2023 BAR REVIEW COMMERCIAL LAW
Handout No. 44
CORPORATION LAW
Philippine Corporation
As provided in Republic Act (RA) No. 7042, otherwise known as the Foreign Investments Act, a
Philippine corporation is defined in the following wise: x x x The term “Philippine national” shall
mean a citizen of the Philippines or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which
at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines. Querubin vs. Commission on Elections En Banc, 776 SCRA 715,
G.R. No. 218787 December 8, 2015
Parent or Holding Company
A parent or holding company is a corporation which owns or is organized to own a substantial
portion of another company’s voting shares of stock enough to control or influence the latter’s
management, policies or affairs thru election of the latter’s board of directors or otherwise. In
other words, a “holding company” is organized and is basically conducting its business by
investing substantially in the equity securities of another company for the purposes of controlling
their policies (as opposed to directly engaging in operating activities) and “holding” them in a
conglomerate or umbrella structure along with other subsidiaries. Significantly, the holding
company itself — being a separate entity — does not own the assets of and does not answer for
the liabilities of the subsidiary or affiliate. Maricalum Mining Corporation vs. Florentino, 872
SCRA 572, G.R. No. 221813 July 23, 2018
In Narra Nickel Mining and Development, Corp. v. Redmont Consolidated Mines, Corp., 722
SCRA 382 (2014), the Court held that the “control test” is the prevailing mode of determining
whether or not a corporation is Filipino.
Under the “control test,” shares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. It is
only when based on the attendant facts and circumstances of the case, there is, in the mind of
the Court, doubt in the 60-40 Filipino-equity ownership in the corporation, that it may apply the
“grandfather rule.” Querubin vs. Commission on Elections En Banc, 776 SCRA 715, G.R. No.
218787 December 8, 2015
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Applying the control test, 60% of SMTC’s 226,000,000 shares, that is 135,600,000 shares, must
be Filipino-owned.
It is clear (from the General Information Sheet) that SMTC reached this threshold amount to
qualify as a Filipino-owned corporation. Indeed, the application of the control test would yield
the result that SMTC is a Filipino corporation. There is then no truth to petitioners’ claim that
SMTC is 100% foreign-owned. Consequently, it becomes unnecessary to confirm this finding
through the grandfather rule119 since the test is only employed when the 60% Filipino ownership
in the corporation is in doubt.120 In this case, not even the slightest doubt is cast since the
petition is severely wanting in facts and circumstances that raise legitimate challenges to SMTC’s
60-40 Filipino ownership. Querubin vs. Commission on Elections En Banc, 776 SCRA 715, G.R.
No. 218787 December 8, 2015
Beneficial owner or beneficial ownership
As defined in the SRC-IRR, “beneficial owner or beneficial ownership means any person who,
directly or indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power (which includes the power to vote or direct the voting of
such security) and/or investment returns or power (which includes the power to dispose of, or
direct the disposition of such security).” Roy III vs. Herbosa, 810 SCRA 1, G.R. No. 207246
November 22, 2016
The term “full beneficial ownership” found in the FIA-IRR is to be understood in the context of
the entire paragraph defining the term “Philippine national.”
Mere legal title is not enough to meet the required Filipino equity, which means that it is not
sufficient that a share is registered in the name of a Filipino citizen or national, i.e., he should also
have full beneficial ownership of the share. If the voting right of a share held in the name of a
Filipino citizen or national is assigned or transferred to an alien, that share is not to be counted
in the determination of the required Filipino equity. In the same vein, if the dividends and other
fruits and accessions of the share do not accrue to a Filipino citizen or national, then that share
is also to be excluded or not counted. Roy III vs. Herbosa, 810 SCRA 1, G.R. No. 207246 November
22, 2016
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CORPORATION LAW
If the Filipino has the “specific stock’s” voting power (he can vote the stock or direct another to
vote for him), or the Filipino has the investment power over the “specific stock” (he can dispose
of the stock or direct another to dispose it for him), or he has both (he can vote and dis pose of
the “specific stock” or direct another to vote or dispose it for him), then such Filipino is the
“beneficial owner” of that “specific stock” — and that “specific stock” is considered (or counted)
as part of the 60% Filipino ownership of the corporation.
In the end, all those “specific stocks” that are determined to be Filipino (per definition of
“beneficial owner” or “beneficial ownership”) will be added together and their sum must be
equivalent to at least 60% of the total outstanding shares of stock entitled to vote in the election
of directors and at least 60% of the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors. Roy III vs. Herbosa, 810 SCRA 1, G.R. No. 207246
November 22, 2016
Application of the 60-40 rule
To be sure, the application of the 60-40 Filipino-foreign ownership requirement separately to
each class of shares, whether common, preferred nonvoting, preferred voting or any other class
of shares fails to understand and appreciate the nature and features of stocks as financial
instruments. Roy III vs. Herbosa, 810 SCRA 1, G.R. No. 207246 November 22, 2016
ABS-CBN alleged that SNN is its subsidiary and although they have interlocking directors, SNN
has its own juridical personality separate from its parent company. ABS-CBN alleged that SNN
controls the line-up of shows of ANC.
We agree with ABS-CBN on this issue. We have ruled that a subsidiary has an independent and
separate juridical personality distinct from that of its parent company and that any suit against
the latter does not bind the former and vice-versa. A corporation is an artificial being invested by
law with a personality separate and distinct from that of other corporations to which it may be
connected.17 Hence, SNN, not ABS-CBN, should have been made respondent in this case. Fortun
vs. Quinsayas, 690 SCRA 623, G.R. No. 194578 February 13, 2013
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A holding corporation has a separate corporate existence and is to be treated as a separate
entity; unless the facts show that such separate corporate existence is a mere sham, or has
been used as an instrument for concealing the truth.
It must further appear that to recognize a parent and a subsidiary as separate entities would aid
in the consummation of a wrong. Maricalum Mining Corporation vs. Florentino, 872 SCRA 572,
G.R. No. 221813 July 23, 2018
Elements of the Alter Ego Theory
The elements of the alter ego theory were discussed in Philippine National Bank v. Hydro
Resources Contractors Corporation, 693 SCRA 294 (2013), to wit:
The first prong is the “instrumentality” or “control” test. This test requires that the subsidiary be
completely under the control and domination of the parent. It examines the parent corporation’s
relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the
parent corporation such that its separate existence as a distinct corporate entity will be ignored.
It seeks to establish whether the subsidiary corporation has no autonomy and the parent
corporation, though acting through the subsidiary in form and appearance, “is operating the
business directly for itself.”
The second prong is the “fraud” test. This test requires that the parent corporation’s conduct in
using the subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship
of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent
corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a
showing of “an element of injustice or fundamental unfairness.”
The third prong is the “harm” test. This test requires the plaintiff to show that the defendant’s
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered. A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendant’s exercise of control and improper use of the
corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence
of three elements: control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by
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the fraudulent or unfair act of the corporation. The absence of any of these elements prevents
piercing the corporate veil. Maricalum Mining Corporation vs. Florentino, 872 SCRA 572, G.R.
No. 221813 July 23, 2018
Totality of Circumstances Test
The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a
wrong, defeat public convenience, insulate bad faith or perpetuate injustice. To aid in the
determination of the presence or absence of fraud, the following factors in the “Totality of
Circumstances Test” may be considered, viz.:
1. Commingling of funds and other assets of the corporation with those of the individual
shareholders;
2. Diversion of the corporation’s funds or assets to non-corporate uses (to the personal uses
of the corporation’s shareholders);
3. Failure to maintain the corporate formalities necessary for the issuance of or subscription
to the corporation’s stock, such as formal approval of the stock issue by the board of
directors;
4. An individual shareholder representing to persons outside the corporation that he or she
is personally liable for the debts or other obligations of the corporation;
5. Failure to maintain corporate minutes or adequate corporate records;
6. Identical equitable ownership in two entities;
7. Identity of the directors and officers of two entities who are responsible for supervision
and management (a partnership or sole proprietorship and a corporation owned and
managed by the same parties);
8. Failure to adequately capitalize a corporation for the reasonable risks of the corporate
undertaking;
9. Absence of separately held corporate assets;
10. Use of a corporation as a mere shell or conduit to operate a single venture or some
particular aspect of the business of an individual or another corporation;
11. Sole ownership of all the stock by one individual or members of a single family;
12. Use of the same office or business location by the corporation and its individual
shareholder(s);
13. Employment of the same employees or attorney by the corporation and its
shareholder(s);
14. Concealment or misrepresentation of the identity of the ownership, management or
financial interests in the corporation, and concealment of personal business activities of
the shareholders (sole shareholders do not reveal the association with a corporation,
which makes loans to them without adequate security);
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15. Disregard of legal formalities and failure to maintain proper arm’s length relationships
among related entities;
16. Use of a corporate entity as a conduit to procure labor, services or merchandise for
another person or entity;
17. Diversion of corporate assets from the corporation by or to a stockholder or other person
or entity to the detriment of creditors, or the manipulation of assets and liabilities
between entities to concentrate the assets in one and the liabilities in another;
18. Contracting by the corporation with another person with the intent to avoid the risk of
nonperformance by use of the corporate entity; or the use of a corporation as a
subterfuge for illegal transactions; and
19. The formation and use of the corporation to assume the existing liabilities of another
person or entity. Maricalum Mining Corporation vs. Florentino, 872 SCRA 572, G.R. No.
221813 July 23, 2018
Settled 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.
In other words, control or ownership of substantially all of a subsidiary’s assets is not by itself an
indication of a holding company’s fraudulent intent to alienate these assets in evading labor-
related claims or liabilities. xxx the PSA was not designed to evade the monetary claims of the
complainants. Although there was proof that G Holdings has an office in Maricalum Mining’s
premises and that that some of their assets have been commingled due to the PSA’s unavoidable
consequences, there was no fraudulent diversion of corporate assets to another corporation for
the sole purpose of evading complainants’ claim. Maricalum Mining Corporation vs. Florentino,
872 SCRA 572, G.R. No. 221813 July 23, 2018
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.
Fernandez vs. Smart Communications, Inc., 909 SCRA 293, G.R. No. 212885 July 17, 2019
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As a general rule, a corporation’s representatives are not bound by the terms of the contract
executed by the corporation. “They are not personally liable for obligations and liabilities
incurred on or in behalf of the corporation.”
There are instances, however, when the distinction between personalities of directors, officers
and representatives, and of the corporation, are disregarded. This is piercing the veil of corporate
fiction. The doctrine of piercing the veil of corporate fiction is a legal precept that allows a
corporation’s separate personality to be disregarded under certain circumstances, so that a
corporation and its stockholders or members, or a corporation and another related corporation
could be treated as a single entity. It is meant to apply only in situations where the separate
corporate personality of a corporation is being abused or being used for wrongful purposes. The
piercing of the corporate veil must be done with caution. To justify the piercing of the veil of
corporate fiction, “it must be 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.” Fernandez vs. Smart
Communications, Inc., 909 SCRA 293, G.R. No. 212885 July 17, 2019
Solidary liability of directors and officers
A corporate director, trustee or officer is to be held solidarily liable with the corporation in the
following instances:
1. When directors and trustees or, in appropriate cases, the officers of a corporation:
a. vote for or assent to patently unlawful acts of the corporation;
b. act in bad faith or with gross negligence in directing the corporate affairs;
c. are guilty of conflict of interest to the prejudice of the corporation, its stockholders
or members, and other persons;
2. When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto;
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the Corporation or
4. When a director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action. Fernandez vs. Smart Communications, Inc., 909 SCRA 293, G.R.
No. 212885 July 17, 2019
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Instances on personal liability not clearly shown
These instances have not been shown in the case of petitioner Maricris. While the Amended
Complaint alleged that EOL fraudulently refused to pay the amount due, nothing in the said
pleading or its annexes would show the basis of Maricris’ alleged fraudulent act that warrants
piercing the corporate veil. No explanation or narration of facts was presented pointing to the
circumstances constituting fraud which must be stated with particularity, thus rendering the
allegation of fraud simply an unfounded conclusion of law. Without specific averments, “the
complaint presents no basis upon which the court should act, or for the defendant to meet it
with an intelligent answer and must, perforce, be dismissed for failure to state a cause of action.”
Fernandez vs. Smart Communications, Inc., 909 SCRA 293, G.R. No. 212885 July 17, 2019
As a general rule, a corporation is invested by law with a personality separate and distinct from
that of the persons comprising it, or from any other legal entity that it may be related to. The
corporation's obligations are its sole liabilities.
Accordingly, the corporate directors, officers, or employees are generally not personally liable
for the corporation's obligations. Malate Construction Development Corporation vs.
Extraordinary Realty Agents, G.R. 243765, January 5, 2022
Personal liability of directors and officers
Before a director or officer of a corporation can be held personally liable for corporate
obligations, however, the following requisites must concur: (1) the complainant must allege 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) the complainant must clearly
and convincingly prove such unlawful acts, negligence or bad faith. Malate Construction
Development Corporation vs. Extraordinary Realty Agents, G.R. 243765, January 5, 2022
Absent clear proof of bad faith and intentional wrongdoing, the general rule that the
corporation's liabilities may not be shifted on to its officers, applies. Accordingly, Olivares may
not be held personally liable for MCDC's liability.
Olivares' purported bad faith and intentional wrongdoing were not proven during the trial of the
case. Rather, Olivares' liability was vaguely premised on the allegations that he acted in bad faith
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and maliciously evaded his obligations. However, no proof was adduced to establish said
accusations. Lest it be forgotten, good faith is always presumed, and he who alleges bad faith has
the duty to prove the same.94 Neither did the RTC and the CA discuss their bases for holding
Olivares solidarily liable with MCDC. Malate Construction Development Corporation vs.
Extraordinary Realty Agents, G.R. 243765, January 5, 2022
The language of the Corporation Code appears to confine the term ultra vires to an act outside
or beyond express, implied and incidental corporate powers.
Ultra vires acts or acts which are clearly beyond the scope of one’s authority are null and void
and cannot be given any effect. Nevertheless, the concept can also include those acts that may
ostensibly be within such powers but are, by general or special laws, either proscribed or declared
illegal. Ultra vires acts or acts which are clearly beyond the scope of one’s authority are null and
void and cannot be given any effect. Querubin vs. Commission on Elections En Banc, 776 SCRA
715, G.R. No. 218787 December 8, 2015
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