietor organized the corporation to insulate
properties transferred thereto against the judgment debt. A.D. Santos v. Vasquez, 22 SCRA 1156 (1968).
When the bus operations belonging to the estate of the deceased spouses is duly incorporated by
the administratrix with the intention to make the corporation liable for past and pending obligations of the
estate as the transportation business itself, then that liability on the part of the corporation, vis-à-vis the
estate, should continue to remain with it even after the percentage of the estate’s shares in the
corporation should have been diluted. Buan v. Alcantara, 127 SCRA 845 (1984).
An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully supported
by Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity under
Article 1311 to 34 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are
valid and binding only between the contracting parties and their successors-in-interest. Thus, despite
the sale of all corporate assets, the transferee corporation cannot be prejudiced as it is not in privity with
the contracts between the transferor corporation and its creditors. Jurisprudence has held that in a
business-enterprise transfer, the transferee is liable for the debts and liabilities of his transferor arising
from the business enterprise conveyed. Many of the application of the business-enterprise transfer have
been related by the Court to the application of the piercing doctrine. Y-I Leisure Phils., Inc. v. Yu, 770
SCRA 56 (2015), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2010 ed., pp. 686, 687-689.; Maricalum Mining
Corp. v. Florentino, 872 SCRA 572 (2018).

3. “EQUITY” TRANSFERS
The disposition by the controlling shareholder of all of its equity in the corporation warrants the
application of the alter ego piercing doctrine since it shows that the transferor had complete control of
the corporation (?). PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990).
PROPER DOCTRINE: The fact that a shareholder sells his shares during the pendency of a collection
case against the corporation, does not make such shareholder personally liable for the corporate debt,
since disposing shareholder has no personal obligation to the creditor, and it is the inherent right of
shareholder to dispose of his shares anytime he desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).

B. MERGER AND CONSOLIDATIONS

A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and continues the combined business.
Since a merger or consolidation involves fundamental changes in the corporation, as well as in the
rights of shareholders and creditors, there must be an express provision of law authorizing them. PNB
v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).139
Merger is a re-organization of two or more corporations that results in their consolidating into a
single corporation, which is one of the constituent corporations, one disappearing or dissolving and the
other surviving.  To put it another way, merger is the absorption of one or more corporations by another
existing corporation, which retains its identity and takes over the rights, privileges, franchises,

137
Jiao v. NLRC, 670 SCRA 184 (2012).
138
Oromeca Lumber Co. v. SSS, 4 SCRA 1188 (1962); San Teodoro Dev. v. SSS, 8 SCRA 96 (1963).
139
McLeod v. NLRC, 512 SCRA 222 (2007).
68
 properties, claims, liabilities and obligations of the absorbed corporation. The absorbing corporation
continues its existence while the life or lives of the other corporation is or are terminated. Bank of
Commerce v. Radio Philippines Network, Inc., 722 SCRA 529 (2014).

1. Procedure for Merger or Consolidation

When the [Revised] Corporation Code’s procedure for merger/consolidation are not followed, there
can be no merger or consolidation, corporate separateness between the constituent corporations
remains, and the liabilities of one entity cannot be enforced against another entity. PNB v. Andrada
Electric & Engineering Co., 381 SCRA 244 (2002).
a. Plan of Merger or Consolidation (Sec. 75)
b. Shareholders’ or Members’ Approval (Sec. 76)
c. Articles of Merger or Consolidation (Sec. 77)
d. Submission of Financial Statements Requirements: For applications of merger, the audited
financial statements of the constituent corporations (surviving and absorbed) as of the date not
earlier than 120 days prior to the date of filing of the application and the long-form audit report for
absorbed corporation(s) are always required. Long form audit report for the surviving corporation is
required if it is insolvent. SEC Opinion 14, s. of 2002, 15 Nov. 2002
SEC had not authority to approve the merger until the requisite tax clearance from the BIR has
been issued; therefore, in spite of the issuance of the certificate of merger by the SEC, the
constituent corporation is not deemed dissolved, but only for tax purposes until the requisite BIR tax
clearance is issued. Axia Power Holdings Philippines Corp. v. CIR, G.R. No. 230847, 14 October
2020.

e. Approval by SEC (Sec. 78): SEC’s issuance of the certificate of merger is crucial—not only does
it bear out SEC’s approval but also marks the moment whereupon the consequences of a merger
take place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases
to exist but its rights, and properties as well as liabilities shall be taken and deemed transferred to
and vested in the surviving corporation. Poliand Industrial Ltd. V. NDC, 467 SCRA 500 (2005).140

f. Prior Notification and Approval by PCC for M&A Exceeding Threshold Value (Secs. 16
and 17, R.A. 10667; PCC Resolution No. 02-2020)

3. Effects of Merger or Consolidation (Sec. 79)

It is settled that in the merger, one of the corporations survives and continues the business, while
the others are dissolved and all their rights, properties and liabilities are acquired by the surviving
corporation. The surviving corporation therefore has a right to institute a collection suit on accounts of
one of one of the constituent corporations. Babst v. Court of Appeals, 350 SCRA 341 (2001).
Global is bound by the terms of the contract entered by its predecessor-in-interest, Asian Bank.
Due to Global’s merger with Asian Bank and because it is the surviving corporation, it is as if it was the
one which entered in a contract with Surecomp. In the same way, Global also has the right to exercise
all defenses, rights, privileges, and counterclaims of every kind and nature which Asian Bank may have
or invoke under the law. Global Business Holdings Inc. v. Surecompsoftware, B.V., 633 SCRA 94 (2010).
In a merger of two banks, the surviving bank cannot claim to be in good faith for the default
committed by the absorbed bank, since it is not an excuse from the legal consequences of the effects of
a merger or consolidation. Under what is now Sec. 79 of RCC, the surviving entity not only acquires all
the rights, privileges, and assets of the absorbed corporation, but also the liabilities and obligations of
the latter as if the surviving company itself incurred it. In this case, since BSA was remised in its
obligations under the loan agreement, BPI as the surviving bank in the merger with BSA cannot feign
ignorance of transactions entered by the former especially when it seeks to benefit from the same by
foreclosing the mortgage thereon. Ong v. BPI Family Savings Bank, Inc., 852 SCRA 614 (2017).

4. De Facto Mergers
In his book, Dean Cesar Villanueva explained that under the [Revised] Corporation Code, “a de
facto merger can be pursued by one corporation acquiring all or substantially all of the properties of
another corporation in exchange of shares of the acquiring corporation. The acquiring corporation would
end up with the business enterprise of the target corporation; whereas, the target corporation would end
up with basically its only remaining assets being the shares of the acquiring corporation.” No de facto
merger took place in the present case simply because the TRB owners did not get in exchange for the
bank’s assets and liabilities an equivalent value in Bancommerce shares. Bancommerce and TRB
agreed with BSP approval to exclude from the sale the TRB's contingent judicial liabilities, including
those owing to RPN. Bank of Commerce v. RPN 9, 722 SCRA 520 (2014).

C. EFFECTS ON EMPLOYEES OF THE CONSTITUENT CORPORATIONS

1. “Assets Only” Transfers

140
Associated Bank v. CA, 291 SCRA 511 (1998); Mindanao Savings and Loan Assn. v. Willkom, 634 SCRA 291 (2010).
69
 There is no law requiring that the purchaser of MDII’s assets should absorb its employees. The
most that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer] to
give preference to the qualified separated employees of MDII in the filling up of vacancies in the
facilities. MDII Supervisors & Confidential Employees Assn. v. Pres. Assistance on Legal Affairs, 79
SCRA 40 (1977).
Unless expressly assumed, employment contracts and CBAs are not enforceable against a
transferee of an enterprise, labor contracts being in personam, thus binding only between the parties. A
labor contract merely creates an action in personam and does not create any real right which should be
respected by third parties. Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 (1989).

2. “Business-Enterprise” Transfers
There is no law requiring that the purchaser should absorb the employees of the selling company.
Well-established is the principle “that it is within the employer’s legitimate sphere of management
control of the business to adopt economic policies to make some changes or adjustments in their
organization or operations that would ensure profit to itself or protect the investments of its
shareholders. As in the exercise of such management prerogative, the employer may merge or
consolidate its business with another or sell or dispose all or substantially all of its assets and properties
which may bring about the dismissal or termination of its employees in the process. Central
Azucarera del Danao v. Court of Appeals, 137 SCRA 295 (1985).
Where a corporation is closed for alleged losses and its equipment are transferred to another
company which engaged in the same operations, the separate juridical personality of the latter can be
pierced to make it liable for the labor claims of the employees of the closed company. National
Federation of Labor Union v. Ople, 143 SCRA 124 (1986).
Although a corporation may have ceased business operations and an entirely new company has
been organized to take over the same type of operations, it does not necessarily follow that no one may
now be held liable for illegal acts committed by the earlier firm. Pepsi-Cola Bottling Co., v. NLRC,
210 SCRA 277 (1992).141
Under the principle of absorption, a bona fide buyer of all, or substantially all, the properties of the
seller or transferor is not obliged to absorb the latter’s employees. The most that the purchasing
company may do, for reasons of public policy and social justice, is to give preference of reemployment
to the selling company’s qualified separated employees, who in its judgment are necessary to the
continued operation of the business establishment. In the case of a transfer of all or substantially all of
the assets of a corporation (i.e., business enterprise transfers), the liabilities of the previous owners to
its employees are not enforceable against the buyer or transferee, unless (a) the latter unequivocally
assumes them; or (b) the sale or transfer was made in bad faith. Barayoga v. APT, 473 SCRA 690
(2005).142
Where a corporation transferred all its assets to another corporation “to settle its obligations” and
not amounting to a fraudulent transfer, that does not authorize application of the piercing doctrine to
make the transferee liable for labor claims against the transferor. McLeod v. NLRC, 512 SCRA 222
(2007).
Settled now is the rule that where one corporation sells or otherwise transfers all its assets to
another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the
transferor. Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).

3. “Equity” Transfers
Where the change of ownership is done in bad faith, or is used to defeat the rights of labor, the
successor-employer is deemed to have absorbed the employees and is held liable for the
transgressions of his or her predecessor. Peñafrancia Tours and Travel Transport v. Sarmiento, 634
SCRA 279 (2010).
Where transfer of ownership is in good faith, the transferee is under no legal duty to absorb the
transferor’s employees as there is no law compelling such absorption. For reasons of public policy and
social justice, transferee may give preference to the qualified separated employees in the filling of
vacancies in the facilities of the purchaser. Manlimos v. NLRC, 242 SCRA 145 (1995).143

4. Mergers and Consolidations

Employees of a predecessor-constituent corporation cannot avail of their previous tenure when
determining their termination benefits with the surviving corporation in the merger. Filipinas Port
Services, Inc. v. NLRC, 177 SCRA 203 (1989).
CONTRA: In the case of merger or consolidation, the employees have a right to their retirement benefits
computed from the time worked with the predecessor-constituent corporations, saying there was no
break in the employer-employee relationship. Filipinas Port Services v. NLRC, 200 SCRA 773 (1991).144
141
Pepsi Cola Distributors v. NLRC, 247 SCRA 386 (1995)
142
Sunio v. NLRC, 127 SCRA 390 (1984); San Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991); Yu v. NLRC, 245 SCRA 134
(1995); Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999).
143
Robledo v. NLRC, 238 SCRA 52 (1994); Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); DBP v. NLRC, 186 SCRA 841 (1990); Coral v.
NLRC, 258 SCRA 704 (1996); Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 (1995).
144
National Union Bank Employees v. Lazaro, 156 SCRA 123 (1988); First Gen. Marketing Corp. v. NLRC, 223 SCRA 337 (1993); Pharmacia and
Upjohn, Inc. v. Albayda, 628 SCRA 544 (2010).
70
 It is more in keeping with social justice according full protection to labor to deem employment
contracts as automatically assumed by the surviving corporation in a merger, even in the absence of an
express stipulation in the articles of merger or the merger plan. This ruling strengthens judicial protection
of the right to security of tenure of employees affected by a merger and avoids confusion regarding the
status of their various benefits. BPI. v. BPI Employees Union, 658 SCRA 828 (2011).145
It is worthy to stress that both AMSFC and DFC are guilty of acts constitutive of constructive
dismissal performed against Baya. As such, they should be deemed as solidarily liable for the monetary
awards in favor of Baya. Meanwhile, Sumifru, as the surviving entity in its merger with DFC, must be
held answer for the latter’s liabilities, including its solidary liability with AMSFC arising herein. Verily,
jurisprudence and what is now Sec. 79 of RCC, state that “in merger of two existing corporations, one of
the corporations survives and continues the business, while the other is dissolved and all its rights,
properties and liabilities are acquired by the surviving corporation.” [quoting from Babst v. Court of
Appeals, 350 SCRA 341 (2001)] Sumifru (Phils.) Corp. v. Baya, 822 SCRA 564 (2017).

5. Spin-Offs
Where a spin-off by the corporation of a division into another corporation is done for a valid
business reason and in good faith, the employees in the spun-off unit no longer belong to the bargaining
unit of the mother company, and that the employees in the new corporations constitute new bargaining
unit. SMC Employees Union-PTGWO v. Confessor, 262 SCRA 81 (1996).
In business parlance, a corporate spin-off occurs when a department, division or portions of the
corporate business enterprise is sold-off or assigned to a new corporation that will arise by the process
which may constitute it into a subsidiary of the original corporation. To spin-off and the attendant transfer
of employees are legitimate business interests of Marsman. The transfer of employees through the
Memorandum of Agreement was proper and did not violate any existing law and jurisprudence. Thus,
the employment of the doctrine of piercing the veil of corporate fiction cannot be applied in the case of a
spin-off since no fraud attended the transaction. Marsman & Company, Inc. v. Sta. Rita, 862 SCRA 211
(2018), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, p. 705 (2010).

XVI. CORPORATE DISSOLUTION AND LIQUIDATION

1. No Vested Rights to Corporate Fiction: No person who has a claim against a juridical entity can
claim any constitutional right to the perpetual existence of such entity. Gonzales v. Sugar Regulatory
Authority, 174 SCRA 377 (1989).

2. Voluntary Dissolution (Sec. 133)

a. When There Are No Creditors Affected (Sec. 134)
b. When There Are Creditors Affected (Sec 135)
c. Shortening of Corporate Term (Sec. 136)
A board resolution to dissolve the corporation does not operate to so dissolve the juridical entity,
since to be effective “[t]he requirements mandated by the [Revised] Corporation Code should have
been strictly complied with.” Vesagas v. Court of Appeals, 371 SCRA 509 (2002).
When a corporation is contemplating dissolution, it must submit tax return on the income earned
by it from the beginning of the year up to the date of its dissolution and pay the corresponding tax
due. BPI v. Court of Appeals, 363 SCRA 840 (2001).
d. Withdrawal of Request or Petition for Dissolution (Sec. 137)
e. Expiration of Term: Where the corporate life of a corporation as stated in its articles of
incorporation expired, without a valid extension having been effected, it was deemed dissolved by
such expiration without need of further action on the part of the corporation. Majority Stockholders of
Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011), citing VILLANUEVA, PHILIPPINE CORPORATE LAW (2010 ed.), p.
841.

3. Involuntary Dissolution (Sec. 133, 138; Sec. 6(l), P.D. 902-A)

a. Involuntary Dissolution a Form of Quo Warranto: Dissolution is a serious remedy granted only
in extreme cases to ensure that there is an avoidance of prejudice to the public. Even when the
prejudice is public in nature, the remedy is to enjoin or correct the mistake; and only when it cannot
be remedied that dissolution is imposed. Government v. El Hogar Filipino, 50 Phil. 399 (1927).146
Corporate dissolution due to mismanagement of majority shareholder is too drastic a remedy,
especially when the situation can be remedied such as giving minority shareholders a veto power to
any decision. Chase v. Buencamino, 136 SCRA 365 (1985).

b. Violation of the RCC; Fraud

If a corporation violates any provision of the Corporation Code, it may, after notice and hearing,
be dissolved in appropriate proceedings before the SEC. PD 902-A vests upon the SEC the power to
145
Philippine Geothermal, Inc. Employees Union v. Unocal Philippines, Inc., 804 SCRA 286 (2016).
146
Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 (1967); Republic v. Bisaya Land Trans., 81 SCRA 9 (1978).
71
 suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships, or associations, upon any of the grounds provided by law, including
among others, fraud in procuring its certificate of registration. PD 902-A and
the Corporation Code do not define fraud. Nevertheless, case law teaches that fraud, in its general
sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving breach of legal or equitable duty, trust or confidence justly reposed, resulting
in the damage to another, or by which an undue and unconscionable advantage is taken of
another. Fraud may be committed through insidious machination, manipulation, concealment, or
misrepresentation that would lead an ordinarily prudent person into error after taking the
circumstances into account. In this case, there is substantial evidence that petitioner committed fraud
by misrepresentation. It led the SEC to believe that it complied with Section 13 of
the Corporation Code by making it appear that Gigi subscribed for 1,600 common shares and paid
P80,000.00 for the same. Maasin Traders Lending Corp. v. Rich, G.R. No. 212838, 05 October
2020.

c. Non-User of Charter and Continuous Inoperation (Secs. 21 and 138)

To “organize” involves the election of officers, providing for the subscription and payment of the
capital stock, the adoption of bylaws, and such other steps as are necessary to endow the legal
entity with the capacity to transact the legitimate business for which the corporation was created.
“Organization” relates merely to the systematization and orderly arrangement of the internal and
managerial affairs of the corporation. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711
(1956).
The failure to file the bylaws does not automatically operate to dissolve a corporation but is now
considered only a ground for such dissolution. Chung Ka Bio v. IAC, 163 SCRA 534 (1988).

4. Legal Effects of Dissolution

When the corporate term expires, the corporation ceases to be a body corporate for the purpose of
continuing the business for which it was organized. PNB v. CFI of Rizal, 209 SCRA 294 (1992).
A corporation that has reached the stage of dissolution is no longer qualified to receive a
secondary franchise, Buenaflor v. Camarines Industry, 108 Phil. 472 (1960); nor can it extend its life
through an amendment of the articles of incorporation, Alhambra Cigar & Cigarette Mfg. Co. v. SEC, 24
SCRA 269 (1968); since either of these two corporation actions would
The dissolution of a juridical entity does not by itself cause the extinction or diminution of the rights
and liability of such entity, since it is allowed to continue as a juridical entity for 3 years for the purpose
of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property, and to distribute its assets. Republic v. Tancinco, 394 SCRA 386
(2002).
Although the time during which the corporation may conduct the liquidation of its assets and sue
and be sued as a corporation is limited to three years from dissolution, there is no time limit within which
the trustees must complete a liquidation placed in their hands. The trustees to whom the corporate
assets have been conveyed pursuant to what is now Sec. 139 of the RCC may sue and be sued as
such in all matters connected with the liquidation. But even when no trustee is appointed during the
three-year liquidation period, what is now Section 184 of the Revised Corporation Code provides that
“[n]o right or remedy in favor of or against any corporation, its stockholders, members, directors,
trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said
corporation;" and that the Board of Directors of the dissolved corporation may be permitted to complete
the corporate liquidation by continuing as "trustees" by legal implication. Premiere Dev. Bank v.
Flores, 574 SCRA 66 (2008).
The executed waivers and quitclaims over labor claims are valid even when executed 6 years after
the revocation of certificate of incorporation—revocation does not result in termination of liabilities. What
are now Secs. 139 and 184 of RCC provide for a 3-year winding up period for a corporation whose
charter is annulled by forfeiture or otherwise to continue as a body corporate for the purpose, among
others, of settling and closing its affairs. Vigilla v. Philippine College of Criminology, 698 SCRA 247
(2013).
Since what are now Secs. 139 and 184 of RCC explicitly provide for the continuation of the body
corporate for 3-years after dissolution, then the rights and remedies against, or liabilities of, the officers
shall not be removed or impaired by reason of the dissolution of the corporation. Chua v. People, 801
SCRA 436, 449 (2016).
Mere revocation of the charter of a corporation does not result in the abatement of the proceedings
since the Board of Directors are considered trustees by legal implication even without Bancom
conveying its assets to a receiver/assignee. Under what is now Sec. 184 of RCC, the corresponding
liabilities of the debtors of a dissolved corporation remain subsisting; otherwise, this would sanction the
unjust enrichment of debtors. Reyes v. Bancom Dev. Corp., 851 SCRA 133 (2018).
Any new business in which a dissolved corporation would engage in, other than those for the
purpose of liquidation, “will be a void because of the non-existence of the corporate party.” Thus, if a
dissolved corporation enters to a real estate mortgage after dissolution, it would be void ab initio;
however, if the mortgage was entered into prior to dissolution, then the corporation’s redemption of the
72
 mortgaged property, even if already after its dissolution, would be valid because of the
liquidation/winding up powers accorded under what is now Sec. 139 of RCC. Rich v. Paloma III, 858
SCRA 27 (2018).

5. METHODS OF CORPORATE LIQUIDATION (Sec. 139)

Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors. It is the
winding up of a corporation so that assets are distributed to those entitled to receive them. It is the
process of reducing assets to cash, discharging the liabilities and dividing the surplus or losses. PVB
Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001).
A derivative suit is fundamentally distinct and independent from liquidation proceedings—they are
neither part of each other nor the necessary consequence of the other. There is therefore no basis from
one action to result in the other. Following the dissolution of a corporation, liquidation or the settlement
of its affairs consists of adjusting the debts and claims, i.e., collecting all that is due to the corporation,
the settlement and adjustment of claims against it and the payment of its just debts. Yu v. Yukayguan,
589 SCRA 588 (2009).147

a. Board of Directors/Trustees Pursuing Liquidation; Subject to the 3-Year Period

Since the old Corporation Law did not contain any provision that allowed any action after the 3-
year period for liquidation, then all actions for or against the corporation as abated after the
expiration thereof. National Abaca Corp. v. Pore, 2 SCRA 989 (1961).
After the expiration of the 3-year period, corporate creditors can still pursue their claims against
corporate assets against the officers or shareholders who have taken over the properties of the
corporation. Tan Tiong Bio v. Comm. of Internal Revenue, 100 Phil. 86 (1956).148
Although a corporate officer is not liable for corporate obligations, such as claims for wages,
when, however, such corporate officer takes corporate property to apply to his own claims against
the corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well
that certain creditors had similarly valid claims, he took advantage of his position as general
manager and applied the assets exclusively to his own claims. De Guzman v. NLRC, 211 SCRA 723
(1992).
It immaterial that the present action was filed after the 3-year liquidation period, for at the very
least, and assuming that judicial enforcement of taxes may not be initiated after said three years
despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding
the corporate assets, obviously for the benefit of all the creditors thereof, the assessment made
within the three years, definitely established the Government as a creditor for whom the liquidator is
supposed to hold assets of the corporation.” Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).149
The Board is not rendered functus officio by the corporation’s dissolution; what is now Sec. 139
of RCC prohibits a dissolved corporation from continuing its business but allows it to continue with a
limited personality in order to settle and close it affairs, including its complete liquidation. Necessarily
there must be a Board that will continue acting for that purpose. Aguirre II v. FQB+7, Inc., 688 SCRA
242 (2013).

b. Liquidation Pursued Thru a Court-Appointed Receiver

Under the Corporation Law, Legislature intended to let the shareholders have control of the
assets of the corporation upon dissolution, by having the directors and executive officers have
charge of the winding up operations, though there is the alternative method of assigning the property
of the corporation to the trustees for the benefit of its creditors and shareholders. “While the
appointment of a receiver rests within the sound judicial discretion of the court, such discretion must,
however, always be exercised with caution and governed by legal and equitable principles, the
violation of which will amount to its abuse, and in making such appointment the court should take
into consideration all the facts and weigh the relative advantages and disadvantages of appointing a
receiver to wind up the corporate business.” China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261
(1933).
When the liquidation of a dissolved corporation has been placed in the hands of a receiver or
assignee, the 3-year period prescribed by law for liquidation cannot be made to apply, and that the
receiver or trustee may institute all actions leading to the liquidation of the assets of the corporation
even after the expiration of said period. Sumera v. Valencia, 67 Phil. 721 (1939).
It is evident from the foregoing discussion of law and jurisprudence that the mere revocation of
the charter of a corporation does not result in the abatement of proceedings. Since its directors are
considered trustees by legal implication, the fact that Bancom did not convey its assets to a receiver
or assignee was of no consequence. It must also be emphasized that the dissolution of a creditor-
corporation does not extinguish any right or remedy in its favor under what is now Sec. 184 of RCC.
As a necessary consequence of the above rule, the corresponding liability of the debtors of a
dissolved corporation must also be deemed subsisting. To rule otherwise would be to sanction the
unjust enrichment of the debtor at the expense of the corporation. Reyes v. Bancom
Development Corp., 850 SCRA 544 (2018).

147
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
148
Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).
149
Paramount Insurance Corp. v. A.C. Ordonez Corp., 561 SCRA 327 (2008).
73
 c. Liquidation Pursued Through a Trustee
Where the affairs of the dissolved corporation were placed in a Board of Liquidators, they were
duly constituted as trustees for the liquidation of the corporate affairs, and there being no term
placed on the Board, their power to pursue liquidation did not terminate upon the expiration of the 3-
year period. Board of Liquidators v. Kalaw, 20 SCRA 987 (1967).
For purposes of dissolution and liquidation of a corporation, the term “trustee” should include
counsel of record who may be deemed to have authority to pursue pending litigation after the
expiration of the 3-year liquidation period. Gelano v. Court of Appeals, 103 SCRA 90 (1981).
If the 3-year extended life has expired without a trustee or receiver having been designated, the
Board of Directors itself, following the rationale of the decision in Gelano, may be permitted to so
continue as “trustees” to complete liquidation; and in the absence of a Board, those having pecuniary
interest in the assets, including the shareholders and the creditors of the corporation, acting for and
in its behalf, might make proper representations with the appropriate body for working out a final
settlement of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717 (1995).150
A trustee appointed for purposes of liquidation does not become personally liable for the
outstanding obligations of the corporation. Republic v. Tancinco, 394 SCRA 386 (2003).
There is no time limit within which the trustees must complete a liquidation placed in their
hands. What is provided in what is now Sec. 139 of RCC is that the conveyance to the trustees must
be made within the 3-year period. But it may be found impossible to complete the work of liquidation
within the 3-year period or to reduce disputed claims to judgment. Furthermore, what is now Sec.
184 of RCC clearly provides that “no right or remedy in favor of or against any corporation, its
shareholders, members, directors, trustees, or officers, nor any liability incurred by any such
corporation, shareholders, members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation.” Vigilla v. Philippine College of
Criminology, Inc., 698 SCRA 247 (2013).
A trustee may continue to prosecute a case commenced by the corporation within 3 years from
its dissolution until rendition of the final judgment, even when rendered beyond the 3-year period
allowed in what is now Sec. 139 of RCC. However, there is nothing in the said cases that allows an
already defunct corporation to initiate a suit after the lapse of said 3-year period. To allow
petitioner to initiate the subject complaint and pursue it until final judgment, on the ground that such
complaint was filed for the sole purpose of liquidating its assets, would be to circumvent the
provisions of what is now Sec. 139 . Alabang Dev. Corp. v. Alabang Hills Village Assn.,  724
SCRA 321 (2014).151

MODULE 11

SPECIAL TYPES OF CORPORATIONS

(16TH AND 17TH WEEKS: MAY 24, 26 AND 31, JUNE 2)

Asynchronous Study: Chapters 17, 18, 19 and 20 of TEXTBOOK

XVII. ONE PERSON CORPORATIONS

1. Concept and Purpose of the OPC (Secs. 10, 115 and 116)
a. Single Stockholder: Natural Person, “Trust” or “Estate”
b. Businesses Not Allowed for OPC

2. Incorporation of the OPC (SEC Memo Circular No. 07-2019)

a. Articles of Incorporation and Bylaws (Secs. 118 and 119)
b. Corporate Name (Sec. 120)
c. Capital Structure for OPC (Sec. 117)

3. Corporate Officers in an OPC

a. Single Stockholder Is Sole Director and President (Sec. 121)
b. Corporate Secretary (Secs. 122 and 123)

150
Reburiano v. CA, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002); Pepsi-Cola Products Phils. v. CA, 443 SCRA 580
(2004).
151
National Electrification Administration v. Maguindanao Electric Cooperative, Inc., 861 SCRA 1 (2018).
74
 c. Corporate Treasurer (Sec. 122)
d. Nominee and Alternate Nominee (Secs. 124, 125 and 126)

4. Operations and Transactions of the OPC

a. Minutes Book (Sec. 127)
b. Records in Lieu of Meetings (Sec. 128)
c. Reportorial Requirements (Sec. 129)

5. Liability of the Single Stockholder (Sec. 130)

a. Burden to Affirmatively Show that OPC Was Adequately Financed
b. Burden to Prove that OPC Property Is Independent of the Single Stockholder’s Non-
Invested Property
c. Principles of Piercing Doctrine Apply with Equal Force to OPC

6. Conversion Processes (SEC Memo Circular No. 27-2020)

a. From Ordinary Stock Corporation to OPC (Sec. 131)
b. From OPC to Ordinary Stock Corporation (Sec. 132)
c. In the Event of Death of the Single Stockholder (Sec. 132)

XVIII. CLOSE CORPORATIONS

1. Definition (Sec. 95)
The concept of a close corporation organized for the purpose of running a family business or
managing family property has formed the backbone of Philippine commerce and industry. Through this
device, Filipino families have been able to turn their humble, hard-earned life savings into going
concerns capable of providing them and their families with a modicum of material comfort and financial
security as a reward for years of hard work. A family corporation should serve as a reward for years of
hard work—as a rallying point for family unity and prosperity, not as a flashpoint for familial strife. It is
hoped that people reacquaint themselves with the concepts of mutual aid and security that are the
original driving forces behind the formation of family corporations and use these tenets in order to
facilitate more civil, if not more amicable, settlements of family corporate disputes. Gala v. Ellice Agro-
Industrial Corp., 418 SCRA 431 (2003).

a. De Jure Close Corporations: Other Articles of Incorporation Requirements (Sec. 96)

(1) Restriction on Transfer of Shares (Secs. 97 and 98)
(2) Pre-Emptive Rights (Sec. 101)
(3) Amendment (Sec. 102)
The articles of incorporation of Motorich Sales Corp. does not contain any provision required
under what is now Sec. 95 of RCC, and therefore from its very articles of incorporation, it is not a close
corporation. It does not become one either, just because Spouses Reynaldo and Nenita Gruenberg
owned 99.866% of its subscribed capital stock. The “[m]ere ownership by a single shareholder or by
another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personalities.” San Juan Structural v. Court of
Appeals, 296 SCRA 631 (1998).
The application of what is now Sec. 97 of RCC on validity of restrictions on transfer of shares
applies only to close corporations. Before courts can allow the operation of Sec. 97 of RCC to a case,
there must first be a factual determination that the corporation is indeed a close corporation; there
needs to be a presentation of evidence on the relevant restrictions in the articles and bylaws. Here,
there is no such determination or even allegation based on the records or the RTC decision that would
assist this Court in ruling on these two major factual matters. Andaya v. Rural Bank of
Cabadbaran, 799 SCRA 325 (2016).1
Even if the transfer of shares is made in violation of the restrictions enumerated under what is
now Sec. 98 of RCC, such transfer is still valid if it has been consented to by all the shareholders of
the close corporation and the corporation cannot refuse to register the transfer of shares in the name
of the transferee. Florete, Sr. v. Florete, Jr., 861 SCRA 157 (2018).

b. De Facto Close Corporation: Incorporated Family-Owned Business

1
Bustos v. Millians Shoe, Inc., 824 SCRA 67 (2017).
75
 The Court cannot lose sight of the fact that the enterprise is a closed family corporation where the
incorporators and directors belong to one single family. It cannot be concealed that Manuel R. Dulay
as president, treasurer and general manager almost had absolute control of the corporation. The
nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc.
is typical: four-fifths of its incorporators being close relatives namely, three (3) children and their father
whose name identifies their corporation. Hence, the contract is valid and binding on the corporation
even without formal Board resolution. Manuel R. Dulay Enterprises v. CA, 225 SCRA 678 (1993).
The petitioners conceded tha both CFTI and Naguiat Enterprises were “close family corporations”
owned by the Naguiat family. What is now Sec. 99(e) of RCC] states: “(e) To the extent that the
shareholders are actively engage(d) in the management or operation of the business and affairs of a
close corporation, the shareholders shall be held to strict fiduciary duties to each other and among
themselves. Said shareholders shall be personally liable for corporate tort unless the corporation has
obtained adequate liability insurance.” Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).

c. Joint Venture Corporation as a Species of Close Corporation

Where a corporation is organized pursuant to the terms of a Joint Venture Agreement, the joint
venture arrangement is first and foremost a contractual partnership agreement, and as much as
possible the contractual intent of the co-venturers should be given realization within the corporate
medium by which they pursued the business enterprise pursuant to the principles embodied in what is
now Section 99 of the RCC. Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130
(1989).

2. Liability of the Shareholders for Managing the Corporation (Secs. 96 and 99)
It was wrong to conclude that under what is now Sec. 96 of RCC “in a close corporation, the
shareholders and/or officers usually manage the business of the corporation and are subject to all
liabilities of directors, i.e., personally liable for corporate debts and obligations.” Nowhere in what is now
Sec. 96 of the RCC do we find any inference that shareholders of a close corporation are automatically
liable for corporate debts and obligations. Parenthetically, only what is now Section 99(e) of RCC
explicitly provides for personal liability of shareholders of close corporation, viz.: “5. To the extent that
the shareholders are actively engaged in the management or operation of the business and affairs of a
close corporation, the shareholders shall be held to strict fiduciary duties to each other and among
themselves. Said shareholders shall be personally liable for corporate torts unless the corporation
has obtained reasonably adequate liability insurance.” As can be read in that provision, several
requisites must be present for its applicability. None of these were alleged in the case to hold the
spouses liable, and no factual circumstances were discussed for this Court to discuss the personally
liability of respondents to their creditors because of “corporate torts.” We thus apply the general doctrine
of separate juridical personality and limited liability. Bustos v. Millians Shoe, Inc., 824 SCRA 67
(2017).

3. Binding Agreements by Shareholders (Sec. 99)

4. No Necessity of Board (Sec. 100)
5. Deadlocks (Sec. 103). Missed opportunity in Ong Yong v. Tiu, 401 SCRA 1 (2003).
6. Withdrawal and Dissolution (Sec. 104)
Even prior to the passage of the old Corporation Code formally recognizing close corporations, the
Supreme Court had on limited instances recognized the common law rights of minority shareholders to
seek dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).

XIX. NONSTOCK CORPORATIONS

1. Theory of the Nonstock Corporation (Secs. 3, 13[b], 42, 86, 87 and 93[e])
It is not inconsistent with its nature for a nonstock corporation to incidentally earn profits in
pursuing its eleemosynary purpose; what is prohibited is to operate it for profit and/or distribute any
profits so earned to its officers and members. Comm. Internal Revenue v. University of Visayas, 1
SCRA 669 (1961).
The Club Filipino Inc. de Cebu was organized for the healthful recreation and entertainment of its
shareholders and members; that upon dissolution its remaining assets would be donated to a charitable
institution; that it operated mainly with funds derived from membership fees and dues; that its bar and
restaurant catered only to its members and their guests; that there was in fact never any dividends
distributed to it shareholders, and whatever was derived on retain from its bar and restaurant was used
to defray its overall overhead expenses and improve its golf course, it stands to reason that the Club is
not engaged in business of an operator of bar and restaurant, and remains a nonstock corporation.
Comm. of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 (1962).
The incurring of profit or losses does not determine whether an activity is for profit or non-profit,
and the courts will consider whether dividends have been declared or its members or that is property,

76
 effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the
objectives of the enterprise. Manila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
A nonstock corporation may only be formed or organized for charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not
engage in investment business where profit is the main or underlying purpose. Although it may obtain
profits as an incident to its operation, such profits are not to be distributed among its members but must
be used for the furtherance of its purposes. People v. Menil, 340 SCRA 125 (2000).
In a mutual life insurance company organized as a nonstock corporation, the so-called “dividends”
received by members-policyholders are not a portion of profits set aside for distribution to the
shareholders. One, a mutual company has no capital stock to which subscription is necessary; there are
no shareholders to speak of, but only members. Two, the amount they receive does not partake of the
nature of a profit or income, such distribution represents overpayment, a benefit to which the member-
policyholder is equitably entitled. Republic v. Sunlife Assurance Co., 473 SCRA 129 (2005).

2. Non-Applicability of the Nationalization Laws to Nonstock Corporations

A foreigner may become a member or an officer of a nonstock corporation. Save for the position of
the Secretary, who must be a Filipino citizen and a resident of the Philippines, the prohibition of foreign
citizens becoming officers in corporations engaged in business does not apply to the activities of a
nonstock corporation which do not fall within the coverage of a nationalized industry or area of business
reserved by law exclusively to Filipino citizens. SEC Opinion No. 12, 21 Nov. 2002.

3. Voting Rights of Members

Under the bylaws, membership in the corporation shall, among others, be terminated by the death
of the member. Further, applying what is now Sec. 90 of RCC that provides that termination
extinguishes all the rights of a member, unless otherwise provided in the articles of the incorporation or
the bylaws, we hold that dead members who are dropped from the membership roster in the manner for
the cause provided for in the bylaw are not to be counted in determining the requisite vote in corporate
matters or the requisite quorum for the annual members’ meeting. With 11 remaining members, the
quorum in the present case should be 6; therefore, there being a quorum, the annual members’
meeting, conducted with six members present, was valid. Tan v. Sycip, 499 SCRA 216 (2006).
When membership has not been terminated in accordance with the provisions provided for in the
articles of incorporation and/or bylaws, then such termination is void, and such individual remains a
member with concomitant rights inspect corporate books and to demand accounting of the corporate
funds. Agdao Landless Residents Assn. v. Maramion, 806 SCRA 74 (2016).

4. Delinquency of Membership Dues

What is now Sec. 66 of RCC refers specifically to unpaid subscriptions to capital stock, the sale of
which is governed by what is now Sec. 67 of RCC, and utterly inapplicable to nonstock corporations. In
such recovery claims, Article 1140 of the Civil Code governs and provides that an action to recover
movables shall prescribe in 8 years. Calatagan Golf Club, Inc. v. Clemente, Jr., 585 SCRA 300 (2009).
A nonstock corporation may seize and dispose of a fully paid membership share on account of his
unpaid monthly dues, when authorized to do so under the bylaws, even when no provision on the
matter appears in the articles of incorporation, and in spite of what is now Sec. 67 of RCC on
delinquency sale pertains to payment of shares subscription. What is now Sec. 90 of RCC provides that
membership shall be terminated in the manner and for causes provided in the articles of incorporation
or the bylaws, then the right of a nonstock corporation to expel a member through the forfeiture of such
member’s share may be established in the bylaws alone and need not be embodied in the articles of
incorporation. Valle Golf & Country Club v. Vda. De Caram, 585 SCRA 218 (2009).1

5. Board of Trustees and Corporate Officers

What is now Sec 106 of RCC, although setting the term of the members of the Board of Trustees at
5 years, has a proviso subjecting the term to what is otherwise provided in the articles or bylaws of
educational corporations—that contrary provision control on the term of office. A trustee occupying his
office in a hold-over capacity could be removed at any time, without cause, upon the election or
appointment of his successor. Barayuga v. Advestist University of the Phils., 655 SCRA 640 (2011).
Bylaws which allow the election of members of the Board of Trustees distributed to two per district,
is not contrary to what is now Sec. 23 of RCC, which requires that in the election of trustees it is
necessary that at least “a majority of the members entitled to vote” must be present. What is now
Section 88 of RCC pertaining to nonstock corporations provides that “(t)he right of the members of any
class or classes (of a nonstock corporation) to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the bylaws.” This is an exception to Section 6 that provides
that “no share may be deprived of voting rights except those classified and issued as ‘preferred’ or
‘redeemable’ shares, unless otherwise provided in this Code.” Ao-as v. Court of Appeals, 491 SCRA 339
(2006).

6. Conversion of Nonstock Corporation to Stock Corporation

1
Magallanes Watercraft Assn. v. Auguis, 791 SCRA 445 (2016)
77
 The conversion of a nonstock educational institution into a stock corporation is not legally feasible,
as it violates what is now Sec. 86 of RCC, that no part of the income of a nonstock corporation may be
distributable as dividends to its members, trustees or officers. “Thus, the [SEC] has previously ruled that
a nonstock corporation cannot be converted into a stock corporation by a mere amendment of the
articles of incorporation. For purposes of transformation, it is fundamental that the nonstock corporation
be dissolved first under any of the methods specified in what is now Title XIV of the RCC. Thereafter,
the members may organize as a stock corporation directed to bring profits or pecuniary gains to
themselves.” SEC Opinion dated 10 Dec. 1992; SEC Opinion dated 24 Feb. 2003.

7. Conversion of Corporation Sole to Aggregate Religious Corporation

By virtue of what is now Sec. 107 of RCC that allows the application to religious corporations of the
general provisions governing nonstock corporations, a corporation sole may convert itself into a
religious aggregate corporation, by formally amending its articles of incorporation, by approval of its sole
corporator and ratified by at least two-thirds of its general membership, and without needlessly going
through the process of dissolution. Inglesia Evangelica Metodista en las Islas Filipino (Corporation
Sole), Inc. v. Lazaro, 624 SCRA 224 (2010).

8. Foundations: Tax Considerations for Nonstock Corporations

a. What Is a “Foundation”? (Secs. 30 and 34(H), NIRC of 1997; Revenue Regulations No. 13-
1998; BIR-NEDA Regulations No. 1-81, as amended and supplemented by NEDA Circular No.
01-2009)
Formal requirements of Rev. Reg. No. 2 are not mandatory, and an entity may, in the absence
of compliance with such requirements, still show that it falls under the provisions of NIRC as a tax-
exempt corporation. Collector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956).
b. Income-Tax Exemption of Certain Nonstock Corporations (Sec. 30, NIRC)
“Non-profit” does not necessarily mean “charitable.” Collector of Internal Revenue v. Club
Filipino Inc. de Cebu considered a sports club organized for recreation and entertainment of its
shareholders and members and primarily funded by membership fees and due, as being non-profit
because of its purpose and there was no evidence that it was engaged in a profit-making enterprise.
But that did not make it “charitable”, which term has been defined in Lung Center of the Philippines
v. Quezon City, 433 SCRA 119 (2004), as “a gift, to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government.” As organization may be considered as non-profit if it does not
distribute any part of its income to shareholders or members; however, despite its being a tax-
exempt institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in Section 30 of the NIRC. CIR v. St. Luke’s Medical Center, 682 SCRA 66 (2012).

9. Right of Members to Proportionate Share of Remaining Assets Upon

Dissolution (Secs. 93 and 94; Sec. 34(H)(2)(c), 1997 NIRC)
As provided for under what are now Secs. 93 and 94 of RCC, in the event of dissolution of a
nonstock corporation, its assets shall be distributed in accordance with the rules. Unless, it is so
provided in the articles of incorporation or bylaws, the members are not entitled to any beneficial or
vested interest over the assets of the nonstock corporation. In other words, nonstock corporations hold
their funds in trust for the carrying out of the objectives and purposes expressed in its charter. SEC
Opinion dated 24 Feb. 2003; SEC Opinion dated 13 May 1992.

XX. FOREIGN CORPORATIONS

1. Definition and Public Policy (Sec. 140)
A foreign corporation owes its existence to the laws of another state, and generally, has no legal
existence within the state in which it is foreign. A foreign corporation illegally doing business here
because of its refusal or neglect to obtain the required license may not unfairly plead such lack to avoid
service and thereby impugn the jurisdiction of the local courts. Such danger, however, does not exist
among foreign corporations that are indubitably not doing business in the Philippines: there would be no
reason for it to be subject to the State’s regulation; in so far as the State is concerned, they have no
legal existence. To subject such foreign corporation to the local courts’ jurisdiction would violate the
essence of sovereignty of the creating state. Avon Insurance PLC v. Court of Appeals, 278 SCRA
312 (1997).

2. License to Do Business in the Philippines

a. Application for License (Secs. 141 and 142)
Rationale for Requiring License: Sec. 69 of old Corporation Law was intended to subject the
foreign corporation doing business in the Philippines to the jurisdiction of our courts, not to prevent
the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the
purpose of business without taking the necessary steps to render it amenable to suit in the local
courts. Marshall-Wells v. Elser, 46 Phil. 71 (1924).
78
 b. Appointment of a Resident Agent (Sec. 144 and 145)
c. Issuance of License (Sec. 143): A licensed foreign corporation should be subjected to no harsher
rules that is required of domestic corporations—it should not be subject to attachment on the
pretense that such foreign corporation is not residing in the Philippines. Claude Neon Lights v. Phil.
Advertising Corp., 57 Phil. 607 (1932).
d. Deposit of Securities (Sec. 143; SEC Memo Circular No. 17-2019)
e. Amendment of License ( Sec. 148)
f. Revocation of License (Secs. 151 and 152)
g. SEC Memo Circular No. 30-2020: Revision of GIS of Foreign Corporation to Include
Beneficial Ownership Information
h. Effects of Failure to Obtain Required License (Secs. 150): The contract itself is valid, but it is
the standing to sue of the foreign corporation that is missing, which can be remedied with the
subsequent obtaining of the license to do business. Home Insurance Co. v. Eastern Shipping
Lines, 123 SCRA 424 (1983).
Under what is now Sec. 142 of RCC, a foreign corporation must first obtain a license to do
business before it can transact business in the Philippines. Without the proper license, it cannot
maintain any action or proceeding before Philippine courts as provided in what is now Sec. 150 of
RCC. Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010).
Summary of Rulings on Doing Business: (1) if a foreign corporation does business in the
Philippines without a license, it cannot sue before Philippine courts; (2) if a foreign corporation is not
doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated
transaction or on a cause of action entirely independent of any business transaction; (3) if a foreign
corporation does business in the Philippines without a license, a Philippine citizen or entity which has
contracted with said corporation may be estopped from challenging the foreign corporation’s
corporate personality in a suit brought before the Philippine courts; and (4) if a foreign corporation
does business in the Philippines with the required license, it can sue before Philippine courts on any
transaction. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).2

3. CONCEPTS OF “DOING BUSINESS IN THE PHILIPPINES”

a. Statutory Definition of Doing Business (R.A. 7042, FOREIGN INVESTMENT ACT OF 1991)
FIA ’91 repealed Arts. 44-56 of the Omnibus Investments Code and enumerates in Sec. 3(d) not
only the acts or activities which constitute “doing business” but also those activities which are not
deemed “doing business”. Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010).

(1) Soliciting Orders or Contracts in the Philippines: When a foreign corporation, through its
affiliate company licensed to do business in the Philippines, solicits within the Philippines for the
design and supplying of equipment for the construction of a local lime plant business, said
foreign corporation is doing business in the Philippines under R.A. 5455 that defines “Soliciting
orders, purchases (sales) or service contracts,” even though the final contract was executed in
Japan. Marubeni Nederland B.V. v. Tensuan, 190 SCRA 105 (1990).
(2) Opening of Offices or Branches in the Philippines: “The phrase ‘doing business’ shall
include … opening offices, whether called ‘liaison’ offices or branches,” leads to no other
conclusion than that Saudia is a foreign corporation doing business in the Philippines, and it
may be sued in the Philippines and is subject to the jurisdiction of Philippine tribunals. Saudi
Arabian Airlines v. Rebesencio, 746 SCRA 140 (2015).
(3) Appointment of Indentors or Broker: When it is shown that the foreign corporation
exercised control over the business of its brokers, then it is deemed doing business in the
country. Granger Associates v. Microwave Systems, Inc., 189 SCRA 631 (1990).3
Under Sec. 3(d) of FIA ‘91, and Sec. 1(f), Rule I of its IRR, the appointment of a distributor
is not sufficient to constitute “doing business” unless it is under the full control of the foreign
corporation. If the distributor is an independent entity that buys and distributes products, other
than those of the foreign corporation, for its own name and its own account, the latter cannot be
considered doing business in the Philippines. Steelcase, Inc. v. Design Int’l Selections, Inc., 670
SCRA 64 (2012).
(4) Foreign Investment in a Domestic Corporation : It is clear from the provision of R.A. 7042
that the IGC’s act of subscribing shares of stocks from McCann, a duly registered domestic
corporation, maintaining investments therein, and deriving dividend income therefrom, does not
qualify as "doing business", and is not required to secure a license before it can file a claim for
tax refund. CIR v. Interpublic Group of Companies, Inc., 913 SCRA 223 (2019).

2
Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004).
3
La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984); Schmid & Oberly v. RJL, 166 SCRA 493 (1988); Wang Laboratories v. Mendoza, 156
SCRA 44 (1974).
79
 b. Jurisprudential Concepts of “Doing Business”: It implies a continuity of commercial dealings
and arrangements, and the performance of acts or works or the exercise of some of the functions
normally incident to the main purpose or object for which a foreign corporation has been organized.
Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 525 (1941).

(1) “Territoriality Rule” – To be doing or “transaction business in the Philippines” for purposes of
what is now Sec. 150 of RCC, the foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions within the Philippine territory on a
continuing basis in its own name and for its own account. B. Van Zuiden Bros., Ltd v. GTVL
Manufacturing Industries, Inc., 523 SCRA 233 (2007), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 813
(2001).

(2) “Contract Test” – Pacific Vegetable Oil Corp. v. Singson, G.R. No. L-7917, 29 April 1955,
Advanced Decision Supreme Court, April 1955 Vol., p. 100-A ; Aetna Casualty & Surety Co.
v. Pacific Star Line, 80 SCRA 635 (1977).4

(3) “Profit-Seeking Transactions Rule” – Although each case must be judged in the light of
attendant circumstances, jurisprudence has evolved several guiding principles for the application
of these tests. “By and large, to constitute ‘doing business,’ the activity to be undertaken in the
Philippines is one that is for profit-making.” Agilent Technologies Singapore (PTE) Ltd. v.
Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004), citing VILLANUEVA, PHILIPPINE
CORPORATE LAW 596 et seq. (1998 ed.) ; Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304
(2010), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 801-802 (2001).
Examples:
 Insurance Business – A foreign corporation with a Philippine settling agent that issues
twelve marine policies covering different shipments to the Philippines is doing business here.
General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).
A foreign corporation which had been collecting premiums on outstanding policies is
doing business in the Philippines. Manufacturing Life Ins. v. Meer, 89 Phil. 351 (1951).
Those that file collection suits with Philippine courts arising from insurance contracts
entered into and premiums paid abroad are not doing business in the Philippines. Aetna
Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977).5
 Air Carriers – Off-line air carriers having general sales agents in the Philippines are
engaged in business in the Philippines and that their income from sales of passage here
(i.e., uplifts of passengers and cargo occur to or from the Philippines) is income from within
the Philippines. South African Airways v. Commissioner of Internal Revenue, 612 SCRA 665
(2010).

c. Special Cases on Infringement of Business Names and Trademarks: The right to corporate
name and trade name of a foreign corporation is a property right in rem, which it may assert and
protect in any of the courts of the world even in countries where it does not personally transact any
business. Western Equipment & Supply Co. v. Reyes, 51 Phil. 115 (1927).
Infringement of trademark may be pursued in local courts separate from the issue of whether
there is the proper license to do business in the Philippines. General Garments Corp. v. Director of
Patens, 41 SCRA 50 (1971).6
d. Doctrine on Unrelated or Isolated Transactions: Isolated acts, contracts, or transactions of
foreign corporations are not regarded as carrying on of business. Typical examples: making of a
single contract, sale with the taking of a note and mortgage in the state to secure payment thereof,
purchase, or note, or the mere commission of a tort. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617
(2002).7
A foreign corporation needs no license to sue before Philippine courts on an isolated
transaction. Even a series of transactions which are occasional, incidental and casual—not of a
character to indicate a purpose to engage in business—do not constitute the doing or engaging in
business as contemplated by law. Lorenzo Shipping v. Chubb and Sons, Inc., 431 SCRA 266 (2004).
The performance of services auxiliary to an existing isolated contract of sale which are not on a
continuing basis do not constitute “doing business in the Philippines.” Antam Consolidated v.
Court of Appeals, 143 SCRA 288 (1986).8
A single act may be considered as either doing business or an isolated transaction depending
on its nature. It may be considered as doing business if it implies a continuity of commercial dealings
and contemplates the performance of acts or the exercise of functions normally incidental to and in
the progressive pursuit of its purpose. Contrarily, it may be considered as an isolated transaction if it

4
Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 (1990).
5
Universal Shipping Lines v. IAC, 188 SCRA 170 (1990).
6
Universal Rubber Products, Inc. v. CA, 130 SCRA 104 (1988).
7
Aboitiz Shipping Corp. v. Insurance Co. of North America, 561 SCRA 262 (2008).
8
Eastboard Navigation, Ltd. v. Juan Ysmael and Co., 102 Phil. 1 (1957).
80
 is different from or not related to the common business of the foreign corporation in the sense that
there is no objective to increasingly pursue its purpose or object. And as stated, a license is not
required if the foreign corporation is suing on an isolated transaction. Magna Ready Mix Concrete
Corp. v. Andersen Bjornstad Kane Jacobs, Inc., G.R. No. 196158, 20 January 2021.
(1) Examples of Isolated Transactions:
 Recovery on the collision of two vessels at the Manila Harbor. Dampfschieffs Rhederei
Union v. La Campañia Transatlantica, 8 Phil. 766 (1907).
 Loss of goods bound for Hongkong but erroneously discharged in Manila. The Swedish East
Asia Co., Ltd. v. Manila Port Service, 25 SCRA 633 (1968).
 Recovery of damages on cargo shipped to the Philippines. Bulakhidas v. Navarro, 142 SCRA
1 (1986).
 Sale of construction equipment to the Government with no intent of continuity of transaction.
Gonzales v. Raquiza, 180 SCRA 254 (1989).
 Recovering a Hongkong judgment from local resident. Hang Lung Bank v. Saulog, 201 SCRA
137 (1991).
 Appointment of local lawyer by foreign movie companies who have registered intellectual
property rights over their movies in the Philippines, to protect such rights for piracy does not
constitute doing business in the country. Columbia Pictures Inc. v. CA, 261 SCRA 144 (1996).

(2) When Single Transactions Constitute Doing Business

 Where a single act or transaction is not merely incidental or casual but indicates the foreign
corporation’s intention to do other business in the Philippines, said single act or transaction
constitutes doing business. Far East Int'l v. Nankai Kogyo, 6 SCRA 725 (1962).
 When a foreign corporation engaged in the manufacture of uniforms purchases through a
local agent 7,770 dozens of soccer jerseys from a local company, it was engaged in
business here for the single act was not merely incidental or casual but is of such character
as distinctly to indicate a purpose on the part of the foreign corporation to do other business
in the state. Litton Mills, Inc. v. Court of Appeals, 256 SCRA 696 (1996).
 Participating in a bidding process since it is the performance by a foreign corporation of the
acts for which it was created, regardless of volume of business, that determines whether a
foreign corporation needs a license or not. European Resources and Technologies, Inc. v.
Ingenieuburo Birkhanh + Nolte, 435 SCRA 246 (2004).

4. Local Suits BROUGHT BY Foreign Corporations

a. Need to Allege Capacity to Sue: That a foreign corporation is not doing business in the
Philippines must be alleged if a foreign corporation desires to sue in Philippines courts under the
“isolated transactions rule.” Atlantic Mutual Inc. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966).9
The filing of an action by a foreign corporation before Philippine courts would mean that by
voluntary appearance, the local courts have actually obtained jurisdiction over the “person” of the
foreign corporation. Communication Materials v. Court of Appeals, 260 SCRA 673 (1996).
b. Need to \ with and been benefited by said corporation and knew it to be without the necessary
license to do business. Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992).10
Though it was a single transaction, ANDERSEN's act of entering into a contract with MAGNA
constitutes doing business in the Philippines because the act is related to ANDERSEN's specific
business purpose. Thus, in doing business without a license, ANDERSEN had no legal capacity to
sue in the Philippines. However, the Court agrees that MAGNA is already estopped from challenging
ANDERSEN's legal capacity to sue. The doctrine of estoppel states that the other contracting party
may no longer challenge the foreign corporation's personality after acknowledging the same by
entering into a contract with it. This principle is applied in order to “prevent a person (or another
corporation) contracting with a foreign corporation from later taking advantage of its noncompliance
with the statutes, chiefly in cases where such person has received the benefits of the
contract.”  Magna Ready Mix Concrete Corp. v. Andersen Bjornstad Kane Jacobs, Inc., G.R.
No. 196158, 20 January 2021.
PROPER DOCTRINE: Foreign corporations which conduct regular business should be denied any
access to courts until they secure a license to ensure that they will abide by the decisions of our
courts, even if adverse. Dismissal of the petition would be without prejudice to the foreign corporation
subsequently re-filing when it has obtained the license. Eriks Ltd. v. Court of Appeals, 267 SCRA
567 (1997).

9
This overturned the previous doctrine in Marshall-Wells (as well as in In re Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), that
the lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense. See also
Commissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).
10
Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Communications Material and Design, Inc. v. CA, 260 SCRA 673 (1996); Agilent
Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004); European Resources and Technologies, Inc. v.
Ingenieuburo Birkhanh+Nolte, 435 SCRA 246 (2004); Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corp., 470 SCRA 650 (2005);
Global Business Holdings, Inc. v. Surecomp Software, B.V., 633 SCRA 470 (2010); Steelcase, Inc. v. Design Int’l Selections, Inc., 670 SCRA 64 (2012).
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5. Local Suits AGAINST Foreign Corporations: A fundamental international law principle is that no
state can by its laws, and no court as a creature thereof, can by its judgments and decrees directly bind
or affect property or persons beyond state limits. Times, Inc. v. Reyes, 39 SCRA 303 (1971).
a. Jurisdiction Over Foreign Corporations (Sec. 12, Rule 14, Rules of Court)
A foreign corporation which has been granted a license to do business in the Philippines obtains
the status of a domestic corporation in that it is deemed to have residence in the country for
purposes of determine venue and status to sue. State Investment House v. Citibank, 203 SCRA 9
(1991); Northwest Orient Airlines v. Court of Appeals, 241 SCRA 192 (1995).
For service of summons under Sec. 14, Rule 14, it is sufficient that it be alleged in the complaint
that the foreign corporation is doing business in the Philippines. Hahn v. CA, 266 SCRA 537 (1997).
When a foreign corporation has designated a person to receive service of summon, the
designation is exclusive and service of summons on any other person is inefficacious. H.B. Zachry
Company Int’l v. Court of Appeals, 232 SCRA 329 (1994).
For a foreign corporation is doing business in the Philippines, summons may be served on (a)
its designated resident agent; (b) if there is no resident agent, the government official designated by
law to that effect; or (c) any of its officers or agent within the Philippines. The mere allegation in the
complaint that a local company is the agent of the foreign corporation is not sufficient to allow proper
service to such alleged agent; it is necessary that there must be specific allegations that establishes
the connection between the foreign corporation and its alleged agent with respect to the transaction
in question. French Oil Mills Machinery Co. v. Court of Appeals, 295 SCRA 462 (1998).

b. Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to question the

tribunal’s jurisdiction over its person is not equivalent to service of summons, nor does it constitute
acquiescence to the court’s jurisdiction. Avon Insurance PLC v. CA, 278 SCRA 312 (1997).
Participation of a foreign corporation’s counsel in the trial process, e.g., cross-examination of
witnesses, agreement and objection to documentary evidence, and the introduction of witnesses and
documentary evidence, vacates the plea of lack of jurisdiction over such foreign corporation.
General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950).11

c. ODD DOCTRINE: “Indeed, if a foreign corporation, not engaged in business in the Philippines, is not
barred from seeking redress from the courts in the Philippines, a fortiori, that same corporation
cannot claim exemption from being sued in Philippine courts for acts done against a person or
persons in the Philippines.” Facilities Management Corp. v. De la Osa, 89 SCRA 131 (1979).12
CONTRA: Sine qua non requirement for service of summons and other legal processes or any such
agent or representative is that the foreign corporation is doing business in the Philippines.
Signetics Corp. v. Court of Appeals, 225 SCRA 737 (1993).13
PRESENT RULE: There is no reason to subject to Philippine jurisdiction foreign corporations not doing
business here; insofar as the State is concerned, such foreign corporations have no legal existence,
and to subject foreign corporations not doing business to the courts’ jurisdiction would violate the
essence of sovereignty. The Court is not persuaded by the position taken invoking the ruling in
Facilities Management. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).

d. STIPULATION ON VENUE: When the contract sued upon has a venue clause within the Philippines, it
is deemed a confirmation by the foreign corporation, even though not doing business in the
Philippines, to be sued in local courts. Linger & Fisher GMBH v. IAC, 125 SCRA 522 (1983).

6. Laws Applicable to Foreign Corporations (Sec. 146)

The provision in the New York law which allowed only shareholders with a minimum number of
shareholdings (3%) to be entitled to exercise the right of inspection is valid in the case of a foreign
corporation licensed to do business in the Philippines which in its internal relationship was bound by the
New York law. Grey v. Insular Lumber Co., 67 Phil. 139 (1938).
7. Amendment of Articles of Incorporation of Foreign Corporations (Sec. 147)
8. Merger and Consolidation of Foreign Corporations (Sec. 149)
9. Withdrawal of Foreign Corporation (Sec. 153)

XXI. MISCELLANY
1. SEC’s Mandate to Develop and Implement Electronic Filing and Monitoring Systems
(Sec. 180; SEC Memo No. 28-2020: Requirements on Corporations to Create and/or
Designate E-mail Account Address and Cellphone Number for Transactions with the SEC)

11
Johnlo Trading Co., v. Flores, 88 Phil. 741 (1951); Johnlo Trading Co. v. Zulueta, 88 Phil. 750 (1951); Pacific Micronisian Line v. Del Rosario, 96
Phil. 23 (1954); Far East Int’l Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 (1962).
12
FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Int’l v. NLRC, 178 SCRA 569 (1989); Wang Laboratories v. Mendoza, 156 SCRA 44 (1987).
13
Hyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1(988).
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2. BSP and Insurance Commission Shall Exercise Primary Authority Over Special
Corporations Such as Banks, Nonbank Financial Institutions and Insurance Companies
under their Supervision and Regulation (Sec. 183)
3. Effect of Repeal of the Code: No right or remedy in favor or against any corporation, its
shareholders, members, directors, trustees or officers, nor any liability incurred by any
such corporation, shareholders, members, directors, trustees or officers, shall be
removed or impaired either by the subsequent amendment or repeal of this Code or any
part thereof. (Sec. 184)
4. Existing Corporation at Adoption of RCC: A corporation lawfully existing and doing
business in the Philippines affected by the new requirements of the Revised
Corporation Code shall be given a period of not more than two (2) years from its
effectivity (23 February 2019) within which to comply. (Sec. 185)

[ FINAL EXAMINATIONS: 18TH AND 19TH WEEKS: JUNE 6 TO 15 ]

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