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CORPORATION LAW INTRODUCTION

A corporation is an artificial being created by operationof law, having the right of succession and the powers, attributesand properties expressly authorized by law or incident to itsexistence.

A corporation, being a creature of law, "owes its life tothe state, its birth being purely dependent on its will," it is "acreature without any existence until it has received theimprimatur of the state acting according to law." A corporationwill have no rights and privileges of a higher priority than that ofits creator and cannot legitimately refuse to yield obedience toacts of its state organs. ( Tanyag v. Benguet Corporation )

A corporation has four (4) attributes:

(1) It is an artificial being;

(2) Created by operation of law; (3) With right of succession; (4) Has the powers, attributes, and properties as

expressly authorized by law or incident to itsexistence.

CLASSIFICATION OF PRIVATECORPORATIONS

Stock Non-Stock

Definition Corporationswhich havecapital stockdivided intoshares and are authorized todistribute to theholders of sharesdividends orallotments of thesurplus profits on

the basis of theshares (§3)

All other privatecorporations (§3)

One where no partof its income isdistributable asdividends to itsmembers, trusteesor officers. (§87)

Purpose Primarily tomake profits forits shareholders

May be formed ororganized forcharitable, religious,educational,professional,cultural, fraternal,literary, scientific,social, civic service,or similar purposeslike trade, industry,

agricultural and likechambers, or anycombination thereof.(§88)

Distribution ofProfits

Profit isdistributed toshareholders

Whatever incidentalprofit made is notdistributed among itsmembers but is usedfor furtherance of itspurpose. AOI or by-laws may provide forthe distribution of itsassets among itsmembers upon itsdissolution. Beforethen, no profit maybe made bymembers.

Composition Stockholders Members

Scope of rightto vote

Each stockholdervotes according

to the proportionof his shares inthecorporation. Noshares may bedeprived ofvoting rightsexcept thoseclassified andissued as"preferred" or"redeemable"shares, and asotherwiseprovided by the

Code. (Sec. 6)

Each member,regardless of class,

is entitled to one (1)vote UNLESS suchright to vote hasbeen limited,broadened, ordenied in the AOI orby-laws. (Sec. 89)

Voting byproxy

May be deniedby the AOI or theby-laws. (Sec.89)

Cannot bedenied. (Sec. 58)

Voting by mail May beauthorized by theby-laws, with theapproval of andunder theconditionsprescribed by theSEC. (Sec. 89)

Not possible.

Who exercisesCorporatePowers §23

Board ofDirectors orTrustees

Members of thecorporation

GoverningBoard

Board ofDirectors orTrustees,consisting of 5-15 directors /trustees.

Board of Trustees,which may consist ofmore than 15trustees unlessotherwise providedby the AOI or by-laws. ( Sec, 92)

Definition and attributes of a corporation

Stock v. Non-Stock Corporations

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Term ofdirectors ortrustees

Directors /trustees shallhold office for 1year and untiltheir successorsare elected andqualified (Sec.23).

Board classified insuch a way that theterm of office of 1/3of their number shallexpire every year.Subsequentelections of trusteescomprising 1/3 of theboard shall be heldannually, andtrustees so electedshall have a term of3 years. ( Sec. 92)

Election ofofficers

Officers areelected by theBoard ofDirectors (Sec.25), except inclosecorporationswhere thestockholdersthemselves mayelect the

officers. (Sec.97)

Officers may directlyelected by themembers UNLESSthe AOI or by-lawsprovideotherwise. (Sec. 92)

Place ofmeetings

Any place withinthe Philippines, ifprovided for bythe by-laws (Sec.93)

Generally, themeetings must beheld at the principaloffice of thecorporation, ifpracticable. If not,then anyplace in thecity or municipalitywhere the principaloffice of thecorporation islocated. (Sec. 51)

Transferabilityof interest ormembership

Transferable. Generally non-transferable sincemembership and allrights arisingtherefrom arepersonal. However,the AOI or by-lawscan provideotherwise. (Sec. 90)

Distribution ofassets in caseof dissolution

See Sec. 94.

CIR VS. CLUB FILIPINO (5 SCRA 321; 1962)

FACTS: Club Filipino owns and operates a club house, asports complex, and a bar restaurant, which is incident tothe operation of the club and its gold course. The club isoperated mainly with funds derived from membershipfees and dues. The BIR seeks to tax the said restaurant asa business.

HELD: The Club was organized to develop and cultivatesports of all class and denomination for the healthfulrecreation and entertainment of its stockholders andmembers. There was in fact, no cash dividenddistribution to its stockholders and whatever was derivedon retail from its bar and restaurants used were to defrayits overhead expenses and to improve its golf course.

For a stock corporation to exist, 2 requisites must becomplied with:

(1) a capital stock divided into shares (2) an authority to distribute to the holders of such

shares, dividends or allotments of the surplus profits on the basis of

shares held.

In the case at bar, nowhere in the AOI or by-laws of ClubFilipino could be found an authority for the distributionof its dividends or surplus profits.

FORMATION AND ORGANIZATION OFCORPORATION

Who may form a corporation (See SEC. 10)

INCORPORATORS

REQUIREMENTS

COMMENTS

Definition stockholders ormembersmentionedin thearticles ofincorporation asoriginallyformingandcomposingthe

corporation and whoaresignatoriesthereofstockholders ormembersmentionedin thearticles ofincorporation asoriginally

compare withCorporatorswhich include allstockholders ormembers,whetherincorporators or

joining thecorporation afterits incorporation.

Requirements in the formation of acorporation

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formingandcomposingthecorporation and whoaresignatoriesthereof

Characteristic naturalpersons

excludescorporations and

partnerships

Number not lessthan 5; notmore than15

may be more than15 for non-stockcorp. excepteducational corp.

does not preventthe “one -man(person)corporation” wherein the other

incorporatorsmay have onlynominalownership of onlyone share ofstock; notnecessarily illegal

Age of legalage

Residence majorityshould beresidentsof thePhilippines

residence arequirement;citizenshiprequirement onlyin certain areassuch as publicutilities, retailtrade banks,investmenthouses, savingsand loanassociations,schools

Mutual Agreement to per form cer ta in ac tsrequi red for organiz ing a corpora t ion

1- Organize and establish a corporation 2- Comply with requirements of corporation

code 3- Contribute capital/resources 4- Mode of use of capital/resource and

control/management of capital/resource

5- distribution/disposition ofcapital/resource (embodied inconstitutive documents)

STEPS COMMENTS

a. Promotional Stage(See SEC.2. Definitions)

Promoter brings together

persons whobecome interestedin the enterprise

aids in procuringsubscriptionsand sets in motionthe machinerywhich leads to theformation of thecorporation itself

formulates thenecessary initialbusiness andfinancial plans and,if necessary, buys

the rights andproperty which thebusiness may need,with theunderstanding thatthe corporationwhen formed, shalltake over the same.

b. Drafting articlesof incorporation

(See SEC. 14)

(see chart below)

c. Filing of articles;payment of fees.

AOI & the treasurer’saffidavit duly signed &acknowledged

must be filed w/ the SEC &the corresponding fees paid

failure to file the AOI willprevent due incorporation ofthe proposed corporation &will not give rise to its

juridical personality. It willnot even be a de facto corp.

Under present SEC rules,the AOI once filed , will bepublished in the SEC Weekly

Bulletin at the expense of thecorp. (SEC Circular # 4,1982).

d. Examination ofarticles; approval orrejection by SEC.

Process : a) SEC shall examine

them in order to determinewhether they are in conformity w/law.

b) If not, the SEC mustgive the incorporators areasonable time w/in w/c to

Steps in the formation of a corporation

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correct or modify theobjectionable portions.

Ground s for re jec t ion ordisapproval of A OI:

a) AOI /amendment notsubstantially in accordance w/the form prescribed

b) purpose/s are patentlyunconstitutional, illegal, immoral,or contrary to government rules &regulations;

c) Treasurer’s Affidavit isfalse;

d) required percentage ofownership has not been compliedwith (Sec. 17)

e) corp.’s establishment,organization or operation will notbe consistent w/ the declarednational economic policies (to bedetermined by the SEC, afterconsultation w/ BOI, NEDA orany appropriate governmentagency -- PD 902-A as amendedby PD 1758, Sec. 6 (k))

Decisions of the SECdisapproving orrejecting AOI may beappealed to the CA bypetition for review inaccordance w/ the ROC.

e. Issuance ofcertificate ofincorporation.

Certificate of Incorporation willbe issued if:

a) SEC is satisfied that alllegal requirements have beencomplied with; and

b) there are no reasonsfor rejecting or disapproving the

AOI.

It is only upon such issuancethat the corporation acquires

juridical personality. (See Sec. 19. Commencement ofcorporate existence)

Should it be subsequentlyfound that the incorporatorswere guilty of fraud inprocuring the certificate ofincorporation, the same maybe revoked by the SEC, afterproper notice & hearing.

b. Draft ing art icles o f inco rpo ration (SeeSEC. 14)

CONTENTS OFAOI

COMMENTS

Corporate Name Essential to its existence since it isthrough it that the corporation can

sue and be sued and perform alllegal acts

A corporate name shall bedisallowed by the SEC if theproposed name is either:

(1) identical or deceptivelyor confusingly similar tothat of any existingcorporation or to anyother name alreadyprotected by law; or

(2) patently deceptive,confusing or contrary toexisting laws. (Sec. 18)

LYCEUM OF THE PHILS. VS.CA (219 SCRA 610)

The policy underlying the prohibitionagainst the registration of a corporatename which is “identical or deceptivelyor confusingly similar” to t hat of anyexisting corporation or which is“patently deceptive or patentlyconfusing” or “contrary to existing lawsis:

1. the avoidance of fraudupon the public whichwould have occasion todeal with the entityconcerned;

2. the prevention of evasionof legal obligations andduties, and

3. the reduction ofdifficulties ofadministration andsupervision overcorporations.

Purpose Clause A corporation can only have one(1) primary purpose. However, itcan have several secondarypurposes.

A corporation has only suchpowers as are expressly grantedto it by law & by its articles ofincorporation, those which may beincidental to such conferredpowers , those reasonablynecessary to accomplish its

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purposes & those which may beincident to its existence.

Corporation may not be formed forthe purpose of practicing aprofession like law, medicine oraccountancy

Principal Office must be within the Philippines specify city or province street/number not necessary important in determining venue in

an action by or against the corp.,or on determining the provincewhere a chattel mortgage ofshares should be registered

Term ofExistence

cannot specify term which islonger than 50 years at a time

may be renewed for another 50years, but not earlier than 5 yearsprior to the original or subsequentexpiry date UNLESS there are

justifiable reasons for an earlierextension.

Incorporatorsand Directors

names, nationalities & residencesof the incorporators;

names, nationalities & residencesof the directors or trustees whowill act as such until the firstregular directors or trustees areelected;

treasurer who has been chosen bythe pre-incorporationsubscribers/members to receiveon behalf of the corporation, allsubscriptions /contributions paid

by them.

Capital Stock amount of its authorized capitalstock in lawful money of thePhilippines

number of shares into which it isdivided

in case the shares are par valueshares, the par value of each,

names, nationalities andresidences of the originalsubscribers, and the amountsubscribed and paid by each onhis subscription, and if some or allof the shares are without parvalue, such fact must be stated

for a non-stock corporation, theamount of its capital, the names,nationalities and residences of thecontributors and the amountcontributed by each

25% of 25% rule to be certified byTreasurer

paid up capital should not be lessthan P5,000

Other matters

Classes of shares into w/c theshares of stock havebeen

divided; preferences of &restrictions on any such class;

and any denial or restriction of thepre-emptive right of

stockholders should also beexpressly stated in said articles.

If the corporation is engaged in awholly or partially

nationalized business or activity,the AOI must contain a

prohibition against a transfer ofstock which would reduce

the Filipino ownership of its stockto less than the required

minimum.

Any corporation may be incorporated as aclose corporation, except:

a) mining or oil companies; b) stock exchanges; c) banks; d) insurance companies; e) public utilities; f) educational institutions; & g) corporations declared to be

vested w/ public interest

User of Corpora te Powers

What is a ‘de facto’ corporation?

A ‘de facto’ corporation is a defectivelyorganized corporation, which has all thepowers and liabilities of a ‘de jure’ corporationand, except as to the State, has a juridicalpersonality distinct and separate from itsshareholders, provided that the followingrequisites are concurrently present:

(1) That there is an apparently validstatute under which the corporationwith its purposes may be formed;

(2) That there has been colorablecompliance with the legalrequirements in good faith; and,

(3) That there has been use ofcorporate powers, i.e., thetransaction of business in someway as if it were a corporation.

Can a corporation transact business as a‘de facto’ corporation while application isstill pending with SEC?

De Facto Corporations: Requisites

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No. In the case of Hall v. Piccio ( 86

Phil. 603; 1950) , where the supposedcorporation transacted business as acorporation pending action by the SEC on itsarticles of incorporation, the Court held thatthere was no ‘de facto’ corporation on theground that the corporation cannot claim to bein ‘good faith’ to be a corporation when it hasnot yet obtained its certificate of incorporation.

Format ion u nder apparent ly va l id s ta tu te .

MUNICIPALITY OF MALABANG V. BENITO (29SCRA 533; 1969)

WON a corporation organized under a statutesubsequently declared void acquires status as ‘de facto’corporation.

No. A corporation organized under a statutesubsequently declared invalid cannot acquire the status ofa ‘de facto’ corporation unless there is some other statuteunder which the supposed corporation may be validlyorganized. Hence, in the case at bar, the mere fact that themunicipality was organized before the statute had beeninvalidated cannot conceivably make it a ‘de facto’corporation since there is no other valid statute to givecolor of authority to its creation.

Colorable compl iance wi th the legalrequi rements in good fa i th .

BERGERON V. HOBBS (71 N.W. 1056, 65 Am. St. Rep.85)

The constitutive documents of the proposedcorporation were deposited with the Register of Deeds butnot on file in said office. One of the requirements for validincorporation is the filing of constitutive documents in theRegister of Deeds.

Was there ‘colorable’ compliance enough to givethe supposed corporation at least the status of a ‘de facto’corporation?

No. The filing of the constitutive documents inthe Register of Deeds is a condition precedent to the rightto act as a corporate body. As long as an act, required asa condition precedent, remains undone, no immunity fromindividual liability is secured.

HARRIL V. DAVIS (168 F. 187; 1909)

The constitutive documents were filed with theclerk of the Court of Appeals but not with the clerk ofcourt in the judicial district where the business waslocated. Arkansas law requires filing in both offices.

Was there ‘colorable’ compliance enough to givethe supposed corporat ion at least the status of a ‘de facto’corporation?

No. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing ofthe articles of incorporation which are not filed, wherefiling is requisite to create the corporation, nor the use ofthe pretended franchise of the nonexistent corporation,will constitute such a corporation de facto as will exemptthose who actively and knowingly use s name to incurlegal obligations from their individual liability to paythem. There could be no incorporation or color of it underthe law until the articles were filed (requisites for validincorporation).

HALL v. PICCIO (29 SCRA 533; 1969)

In the case of Hall v. Piccio, where the supposedcorporation transacted business as a corporation pendingaction by the SEC on its articles of incorporation, theCourt held that there was no ‘de facto’ corporation on theground that the corporation cannot claim to be in ‘goodfaith’ to be a corporation when it has not yet obtained itscertificate of incorporation.

NOTE: The validity of

incorporation cannot be inquired intocollaterally in any private suit to which such corporation may be aparty. Such inquiry must be througha quo warranto proceeding made bythe Solicitor General. (Sec. 20)

(Sec. 21)

Distinguish a de facto corporation from acorporation by estoppel.

The ‘de facto’ doctrine differs fromthe estoppel doctrine in that where all therequisites of a ‘de facto’ corporation arepresent, then the defectively organizedcorporation will have the status of a ‘de jure’corporation in all cases brought by andagainst it, except only as to the State in adirect proceeding. On the other hand, if any ofthe requisites are absent, then the estoppeldoctrine can apply only if under thecircumstances of the particular case thenbefore the court, either the defendantassociation is estopped from defending on theground of lack of capacity to be sued, or the

CORPORATION BY ESTOPPEL

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defendant third party had dealt with theplaintiff as a corporation and is deemed tohave admitted its existence.

(De facto – has status of ‘de jure’ corpo, except separatepersonality against State, provided all requisites are present)

What are the effects of a Corporation byEstoppel in suits brought:

(1) against the Corporation? Considered acorporation in suits brought against it if

it held itself out assuch and denies capacityto be sued;

(2) against third party? Third party cannotdeny existence of corporation if it

dealt with it assuch.

EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527;1881)

Company was sued on a promissory note. Itsdefense was that at the time of its issuance, it wasdefectively organized and therefore could not be sued assuch.

The Corporation cannot repudiate the transactionor evade responsibility when sued thereon by setting upits own mistake affecting the original organization.

LOWELL-WOODWARD vs. WOODS (104 Kan. 729;1919)

Corporation sued a partnership on a promissorynote. The latter as defense alleged that the plaintiff wasnot a corporation.

One who enters into a contract with a partydescribed therein as a corporation is precluded, in anaction brought thereon by such party under the samedesignation, from denying its corporate existence.

ASIA BANKING VS STANDARD PRODUCTS (46 Phil. 145; 1924)

The corporation sued another corporation a promissory note. The defense was that the plaintiff wasnot able to prove the corporate existence of both parties.

The defendant is estopped from denying its owncorporate existence. It is also estopped from denying theother’s cor porate existence. The general rule is that in theabsence of fraud, a person who has contracted orotherwise dealt with an association is such a way as torecognize and in effect admit its legal existence as acorporate body is thereby estopped from denying itscorporate existence.

CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ;1964)

IBM sued Cranson in his personal capacityregarding a typewriter bought by him as President of adefectively organized company whose Articles were notyet filed when the obligation was contracted.

IBM, having dealt with the defectively organizedcompany as if it were properly organized and havingrelied on its credit instead of Cranson’s, is estopped fromasserting that it was not incorporated. It cannot sueCranson personally.

SALVATIERRA VS GARLITOS (103 Phil. 757;1958)

Salvatierra leased his land to the corporation. Hefiled a suit for accounting, rescission and damages againstthe corporation and its president for his share of the

produce. Judgment against both was obtained. Presidentcomplains for being held personally liable.

He is liable. An agent who acts for a non-existent principal is himself the principal. In acting on behalf of acorporation which he knew to be unregistered, heassumed the risk arising from the transaction.

ALBERT VS UNIVERSITY PUBLISHING CO.,INC. ( Jan. 30, 1965)

Mariano Albert entered into a contract withUniversity Publishing Co., Inc. through Jose M. Aruego,its President, whereby University would pay plaintiff forthe exclusive right to publish his revised Commentarieson the Revised Penal Code. The contract stipulated thatfailure to pay one installment would render the rest of the

payments due. When University failed to pay the secondinstallment, Albert sued for collection andwon. However, upon execution, it was found thatUniversity was not registered with the SEC. Albert

petitioned for a writ of execution against Jose M. Aruegoas the real defendant. University opposed, on the groundthat Aruego was not a party to the case.

The Supreme Court found that Aruego representeda non-existent entity and induced not only Albert but the

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court to believe in such representation. Aruego, acting asrepresentative of such non-existent principal, was the real

party to the contract sued upon, and thus assumed such privileges and obligations and became personally liablefor the contract entered into or for other acts performed assuch agent.

The Supreme Court likewise held that the doctrineof corporation by estoppel cannot be set up against Albertsince it was Aruego who had induced him to act upon his(Aruego's) willful representation that University had beenduly organized and was existing under the law.

When adopted:

(a) No later than one (1) month afterreceipt from SEC ofofficial notice of

issuance of Cert. of incorporation.

Requirement: Affirmative vote ofstockholders representing at least

majority ofoutstandingcapital stock(Stock Corp.) ormembers (Non-Stock)

Must be signed bystockholders or members voting for them

(b) Prior to incorporation

Requirement: Approval of allincorporators; must be signed by all of them

Where kept: (1) In the principal office of thecorporation ; and

(2) Securities and ExchangeCommission

When effective: Only upon the SEC’s issuanceof a certification that the by-laws

are not inconsistent withthe Corporation Code.

Special corporations: By-laws and/or amendmentsthereto must be accompanied by

a certificate of the appropriategovernment agency to the

effect that such by-laws /amendments are in accordance with

law.

banks or banking institutions building and loan associations trust companies insurance companies public utilities

educational institutions other special corporations governed by

special laws

Contents of By-laws - Subject to the provisions of theConstitution, this Code, other

special laws, and thearticles of incorporation, aprivate corporation mayprovide in its by-laws for:

1) the time, place and manner of calling andconducting regular or special meetings of thedirectors or trustees;

2) the time and manner of calling andconducting regular and special meetings ofthe stockholders or members;

3) the required quorum in meetings ofstockholders or members and the manner ofvoting herein;

4) the form for proxies of stockholders and

members and the manner of voting them; 5) the qualifications, duties and compensation of

directors or trustees, officers and employees;

6) the time for holding the annual election ofdirectors or trustees and the mode or mannerof giving notice thereof;

7) the manner of election or appointment andthe term of office of all officers other thandirectors or trustees;

8) the penalties for violation of the by-laws;

9) in the case of stock corporations, the mannerof issuing certificates; and

10) such other matters as may be necessary forthe proper or convenient transaction of itscorporate business and affairs.

FLEISCHER V. BOTICA NOLASCO CO. (47 Phil.583; 1925)

As a general rule, the by-laws of a corporation arevalid if they are reasonable and calculated to carry intoeffect the objective of the corporation and are not

contradictory to the general policy of the laws of the land.Under a statute authorizing by-laws for the transfer ofstock, a corp. can do no more than prescribe a generalmode of transfer on the corp. books and cannot justifyan restriction upon the right of sale.

GOVT. OF P.I. V. EL HOGAR

Is a provision in the by-laws allowing the BOD, by voteof absolute majority, to cancel shares valid?

BY-LAWS (Sec. 46 & 47)

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No. It is a patent nullity, being in direct conflictwith Sec. 187 of the Corp. Law which prohibits forcedsurrender of unmatured stocks except in case ofdissolution.

Is a provision in the by-laws fixing the salary of directorsvalid?

Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fixcompensation lies with the corporation.

Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid?

Yes. The Corporation Law gives the corporationthe power to provide qualifications of its directors. CITIBANK, N.A. v. CHUA (220 SCRA 75)

Where the SEC grants a license to a foreigncorporation, it is deemed to haveapproved its

foreign-enacted by-laws. Sec. 46 of theCorporation Code which states that by-laws arenot valid without SEC approval applies only todomestic corporations.

A board resolution appointing an attorney-in-factto represent the corporation during pre-trial is notnecessary where the by-laws authorize an officerof the corporation to make such appointment.

LOYOLA GRAND VILLAS v. CA (276 SCRA 681)

ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the date

of its incorporation, as mandated by Art. 46 of theCorporation Code, results in the corporation'sautomatic dissolution.

RULING: No. Failure to file by-laws does not resultin the automatic dissolution of the corporation. Itonly constitutes a ground for suchdissolution. ( Cf. Chung Ka Bio v. IAC, 163 SCRA534) Incorporators must be given the chance toexplain their neglect or omission and remedy thesame.

THE CORPORATE ENTITY

When does the corporation’s existence as alegal entity commence?

Upon issuance by the SEC of the certificate ofincorporation (Sec. 19)

What rights does the corporation acquire?

The right to:

1) sue and be sued;2) hold property in its own name;3) enter into contracts with third persons;&4) perform all other legal acts.

Since corporate property is owned by thecorporation as a juridical person, thestockholders have no claim on it as owners,but have merely an expectancy or inchoateright to the same should any of it remain uponthe dissolution of the corporation after allcorporate creditors have beenpaid. Conversely, a corporation has no

interest in the individual property of itsstockholders, unless transferred to thecorporation. Remember that the liability ofthe stockholders is limited to the amount ofshares.

SAN JUAN STRUCTURAL & STEELFABRICATORS v. CA (296 SCRA 631)

A corporation is a juridical person separate anddistinct from its stockholders or members. Accordingly,the property of the corporation is not the property of itsstockholders or members and may not be sold by thestockholders or members without express authorization

from the corporation's Board of Directors.

In this case, the sale of a piece of land belongingto Motorich Corporation by the corporation treasurer(Gruenberg) was held to be invalid in the absence ofevidence that said corporate treasurer was authorized toenter into the contract of sale, or that the said contract wasratified by Motorich. Even though Gruenberg and herhusband owned 99.866% of Motorich, her act could not

bind the corporation since she was not the sole controllingstockholder.

STOCKHOLDERS OF F. GUANZON V. REGISTEROF DEEDS (6 SCRA 373)

Properties registered in the name of thecorporation are owned by it as an entity separate anddistinct from its members. While shares of stockconstitute personal property, they do not represent

property of the corporation. A share of stock only typifiesan aliquot part of the corporation's property or the right toshare in its proceeds to that extent when distributedaccording to law and equity, but its holder is not the ownerof any part of the capital of the corporation. Nor is he

The Theory of Corporate Entity

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entitled to the possession of any definite portion of its property or assets.

The act of liquidation made by the stockholdersof the corp of the latter’s assets is not and cannot beconsidered a partition of community property, but rathera transfer or conveyance of the title of its assets to theindividual stockholders. Since the purpose of theliquidation, as well as the distribution of the assets, is totransfer their title from the corporation to the stockholdersin proportion to their shareholdings, that transfer cannot

be effected without the corresponding deed ofconveyance from the corporation to the stockholders. Itis, therefore, fair and logical to consider the certificate ofliquidation as one in the nature of a transfer orconveyance.

CARAM V. CA (151 SCRA 373; 1987)

The case of the unpaid compensation for the preparationof the project study.

The petitioners were not involved in the initialstages of the organization of the airline. They weremerely among the financiers whose interest was to beinvited and who were in fact persuaded, on the strength ofthe project study, to invest in the proposed airline.

There was no showing that the Airline was afictitious corp and did not have a separate juridical

personality to justify making the petitioners, as principalstockholders thereof, responsible for its obligations. As a

bona fide corp, the Airline should alone be liable for itscorporate acts as duly authorized by its officers anddirectors. Granting that the petitioners benefited from theservices rendered, such is no justification to hold them

personally liable therefor. Otherwise, all the otherstockholders of the corporation, including those whocame in late, and regardless of the amount of theirshareholdings, would be equally and personally liablealso with the petitioner for the claims of the privaterespondent.

PALAY V. CLAVE (124 SCRA 640; 1983)

The case of the reliance on a default provision of thecontract granting automatic extra-judicial rescission.

The court found no badges of fraud on the part ofthe president of the corporation. The BOD had literallyand mistakenly relied on the default provision of thecontract. As president and controlling stockholder of thecorp, no sufficient proof exists on record that he used thecorp to defraud private respondent. He cannot, therefore,

be made personally liable because he appears to be thecontrolling stockholder. Mere ownership by a single

stockholder or by another corporation of all or nearly allof the capital stock of a corporation is not of itselfsufficient ground for disregarding the separate corporate

personality.

MAGSAYSAY V. LABRADOR (180 SCRA 266)

The case of the assignment by Senator Magsaysay of acertain portion of his shareholdings in SUBIC granting hissisters the right to intervene in a case filed by the widowagainst SUBIC.

The words "an interest in the subject," to allow petitioners to intervene, mean a direct interest in the causeof action as pleaded, and which would put the intervenorin a legal position to litigate a fact alleged in thecomplaint, without the establishment of which plaintiffcould not recover.

Here, the interest, of petitioners, if it exists at all,is indirect, contingent, remote, conjectural, consequentialand collateral. At the very least, their interest is purelyinchoate, or in sheer expectancy of a right in themanagement of the corporation and to share in the profitsthereof and in the properties and assets thereof ondissolution, after payment of the corporate debts andobligations.

While a share of stock represents a proportionateor aliquot interest in the property of the corp, it does notvest the owner thereof with any legal right or title to anyof the property, his interest in the corporate property beingequitable and beneficial in nature. Shareholders are in nolegal sense the owners of corporate property, which isowned by the corp as a distinct legal person.

Q: What is the theory of corporate entity?

A: That a corporation has a personalitydistinct from its stockholders, and is notaffected by the personal rights, obligationsand transactions of the latter.

Q: When Can the Veil of Corporate Entity bePierced?

A: The veil of corporate fiction may bepierced when it is used as a shield to furtheran end subversive of justice, or for purposesthat could not have been intended by law thatcreated it or to defeat public convenience,

justify wrong, protect fraud or defend crime orto perpetuate fraud or confuse legitimateissues or to circumvent the law or perpetuatedeception or as an alter ego, adjunct or

PIERCING THE CORPORATE VEIL

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business conduit for the sole benefit of thestockholders.

Q: What are the effects of disregarding thecorporate veil?

(1) Stockholders would be personally liablefor the acts and contracts of the corporationwhose existence at least for the purpose ofthe particular situation involved is ignored.

(2) Court is not denying corporate existencefor all purposes but merely refuses to allowthe corporation to use the corporate privilegefor the particular purpose involved.

Contrary to law / pub l ic pol icy; evas ion ofl iabi li ty to gov ernment

STATE V. STANDARD OIL (49 Ohio, St., 137, N.E.279, 15; 1892)

Where all or a majority of stockholderscomprising a corporation do an act which is designed toaffect the property and business of the company, as if ithad been a formal resolution of its Board of Directors andthe acts done is ultra vires, the act should be regarded asthe act of the corporation, and may be challenged by thestate in a quo warrranto proceeding.

LAGUNA TRANS V. SSS (107 Phil. 833; 1960)

Where the corporation was formed by and

consisted of the members of a partnership whose businessand property was conveyed to the corporation for the purpose of continuing its business, such corporation is presumed to have assumed partnership debts.

MARVEL BLDG. CORP. V. DAVID (94 Phil. 376;1954)

The fact that:

certificates in possession of Castro were endorsed

in blank; Castro had enormous profits and had motive to

hide them; other subscribers had no incomes of sufficient

magnitude; and directors never met;

shows that other shareholders may be considereddummies of Castro. Hence, corporate veil may be pierced.

Evasion of l iab i l i ty to credi tors

TAN BOON BEE CO. V. JARENCIO (163 SCRA 205;1988)

Tan BBC (T) supplies paper to GraphicsPublishing Inc (G) but the latter fails to pay. G's printingmachine levied upon to satisfy claim but PADCO, anothercorpo intercedes, saying it is the owner of the machine,having leased such to G.

Printing machine was allowed by the Court tosatisfy G's liability. Both G and PADCO's corporateentities pierced because they have: the same board ofdirectors, PADCO owns 50% of G, PADCO neverengaged in the business of printing. Obviously, the boardis using PADCO to shield G from fulfilling liability to T.

NAMARCO v. AFCorp (19 SCRA 962; 1967)

Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wife, own 76% of AFC)contracts with NAMARCO for an exchange of sugar (rawv. refined). N delivers, AFC doesn't since it did not havesugar to supply in the first place. N sues to recover sumof money plus damages.

Sycip held jointly and severally liable withAFC. AFC's corporate veil was pierced because it wasused as Sycip's alter ego, corpo used merely as aninstrumentality, agency or conduit of another to evadeliability.

JACINTO V. CA (198 SCRA 211)

Jacinto, president/GM and owner of 52% ofcorpo, owes MetroBank sum of money, signs trustreceipts therefor. Jacinto absconds. Jacinto ordered to

jointly and severally pay MetroBank. Corpo veil pierced because it was used as a shield to perpetuate fraud and/orconfuse legitimate issues. There was no clear cutdelimitation between the personality of Jacinto and thecorporation.

Evasion of l iab i l i ty / obl iga t ion to emp loyees

CLAPAROLS V. CIR (65 SCRA 613; 1975)

Both predecessor and successor were owned andcontrolled by petitioner and there was no break in thesuccession and continuity of the same business. All theassets of the dissolved Plant were turned over to the

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emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and maliciously designedto evade its financial obligation to its employees.

INDOPHIL TEXTILE MILL WORKERS UNION V.CALICA (205 SCRA 698)

Rule: The doctrine of piercing the veil ofcorporate entity applies when corporate fiction is used todefeat public convenience, justify wrong, protect fraud ordefend crime, or when it is made as a shield to confuse thelegitimate issues or where a corporation is the mere alterego or business conduit of a person, or where thecorporation is so organized and controlled and its affairsare so conducted as to make it merely an instrumentality,agency, conduit or adjunct of another corporation.

Case at bar: Union sought to pierce corporate veil allegingthat the creation of Acrylic is a devise to evade theapplication of the CBA Indophil had with them (or itsought to include the other union in its bargainingleverage).

SC: Legal corporate entity is disregarded only if it issought to hold the officers and stockholders directly liablefor a corporate debt or obligation. Union does not seek toimpose such claim against Acrylic. Mere fact that

businesses were related, that some of the employees ofIndophil are the same persons manning and providing forauxiliary services to the other company, and that physical

plants, officers and facilities are situated in the samecompound - not sufficient to apply doctrine.

NAFLU V. OPLE (143 SCRA 125; 1986)

Libra/Dolphin Garments was but an alter ego ofLawman Industrial, therefore, the former must bear theconsequences of the latter's unfair acts. It cannot denyreinstatement of petitioners simply because of cessationof Lawman's operations, since it was in fact an illegallock-out, the company having maintained a run-awayshop and transferred its machines and assets there.

Here, the veil of corporate fiction was pierced inorder to safeguard the right to self-organization andcertain vested rights which had accrued in favor of theunion. Second corporation sought the protective shield ofcorporate fiction to achieve an illegal purpose.

ASIONICS PHILS. v. NLRC (290 SCRA 164)

A corporation is invested by law with a personality separate and distinct from those of the persons

composing it as well as from that of any other legal entityto which it may be related. Mere ownership by a singlestockholder or by another corporation of all or nearly allof the capital stock of a corporation is not of itselfsufficient ground for disregarding the separate corporate

personality.

Where there is nothing on record to indicate thePresident and majority stockholder of a corporation hadacted in bad faith or with malice in carrying out theretrenchment program of the company, hecannot be heldsolidarily and personally liable with the corporation.

Evasion of l iab i l i ty on cont rac t

VILLA-REY TRANSIT V. FERRER (25 SCRA 849;1968)

Jose M. Villarama, operator of a bus company,Villa Rey Transit, which was authorized to operate 32units from Pangasinan to Manila and vice-versa, sold 2CPCs to Pantranco. One of the conditions included in thecontract of sale was that the seller (Villarama) "shall not,for a period of 10 years from the date of the sale, applyfor any TPU service identical or competing with the buyer(Pantranco)."

Barely 3 months after the sale, a corporation calledVilla Rey Transit, Inc. was organized, with the wife ofJose M. Villarama as one of the incorporators and whowas subsequently elected as treasurer of theCorporation. Barely a month after its registration with theSEC, the corporation bought 5 CPCs and 49 buses fromone Valentin Fernando, and applied with the PublicService Commission (PSC) for approval of the sale.Before the PSC could take final action on the saidapplication, however, 2 of the 5 CPCs were levied upon

pursuant to a writ of execution issued by the CFI in favorof Eusebio Ferrer, judgment creditor, against ValentinFernando, judgment debtor. During the public saleconducted, Ferrer was the highest bidder, and a certificateof sale was issued in his name. Shortly thereafter, he soldthe said CPCs to Pantranco, and they jointly submittedtheir contract of sale to the PSC for approval.

The PSC issued an order that pending resolutionof the applications, Pantranco shall have the authority to

provisionally operate the service under the 2 CPCS thatwere the subject of the contract between Ferrer andPantranco. Villa Rey Transit took issue with this, andfiled a complaint for annulment of the sheriff's sale of theCPCs and prayed that all the orders of the PSC relative tothe dispute over the CPCs in question beannulled. Pantranco filed a third-party complaint againstJose M. Villarama, alleging that Villarama and Villa Rey

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Transit are one and the same, and that Villarama and/orthe Corporation is qualified from operating the CPCs byvirtue of the agreement entered into between Villaramaand Pantranco.

Given the evidence, the Court found that thefinances of Villa-Rey, Inc. were managed as if they werethe private funds of Villarama and in such a way andextent that Villarama appeared to be the actual owner ofthe business without regard to the rights of thestockholders. Villarama even admitted that he mingledthe corporate funds with his own money. Thesecircumstances negate Villarama's claim that he was onlya part-time General Manager, and show beyond doubt thatthe corporation is his alter ego. Thus, the restrictiveclause with Pantranco applies. A seller may not makeuse of a corporate entity as a means of evading theobligation of his covenant. Where the Corporation issubstantially the alter ego of one of the parties to thecovenant or the restrictive agreement, it can beenjoined from competing with the covenantee.

Close Corpora t ions

CEASE V. CA (93 SCRA 483; 1979)

The Cease plantation was solely composed of theassets and properties of the defunct Tiaong plantationwhose license to operate already expired. The legal fictionof separate corporate personality was attempted to be usedto delay and deprive the respondents of their successionrights to the estate of their deceased father.

While originally, there were other incorporatorsof Tiaong, it has developed into a closed familycorporation (Cease). The head of the corporation, Cease,used the Tiaong plantation as his instrumentality. It washis business conduit and an extension of his personality.There is not even a showing that his children weresubscribers or purchasers of the stocks they own.

DELPHER TRADES V. CA (157 SCRA 349; 1988)

The Delpher Trades Corp. is a business conduitof the Pachecos. What they really did was to invest their

properties and change the nature of their ownership fromunincorporated to incorporated form by organizingDelpher and placing the control of their properties underthe corporation. This saved them inheritance taxes.

This is the reverse of Cease; however, it does notmodify the other cases. It stands on its own because of thefacts.

Q: What is the general rule governing parent-subsidiary relationship?

A: The mere fact that a corporation owns allor substantially all of the stocks of anothercorporation is not alone sufficient to justifytheir being treated as one entity.

Q: When may it be disregarded by thecourts?

(1) if the subsidiary was formed for thepayment of evading the payment ofhigher taxes

(2) where it was controlled by the parentthat its separate identity was hardlydiscernible

(3) parent corporations may be held

responsible for the contracts as wellas the torts of the subsidiary

Q: What are the criteria by which thesubsidiary can be considered a mereinstrumentality of the parent company?

1. the parent corp. owns all or most ofthe capital stock of the subsidiary.

2. the parent and subsidiary havecommon directors and officers

3. the parent finances the subsidiary4. the parent subscribes to all the

capital stock of the subsidiary orotherwise causes its incorporation

5. the subsidiary has grosslyinadequate capital

6. the parent pays the salaries andother expenses or losses of thesubsidiary

7. the subsidiary has substantially nobusiness except with the parentcorp. or no assets except thoseconveyed to or by the parent corp.

8. in the papers of the parent corp. orin the statements of its officers, thesubsidiary is described as a

department or division of the parentcorp. or its business or financialresponsibility is referred as theparent’s own

9. the parent uses the property of thesubsidiary as its own

10. the directors or the executives of thesubsidiary do not act independentlyin the interest of the subsidiary buttake their orders from the parentcorp. in the latter’s interest

11. the formal legal requirements of thesubsidiary are not observed

(Garrett vs. Southern Railway)

Parent-Subsidiary Relationship

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(Note: Sir Jack said that we must not stopafter we’ve gone through the 11 points inorder to determine whether or not there is asubsidiary or instrumentality. We must gofurther and consider other circumstanceswhich may help determine clearly the truenature of the relationship. --- Em)

GARRETT VS. SOUTHERN RAILWAY (173 F.Supp. 915, E.D. Tenn. 1959)

This case involved a Workers Compensationclaim by a wheel moulder employed by Lenoir CarWorks. The plaintiff sought to claim from SouthernRailway Company, which acquired the entire capitalstock of Lenoir Car Works. Plaintiff contended thatSouthern so completely dominated Lenoir that the latterwas a mere adjunct or instrumentality of Southern.

The general rule is that stock ownership alone by

one corporation of the stock of another does not therebyrender the dominant corporation liable for the torts of thesubsidiary, unless the separate corporate existence of thesubsidiary is a mere sham, or unless the control of thesubsidiary is such that it is but an instrumentality oradjunct of the dominant corporation.

In the case, it was found that there were twodistinct operations. There was no evidence that Southerndictated the management of Lenoir. In fact, evidenceshows that Marius, the manager of the subsidiary, was infull control of the operation. He established prices,

handled negotiations in CBAs, etc. Lenoir paid localtaxes, had local counsel and maintain a Workmen’sCompensation Fund. There was also no evidence thatLenoir was run solely for the benefit of Southern. In fact,a substantial part of its requirements in the field ofoperation of Lenoir was bought elsewhere. Lenoir soldsubstantial quantities to other companies. Policydecisions remained in the hands of Marius. Hence, thecomplaint against Southern Railway was dismissed.

KOPPEL VS. YATCO (77 Phil. 496; 1946)

This case involved a complaint for the recovery ofmerchant sales tax paid by Koppel (Philippines), Inc.under protest to the Collector of InternalRevenue. Although the Court of First Instance did notdeny legal personality to Koppel (Philippines), Inc. forany and all purposes, it dismissed the complaint sayingthat in the transactions involved in the case, the publicinterest and convenience would be defeated and wouldamount to a perpetration of tax evasion unless resort washad to the doctrine of "disregard of the corporate fiction."

The facts show that 99.5% of the shares of stocksof K-Phil were owned by K-USA. K-Phil. acted as arepresentative of K-USA and not as an agent. K-Phil. also

bore alone its own incidental expenses (e.g. Cableexpenses) and also those of its “principal”. Moreover, K-Phil’s share in the profits was left in the hands of K -USA. Clearly, K-Phil was a mere branch or dummy of K-USA, and was therefore liable for merchant sales tax. Toallow otherwise would be to sanction a circumvention ofour tax laws and permit a tax evasion of no mean

proportion and the consequent commission of a graveinjustice to the Government. Moreover, it would allowthe taxpayer to do by indirection what the tax laws

prohibit to be done directly.

LIDDELL & CO. VS. CIR (2 SCRA 632; 1961)

Liddel Motors Inc. was an alter ego of Liddel &Co. At the time of its incorporation, 98% of the LiddelInc.’s stock belonged to Frank Liddel. As to LiddelMotors, Frank supplied the original capital funds. The

bulk of the business of Liddel Inc. was channeled throughLiddel Motors. Also, Liddel Motors pursued no otheractivities except to secure cars, trucks and spare partsfrom Liddel Inc. and then sell them to the general public.

To allow the taxpayer to deny tax liability on theground that the sales were made through another anddistinct corporation when it is proved that the latter isvirtually owned by the former or that they were practicallyone and the same is to sanction the circumvention of taxlaws.

YUTIVO VS. CTA (1 SCRA 160; 1961)

Southern Motors was actually owned andcontrolled by Yutivo as to make it a mere subsidiary or

branch of the latter created for the purpose of sellingvehicles at retail. Yutivo financed principally, if notwholly, the business of Southern Motors and actuallyexceeded the credit of the latter . At all times, Yutivo,through the officers and directors common to it and theSouthern Motors exercised full control over the cashfunds, policies, expenditures and obligations of thelatter. Hence, Southern Motors, being a mereinstrumentality or adjunct of Yutivo, the CTA correctlydisregarded the technical defense of separate corporateidentity in order to arrive at the true tax liability of Yutivo.

LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953)

The La Campana Gaugau Packing and LaCampana Coffee Factory were operating under one single

business although with 2 trade names. It is a settleddoctrine that the fiction of law of having the corporateidentity separate and distinct from the identity of the

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persons running it cannot be invoked to further theend subversive of the purpose for which it wascreated. In the case at bar, the attempt to make the two

businesses appear as one is but a device to defeat the endsof the law governing capital and labor relations andshould not be permitted to prevail.

PROMOTER’S CO NTRACTS PRIOR TOINCORPORATION

While a corporation couldnot have been a party to apromoter's contract since it did yetexist at the time the contract wasentered into and thus could not

possibly have had an agent whocould legally bind it, the corporationmay make the contracts its own andbecome bound thereon if, afterincorporation, it:

(1) Adopts or ratifies thecontract; or

(2) Accepts its benefitswith knowledge of theterms thereof.

It must be noted, however, that thecontract must be adopted in itsentirety; the corporation cannotadopt only the part that is beneficialto it and discard that which isburdensome. Moreover, thecontract must be one which is withinthe powers of the corporation toenter, and one which the usualagents of the company have expressor implied authority to enter.

McARTHUR V. TIMES PRINTING CO. (48 Minn.319, 51 N.W. 216; 1892)

It is not a requisite that a corporation's adoptionor acceptance of a promoter's contract be expressed, but itmay be inferred from acts or acquiescence on the part ofthe corporation, or its authorized agents, as any similaroriginal contract might be shown.

The right of agents to adopt an agreementoriginally made by promoters depends upon the purposesof the corporation and the nature of the agreement. Theagreement must be one which the corporation itself couldmake and one which the usual agents of the companyhave express or implied authority to enter into.

CLIFTON v. TOMB (21 F. 2d 893; 1921)

Whatever may be the proper legal theory bywhich a corporation may be bound by the contract(ratification, adoption, novation, a continuing offer to beaccepted or rejected by the corporation), it is necessary inall cases that the corporation should have full knowledgeof the facts, or at least should be put upon such notice aswould lead, upon reasonable inquiry, to the knowledge ofthe facts.

CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223; 1937)

A promoter could not have acted as agent for acorporation that had no legal existence. A corporation,until organized, has no life therefore no faculties. Thecorporation had no juridical personality to enter into acontract.

Also see Caram v. CA

Should the other contractingparty fail to perform its part of thebargain, the corporation which hasadopted or ratified the contract may

either sue for:

(1) Specific performance;or

(2) Damages resultingfrom breach ofcontract.

The fact of bringing an action on thecontract has been held to constitutesufficient adoption or ratification togive the corporation a cause ofaction.

BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17S.W. 2d 715; 1929)

When the corporation was formed, theincorporators took upon themselves the whole thing, andratified all that had been done on its behalf. Though therewas no formal assignment of the contract to thecorporation, the acts of the incorporators were an adoptionof the contract. Therefore the corporation has the right tosue for damages for the breach of contract.

Liability of Corporation for Promoter’sContracts

Corporate Rights under Promoter’sContracts

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RIZAL LIGHT V. PSC (25 SCRA 285; 1968)

The incorporation of (Morong) and its acceptanceof the franchise as shown by this action in prosecuting theapplication filed with the Commission for approval ofsaid franchise, not only perfected a contract between themunicipality and Morong but also cured the deficiency

pointed out by the petition. The fact that Morong did nothave a corporate existence on the day the franchise wasgranted does not render the franchise invalid, as Moronglater obtained its certificate of incorporation and acceptedthe franchise.

GENERAL RULE: Promoters are personallyliable on their contracts made on behalf of a corporation to be

formed.

EXCEPTION: If there is an express orimplied agreement to thecontrary. It must be notedthat the fact that thecorporation when formedhas adopted or ratified thecontract does not releasethe promoter fromresponsibility unless anovation was intended.

WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E.873; 1915)

Individual promoters cannot escape liabilitywhere they buy machinery, receive them in their

possession and authorize one member to issue a note, incontemplation of organizing a corporation which was notformed. (see Campos' notes p. 258-259). The agent is

personally liable for contracts if there is no principal. Themaking of partial payments by the corporation, when

later formed, does not release the promoters here fromliability because the corporation acted as a mere stranger

paying the debt of another, the acceptance of which bythe creditor does not release the debtors from liability overthe balance. Hence, there is no adoption or ratification.

HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp.936; 1963)

The rule is that if the contract is partly to be performed before incorporation, the promoters solely are

liable. Even if the promoter signed "on behalf ofcorporation to be formed, who will be obligor," there washere an intention of the parties to have a present obligor,

because three-fourths of the payment are to be made at thetime the drawings or plans in the architectural contract arecompleted, with or without incorporation. A purportedadoption by the corporation of the contract must beexpressed in a novation or agreement to that effect. The

promoter is liable unless the contract is to be construed tomean: 1) that the creditor agreed to look solely to the newcorporation for payment; or 2) that the promoter did nothave any duty toward the creditor to form the corporationand give the corporation the opportunity to assume and

pay the liability.

QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d1056; 1961)

The promoters here are not liable because thecontract imposed no obligation on them to form acorporation and they were not named there asobligors/promissors. The creditor-plaintiff was aware ofthe inexistence of the corporation but insisted on namingit as obligor because the planting season was fastapproaching and he needed to dispose of the seedlings.There was no intent here by plaintiff-creditor to look tothe promoters for the performance of the obligation. Thisis an exception to the general rule that promoters are

personally liable on their contracts, though made on behalf of a corporation to be formed.

OLD DOMINION VS. BIGELOW (203 Mass. 159, 89 N.E. 193; 1909)

A promoter, notwithstanding his fiduciary dutiesto the corporation, may still sell properties to it, but hemust pursue one of four courses to make the contract

binding. These are: 1) provide an independent board ofofficers in no respect directly or indirectly under hiscontrol, and make full disclosure to the corporationthrough them; 2) make full disclosure of all material factsto each original subscriber of shares in the corporation; 3)

procure a ratification of the contract after disclosing itscircumstances by vote of the stockholders of thecompletely established corporation; or 4) be himself thereal subscriber of all the shares of the capital stockcontemplated as a part of the promotion scheme. The

promoter is liable, even if owning all the stock of thecorporation at the time of the transaction, if further

Personal Liability of Promoter on Pre-Incorporation Contracts

Fiduciary relationship between corporationand promoter

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original subscription to capital stock contemplated as anessential part of the scheme of promotion came in aftersuch transaction.

CORPORATE POWERS

To sue and be sued in its corporatename;

Of succession by its corporate name forthe period of time stated in the articles ofincorporation and the certificate ofincorporation;

To adopt and use a corporate seal;

To amend its articles of incorporation inaccordance with the provisions of thisCode;

To adopt by-laws not contrary to law,morals, or public policy, and to amend orrepeal the same in accordance with thisCode;

In case of stock corporations, to issue ofsell stocks to subscribers and to selltreasury stocks in accordance with theprovisions of this Code; and to admitmembers to the corporation if it be a non-stock corporation;

To purchase, receive, take, grant, hold,convey, sell, lease, pledge, mortgageand otherwise deal with such real andpersonal property, including securitiesand bonds of other corporations, as thetransaction of the lawful business of thecorporation may reasonably andnecessarily require, subject to thelimitations prescribed by law and theConstitution;

( NOTE : There are two (2) generalrestrictions on the power of the corp.to acquire and hold properties:

(1) that the property mustbe reasonable andnecessarily

required by thetransaction of its lawful business,and

(2) that the power shall besubject to thelimitations prescribed

by other special lawsand the Constitution.)

To adopt any plan of merger orconsolidation as provided in this Code;

To make reasonable donations, includingthose for the public welfare of forhospital, charitable, cultural, scientific,civic, or similar purposes:

Provided that: no corporation,domestic or foreign, shall give donations in

aid of any politicalparty or candidateor for purposes ofpartisan politicalactivity;

To establish pension, retirement andother plans for the benefit of its directors,trustees, officers and employees; and

To exercise such other powers as may beessential or necessary to carry out itspurpose or purposes as stated in itsarticles of incorporation.

Extension or shortening of thecorporate term (Sec. 37)

Increase or decrease of the capitalstock (Sec. 38)

Incur, create or increase bondedindebtedness (Sec. 38)

Denial of the pre-emptive right (Sec.39)

Sale or other disposition ofsubstantially all its assets. (Sec. 40)

A sale is deemed tosubstantially cover all thecorporate property and assets ifsuch sale renders thecorporation incapable ofcontinuing the business oraccomplishing the purpose forwhich it was incorporated.

Acquisition of its own shares. (Sec.41)

Investment in another corporation orbusiness. (Sec. 42)

Declaration of dividends. (Sec. 43)

Entering into managementcontracts. (Sec. 44)

General Powers of Corporation (Sec. 36)

Specific Powers of Corporation

Implied Powers

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Under Sec. 36, a corporation is given such powers as

are essential or necessary to carry out its purpose or purposesas stated in the articles of incorporation. This phrase gives riseto such a wide range of implied powers, that it would not be atall difficult to defend a corporate act versus an allegation that itis ultra vires.

A corporation is presumed to act within its powers andwhen a contract is not its face necessarily beyond its authority;it will, in the absence of proof to the contrary, be presumed valid.

Black’s Law Dictionary Definition:

Ultra vires acts are those acts beyond the scope of thepowers of the corporation, as defined by its charter or laws ofstate of incorporation. The term has a broad application andincludes not only acts prohibited by the charter, but acts whichare in excess of powers granted and not prohibited, andgenerally applied either when a corporation has no power

whatever to do an act, or when the corporation has the powerbut exercises it irregularly.

Q: What are the consequences of ultravires acts?

The corporation may be dissolved undera quo warrranto proceeding.

The Certificate of Registration may besuspended or revoked by the SEC.

Parties to the ultra vires contract will be

left as they are, if the contract has beenfully executed on both sides. Neitherparty can ask for specific performance, ifthe contract is executory on bothsides. The contract, provided that it isnot illegal, will be enforced, where oneparty has performed his part, and theother has not with the latter havingbenefited from the former’s perfo rmance.

Any stockholder may bring an individualor derivative suit to enjoin a threatenedultra vires act or contract. If the act orcontract has already been performed, aderivative suit for damages against thedirectors maybe filed, but their liability willdepend on whether they acted in goodfaith and with reasonable diligence inentering into the contracts. When thesuit against the injured party who had noknowledge that the corporation wasengaging in an act not included expresslyor impliedly in its purposes clause.

Ultra vires acts may become binding bythe ratification of all the stockholders,unless third parties are prejudicedthereby, or unless the acts are illegal.

REPUBLIC OF THE PHILS. v. ACOJE MINING (7SCRA 361; 1963 )

Resolution adopted by the company to open a post office branch at the mining camp and to assume soleand direct responsibility for any dishonest, careless ornegligent act of its appointed postmaster is NOT ULTRAVIRES because the act covers a subject which concernsthe benefit, convenience, and welfare of the company’semployees and their families.

While as a rule an ultra vires act is one committedoutside the object for which a corporation is created asdefined by the law of its organization and therefore

beyond the powers conferred upon it by law, there arehowever certain corporate acts that may be performedoutside of the scope of the powers expressly conferred ifthey are necessary to promote the interest or welfare ofthe corporation.

CARLOS v. MINDORO SUGAR CO. (57 SCRA 343,1932)

The BOD of the Phil Trust Co. adopted aresolution which authorized its president to purchase at

par and in the name of the corp. bonds of MSC. These bonds were later resold and guaranteed by PTC to third persons. PTC paid plaintiff the corresponding interest payments until July 1, 1928 when it alleged that it is not bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal andvoid.

Held: The act of guaranty by PTC was well within itscorporate powers. Furthermore, having received moneyor property by virtue of the contract which is not illegal,it is estopped from denying liability. Even if the then

prevailing law (Corp. Law) prohibited PTC fromguaranteeing bonds with a total value in excess of itscapital, with all the MSC properties transferred to PTC

based on the deed of trust, sufficient assets were madeavailable to secure the payment of the correspondingliabilities brought about by the bonds.

GOV’T v. EL HOGAR (50 Phil 399; 1932)

(This case is an example of how the implied powersconcept may be used to justify certain acts of acorporation.)

A quo warranto proceeding instituted by the Gov't againstEl Hogar, a building and loan ass'n to deprive it of its corp.franchise.

The Ultra Vires Doctrine

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1. El Hogar held title to real property for a period in excessof 5 years in good faith, hence this cause will not prosper.

2. El Hogar owned a lot and bldg. at a business district inManila allegedly in excess of its reasonable requirements,held valid bec, it was found to be necessary and legallyacquired and developed.

3. El Hogar leased some office space in its bldg.; itadministered and managed properties belonging todelinquent SHs; and managed properties of its SHs evenif such were not mortgaged to them.

Held: first two valid, but the third is ultra vires bec.the administration of property in that manner is more

befitting of the business of a real estate agent or trustcompany and not of a building and loan ass'n.

4. Compensation to the promoter and organizerallegedly excessive and unconscionable.

Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is thecorp. or its SHs who may bring a complaint on such.

5. Issuance of special shares did not affect El Hogar'scharacter as a building and loan ass'n nor make its loansusurious.

6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec. accdg. to the SC, the by-laws expressly authorizes the BOD to determine each yearthe amount to be written down upon the expenses ofinstallation and the property of the corp.

7. The Corp. Law does not expressly grant the power ofmaintaining reserve funds but such power is implied. All

business enterprises encounter periods of gains andlosses, and its officers would usually provide for thecreation of a reserve to act as a buffer for suchcircumstances.

8. That loans issued to member borrowers are being usedfor purposes other than the bldg. of homes not invalid bec.there is no statute which expressly declares that loans may

be made by these ass'ns solely for the purpose of bldg.homes.

9. Sec. 173 of the Corp. Law provides that "any person"may become a SH on a bldg. and loan ass'n. The word"person" is used on a broad sense including not onlynatural persons but also artificial persons.

BISSEL v. MICHIGAN SOUTHERN ( 22 NY 258;1860)

Two railroad corporations contend that theytranscended their own powers and violated their ownorganic laws. Hence, they should not be held liable forthe injury of the plaintiff who was a passenger in one oftheir trains.

Held: The contract between the two corporations was anultra vires act. However, it is not one tainted withillegality, therefore, the accompanying rights andobligations based on the contract of carriage betweenthem and the plaintiff cannot be avoided by raising sucha defense.

PIROVANO v. DELA RAMA STEAMSHIP (96 Phil335 , 1954)

This case involved the issue of whether or not thedefendant corporation performed an ultra vires act bydonating the life insurance proceeds to the minor childrenof Pirovano, the deceased president of the defendantcompany under whose management the company grewand progressed to become a multi-million pesocorporation.

Held: NO.

The AOI of the corporation provided two relevantitems:

“(1) to invest and deal with moneys of thecompany not immediately required, insuch manner as from time to time may bedetermined; and

(2) to aid in any other manner any person,association or corporation of which anyobligation or in which any interest is held

by this corporation or in the affairs of prosperity of which this corporation hasa lawful interest.”

From this, it is obvious that the corporation properly exercised within its chartered powers the act ofavailing of insurance proceeds to the heirs of the insuredand deceased officer.

HARDEN v. BENGUET CONSOLIDATED (58 Phil141)

A contract between Benguet and Balatoc provided that Benguet will bring in capital, eqpt. andtechnical expertise in exchange for capital shares inBalatoc. Harden was a SH of Balatoc and he contendsthat this contract violated the Corp.Law which restrictsthe acquisition of interest by a

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mining corp. in another mining corp.

Held: Harden has no standing bec. if any violation has been committed, the same can be enforced only in acriminal prosecution by an action of quo warranto whichmay be maintained only by the Attorney-General.

CONTROL AND MANAGEMENT

Q: What are the three levels of corporatecontrol/power?

Board of directors or trustees- responsible forcorporate policies and the generalmanagement of the business and affairs ofthe corporation.

Officers- execute the policies laid down by the

board.Stockholders or members- have residualpower over fundamental corporate changeslike amendments of articles of incorporation.

Board of d i rec tors or t rus tees

Q: What are the powers of the BOD?

The BOD is responsible for corporate policiesand the general management of the businessaffairs of the corporation. (See Citibank vChua)

(a) Authority ( Sec. 24)

(b) Requirements

(i) Qualifying share ( Sec. 24)

(ii) Residence ( Sec. 24)

(iii) Nationality

(iv) Disqualifications ( Sec. 27) - conviction by final judgment ofoffense punishable > 6 yrs.prison

- violation of Corporation codewithin 5 years prior to date ofelection or appointment

(c) How elected ( Sec. 24)

The formula for determining the number of shares neededto elect a given number of directors is as follows:

X = Y x N1 + 1

N + 1

X = being the number of shares needed to elect a givennumber of directors

Y = being the total number of shares present orrepresented at the meeting

N1 = being the number of directors desired to beelected

N = being the total number of directors to be elected

(d) How removed ( Sec. 28)

By a vote of the SHs holding or representing at least2/3 of the outstanding capital stock, or by a vote of atleast 2/3 of the members entitled to vote, provided thatsuch removal takes place at either a regular meeting ofthe corporation or at a special meeting called for thepurpose. In both cases, there must be previous noticeto the SHs / members of the intention to propose suchremoval at the meeting.

Removal may be with or without cause. However,removal without cause may not be used to depriveminority SHs or members of the right of representationto which they may be entitled under Sec. 24 of theCode.

(e) How vacancy filled ( Sec. 29)

If vacancy due to removal Must be filledby the SHs in a regular or special meeting

or expiration of term: called for thatpurpose.

If "vacancy" due to increase Only by means of anelection at a regular or special SHs

in number of directors meeting dulycalled for the purpose, or in the same ortrustees: meeting authorizingthe increase of directors or trustees

if so stated inthe notice of the meeting.

All other vacancies: May be filled bythe vote of at least a majority of the

remainingdirectors or trustees, if still constituting a

quorum.

Note: Directors or trustees so elected to fill vacanciesshall be elected only for the unexpired

term of their predecessors in office.

(f) How compensated ( Sec. 30)

If provided in by-laws: That compensationstated in the by-laws.

If not provided in by-laws: Directors shall notreceive any compensation other than reasonable perdiems, as directors. However, compensation otherthan per diems may be granted to directors by amajority vote of the SHs at a regular or specialstockholders' meeting.

Note: In no case shall the total yearly compensationof directors, as such directors, exceed 10%

Allocation of Power and Control

Who Exercises Corporate Powers

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of the net income before income tax of thecorporation during the preceding year.

(g) Matters requiring Board of Directors' action

(h) Liability ( See subs equent d iscuss ion under Dut ies ofDirec tors and Contro l l ing Stockhold ers .)

(i) In general (Sec. 31)

(ii) Business judgment rule

(iii) Dealings with the corporation (Sec. 32)

(iv) Contracts between corporations with interlockingdirectors (Sec. 33)

(v) Disloyalty (Sec. 34)

(vi) Watered stocks (Sec. 65)

(i) Executive Committee ( Sec. 35)

See subsequent discussion under BoardCommittees.

RAMIREZ VS. ORIENTALIST CO ANDFERNANDEZ (38 Phil. 634; 1918)

In this case, the board of directors, before thefinancial inability of the corporation to proceed with the

project was revealed, had already recognized the contractsas being in existence and had proceed with the necessarysteps to utilize the films. The subsequent action by thestockholders in not ratifying the contract must be ignored.The functions of the stockholders are limited of nature.The theory of a corporation is that the stockholders mayhave all the profits but shall return over the completemanagement of the enterprise to their representatives andagents, called directors. Accordingly, there is little for thestockholders to do beyond electing directors, making by-laws, and exercising certain other special powers defined

by law. In conformity with this idea, it is settled thatcontracts between a corporation and a third person must

be made by directors and not stockholders.

LOPEZ VS. ERICTA (45 SCRA 539; 1972)

In this case, the Board of Regents of theUniversity of the Philippines terminated the ad interimappointment of Dr. Blanco as Dean of the College ofEducation by not acting on the matter. In the transcript ofthe meeting which was latter agreed to be deleted, it wasfound out that the BOR, consisting of 12 members, voted5 in favor of Dr. Blanco's appointment 3 voted against,and 4 abstained.

The core of the issue is WON the 4 abstentionswill be counted in favor of Dr. Blanco's appointment oragainst it. The SC held that such abstentions be counted

as negative vote considering that those who abstained, 3of which members of the Screening Committee, intendedto reject Dr. Blanco's appointment.

ZACHARY VS. MILLIN (294 Mic. 622; 1940)

The issue in this case is regarding the validity ofthe director's meeting at the company's laboratory onDecember 8, 1937 wherein Zachary was removed as

president of the company. Zachary that he was notnotified of the meeting thus, the action was void. On theother hand, the defendants contend that the noticerequirement was waived by Zachary's presence at themeeting.

The SC held that the validity of the meeting wasnot affected by the failure to give notice as required by the

by-laws, provided that the parties were personally present. Since all the parties were present at the meetingof December 8, and understood that the meeting was to bea directors' meeting, then the action taken is final and maynot be voided by any informality in connection with its

being called.

PNB VS. CA (83 SCRA 238; 1978)

The action was brought by the mortgagor(Tapnio) against PNB for damages in connection with thefailure of the latter's board of directors to actexpeditiously on the proposed lease of the former's sugarquota to one Tuazon.

The Supreme Court held that while the PNB hasthe ultimate authority to approve or disapprove the

proposed lease since the quota was mortgaged to PNB, thelatter certainly cannot escape liability for observing, forthe protection of the interest of the private respondents,that degree of care, precaution and vigilance which thecircumstances justly demand in approving ordisapproving the lease of the said sugar quota.

Corpora te off icers and agents

(a) Minimum set of officers and theirqualifications ( Sec. 25)

The minimum set of officers are:

(1) president (who shall be adirector);

(2) secretary (who shall be aresident and Filipino citizen);and

(3) treasurer (who may or may notbe a director)

The by-laws, however, may provide for otherofficers.

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Any 2 or more positions may be held

concurrently by the same person, except that noone shall act as (a) president and secretary, or (b)president and treasurer at the same time.

(b) Disqualifications ( Sec. 27)

- Conviction by final judgment of an offensepunishable by imprisonment > 6 yrs.

- Violation of Corporation Code committedwithin 6 yrs. prior to the date of election or

appointment

(c) Liability in general ( Sec. 31)

See discussion under Duties of Directors andControlling Stockholders. .

(d) Dealings with the corporation ( Sec. 32)

- Generally voidable ( See discussion underDuties of Directors and Controlling

Stockhol ders)

What is the doctrine of apparent authority?

The doctrine of apparentauthority provides that a corporationwill be liable to innocent thirdpersons for the acts of its agentwhere the representation was madeby the agent in the course ofbusiness and acting within his/hergeneral scope of authority eventhough, in the particular case, theagent is secretly abusing hisauthority and attempting toperpetrate a fraud upon his/herprincipal or some other person forhis/her own ultimate benefit.

FIRST PHILIPPINE INTERNATIONAL BANK &RIVERA v. CA ( January 24, 1996)

The authority of a corporate officer in dealingwith third persons may be actual or apparent. Thedoctrine of "apparent authority," with special reference to

banks, was laid out in Prudential Bank v. CA (223 SCRA350) where it was held that:

A bank is liable for thewrongful acts of itsofficers done in theinterest of the bank or inthe course of dealings ofthe officers in theirrepresentative capacity

but not for acts outsidethe scope of theirauthority. A bank

holding out its officersand agents as worthy ofconfidence will not be

permitted to profit by thefrauds they may thus beenabled to perpetrate inthe apparent scope oftheir employment; norwill it be permitted toshrink from itsresponsibility for suchfrauds, even though no

benefit may accrue tothe bank therefrom.

Accordingly, a bank is liable to innocent third persons where the representation is made in the course ofits business by its agent acting within the general scope ofhis authority even though, in the particular case, the agentis secretly abusing his authority and attempting to

perpetrate a fraud upon his principal or some other personfor his own ultimate benefit. Application of these

principles is especially necessary because banks have afiduciary relationship with the public and their stabilitydepends on the confidence of the people in their honestyand efficiency. Such faith will be eroded where banks donot exercise strict care in the selection and supervision ofits employees, resulting in prejudice to their depositors.

YU CHUCK V. KONG LI PO (46 Phil. 608; 1924)

The power to bind a corporation by contract lieswith its board of directors or trustees. Such power may beexpressly or impliedly be delegated to other officers andagents of the corporation. It is also well settled thatexcept where the authority of employing servants oragents is expressly vested in the board, officers or agentswho have general control and management of thecorporation's business, or at least a specific part thereof,may bind the corporation by the employment of suchagents and employees as are usual and necessary in theconduct of such business. Those contracts ofemployment should be reasonable. Case at bar: contractof employment in the printing business was too long andonerous to the business (3-year employment; shall receivesalary even if corp. is insolvent).

THE BOARD OF LIQUIDATORS V. HEIRS OFMAXIMO KALAW (20 SCRA 987; 1967)

Kalaw was a corporate officer entrusted withgeneral management and control of NACOCO. He hadimplied authority to make any contract or do any actwhich is necessary for the conduct of the business. He

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may, without authority from the board, perform acts ofordinary nature for as long as these redound to the interestof the corporation. Particularly, he contracted forwardsales with business entities. Long before some of thesecontracts were disputed, he contracted by himself alone,without board approval. All of the members of the boardknew about this practice and have entrusted fully suchdecisions with Kalaw. He was never questioned norreprimanded nor prevented from this practice. In fact, the

board itself, through its acts and by acquiescence, havelaid aside the by-law requirement of prior boardapproval. Thus, it cannot now declare that these contracts(failures) are not binding on NACOCO.

ZAMBOANGA TRANSPO V. BACHRACHMOTORS (52 Phil. 244; 1928)

A chattel mortgage, although not approved by the board of directors as stipulated in the by-laws, shall still be valid and binding when the corporation, through the board, tacitly approved and ratified it. The following actsof the board constitute implied ratification:

1. Erquiaga is one of the largest stockholder, and was theall-in-one officer (he was the President, GM,Attorney, Auditor, etc.)

2. Two other directors approved his actions andexpressed satisfaction with the advantages obtained

by him in securing the chattel mortgage.

3. The corporation took advantage of the benefits of thechattel mortgage. There were even partial paymentsmade with the knowledge of the three directors.

ACUNA V. BATAC PRODUCERS COOPERATIVEMARKETING ASSOCIATION (20 SCRA 526; 1967)

Acuna entered into an agreement with Verano,manager of PROCOMA, in which the former would beconstituted as the latter's agent in Manila. Acunadiligently went about his business and even used personalfunds for the benefit of the corporation. During the face-to-face meeting with the board, Acuna was assured thatthere need not be any board approval for his constitutionas agent for it would only be a mere formality. Later on,the board disapproved the agency and did not payhim. The SC ruled that the agreement was valid due tothe ratification of the corp. proven by these acts:

1. He was assured by the board that no boardapproval was necessary.

2. He delivered P 20,000, performed his workwith the knowledge of the board.

3. Due to acquiescence, the board cannotdisown or disapprove the contract.

Board Comm it tees

The By-laws of the corporation maycreate an executive committee, composed ofnot less than 3 members of the Board, to beap