Select Jurisprudential Pronouncements and Rulings in Corporation Law

Prepared By: Alimar Mohammad Malabad

“CAPITAL” UNDER THE CONSTITUTION REFERS ONLY TO SHARES OF STOCK THAT CAN VOTE
IN ELECTION OF DIRECTORS

The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common shares, and not to
the total outstanding capital stock comprising both common and non-voting preferred shares. As
revealed in the deliberations of the Constitutional Commission, "capital" refers to the voting stock or
controlling interest of a corporation.

Preferred shares are to be factored in only if they are entitled to vote in the election of directors. If
preferred shares have no voting rights, then they cannot elect members of the board of directors,
which wields control of the corporation.

THREE SAFEGUARDS WITH RESPECT TO STOCK CORPORATIONS ENGAGED IN THE BUSINESS

OF A PUBLIC UTILITY

(1) 60% of its capital must be owned by Filipino citizens; (2) participation of foreign investors in its
board of directors is limited to their proportionate share in its capital; and (3) all its executive and
managing officers must be citizens of the Philippines. (Roy III vs Herbosa, per Caguioa, J.)

APPLICATION OF GRANDFATHER RULE DOES NOT ABSTAIN FROM THE CONTROL TEST

The Control Test and the Grandfather Rule are not, as it were, incompatible ownership-determinant
methods that can only be applied alternative to each other. Rather, these methods can, if appropriate,
be used cumulatively in the determination of the ownership and control of corporations engaged in
fully or partly nationalized activities like mining operations or the operation of public utilities.

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and
control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied. Put in another manner, if the subject
corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered
foreign-owned, in which case, the need to resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement
can be considered a Filipino corporation if there is no doubt as to who has the "beneficial ownership"
and "control" of the corporation. In that instance, there is no need for a dissection or further inquiry
on the ownership of the corporate shareholders in both the investing and investee corporation or the
application of the Grandfather Rule. As a corollary rule, even if the 60-40 Filipino to foreign equity ratio
is apparently met by the subject or investee corporation, a resort to the Grandfather Rule is necessary
if doubt exists as to the locus of the "beneficial ownership" and "control." In this case, a further
investigation as to the nationality of the personalities with the beneficial ownership and control of the
corporate shareholders in both the investing and investee corporations is necessary.

APPLICATION OF THE GRANDFATHER RULE-STOCK ATTRIBUTION

The Grandfather Rule was originally conceived to look into the citizenship of the individuals who
ultimately own and control the shares of stock of a corporation for purposes of determining compliance
with the constitutional requirement of Filipino ownership.

As defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the percentage of
Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities,
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
Prepared By: Alimar Mohammad Malabad

provided for under the Constitution and other nationalization laws, is computed, in cases where
corporate shareholders are present, by attributing the nationality of the second or even subsequent
tier of ownership to determine the nationality of the corporate shareholder." Thus, to arrive at the
actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the
corporation are determined.

DOUBT; INDICATORS

The "doubt" that demands the application of the Grandfather Rule in addition to or in tandem with the
Control Test is not confined to, or more bluntly, does not refer to the fact that the apparent Filipino
ownership of the corporation’s equity falls below the 60% threshold. Rather, "doubt" refers to various
indicia that the "beneficial ownership" and "control" of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders.

"Significant indicators of the dummy status" have been recognized in view of reports "that some Filipino
investors or businessmen are being utilized or [are] allowing themselves to be used as dummies by
foreign investors" specifically in joint ventures for national resource exploitation. These indicators are:

1. That the foreign investors provide practically all the funds for the joint investment undertaken by
these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological support for the joint
venture;
3. That the foreign investors, while being minority stockholders, manage the company and prepare all
economic viability studies. (Narra Nickel Mining and Development Corp., vs Redmont
Consolidated Mines Corp., per Velasco, Jr., J.)

PRIOR RIGHT IN CORPORATE NAME REGISTRATION

In this case, FICCPI was incorporated on March 14, 2006. On the other hand, ICCPI was incorporated
only on April 5, 2006, or a month after FICCPI registered its corporate name. Thus, applying the
principle in the Refractories case, we hold that FICCPI, which was incorporated earlier, acquired a prior
right over the use of the corporate name.

ICCPI cannot argue that it first incorporated and held the "Filipino Indian Chamber of Commerce," in
1977; and that it established the name's goodwill until it failed to renew its name due to oversight. 49 It
is settled that a corporation is ipso facto dissolved as soon as its term of existence expires.50 SEC
Memorandum Circular No. 14-2000 likewise provides for the use of corporate names of dissolved
corporations:

The name of a dissolved firm shall not be allowed to be used by other firms within three (3) years after
the approval of the dissolution of the corporation by the Commission, unless allowed by the last
stockholders representing at least majority of the outstanding capital stock of the dissolved firm.

When the term of existence of the defunct FICCPI expired on November 24, 2001, its corporate name
cannot be used by other corporations within three years from that date, until November 24, 2004.
FICCPI reserved the name "Filipino Indian Chamber of Commerce in the Philippines, Inc." on January
20, 2005, or beyond the three-year period. Thus, the SEC was correct when it allowed FICCPI to use
the reserved corporate name.

CC EXPRESSLY PROHIBITS THE USE OF A CORPORATE NAME WHICH IS IDENTICAL OR

DECEPTIVELY OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
Prepared By: Alimar Mohammad Malabad

To fall within the prohibition, two requisites must be proven, to wit:

1. that the complainant corporation acquired a prior right over the use of such corporate name; and
2. the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar to that of any existing corporation or to any other name already
protected by law; or
(c) patently deceptive, confusing or contrary to existing law.

Proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur.

The word "Filipino" is merely a description, referring to a Filipino citizen or one living in the Philippines,
to describe the corporation's members. On the other, the words "in the Philippines" and "Phils., Inc."
are simply geographical locations of the corporations which, even if appended to both the corporate
names, will not make one distinct from the other. Under the facts of this case, these words cannot be
separated from each other such that each word can be considered to add distinction to the corporate
names. Taken together, the words in the phrase "in the Philippines" and in the phrase "Phils. Inc." are
synonymous—they both mean the location of the corporation. (Indian Chamber of Commerce
Phils., Inc. vs Filipino Indian Chamber of Commerce in the Philippines, Inc., per Jardeleza,
J.)

REGISTRATION OF TRANSFER OF SHARES OF STOCK MINISTERIAL DUTY ON THE PART OF

THE CORPORATION; LIMITATION

In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not
try to decide the question of ownership. Aggrieved parties may then resort to the remedy of mandamus
to compel corporations that wrongfully or unjustifiably refuse to record the transfer or to issue new
certificates of stock. This remedy is available even upon the instance of a bona fide transferee who is
able to establish a clear legal right to the registration of the transfer. This legal right inherently flows
from the transferee's established ownership of the stocks. The only limitation imposed by Section 63
of the Corporation Code is when the corporation holds any unpaid claim against the shares intended
to be transferred.

A mere endorsement of stock certificates by the supposed owners of the stock could not be the basis
of an action for mandamus in the absence of express instructions from them. By the import of Section
63 of the Corporation Code, the stock and transfer book would be the main reference book in
ascertaining a person's entitlement to the rights of a stockholder. Consequently, without the
registration of the transfer, the alleged transferee could not yet be recognized as a stockholder who is
entitled to be given a stock certificate.

In the instant case, however, the submitted documents did not merely consist of an endorsement.
Rather, petitioner presented several undisputed documents, among which was respondent Oraiz's
letter to Chute denying her request to transfer the stock standing in her name in favor of Andaya. This
letter clearly indicated that the registered owner herself had requested the registration of the transfer
of shares of stock. (Andaya vs Rural Bank of Cabadbaran, per Sereno, C.J.)

NATURE OF A CERTIFICATE OF STOCK

A certificate of stock is a written instrument signed by the proper officer of a corporation stating or
acknowledging that the person named in the document is the owner of a designated number of shares
of its stock. It is prima facie evidence that the holder is a shareholder of a corporation. A certificate,
however, is merely a tangible evidence of ownership of shares of stock. It is not a stock in the
corporation and merely expresses the contract between the corporation and the stockholder. The
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
Prepared By: Alimar Mohammad Malabad

shares of stock evidenced by said certificates, meanwhile, are regarded as property and the owner of
such shares may, as a general rule, dispose of them as he sees fit, unless the corporation has been
dissolved, or unless the right to do so is properly restricted, or the owner's privilege of disposing of his
shares has been hampered by his own action.

TRANSFERABILITY OF SHARES OF STOCK

The provision on the transfer of shares of stocks contemplates no restriction as to whom they may be
transferred or sold. As owner of personal property, a shareholder is at liberty to dispose of them in
favor of whomsoever he pleases, without any other limitation in this respect, than the general
provisions of law.

MINIMUM REQUISITES FOR VALID TRANSFER OF STOCKS

(a) there must be delivery of the stock certificate; (b) the certificate must be endorsed by the owner
or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) to be valid
against third parties, the transfer must be recorded in the books of the corporation.

The delivery contemplated in Section 63, however, pertains to the delivery of the certificate of shares
by the transferor to the transferee, that is, from the original stockholder named in the certificate to
the person or entity the stockholder was transferring the shares to, whether by sale or some other
valid form of absolute conveyance of ownership. "Shares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed. Title may be vested in the transferee by the delivery
of the duly indorsed certificate of stock."

It is thus clear that Teng's position - that Ting Ping must first surrender Chiu's and Maluto's respective
certificates of stock before the transfer to Ting Ping may be registered in the books of the corporation
- does not have legal basis. The delivery or surrender adverted to by Teng, i.e., from Ting Ping to TCL,
is not a requisite before the conveyance may be recorded in its books. To compel Ting Ping to deliver
to the corporation the certificates as a condition for the registration of the transfer would amount to a
restriction on the right of Ting Ping to have the stocks transferred to his name, which is not sanctioned
by law.

Respondent Ting Ping Lay was able to establish prima facie ownership over the shares of stocks in
question, through deeds of transfer of shares of stock of TCL Corporation. Petitioners could not
repudiate these documents. Hence, the transfer of shares to him must be recorded on the corporation's
stock and transfer book. In the same vein, Teng cannot refuse registration of the transfer on the
pretext that the photocopies of Maluto's certificates of stock submitted by Ting Ping covered only 1,305
shares and not 1,440. As earlier stated, the respective duties of the corporation and its secretary to
transfer stock are purely ministerial.

ISSUACE OF CERTIFICATE OF STOCKS IS GENERALLY REGULATED BY CORPORATION’S BY-

LAWS; ISSUANCE OF NEW CERTIFICATE IN THE NAME OF TRANSFEREE GOVERNED BY CORP
CODE-REQUISITES

First, the certificates must be signed by the president or vice-president, countersigned by the secretary
or assistant secretary, and sealed with the seal of the corporation.
Second, delivery of the certificate is an essential element of its issuance.
Third, the par value, as to par value shares, or the full subscription as to no par value shares, must
first be fully paid.
Fourth, the original certificate must be surrendered where the person requesting the issuance of a
certificate is a transferee from a stockholder.
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
Prepared By: Alimar Mohammad Malabad

The surrender of the original certificate of stock is necessary before the issuance of a new one so that
the old certificate may be cancelled. A corporation is not bound and cannot be required to issue a new
certificate unless the original certificate is produced and surrendered. Surrender and cancellation of
the old certificates serve to protect not only the corporation but the legitimate shareholder and the
public as well, as it ensures that there is only one document covering a particular share of stock.

In the case at bench, Ting Ping manifested from the start his intention to surrender the subject
certificates of stock to facilitate the registration of the transfer and for the issuance of new certificates
in his name. It would be sacrificing substantial justice if the Court were to grant the petition simply
because Ting Ping is yet to surrender the subject certificates for cancellation instead of ordering in this
case such surrender and cancellation, and the issuance of new ones in his name. (Teng vs SEC, per
Reyes, J.)

NEGLECT OF AUTHORIZED OFFICER TO CALL A MEETING

Where there is an officer authorized to call a meeting and that officer refuses, fails, or neglects to call
a meeting, the SEC can assume jurisdiction and issue an order to the petitioning stockholder to call a
meeting pursuant to its regulatory and administrative powers to implement the Corporation Code.

If it be true that the Corporate Secretary refused to call a meeting despite fervent demand from the
MSCOC, the remedy of the stockholders would have been to file a petition to the SEC to direct him to
call a meeting by giving proper notice required under the Code. To rule otherwise would open the
floodgates to abuse where any stockholder, who consider himself aggrieved by certain corporate
actions, could call a special stockholders' meeting for the purpose of removing the sitting officers in
direct violation of the rules pertaining to the call of meeting laid down in the by-laws.

ILLEGAL VS ULTRA VIRES ACTS; VOID MEETING RESULTS TO VOID ACTS IN SUCH MEETING

The former contemplates the doing of an act which are contrary to law, morals or public policy or public
duty, and are, like similar transactions between individuals, void: They cannot serve as basis of a court
action nor acquire validity by performance, ratification or estoppel. Mere ultra vires acts, on the other
hand, or those which are not illegal or void ab initio, but are not merely within the scope of the articles
of incorporation, are merely voidable and may become binding and enforceable when ratified by the
stockholders.

Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in the MSC by-
laws can it be gathered that the Oversight Committee is authorized to step in wherever there is breach
of fiduciary duty and call a special meeting for the purpose of removing the existing officers and electing
their replacements even if such call was made upon the request of shareholders. Needless to say, the
MSCOC is neither empowered by law nor the MSC by-laws to call a meeting and the subsequent
ratification made by the stockholders did not cure the substantive infirmity, the defect having set in at
the time the void act was done. The defect goes into the very authority of the persons who made the
call for the meeting. It is apt to recall that illegal acts of a corporation which contemplate the doing of
an act which is contrary to law, morals or public order, or contravenes some rules of public policy or
public duty, are, like similar transactions between individuals, void. They cannot serve as basis for a
court action, nor acquire validity by performance, ratification or estoppel.

Consequently, such Special Stockholders' Meeting called by the Oversight Committee cannot have any
legal effect. The removal of the Bernas Group, as well as the election of the Cinco Group, effected by
the assembly in that improperly called meeting is void, and since the Cinco Group has no legal right to
sit in the board, their subsequent acts of expelling Bernas from the club and the selling of his shares.
at the public auction, are likewise invalid. (Bernas vs Cinco, per Perez, J.)
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
Prepared By: Alimar Mohammad Malabad

ACTION FOR INJUNCTION FILED BY A CORPORATION GENERALLY DOES NOT LIE TO

PREVENT THE ENFORCEMENT OF STOCKHOLDER’S RIGHT TO INSPECTION

The Corporation Code provides that a stockholder has the right to inspect the records of all business
transactions of the corporation and the minutes of any meeting at reasonable hours on business days.
The stockholder may demand in writing for a copy of excerpts from these records or minutes, at his
or her expense.

CORPORATION’S OBJECTIONS TO THE RIGHT TO INSPECT MUST BE RAISED AS A DEFENSE;

EXAMPLES OF PROPER AND IMPROPER PURPOSES

1. The person demanding to examine and copy excerpts from the corporation's records and minutes
has not improperly used any information secured through any previous examination of the records of
such corporation; and 2. The demand is made in good faith or for a legitimate purpose.

Among the purposes held to justify a demand for inspection are the following: (1) To ascertain the
financial condition of the company or the propriety of dividends; (2) the value of the shares of stock
for sale or investment; (3) whether there has been mismanagement; (4) in anticipation of
shareholders' meetings to obtain a mailing list of shareholders to solicit proxies or influence voting;
(5) to obtain information in aid of litigation with the corporation or its officers as to corporate
transactions. Among the improper purposes which may justify denial of the right of inspection are: (1)
Obtaining of information as to business secrets or to aid a competitor; (2) to secure business
"prospects" or investment or advertising lists; (3) to find technical defects in corporate transactions in
order to bring "strike suits" for purposes of blackmail or extortion.

Good faith and a legitimate purpose are presumed. It is the duty of the corporation to allege and prove
with sufficient evidence the facts that give rise to a claim of bad faith as to the existence of an
illegitimate purpose.

The confidentiality of business transactions is not a magical incantation that will defeat the request of
a stockholder to inspect the records. Although it is true that the business is entitled to the protection
of its trade secrets and other intellectual property rights, facts must be pleaded to convince the court
that a specific stockholder's request for inspection, under certain conditions, would violate the
corporation's own legal right.

REMEDY FOR UNJUST DENIAL OF RIGHT TO INSPECT

The act of PASAR in filing a petition for injunction with prayer for writ of preliminary injunction is
uncalled for. The petition is a pre-emptive action unjustly intended to impede and restrain the
stockholders' rights. If a stockholder demands the inspection of corporate books, the corporation could
refuse to heed to such demand. When the corporation, through its officers, denies the stockholders of
such right, the latter could then go to court and enforce their rights. It is then that the corporation
could set up its defenses and the reasons for the denial of such right. Thus, the proper remedy available
for the enforcement of the right of inspection is undoubtedly the writ of mandamus to be filed by the
stockholders and not a petition for injunction filed by the corporation. (Philippine Associated
Smelting and Refining Corp. vs Lim, per Leonen, J.)

CORPORATE LEGAL SUITS

Individual suits are filed when the cause of action belongs to the stockholder personally, and not to
the stockholders as a group, or to the corporation, e.g. denial of right to inspection and denial of
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
Prepared By: Alimar Mohammad Malabad

dividends to a stockholder. If the cause of action belongs to a group of stockholders, such as when the
rights violated belong to preferred stockholders, a class or representative suit may be filed to
protect the stockholders in the group.

A derivative suit, on the other hand, is one which is instituted by a shareholder or a member of a
corporation, for and in behalf of the corporation for its protection from acts committed by directors,
trustees, corporate officers, and even third persons. The whole purpose of the law authorizing a
derivative suit is to allow the stockholders/members to enforce rights which are derivative (secondary)
in nature, i.e., to enforce a corporate cause of action.

REQUISITES OF A DERIVATIVE SUIT

a) The party bringing suit should be a shareholder as of the time of the act or transaction complained
of, the number of his shares not being material;
b) He has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors
for the appropriate relief but the latter has failed or refused to heed his plea; and
c) The cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit.

In a strict sense, the first cause of action, and the reliefs sought, should have been brought through a
derivative suit. The first cause of action pertains to the corporate right of ALRAI involving its corporate
properties which it owned by virtue of the Deeds of Donation. In derivative suits, the real party-in-
interest is the corporation, and the suing stockholder is a mere nominal party. A derivative suit,
therefore, concerns "a wrong to the corporation itself. In this case, the reliefs sought do not entail the
premature distribution of corporate assets. On the contrary, the reliefs seek to preserve them for the
corporate interest of ALRAI. Clearly then, any benefit that may be recovered is accounted for, not in
favor of respondents, but for the corporation, who is the real party-in-interest.

POWER OF A CORPORATION TO VALIDLY GRANT OR CONVEY ANY OF ITS REAL OR

PERSONAL PROPERTIES CIRCUMSCRIBED BY ITS PRIMARY PURPOSE

It is therefore important to determine whether the grant or conveyance is pursuant to a legitimate

corporate purpose, or is at least reasonable and necessary to further its purpose. (Agdao Residents,
Inc. vs Maramion, per Jardeleza, J.)

EXISTING INTRA-CORPORATE DISPUTE WHICH DOES NOT CONSTITUTE A CONTINUATION

OF CORPORATE BUSINESS NOT AFFECTED BY THE SUBSEQUENT DISSOLUTION OF THE
CORPORATION

A corporation’s board of directors is not rendered functus officio by its dissolution. Since Section 122
allows a corporation to continue its existence for a limited purpose, necessarily there must be a board
that will continue acting for and on behalf of the dissolved corporation for that purpose. In fact, Section
122 authorizes the dissolved corporation’s board of directors to conduct its liquidation within three
years from its dissolution. Jurisprudence has even recognized the board’s authority to act as trustee
for persons in interest beyond the said three-year period. Thus, the determination of which group is
the bona fide or rightful board of the dissolved corporation will still provide practical relief to the parties
involved.

The same is true with regard to Vitaliano’s shareholdings in the dissolved corporation. A party’s
stockholdings in a corporation, whether existing or dissolved, is a property right which he may vindicate
against another party who has deprived him thereof. The corporation’s dissolution does not extinguish
such property right.
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
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Corporate dissolution will not extinguish any liability already incurred by the corporation, its
stockholders, directors, or officers. In short, Section 145 preserves a corporate actor’s cause of action
and remedy against another corporate actor. In so doing, Section 145 also preserves the nature of the
controversy between the parties as an intra-corporate dispute.

The dissolution of the corporation simply prohibits it from continuing its business. However, despite
such dissolution, the parties involved in the litigation are still corporate actors. The dissolution does
not automatically convert the parties into total strangers or change their intra-corporate relationships.
Neither does it change or terminate existing causes of action, which arose because of the corporate
ties between the parties. Thus, a cause of action involving an intra-corporate controversy remains and
must be filed as an intra-corporate dispute despite the subsequent dissolution of the corporation.

RELATIONSHIP AND NATURE OF THE CONTROVERSY TESTS

Initially, the main consideration in determining whether a dispute constitutes an intra-corporate

controversy was limited to a consideration of the intra-corporate relationship existing between or
among the parties. The types of relationships embraced under Section 5(b) were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners, members, or
officers;
c) between the corporation, partnership, or association and the State as far as its franchise, permit or
license to operate is concerned; and
d) among the stockholders, partners or associates themselves.

However, it is not the mere existence of an intra-corporate relationship that gives rise to an intra-
corporate controversy; to rely on the relationship test alone will divest the regular courts of their
jurisdiction for the sole reason that the dispute involves a corporation, its directors, officers, or
stockholders. We saw that there is no legal sense in disregarding or minimizing the value of the nature
of the transactions which gives rise to the dispute.

Under the nature of the controversy test, the incidents of that relationship must also be considered for
the purpose of ascertaining whether the controversy itself is intra-corporate. The controversy must not
only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the
enforcement of the parties' correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are
merely incidental to the controversy or if there will still be conflict even if the relationship does not
exist, then no intra-corporate controversy exists.

Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of intra-corporate
or partnership relations, and (b) the nature of the question subject of the controversy must be such
that it is intrinsically connected with the regulation of the corporation or the enforcement of the parties’
rights and obligations under the Corporation Code and the internal regulatory rules of the corporation.
So long as these two criteria are satisfied, the dispute is intra-corporate and the RTC, acting as a
special commercial court, has jurisdiction over it. (Aguirre vs FBQ+7, Inc., per Del Castillo, J.)

REQUISITES OF A STOCKHOLDERS’ OR MEMBERS’ MEETING; IN NON-STOCK

CORPORATIONS, QUORUM IS DETERMINED BY THE MAJORITY OF ITS ACTUAL MEMBERS;
QUORUM DIFFERENT FROM VOTING RIGHTS; ILLUSTRATION

In corporate parlance, the term "meeting" applies to every duly convened assembly either of
stockholders, members, directors, trustees, or managers for any legal purpose, or the transaction of
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business of a common interest. Under Philippine corporate laws, meetings may either be regular or
special. A stockholders' or members' meeting must comply with the following requisites to be valid:

1. The meeting must be held on the date fixed in the By-Laws or in accordance with law;
2. Prior written notice of such meeting must be sent to all stockholders/members of record;
3. It must be called by the proper party;
4. It must be held at the proper place; and
5. Quorum and voting requirements must be met.

Of these five (5) requirements, the existence of a quorum is crucial. Any act or transaction made
during a meeting without quorum is rendered of no force and effect, thus, not binding on the
corporation or parties concerned.

For stock corporations, the quorum is based on the number of outstanding voting stocks while for non-
stock corporations, only those who are actual, living members with voting rights shall be counted in
determining the existence of a quorum.

The basis in determining the presence of quorum in non-stock corporations is the numerical equivalent
of all members who are entitled to vote, unless some other basis is provided by the By-Laws of the
corporation. The qualification "with voting rights" simply recognizes the power of a non-stock
corporation to limit or deny the right to vote of any of its members. To include these members without
voting rights in the total number of members for purposes of quorum would be superfluous for although
they may attend a particular meeting, they cannot cast their vote on any matter discussed therein.

Applying the law and Condocor's By-Laws, if there are 100 members in a non-stock corporation, 60 of
which are members in good standing, then the presence of 50% plus 1 of those members in good
standing will constitute a quorum. Thus, 31 members in good standing will suffice in order to consider
a meeting valid as regards the presence of quorum. The 31 members will naturally have to exercise
their voting rights. It is in this instance when the number of voting rights each member is entitled to
becomes significant. If 29 out of the 31 members are entitled to 1 vote each, another member (known
as A) is entitled to 20 votes and the remaining member (known as B) is entitled to 15 votes, then the
total number of voting rights of all 31 members is 64. Thus, majority of the 64 total voting rights,
which is 33 (50% plus 1), is necessary to pass a valid act. Assuming that only A and B concurred in
approving a specific undertaking, then their 35 combined votes are more than sufficient to authorize
such act.

OWNER-DEVELOPER OF A CONDOMINIUM PROJECT MAY BE A MEMBER OF A CONDOMINIUM

CORPORATION; MAY APPOINT DULY AUTHORIZED REPRESENTATIVES MERELY TO VOTE BUT
CANNOT BE VOTED FOR AS DIRECTORS

Ownership of a unit entitles one to become a member of a condominium corporation. The Condominium
Act does not provide a specific mode of acquiring ownership. Thus, whether one becomes an owner of
a condominium unit by virtue of sale or donation is of no moment.

Individual respondents who are non-members cannot be elected as directors and officers of the
condominium corporation. While Moldex may rightfully designate proxies or representatives, the latter,
however, cannot be elected as directors or trustees of Condocor. First, the Corporation Code clearly
provides that a director or trustee must be a member of record of the corporation. Further, the power
of the proxy is merely to vote. If said proxy is not a member in his own right, he cannot be elected as
a director or proxy. (Lim vs Moldex Land, Inc., per Mendoza, J.)
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OFFLINE INTERNATIONAL AIR CARRIER SELLING PASSAGE TICKETS IN THE PHILIPPINES

THROUGH A GENERAL SALES AGENT A RESIDENT FOREIGN CORPORATION DOING BUSINESS
IN THE PHILIPPINES; WHAT CONSTITUTES DOING BUSINESS IN THE PHILIPPINES

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business.
Each case must be judged in the light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the business organization.
In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character.

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose
of petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner. There is
nothing on record to show that Aerotel solicited orders alone and for its own account and without
interference from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any
contract on behalf of [petitioner Air Canada] without the express written consent of [the latter,]" and
it must perform its functions according to the standards required by petitioner. Through Aerotel,
petitioner is able to engage in an economic activity in the Philippines. Further, petitioner was issued
by the Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for a period
of five years, or from April 24, 2000 until April 24, 2005. Petitioner is, therefore, a resident foreign
corporation. (Air Canada vs CIR, per Leonen, J.)

UNLICENSED FOREIGN CORPORATIONS DOING BUSINESS IN THE PHILIPPINE DO NOT

HAVE THE CAPACITY TO SUE BEFORE THE LOCAL COURTS; BUY AND SELL TRANSACTION
DOES NOT CONSTITUTE DOING BUSINESS

In addition to Steelcase products, DISI also distributed products of other companies including carpet
tiles, relocatable walls and theater settings. The dealership agreement between Steelcase and DISI
had been described by the owner himself as: “basically a buy and sell arrangement whereby we would
inform Steelcase of the volume of the products needed for a particular project and Steelcase would, in
turn, give ‘special quotations’ or discounts after considering the value of the entire package. In making
the bid of the project, we would then add out profit margin over Steelcase’s prices. After the approval
of the bid by the client, we would thereafter place the orders to Steelcase. The latter, upon our
payment, would then ship the goods to the Philippines, with us shouldering the freight charges and
taxes.” From the preceding facts, the only reasonable conclusion that can be reached is that DISI was
an independent contractor, distributing various products of Steelcase and of other companies, acting
in its own name and for its own account.

DOCTRINE OF ESTOPPEL TO DENY CORPORATE EXISTENCE APPLIES TO FOREIGN AS WELL

AS TO DOMESTIC CORPORATIONS

One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its
corporate existence and capacity: The principle will be applied to prevent a person contracting with a
foreign corporation from later taking advantage of its noncompliance with the statutes chiefly in cases
where such person has received the benefits of the contract.
Unquestionably, entering into a dealership agreement with Steelcase charged DISI with the knowledge
that Steelcase was not licensed to engage in business activities in the Philippines. This Court has
carefully combed the records and found no proof that, from the inception of the dealership agreement
in 1986 until September 1998, DISI even brought to Steelcase’s attention that it was improperly doing
business in the Philippines without a license. It was only towards the latter part of 1998 that DISI
deemed it necessary to inform Steelcase of the impropriety of the conduct of its business without the
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requisite Philippine license. It should, however, be noted that DISI only raised the issue of the absence
of a license with Steelcase after it was informed that it owed the latter US$600,000.00 for the sale and
delivery of its products under their special credit arrangement.

By acknowledging the corporate entity of Steelcase and entering into a dealership agreement with it
and even benefiting from it, DISI is estopped from questioning Steelcase’s existence and capacity to
sue. (Steelcase, Inc. vs Design International Selections, Inc., per Mendoza, J.)

DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION APPLIES WHEN CORPORATION

SEEKS TO EVADE SUBSIDIARY LIABILITY FOR DAMAGES IN A CRIME OR TO AVOID
EXECUTION OF FINAL JUDGMENT

Where the main purpose in forming the corporation was to evade one’s subsidiary liability for damages
in a criminal case, the corporation may not be heard to say that it has a personality separate and
distinct from its members, because to allow it to do so would be to sanction the use of fiction of
corporate entity as a shield to further an end subversive of justice.

The RTC had sufficient factual basis to find that petitioner and Travel and Tours Advisers, Inc. were
one and the same entity, specifically:– (a) documents submitted by petitioner in the RTC showing that
William Cheng, who claimed to be the operator of Travel and Tours Advisers, Inc., was also the
President/Manager and an incorporator of the petitioner; and (b) Travel and Tours Advisers, Inc. had
been known in Sorsogon as Goldline. There is no reason why defendant company would be using
Goldline buses in its operations unless the two companies are actually one and the same. (Gold Line
Tours, Inc. vs Heirs of Lacsa, per Bersamin, J.)

WHEN DIRECTOR, TRUSTEE OR OFFICER PERSONALLY LIABLE

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

‘1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence
in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
‘2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection thereto;
‘3. He agrees to hold himself personally and solidarily liable with the corporation; or
‘4. He is made, by a specific provision of law, to personally answer for his corporate action.

BAD FAITH OR GROSS NEGLIGENCE; MUST BE ESTABLISHED CLEARLY AND CONVINCINGLY

Bad faith "imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, not
simply bad judgment or negligence." "It means breach of a known duty through some motive or
interest or ill will; it partakes of the nature of fraud."

Piercing the corporate veil in order to hold corporate officers personally liable for the corporation’s
debts requires that "the bad faith or wrongdoing of the director must be established clearly and
convincingly as bad faith is never presumed.

The mere fact that Morning Star has been incurring huge losses and that it has no assets at the time
it contracted large financial obligations to IATA, cannot be considered that its officers, Defendants-
Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and Wong Yan Tak, acted in
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bad faith or such circumstance would amount to fraud, warranting personal and solidary liability of its
corporate officers. The same is also true with the fact that Morning Star Management Ventures
Corporation and Pic ‘N Pac Mart, Inc., corporations having the same set of officers as Morning Star,
were doing relatively well during the time that the former incurred huge losses. Thus, only Morning
Star should be held personally liable to Plaintiff- Appellee, and not its corporate officers.

Mere allegations that Morning Star Management Ventures Corporation and Pic ‘N Pac Mart, Inc. "were
doing relatively well during the time that respondent Morning Star was incurring huge losses"86 do
not establish bad faith or fraud by the individual respondents. Such allegations alone do not prove that
the individual respondents were transferring respondent Morning Star’s properties in fraud of its
creditors. Neither does the allegation that Morning Star Management Ventures Corporation has title
over the land and building where the offices can be found establish bad faith or fraud. Petitioner did
not show that this title was originally in respondent Morning Star’s name and was later transferred to
respondent Morning Star.

CONTROL TEST FOR THE OPERATION OF ALTER EGO DOCTRINE

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so that the corporate entity
as to this transaction had at the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must [have] proximately caused the injury or unjust loss
complained of. (Pioneer Insurance Surety Corp. vs Morning Start Travel & Tours, Inc., per
Leonen, J.)

INSTRUMENTALITY RULE; ILLUSTRATION

Where it appears that business enterprises are owned, conducted and controlled by the same parties,
law and equity will disregard the legal fiction that these corporations are distinct entities and shall treat
them as one. This is in order to protect the rights of third persons.

Vicmar is the employer of respondents despite the allegations that a number of them were assigned
to the branches of Vicmar. Petitioners failed to refute the contention that Vicmar and its branches have
the same owner and management - which included one resident manager, one administrative
department, one and the same personnel and finance sections. Notably, all respondents were
employed by the same plant manager, who signed their identification cards some of whom were under
Vicmar, and the others under TFDI. (Vicmar Development Corp. vs Elarcosa, per Del Castillo, J.)

PIERCING DOCTRINE IN ALTER EGO OR BUSINESS CONDUIT CASES; ILLUSTRATION

A corporation has a separate and distinct personality from its stockholders, and from other corporations
it may be connected with. However, such personality may be disregarded, or the veil of corporate
fiction may be pierced attaching personal liability against responsible person if the corporation's
personality "is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is
used as a device to defeat the labor laws." By responsible person, we refer to an individual or entity
responsible for, and who acted in bad faith in committing illegal dismissal or in violation of the Labor
Code; or one who actively participated in the management of the corporation. Also, piercing the veil
of corporate fiction is allowed where a corporation is a mere alter ego or a conduit of a person, or
another corporation.
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Petitioners and DMI jointly filed their Position Paper, Reply, and Rejoinder in contesting respondents'
illegal dismissal. Perplexingly, petitioners argued that they were not part of DMI and were not privy to
its dealings; yet, petitioners, along with DMI, collectively raised arguments on the illegal dismissal case
against them. Petitioners denied having any participation in the management and operation of DMI;
however, they were aware of and disclosed the circumstances surrounding respondents' employment,
and propounded arguments refuting that respondents were illegally dismissed. Petitioners revealed the
annual compensation of respondents and their length of service; they also set up the defense that
respondents were merely project employees, and were not terminated but that DMI's contract with its
client was discontinued resulting in the absence of hauling projects for respondents. If only to prove
that they were not part of DMI, petitioners could have revealed who operated it, and from whom they
derived the information embodied in their pleadings. Such failure to reveal thus gives the Court reasons
to give credence to respondents' firm stand that petitioners are no strangers to DMI, and that they
were the ones who managed and operated it.

Spouses Smith categorically identified petitioners as the owners and managers of DMI. In their Motion
to Quash, however, petitioners neither denied the allegation of spouses Smith nor adduced evidence
to establish that they were not the owners and managers of DMI. They simply insisted that they could
not be held personally liable because of the immutability of the final and executory NLRC Decision, and
of the separate and distinct personality of DMI.

WHEN PIERCING ALLOWED EVEN AFTER FINAL JUDGMENT AND ON EXECUTION

Piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded, and be
held solidarily liable even after final judgment and on execution, provided that such persons
deliberately used the corporate vehicle to unjustly evade the judgment obligation, or resorted to fraud,
bad faith, or malice in evading their obligation. (Dutch Movers, Inc. vs Lequin, per Del Castillo,
J.)

PIERCING OF CORPORATE VEIL MUST BE DONE WITH CAUTION; 3 BASIC AREAS

Whether the separate personality of the corporation should be pierced hinges on obtaining facts
appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when
necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote
unfair objectives.

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of
public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.

INSTRUMENTALITY OR CONTROL TEST OF THE ALTER EGO DOCTRINE; ILLUSTRATION

The instrumentality or control test of the alter ego doctrine requires not mere majority or complete
stock control, but complete domination of finances, policy and business practice with respect to the
transaction in question. The corporate entity must be shown to have no separate mind, will, or
existence of its own at the time of the transaction.
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Spouses Celones are incorporators, directors, and majority stockholders of the ATSI and PPPC. But
that is all that CMCI has proven. There is no proof that PPPC controlled the financial policies and
business practices of ATSI either in July 2001 when Felicisima proposed to set off the unpaid ₱3.2
million mobilization fund with CMCI's rental of Prodopak machines; or in August 2001 when the lease
agreement between CMCI and ATSI commenced. Assuming arguendo that Felicisima was sufficiently
clothed with authority to propose the offsetting of obligations, her proposal cannot bind ATSI because
at that time the latter had no transaction yet with CMCI. Besides, CMCI had leased only one Prodopak
machine. Felicisima's reference to the Prodopak machines in its letter in July 2001 could only mean
that those were different from the Prodopak machine that CMCI had leased from A TSI.

Contrary to the claim of CMCI, none of the letters from the Spouses Celones tend to show that ATSI
was even remotely involved in the proposed offsetting of the outstanding debts of CMCI and PPPC.
Even Felicisima's letter to the new management of CMCI in 2003 contains nothing to support CMCI's
argument that Felicisima represented herself to be clothed with authority to propose the offsetting.

FRAUD TEST AND HARM TEST

The fraud test, which is the second of the three-prong test to determine the application of the alter
ego doctrine, requires that the parent corporation's conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. Under the third prong, or the harm test, 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 has to be established. (California Manufacturing Company,
Inc. vs Advanced Technology System, Inc., per Sereno, C.J.)

CORPORATE OFFICERS WHO ARE LIABLE FOR VIOLATION OF BP 33 (PROHIBITED ACTS

INVOLVING PETROLEUM PRODUCTS)

When the offender is a corporation, partnership, or other juridical person, the president, the general
manager, managing partner, or such other officer charged with the management of the business affairs
thereof, or employee responsible for the violation shall be criminally liable. (Federated LPG Dealers
Association vs Del Rosario, per Del Castillo, J.)

MERGER SHALL ONLY BE EFFECTIVE UPON ISSUANCE OF A CERTIFICATE OF MERGER BY

SEC; FAVORABLE RECOMMENDATION OF APPROPRIATE GOVERNMENT AGENCY FOR
SPECIAL CORPORATIONS NOT ENOUGH; EFFECTS

Where a party to the merger is a special corporation governed by its own charter, the Code particularly
mandates that a favorable recommendation of the appropriate government agency should first be
obtained.

In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered
with the SEC due to incomplete documentation. Consequently, the SEC did not issue the required
certificate of merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines
recognized such merger, the fact remains that no certificate was issued by the SEC. Such merger is
still incomplete without the certification.

The issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval
but it also marks the moment when the consequences of a merger take place. By operation of law,
upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights and
properties, as well as liabilities, shall be taken and deemed transferred to and vested in the surviving
corporation.
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The same rule applies to consolidation which becomes effective not upon mere agreement of the
members but only upon issuance of the certificate of consolidation by the SEC. When the SEC, upon
processing and examining the articles of consolidation, is satisfied that the consolidation of the
corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it issues
a certificate of consolidation which makes the reorganization official. The new consolidated corporation
comes into existence and the constituent corporations are dissolved and cease to exist.

There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as respondents,
the two corporations shall not be considered as one but two separate corporations. Thus, in the instant
case, as far as third parties are concerned, the assets of FISLAI remain as its assets and cannot be
considered as belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment wherein FISLAI
assigned its assets and properties to DSLAI, and the latter assumed all the liabilities of the former.
(Mindanao Savings and Loan Association, Inc. vs Willkom, per Nachura, J.)

LIABILITY FOR A CONTRACT ENTERED INTO ON BEHALF OF AN UNINCORPORATED

ASSOCIATION OR OSTENSIBLE CORPORATION MAY LIE IN A PERSON WHO MAY NOT HAVE
DIRECTLY TRANSACTED ON ITS BEHALF BUT REAPED BENEFITS FROM THAT CONTRACT

Even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped
from denying its corporate existence. "The reason behind this doctrine is obvious — an unincorporated
association has no personality and would be incompetent to act and appropriate for itself the power
and attributes of a corporation as provided by law; it cannot create agents or confer authority on
another to act in its behalf; thus, those who act or purport to act as its representatives or agents do
so without authority and at their own risk. And as it is an elementary principle of law that a person
who acts as an agent without authority or without a principal is himself regarded as the principal,
possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting
to act on behalf of a corporation which has no valid existence assumes such privileges and obligations
and becomes personally liable for contracts entered into or for other acts performed as such agent.

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

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In
the first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility
for a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated
it as a corporation and received benefits from it, may be barred from denying its corporate existence
in a suit brought against the alleged corporation. In such case, all those who benefited from the
transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took advantage of. (Lim Tong Lim vs Philippine
Fishing Gear Industries, Inc., per Panganiban, J.)

ACQUISITION OF STOCKS BY SUCCESSION AND MERE INCLUSION AS STOCKHOLDER IN THE

GIS DOES NOT BIND CORPORATION

Madrid's inheritance of Angela's shares of stock does not ipso facto afford him the rights accorded to
such majority ownership of FSVCI's shares of stock. Verily, all transfers of shares of stock must be
registered in the corporate books in order to be binding on the corporation. Specifically, this refers to
the Stock and Transfer Book. An owner of shares of stock cannot be accorded the rights pertaining to
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a stockholder - such as the right to call for a meeting and the right to vote, or be voted for - if his
ownership of such shares is not recorded in the Stock and Transfer Book.

While it may be true that petitioners were named as shareholders in the General Information Sheet
submitted to the SEC, that document alone does not conclusively prove that they are shareholders of
PFSC. The information in the document will still have to be correlated with the corporate books of
PFSC. As between the General Information Sheet and the corporate books, it is the latter that is
controlling.

In light of the foregoing, Madrid could not have made a valid call of the November 18, 2009 Meeting
as his stock ownership of FSVCI as registered in the Stock and Transfer Book is only 4.16% in view of
the non-registration of Angela's shares of stock in the FSVCI Stock and Transfer Book in his favor. As
there was no showing that he was able to remedy the situation by the time the meeting was held, the
conduct of such meeting, as well as the matters resolved therein, including the reorganization of the
FSVCI Board of Directors and the election of new corporate officers, should all be declared null and
void. (F&S Velasco Co., Inc. vs Madrid, per Perlas-Bernabe, J.)

ONE OF THE EFFECTS OF A MERGER IS THAT THE SURVIVING COMPANY SHALL INHERIT NOT
ONLY THE ASSETS, BUT ALSO THE LIABILITIES OF THE CORPORATION IT MERGED WITH

Sumifru's contention that it should only be held liable for the period when Baya stayed with DFC as it
only merged with the latter and not with AMSFC is untenable. In this case, it is worthy to stress that
both AMSFC and DFC are guilty of acts constitutive of constructive dismissal performed against Baya.
As such, they should be deemed as solidarily liable for the monetary awards in favor of Baya.
Meanwhile, Sumifru, as the surviving entity in its merger with DFC, must be held answerable for the
latter's liabilities, including its solidary liability with AMSFC arising herein. (SUMIFRU vs Baya, per
Perlas-Bernabe, J.)

SERVICE OF SUMMONS UPON A DOMESTIC CORPORATION

If the defendant is a domestic private juridical entity, service may be made on its president, managing
partner, general manager, corporate secretary, treasurer, or in-house counsel. It has been held that
this enumeration is exclusive. Service on a domestic private juridical entity must, therefore, be made
only on the person expressly listed in Section 11, Rule 14 of the Rules of Court. If the service of
summons is made upon persons other than those officers enumerated in Section 11, the same is
invalid.

There is no dispute that respondent Expressions is a domestic corporation duly existing under the laws
of the Republic of the Philippines, and that respondent Bon Huan is its president. Thus, for the trial
court to acquire jurisdiction, service of summons to it must be made to its president, Bon Huan, or to
its managing partner, general manager, corporate secretary, treasurer, or in-house counsel. It is
further undisputed that the questioned second service of summons was made upon Ochotorina, who
was merely one of the secretaries of Bon Huan, and clearly, not among those officers enumerated
under Section 11 of Rule 14. The service of summons upon Ochotorina is thus void and, therefore,
does not vest upon the trial court jurisdiction over Expressions. (Interlink Movie Houses, Inc. vs
Lim, per Martires, J.)
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GOOD FAITH NOT AN EXCUSE TO EXEMPT FROM THE EFFECTS OF A MERGER OR

CONSOLIDATION

The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations.

Pursuant to such merger and consolidation, BPI's right to foreclose the mortgage on petitioner's
property depends on the status of the contract and the corresponding obligations of the parties
originally involved, that is, the agreement between its predecessor BSA and petitioner. Since BSA
incurred delay in the performance of its obligations and subsequently cancelled the omnibus line
without petitioners' consent, its successor BPI cannot be permitted to foreclose the loan for the reason
that its successor BSA violated the terms of the contract even prior to petitioners' justified refusal to
continue paying the amortizations. (Sps. Ong vs BPI Family Savings Bank, per Reyes, Jr., J.)

IN DETERMINING THE EXISTENCE OF CONFUSING SIMILARITY IN CORPORATE NAMES, THE

TEST IS WHETHER THE SIMILARITY IS SUCH AS TO MISLEAD A PERSON USING ORDINARY
CARE AND DISCRIMINATION

In so doing, the Court must look to the record as well as the names themselves.

Petitioner's assertion that the words "Montessori International of Malolos, Inc." are four distinctive
words that are not found in respondents' corporate names so that their corporate name is not identical,
confusingly similar, patently deceptive or contrary to existing laws, does not avail. As correctly held
by the SEC OGC, all these words, when used with the name "De La Salle," can reasonably mislead a
person using ordinary care and discretion into thinking that petitioner is an affiliate or a branch of, or
is likewise founded by, any or all of the respondents, thereby causing confusion.

The phrase "De La Salle" is not merely a generic term. Respondents' use of the phrase being suggestive
and may properly be regarded as fanciful, arbitrary and whimsical, it is entitled to legal protection.
Petitioner's use of the phrase "De La Salle" in its corporate name is patently similar to that of
respondents that even with reasonable care and observation, confusion might arise. The Court notes
not only the similarity in the parties' names, but also the business they are engaged in. They are all
private educational institutions offering pre-elementary, elementary and secondary courses. As aptly
observed by the SEC En Banc, petitioner's name gives the impression that it is a branch or affiliate of
respondents. It is settled that proof of actual confusion need not be shown. It suffices that confusion
is probable or likely to occur.

COMPARED TO LYCEUM CASE

The Court there held that the word "Lyceum" today generally refers to a school or institution of
learning. It is as generic in character as the word "university." Since "Lyceum" denotes a school or
institution of learning, it is not unnatural to use this word to designate an entity which is organized
and operating as an educational institution. Moreover, the Lyceum of the Philippines, Inc.'s use of the
word "Lyceum" for a long period of time did not amount to mean that the word had acquired secondary
meaning in its favor because it failed to prove that it had been using the word all by itself to the
exclusion of others. More so, there was no evidence presented to prove that the word has been so
identified with the Lyceum of the Philippines, Inc. as an educational institution that confusion will surely
arise if the same word were to be used by other educational institutions.

Here, the phrase "De La Salle" is not generic in relation to respondents. It is not descriptive of
respondent's business as institutes of learning, unlike the meaning ascribed to "Lyceum." Moreover,
respondent De La Salle Brothers, Inc. was registered in 1961 and the De La Salle group had been using
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the name decades before petitioner's corporate registration. In contrast, there was no evidence of the
Lyceum of the Philippines, Inc.'s exclusive use of the word "Lyceum," as in fact another educational
institution had used the word 17 years before the former registered its corporate name with the SEC.
Also, at least nine other educational institutions included the word in their corporate names. There is
thus no similarity between the Lyceum of the Philippines case and this case that would call for a similar
ruling. (De La Salle Montessori International of Malolos vs De La Salle Brothers, per
Jardeleza, J.)

TOTAL OUTSTANDING CAPITAL STOCKS WITHOUT DISTINCTION AS TO DISPUTED OR

UNDISPUTED SHARES OF STOCK BASIS IN DETERMINING THE PRESENCE OF QUORUM

The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders' meeting. Only stocks actually issued and outstanding may be voted. Thus, for stock
corporations, the quorum is based on the number of outstanding voting stocks. The distinction of
undisputed or disputed shares of stocks is not provided for in the law or the jurisprudence. Ubi lex non
distinguit nec nos distinguere debemus — when the law does not distinguish we should not distinguish.
(Que Villongco vs Que Yabut, per Tijam, J.)

ONCE A CORPORATION IS DISSOLVED BE IT VOLUNTARILY OR INVOLUNTARILY,

LIQUIDATION, WHICH IS THE PROCESS OF SETTLING THE AFFAIRS OF THE CORPORATION
WILL ENSUE

This consists of (1) collection of all that is due the corporation, (2) the settlement and adjustment of
claims against it, and (3) the payment of its debts.

From the foregoing, it is clear that, by the time MTLC executed the real estate mortgage agreement,
its juridical personality has already ceased to exist. The agreement is void as MTLC could not have
been a corporate party to the same. To be sure, a real estate mortgage is not part of the liquidation
powers that could have been extended to MTLC. It could not have been for the purposes of "prosecuting
and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets." It is, in fact, a new business in which MTLC no longer
has any business pursuing. (Rich vs Paloma, per Reyes, Jr., J.)

SUBSEQUENT INCORPORATION VALIDATES DEED OF DONATION EXECUTED PRIOR TO

INCORPORATION; DOCTRINE OF CORPORATION BY ESTOPPEL

The doctrine of corporation by estoppel is founded on principles of equity and is designed to prevent
injustice and unfairness. It applies when a non-existent corporation enters into contracts or dealings
with third persons. In which case, the person who has contracted or otherwise dealt with the non-
existent corporation is estopped to deny the latter's legal existence in any action leading out of or
involving such contract or dealing. While the doctrine is generally applied to protect the sanctity of
dealings with the public, nothing prevents its application in the reverse, in fact the very wording of the
law which sets forth the doctrine of corporation by estoppel permits such interpretation. Such that a
person who has assumed an obligation in favor of a non-existent corporation, having transacted with
the latter as if it was duly incorporated, is prevented from denying the existence of the latter to avoid
the enforcement of the contract.

Jurisprudence dictates that the doctrine of corporation by estoppel applies for as long as there is no
fraud and when the existence of the association is attacked for causes attendant at the time the
contract or dealing sought to be enforced was entered into, and not thereafter.
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
Prepared By: Alimar Mohammad Malabad

In this controversy, Purificacion dealt with the petitioner as if it were a corporation. This is evident
from the fact that Purificacion executed two (2) documents conveying her properties in favor of the
petitioner – first, on October 11, 1999 via handwritten letter, and second, on August 29, 2001 through
a Deed; the latter having been executed the day after the petitioner filed its application for registration
with the SEC. In this case, while the underlying contract which is sought to be enforced is that of a
donation, and thus rooted on liberality, it cannot be said that Purificacion, as the donor failed to acquire
any benefit therefrom so as to prevent the application of the doctrine of corporation by estoppel. To
recall, the subject properties were given by Purificacion, as a token of appreciation for the services
rendered to her during her illness. In fine, the subject deed partakes of the nature of a remuneratory
or compensatory donation, having been made "for the purpose of rewarding the donee for past
services, which services do not amount to a demandable debt."

Therefore, under the premises, past services constitutes consideration, which in turn can be regarded
as "benefit" on the part of the donor, consequently, there exists no obstacle to the application of the
doctrine of corporation by estoppel; although strictly speaking, the petitioner did not perform these
services on the expectation of something in return. Precisely, the existence of the petitioner as a
corporate entity is upheld in this case for the purpose of validating the Deed to ensure that the primary
objective for which the donation was intended is achieved, that is, to convey the property for the
purpose of aiding the petitioner in the pursuit of its charitable objectives. (The Missionary Sisters
of Our Lady of Fatima vs Alzona, per Reyes, Jr., J.)

WHO IS DEEMED TO BE A CORPORATE OFFICER; DISMISSAL AN INTRA-CORPORATE

DISPUTE

The creation of the position is under the corporation's charter or by-laws, and that the election of the
officer is by the directors or stockholders must concur in order for an individual to be considered a
corporate officer, as against an ordinary employee or officer. It is only when the officer claiming to
have been illegally dismissed is classified as such corporate officer that the issue is deemed an
intracorporate dispute which falls within the jurisdiction of the trial courts.

It is apparent from the By-laws of WUP that the president was one of the officers of the corporation,
and was an honorary member of the Board. He was appointed by the Board and not by a managing
officer of the corporation. We held that one who is included in the by-laws of a corporation in its roster
of corporate officers is an officer of said corporation and not a mere employee.

The alleged "appointment" of Maglaya instead of "election" as provided by the by-laws neither convert
the president of university as a mere employee, nor amend its nature as a corporate officer. With the
office specifically mentioned in the by-laws, the NLRC erred in taking cognizance of the case, and in
concluding that Maglaya was a mere employee and subordinate official because of the manner of his
appointment, his duties and responsibilities, salaries and allowances, and considering the Identification
Card, the Administration and Personnel Policy Manual which specified the retirement of the university
president, and the check disbursement as pieces of evidence supporting such finding.

A corporate officer's dismissal is always a corporate act, or an intracorporate controversy which arises
between a stockholder and a corporation, and the nature is not altered by the reason or wisdom with
which the Board of Directors may have in taking such action. The issue of the alleged termination
involving a corporate officer, not a mere employee, is not a simple labor problem but a matter that
comes within the area of corporate affairs and management and is a corporate controversy in
contemplation of the Corporation Code. (Wesleyan University-Philippines vs Maglaya, per
Peralta, J.)
 Select Jurisprudential Pronouncements and Rulings in Corporation Law
Prepared By: Alimar Mohammad Malabad

CORPORATION AND CORPORATE OFFICER’S LIABILITIES FOR ISSUANCE OF BOUNCING

CHECK

The general rule is that a corporate officer who issues a bouncing corporate check can be held civilly
liable when he is convicted. The criminal liability of the person who issued the bouncing checks in
behalf of a corporation stands independent of the civil liability of the corporation itself, such civil liability
arising from the Civil Code. But BP 22 itself fused this criminal liability with the corresponding civil
liability of the corporation itself by allowing the complainant to recover such civil liability, not from the
corporation, but from the person who signed the check in its behalf.

The civil liability of the corporate officer for the issuance of a bouncing corporate check attaches only
if he is convicted. Conversely, therefore, it will follow that once acquitted of the offense of violating BP
22, a corporate officer is discharged from any civil liability arising from the issuance of the worthless
check in the name of the corporation he represents. This is without regard as to whether his acquittal
was based on reasonable doubt or that there was a pronouncement by the trial court that the act or
omission from which the civil liability might arise did not exist. (Pilipinas Shell Petroleum Corp. VS
Duque, per Peralta, J.)

RESIDENCE OF A CORPORATION WITH RESPECT TO INSOLVENCY PROCEEDINGS

To determine the venue of an insolvency proceeding, the residence of a corporation should be the
actual place where its principal office has been located for six (6) months before the filing of the
petition. If there is a conflict between the place stated in the articles of incorporation and the physical
location of the corporation's main office, the actual place of business should control.

Requiring a corporation to go back to a place it has abandoned just to file a case is the very definition
of inconvenience. There is no reason why an insolvent corporation should be forced to exert whatever
meager resources it has to litigate in a city it has already left.

In any case, the creditors deal with the corporation's agents, officers, and employees in the actual
place of business. To compel a corporation to litigate in a city it has already abandoned would create
more confusion. Moreover, the six (6)-month qualification of the law's requirement of residence shows
intent to find the most accurate location of the debtor's activities. If the address in a corporation's
articles of incorporation is proven to be no longer accurate, then legal fiction should give way to fact.
(Pilipinas Shell Petroleum Corp. vs Royal Ferry Services, Inc., per Leonen, J.)