Philippine Corporate Law Syllabus
Philippine Corporate Law Syllabus
Paragon Mining Corp. v. CA, 497 SCRA 638 (2006); Cebu Bionic Builders Supply, v. DBP, 635 SCRA 13 (2010); Esguerra v. Holcim Phils., 704 SCRA
490 (2013).
Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).4
c. “JURIDICAL ENTITY” LEVEL: “The corporation’s juridical personality is primarily a medium
through which to pursue a business enterprise.”
4. “ TRI-LEVEL RELATIONSHIPS ” IN THE CORPORATE SETTING
a. “JURIDICAL ENTITY” RELATIONSHIP: Treats of the legal consequences arising from the
relationship between the State as the creator, and the
corporation as its creature.
b. “INTRA-CORPORATE” RELATIONSHIPS: Treat of the legal consequences arising from “corporate
contractual relationships” —
(1) Between the corporation and its agents (directors/trustees and officers) to act
in the real world, governed by Law on Agency transmuted into Corporate Law
doctrines;
(2) Between the corporation and its shareholders/members, governed primarily by
Corporate Law;
(3) Between shareholders/members and the directors/trustees and officers,
governed by the Law on Business Trusts transmuted into Corporate Law
doctrines;
(4) Among the shareholders or members in common venture, governed by
Corporate Law implementing Contract Law doctrines.
➢ Underpinned by the “Doctrine of Maximization of Shareholder Value”
c. “EXTRA-CORPORATE” RELATIONSHIPS: Deals with legal consequences arising from the
relationships of the corporation with the public it deals with or those affected by its
business enterprise —
(1) Between the corporation and those it contracts with, governed by various Laws on
Contracts;
(2) Between the corporation and its employees, governed by Labor Laws;
(3) Between the corporation and those affected by its enterprise, governed by Law on
Torts or Quasi-Delict.
➢ Underpinned by the emerging “Stakeholder Theory”
5. THEORIES ON THE FORMATION OF CORPORATIONS
a. Theory of Concession:
A corporation’s claim of a juridical personality of its own and to transact business as
such, is not a matter of absolute right, but a privilege which may be enjoyed only under
such terms as the State may deem necessary to impose. cf Ang Pue & Co. v. Sec. of
Commerce & Industry, 5 SCRA 645 (1962).
“There is thus a rejection of Gierke’s genossenchaft theory, the basic theme of which
… ‘is the reality of the group as a social and legal entity, independent of state recognition
and concession.’ A corporation as known to Philippine jurisprudence is a creature without
any existence until it has received the imprimatur of the state acting according to law. It is
logically inconceivable therefore that it will have rights and privileges of a higher priority
than that of its creator. More than that, it cannot legitimately refuse to yield obedience to
acts of its state organs, certainly not excluding the judiciary, whenever called upon to do
so.” ✓Tayag v. Benguet Consolidated, 26 SCRA 242 (1968).
All corporations, big or small, must abide by the provisions of the [Revised]
Corporation Code; even a simple family corporation cannot claim an exemption nor can it
have rules and practices other than those established by law. Torres v. Court of Appeals,
278 SCRA 793 (1997).
4Footnote 35: Recent cases have enlarged the concept of good will over the behavioristic resort of old customers to the old place of business. It is
now recognized that “It may include in addition to those factors all that goes with a business in excess of its mere capital and physical value; such as
reputation for promptness, fidelity, integrity, politeness, business sagacity and commercial skill in the conduct of its affairs, solicitude for the welfare of
customers and other tangible elements which contribute to successful commercial venture.”
2
“It is a basic postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general enabling act,”
and the procedure and conditions provided under the law for the acquisition of such
juridical personality must be complied with. Although the statutory grant to an association
of the powers to purchase, sell, lease and encumber property can only be construed the
grant of a juridical personality to such an association,” nevertheless, the failure to comply
with the statutory procedure and conditions does not warrant a finding that such
association acquired a juridical personality, even when it adopts a constitution and a set
of bylaws. Int’l Express Travel & Tour Services v. Court of Appeals, 343 SCRA 674 (2000).
b. Theory of Enterprise Entity: ✓BERLE, 47 COLUMBIA LAW REV. 343 (1947)
A corporation is but an association of individuals, allowed to transact business under
a corporate name with a distinct legal personality. In organizing itself as a collective body,
the group or its members waives no constitutional immunities and perquisites appropriate
to such a body. Philippine Stock Exchange (PSE) v. Court of Appeals, 281 SCRA 232 (1997).
Corporations are composed of natural persons and their separate corporate
personality is no shield for the commission of injustice and inequity, such as to avoid the
execution of the property of a sister company. Tan Boon Bee & Co. v. Jarencio, 163 SCRA
205 (1988).
6. ADVANTAGEOUS ATTRIBUTES AND DISADVANTAGES OF THE CORPORATION
a. PRIMARY ATTRIBUTES OF THE CORPORATION UNDER CORPORATE LAW FRAMEWORK:
(i) STRONG/SOLEMN JURIDICAL PERSONALITY (Sec. 2; Arts. 44[3], 45 and 46, Civil Code)
While not in fact a person, the corporation is treated through fiction by the law as
though it were a person—an artificial person distinct and separate from its
shareholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989).
Shareholders are not co-owners of corporate assets; the transfer of corporate
assets to the shareholders by way of dissolution is an act of conveyance and not a
partition among co-owners. Stockholders of F. Guanzon and Sons, Inc. v. Register of
Deeds of Manila, 6 SCRA 373 (1962).
Execution pending appeal may be allowed when “the prevailing party is already of
advanced age and in danger of extinction,” but not in this case a corporation whose
“juridical entity’s existence cannot be likened to a natural person—its precarious
financial condition is not by itself a compelling circumstance warranting immediate
execution and does not outweigh the long standing general policy of enforcing only
final and executory judgment.” Manacop v. Equitable PCIBank, 468 SCRA 256 (2005).
(ii) CENTRALIZED MANAGEMENT (Sec. 22)
Under [Sec. 22 of RCC], save in those instances where the Code requires
shareholders’ approval for certain specific acts, it is the Board of Directors/Trustees
which exercises all the corporate powers in a corporation. Great Asian Sales Center
Corp. v. Court of Appeals, 381 SCRA 557 (2002).5
(iii) LIMITED LIABILITY TO SHAREHOLDERS AND NON-LIABILITY TO DIRECTORS/TRUSTEES
AND OFFICERS FOR THE LIABILITIES OF THE CORPORATION
An important advantage of the corporation is the limitation of an investor’s liability
to the amount of investment, which flows from the legal theory that a corporate entity
is separate and distinct from its shareholders. San Juan Structural and Steel, Inc. v. CA,
296 SCRA 631 (1998).
By virtue of the principle separate juridical personality, the corporate debts or
credits are not the those of the shareholders. This protection from corporate liability
5Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).
3
for shareholders is the principle of limited liability. PNB v. Hydro Resources
Contractors Corp., 693 SCRA 294 (2013). 6
Where the creditor sues not only the company but also all shareholders to reach
their unpaid subscription which appear to be the only visible assets of the company,
the controlling doctrine is that “a stockholder is personally liable for the financial
obligations of the corporation to the extent of his unpaid subscription.” Halley v.
Printwell, Inc. 649 SCRA 116 (2011).
It is hornbook law that corporate personality is a shield against personal liability of
its officers—a corporate officer and his spouse cannot be made personally liable under
a trust receipt where he entered into and signed the contract clearly in his official
capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).7
Obligations incurred by the corporation through its directors and officers, are its
sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos,
357 SCRA 77 (2001).
(iv) FREE-TRANSFERABILITY OF “UNITS OF OWNERSHIP” (SHARES) (Sec. 62)
It is the inherent right of the shareholder to dispose of his shares, which he owns
as any other property, anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).8
No corporation can restrict the right of a shareholder to transfer shares, but merely
has authority to adopt regulations on the formalities and procedure to be followed in
effecting such sale or transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).
b. Disadvantages of the Corporate Medium:
(1) Agency Cost: Abuse of Management; Breach of Trust
(2) Abuse of Limited Liability Feature
(3) High Cost of Maintenance of the Corporate Medium
(4) Double Taxation:
• Dividends received by individuals from domestic corporations are subject to
final 10% tax for income earned on or after 01 January 1998. Sec. 24(B)(2), 1997
NIRC.
• However, inter-corporate dividends between domestic corporations are not
subject to any income tax. Sec. 27(D)(4), 1997 NIRC.
• Re-imposition of the 10% “improperly accumulated earnings tax” for holding
companies. Sec. 29, 1997 National Internal Revenue Code (NIRC).
7. COMPARED WITH OTHER BUSINESS MEDIA
a. Sole Proprietorships
A sole proprietorship, although regulated separately from its owner for purpose of
taxation and regulation, is not vested with juridical personality to file or defend an action.
Excellent Quality Apparel v. Win Multiple-Rich Builders, 578 SCRA 272 (2009).9
b. Business Trusts (Art. 1442, Civil Code)
c. Partnerships (Arts. 1768 and 1775, Civil Code)
d. Joint Ventures
Joint venture is an association of persons or companies jointly undertaking some
commercial enterprise; generally all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to direct and
govern the policy in connection therewith, and agreement to share both in profit and
losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).
e. Joint Accounts or Cuentas en Participacion (Arts. 239-243, Code of Commerce)
4
Cuentas en participacion is an accidental partnership constituted in a manner that its
existence was only known to those who had an interest in the same, there being no mutual
agreement between the partners, and without a corporate name indicating to the public
in some way that there were other people besides the one who ostensibly managed and
conducted the business, governed under Art. 239 of the Code of Commerce. Those who
contract with the person under whose name the business of such partnership of cuentas
en participacion is conducted, shall have only a right of action against such person and not
against the other persons interested, and the latter, on the other hand, shall have no right
of action against third person who contracted with the manager unless such manager
formally transfers his right to them. Bourns v. Carman, 7 Phil. 117 (1906).
A joint account is when a third person is financially interested in the business of a
merchant but does not give rise to the creation of a juridical person. CIR v. Cojuangco, 109
Phil. 443 (1960).
f. Cooperatives (Art. 3, R.A. No. 6938)
8. x CLASSIFICATION OF CORPORATIONS
a. In Relation to the State:
(1) Private Corporations (Sec. 3, Act 1459)
(2) Public Corporations or Local Government Units (LGUs) (Sec. 3, Act No. 1459)
(3) Quasi-Public Corporations
(4) GOVERNMENT-OWNED-OR-CONTROLLED CORPORATIONS (GOCCS) – SEE R.A. No. 10149;
Villanueva & Reyes, The Great Restructuring of the Public Corporate Sector, 59 ATENEO
L.J. 41 (2014).
Local water districts created under P.D. 198 by the different local legislative bodies,
with the primary function to sell water to residents within their territory, under such
schedules of rates and charges as may be determined by their boards are considered quasi-
public corporations, performing public services and supplying public wants, Marilao Water
Consumers Assn. v. IAC, 201 SCRA 437 (1991); they are clearly GOCCs, and their Board of
Directors and personnel are government employees subject to civil service laws and anti-
graft laws. Feliciano v. COA, 419 SCRA 363 (2004).
The doctrine that employees of GOCCs, whether created by special law or formed as
subsidiaries under the general corporation law are governed by the Civil Service Law and
not by the Labor Code, has been supplanted by the 1987 Constitution. GOCCs created by
special charter are subject the Civil Service Law, while those incorporated under the
[Revised] Corporation Code are governed by the Labor Code. PNOC-EDC. v. NLRC, 201 SCRA
487 (1991).10
A GOCC has a personality of its own, distinct and separate from that of the
government, and the intervention of the Executive Secretary does not change the
independent existence of a government entity as it deals with another government entity.
PUP v. Court of Appeals, 368 SCRA 691 (2001).
The GOCC Governance Act (R.A. 10149), which governs compensation and position
classification systems within the GOCC Sector, does not distinguish between chartered and
nonchartered GOCCs, and its provisions apply equally to both. GSIS Family Bank Employees
Union v. Villanueva, G.R. No. 210773, 23 January 2019.
A GOCC is a government agency when it is organized as a stock or non-stock
corporation, and must comply with three requisites: (a) it has a capital stock, (b) the capital
stock is divided into shares, and (c) it is authorized to distribute dividends and allotments
of surplus and profits to its stockholders. As for non-stock corporations, they must have
members and must not distribute ay part of their income to said members. However, the
is now formal administrative and statutory recognition of “government instrumentalities
10Davao City Water District v. Civil Service Commission, 201 SCRA 593 (1991).
5
with corporate powers/government corporate entities,” which may not fall within the
definition of stock and non-stock corporations, but are government instrumentalities that
are vested with corporate powers. LRTA v. Quezon City, G.R. NO. 221626, 09 Oct. 2019.
Under the Constitution, the COA has audit jurisdiction over both GOCCs with original
charters (subject to COA pre-audit) and those without original charters (those organized
under the Corporation Code—subject to post-audit). Alejandrino v. COA, G.R. No. 245400,
12 Nov. 2019.
(i) Charterred GOCCs
Although Boy Scouts of the Philippines does not receive any government financial
subsidy, and its funds and assets are not considered government in nature and not subject
to COA audit, the fact that it received a special charter, its governing board are appointed
by the Government, and that its purpose are of public character, for they pertain to the
educational, civic and social development of the youth which constitute a very substantial
and important part of the nation, it is not a public corporation in the same sense that local
governments are public corporation since its does not govern a portion of the state, but it
also does not have proprietary functions in the same sense that the functions or activities
of GOCCs, is may still be considered as such, or under the 1987 Administrative Code as an
instrumentality of the Government, and it employees are subject to the Civil Service Law.
Boy Scouts of the Philippines v. NLRC, 196 SCRA 176 (1991).
Although it has a special charter, the Chairman of the Philippine National Red Cross is
not appointed by the President. Although Camporendodo v. NLRC had ruled that PNRC is
GOCC because it is constituted under a special charter, it failed to consider the definition
of a GOCC as provided under Sec. 2(13) of the 1987 Administrative Code, which requires
that a GOCC to be such must be owned by the government, and in the case of a stock
corporation, at least a majority of its capital stock must be owned by the government.
Liban v. Gordon, 593 SCRA 68 (2009).
When the law vests in a government instrumentality corporate powers, it does not
become necessarily a corporation. A GOCC must be organized as a stock or nonstock
corporation. The MIAA is not a GOCC because it is not constituted of capital divided into
shares, and neither is it a nonstock corporation because it has no members. MIAA is a
government instrumentality vested with corporate powers to perform efficiently its
government functions. MIAA v. CA, 495 SCRA 591 (2006).
[Section 30 of the RCC] is applicable to corporations which have been organized by
special charters since Sec. 4 thereof renders the provisions supplementary to all
corporations, including those with special or individual charters, such as cooperatives
organized under P.D. 269. Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
While public benefit and welfare may be attributable to the operation of the Bases
Conversion and Development Authority (BCDA), yet it is certain that the functions it
performs are basically proprietary in nature—the promotion of economic and social
development and the country’s goal for enhancement. Therefore, the rule that
prescription does not run against the State will not apply to BCDA—when title of the
Republic has been divested, its grantees, although artificial bodies of its own creation, are
in the same category as ordinary persons. Shipside Inc. v. CA, 352 SCRA 334 (2001).
In order to qualify as a GOCC, one must be organized either as a stock or nonstock
corporation. [Section 3 of RCC] defines a stock corporation as one whose “capital stock is
divided into shares and … authorized to distribute to the holders of such shares dividends.”
Although BCDA has an authorized capital of P100 Billion, however, it is not divided into
shares; it has no voting shares; and has no provision which authorizes the distribution of
dividends and allotment of surplus and profits to BCDA’s shareholders. It cannot qualify
also as a nonstock corporation because its primary purpose do not fall within the purposes
6
enumerated under Section 88. Nonetheless, BCDA is a government instrumentality vested
with corporate powers. BCDA v. CIR, 867 SCRA 179 (2018).
(ii) Noncharterred GOCCs (Organized under the Revised Corporation Code)
Government’s majority shares does not make an entity a public corporation, for it
remains a “private corporation” having been organized under the Corporation Law.
National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924).
Being a GOCC makes a private corporation liable for laws applicable to the
Government and subject to the control of the Government. Cervantes v. Auditor General,
91 Phil. 359 (1952).
A private corporation is created by operation of law under the [Revised] Corporation
Code while a government corporation is normally created by special law referred to often
as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994).
Whether a corporation is GOCC or private in nature is simple: Is it created by its own
charter for the exercise of a public function, or by incorporation under the general
corporation law? Those with special charters, are government corporations subject to its
provisions, and its employees are under the jurisdiction of the Civil Service Commission,
and are compulsory members of the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999).
On the other hand, we have no doubt that SEC has jurisdiction over GOCCs established
or organized under the [Revised] Corporation Code. These GOCCs are regarded as private
corporations despite common misconceptions, inn spite of the fact that the government
may own the controlling shares in the corporation. PNCC v. Pabion, 320 SCRA 188 (1999).
That Corregidor Foundation, Inc. was organized as nonstock corporation under the old
Corporation Code, does not make it a private and non-government corporation. Firstly,
R.A. 10143 includes within the statutory definition of GOCCs those that are nonstock
corporations. Secondly, it is immaterial whether a government corporation is private or
public for purposes of exercising COA’s audit—so long as the government owns or controls
the corporation, the COA may audit the corporation’s accounts. Secondly, just because its
employees are not under Civil Service jurisdiction, does not exempt it from COA
jurisdiction. Oriondo v. COA, G.R. No. 211293, 04 June 2019.
b. As to Legal Status:
(1) De Jure Corporation
(2) De Facto Corporation (Sec. 19)
(3) Corporation by Estoppel (Sec. 20)
c. As to the Nature of Its Business Enterprise:
(1) Corporation Whose Business Only Affects Private Interests
(2) Corporation Whose Business Is Vested with Public Interests
d. As to Existence of Shares:
(1) Stock Corporation (Sec. 3)
(2) Nonstock Corporation (Secs. 3, 86 and 87)
e. As to Purpose of Incorporation:
(1) Business (for-Profit) Corporations
(2) Nonstock and Non-profit Corporations: Charitable, Scientific or Vocational
Corporations
(3) Educational Corporations (Secs. 105; Sec. 25, B.P. Blg. 232)
(4) Religious Corporation (Sec. 107)
Decisions on purely ecclesiastical matters by proper church tribunals are conclusive
upon civil tribunals—a church member who is expelled or a priest or minister who is
deprived of his office by church authorities, is without remedy in the civil courts. Long
v. Basa, 366 SCRA 113 (2001).
(5) Other Special Corporations (Sec. 4)
7
f. As to Number of Corporators:
(1) Aggregate Corporation—no limit of shareholders or members
(2) Close Corporation—not more than 20 shareholders of records (Sec. 95)
(3) One Person Corporation—available only for stock corporations (Sec. 115)
(4) Corporation Sole—religious corporation (Secs. 108)
A corporation sole has no nationality being an institution that existed prior to the
Republic; but if any nationality is to be accorded to it, it is to be judged from the nationality
of the majority of the faithfuls thereof. Roman Catholic Apostolic Administrator of Davao,
Inc. v. LRC and the Register of Deeds of Davao City, 102 Phil. 596 (1957).
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni
Cristo, 127 SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold
alienable lands of the public domain, because of the constitutional prohibition qualifying
only individuals to acquire land and the provision under the Public Land Act which applied
only to Filipino citizens or natural persons, has been expressly overturned in Director of
Land v. IAC, 146 SCRA 509 (1986); Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984);
Republic v. IAC, 168 SCRA 165 (1988).
g. As to Place of Incorporation:
(1) Domestic Corporation
(2) Foreign Corporation (Sec. 140)
II. NATURE AND ATTRIBUTES OF THE CORPORATION
1. Power to Create a Corporation Is Legislative in Character (Sec. 16, Art. XII, 1987
Constitution)
Since under the Constitution, Congress cannot enact a law creating a private corporation
with a special charter, except when it is a GOCC, it follows then that Congress can create
corporations with special charters only if such are GOCCs. Thus, all water districts which are
not created under the Corporation Code but pursuant to P.D. 198, are GOCCs and within
COA’s jurisdiction. Feliciano v. COA, 419 SCRA 363 (2004).11
P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on the
formation of a private corporation by special legislative act, as it is not a GOCC, since NDC was
merely required to extend a loan to the new corporation, and the new stocks of the
corporation were to be issued to the old investors and shareholders of the insolvent Agrix
upon proof of their claims against the abolished corporation. National Development
Corporation v. Philippine Veterans Bank, 192 SCRA 257 (1990).
2. CORPORATION AS A “ PERSON BEFORE THE LAW ”
a. Entitled to Invoke the Due Process and Equal Protection Clauses
The due process clause has universal application and covers private corporations
insofar as their properties are concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136
(1920).12
The failure to formally implied a corporation in a suit for recovery of ill-gotten wealth
against its shareholders cannot bind the corporation itself; otherwise, the corporation’s
fundamental right to due process will be violated. COCOFED v. Republic, 805 SCRA 1
(2016).13
b. Protected under the Unreasonable Searches and Seizure Clause
A corporation is protected by the constitutional guarantee against unreasonable
searches and seizures, but its officers have no cause of action to assail the legality of the
seizures, regardless of the amount of shares of each in said corporation because the
corporation has a personality distinct and separate from those of said officers. Stonehill v.
Diokno, 20 SCRA 383 (1967).
267 (1997); NPC v. Philipp Brothers Oceanic, Inc., 369 SCRA 629 (2001); Flight Attendants and Stewards Assn. of the Phils. v. PAL, 559 SCRA 252
(2008); Employees Union of Bayer Phils. v. Bayer Philippines, Inc., 636 SCRA 473 (2010); BUT THEN: San Fernando Regala Trading v. Cargill Philippines,
707 SCRA 187 (2013).
9
whether the principal be a natural person or a corporation, and whether the agent be a
natural or artificial person. Philippine National Bank v. Court of Appeals, 83 SCRA 237 (1978).
“Corporate tort” consists in the violation of a right given or the omission of a duty imposed
by law; a breach of a legal duty. The failure of the corporate employer to comply with the
duty under the Labor Code to grant separation pay to employees in case of cessation of
operations constitutes tort and its shareholder who was actively engaged in the management
or operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC, 269
SCRA 564 (1997).
6. Corporate Criminal Liability
a. Generally: No Criminal Suit Can Lie Against a Corporation
Philippines courts have no common law jurisdiction. Consequently, corporations
cannot be held criminally liable under Philippine jurisdiction since at this time there is no
law relating to the practice and procedure in criminal actions whereby a corporation may
be brought to court to be proceeded against criminally. West Coast Life Ins. Co. v. Hurd, 27
Phil. 401 (1914).
However, a corporation can be a real-party-in-interest for the purpose of bringing a
civil action for malicious prosecution for the damages suffered by the corporation for the
criminal proceedings brought against its officer. Cometa v. Court of Appeals, 301 SCRA 459
(1999).
Prior to the Trust Receipts Law, a corporate officer who signs the trust receipt could
not be held criminally liable for estafa punished under the Revised Penal Code, for his
criminal liability could not be proven beyond reasonable doubt under the doctrine that
“the corporation was [not] directly required by law to do an act in a given manner, and the
same law makes the person who fails to perform the act in the prescribed manner
expressly liable criminally.” Sia v. CA, 121 SCRA 655 (1983).
Now, the Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation, hence, the law makes the officers or employees
responsible for the offense liable to suffer the penalty of imprisonment. Ong v. Court of
Appeals, 401 SCRA 647 (2003). 18
The Trust Receipts Law specifically makes the officers, employees or other officers or
persons responsible for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or employees responsible
for the offense. The rationale is that such officers or employees are vested with the
authority and responsibility to devise means necessary to ensure compliance with the law
and, if they fail to do so, are held criminally accountable. A corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment;
however, it may be charged and prosecuted for a crime if the imposable penalty is fine.
Even if the statute prescribes both fine and imprisonment as penalty, a corporation may
be prosecuted and, if found guilty, may be fined. ✓Ching v. Secretary of Justice, 481 SCRA
602 (2006).
b. Shareholders Per Se Cannot Be Held Liable for a Corporate Criminal Act
Shareholders, being “owners” of the corporation or being basically investors in the
corporation, and with the management of its business generally vested in the Board of
Directors, cannot be held liable for the criminal offense committed on behalf of the
corporation, unless they personally took part in the same. Espiritu v. Petron Corp., 605
SCRA 245 (2009).
c. Directors/Trustees Per Se Not Personally Liable for a Corporate Criminal Act (Sec. 171)
21Filipinas Compania de Seguros v. Christern, Huenefeld & Co., 89 Phil. 54 (1951); Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952).
13
The donation of land to an unincorporated religious organization, whose trustees are
foreigners, would violate constitutional prohibition and the refusal would not be in
violation of the freedom of religion clause. The fact that the religious association “has no
capital stock does not suffice to escape the constitutional inhibition, since it is admitted
that its members are of foreign nationality … and the spirit of the Constitution demands
that in the absence of capital stock, the controlling membership should be composed of
Filipino citizens.” Register of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955).
BUT: A corporation sole being a creature prior to the constitution, has no nationality.
If a nationality is sought to be determined, the same depends of the nationality of the
majority of the lay members and not on the nationality of the sole corporator. Roman
Catholic Apostolic Administrator of Davao, Inc. v. LRC and the Register of Deeds of Davao,
102 Phil. 596 (1957).
If foreign equity in a landholding corporation exceed 40%, it is not the foreign
shareholders’ ownership of the shares which is adversely affected by the capacity of the
corporation to own land—that is, the corporation becomes disqualified to own land. The
prohibition in the Constitution applies only to ownership of land; it does not extend to
immovable or real property as defined under Article 415 of the Civil Code. Otherwise, we
would have a strange situation where the ownership of immovable property such as trees,
plants and growing fruit attached to the land would be limited to Filipinos and Filipino
corporations only. J.G. Summit Holdings, Inc. v. CA, 450 SCRA 169 (2005).
Radstock, a foreign corporation with unknown owners whose nationalities are also
unknown, is not qualified to own land in the Philippines, and therefore also disqualified to
own the rights to ownership of lands in the Philippines—it is basic that an assignor or seller
cannot assign or sell something he does not own at the time the ownership, or the rights
to the ownership, are to be transferred to the assignee or buyer. The assignment by PNCC
of the real properties to a nominee to be designated by Radstock is a circumvention of the
constitutional prohibition against a private foreign corporation owning lands in the
Philippines. Strategic Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
The nationality of a nonstock corporation in relation to land acquisition is computed
not on membership contribution but that the 60-40 minimum Filipino requirement applies
to both the nationality of the members, and their voting powers. SEC Opinion No. 16-15,
1 June 2016.
(4) Public Utilities (Sec. 11, Art. XII, Constitution)
The nationality test for public utilities applies not at the time of the grant of the
primary franchise that makes a corporation a juridical person, but at the grant of the
secondary franchise that authorizes the corporation to engage in a nationalized industry.
✓People v. Quasha, 93 Phil. 333 (1953).
The primary franchise, that is, the right to exist as such, is vested in the shareholders
or members and not in the corporation itself and cannot be conveyed in the absence of a
legislative authority to do so. The secondary franchises are vested in the corporation and
may ordinarily be conveyed or mortgaged under a general power granted to a corporation
to dispose of its property, except such special or secondary franchises as are charged with
a public use. J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964).
The Constitution requires a franchise for operating a public utility; however, it does
not require a franchise before one can own the facilities needed to operate a public utility
so long as it does not operate them to serve the public. There is a clear distinction between
“operation” of a public utility and ownership of the facilities used to serve the public.
✓Tatad v. Garcia, Jr., 243 SCRA 436 (1995).
(5) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)
14
(6) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution; P.D. 36, amended by P.D.s 191
and 197; Sec. 2, P.D. 576; DOJ Opinion 163, s.1973; DOJ Opinion No. 120, s.1982; SEC
Opinion, 24 March 1983; SEC Opinion, 15 July 1991, XXV SEC QUARTERLY BULLETIN No. 4,
p. 31.)
a. Cable Industry: “Cable TV operations shall be governed by E.O. No. 205 (s.1987). If
CATV operators offer public telecommunications services, they shall be treated just
like a public telecommunications entity.” NTC Memo Circular No. 8-9-95.
Cable TV is “a form of mass media which must, therefore, be owned and
managed by Filipino citizens, or corporations, cooperatives or associations, wholly-
owned and managed by Filipino citizens pursuant to the mandate of the
Constitution.” DOJ Opinion No. 95, s. 1999, citing Allied Broadcasting, Inc. v.
Federal Communications Commission, 435 F.2d 70.
e. NEDA May Set Limitations of Stock Ownership in Corporations Vested with Public
Interests (Sec. 176)
III. SEPARATE JURIDICAL PERSONALITY AND THE
DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION
1. MAIN DOCTRINE: A Corporation Has a Personality Separate and Distinct from Its Directors or
Trustees, Officers, Its Shareholders or Members (Sec. 2; Art. 44, Civil Code)
A corporation is a juridical entity with a legal personality separate and distinct from
the people comprising it, hence:
• Assets of the shareholders may not be considered as assets of the corporation,
and vice-versa. Situs Dev. Corp. v. Asiatrust Bank, 677 SCRA 495 (2012).
• It may not be made to answer for personal acts and liabilities of its
shareholders or those of legal entities to which it may be connected, and vice
versa. General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225
(2007).22
Such legal fiction is only for purposes of convenience and to subserve the ends of
justice—it cannot be extended to a point beyond its reason and policy. Where, as in this
case, the corporate fiction was used as a means to perpetrate a social injustice or as a
vehicle to evade obligations or confuse the legitimate issues, it would be discarded and the
two (2) corporations would be merged as one, the first being merely considered as the
instrumentality, agency, conduit or adjunct of the other. Azcor Manufacturing Inc. v. NLRC,
303 SCRA 26 (1999). 23
a. DOCTRINES EMANATING FROM THE PRIMARY ATTRIBUTE OF SEPARATE JURIDICAL PERSONALITY:
(i) Doctrine of Limited Liability: Shareholders/Members Cannot be Held Liable for the
Liabilities of the Corporation, Except to the Extent of
Their Investments or Promised Investments.
(ii) Agency Law Principle: Directors/Trustees, Officers and Other Corporate Agents Do
Not Become Personally Liable for Corporate Contracts That
They Enter Into in Behalf of the Corporation.
Corporate debt or credit is not the debt or credit of the shareholder nor is the
shareholder’s debt or credit that of the corporation. Traders Royal Bank v. Court of
Appeals, 177 SCRA 789 (1989).
Debts incurred by directors, officers, and employees acting as corporate agents are
not their direct liability but of the corporation they represent. Crisologo v. People, 686
SCRA 782 (2012).24
22McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA
598 (2009); Shrimp Specialists, Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Saverio v. Puyat, 710 SCRA 747 (2013).
23Martinez v. CA 438 SCRA 139 (2004); Prudential Bank v. Alviar, 464 SCRA 353 (2005); EDSA Shangri-La Hotel and Resorts v. BF Corp., 556
SCRA 25 (2008); Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
24Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519 (2013); Land Bank of the Philippines v. Belle Corp., 769 SCRA 46 (2015); Ferro
Inc. v. Fuji-Triumph Agri-Industrial Corp., 608 SCRA 1 (2009); Hacienda Luisita, Inc. v. Presidential Agrarian Reform Council, 660 SCRA 525 (2011).
28Sesbreno v. CA, 222 SCRA 466 (1993); “G” Holdings, Inc. v. National Mines and Allied Workers Union Local, 604 SCRA 73 (2010); Malixi v. Mexicali
Phils., Inc. , 792 SCRA 586 (2016); Malixi v. Mexicali Philippines, Inc., 792 SCRA 586 (2016); Zaragoza v. Tan, 847 SCRA 437 (2017).
29Bautista v. Auto Plus Traders, Inc. 561 SCRA 223 (2008); Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Saverio v.
16
are separate entities. Cruz v. Dalisay, 152 SCRA 487 (1987); Booc v. Bantuas, 354 SCRA
279 (2001).
The President of the corporation which is liable for the accident caused by its truck
driver cannot be held solidarily liable for the judgment obligation arising from quasi-
delict, since the fact alone of being President is not sufficient to hold him solidarily
liable for the liabilities adjudged against the corporation. Secosa v. Heirs of Erwin
Suarez Fancisco, 433 SCRA 273 (2004).
When the compulsory counterclaim filed against corporate officers for their alleged
fraudulent act indicate that such corporate officers are indispensable parties in the
litigation, the original inclusion of the corporation in the suit does not thereby allow
the denial of a specific counter-claim being filed to make the corporate officers
personally liable. Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA
522 (2004).
(iii) On Privileges Enjoyed: The tax exemption clause in the charter of a corporation
cannot be extended to nor enjoyed even by the controlling shareholders. Manila Gas
Corp. v. CIR, 62 Phil. 895 (1936).
(iv) On Suits For or Against the Corporation:
A corporation has no legal standing to file a suit for recovery of certain parcels of
land owned by its members in their individual capacity, even when the corporation is
organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347
(1976).
Shareholders have no standing to intervene in a collection case covering the loans
of the corporation since shareholders’ interest in corporate property is purely
inchoate. Saw v. CA, 195 SCRA 740 (1991); and vice-versa. Francisco Motors Corp. v.
CA, 309 SCRA 72 (1999).
A corporate defendant against whom a writ of possession has been issued, cannot
use the fact that it has obtained controlling equities in the corporate plaintiffs to
suspend enforcement of the writ, for they are separate juridical persons, and thus
their separate business and proprietary interests remain. Silverio, Jr. v. Filipino
Business Consultants, Inc., 466 SCRA 584 (2005).
Shareholders have no standing to recover damages arising from the wrongful
attachment of the corporation’s assets. Stronghold Insurance Co. v. Cuenca, 692 SCRA
473 (2013).
2. PIERCING THE VEIL OF CORPORATE FICTION
a. Source of Incantation: U.S. v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 (1905).
The notion of corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical, if the corporate entity is being used as a cloak
or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct,
or a business conduit for the sole benefit of the shareholders. Gochan v. Young, 354 SCRA
207 (2001).31
This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape liability
arising for a debt, or to perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives to cover up an otherwise blatant violation of the
prohibition against forum shopping. Only is these and similar instances may the veil be
pierced and disregarded. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).
The legal fiction of separate corporate existence is not at all times invincible; it may
be pierced when employed as a means to perpetrate a fraud, confuse legitimate issues,
31DBP v. CA, 357 SCRA 626, 358 SCRA 501, 363 SCRA 307 (2001); Velarde v. Lopez, 419 SCRA 422 (2004); R&E Transport v. Latag, 422 SCRA
698 (2004); Secosa v. Heirs of Erwin Suarez Fancisco, 433 SCRA 273 (2004); Martinez v. CA, 438 SCRA 139 (2004); McLeod v. NLRC, 512 SCRA 222
(2007); Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435 (2009).
17
used as a means to promote unfair objectives, or to shield an otherwise blatant violation
of the prohibition against forum-shopping. While piercing of the corporate veil has to be
done with caution, the corporate fiction may be disregarded when necessary in the
interest of justice. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).
When the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association of
persons. The corporate entity may also be disregarded in the interest of justice in such
cases as fraud that may work inequities among members internally, involving no rights of
the public or third persons. In both instances, for the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and convincingly
established; it cannot be presumed. Suldao v. Cimech System Construction, Inc., 506 SCRA
256 (2006).
b. Classification of Piercing Cases:
• FRAUD PIERCING: When corporate entity is used to commit a crime, to undertake
fraud or do a wrong, or that the corporate veil is used as a means to evade the
consequences of one’s criminal or fraudulent acts;
• ALTER-EGO PIERCING: When the corporate entity merely a farce since the
corporation is merely the alter ego, business conduit, or instrumentality of a
person or another entity;
• DEFEAT OF PUBLIC CONVENIENCE (EQUITY PIERCING): When the application of the
separate corporate personality would be inconsistent with the business purpose
of the legal fiction or would merely confuse legitimate issues, or when piercing
the corporate fiction is necessary to achieve justice or equity for those who deal
in good faith with the corporation.
Authorities are agreed on at least three (3) basic areas where piercing the veil, with
which the law covers and isolates the corporation from any other legal entity to which it
may be related, is allowed: (1) defeat of public convenience, as when the corporation is
used as vehicle for the evasion of existing obligation; (2) fraud cases or when the
corporate entity is used to justify wrong, protect fraud, or defend a crime; or (3) alter ego
cases, where the corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation. ✓General Credit Corp. v. Alsons Dev. and Investment
Corp., 513 SCRA 225 (2007),32 citing VILLANUEVA, COMMERCIAL LAW REVIEW (2004 ed.), at p.
576.
c. Objectives and Effects of the Application of the Piercing Doctrine
The main effect of disregarding the corporate fiction is that shareholders will be held
personally liable for the acts and contracts of the corporation, whose existence, at least
for the purpose of the particular situation involved, is ignored. Considering that We find it
justified to pierce the corporate veil in this case, MPEI must, perforce, be treated as a mere
association of persons whose assets are unshielded by corporate fiction. Such persons’
individual liability shall now be determined with respect to the matter at hand. Republic v.
Mega Pacific eSolutions, Inc., 794 SCRA 414 (2016).33
When two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third parties,
disregard the legal fiction that two corporations are distinct entitled and treat them as
32Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Prisma Construction & Dev. Corp. v . Menchavez, 614 SCRA 590
(2010); Sarona v. NLRC, 663 SCRA 394 (2012); Lanuza, Jr. v. BF Corp., 77 SCRA 275 (2014); De Castro v. CA, 805 SCRA 265 (2016);
Montealegre v. Spouses De Vera, G.R. No. 208920, 10 July 2019.
33Traders Royal Bank v. Court of Appeals, 269 SCRA 15 (1997); Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009);
34Marques v. Far East Bank, 639 SCRA 312 (2011); Sarona v. NLRC, 663 SCRA 394 (2012); De Castro v. CA, 805 SCRA 265 (2016); Lee v.
19
constitute application of the piercing doctrine. DBP v. Court of Appeals, 363 SCRA 307
(2001).
(iii) Party Invoking Piercing Doctrine Must Have a “Victim Standing”: The bank cannot
successfully invoke the piercing doctrine when it was proven that the assignment of
the securities by the subsidiary company was contrary to existing rules of the Central
Bank of the Philippines, which were well-known to the officers of the lending bank.
Being merely an equitable remedy, employment of the piercing doctrine can only be
for the “protection of the interests of innocent third persons dealing with the
corporate entity which the law aims to protect by this doctrine.” ✓Traders Royal Bank
v. Court of Appeals, 269 SCRA 15 (1997).
(iv) Not Applicable to Theorize or to Advance/Create New Rights or Interest:
Piercing of the veil of corporate fiction cannot be resorted under a theory of co-
ownership to justify continued use and possession by shareholders of corporate
properties. ✓Boyer-Roxas v. Court of Appeals, 211 SCRA 470 (1992).
Piercing cannot be availed of to dislodge from SEC’s jurisdiction a petition for
suspension of payments filed under P.D. 902-A, on the ground that the petitioning
individuals should be treated as the real petitioners to the exclusion of the petitioning
corporate debtor: “doctrine only applies when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime.” Union Bank v. Court
of Appeals, 290 SCRA 198 (1998).
Application of the piercing of the subsidiary company to merge it with the holding
company cannot be allowed to support a theory of set-off or compensation, there
being no allegation much less any proof of fraud. Nisce v. Equitable PCI Bank, Inc., 516
SCRA 231 (2007).
An employee who retires and avails of her retirement benefits, but continued as a
consultant with affiliate companies, cannot employ piercing in order to treat her stint
with the affiliate companies as part of her employment with the main company she
retired from—there is no fraud or employment of unfair shielding. Rivera v. United
Laboratories, Inc., 586 SCRA 269 (2009).
BUT SEE: Where clear evidence support the fact that a corporation’s affiliates have
received large amounts which became the consideration for the company’s execution
of a real estate mortgage over its properties, then the piercing doctrine shall be
applied to support the fact that the real estate mortgage was valid and supported by
proper consideration. ✓Siain Enterprises v. Cupertino Realty Corp., 590 SCRA 435
(2009).
Piercing of the veil of corporate fiction cannot be used to justify service of summons
on the subsidiary to be binding on the parent company. A wholly-owned subsidiary is
a distinct and separate entity from its mother company and the fact that the latter
exercises control over the firm does not justify disregarding their separate personality.
The complaint taken as a whole should be able to convey that the subsidiary is but a
business conduit of the principal or that by reason of fraud, their separate and distinct
and separate personalities should be disregarded. Luzon Iron Dev. Group Corp. v.
Bridgestone Mining and Dev. Corp., 813 SCRA 583 (2016).
(v) Piercing Must Therefore Be Based on Clear Evidence: To disregard the separate
juridical personality, it is elementary that the wrongdoing cannot be presumed and
must be clearly and convincingly established. Application of the doctrine of piercing
should be done with caution. Otherwise, an injustice that was never intended may
20
result from an erroneous application. PNB v. Andrada Electric & Engineering Co., 381
SCRA 244 (2002).37 CONSEQUENTLY:
• Organizing the corporation when relationship between landowner and
developer were still cordial cannot be used as a basis to hold the corporation
liable later on for landowner’s obligations to the developer under the mere
allegation that the corporation is being used to evade the performance of
obligation by its major shareholders. Luxuria Homes, Inc. v. Court of Appeals,
302 SCRA 315 (1999).
• The Court finds that the Remington failed to discharge its burden of proving bad
faith on the part of Marinduque Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the piercing of the corporate veil.
DBP v. Court of Appeals, 363 SCRA 307 (2001). 38
• Neither has it been alleged or proven that Merryland is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency conduit or adjunct of Cardale. Even assuming that the
businesses of Cardale and Merryland are interrelated, this alone is not
justification for disregarding their separate personalities, absent any showing
that Merryland was purposely used as a shield to defraud creditors and third
persons. Francisco v. Mejia, 362 SCRA 738 (2001).39
• The mere assertion by a Filipino litigant against the existence of a “tandem”
between two Japanese corporations cannot be the basis for piercing, which can
only be applied by showing wrongdoing by clear and convincing evidence.
Marubeni Corp. v. Lirag, 362 SCRA 620 (2001).
• Whether a corporation is a mere alter ego is a purely a question of fact, and the
party seeking to pierce has the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate personality rule.
Concept Builder, Inc. v. NLRC, 257 SCRA 149 (1996).40
(vi) Piercing Is a Power Belonging to the Courts and Cannot Be Assumed Improvidently
by a Sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).41
3. FRAUD PIERCING CASES:
a. Corporate Fiction Used to Do Wrong or Evade Consequences Thereof:
Where a shareholder, who has absolute control over the affairs of the corporation,
entered into a contract with another corporation through fraud and false representations,
such shareholder shall be liable solidarily with co-defendant corporation even when the
contract sued upon was entered into on behalf of the corporation. NAMARCO v. Associated
Finance Co., 19 SCRA 962 (1967).
Piercing is allowed where the corporation is used as a means to appropriate a property
by fraud which property was later resold to the controlling shareholders. Heirs of Ramon
Durano, Sr. v. Uy, 344 SCRA 238 (2000).
Fraud and bad faith on the part of certain corporate officers or shareholders may
warrant the piercing of the veil of corporate fiction so that the said individual may not seek
refuge therein, but may be held individually and personally liable for his or her actions,
Lafarge Cement Phils., Inc. v. Continental Cement Corp., 443 SCRA 522 (2004);42 however,
mere allegation of fraud or bad faith, without evidence supporting such claims cannot
37Lim v. CA, 323 SCRA 102 (2000); General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Pantranco Employees Assn.
(PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009); Halley v. Printwell, Inc. 649 SCRA 116 (2011); Ferro Chemicals, Inc. v. Garcia, 804 528 (2016).
38McLeod v. NLRC, 512 SCRA 222 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
39Ramoso v. CA, 347 SCRA 463 (2000); Guatson Int’l Travel and Tours v. NLRC, 230 SCRA 815 (1990).
40Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); MR Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002); Ramirez v. Mar Fishing Co., 672
SCRA 137 (2012); Pacific Rehouse Corp. v. CA, 719 SCRA 665 (2014); Commissioner of Customs v. Oilink Int’l Corp., 728 SCRA 469 (2014); WPM Int’l
Trading v. Labayen, 735 SCRA 299 (2014); Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016).
41
D.R. CATC Services v. Ramos, 477 SCRA 18 (2005).
42Mendoza v. Banco Real Dev. Bank, 470 SCRA 86 (2005).
21
warrant the piercing of the corporate veil. DBP v. Court of Appeals, 357 SCRA 626; 358
SCRA 501; 363 SCRA 307 (2001).
PThe attempt to make the security agencies appear as two separate entities, when in
reality they were but one, was a devise to defeat the law [i.e., in this case to avoid liabilities
under labor laws] and should not be permitted. Enriquez Security Services, Inc. v. Cabotaje,
496 SCRA 169 (2006).
Piercing will be applied when there is an indubitable link between CBB’s closure and
Binswanger’s incorporation: CBB ceased to exist only in name; it re-emerged in the person
of Binswanger to avoid payment by CBB of the last two installments of its monetary
obligation to Livesey, as well as its other financial liabilities. Livesey v. Binswanger
Philippines, 719 SCRA 433 (2014).
While courts have authority to wield the sword which pierces through the veil of
corporate fiction, concomitant to the exercise of this power, is the responsibility to uphold
the doctrine of separate entity, when rightly so; as it has for so long encouraged
businessmen to enter into economic endeavors fraught with risks and where only a few
dared to venture. Hence, any application of the doctrine of piercing the corporate veil
should be done with caution. A court should be mindful of the milieu where it is to be
applied. It must be certain that the corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed.
Otherwise, an injustice that was never unintended may result from an erroneous
application. ✓Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).43
b. Shell or Fictitious Company: “Fictitious companies are by definition fraudulent and may
also serve as fronts for government officials. The typical scheme involves corrupt
government officials creating a fictitious company that will serve as a ‘vehicle’ to secure
contract awards. Often, the fictitious—or ghost—company will subcontract work to lower
cost and sometimes unqualified firms. The fictitious company may also utilize designated
losers as subcontractors to deliver the work, thus indicating collusion.” They have no
significant assets, staff or operational capacity. They pose a serious red flag as a bidder on
public contracts, because they often hide the interests of project or government officials,
concealing a conflict of interest and opportunities for money laundering. Republic v. Mega
Pacific eSolutions, Inc., 794 SCRA 414 (2016), citing VILLANUEVA & TIANSAY, PHILIPPINE
CORPORATE LAW, p. 105 (2013 ed.)
c. Guiding Principles in Fraud Cases: Why is there inordinate showing of alter-ego elements?
• There must have been fraud or an evil motive in the affected transaction, and the mere
proof of control of the corporation by itself would not authorize piercing;
• Corporate fiction is used as a means to commit the fraud or avoid the consequences
thereof; and
• The main action should seek for the enforcement of pecuniary claims pertaining to the
corporation against corporate officers or shareholders.
Probative Factors for Fraud Piercing: The corporate fiction must be the very means
by which to commit fraud or avoid the consequences of ones unlawful or wrongful acts.
✓Concept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).44 The absence of these elements
prevents piercing the corporate veil. Lim v. Court of Appeals, 323 SCRA 102 (2000). 45
46Indophil Textile Mill Workers Union v. Calica, 205 SCRA 697 (1992); Del Rosario v. NLRC, 187 SCRA 777 (1990); Park Hotel v. Soriano, 680 SCRA
328 (2012); Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013).
47Martinez v. Court of Appeals, 438 SCRA 130 (2004).
48Tomas Lao Construction v. NLRC, 278 SCRA 716 (1997); Marques v. Far East Bank and Trust Co., 639 SCRA 312 (2011).
49General Credit Corp. v. Alsons Dev. and Investment Corp., 513 SCRA 225 (2007); Sarona v. NLRC, 663 SCRA 394 (2012).
50Shoemart v. NLRC, 225 SCRA 311 (1993).
23
and systems overlap inherent in parent and subsidiary relations often render the
subsidiary as mere local branch, agency or adjunct of the foreign parent. Thus, when the
foreign parent company leased a large parcel of land purposely for the benefit of its
subsidiary, which took over possession of the leased premises, the subsidiary was a mere
alter ego. Mariano v. Petron Corp., 610 SCRA 487 (2010).
When a corporation lawfully terminates its employees based on ceasing of
operations, the terminated employees cannot make a sister company liable for their
claims. Although ownership by one corporation of all or a great majority of stocks of
another corporation and their interlocking directorates may serve as indicia of control, by
themselves and without more, they are insufficient to establish an alter ego relationship
that will justify the puncturing of the latter's corporate cover. Zambrano v. Philippine
Carpet Manufacturing Corp., 828 SCRA 144 (2017).
d. Guiding Principles in Alter-Ego Cases:
• Doctrine applies even in the absence of evil intent, because of the direct violation of a
central corporate law principle of separating ownership from management;
• Doctrine in such cased is based on estoppel: if shareholders do not respect the
separate entity, others cannot also be expected to be bound by the separate juridical
entity;
• Piercing in alter ego cases may prevail even when no monetary claims are sought to
be enforced against the shareholders or officers.
Probative Factors in Alter Ego Piercing: The instrumentality or control test requires
ot mere majority or complete stock control, but complete domination of finances, policy
and business practices with respect to the transaction in question. ✓California
Manufacturing Co., Inc. v. Advanced Technology System, Inc., 824 SCRA 295 (2017).51
The mere existence of a parent-subsidiary relationship between two corporation, or
that one corporation is affiliated with another company does not by itself allow the
application of the alter ego piercing doctrine. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97
(1946).52
Just because two foreign companies came from the same country and closely worked
together on certain projects would the conclusion arise that one was the conduit of the
other, thus piercing the veil of corporate fiction. Marubeni Corp. v. Lirag, 362 SCRA 620
(2001).
Use of a controlling shareholder’s initials in the corporate name is not sufficient reason
to pierce, since by that practice alone does it mean that the said corporation is merely a
dummy of the individual shareholder, provided such act is lawful. LBP v. Court of Appeals,
364 SCRA 375 (2001).
If used to perform legitimate functions, a subsidiary’s separate existence shall be
respected, and the liabilities of the parent corporation and the subsidiary will be confined
to those arising in their respective businesses. Even when the parent corporation agreed
to the terms to support a standby credit agreement in favor of the subsidiary, does not
mean that its personality has merged with that of the subsidiary. MR. Holdings, Ltd. V.
Bajar, 380 SCRA 617 (2002).53
5. EQUITY PIERCING: “DEFEAT OF PUBLIC CONVENIENCE”
a. Corporate Fiction Is Raised to Confuse Legitimate Issues:
In a situation where employee in the mother company was detailed/assigned to a
sister company whereat the employee died by reason of work-related illness, and
workmen’s compensation benefits were sought against the sister company, there would
24
be proper basis to pierce the veil of corporate fiction to treat the two companies as one to
allow jurisdiction over the case to be retained by the Workmen’s Compensation
Commission to rule on the defense of the lack of employer-employee relationship. The
separate juridical personality should not be used to confuse legitimate issues. ✓Telephone
Engineering and Service Co. v. WCC, 104 SCRA 354 (1981).
b. Raise Legal Technicalities:
A complaint for unfair labor practice was filed not against the employer-corporation
but against the President and controlling shareholder, field supervisor and manager, all in
their official capacity; but that the final judgment for reinstatement and damages was in
the name of the company. The judgment can be enforced against the company and its
properties on the ground of equity piercing: “No benefit can be attained if this case were
to be remanded to the court a quo merely in response to a technical substitution of parties
for such would only cause an unwarranted delay that would work to Honorata’s prejudice.
This is contrary to the spirit of the law which enjoins a speedy adjudication of labor cases
disregarding as much as possible the technicalities of procedure.” ✓Emilio Cano
Enterprises v. CIR, 13 SCRA 291 (1965).
Where the main purpose in forming the corporation was to evade one's subsidiary
civil liability for damages in a criminal case, the corporation may not be heard to say that
it has a personality separate and distinct from its members, because to allow it to do so
would be a shield to further an end subversive of justice. The Supreme Court can even
substitute the real party in interest in place of the defendant corporation in order to avoid
multiplicity of suits and thereby save the parties unnecessary expenses and delay. Palacio
v. Fely Transportation Co., 5 SCRA 1011 (1962).54
Where a debtor registers his residence to a family corporation in exchange of shares,
and continues to live therein, then the separate juridical personality may be disregarded.
PBCom v. Court of Appeals, 195 SCRA 567 (1991).
Where corporate fiction was used to perpetrate social injustice or as a vehicle to evade
obligations or confuse the legitimate issues (as in this case where the actions of
management of the two corporations created confusion as to the proper employer of
claimants), the two corporations would be merged as one. Azcor Manufacturing, Inc. v.
NLRC, 303 SCRA 26 (1999).
We have applied the piercing doctrine in cases where the employees are put in a
disadvantageous position as a result of the employers’ separate juridical personalities,
pursuant to the fundamental doctrine that corporate fiction should not be used as a
subterfuge to commit injustice and circumvent labor laws. While there is no prohibition on
the mere act of engaging in a work-pooling scheme as sister companies, that act will not
be tolerated, and the sister companies’ separate juridical personalities will be disregarded,
if they use that scheme to defeat the workers right to collective bargaining. Lee v.
Samahang Manggagawa ng Super Lamination, 809 SCRA 313 (2016).
6. The Case for Thinly-Capitalized Corporations:
a. Alter Ego Piercing: The judgment debt against the corporation can be pursued against the
controlling shareholder when it has been shown that the corporation had no existing
assets of its own and the operation of the corporation was so merged with those of the
shareholders as to be practically indistinguishable. Furthermore, they had the same office,
the funds were held by the shareholders, and the corporation had no visible assets.
✓McConnel v. Court of Appeals, 1 SCRA 722 (1961).
b. Fraud Piercing: The DOJ Resolution explicitly identified the false pretense, fraudulent act
or fraudulent means perpetrated upon the investing public who were made to believe that
ASBHI had the financial capacity to repay the loans it enticed petitioners to extend, despite
54Also
25
the fact that the deficient capitalization evidenced by its articles of incorporation, the
treasurer’s affidavit, the audited financial statements. “Moreover, respondent’s argument
assumes that there is legal obligation on the part of petitioners to undertake an
investigation of ASBHI before agreeing to provide the loans. There is no such obligation. It
is unfair to expect a person to procure every available public record concerning an
applicant for credit to satisfy himself of the latter’s financial standing. At least, that is not
the way an average person takes care of his concerns.” ✓Gabionza v. Court of Appeals,
565 SCRA 38 (2008).
c. Equity Piercing: Where the corporation was under the control of its shareholders who ran-
up quite a high obligation with the printing company knowing fully well that their
corporation was not in a position to pay for the accounts, and where in fact they personally
benefited from the operations of the company to which they never paid their subscription
in full, would constitute piercing of the veil to allow the creditor to be able to collect what
otherwise were debts owed by the company which has no visible assets and has ceased all
operations. ✓Halley v. Printwell, Inc. 649 SCRA 116 (2011).
7. Evasion, Avoidance or Minimization of Taxes
Use of dummies to constitute the corporation for the benefit of the controlling
shareholder who sought to avoid payment of war profit taxes would allow the tax authorities
to levy upon the corporate properties to enforce the tax assessment against the controlling
shareholder [under the principles of alter ego piercing]. Marvel Building v. David, 9 Phil. 376
(1951).
A taxpayer has the legal right to decrease the amount of what otherwise would be his
taxes or altogether avoid them by means which the law permits, which therefore would only
constitute tax avoidance which would allow piercing even in the absence of fraud (i.e., tax
evasion) under the guise that the use of the separate corporate veil was a means to defeat
public convenience. However, when the maintenance of the separate juridical entities serve
only to minimize the collective taxes that the corporations are paying, whereas in their
operations they are operated in overlapping and informal manner, would justify the piercing
of the corporate veil based on alter ego considerations for purposes of collecting the proper
taxes. ✓Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961).55
The plea to pierce the veil of corporate fiction on the allegation that the corporations’
true purpose is to avoid payment by the incorporating spouses of the estate taxes on the
properties transferred to the corporations: “With regard to their claim that [the companies]
Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes,
suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise
could be his taxes or altogether avoid them, by means which the law permits, cannot be
doubted.” Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
In a number of cases, the Court has shredded the veil of corporate identity and ruled that
where a corporation is merely an adjunct, business conduit or alter ego of another
corporation or when they practice fraud on internal revenue laws, the fiction of their separate
and distinct corporate identities shall be disregarded, and both entities treated as one taxable
person, subject to assessment for the same taxable transaction. Comm. of Internal Revenue
v. Menguito, 565 SCRA 461 (2008).
8. DUE PROCESS CLAUSE CONSIDERATIONS IN PIERCING CASES
a. Suit Against Controlling Shareholder Is Not a Suit Against the Corporation or the
Subsidiary That Would Allow the Piercing Doctrine to Be Applied Against the Latter:
Failure to implead the corporations as defendants and merely annexing a list of such
corporations to the complaints is a violation of due process for it would in effect be
55Liddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961); CIR v. Norton and Harrison, 11 SCRA 704 (1964).
26
disregarding their distinct and separate personality without a hearing. PCGG v.
Sandiganbayan, 365 SCRA 538 (2001).
Although both trial and appellate courts found sufficient basis for the conclusion that
PKA and Phoenix Omega were one and the same, and the former is merely a conduit of
the other, We hold void the application of a writ of execution on a judgment held only
against PKA, since the RTC obtained no jurisdiction over the person of Phoenix Omega
which was never summoned as formal party to the case. The general principle is that no
person shall be affected by any proceedings to which he is a stranger, and strangers to a
case are not bound by the judgment rendered by the court. Padilla v. Court of Appeals,
370 SCRA 208 (2001).
Piercing the veil of corporate fiction is applied only to determine established liability;
it is not available to confer on the court a jurisdiction it has not acquired, in the first place,
over a party not impleaded in the case. The doctrine comes into play only during the trial
of the case after the court has already acquired jurisdiction over the corporation. Hence,
before this doctrine can be even applied based on the evidence presented, it is imperative
that the court must first have jurisdiction over the corporation. ✓Mayor v. Tiu, 810 SCRA
256 (2016).
BUT SEE: Piercing of the corporate veil is premised on the fact that the corporation
concerned must have been properly served with summons or properly subjected to the
jurisdiction of the court a quo. Corollary thereto, it cannot be subjected to a writ of
execution meant for another in violation of its right to due process. There exists, however,
an exception to this rule: if it is shown "by clear and convincing proof that the separate and
distinct personality of the corporation was purposefully employed to evade a legitimate
and binding commitment and perpetuate a fraud or like wrongdoings.” ✓Int’l Academy of
Management and Economics v. Litton and Co., Inc., 848 SCRA 437 (2017).
HOWEVER: A suit brought against the corporate officers sued in their official capacity
would allow the application of the piercing doctrine to make the corporation liable since
the corporation, although not made a formal party to the case, was not denied due
process. ✓Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965).
b. To Make Acting Officers Personally Liable under the Piercing Doctrine, Is There a Need to
Bring a New Case Against the Officer?
Application of the piercing doctrine may be made even during the enforcement of the
judgment debt of the corporation against the controlling shareholders. ✓McConnel v.
Court of Appeals, 1 SCRA 723 (1961).
There is no denial of due process to hold officers liable under the piercing doctrine,
provided that evidential basis has been adduced during trial to apply the piercing doctrine.
✓Jacinto v. Court of Appeals, 198 SCRA 211 (1991).
We suggested as much in Arcilla v. Court of Appeals, 215 SCRA 120 (1992), where we
found lawful the Court of Appeal’s application of the piercing doctrine to hold the
President liable for the obligations incurred in the name of the corporation although it was
not a party to the collection suit before the trial court. Violago v. BA Finance Corp., 559
SCRA 69 (2008).
The elements of “control” laid down in Concept Builders to allow the application of
the piercing doctrine must be properly pleaded and proved during the hearing on the
merits, and cannot be merely raised for the first time in the motion for the issuance of an
alias writ of execution. ✓Pacific Rehouse Corp. v. Court of Appeals, 719 SCRA 665 (2014).
IV. CORPORATE CONTRACT LAW
1. Pre-Incorporation/Promoter’s Contracts
a. Who Is a Promoter?
27
“Promoter” is a person who, acting alone or with others, takes initiative in founding
and organizing the business or enterprise of the issuer [i.e., corporate enterprise whose
shares are subscribed by investors] and receives consideration therefor. Sec. 3.10,
Securities Regulation Code (R.A. 8799)
b. Pre-incorporation Subscription Agreements (Secs. 59 and 60)
c. Liability Rules for Promoter’s Contracts:
A corporation, until organized, has no being, franchises or faculties, nor do those
engaged in bringing it into being have any power to bind it by contract—it is, as it were, a
child in ventre sa mere. The acts of promoters of a corporation may be ratified by the
corporation if and when subsequently organized, but under the peculiar facts and
circumstances of the present case we decline to extend the doctrine of ratification which
would result in the commission of injustice or fraud to the candid and unwary. ✓Cagayan
Fishing Dev. Co., Inc. v. Teodoro Sandiko, 65 Phil. 223 (1937).
A franchise granted to a corporation still in the process of incorporation would
nevertheless constitute a valid contractual commitment, with the acceptance thereof
subsequent to the completion of incorporation. ✓Rizal Light & Ice Co. v. Public Service
Commission, 25 SCRA 285 (1968).
Promoter’s contracts can be pursued against the investors who were the venture’s
“moving spirit”, but not against those who were merely convinced to invest in the
corporate venture on the basis of the feasibility study undertaken by the promoters.
✓Caram, Jr. v. CA, 151 SCRA 372 (1987).
2. De Facto Corporation (Sec. 19)
a. Elements: ✓Arnold Hall v. Piccio, 86 Phil. 634 (1950).
By its failure to submit its bylaws on time, the AIIBP may be considered a de facto
corporation whose right to exercise corporate powers may not be inquired into collaterally
in any private suit to which such corporations may be a party. Sawadjaan v. Court of
Appeals, 459 SCRA 516 (2005).
The filing of articles of incorporation and the issuance of the certificate of
incorporation are essential for the existence of a de facto corporation. In fine, it is the act
of registration with SEC through the issuance of the Certificate of Incorporation that marks
the beginning of an entity’s corporate existence. Thus, a donation made in favor of the
corporation after the filing of its incorporation papers with the SEC, but before the issuance
of the SEC Certificate of Incorporation requires the application, not of the de facto
corporation doctrine, but rather of the corporation by estoppel doctrine under Sec. 21.
✓Missionary Sisters of Our Lady of Fatima v. Alzona, G.R. No. 224307, 06 Aug 2018.
3. Corporation by Estoppel Doctrine (Sec. 20)
a. Jurisprudential Background:
In the absence of fraud, a person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect admit its legal existence as a
corporate body is thereby estopped to deny its corporate existence in any action leading
out of or involving such contract. Asia Banking Corp. v. Standard Products, 46 Phil. 145
(1924).56
The corporation by estoppel doctrine cannot be applied against the claims of an
innocent third-party who seeks to enforce the contract against the person who entered
into a contract in behalf of a non-existent corporation on the ground of separate juridical
personality. The doctrine that is application is one found in the Law on Agency, i.e., a
purported agent who enters into a contract in the name of the non-existing principal shall
be personally liable for contract so entered into. Vda. De Salvatierra v. Garlitos, 103 Phil.
757 (1958).
56Citing Behn Meyer & Co. v. Rosatzin, 5 Phil. 660 (1906); Chamber of Commerce v. Pua Te Choing, 14 Phil. 222 (1909).
28
We reiterate Salvatiera in that one who has induced another to act upon his willful
misrepresentation that a corporation was duly organized and existing under the law,
cannot thereafter set up against his victim the principle of corporation by estoppel. For
even when there is an existing corporate entity, we have applied the doctrine of piercing
of the veil of corporate fiction to make the actors behind the corporation personally liable
for the contract entered into in the name of the corporation. Albert v. University
Publishing Co., 13 SCRA 84 (1965).
b. Nature of Doctrine: Founded on principles of equity and designed to prevent injustice and
unfairness, the doctrine applies when persons assume to form a corporation and exercise
corporate functions and enter into business relations with third persons. Where no third
person is involved in the conflict, there is no corporation by estoppel. A failed consolidation
therefore cannot result in a consolidated corporation by estoppel. Lozano v. De Los Santos,
274 SCRA 452 (1997)
A party cannot challenge the personality of the plaintiff as a duly organized
corporation after having acknowledged same when entering into the contract with the
plaintiff as such corporation for the transportation of its merchandise. Ohta Dev. Co. v.
Steamship Pompey, 49 Phil. 117 (1926).57
A person who accepts employment in an unincorporated charitable association is
estopped from alleging its lack of juridical personality. Christian Children’s Fund v. NLRC,
174 SCRA 681 (1989).
[Section 20 of RCC] explicitly provides that one who assumes an obligation to an
ostensible corporation cannot resist performance thereof on the ground that there was in
fact no corporation. Clearly, petitioner is bound by his obligation under the MOA not only
on estoppel but by express provision of law. ✓Paz v. New Int’l Environmental Universality,
Inc., 756 SCRA 284 (2015).
The corporation by estoppel doctrine rest on the idea that if the Court were to
disregard the existence of an entity which entered into a transaction with a third party,
unjust enrichment would result as some form of benefit have already accrued on the part
of one of the parties. Thus, in that instance, the Court affords upon the unorganized entity
corporate fiction and juridical personality for the sole purpose of upholding the contract
or transaction. ✓Missionary Sisters of Our Lady of Fatima v. Alzona, G.R. No. 224307, 06
Aug 2018.
c. Two Levels: (i) With “Fraud;” and (ii) Without “Fraud”
When the incorporators represent themselves to be officers of the corporation which
was never registered with SEC, and engaged in the name of the purported corporation in
illegal recruitment, they are estopped from claiming that they are not liable as corporate
officers under [Se. 20 of RCC] which provides that all persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general partners
for all the debts, liabilities and damages incurred or arising as a result thereof. ✓People v.
Garcia, 271 SCRA 621 (1997).
The application of the doctrine applies to a third party only when he tries to escape
liabilities on a contract from which he has benefited on the irrelevant ground of defective
incorporation. In the case at bar, the petitioner is not trying to escape liability from the
contract but rather is the one claiming from the contract. However, one who deals with an
unincorporated association is not estopped to deny its corporate existence when his
purpose is not to avoid liability, but precisely to enforce the contract against the action for
the purported corporation. ✓Int’l Express Travel & Tour Services v. Court of Appeals, 343
SCRA 674 (2000).
57The same principle applied in Compania Agricole de Ultramar v. Reyes, 4 Phil. 1 (1911), but that case pertained to a commercial partnership which
required registration in the registry under the terms of the Code of Commerce).
29
d. Can a Defective Attempt to Form a Corporation Result at Least into a Partnership?
While ordinarily persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of partners inter se; such a
relation, however, does not necessarily exist, for ordinarily persons cannot be made to
assume the relation of partners when their purpose is that no partnership shall exist, and
it should be implied only when necessary to do justice between the parties. Thus, one who
takes no part except to subscribe for stock in a proposed corporation which is never legally
formed does not become a partner with other subscribers who engage in business under
the name of the pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution. A partnership relation between
certain shareholders and other shareholders, who were also directors, will not be implied
in the absence of an agreement, so as to make the former liable to contribute for payment
of debts illegally contracted by the latter. ✓Pioneer Insurance v. Court of Appeals, 175
SCRA 668 (1989).
Under the law on estoppel including that under Sec. 21, those acting on behalf of an
ostensible corporation and those benefited by it, knowing it to be without valid existence,
are held liable as general partners. ✓Lim Tong Lim v. Phils. Fishing Gear Industries, Inc.,
317 SCRA 728 (1999).
4. TRUST FUND DOCTRINE
a. Common Law Premise:Creditors Preferred Over Equity-holders to the Assets of the
Business Enterprise (Art. 2236, Civil Code)
The subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts. ✓Phil. Trust Co. v. Rivera, 44 Phil. 469 (1923); Lumanlan
v. Cura, 59 Phil. 746 (1934).
A share of stock is not an indebtedness of the company to the owner, and therefore, it
is not a credit. Shareholders are not as to their shares creditors of the company, which can
be off-setted against their liabilities to the company. The capital stock of a corporation is a
trust fund to be used more particularly for the security of its creditors. ✓Garcia v. Lim Chu
Sing, 59 Phil. 562 (1934).
The requirement of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which provides that the capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors. Reason:
creditors of a corporation are preferred over the shareholders in the distribution of
corporate assets. There can be no distribution of assets among the shareholders without
first paying corporate creditors; any disposition of corporate funds to the prejudice of
creditors is null and void. ✓Boman Environmental Dev. Corp. v. Court of Appeals, 167 SCRA
540 (1988).58
Even when foreclosure on corporate assets was wrongful done, shareholders have no
standing to recover for themselves moral damages; otherwise, it would amount to the
appropriation by, and the distribution to, such shareholders of part of the corporation’s
assets before the dissolution and the liquidation of its debts and liabilities. APT v. Court of
Appeals, 300 SCRA 579 (1998).
The “trust fund” doctrine considers the subscribed capital stock as a trust fund for the
payment of the debts of the corporation, to which the creditors may look for satisfaction.
Until the liquidation of the corporation, no part of the subscribed capital stock may be
turned over or released to the shareholder (except in the redemption of the redeemable
shares) without violating this principle. Thus dividends must never impair the subscribed
60Also Lyceum of the Phils. v. Court of Appeals, 219 SCRA 610 (1993).
32
not only for the protection of the corporations involved, but more so for the
protection of the public. It has authority to de-register at all times, and under all
circumstances corporate names which in its estimation are likely to generate
confusion.” GSIS Family Bank v. BPI Family Bank, 771 SCRA 284 (2015).
(ii) No Corporate Name Shall Be Allowed if: ✓SEC Memo Circular No. 13-2019
• “Not Distinguishable From That Already Reserved or Registered”
• “Name Already Protected by Law”
• “When Use of Name is Contrary to Law”
(ii) SEC Power to Adjudicate Over Use of Corporate Name (Sec. 17)
By express mandate of law, the SEC has absolute jurisdiction, supervision and
control over all corporations. It is the SEC’s duty to prevent confusion in the use of
corporate names not only for the protection of the corporation involved, but more so
for the protection of the public. It has the authority to de-register at all times, and
under all circumstances corporate names which in its estimation are likely to generate
confusion. Indian Chamber of Commerce Phils., Inc. v. Filipino Indian Chamber of
Commerce in the Philippines, Inc., 799 SCRA 27 (2016).
(iv) Effect of Change of Corporate Name: A corporation may change its name by the
amendment of its articles of incorporation, but the same is not effective until
approved by the SEC. Phil. First Insurance Co. v. Hartigan, 34 SCRA 252 (1970).
A change in the corporate name does not make a new corporation, and has no
effect on the identity of the corporation, or on its property, rights, or liabilities.
Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992).61
(v) Use of Corporate Names of Dissolved Corporations – A dissolved corporation’s name
shall not be allowed to be used within 3 years after approval of dissolution by the SEC,
unless allowed by the last shareholders representing at least majority of the
outstanding capital stock. Indian Chamber of Commerce Phils. Inc. v. Filipino Indian
Chamber of Commerce in the Phils., 799 SCRA 27 (2016).
d. Purpose Clauses (Secs. 14[b] and 41)
The primary purpose clause in the articles of incorporation is meant to protect
shareholders so they will know the main business of the corporation and file derivative
suits if the corporation deviates from the primary purpose. Uy Siuliong v. Director of
Commerce and Industry, 40 Phil. 541 (1919).
“The best proof of the purpose of a corporation is its articles of incorporation and
bylaws. The articles of incorporation must state the primary and secondary purposes of
the corporation, while the bylaws outline the administrative organization of the
corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said
purpose.” Therefore, the allegation that the corporations were organized to illegally avoid
the provisions on land reform and to avoid the payment of estate taxes, constitute
prohibited collateral attack. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003).
d. Corporate Term (Sec. 11):
(i) DEFAULT RULE: Perpetual Term
(ii) Retention/Choosing of Definite Corporate Term
(iii) Extension of Definite Corporate Term: No extension of term can be effected once
dissolution stage has been reached, as it constitutes new business. Alhambra Cigar v.
SEC, 24 SCRA 269 (1968).
Article 605 of Civil Code “clearly limits any usufruct constituted in favor of a
corporation or association to 50 years. A usufruct is meant only as a lifetime grant.
Unlike a natural person, a corporation’s lifetime may be extended indefinitely. The
usufruct would then be perpetual. This is especially insidious in cases where the
61P.C. Javier & Sons v. CA, 462 SCRA 36 (2005); Zuellig Freight and Cargo Systems v. NLRC, 701 SCRA 562 (2013).
33
usufruct given to a corporation covers public land.” National Housing Authority v.
Court of Appeals, 456 SCRA 17 (2005).
(iv) Revival of Expired Corporations: ✓SEC Memo Circular No. 23-2019
➢ “Reincorporation” mandated in xChung Ka Bio v. IAC, 163 SCRA 534 (1988) no
longer applies.
e. Principal Place of Business (Secs. 13[c] and 50): Place of residence of the corporation is the
place of its principal office. Clavecilla Radio System v. Antillon, 19 SCRA 379 (1967)
The residence of its President is not the residence of the corporation because a
corporation has a personality separate and distinct from that of its officers and
shareholders. Sy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982).
Although the Rules of Court do not provide expressly, jurisprudence has settled that the
place where the principal office of a corporation is located, as stated in the articles, indeed
establishes its residence. This ruling is important in determining the venue of an action by
or against a corporation, as in the present case. Hyatt Elevators and Escalators Corp. v.
Goldstar Elevators, Phils., Inc., 473 SCRA 705 (2005), citing VILLANUEVA, PHILIPPINE CORPORATE
LAW (1998), p. 162.
f. No Minimum Capitalization (Sec. 12)
➢ Why Is Authorized Capital Stock Required to Be Stated under Sec. 13(h)?
g. No More Subscription and Paid-Up Requirements (Sec. 13 of old Corporation Code)
➢ BUT SEE: 25% Subscription – 25% Paid-up Requirement under Section 37 for Increasing
the Authorized Capital Stock
3. Grounds for Disapproval of the Articles (Sec. 16)
When the proposed articles show that the object is to organize a barrio into a separate
corporation for the purpose of taking possession and having control of all municipal property
within the incorporated barrio and administer it exclusively for the benefit of the residents,
the object is unlawful and the articles can be denied registration. Asuncion v. De Yriarte, 28
Phil. 67 (1914).
4. Amendments to the Articles (Sec. 15)
VI. BYLAWS
1. Nature and Function and Contents of Bylaws (Sec. 46)
The power to adopt bylaws is an inherent power on the part of those forming a
corporation or any other form of association. Gokongwei, Jr. v. SEC, 89 SCRA 337 (1979).
As the “rules and regulations or private laws enacted by the corporation to regulate,
govern and control its own actions, affairs and concerns and its stockholders/members and
directors and officers with relation thereto and among themselves in their relation to it,”
bylaws are indispensable to corporations. These may not be essential to corporate birth but
certainly, these are required for an orderly governance and management of corporations.
Loyola Grand Villas Homeowners v. CA, 276 SCRA 681 (1997).
Bylaws are traditionally defined as regulations, ordinances, rules or laws adopted by a
corporation for its internal governance, including rules for routine matters such as calling
meetings and the like. If those key bylaw provisions on matters such as quorum requirements,
meetings, or on the internal governance of the local/chapter are themselves already provided
for in the constitution, then it would be feasible to overlook the requirements for bylaws.
Indeed in such an event, to insist on the submission of a separate document denominated as
“ByLaws” would be an undue technicality, as well as a redundancy. San Miguel Corp. v.
Mandaue Packing Products Plants Union-FFW, 467 SCRA 107 (2005).
Bylaws are the self-imposed rules resulting from the agreement between the country
club and its members to conduct the corporate business in a particular way. In that sense, the
bylaws are the private “statutes” by which the country club is regulated, and will function.
Bylaws constitute a binding contract as between the country club and its members, and as
34
among the members themselves. They are self-imposed private laws binding on all members,
directors, and officers of the country club. The prevailing rule is that the provisions of the
articles of incorporation and the bylaws must be strictly complied with and applied to the
letter. ✓Ching v. Quezon City Sports Club, Inc., 807 SCRA 46 (2016).62
a. New Mandated Contents of the Bylaws (Sec 46):
• Mode by which a shareholder, member, director, or trustee may attend meetings
and cast their votes
• An arbitration agreement may be provided in the Bylaws pursuant to Section 181
2. Adoption Procedure for Bylaws (Sec. 45)
a. Section 45 Removed the One Month from Incorporation Period to Adopt Bylaws, and has
rendered the following decisions irrelevant:
There can be no automatic dissolution simply because the incorporators failed to file
the required bylaws under Sec. 46 of old Corporation Code. Proper notice and hearing are
cardinal components of due process in any democratic institution, agency or society. In
other words, the incorporators must be given the chance to explain their neglect or
omission and remedy the same. Loyola Grand Villas Homeowners Assn. v. Court of Appeals,
276 SCRA 681 (1997).
A corporation which has failed to file its bylaws within the prescribed period does not
ipso facto lose its powers as such, and may be considered a de facto corporation whose
right to exercise corporate powers may not be inquired into collaterally in any private suit
to which such corporations may be a party. Sawadjaan v. Court of Appeals, 459 SCRA 516
(2005).
b. Failure to Adopt and Maintain the Bylaws Now Specifically Criminally Punishable and
Subject to SEC’s Contempt Power (Sec. 161)
3. COMMON LAW INTRAMURAL LIMITATIONS ON BYLAWS
a. Bylaws Cannot Be Contrary to Law, Public Policy or the Charter
A bylaw provision that empowers the Board of Directors to cancel the shares of any
member and return to the owner thereof the value thereof is void for being in violation of
the Corporation Law that provided that capital can only be returned after dissolution.
Government of P.I. v. El Hogar Filipino, 50 Phil. 399 (1927).
A bylaw provision granting to a shareholder permanent seat in the Board of Directors
is void, even when formally adopted by the members of the association, because it is
contrary to the provision of the [Revised] Corporation Code requiring all members of the
Board to be elected by the shareholders. Grace Christian High School v. Court of Appeals,
281 SCRA 133 (1997).
Bylaw provisions cannot be such or be amended to be able to go around the security
of tenure clause of employees nor impair the obligation of existing contracts or rights;
otherwise, it would enable an employer to remove any employee from his employment by
the simple expediency of amending its bylaws and providing that his/her position shall
cease to exist upon occurrence of a specified event.” Salafranca v. Philamlife (Pamplona)
Village Homeowners Assn., 300 SCRA 469 (1998).
Board of Directors should act in the manner and within the formalities, if any,
prescribed in its charter or bylaws. Thus, Board must act as a body in a meeting called
pursuant to the law or the corporation’s bylaws; otherwise, any action taken therein may
be questioned by the objecting director or shareholder. Certainly, the rules set in the
bylaws are mandatory for every member to respect; they are the fundamental law with
which the corporation and its officers and members must comply. It is on this score that
we cannot sustain the Bernas Group’s stance that the subsequent annual shareholders’
meetings were valid. ✓Bernas v. Cinco, 761 SCRA 104 (2015).
62 Forest Hills Golf and Country Club v. Gardpro, Inc., 739 SCRA 28 (2014).
35
b. Bylaws Cannot Be Unreasonable or Be Contrary to their Very Nature
Bylaws are intended merely for the protection of the corporation, and prescribe
regulation, not restrictions on property rights of shareholders; they are always subject to
the charter of the corporation. Rural Bank of Salinas, Inc. v. Court of Appeals, 210 SCRA
510 (1992).
Authority granted to a corporation to regulate the transfer of its stock does not
empower the corporation to restrict the right of a shareholder to transfer his shares, but
merely authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).
c. Bylaws Cannot Discriminate Among Its Shareholders or Members
4. Generally, Bylaws Are Not Binding on the Dealing Public
Bylaw provisions on the required quorum for special meetings of the Board have the
force of law and are binding even on third-parties who deal with the properties of the
corporation. ✓Peña v. Court of Appeals, 193 SCRA 717 (1991).
The nature of bylaws being intramural instruments would mean that they are not binding
on third-parties, except those who have actual knowledge of their contents. ✓China Banking
Corp. v. Court of Appeals, 270 SCRA 503 (1997).
Contracts entered into on behalf of the corporation not signed by the Chairman in
violation of the specific bylaw provision are not void, since bylaws operate merely as internal
rules among the shareholders, they cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same.” PMI Colleges v. NLRC, 277 SCRA 462
(1997).
5. Amendments and Revisions of Bylaws (Sec. 47)
VII. CORPORATE POWERS AND CAPACITY
1. Corporate Power and Juridical Capacity to Act (Art. 46, Civil Code; Secs. 36 and 45)
A corporation has no power except those expressly conferred by the [Revised]
Corporation Code and those that are implied or incidental to its existence. In turn, a
corporation exercises said powers through its Board of Directors and/or its duly authorized
officers. In turn, physical acts of the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose by corporate bylaws or
by a specific act of the Board. Shipside Inc. v. CA, 352 SCRA 334 (2001). 63
A corporation has only such powers as are expressly granted by law and its articles of
incorporation (express powers), those which may be incidental to such conferred powers,
those reasonably necessary to accomplish its purposes (implied powers), and those which
may be incident to its existence as a juridical entity (incidental powers). Pilipinas Loan Co. v.
SEC, 356 SCRA 193 (2001). 64
a. Express Powers Enumerated in SECTION 35
b. Implied Powers: When the articles expressly provide that the purpose was to “engage in
the transportation of person by water,” such corporation cannot engage in the business of
land transportation, which is an entirely different line of business. Luneta Motor Co. v. A.D.
Santos, Inc., 5 SCRA 809 (1962).
A corporation whose primary purpose is to generate electric power has no authority
to undertake stevedoring services to unload coal into its pier since it is not reasonably
necessary for the operation of its power plant. National Power Corp. v. Vera, 170 SCRA 721
(1989).
A corporation organized to engage as a lending investor cannot engage in pawnbroker.
Pilipinas Loan Co. v. SEC, 356 SCRA 193 (2001).
63Salenga v. CA, 664 SCRA 635 (2012); Ellice Agro-Industrial Corp. v. Young, 686 SCRA 51 (2012); Ignacio v. Home Bankers Savings and Trust
36
A mining company has not power to engage in real estate development. Heirs of
Antonio Pael v. Court of Appeals, 372 SCRA 587 (2001).
c. Incidental Powers: The act of issuing checks is within the ambit of a valid corporate act,
for it as for securing a loan to finance the activities of the corporation, hence, not an ultra
vires act. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
2. EXPRESS POWERS THAT REQUIRE SHAREHOLDERS’ RATIFICATION
a. Extend or Shorten Corporate Term (Secs. 11, 36 and 80[1])
b. Increase or Decrease Capital Stock (Sec. 37)
Despite the Board resolution approving the increase in capital stock and the receipt of
payment on the future issues of the shares from the increased capital stock, such funds do
not constitute part of the capital stock of until approval of the increase by SEC. Central
Textile Mills v. NWPC, 260 SCRA 368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of union
members, amounts to nothing but a premature and plain distribution of corporate assets
to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital
through the years, and would constitute unfair labor practice. Madrigal & Co. v. Zamora,
151 SCRA 355 (1987).
c. Incur, Create or Increase Bonded Indebtedness (Sec. 37)
d. Sell, Dispose, Mortgage or Encumber All or Substantially All Assets (Sec. 39)
Corporate property is not property of the shareholders or members, and as such, may
not be sold without express authority from the Board of Directors. Litonjua v. Eternit Corp.,
490 SCRA 204 (2006).
Sale by Board of the only corporate property without compliance with Sec. 40
requiring ratification of members representing at least two-thirds of the membership,
would make the sale null and void. Islamic Directorate v. CA, 272 SCRA 454 (1997); Peña
v. CA, 193 SCRA 717 (1991).
The [Revised] Corporation Code defines a sale or disposition of substantially all assets
and property of a corporation as one by which the corporation “would be rendered
incapable of continuing the business or accomplishing the purpose for which it was
incorporated” – any sale or disposition short of this will not need shareholder ratification,
and may be pursued by the majority vote of the Board of Directors. Strategic Alliance Dev.
Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009).
(i) Shareholders’ Approval of Sale of Corporate Assets for PLCs (SEC Memo Circular No.
12-2020)
e. Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 41)
Investment by a sugar central in the equity of a jute-bag manufacturing company used
in packing sugar falls within the implied powers of the sugar central as part of its primary
purpose; it does not need shareholders’ ratification. ✓De la Rama v. Ma-ao Sugar Central
Co., 27 SCRA 247 (1969).
f. Enter into Management Contracts (Sec. 43)
A management contract is not an agency contract, and therefore is not revocable at
will. Nielson & Co. v. Lepanto Consolidated Mining, 26 SCRA 540 (1968); Ricafort v. Moya,
195 SCRA 247 (1991).
3. OTHER CORPORATE POWERS (Sec. 35)
a. Sell Land and Other Properties
When the corporation’s primary purpose is to market, distribute, export and import
merchandise, the sale of land is not within the actual or apparent authority of the
corporation acting through its officers, much less when acting through the treasurer.
Articles 1874 and 1878 of Civil Code requires that when land is sold through an agent, the
37
agent’s authority must be in writing, otherwise the sale is void. San Juan Structural v. Court
of Appeals, 296 SCRA 631 (1998). 65
b. Borrow Funds
The power to borrow money is one of those cases where even a special power of
attorney is required under Art. 1878 of Civil Code. There is invariably a need of an enabling
act of the corporation to be approved by its Board of Directors. The argument that the
obtaining of loan was in accordance with the ordinary course of business usages and
practices of the corporation is devoid of merit because the prevailing practice in the
corporation was to explicitly authorize an officer to contract loans in behalf of the
corporation. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
c. Power to Sue and Be Sued
When the power to sue is delegated by the bylaws to a particular officer, such officer
may appoint counsel to represent the corporation in a pre-trial hearing without need of a
formal board resolution. Citibank, N.A. v. Chua, 220 SCRA 75 (1993).
As a creature of the law, the powers and attributes of a corporation are those set out,
expressly or implied, in the law. Among the general powers granted by law to a corporation
is the power to sue in its own name. This power is granted to a duly-organized corporation,
unless specifically revoked by another law. Umale v. ASB Realty Corp., 652 SCRA 215
(2011).
Under [Sec. 35 in relation to Sec. 22 of RCC], where a corporation is an injured party,
its power to sue is lodged with its Board. A minority shareholder who is a member of the
Board has no such power or authority to sue on the corporation’s behalf. Tam Wing Tak v.
Makasiar, 350 SCRA 475 (2001).66
(i) xCertificate of Non-Forum Shopping
Where petitioner is a corporation, a Board resolution authorizing an officer to
execute the certi-ficate against forum shopping is necessary—a certification not signed
by a duly authorized person renders the petition dismissable, Gonzales v. Climax Mining
Ltd., 452 SCRA 607 (2005);67 such as the administrator or project manager, Esteban, Jr.
v. Vda. de Onorio, 360 SCRA 230 (2001); or the General Manager, Central Cooperative
Exchange Inc. v. Enciso, 162 SCRA 706 (1988).
The corporate veil cannot be used to blatantly violate the prohibition against forum-
shopping. Where the corporation itself has not been remiss in vigorously prosecuting
or defending corporate causes and in using and applying remedies available to it, then
shareholders, whether suing as the majority in direct actions or as the minority in a
derivative suit, cannot be allowed to pursue the same claims. First Philippine
International Bank v. Court of Appeals, 252 SCRA 259 (1996).
For counsel to sign the certification for the corporation, he must specifically be
authorized by the Board of Directors. BPI Leasing Corp. v. CA, 416 SCRA 4 (2003).68
Nonetheless, such lack of authority may be cured: even if the counsel executed the
verification and certificate of non-forum shopping before the board authorized him, the
passing of the board resolution of authorization before the actual filing of the
complaint. Median Container Corp. v. Metropolitan Bank and Trust Co., 561 SCRA 622
(2008); the submission in the motion for reconsideration of the authority to sign the
65AF Realty & Dev., Inc. v. Dieselman Freight Services Co., 373 SCRA 385 (2002); Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003);
Cosco Phils. Shipping v. Kemper Insurance Co., 670 SCRA 343 (2012).
66Shipside Inc. v. CA, 352 SCRA 334 (2001); SSS v. COA, 384 SCRA 548 (2002); United Paragon Mining Corp. v. CA, 497 SCRA 638 (2006);
Mediserv, Inc. v. CA, 617 SCRA 284 (2010); Cebu Bionic Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010); Ellice Agro-Industrial Corp. v. Young, 686
SCRA 51 (2012); Swedish Match Phils v. Treasurer of Manila, 700 SCRA 428 (2013); Esguerra v. Holcim Phils., 704 SCRA 490 (2013); Philippine
Numismatic and Antiquarian Society v. Aquino, 816 SCRA 161 (2017).
67DBP v. CA, 440 SCRA 200 (2004); Public Estates Authority v. Uy, 372 SCRA 180 (2001); PAL v. Flight Attendance and Stewards Assn. of the Phils.
(FASAP), 479 SCRA 605 (2006); Metro Drug Distribution v. Narcisco, 495 SCRA 286 (2006); Cagayan Valley Drug Corp. v. CIR, 545 SCRA 10 (2008)
Mediserv, Inc. v. CA, 617 SCRA 284 (2010); Cosco Phils. Shipping v. Kemper Insurance Co., 670 SCRA 343 (2012); Almeda v. Heirs of Ponciano Almeda,
839 SCRA 630 (2017); BSP v. BG Homes, Inc., G.R. No. 228239, 10 June 2019.
68Mariveles Shipyard Corp. v. CA, 415 SCRA 573 (2003); Nissan Car Lease Phils. v. Lica Management Inc., 780 SCRA 400 (2016); Steamship Mutual
Underwirting Assn. (Bermuda) Ltd. v. Sulpicio Lines, Inc., 840 SCRA 203 (2017).
38
verification and certification constitutes substantial compliance with the procedural
requirements. Asean Pacific Planners v. City of Urdaneta, 566 SCRA 219 (2008).
When a corporate officers has been granted express power by the Board of Directors
to institute a suit, the same is considered broad enough to include the power of said
corporate officer to execute the verification and certification against forum shopping
required in initiatory pleadings under the Rules of Court. Cunanan v. Jumping Jap
Trading Corp., 586 SCRA 620 (2009).
A President can sign the verification and certification against non-forum shopping in
behalf of the corporation without the benefit of a board resolution. South Cotabato
Communications Corp. v. Sto. Tomas, 638 SCRA 566 (2011).
However, the following officials or employees of the company can sign a verification
and certification against forum-shopping without need of a board resolution: (1) the
Chairperson of the Board of Directors, (2) the President of a corporation, (3) the General
Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment
Specialist in a labor case. While the above cases do not provide a complete listing of
authorized signatories to the verification and certification required by the rules, the
determination of the sufficiency of the authority was done on a case to case basis. Pasos
v. PNCC, 700 SCRA 608 (2013).
(ii) xService of Summons on Corporations
Section 11, Rule 14 of the Rules of Civil Procedure uses the term “general manager”
and unlike the old provision in the Rules of Court, it does not include the term “agent”.
Consequently, the enumeration of persons to whom summons may be served is
“restricted, limited and exclusive” following the rule on statutory construction expressio
unios est exclusio alterius. Therefore, the earlier cases that uphold service of summons
upon a construction project manager; 69 a corporation’s assistant manager;70 ordinary
clerk of a corporation;71 private secretary of corporate executives;72 retained counsel;73
officials who had charge or control of the operations of the corporation, like the
assistant general manager;74 or the corporation’s Chief Finance and Administrative
Officer;75 no longer apply since they were decided under the old rule that allows service
of summons upon an “agent”76 of the corporation. E.B. Villarosa & Partners Co., Ltd. v.
Benito, 312 SCRA 65 (1999). 77
d. Hire Employees and Appoint Agents
Except where the authority of employing servants and agents is expressly vested in
the board of directors or trustees, an officer or agent who has general control and
management of the corporation’s business, or a specific part thereof, may bind the
corporation by the employment of such agents and employees as are usual and necessary
in the conduct of such business. But the contracts of employment must be reasonable. Yu
Chuck v. “Kong Li Po,” 46 Phil. 608 (1924).
e. Provide Gratuity Pay for Employees (Sec. 35[j])
Providing gratuity pay for employees is an express power of a corporation under the
[Revised] Corporation Code, and cannot be considered to be ultra vires to avoid any
liability arising from the resolution granting such gratuity pay. Lopez Realty v. Fontecha,
247 SCRA 183, 192 (1995).
f. To Make Reasonable Donations (Sec. 35[i])
39
g. To Enter Into a Partnership, Joint Venture and other commercial agreements with
natural and juridical persons (Sec. 35[h])
Overturns: ✓SEC Opinion, 29 February 1980
✓SEC Opinion No. 16-22. 04 October 2016
While a corporation has no inherent power to enter into a partnership, it may enter into
a joint venture arrangement. ✓Tuason & Co. v. Bolaños, 95 Phil. 106 (1954).
4. ULTRA VIRES DOCTRINE
a. Ultra Vires of the First Type: Classic Ultra Vires Acts (Secs. 2 and 44)
An ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the power
conferred upon it by law. The term “ultra vires“ is “distinguished from an illegal act for the
former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.” Atrium Management Corp. v.
Court of Appeals, 353 SCRA 23 (2001).
A corporation has no power except those expressly conferred on it by the [Revised]
Corporation Code, its charter, and those that are implied or incidental to its existence. In
turn, a corporation exercises said powers through its Board of Directors and/or its duly
authorized officers and agents. Monfort Hermanos Agricultural Dev. Corp. v. Monfort III,
434 SCRA 27 (2004).
From a reading of Sec. 45 (now Sec. 44), it is clear that a corporation has: (1) express
powers, which are bestowed upon by law or its articles of incorporation; and (2) necessary
or incidental powers to the exercise of those expressly conferred. An act which cannot fall
under a corporation's express or necessary or incidental powers is an ultra vires act.
Magallanes Watercraft Assn. v. Auguis, 791 SCRA 445 (2016).
(i) General Judicial Attitude Towards the Ultra Vires Doctrine: The plea of “ultra vires”
will not be allowed to prevail, whether interposed for or against a corporation, when
it will not advance justice but, on the contrary, will accomplish a legal wrong to the
prejudice of another who acted in good faith. Zomer Dev. Corp. v. Int’l Exchange Bank,
581 SCRA 115 (2009).
(ii) Ratification of Ultra Vires Acts – Acts done by the Board of Directors which are ultra
vires cannot be set-aside if the acts have been ratified by the shareholders. ✓Pirovano
v. De la Rama Steamship Co., 96 Phil. 335 (1954).
Even when a particular corporate act does not fall within the express or implied
powers of the corporation, it will not be set aside when, not being malum prohibitum,
the corporation, through its senior officers or its Board of Directors, are estopped from
questioning the legality of such act, contract or transaction. Carlos v. Mindoro Sugar
Co., 57 Phil. 343 (1932). 78
b. Ultra Vires of the Second Type: Doctrine of Centralized Management (Sec. 22)
Acts done in excess of officers’ scope of authority cannot bind the corporation.
However, when subsequently a compromise agreement was on behalf of the corporation
being represented by its President acting pursuant to a Board of Directors’ resolution, such
constituted as a confirmatory act signifying ratification of all prior acts of its officers. NPC
v. Alonzo-Legasto, 443 SCRA 342 (2004).
Contracts or acts of a corporation must be made either by the Board of Directors or
by a corporate agent duly authorized by the Board—absent such valid
delegation/authorization, the rule is that the declaration of an individual directors relating
to the affairs of the corporation, but not in the course of, or connected with the
performance of authorized duties of such director, are held not binding on the corporation.
Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).
78Republic v. Acoje Mining Co., 3 SCRA 361 (1963); Crisologo Jose v. CA, 177 SCRA 594 (1989).
40
Application of the First and Second Types of Ultra Vires – Third persons dealing with
corporations must determine the corporation’s competence as expressly defined by the
law and their articles of incorporation. Corporate acts that are outside those express
definitions under the law or articles of incorporation or those “committed outside the
object for which a corporation is created” are ultra vires. The only exception to this rule is
when acts are necessary and incidental to carry out a corporation's purposes, and to the
exercise of powers conferred by the [Revised] Corporation Code and under a corporation's
articles of incorporation. This exception is specifically included in the general powers of a
corporation under [Sec. 35 of RCC]. ✓University of Mindanao v. BSP, 778 SCRA 458 (2016).
c. Ultra Vires of the Third Type: Although arrangements between the two mining companies
was prohibited under the terms of the old Corporation Law, the Supreme Court did not
declare the nullity of the agreements on the ground that only private rights and interests,
not public interests, were involved in the case.✓Harden v. Benguet Consolidated Mining
Co., 58 Phil. 140 (1933).
VIII. BOARD OF DIRECTORS / TRUSTEES AND OFFICERS
Whatever may be the term used in the company charter, the “Board of Directors” is the
body which (1) exercises all powers provided for under the [Revised] Corporation Code; (2)
conducts all business of the corporation; and (3) controls and holds all properties of the
corporation. Its members have been characterized as clothed with a fiduciary character. Hence,
the corporation’s general counsel cannot represent the members of the Board who have been
sued by the shareholders in a derivative suit, for clearly the Board is separate and distinct from
the corporate entity itself. Hornilla v. Salunat, 405 SCRA 220 (2003).
Nonstock and other special corporations may, through their articles of incorporation or their
bylaws, designate their Governing Board by any name other than as “Board of Trustees.” (Sec.
174)
1. DOCTRINE OF CENTRALIZED MANAGEMENT (Sec. 22)
The raison d’etre behind conferment of corporate powers on the Board is not lost on the
Court – indeed, the concentration in the Board of the powers of control of corporate business
and appointment of corporate officers and managers is necessary for efficiency in any large
organization. Shareholders are too numerous, scattered and unfamiliar with the corporate
business to conduct its affairs directly—so the plan of corporate organization is for the
shareholders to choose the directors who shall control and supervise the conduct of
corporate business. ✓Filipinas Port Services v. Go, 518 SCRA 453 (2007).
[Section 22 of RCC] provides that the corporate powers of all corporations shall be
exercised by the Board of Directors. Just as a natural person may authorize another to do
certain acts in his behalf, so may the Board validly delegate some of its functions to individual
officers or agents appointed by it. Thus, contracts or acts of a corporation must be made
either by the Board of Directors or by a corporate agent duly authorized by the Board. Absent
such valid delegation/authorization, the rule is that the declarations of an individual director
relating to the affairs of the corporation, but not in the course of, or connected with the
performance of authorized duties of such director, are held not binding on the corporation.
Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).79
A corporation is an artificial being and can only exercise its powers and transact its
business through the instrumentalities of its Board of Directors, and through its officers and
agents, when authorized by resolution or by its bylaws. Consequently, when legal counsel was
79Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924); Gamboa v. Victoriano, 90 SCRA 40 (1979); Reyes v. RCPI Employees Credit Union, 499 SCRA 319
(2006); Yasuma v. Heirs of Cecilio S. De Villa, 499 SCRA 466 (2006); Raniel v. Jochico, 517 SCRA 221 (2007); Republic v. Coalbrine Int’l, 617 SCRA
491 (2010); Olongapo City v. Subic Water and Sewerage Co., 732 SCRA 132 (2014); Philippine Stock Exchange (PSE) v. Litonjua, 812 SCRA 121 (2016);
Colegio Medico-FGarmaceutico de Filipinas, Inc. v. Lim, 869 SCRA 298 (2018).
41
clothed with authority through formal board resolution, his acts bind the corporation. De
Liano v. Court of Appeals, 370 SCRA 349 (2001).80
Although the best proof of the authority of the officer to represent or bind the
corporation would be the board resolution itself, the Court has considered a Secretary’s
Certificate of the existence of such board resolution as sufficient proof of authority for a
person named in it to represent the corporation. Meatworld Int’l Inc. v. Hechanova, 842 SCRA
620 (2017).
a. Theories on Source of Board Power
(i) Theory of State-Vested Powers: The Board of Directors generally has a right to ignore
the resolutions of the shareholders on corporate matters, for contracts between a
corporation and the public must be made by the Board in the exercise of its business
judgment, and not by the shareholders. A Director-Treasurer has no power to bind the
company even in transactions that are pursuant to the primary purpose its corporation,
especially when the bylaws specifically provided that the acts entered into can only be
done by the Board of Directors. ✓Ramirez v. Orientalist Co., 38 Phil. 634 (1918).
The powers granted to the Board of Directors are directly vested to them by law
pursuant to [Sec. 22 of RCC]. Thus, the MOA executed among the feuding shareholders
that arranges that the affairs of the corporation shall be in the hands of one set of
shareholders would be void and cannot serve to oust the duly elected Board of Directors
from the exercise of corporate powers. ✓Toms v. Rodriguez, 761 SCRA 679 (2015); 797
SCRA 60 (2016).
(ii) Theory of Shareholder-Delegated Powers: The Board of Directors is a creation of the
shareholders and controls and directs the affairs of the corporation by delegation of the
shareholders. By drawing themselves the powers of the corporation, they occupy
positions of trusteeship in relation to the shareholders. ✓Angeles v. Santos, 64 Phil.
697 (1937).
One of the most important rights of a shareholder is the right to vote for the directors
who are to manage the corporate affairs. The right to choose the persons who will direct
and manage the corporation is significant, because it is the main way in which a
shareholder can have a voice in the management of corporate affairs, or can have a say
on how the purposes and goals of the corporation may be achieved. Once the directors
are elected, the shareholders relinquish corporate powers to the Board in accordance
with law. Tan v. Sycip, 499 SCRA 216 (2006).
b. Board Must Act as a Body to Bind the Corporation (Sec. 52)
Exercise of powers by the Board of Directors may be express and formal through the
adoption of a board resolution in a meeting called for the purpose; or it may be implied
where the Board collectively and knowingly allows the President to enter into important
contracts in the pursuit of the corporate business. ✓Board of Liquidators v. Heirs of
Maximo M. Kalaw, 20 SCRA 987 (1967).
COMPARE: Where the President enters into speculative contracts without prior nor
subsequent Board approvals, nor were the transactions included in the reports to the
Board, such contracts do not bind the corporation. It must be pointed out that the Board
of Directors, not the President, exercises corporate powers. ✓Safic Alcan & Cie v. Imperial
Vegetable Oil Co., 355 SCRA 559 (2001).
A corporation, through its Board of Directors, should act in the manner and within the
formalities prescribed by its charter or by the general law. Thus, directors must act as a
body in a meeting called pursuant, otherwise, any action taken therein may be questioned
by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an
80Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003); Shipside Inc. v. CA, 352 SCRA 334 (2001); Lanuza, Jr. v. BF Corp., 737 SCRA
275 (2014).
42
action of the Board during a meeting, which was illegal for lack of notice, may be ratified
either expressly, by the action of the directors in subsequent legal meeting, or impliedly,
by the corporation’s subsequent course of conduct. Lopez Realty v. Fontecha, 247 SCRA
183 (1995).
c. Effects of Acts by a “Bogus” Board: The acts or contracts effected by a bogus Board would
be void pursuant to Art. 1318 of Civil Code because of the lack of “consent”. Islamic
Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997).
d. Executive and Other Board Committees (Sec. 34): It is within the power of the Board of
Directors to authorize any person or committee to undertake corporate acts. The board
has power to constitute even an executive committee, even when no such committee is
provided for in the articles and bylaws of the corporation. Filipinas Port Services, Inc. v. Go,
518 SCRA 453 (2007).
2. BUSINESS JUDGMENT RULE
a. BJR FIRST BRANCH: On the Transactions Entered Into: When resolutions are passed in good
faith by the Board of Directors, it is valid and binding, and whether or not it will cause
losses or decrease the corporation’s profits, the courts have no authority to review them.
Questions of policy or management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute its judgment
[for that] of the Board. The Board is the corporation’s business manager, and so long as it
acts in good faith its orders are not reviewable by the courts. ✓Montelibano v. Bacolod-
Murcia Milling Co., 5 SCRA 36 (1962).81
While SEC is the agency with the primary say as to whether or not securities, including
shares of a corporation, may be traded or not in the stock exchange, it does not mean that
PSE’s management prerogatives are under the absolute control of the SEC. The PSE is, after
all, a corporation authorized by its corporate franchise to engage in its proposed and duly
approved business. One of the PSE’s main concerns, as such, is still the generation of profit
for its shareholders. ✓Philippine Stock Exchange v. Court of Appeals, 281 SCRA 232
(1997).
No court can, in resolving the issues between squabbling shareholders, order the
corporation to undertake certain corporate acts, since it would be in violation of the
business judgment rule. ✓ Ong Yong v. Tiu, 401 SCRA 1 (2003), citing VILLANUEVA, PHILIPPINE
CORPORATE LAW (1998 ed), p. 288.
b. BJR SECOND BRANCH: On the Personal Liability of the Acting Directors and/or Officers:
Directors and officers who purport to act for the corporation, keep within the lawful scope
of their authority and act in good faith, do not become liable, whether civilly or otherwise,
for the consequences of their acts, which are properly attributed to the corporation alone.
Benguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992).
If the cause of the losses is merely error in business judgment, not amounting to bad
faith or negligence, directors and/or officers are not liable. For them to be held
accountable, the mismanagement and the resulting losses must be proven to have
resulted from bad faith and with malice in doing the assailed acts. Bad faith does not simply
connote bad judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of a known duty through some motive
or interest or ill-will partaking of the nature of fraud. Filipinas Port Services, Inc. v. Go, 518
SCRA 453 (2007).
It is elementary in Corporation Law that the business judgment rule, which prohibits
the courts from interfering in the judgment made by the Board and its officers, admits of
exceptions: bad faith being one of them, gross negligence, another. Virata v. Ng Wee, 830
SCRA 271 (2017).
81Estacio v. Pampanga I Electric Cooperative, Inc., 596 SCRA 542 (2009); Cua, Jr. v. Tan, 607 SCRA 645 (2009).
43
3. COUNTERVAILING DOCTRINES TO PROTECT CORPORATE CONTRACTS
a. Doctrine of Ratification or Estoppel (Art. 1910, Civil Code)
Between the act of the Board as a body affirming informally the perfection of a
contract entered into in behalf of the corporation by a senior officer, and the subsequent
formal board resolution rejecting the same contract, the former must prevail under the
doctrine of estoppel. Acuña v. Batac Producers Cooperative Marketing Assn., 20 SCRA 526
(1967).
Ratification means that the principal voluntarily adopts, confirms and gives sanction
to some unauthorized act of its agent on its behalf. The substance of the doctrine is
confirmation after conduct, amounting to a substitute for a prior authority. Ratification
can be made either expressly or impliedly. Implied ratification may take various forms—
like silence or acquiescence, acts showing approval or adoption of the act, or acceptance
and retention of benefits flowing therefrom. Lopez Realty v. Spouses Tanjangco, 739 SCRA
644 (2014).
In order to ratify the unauthorized act of an agent to bind the corporation, it must be
shown that the Board or officer authorized to ratify had full and complete knowledge of
all the material facts connected with the transaction to which it relates. Ratification can
never be made by the same person who wrongfully assume the power to make the
contract, but the ratification must be by the officer or governing body having authority to
make such contract. Vicente v. Geraldez, 52 SCRA 210 (1973).
The admission by counsel on behalf of the corporation of the latter’s culpability for
personal loans obtained by its corporate officers cannot be given legal effect when the
admission was “without any enabling act or attendant ratification of corporate act,” as
would authorize or even ratify such admission. In the absence of such ratification or
authority, such admission does not bind the corporation. Aguenza v. Metropolitan Bank
and Trust Co., 271 SCRA 1 (1997).
Doctrine of Laches or Stale Demands: The failure or neglect, for an unreasonable and
unexplained length of time, to do that which by exercising due diligence could or should
have been done earlier, or the negligence or omission to assert a right within a reasonable
time, warrants a presumption that the party entitled to assert it either has abandoned it
or declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002).
When an officer in a bank arranges a credit line agreement and forwards the same to
the legal department at its head office, and the bank did no disaffirm the contract, then it
is bound by it. Premier Dev. Bank v. Court of Appeals, 427 SCRA 686 (2004).
Under Art. 1910 of Civil Code, acts done by such officers beyond the scope of their
authority cannot bind the corporation unless it has ratified such acts expressly or tacitly,
or is estopped from denying them. Thus, contracts entered into by corporate officers
beyond the scope of authority are unenforceable against the corporation unless ratified
by the Board. ✓Woodchild Holdings, Inc. v. Roxas Electric Constructions Co., 436 SCRA
235 (2004).
Acts done in excess of officers’ scope of authority cannot bind the corporation;
however, when subsequently a compromise agreement was on behalf of the corporation
being represented by its President acting pursuant to a Board resolution, such constituted
as ratification of all prior acts of its officers. National Power Corp. v. Alonzo-Legasto, 443
SCRA 342 (2004).
b. Doctrines of Apparent Authority (Art. 1883, Civil Code): If a corporation knowingly permits
one of its officers to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts, the corporation will, as against anyone
44
who has in good faith dealt with it through such agent, be estopped from denying the
agent’s authority. ✓Francisco v. GSIS, 7 SCRA 577 (1963).82
A corporation cannot disown its President’s act of obtain a loan from the bank, on the
ground that it never authorized the President by the lack of any formal Board resolution.
The following placed the Board in estoppel in pais: (a) bylaws provides for the powers of
the President, which includes executing contracts and agreements, borrowing money,
signing, indorsing and delivering checks; (b) there were already previous transaction of
discounting the checks involving the same personalities wherein any enabling resolution
from the Board was dispensed with and yet the bank was able to collect from the
corporation. Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991).
The authority of a corporate officer dealing with third persons may be actual or
apparent . . . the principal is liable for the obligations contracted by the agent. The agent’s
apparent representation yields to the principal’s true representation and the contract is
considered as entered into between the principal and the third person. First Philippine Int’l
Bank v. Court of Appeals, 252 SCRA 259 (1996).
Persons who deal with corporate agents within circumstances showing that the agents
are acting in excess of corporate authority, may not hold the corporation liable. Traders
Royal Bank v. Court of Appeals, 269 SCRA 601 (1997).
Estoppel precludes a corporation’s Board from denying the validity of the transaction
entered into by its officer with a third party who in good faith, relied on the authority of
the former as manager to act on behalf of the corporation. ✓Lipat v. Pacific Banking Corp.,
402 SCRA 339 (2003).
Naturally, the third person has little or no information as to what occurs in corporate
meeting, since what transpires in the Board room is entirely an internal matter, and must
necessarily rely upon the external manifestations of corporate consent. The integrity of
commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law. Hence, petitioner may not
impute negligence on the part of the respondents in failing to find out the scope of Atty.
Soluta’s authority. Indeed, the public has the right to rely on the trustworthiness of bank
officers and their acts. ✓Associated Bank v. Pronstroller, 558 SCRA 113 (2008).
The general rule remains that, in the absence of authority from the Board of Directors,
no person, not even its officers, can validly bind a corporation. If a corporation, however,
consciously lets one of its officers, or any other agent, to act within the scope of an
apparent authority, it will be estopped from denying such officer’s authority. …
Unmistakably, the Court’s directive in Yao Ka Sin Trading is that a corporation should first
prove by clear evidence that its corporate officer is not in fact authorized to act on its behalf
before the burden of evidence shifts to the other party to prove, by previous specific acts,
that an officer was clothes by the corporation with apparent authority. ✓Westmont Bank
v. Inland Construction and Dev. Corp., 582 SCRA 230 (2009).83
The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent’s authority if it knowingly permits one of its officers or any other agent
to act within the scope of an apparent authority, and it holds him out to the public as
possessing the power to do those acts. The doctrine does not apply if the principal did not
commit any acts or conduct which a third party knew and relied upon in good faith as a
result of the exercise of reasonable prudence. Moreover, the agent’s acts or conduct must
have produced a change of position to the third party’s detriment. ✓Advance Paper Corp.
v. Arma Traders Corp., 712 SCRA 313 (2013).
82Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 325 SCRA 99 (2000); Soler v. CA, 358 SCRA 57 (2001); United Coconut Planters Bank v. Planters
88Yu Chuck v. “Kong Li Po,” 46 Phil. 608 (1924); Vicente v. Geraldez, 52 SCRA 210 (1973); Boyer-Roxas v. CA, 211 SCRA 470 (1992); Associated
Bank v. Pronstroller, 558 SCRA 113 (2008); Pasos v. PNCC, 700 SCRA 608 (2013).
50
so to act and had recognized, approved and ratified his former and similar actions.”
✓People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998).89
Since [Section 24] mandates that the President shall be a director, it follows that
a person who cannot qualify to be a director cannot validly be appointed President.
✓Lim v. Moldex Land, Inc., 815 SCRA 619 (2017).
It is the Board of Directors, not the President, that exercises corporate powers. It
must be emphasized that the basis for agency is representation and a person dealing
with an agent is put upon inquiry and must discover upon his peril the authority of the
agent. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001).
The President is considered as the corporation’s agent, and as such, his knowledge
of the repeal of a resolution in another juridical person in which his corporation has
an interest, is ascribed to his principal under the theory of imputed knowledge. Rovels
Enterprises v. Ocampo, 392 SCRA 176 (2002).
The President of the corporation which becomes liable for the accident caused by
its truck driver cannot be held solidarily liable for the judgment obligation arising from
quasi-delict, since being President is not sufficient to hold him solidarily liable for the
liabilities adjudged against the corporation and its employee. Secosa v. Heirs of Erwin
Suarez Fancisco, 433 SCRA 273 (2004).
The President is a corporate officers under [Section 24], and issues of dismissal
relating to him would be considered an intra-corporate dispute, not a labor dispute.
Malcaba v. ProHealth Pharma Phils., Inc., 864 SCRA 518 (2018).
(ii) Vice-President: The law does not require that a Vice-President be a shareholder.
Baguio v. Court of Appeals, 226 SCRA 366 (1993).
When the Bylaws provide that the Vice-President and Secretary must have the
same qualifications as those of the President (i.e., must be a member of the Board),
then the appointment of persons who are not members to such positions would
also be unlawful. ✓Lim v. Moldex Land, Inc., 815 SCRA 619 (2017).
(iii) Corporate Secretary: The Corporate Secretary is the custodian of corporate records—
he keeps the stock and transfer book and makes proper and necessary entries therein.
It is his duty and obligation to register valid transfers of stock in the corporate books;
and in the event he refuses to comply with such duty, the transferor-shareholder may
rightfully bring suit to compel performance. Torres, Jr. v. Court of Appeals, 278 SCRA
793 (1997).
A sale that fails to comply with [Sec. 39 of RCC], cannot be invalidated when the
buyer relies upon a Secretary’s Certificate confirming authority. A Secretary’s
Certificate regular on its face can be relied upon by a third party who does not have
to investigate the truths of the facts contained in such certification; otherwise
corporate business transactions would become tortuously slow and unnecessarily
hampered. Esguerra v. CA, 267 SCRA 380 (1997).
Although the Corporate Secretary’s duty to record transfers of stock is ministerial,
he cannot be compelled to do so when the transferee’s title to said shares has no
prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure
and sale, does not acquire ownership rights over the pledged shares and thus cannot
compel the corporate secretary to record his alleged ownership of such shares on the
basis merely of the contract of pledge. Mandamus will not issue to establish a right,
but only to enforce one that is already established. Lim Tay v. Court of Appeals, 293
SCRA 634 (1998);
Per its Secretary’s Certificate, the Foundation had given its President ostensible and
apparent authority to inter alia deal with the respondent bank, and therefore the
89Advance Paper Corp. v. Arma Traders Corp., 712 SCRA 313 (2013).
51
Foundation is estopped from questioning the President’s authority to obtain the
subject loans from the respondent bank. Lapulapu Foundation, Inc., v. Court of
Appeals, 421SCRA 328 (2004).
The proper evidence of a Board resolution approving the sale of a piece of land can
only the Secretary’s Certificate embodying such resolution, since it serves as the
corporation’s official document showing the corporate actions approved by its Board
of Directors, as well as the extent and scope of authority necessarily conferred to its
agents for the execution and implementation of such actions. Lim v. People, 862 SCRA
405 (2018).
(iv) Corporate Treasurer: A Corporate Treasurer’s function have generally been described
as “to receive and keeps funds of the corporation, and to disburse them in accordance
with the authority given him by the board or the properly authorized officers.” Unless
duly authorized, a treasurer, whose power are limited, cannot bind the corporation in
a sale of its assets, which obviously is foreign to a corporate treasurer’s function. San
Juan Structural v. CA, 296 SCRA 631 (1998).
A Corporate Treasurer whose negligence in signing a confirmation letter for
rediscounting of crossed checks, knowing fully well that the checks were strictly
endorsed for deposit only to the payee’s account and not to be further negotiated,
may be personally liable for the damaged caused the corporation. Atrium
Management Corp. v. Court of Appeals, 353 SCRA 23 (2001).
(v) Compliance Officer (Sec. 24): For corporations vested with public interests, the Board
shall appoint a compliance officer.
(vi) Manager: Although a branch manager of a bank, within his field and as to third
persons, is the general agent and is in general charge of the corporation, with apparent
authority commensurate with the ordinary business entrusted him and the usual
course and conduct thereof, yet the power to modify contracts of the bank remains
generally with the Board. Being a branch manager alone is insufficient to support the
conclusion that he has been clothed with “apparent authority” to verbally alter terms
of the bank’s written contract, such the mortgage contract. Bañate v. Philippine
Countryside Rural Bank (Liloan, Cebu), Inc., 625 SCRA 21 (2010).
b. BOARD POWER TO APPOINT AND TERMINATE CORPORATE OFFICERS
(i) Who Is a “Corporate Officer” under the Power of the Board to Hire and Fire? (Sec.
25): “Corporate officers” in the context of being the business judgment powers of the
Board to hire and fire are those officers who are given that character by the [Revised
Corporation Code] or by the bylaws. ✓Gurrea v. Lezama, 103 Phil. 553 (1958).90
The position of Executive Secretary provided for in the bylaws is an “officer”
position. Since the appointment of the incumbent did not contain a fix term, the
implication was that the appointee held the appointment at the pleasure of the Board,
such that when the Board opted to replace the incumbent, technically there was no
removal but only an expiration of the term. Mita Pardo de Tavera v. Tuberculosis
Society, 112 SCRA 243 (1982).91
One who is included in the bylaws in its roster of corporate officers is an officer and
not a mere employee. Being a corporate officer, his removal is deemed to be an intra-
corporate dispute cognizable by the SEC and not by the NLRC. Ongkingco v. NLRC, 270
SCRA 613 (1997).92
For purposes of determining applicability of “security of tenure” under Labor Laws,
one who holds a position, no matter how high in the organization, which is not
90Garcia v. Eastern Telecommunications Phils., 585 SCRA 450 (2009); WQPP Marketing Communications v. Galera, 616 SCRA 422 (2010).
91PSBA v. Leaño, 127 SCRA 778 (1984); Dy v. NLRC, 145 SCRA 211 (1986); Visayan v. NLRC, 196 SCRA 410 (1991); Easycall Communications
Phils., v. King, 478 SCRA 102 (2005); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia, 715 SCRA 534 (2014).
92Garcia v. Eastern Telecommunications Philippines, 585 SCRA 450 (2009).
52
provided for by law or defined in the bylaws, is considered still to be an employee and
not an officer, the latter being within the business judgment power of the Board to
hire and fire. Pamplona Plantation Co. v. Acosta, 510 SCRA 249 (2006). 93
Ordinary employees are generally employed not by action of the directors and
shreholders but by that of the Management who also determines the compensation
to be paid such employees. Corporate officers, on the other hand, are elected or
appointed by the directors or shareholders, and are those who are given that
character either by the [Revised] Corporation Code or by the bylaws. Gomez v. PNOC
Dev. and Management Corp., 606 SCRA 187 (2009).94
Even if bylaws provide expressly that the Board of Directors “shall have full power
to create new offices and to appoint the officers thereto,” any office created, and any
officer appointed pursuant to such clause does not become a “corporate officer”, but
is an employee and the determination of the rights and liabilities relating to his
removal are within NLRC’s jurisdiction—they do not constitute intra-corporate
controversies. “A different interpretation can easily leave the way open for the Board
of Directors to circumvent the constitutionally guaranteed security of tenure of the
employee by the expedient inclusion in the Bylaws of an enabling clause on the
creation of just any corporate officer position.” The rulings in Tabang v. NLRC, 266
SCRA 462 (1997), and Nacpil v. International Broadcasting Corp., 379 SCRA 653 (2002),
“should no longer be controlling.” ✓Matling Industrial and Commercial Corp. v.
Coros, 633 SCRA 12 (2010).95
Where the bylaws expressly provide for the positions of “one or more vice-
president”, then the appointment of the Executive Vice-President pursuant to said
bylaw provision would make the appointee a corporate officer within the
contemplation of our ruling in Matling Industrial and commercial Corp v. Coros.
✓Cacho v. Balagtas, 855 SCRA 11 (2018).
Under [Sec. 24 of RCC], the President is considered a corporate officer; whereas,
“Assistant Vice President” is not among the officers stated therein, must less is it
provided for in the bylaws. The dismissal of the President is therefore an intra-
corporate dispute that is beyond the jurisdiction of the NLRC, while the dismissal of
the Assistant Vice President was well within NLRC’s jurisdiction to resolve. Malcaba v.
ProHealth Pharma Phils., Inc., 864 SCRA 518 (2018).
(ii) Nature of Exercise of Power to Terminate Officers: An officer’s removal is a corporate
act, its nature is not altered by the reason or wisdom, or lack thereof, with which the
Board of Directors might have in taking such action. Perforce, the matter would come
within the area of corporate affairs and management, and such a corporate
controversy would call for SEC adjudicative expertise [now RTC Special Commercial
Courts], not that of NLRC. ✓De Rossi v. NLRC, 314 SCRA 245 (1999); Okol v. Slimmers
World Int’l, 608 SCRA 97 (2009).
The President, Vice-President, Secretary and Treasurer are commonly regarded as
the principal or executive officers of a corporation, usually designated as the officers;
however, other officers are sometimes created by the charter or bylaws, or the Board
may be empowered under the bylaws of a corporation to create additional offices as
may be necessary. This Court expounded that an “office” is created by the charter and
the officer is elected by the directors or shareholders, while an “employee” usually
occupies no office and generally is employed not by action of the directors or
shareholders but by the managing officer who also determines the compensation to
93WPP Marketing Communications, Inc. v. Galera, 616 SCRA 422 (2010); Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Loreche-Amit v.
Cagayan de Oro Medical Center, Inc., G.R. No. 216635, 03 June 2019.
94Okol v. Slimmers World Int’l, 608 SCRA 97 (2009); FVR Skills and Services Exponents v. Seva, 739 SCRA 271 (2014).
95Marc II Marketing, Inc. v. Joson, 662 SCRA 35 (2011); Barba v. Liceo de Cagayan University, 686 SCRA 648 (2012); Cosare v. Broadcom Asia,
Inc., 715 SCRA 534 (2014); Ellao y Dela Vega v. Batanga I Electric Cooperative, 871 SCRA 227 (2018).
53
be paid to such employee. The creation of the position is under the charter or by-aws,
and that the election of the officer is by the Board must concur in order for an
individual to be considered a corporate officer, as against an ordinary employee or
officer. It is only when the officer claiming to have been illegally dismissed is classified
as such corporate officer that the issue is deemed an intra-corporate dispute.
✓Wesleyan University-Philippines v. Maglaya, Sr., 815 SCRA 171 (2017).
12. FIDUCIARY DUTIES OF DIRECTORS, TRUSTEES AND OFFICERS
a. Directors as Fiduciaries
The following provisions in the charter of the company are unlawful under the old
Corporation Law: that contracts and transactions with other corporations shall not be
affected by the fact that any of the directors or officers of the company may be interested
in or are directors or officers of such other corporations; that persons who may become
directors or officers this the company are hereby relieved of all responsibilities which they
would otherwise incur by reason of any contracted entered into which this company either
for their own benefit or for the benefit of any person, firm, or corporation to which they
may be interested. The impact of these provisions upon the traditional fiduciary
relationship between the directors and the shareholders of the company is too obvious to
escape notice by the SEC which is called upon to protect the interests of investors. Palting
v. San Jose Petroleum, 18 SCRA 924 (1966).
In Philippine jurisdiction, the members of the Board of Directors have a three-fold
duty: duty of obedience, duty of diligence, and the duty of loyalty. Accordingly, the
members of the Board (1) shall direct the affairs of the corporation only in accordance
with the purpose for which it was organized; (2) shall not willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or act in bad faith or with gross
negligence in directing the affairs of the corporation; and (3) shall not acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees. ✓Strategic
Alliance Dev. Corp. v. Radstock Securities Ltd., 607 SCRA 413 (2009), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW, 2001, p. 318.
b. Duty of Obedience (Sec. 24)
The Board of Directors should act in the manner and within the formalities, if any,
prescribed by its charter or by the general law. Lopez Realty, Inc. v. Fontecha, 247 SCRA
183 (1995).
c. Duty of Diligence (Sec. 30)
The directors shall be personally liable to reimburse the corporation for the amounts
of dividends wrongfully declared and paid to shareholders, when they failed to consider
that the recorded retained earnings in the corporate books was illusory considering the
various accounts receivables that had to be written off as uncollectible. ✓Steinberg v.
Velasco, 52 Phil. 953 (1929).
To make a director personally liable for corporate debts, the wrongdoing approved or
assented to by the director must be a patently unlawful act. Mere failure to comply with
the notice requirement of labor laws on company closure or dismissal of employees does
not amount to a patently unlawful act. Patently unlawful acts are those declared unlawful
by law which imposes penalties for commission of such unlawful acts. There must be a law
declaring the act unlawful and penalizing the act. Carag v. NLRC, 520 SCRA 28 (2007). 96
Under [Sec. 30] personal liability will only attaches to a director or officer if they are
guilty of any of the following: (1) willfully or knowingly vote or asset to patently unlawful
acts of the corporation; (2) gross negligence; or (3) bad faith. It is only in these exceptional
cases when officers are solidarily liable. PCGG v. Gutierrez, 871 SCRA 148 (2018); Kho, Sr.
v. Manganua, G.R. No. 237246 (29 July 2019).
96Dy-Dumalasa v. Fernandez, 593 SCRA 656 (2009); Montealegre v. Spouses De Vera, G.R. No. 208920, 10 July 2019.
54
d. Duty of Loyalty (Secs. 30, 31 and 33)
(i) Doctrine of Corporate Opportunity: It is well established that corporate officers are
not permitted to use their position of trust and confidence to further their private
interests. The “doctrine of corporate opportunity” s precisely a recognition by the
courts that the fiduciary standards could not be upheld where the fiduciary was acting
for two entities with competing interest. The doctrine rest fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage of
an opportunity for his personal profit when the interest of the corporation justly calls
for protection. ✓Gokongwei v. SEC, 89 SCRA 336 (1979).
(ii) Using Inside Information: When a director and majority shareholder, who is the
administrator of corporate affairs directly negotiating the sale of corporate
landholdings to the Government at great prices, purchases the stocks of a shareholder
without informing the latter of the on-going negotiations, such director is deemed to
have fraudulently acquired the shareholdings by way of deceit practiced by means of
concealing his knowledge of important corporate affairs. Strong v. Repide, 41 Phil.
947 (1909).
Doctrine of corporate opportunity applies to confidential employees of the
corporation. cf. Sing Juco v. Llorente, 43 Phil. 589 (1922).
(iii) Self-Dealings of Directors and Officers (Sec. 31)
[Section 31 of RCC] on self-dealings by directors and officers merely incorporate
well-established principles in Corporate Law. A director who enters into a
distributorship agreement with the corporation would make the contract voidable at
the option of the corporation especially when the terms are disadvantageous to the
corporation. Such director cannot claim the same doctrine as an outsider dealing in
good faith with the corporation. ✓Prime White Cement Corp. v. IAC, 220 SCRA 103
(1993).
(iv) Material Related Party Transactions for PLCs (Sec. 31; SEC Memo Circular No. 10-
2019)
e. Contracts Between Corporations with Interlocking Directors (Sec. 32)
The rule under [Sec. 32 of RCC] allowing annulment of contracts between corporations
with interlocking directors resulting in the prejudice to one of the corporation, has no
application to cases where fraud is alleged to have been committed to third parties. DBP
v. Court of Appeals, 363 SCRA 307 (2001).
f. Duty to Maintain Records and Report on Salient Corporate Data (Sec. 161)
(1) To Adopt, Maintain and Allow Inspection of the Bylaws under Sec. 45
(2) To Keep, Maintain and Allow Inspection of Articles of Incorporation and Other
Corporate Books and Records under Sec. 73
➢ See Reporting in the GIS of Beneficial Ownership (SEC Memo. Circular No. 15-
2019)
(3) To Keep and Update the List of Members and Proxies for Nonstock Corporations
under Sec. 92
(4) To Keep, Maintain and Update the Minutes Book for One Person Corporations (OPC)
under Section 128
(5) To Annually Submit to the SEC the General Information Sheet (GIS) and Audited
Financial Statements under Sec. 177;
➢ For Corporations Vested with Public Interests: Also Submit Director Compensation
Report and Director Appraisal and Performance Report
This Court takes judicial notice of the fact that audited financial statements
submitted by corporations, as required by [Sec. 177 of RCC], are made available to the
public. Hence, the Court fails to see how Atty. Castillon violated any law when he
55
attached a copy of Ready Form’s audited financial statements in the Petition for
Blacklisting he filed with the National Publishing Office (NPO). Ready Form, Inc. v.
Castillon, Jr., 859 SCRA 531 (2018).
g. Duty/Obligations to Creditors and Other Stakeholders (Secs. 22 and 30)
(i) Who are “Stakeholders” of a Corporation? SEE: ✓CODE OF CORPORATE GOVERNANCE FOR
PUBLICLY-LISTED COMPANIES (SEC Memo. Circular No. 19, s.2016)
Under the trust fund doctrine, it would be a violation of the right of creditors to
allow the return to the shareholders of any portion of their capital or declare dividends
outside of the unrestricted retained earnings, and that upon the corporation’s
insolvency, the Board of Directors are duty bound to hold its assets primarily for the
payment of the creditors. ✓Mead v. McCullough, 21 Phil. 95 (1911).
The banking system is an indispensable institution in the modern world and plays a
vital role in the economic life of every civilized nation. Whether as mere passive
entities for the safekeeping and saving of money or as active instruments of business
and commerce, banks have become an ubiquitous presence among the people, who
have come to regard them with respect and even gratitude and, most of all,
confidence. x x x The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. In the case at bar, it is obvious that the respondent bank
was remiss in that duty and violated that relationship. What is especially deplorable is
that, having been informed of its error in not crediting the deposit in question to the
petitioner, the respondent bank did not immediately correct it but did so only one
week later or twenty-three days after the deposit was made. ✓Simex International,
Inc. v. Court of Appeals, 183 SCRA 360 (1990).
Since the banking business is impressed with public interest, of paramount
importance is the trust and confidence of the public in general. The diligence required
of banks is more than that of a good father of a family, but the highest degree of
diligence, and high standards of integrity and performance are even required. The
nature of bank’s functions require it “to treat its depositors’ accounts with meticulous
care, always having in mind the fiduciary nature of their relationship.”97 Here, even if
withdrawals were effected before passage of GBL, nonetheless, its Sec. 2 categorical
declaration of the “fiduciary nature of banking that requires high standards of integrity
and performance,” is only a statutory affirmation of Supreme Court decisions in esse
at time of such withdrawals. PNB v. Pike, 470 SCRA 328 (2005). 98
While in theory a hospital as a juridical entity cannot practice medicine, in reality it
utilizes doctors, surgeons and medical practitioners in the conduct of its business of
facilitating medical and surgical treatment. Within that reality, three legal
relationships crisscross: (1) between the hospital and the doctor practicing within its
premises; (2) between the hospital and the patient being treated or examined within
its premises; and (3) between the patient and the doctor. Regardless of its relationship
with the doctor, the hospital may be held directly liable to the patient for its own
negligence or failure to follow established standard of conduct to which it should
conform as a corporation. ✓Professional Services, Inc. v. CA, 611 SCRA 282 (2010).
97Philippine Bank of Commerce v. Court of Appeals [“CA”], 269 SCRA 695 (1997); Bank of P.I. v. CA, 326 SCRA 641 (2000); Bank of P.I. v.
Casa Montessori Internationale, 430 SCRA 261 (2004); Bank of P.I. v. Lifetime Marketing Corp., 555 SCRA 373 (2008); Philippine Savings
Bank v. Chowking Food Corp., 557 SCRA 318 (2008); Bank of America v. Philippine Racing Club, 594 SCRA 301 (20019); Metropolitan Bank
v. Mariñas, 625 SCRA 511 (2011).
98Associated Bank v. Tan, 446 SCRA 282 (2004); Sandejar v. Ignacio, 541 SCRA 61 (2007); Bank of P.I. v. Lifetime Marketing Corp., 555
SCRA 373 (2008); PNB v. Velasco, 564 SCRA 512 (2008); Security Bank v. RCBC, 577 SCRA 407 (2009); Equitable PCI Bank v. Tan, 628
SCRA 346 (2010); Citibank v. Dinopol, 635 SCRA 649 (2010); PCI Bank v. Balmaceda, 658 SCRA 33 (2011); Metropolitan Bank v. Tobias III,
664 SCRA 165 (2012); Metropolitan Bank v. Centro Dev. Corp., 672 SCRA 325 (2012); Comsaving Bank v. Capistrano, 704 SCRA 72 (2013).
56
The Board of Directors is expected to be more than a mere rubber stamp of the
corporation and its subordinate departments. It wields all corporate powers bestowed
by the [Revised] Corporation Code, including the control over its properties and the
conduct of its business. Being stewards of the company, the Board is primarily charged
with protecting the corporate property and assets in behalf of its stakeholders.
Although it cannot be shown that the (two) directors approving the credit line where
unaware of the fraudulent intent for such transactions, nevertheless, they were still
liable for the defrauded investors for gross negligence in managing the affairs of the
company in not exercising more circumspection based on the facts already known to
them that resulted to the prejudice of its clients and stakeholders. Neither can the
business judgment rule apply herein for it is elementary in Corporation Law that the
doctrine admits of exception: bad faith being one of them, gross negligence, another.
✓Virata v. Ng Wee, 830 SCRA 271 (2017); 860 SCRA 49 (2018).
It is well-settled that electricity distribution utilities, which rely on mechanical
devices and equipment for the orderly undertaking of their business, are duty-bound
to make reasonable and proper periodic inspections of their equipment. If they are
remiss in carrying out this duty due to their own negligence, they risk forfeiting the
amounts owed by the customers affected. It must be emphasized that electricity is “a
basic necessity whose generation and distribution is imbued with public interest, and
its provider is a public utility subject to strict regulation by the State in the exercise of
police power;” it is a business vested with public interests. The serious consequences
on a consumer, whose electric supply has been cut off, behoove a distribution utility
to strictly comply with the legal requisites before disconnection may be done. This is
all the more true considering Meralco's dominant position in the market compared to
its customers' weak bargaining position. ✓Manila Electric Co. v. Nordec Philippines,
861 SCRA 515 (2018).
(ii) Formal Recognition of the Duty of Directors/Trustees to Good Corporate
Governance:
➢ Directors/Trustees elected shall perform their duties as prescribed by law, rules
of good corporate governance, and bylaws (Sec. 23)
➢ Qualifications and disqualifications rules imposed by SEC to promote good
corporate governance (Sec. 26)
➢ Contents of the Bylaws for the promotion of good corporate governance (Sec.
46[k])
➢ Duty to present to shareholders/members at annual meetings reports, records
and such other items that the SEC may require in the interest of good corporate
governance and the protection of minority shareholders (Sec. 49[6]) 99
13. LIABILITIES OF DIRECTORS, TRUSTEES AND OFFICERS (Sec. 30)
a. GENERAL RULE: Corporate Officers Not Liable for Corporate Debts: Since a corporation has
a juridical personality separate and distinct from its directors/trustees and officers, the
obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are
not their personal liability but the direct responsibility of the corporation they represent.
Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013).100
ERGO: Unless they have exceeded their authority, corporate officers are not personally
liable for their official acts, because a corporation, by legal fiction, has a personality
separate and distinct from its officers, shareholders and members. Price v. Innodata Phils.,
Inc., 567 SCRA 269 (2008).101
99Integrated Annual Corporate Governance Report under SEC Memo Circular No. 15-2017; Sustainability Reporting Guidelines for PLCs
St. Tomas v. Salac, 685 SCRA 245 (2012); Cosare v. Broadcom Asia, 715 SCRA 534 (2014).
57
Mere ownership by an officer (President) of majority of the equity of the corporation
do not warrant a piercing of the veil of corporate fiction to make such officer personally
liable for the debts of the corporation. Palay, Inc. v. Clave, 124 SCRA 638 (1993).102
A corporation has a personality separate and distinct from the persons composing or
representing it; hence, personal liability attaches only in exceptional cases, such as when
the director, trustee, or officer is guilty of bad faith or gross negligence in directing the
affairs of the corporation. Continental Cement Corp. v. Asea Brown Boveri, Inc., 659 SCRA
137 (2011).103
b. Directors/Trustees or Officers May Contractually Obligating Oneself to Corporate Debts
While the limited liability doctrine is intended to protect the shareholder by
immunizing him from personal liability for the corporate debts, a corporate officer may
nevertheless divest himself of this protection by voluntarily binding himself to the
payment of the corporate debts. Toh v. Solid Bank Corp., 408 SCRA 544 (2003).
Officers signing as corporate representative did not undertake to guarantee
personally the payment of the corporation’s debt embodied in the trust receipts. Debts
incurred by directors, officers and employees acting as corporate agents are not theirs but
the direct liability of the corporation. As an exception, directors or officers are personally
liable for the corporation’s debt if they so contractually agree or stipulate. Tupaz IV v.
Court of Appeals, 476 SCRA 398 (2005).
Where the Chairman & President has made himself accountable in the promissory
note “in his personal capacity and as authorized by the Board Resolution,” and in the
absence of any representation on the part of corporation that the obligation is all its own
because of its separate corporate identity, we see no occasion to consider piercing the
corporate veil as material to the case.” Prisma Construction & Dev. Corp. v. Menchavez,
614 SCRA 590 (2010).
c. Breach of Duty of Diligence Vis-à-vis Section 30: When Directors/Trustees or Officers
Personally Liable for Corporate Transactions:
(i) Directors/Trustees or Officers Personally Liable in Limited Instances: ✓Tramat
Mercantile, Inc. v. Court of Appeals, 238 SCRA 14 (1994).104
(ii) Requisites to Hold Directors/Trustees or Officers Personally Liable
The general rule is that a corporation is invested by law with a personality separate
and distinct from that of the persons composing it, or from any other legal entity that it
may be related to. Therefore, to hold a director officers personally liable for corporate
obligations, the following requisites must concur: (1) complainant must allege in the
complaint that the director or officer assented to a patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2)
complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith. Mactan Rock Industries v. Germo, 850 SCRA 532 (2018).105
Finding of solidary liability on officers and directors would patently be baseless when
the decision contains no allegation or finding regarding particular acts committed by said
officers and director that show them to have been individually guilty of unmistakable
malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate
102Pabalan v. NLRC, 184 SCRA 495 (1990); Sulo ng Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 (1976); Mindanao Motors Lines, v. CIR, 6 SCRA 710
(1962).
103Prisma Construction & Dev. Corp. v. Menchavez, 614 SCRA 590 (2010); Urban Ban, Inc. v. Peña, 659 SCRA 418 (2011) ; Gotesco Properties, v.
Fajardo, 692 SCRA 319 (2013); Olivarez Realty Corp. v. Castillo, 729 SCRA 544 (2014).
104MAM Realty v. NLRC, 244 SCRA 797 (1995); NFA v. CA, 311 SCRA 700 (1999); Atrium Management Corp. v. CA, 353 SCRA 23 (2001); Malayang
Samahan ng mga Manggawgawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001); Powton Conglomerate, Inc. v. Agcolicol, 400 SCRA 523 (2003); H.L.
Carlos Construction v. Marina Properties Corp., 421 SCRA 428 (2004); McLeod v. NLRC, 512 SCRA 222 (2007); Abott Laboratories Phils. V. Alcaraz,
701 SCRA 682 (2013); SPI Technologies v. Mapua, 720 SCRA743 (2014); Lanuza, Jr. v. BF Corp., 737 SCRA 275 (2014); Montallana v. La Consolacion
College Manila, 744 SCRA 163 (2014); Bank of Commerce v. Nite, 763 SCRA 520 (2015); PCGG v. Gutierrez, 871 SCRA 148 (2018).
105Heirs of Fe Tan Uy v. Int’l Exchange Bank, 690 SCRA 519 (2013); Abott Laboratories Phil. v. Alcaraz, 701 SCRA 682 (2013); Polymer Rubber
Corp. v. Salamuding, 702 SCRA 153 (2013); Ico v. Systems Technology Institute, 729 SCRA 439 (2014); FVR Skills and Services Exponents v. Seva,
739 SCRA 271 (2014); Bank of Commerce v. Nite, 763 SCRA 620 (2015); Dimson v. Chua, 811 SCRA 630 (2016); Zaragoza v. Tan, 847 SCRA 437
(2017).
58
officers and directors are sued merely as nominal parties in their official capacities as such,
they cannot be held liable personal for the judgment rendered against the corporation.
NPC. v. Court of Appeals, 273 SCRA 419 (1997). 106
(iii) Bad Faith
To hold a director personally liable for debts of the corporation, and thus pierce the
veil of corporate fiction, the bad faith or wrongdoing of the director must be established
clearly and convincingly. Bad faith is never presumed. Bad faith does not connote bad
judgment or negligence. Bad faith imports a dishonest purpose. Bad faith means [a] breach
of a known duty through some ill motive or interest. Bad faith partakes of the nature of
fraud. Carag v. NLRC, 520 SCRA 28 (2007). 107
“Bad faith” does not arise just because a corporation fails to pay its obligation,
because the inability to pay one’s obligation is not synonymous with fraudulent intent not
to honor the obligations. In order to piece the veil of corporate fiction, for reasons of
negligence by the director, trustee or officer in the conduct of the transactions of the
corporation, such negligence must be “gross”. ✓Magaling v. Ong, 562 SCRA 152 (2008).
(iv) Fraud
An officer-shareholder who signs in behalf of the corporation to a fraudulent contract
cannot claim the benefit of separate juridical entity: “Thus, being a party to a simulated
contract of management, petitioner Uy cannot be permitted to escape liability under the
said contract by using the corporate entity theory. This is one instance when the veil of
corporate entity has to be pierced to avoid injustice and inequity.” Paradise Sauna
Massage Corp. v. Ng, 181 SCRA 719 (1990).
(v) Section 30 Does Not Encompass All of “Breach of Duty of Diligence”
Officers of a corporation may become liable for its loans when they have breached
their duty of diligence under [Sec. 30 of RCC]. Aratea v. Suico, 518 SCRA 501 (2007).108
Holding an officer personally liable for directing the corporate affairs with gross
negligence or in bad faith does not amount to an application of the doctrine of piercing
the veil of corporate fiction, for such personal liability is imposed directly under [Sec. 30
of RCC] to directors and officers who are guilty of violating their duty of diligence.
✓Sanchez v. Republic, 603 SCRA 229 (2009); BUT SEE: ✓Virata v. Ng Wee, 830 SCRA 271
(2017).
d. xJURISPRUDENCE IN LABOR LAW: Under Article 283 of the Labor Code, since a corporate
employer is an artificial person, it must have an officer who can be presumed to be the
employer, “acting in the interest of (the) employer” and therefore the highest officer
becomes personally liable for labor claims. A.C. Ransom Labor Union-CCLU v. NLRC, 142
SCRA 269 (1986).
(i) Overturning the A.C. Ransom Ruling: Only the responsible officer who had a hand in
illegally dismissing an employee should be held personally liable for the corporate
obligations arising from such act. Maglutac v. NLRC, 189 SCRA 767 (1990);109 for the
separate juridical personality of a corporation to be disregarded as to make the
highest corporate officer personally liable on labor claims, the wrongdoing must be
clearly and convincingly established. Del Rosario v. NLRC, 187 SCRA 777 (1990).
106Emilio Cano Enterprises v. CIR, 13 SCRA 291 (1965); Arcilla v. CA, 215 SCRA 120 (1992).
107Banque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949); EPG Constructions Co. v. CA, 210 SCRA 230 (1992); Rustan Pulp & Paper
Mills v. IAC, 214 SCRA 665 (1992); Western Agro-Industrial Corp. v. Court of Appeals, 188 SCRA 709 (1990); Laborte v. Pagsanjan Tourism Consumers’
Coop., 713 SCRA 536 (2014); Olivarez Realty Corp. v. Castillo, 729 SCRA 544 (2014); Pioneer Insurance & Surety Corp. v. Morning Star Travel & Tours,
762 SCRA 283 (2015).
108Singian, Jr. v. Sandiganbayan, 478 SCRA 348 (2005); EDSA Shangri-La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008).
109Gudez v. NLRC, 183 SCRA 644 (1990); Chua v. NLRC, 182 SCRA 353 (1990); Reahs Corp. v. NLRC, 271 SCRA 247 (1997)
59
Corporate officers are not personally liable for money claims of discharged
employees unless they acted with evident malice and bad faith in terminating their
employment. AHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996).110
In labor cases, directors and officers are solidarily liable for the termination of
employment of employees done with malice or in bad faith. In this case, it is
undisputed that the officers have a direct hand in the illegal dismissal of the
employees. They were the one, who as high-ranking officers and directors, signed the
Board resolution retrenching the employees on the feigned ground of serious business
losses that had no basis apart from an unsigned and unaudited Income Statement.
Uichico v. NLRC, 273 SCRA 35 (1997).
A corporation, being a juridical entity, may act only through its directors, officers
and employees and obligations incurred by them, acting as corporate agents, are not
theirs but the direct accountabilities of the corporation. In labor cases, directors and
officers are solidarily liable with the corporation for the termination of employment
of employees done with malice or bad faith. Brent Hospital, Inc. v. NLRC, 292 SCRA 304
(1998).111
Officers cannot be held personally liable for damages on account of employees
dismissal because the employer corporation has a personality distinct from its officers
who merely acted as agents. Malayang Samahan… sa M. Greenfields v. Ramos, 357
SCRA 77 (2001).112
(ii) Limiting the A.C. Ransom Ruling to Insolvent Corporation: A.C. Ransom is not in point
because there the corporation actually ceased operations after the decision of the
court was promulgated against it, making it necessary to enforce it against its former
president. When the corporation is still existing and able to satisfy the judgment in
favor of the private respondent, corporate officers cannot be held personally liable.
Lim v. NLRC, 171 SCRA 328 (1989).
A.C. Ransom will apply only where the persons who are made personally liable for
the employees’ claims are shareholders-officers of employer corporation. Here, a
mere general manager while admittedly the highest ranking corporate representative,
is nevertheless not a shareholder and much less a member of the Board nor an officer
thereof. De Guzman v. NLRC, 211 SCRA 723 (1992).
(iii) A.C. Ransom Reiterated Again in Restuarante Las Conchas v. Llego, 314 SCRA 24
(1999).113
(iv) Definitive Overturning of A.C. Ransom Ruling: It is settled that in the absence of
malice, bad faith, or specific provisions of law, a shareholder or an officer of a
corporation cannot be made personally liable for corporate liabilities. McLeod v. NLRC,
512 SCRA 222 (2007). 114
Clearly, in A.C. Ransom, President organized ROSARIO to evade payment of
backwages to the 22 strikers. This situation, or anything similar showing malice or bad
faith on the part of Patricio, does not obtain in the present case. [What applies
110Nicario v. NLRC, 295 SCRA 619 (1998); Flight Attendants and Stewards Assn. of the Phils. v. PAL, 559 SCRA 252 (2008); M+W Zander Phils. v.
Enriquez, 588 SCRA 590 (2009); AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633, (2009); Lowe, Inc. v. CA, 596 SCRA 140 (2009); Peñaflor
v. Outdoor Clothing Manufacturing Corp., 618 SCRA 208 (2010).
111Culili v. Eastern Telecommunications Phils., 642 SCRA 338 (2011); Grandteq Industrial Steel Products v. Estrella, 646 SCRA 391 (2011); Alert
Security and Investigation Agency, v. Pasawilan, 657 SCRA 655 (2011); Lynvil Fishing Enterprises v. Ariola, 664 SCRA 679 (2012); Blue Sky Trading Co.
v. Blas, 667 SCRA 727 (2012); Polymer Rubber Corp. v. Salamuding, 702 SCRA 153 (2013); Ico v. STI, Inc., 729 SCRA 439 (2014); De Castro v. CA,
805 SCRA 265 (2016); Lozada v. Mendoza, 805 SCRA 673 (2016).
112AMA Computer College-East Rizal v. Ignacio, 590 SCRA 633 (2009).
113Villanueva v. Adre, 172 SCRA 876 (1989); Carmelcraft Corp. v. NLRC, 186 SCRA 393 (1990); Valderrama v. NLRC, 256 SCRA 466 (1996); NYK
Assn. v. NLRC, 310 SCRA 403 (1999); Acesite Corp. v. NLRC, 449 SCRA 360 (2005); Coca-Cola Bottlers Phils. v. Daniel, 460 SCRA 494 (2005); Suldao
v. Cimech System Construction, 506 SCRA 256 (2006); Supreme Steel Pipe Corp. v. Bardaje, 522 SCRA 155 (2007); Culili v. Eastern Telecommunications
Phils., 642 SCRA 338 (2011). Grandteq Industrial Steel Products v. Estrella, 646 SCRA 391 (2011); Mirant (Phils.) Corp. v. Caro, 723 SCRA 465 (2014);
PNOC Energy Dev. Corp. v. Buenfiaje, 795 SCRA 79 (2016).
60
therefore is the ruling [i]n Santos v. NLRC, [254 SCRA 673 (1996)]. McLeod v. NLRC,
512 SCRA 222 (2007). 115
It was clarified in Carag v. NLRC, 520 SCRA 28 (2007), and McLeod v. NLRC, 512
SCRA 22 (2007), that Article 212(e) of Labor Code, by itself, does not make an officer
personally liable for corporate debts—the governing law on personal liability of
directors or officers for debts of the corporation is still [Sec. 30 of RCC]. Pantranco
Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009). 116
e. Personal Liability of Trustees and Officers of Nonstock Corporations: The nonstock
corporation acted in clear bad faith when it sent the final notice to a member under the
pretense they believed him to be still alive, when in fact it had very well known that he had
already died. Nonstock corporations and their officers are not exempt from the obligation
imposed by Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code,
which provisions enunciate a general obligation under law for every person to act fairly
and in good faith towards one another. Valley Golf and Country Club, Inc. v. Vda. De Caram,
585 SCRA 218 (2009).
IX. SHAREHOLDERS AND MEMBERS
1. What Does a “Share of Stock” Represent?
While shares constitute personal property, they are not the property of the corporation.
They are property of the shareholders to whom issued, and they represent an aliquot part to
share in its proceeds of the liquidation of the corporation properties when distributed
according to law and equity. The shareholder is not a co-owner of corporate property, nor is
he entitled to any definite portion of its assets. Stockholders of F. Guanson and Sons, Inc. v.
Register of Deeds of Manila, 6 SCRA 373 (1962).
The registration of shares in a shareolder’s name, the issuance of stock certificates, and
the right to receive dividends are all rights that flow from ownership. Lim Tay v. CA, 293 SCRA
634 (1998).117
As early as the case of Fisher v. Trinidad, We already declared that “[t]he distinction
between the title of a corporation, and the interest of its members or shareholders in the
property of the corporation, is familiar and well-settled. The ownership of that property is in
the corporation, and not in the holders of shares of its stock. The interest of each shareholder
consists in the right to a proportionate part of the profits whenever dividends are declared
by the corporation, during its existence, under its charter, and to a like proportion of the
property remaining, upon the termination or dissolution of the corporation, after payment of
its debts.” Mobilia Products, Inc. v. Umezawa, 452 SCRA 736 (2005).
A person who desires to be recognized as shareholder to exercise shareholders’ right
must secure standing by having his ownership of share recorded on the stock and transfer
book. Thus, only those whose ownership of shares are duly registered in the stock and
transfer book are considered shareholders of record and are entitled to all rights of a
shareholder. Guy v. Guy, 790 SCRA 288 (2016).
2. The Preemptive Right (Sec. 38)
Pre-emptive right under [Section 38] refers to the right of a shareholder of a stock
corporation to subscribe to all issues or disposition of shares of any class, in proportion to
their respective shareholdings. Although it can validly be withdrawn, it cannot be done in
breach of fiduciary duties such as to perpetuate control over the corporation. ✓Majority
Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
The early pronouncement in Datu Tagoranao Benito v. SEC, 123 SCRA 722 (1983) that
pre-emptive right only covers increases in authorized capital stock, has been corrected in Dee
115H.R. Carlos Construction v. Marina Properties Corp., 421 SCRA 428 (2004); Pamplona Plantation Co. v. Acosta, 510 SCRA 249 (2006); Elcee
Farms, Inc. v. NLRC, 512 SCRA 602 (2007); Uy v. Villanueva, 526 SCRA 73 (2007).
116David v.National Federation of Labor Unions, 586 SCRA 100 (2009); Alert Security Investigation Agency v. Pasawilan, 657 SCRA 655 (2011).
117TCL Sales Corp. v. Court of Appeals, 349 SCRA 35 (2001).
61
v. SEC, 199 SCRA 238 (1991), which took note of the new wordings under [Section 38] as to
cover all issuances of shares.
3. Right to Transfer or Dispose of Shareholdings (Sec. 62)
a. Restriction on Transfers—In General
An agreement by which a person obliges himself not to engage in competitive trade
for five years is valid and reasonable and not an undue or unreasonable “restraint of
trade”, and is obligatory on the parties who voluntarily enter into such agreement.
Ollendorf v. Abrahamson, 38 Phil. 585 (1918).
A contractual undertaking on restriction of transfer of shares that has a reasonable
business purpose and limited in coverage is valid and binding. ✓Lambert v. Fox, 26 Phil.
588 (1914).
b. RIGHT OF FIRST REFUSAL
[Section 62 of RCC] contemplates no restriction as to whom the stocks may be
transferred. It does not suggest that any discrimination may be created by the corporation
in favor of, or against a certain purchaser. The owner of shares, as owner of personal
property, is at liberty, under said section to dispose them in favor of whomever he pleases,
without limitation in this respect, than the general provisions of law. ✓Fleishcher v. Botica
Nolasco, 47 Phil. 583 (1925).
The indication on th face of the stock certificate that it is “Nontranferable” alone odes
no compel the corporation to buy back the shares from the shareholder, and held that “in
the absence of a similar contractual obligation and of a legal provision applicable thereto,
it is logical to conclude that it would be unjust and unreasonable to compel the corporation
to comply with a non-existent or imaginary obligation.” ✓Padgett v. Babcock &
Templeton, Inc., 59 Phil. 232 (1933).
The “right of first refusal” is primarily an attribute of ownership; and a waiver thereof
is an act of ownership. To allow the PCGG to vote the sequestered shares for this purpose
would be sanctioning its exercise of an act of strict ownership. PCGG v. SEC, G.R. No.
82188, 30 June 1988 (unrep.)
A corporation cannot by its board, its bylaws, or the act of its officers, create
restrictions in stock transfers, because “Restrictions in the traffic of stock must have their
source in legislative enactment, as the corporation itself cannot create such impediment.
Bylaws are intended merely for the protection of the corporation, and prescribe relation,
not restriction; they are always subject to the charter of the corporation.” The only
limitation imposed by [Section 62] is when the corporation holds any unpaid claim against
the shares intended to be transferred. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
In a landholding corporation which by constitutional mandate is limited to 40% foreign
equity, where there is a right of first refusal t between the co-shareholders, the fact that
the corporation owns land cannot deprive shareholders of their right of first refusal. No
law disqualifies a person from purchasing shares in a landholding corporation even if the
latter will exceed the allowed foreign equity, what the law disqualifies is the corporation
from owning land. J.G. Summit Holdings v. Court of Appeals, 450 SCRA 169 (2005).
c. Remedy If Registration Refused:
Mandamus will not lie to compel the corporate secretary to register the transfer of
shares in the corporate books when the petitioner is not the registered shareholder nor
does he hold a power of attorney from the latter. This is under the general rule that as
between the corporation and its shareholders, the corporation looks only to its books for
the purpose of determining who its share-holders are, so that a mere indorsee of a
certificate of stock, claiming to be the owner, will not necessarily be recognized as such by
the corporation and its officers, in absence of express instructions of the registered owner
62
to make such transfer to the indorsee, or a power of attorney authorizing such transfer.
✓Hager v. Bryan, 19 Phil. 138 (1911).118
BUT SEE: It is already settled jurisprudence that the registration of a transfer of shares
is a ministerial duty on the part of the corporation. 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. ✓Andaya v. Rural Bank of Cabadbaran, 799 SCRA 325
(2016).
A stipulation on the stock certificate that any assignment would not be binding on the
corporation unless registered in the corporate books as required under the bylaws and
without providing when registration should be made, would mean that the cause of action
and the determination of prescription period would begin only when demand for
registration is made and not at the time of the assignment of the certificate. Won v. Wack
Wack Golf & Country Club, 104 Phil. 466 (1958).
Since the law does not prescribe a period within which the registration of purchase of
shares should be effected, the action to enforce the right does not accrue until there has
been a demand and a refusal concerning the transfer.” Ponce v. Alsons Cement Corp., 393
SCRA 602 (2002).119
The claim for damages of what the shares could have sold had the demand for their
registration in the name of the buyer been complied with is deemed to be speculative
damage and non-recoverable. Batong Buhay Gold Mines v. Court of Appeals, 147 SCRA 4
(1987).
4. Rights to Dividends (Sec. 42)
Dividends from retained earnings can only be declared to those who are shareholders of
the corporation; dividends cannot be declared to creditors as part of the settlement of debts.
Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968).
Stock dividend is the amount that the corporation transfers from its surplus profit
account to its capital account. It is the same amount that can loosely be termed as the “trust
fund” of the corporation. NTC v. Court of Appeals, 311 SCRA 508 (1999).
The term “dividend” in its technical sense and ordinary acceptation is that part of portion
of the profits of the enterprise which the corporation, by its governing agents, sets apart for
ratable division among the holders of it capital stock—it is a payment, and the right thereto
is an incident of ownership of stock. Hence, when the Court directed that a total of 111,415
shares of PLDT be reconveyed to the Republic as the rightful owner of said shares that
necessarily included the reconveyance to the Republic of the dividends and interest accruing
thereto. Cojuangco v. Sandiganbayan, 586 SCRA 790 (2009).
[Section 42 of RCC] prohibits the issuance of any stock dividend without the approval of
shareholders, representing not less than two-thirds (2/3) of the outstanding capital stock,
which underscores the fact that payment of dividends to a shareholder is not a matter of right
but a matter of consensus. Furthermore, “interest bearing stocks”, on which the corporation
agrees absolutely to pay interest before dividends are paid to the common shareholders, is
legal only when construed as requiring payment of interest as dividends from net earnings or
surplus only. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
The power to declare dividends under [Sec. 42 of RCC] is with the Board of Directors,
and can be declared only out of its unrestricted retained earnings. Assuming arguendo that
Socorro as corporate director was authorized by the Board to fix the monthly dividends of
Sugiyama, it appears that she committed an ultra vires act because dividends can be
118Rivera v. Florendo, 144 SCRA 643 (1986); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
119Interport Resources Corp. v. Securities Specialists, Inc., 792 SCRA 155 (2016).
63
declared only out of unrestricted retained earnings of a corporation, which earnings cannot
obviously be fixed and pre-determined 5 years in advance.” ✓Ongkingco v. Sugiyama, G.R.
No. 217787, 18 Sept. 2019.
5. Right to Attend Shareholders’/Members’ Meetings (Secs. 6 and 88)
Until challenged successfully in proper proceedings, a registered shareholder has a right
to participate in any meeting, and in the absence of fraud the action of the shareholders’
meeting cannot be collaterally attacked on account of such participation, even if it be shown
later on that the shares had been previously sold (but not recorded). Price and Sulu Dev. Co.
v. Martin, 58 Phil. 707 (1933).
a. Meetings of Shareholders or Members (Secs. 48 and 49)
➢ Recognition of Right to Propose the Holding of a Special Meeting and Items to Be
Included in the Agenda (Sec. 49)
➢ Shareholders’ Right to Put Item on the Agenda (SEC Memo Circular No. 14-2020)
b. Place and Time of Meetings (Secs. 50 and 92)
c. Notices of Meetings (Sec. 50; SEC Memo Circular No. 03-2020)
➢ Specific Matters Accompanying the Notice (Sec. 50)
➢ Specific Rules on Waiver of Improper Notice (Sec. 49)
[Section 49 of RCC] expressly allows a shorter period of notice of shareholders’
meetings that those provided under its default [21 days] period, provided the same is
provided for in the Bylaws, Ricafort v. Dicdican, 787 SCRA 163 (2016); such period set in
the Bylaws is valid even when the period is reckoned from the mailing of the notice rather
than when it is actually received by the shareholder of record, Guy v. Guy, 790 SCRA 288
(2016).
d. Pre-Meeting Procedures
• Closure of the Stock and Transfer Book: 20 days regular; 7 days special (Sec. 49)
• Postponing of Meeting: 2 weeks unless Bylaws provides otherwise (Sec. 49)
e. Conduct of Shareholders’ or Members’ Meetings (Secs. 51 and 52)
(i) Chairman (in his absence the President) Presides (Sec. 53)
(ii) Quorum (Sec. 51)
Quorum is based on the totality of the shares which have been subscribed and
issued whether it be founders’ shares or common shares. To base the computation of
quorum solely on the obviously deficient, if not inaccurate STB, and completely
disregarding the issued and outstanding shares indicated in the articles of
incorporation would work injustice to the owners and/or successors in interest of the
said shares. The STB cannot be used as the sole basis for determining the quorum as
it does not reflect the totality of shares which have been subscribed, more so when
the articles of incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book. Lanuza v. Court
of Appeals, 454 SCRA 54 (2005).
For stock corporations, the “quorum” referred to in [Sec. 51 of RCC] is based on the
number of outstanding voting stocks. For nonstock corporations, only those who are
actual, living members with voting rights shall be counted in determining the
existence of a quorum during members’ meetings. Dead members shall not be
counted. ✓Tan v. Sycip, 499 SCRA 216 (2006).120
(iii) Right to Participate Thru Remote Communication or In Absentia: When authorized
in Bylaws; EXCEPT: Corporations vested with public interests (Secs. 23 and 49)
➢ SEC Guidelines on Attendance and Participation of Stockholders or Members in
Regular and Special Meetings (SEC Memo Circular No. 06-2020)
(iv) Matters That Board Shall Endeavor to Present to Shareholders/Members (Sec. 49)
120Lim v. Moldex Land, Inc., 815 SCA 619 (2017); Villongco v. Yabut, 854 SCRA 132 (2018).
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6. Right to Vote at Shareholders’ or Members’ Meetings
a. Right to Nominate Director or Trustee (Sec. 23)
b. Nature of the Right to Vote
One of the rights of a shareholder is the right to participate in the control and
management of the corporation that is exercised through his vote—a right inherent in and
incidental to the ownership of corporate stock, and as such is a property right. Castillo v.
Balinghasay, 440 SCRA 442 (2004).
Sequestration of shares does not entitle the government to exercise acts of
ownership, since even sequestered shares may be voted upon by the registered
shareholder. Cojuangco Jr. v. Roxas, 195 SCRA 797 (1991). However, inasmuch as the
subject UCPB shares in the present case were undisputably acquired with coco levy funds
which are public in character, then the right to vote them shall be exercised by the PCGG.
Republic v. COCOFED, 372 SCRA 462 (2001); Trans Middle East (Phils) v. Sandiganbayan,
490 SCRA 455 (2006).
c. Instances When Shareholders Entitled to Vote:
- Option to Maintain Fixed Term (Sec. 11)
- Extension or shortening of fixed term (Secs. 11 and 36)
- Amendment of articles of incorporation (Sec. 15)
- Election of directors or trustees (Sec. 23)
- Removal of directors or trustees and filling-up the vacancy (Sec. 27)
- Granting compensation to directors or trustees (Sec. 29)
- Approval of material contracts with directors/trustees (Sec. 31)
- Ratifying contracts between corporations with interlocking directors (Sec. 32)
- Investment in another business or corporation (Secs. 35 and 41)
- Increase or decrease of capital stock (Sec. 37)
- Incurring, or increasing bonded indebtedness (Sec. 37)
- Sale, disposition or encumbrance of all or substantially all of the corporate assets (Sec.
39)
- Declaration of stock dividends (Sec. 42)
- Entering into management contracts (Sec. 43)
- Adoption, amendment and repeal of bylaws (Secs. 45 and 47)
- Fixing of consideration of no par value shares (Sec. 61)
- Merger and consolidation (Sec. 76)
d. When Right to Vote Exercisable Thru Remote Communication or In Absentia (Sec. 23)
e. Right to Vote of Secured Creditors and Administrators (Sec. 54)
When shares are pledged by means of endorsement in blank and delivery of the
covering certificates to lender, the pledgee does not become the owner thereof simply by
the failure of the registered shareholder to pay his loan. Consequently, without proper
foreclosure, the lender cannot demand that the shares be registered in his name. Lim Tay
v. CA, 293 SCRA 634 (1998).
Although the Rules of Court, while permitting an executor or administrator to
represent or to bring suits on behalf of the deceased, do no prohibit the heirs from
representing the deceased. When no administrator has been appointed, there is all the
more reason to recognize the heirs as the proper representatives of the deceased. Gochan
v. Young, 354 SCRA 207 (2001).
e. Voting in Case of Joint Ownership (Sec. 55)
f. Treasury Shares Have No Voting Rights (Sec. 57) Tan v. Sycip, 499 SCRA 216 (2006).
7. Right of Appraisal (Secs. 80 to 85 and 104)
A shareholder who dissents from certain corporate actions has the right to demand
payment of the fair value of his shares, which right of appraisal is expressly recognized in
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Section 81. Clearly, the right of appraisal may be exercised when there is a fundamental
change in the charter or articles of incorporation substantially prejudicing the rights of the
shareholders. It does not vest unless objectionable corporate action is taken. It serves the
purpose of enabling the dissenting shareholder to have his interest purchased and to retire
from the corporation. Turner v. Lorenzo Shipping Corp., 636 SCRA 13 (2010).
8. Contracts and Agreement Affecting Shareholdings
a. PROXY (Sec. 57)
Proxy solicitation involves the securing and submission of proxies, while proxy
validation concerns the validation of such secured and submitted proxies. It is possible that
an intra-corporate controversy may animate a disgruntled shareholder to complain to the
SEC, corporation’s violations of SEC rules and regulations, but that motive alone should not
be sufficient to deprive the SEC of its investigatory and regulatory powers, especially when
such powers are exercisable on a motu proprio basis. GSIS v. Court of Appeals, 585 SCRA 679
(2009).
SEC’s power to pass upon the validity of proxies in election contests has effectively been
withdrawn, tied as it is to its abrogated jurisdictional powers. The fact that the jurisdiction
of the regular courts under Sec. 5(c) is confined to the voting on election of officers, and not
on all matters which may be voted upon by shareholders, elucidates that the power of SEC
to regulate proxies remains extant and could very well be exercised when shareholders vote
on matters other than the election of directors. GSIS v. Court of Appeals, 585 SCRA 679
(2009).
b. VOTING TRUST AGREEMENTS (Sec. 58): A VTA separates the voting rights and other rights
covered of the stock from other attributes of ownership, intended to be irrevocable for a
definite period of time and the purpose of which is to give to the trustee to acquire voting
control of the corporation. ✓Lee v. Court of Appeals, 205 SCRA 752 (1992).
The trustor has a right to terminate the voting trust agreement for breach thereof.
Everett v. Asia Banking Corporation, 49 Phil. 512 (1926).
Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153
(1988).
c. POOLING AGREEMENTS OR SHAREHOLDERS’ AGREEMENTS (Sec. 99)
9. RIGHTS TO INSPECT AND COPY CORPORATE RECORDS
a. Basis of Right
The shareholder’s right of inspection of corporate books and records arises as an
incident of ownership of the assets and property of the corporation. It is therefore an
incident of ownership of the corporate property, whether such interest be termed an
equitable ownership, a beneficial ownership or a quasi-ownership. The right of inspection
is predicated upon the necessity of self-protection on the part of the shareholder.
✓Gokongwei, Jr. v. SEC, 89 SCRA 336 (1979).121
The grant of legal personality to a corporation is conditioned on its compliance with
certain obligations. Among these are its fiduciary responsibilities to its shareholders.
Providing shareholders with access to information is a fundamental basis for their
intelligent participation in the governance of the corporation as a business organization
that they partially own. The law is agnostic with respect to the amount of shares
required. Generally, each individual sgareholder should be given reasonable access so
that he or she can assess or share his or her assessment of the management of the
corporation with other shareholders. The separate legal personality of a corporation is
not so absolutely separate that it divorces itself from its responsibility to its constituent
owners. PASAR Corp. v. Lim, 804 SCRA 600 (2016).
The right to inspect remains valid and enforceable during the 3-year liquidation
123
Spouses Hiteroza v. Cruzada, 794 SCRA 511 (2016).
124 Sy Tiong Shiou v. Sy Chim, 582 SCRA 517 (2009); Roque v. People, 826 SCRA 618 (2017).
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A “family corporation” is not exempt from complying with the clear requirements and
formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or
rules which distinguishes between family corporations and other types of corporations in the
institution by a shareholder of a derivative suit. Ang v. Spouses Ang, 699 SCRA 272 (2013).
a. Nature of the Power to File Derivative Suit
A derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against the corporation, for which the directors
refuse to sue. It is a remedy designed by equity and has been the principal defense of the
minority shareholders against abuses by the majority. Western Institute of Technology, Inc.
v. Salas, 278 SCRA 216 (1997). 125
The whole purpose of the law authorizing a derivative suit is to allow the
shareholders/member to enforce rights which are derivative (secondary) in nature, i.e., to
enforce a corporate cause of action. R.N. Symaco Trading Corp v. Santos, 467 SCRA 312
(2005).126
While an individual suit are filed when the cause of action belong to the shareholder
personally, such a denial of the right of inspection or denial of the right to dividends, a
class suit can be filed when the cause of action belongs to a group of shareholders, such
as when the rights violated belong to preferred shareholders. A derivative suit, on the
other hand, is one which is instituted by a shareholder or a member of a corporation, for
and in behalf of the corporation for its protection from acts committed by directors,
trustees, corporate officers, and even third persons. Agdao Landless Residents Assn., Inc.
v. Maramion, 806 SCRA 74 (2016), citing VILLANUEVA & TIANSAY, PHILIPPINE CORPORATE LAW, p.
474, 2013 ed.
b. Condition Precedent: When Board Cannot Properly Exercise Its Business Judgment
GENERAL RULE: In the absence of a special authority from the Board of Directors to institute
a suit in behalf of the corporation, the President or managing director is disqualified by law
to sue in her own name or for the corporation. The power to sue and be sued is lodged in
the Board that exercises its corporate powers and not in the President. Bitong v. Court of
Appeals, 292 SCRA 503 (1998).
Under [Sec. 35 in relation to Sec. 22 of RCC] a corporation’s power to sue is lodged
with its Board. An individual shareholder is permitted to institute a derivative suit on behalf
of the corporation in order to protect or vindicate corporate rights, whenever the officials
of the corporation refuse to sue, or are the ones to be sued, or hold the control of the
corporation. In such actions, the suing shareholder is regarded as a nominal party, with the
corporation as the real party in interest. ✓Chua v. Court of Appeals, 443 SCRA 259
(2004).127
Minority shareholders do not have any statutory right to override the business
judgments of the officers and Boards of Directors. It is settled that a shareholder's right to
institute a derivative suit is not based on any express provision of the [Revised]
Corporation Code, or even the Securities Regulation Code, but is impliedly recognized
when the said laws make corporate directors or officers liable for damages suffered by the
corporation and its shareholders for violation of their fiduciary duties. ✓Ching v. Subic Bay
Golf and Country Club, Inc., 734 SCRA 569 (2014).128
While questions of policy and management are left to the honest decision of the
officers and directors of a corporation, and the courts are without authority to substitute
their judgment for the judgment of the Board of Directors; yet where the corporate
directors are guilty of breach of trust—not of mere error of judgment or abuse of
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discretion—and intra-corporate remedy is futile or useless, a shareholder may institute a
suit in behalf of himself and other shareholders and for the benefit of the corporation.
However, the corporation is the real party in interest in a derivative suit and the suing
shareholder is only a nominal party. A derivative suit must be differentiated from a class
suit. Cua, Jr. v. Tan, 607 SCRA 645 (2009). 129
In Cua, v. Tan, We held that by virtue of ratification, the acts of the Board of Directors
become the acts of the shareholders themselves, even if those acts were, at the outset,
unauthorized. To declare the Board resolution null and void will serve no practical use or
value, or affect any of the rights of the parties, because the subsequent shareholders’
resolution approving and ratifying said acquisition and the manner in which PRCI shall
constitute the JTH Board of Directors, will still remain valid and binding. ✓Lopez Realty,
Inc. v. Spouses Tanjangco, 739 SCRA 644 (2014).
Grounded on equity, the derivative suit has proven to be an effective tool for the
protection of minority shareholders. Such actions have for their object the vindication of
a corporate injury, even though they are not brought by the corporation, but by its
stockholders. That said, derivative suits remain an exception. As a general rule, corporate
litigation must be commenced by the corporation itself, with the imprimatur of the board
of directors, which, pursuant to the law, wields the power to sue. Therefore, since the
derivative suit is a remedy of last resort, it must be shown that the board, to the detriment
of the corporation and without a valid business consideration, refuses to remedy a
corporate wrong. A derivative suit may only be instituted after such an omission. Simply
put, derivative suits take a back seat to board-sanctioned litigation whenever the
corporation is willing and able to sue in its own name. ✓Ago Realty & Dev. Corp. v. Ago,
G.R. No.s 210906 & 211203, 16 Oct. 2019. & Dev.|
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A lawyer engaged as counsel for a corporation cannot represent members of its
Board of Directors in a derivative suit brought against them. To do so would be
tantamount to representing conflicting interests, which is prohibited by the Code of
Professional Responsibility.” Hornilla v. Salunat, 405 SCRA 220 (2003).
Since a derivative action is a suit by a shareholder to enforce a corporate cause of
action, the corporation is a necessary party to the suit, and the relief which is granted
is a judgment against a third person in favor of the corporation. Similarly, if a
corporation has a defense to an action against it and is not asserting it, a shareholder
may intervene and defend on behalf of the corporation. Chua v. Court of Appeals, 443
SCRA 259 (2004).133
In a derivative suit, a shareholder may validly institute a derivative suit to vindicate
the alleged corporate injury; in which case such shareholders is only a nominal party
while the corporation is the real party-in-interest. Filipinas Port Services v. Go, 518
SCRA 453 (2007).
A minority shareholder-director has no power or authority to sue on the
corporation’s behalf. Nor can we uphold this as a derivative suit, since it is required
that the minority shareholder suing for and on behalf of the corporation must allege
in his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who may wish to join him in
the suit. There is now showing that petitioner has complied with the foregoing
requisites. Tam Wing Tak v. Makasiar, 350 SCRA 475 (2001).134
The status of heirs as co-owners of shares prior to the partition of decedent’s estate
does not immediately and necessarily make them shareholders—unless and until
there is compliance with the [Sec. 62 of RCC] on the manner of transferring shares,
the heirs do not become registered shareholders of the corporation. Puno and Puno
Enterprises, Inc., 599 SCRA 585 (2009).135
(ii) Exhaustion of Intra-Corporate Remedies: A condition precedent to the filing of a
derivative suit is that the party has tried to exhaust intra-corporate remedies, i.e., has
made a demand on the Board of Directors for the appropriate relief, but the latter has
failed or refused to heed his plea. Everett v. Asia Banking Corp., 49 Phil. 512 (1927);
Angeles v. Santos, 64 Phil. 697 (1937).
A derivative suit to question validity of foreclosure of the mortgage on corporate
assets can be filed without prior demand upon the Board of Directors where the
legality of the constitution of the Board lies at the center of the issues. DBP v.
Pundogar, 218 SCRA 118 (1993).
The obvious intent behind the rule requiring the shareholder filing a derivative suit
to first exert all reasonable efforts to exhaust all remedies available under the articles
of incorporation, by laws, laws or rules governing the corporation to obtain relief he
desires is to make the derivative suit the final recourse of the shareholders, after all
other remedies to obtain the relief sought had failed. Yu v. Yukayguan, 589 SCRA 588
(2009).136
While it is true that the complaining shareholder must satisfactorily show that he
has exhausted all means to redress his grievances within the corporation, except when
such remedy is complete control of the person against whom the suit is being filed.
The reason is obvious: a demand upon the board to institute an action and prosecute
the same effectively would have been useless and an exercise in futility. Hi-Yield
Realty, Inc. v. CA, 590 SCRA 548, 557 (2009).
133Go v. Distinction Properties Dev. and Construction, Inc., 671 SCRA 461 (2012).
134Hi-YieldRealty. v. CA, 590 SCRA 548 (2009).
135Reyes v. RTC of Makati, Br. 142, 561 SCRA 593 (2008).
136Ching v. Subic Bay Golf and Country Club, Inc., 734 SCRA 569 (2014).
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(iii) Relief/Remedies Must Be for the Benefit of the Corporation: The complaint cannot
demand for the defendants to pay the suing shareholders the value of their respective
participation in the assets that have been damaged, for a derivative suit must have
cause of action for the benefit of the corporation. Evangelista v. Santos, 86 Phil. 387
(1950).137
Appointment of receiver can be an ancillary remedy in a derivative suit. Chase v.
CFI of Manila, 18 SCRA 602 (1966).
A suit to enforce preemptive rights in a corporation is not a derivative suit, and
therefore a temporary restraining order enjoining a person from representing the
corporation will not bar such action, because it is instituted on behalf and for the
benefit of the shareholder, not the corporation. Lim v. Lim-Yu, 352 SCRA 216 (2001).
Allegations of injury to the relators can co-exist with those pertaining to the
corporation—merely gives an additional cause of action against the erring directors.
Gochan v. Young, 354 SCRA 207 (2001).
Where directors have committed a breach of trust either by their fraud, ultra vires
acts, or negligence, and the corporation is unable or unwilling to institute suit to
remedy the wrong, a shareholder may sue on behalf of himself and other shareholders
and for the benefit of the corporation, to bring about a redress of the wrong done
directly to the corporation and indirectly to the shareholders. In such derivative suit,
the corporation is the real party in interest while the shareholder filing suit is only
nominal party. Hornilla v. Salunat, 405 SCRA 220 (2003).
Since it is the corporation that is the real party-in-interest in a derivative suit, then
the reliefs prayed for must be for the benefit or interest of the corporation. When the
relief prayed for does not pertain to the corporation, then it is an improper derivative
suit. Legaspi Towers 300, Inc. v. Muer, 673 SCRA 453 (2012),138 citing VILLANUEVA,
PHILIPPINE CORPORATE LAW, 1998 ed., p. 375.
A derivative suit presupposes that the corporation is the injured party and the
individual shareholder who files the suit seeks to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or
hold control of the corporation. Here, the harm or injury that Aliño sought to be
prevented pertains to properties registered under Aliño and other third-party
mortgagors. x x x Furthermore, the prayer in the complaint seeks for recovery of the
properties belonging to Aliño and other third party mortgagors, some of whom are
not shareholders of VR Holdings, who mortgaged their properties to BSP. BSP v.
Campa, Jr., 783 SCRA 476 (2016).
(iv) Lack of Appraisal Right: An allegation that appraisal rights were not available for the
acts complained of is another requisite for filing derivative suits under Rule 8, Section
1(3) of the Interim Rules. Also a distinction must be made between an individual
shareholder’s suit, a class suit for shareholders from derivative suits. ✓Villamor, Jr. v.
Umale, 736 SCRA 325 (2014).139
(v) Must Not Be a Nuisance or Harassment Suit: Nuisance and harassment suits are
prohibited, and in determining whether a suit is a nuisance or harassment suit, the
court shall consider, among others, the follow: (a) The extent of the shareholding or
interest of the initiating shareholder or member; (b) subject matter of the suit; (c) legal
and factual basis of the complaint; (d) availability of appraisal rights for the act or acts
complained of; and (e) prejudice or damage to the corporation. In case of nuisance or
harassments suits, the court may motu proprio or upon motion dismiss the case. ✓Ang
v. Ang, 699 SCRA 272 (2013); BSP v. Campa, Jr., 787 SCRA 476 (2016).
137Reyes v. Tan, 3 SCRA 198 (1961); Republic Bank v. Cuaderno, 19 SCRA 671 (1967).
138R.N. Symaco Trading Corp. v. Santos, 467 SCRA 312 (2005); Ang v. Ang, 699 SCRA 272 (2013).
139Florete, Jr. v. Florete, Sr., 781 SCRA 285 (2016).
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d. Venue for Derivative Suit – Under Section 5, Rule 1 of the Interim Rules, the proper venue
for derivative suit would be in the RTC which has jurisdiction over the principal office of
the corporation. Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 (2009).
11. Shareholders’ Right over change of External Auditor (SEC Memo Circular No. 08-2018)
12. Right to Proportionate Share of Remaining Assets Upon Dissolution (Sec. 139)
In the liquidation of a corporation, after the payment of all corporate liabilities, the
remaining assets, if any, must be distributed to the shareholders in proportion to their
interests in the corporation, which is referred to as liquidating dividend. President of PDIC v.
Reyes, 460 SCRA 473 (2005).
X. SHARES AND CAPITAL STOCK
A corporation may obtain funds for capital expenditures by floating either shares (equity)
or bonds (debt securities). Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461
(2011).
An “investment”, being in the nature of equity, is an expenditure to acquire property or
other assets in order to produce revenue. It is the placing of capital or laying out of money in
a way intended to secure income or profit from its employment. Unlike a deposit of money
or a loan that earns interest, an investor cannot be assured of a dividend or an interest on the
amount invested, for dividends on investments are granted only after profits or gains are
generated. President of PDIC v. Reyes, 460 SCRA 473 (2005).
But once issued, shares are not owned nor are they assets of the corporation—they are
owned by the shareholders of record. The corporation whose shares are the subject of
transfer transaction (through sale, assignment, donation, or any other mode of conveyance)
need not be a part to transaction for it to be valid. However, to bind the corporation, it is
necessary that the transfer is recorded in its books. Forest Hills Golf & Country Club v. Vertex
Sales and Trading, Inc., 692 SCRA 706 (2013).
1. Concept of “Capital Stock” (Sec. 173)
[Section 173 of RCC] defines “Paid-up Capital” as that portion of the “Authorized Capital
Stock” which has been both subscribed and paid. Not all funds or assets received by the
corporation can be considered paid-up capital; such must form part of the Authorized Capital
Stock that has been subscribed and then actually paid up. Advances by shareholders as
payment of future subscriptions do not constitute part of the “Outstanding Capital Stock”.
MSCI-NACUSIP v. NWPC, 269 SCRA 173 (1997). 140
Under [Sec. 173 of RCC] the term “Capital Stock” excludes treasury shares. Thus, quorum
is based on the totality of the shares that have been subscribed and issued, whether it be
founders’ shares or common shares. Lanuza v. Court of Appeals, 454 SCRA 54 (2005).
The “Subscribed Capital” is the total amount of the capital that persons (subscribers or
shareholders) have agreed to take and pay for, which need not necessarily be, and can be
more than, the par value of the shares. In fine, it is the amount that the corporation receives,
inclusive of the premium if any, in consideration of the original issuance of the shares. NTC v.
Court of Appeals, 311 SCRA 508 (1999).
2. Classification of Shares (Sec. 6)
a. Common Shares: “A common stock represents the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and usually issued without extraordinary
rights or privileges and entitles the shareholder to a pro rata division of profits.” CIR v. CA,
301 SCRA 152 (1999).
b. Preferred Shares: (1) Cumulative or Non-cumulative
(2) Participating or Non-participating
(3) Priority in Asset Distribution Upon Dissolution
(4) Par Value or No-Par Value
140Central Textile Mills v. NWPC, 260 SCRA 368 (1996); CIR v. First Express Pawnshop Co., Inc., 589 SCRA 253 (2009).
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Preferred stocks are those which entitle the shareholder to some priority on dividends
and asset distribution. Comm. of Internal Revenue v. Court of Appeals, 301 SCRA 152
(1999).
Shareholders of preferred shares issued with 1% dividend rate are not entitled to the
payment thereof as a matter of right without the necessity of a prior declaration of
dividends which can only come from existing retained earnings. ✓Republic Planters Bank
v. Agana, 269 SCRA 1 (1997).
It is not correct to say that holders of the non-voting preferred shares lose all their
voting rights, since Section 6 provides for the situations where non-voting shares like
preferred shares are granted voting rights. COCOFED. v. Republic, 600 SCRA 102 (2009).
In the absence of provisions in the articles denying voting rights to preferred shares,
preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in
the election of directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the same manner as
bondholders. Under the [Revised] Corporation Code only preferred or redeemable shares
can be deprived of voting rights. Common shares cannot be deprived of the right to vote,
and any provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid. Gamboa v. Teves, 652 SCRA 690 (2011).
c. Redeemable Shares (Sec. 8)
When the certificates of stock recognize redemption, but the option to do so is clearly
vested in the corporation, the redemption is clearly the type known as “optional” and rest
entirely with the corporation, and that the shareholder is without right to either compel
or refuse the redemption of his shares. ✓Republic Planters Bank v. Agana, 269 SCRA 1
(1997).
“Redemption” is repurchase, a reacquisition of stock by the issuing corporation in
exchange for money or property, whether or not the acquired stock is cancelled, retired
or held in the treasury. Essentially, the corporation gets back some of its stock, distributes
cash or property to the shareholder in payment for the stock, and continues in business as
before. The redemption of stock dividends previously issued is used as a veil for the
constructive distribution of cash dividends, and therefore subject to tax. Comm. of Internal
Revenue v. Court of Appeals, 301 SCRA 152 (1999).
d. Founders’ Shares (Sec. 7)141
Since Section 7 makes no distinction (and is found under General Provisions), then it
must mean that founders’ shares may be applied to both stock and nonstock corporations.
Although [Section 88 of the Revised Corporation Code] allows in a nonstock corporation to
limit, broaden or deny the right of members of any class, the specific provision of Section
7 to founders’ share must prevail, and that the nonstock corporation can lawfully suspend
or define the voting rights of its members, but with respect to founders’ share, the
exclusive right to vote and be voted for of the founders’ share should expire after five years
from the approval of the SEC. Forest Hills and Country Club, Inc. v. Kings Properties Corp.,
G.R. No. 212833, 07 Aug. 2019.
e. Treasury Shares (Sec. 9): Treasury shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase, donation, forfeiture or other means, and
do not have the status of being outstanding shares and are not entitled to be voted upon
nor participate in dividend declarations. Comm. of Internal Revenue v. Manning, 66 SCRA
14 (1975).
141In Castillo v. Balinghasay, 440 SCRA 442 (2004), the position that when the articles of incorporation provide expressly a class of shares to have
the exclusive right to vote and be voted for into the Board of Directors, that such shares would essentially be founder’s share was raised but not resolved.
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A treasury share, either common or preferred, may be used for a variety of corporate
purposes, such as for a stock bonus plan for management and employees, or for acquiring
another company. It may be held indefinitely, resold or retired. While held in the
company’s treasury, the stock earns no dividends and has no vote in company affairs.
COCOFED v. Republic, 600 SCRA 102 (2009).
f. Stock Warrants and Stock Options
g. Re-Classification and Exchange of Shares
“Reclassification of shares does not always bring any substantial alteration in the
subscriber’s proportional interest. But the exchange is different—there would be a shifting
of the balance of stock features like priority in dividend declarations or absence of voting
rights. Yet neither the reclassification nor exchange per se yields income for tax purposes.
… In this case, the exchange of shares, without more, produces no realized income to the
subscriber. There is only a modification of the subscriber’s rights and privileges—which is
not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a
subscriber disposes of his entire interests and not when there is still maintenance of
proprietary interest.” CIR v. Court of Appeals, 301 SCRA 152 (1999).
Conversion of common shares into preferred shares through amendment of articles
of incorporation, is a legitimate exercise of corporate powers. Conversion does not amount
to SMC using its funds to effect conversion, but would amount merely to a reconfiguration
of said (common) shares into preferred shares. COCFED v. Republic, 600 SCRA 102 (2009).
4. Hybrid Securities: ✓Government v. Phil. Sugar Estates, 38 Phil. 15 (1918).
5. Quasi-Reorganization
a. Reduction of Capital Stock (Sec. 37): Reduction of capital stock cannot be employed to
avoid the corporation’s obligations under the Labor Code. Madrigal & Co. v. Zamora, 151
SCRA 355 (1987).
b. Stock Splits versus Stock Consolidations
6. Subscription Agreements (Secs. 59 and 71)
a. No More Contract of Sale of “Unissued Shares”: ✓Bayla v. Silang Traffic Co., Inc., 73 Phil.
557 (1942).
b. Assignment of Subscription Agreements
When properties were assigned pursuant to a pre-incorporation subscription
agreement, but the corporation fails to issue the covered shares, the return of such
properties to the subscriber is a direct consequence of rescission and does not amount to
corporate distribution of assets prior to dissolution. Ong Yong v. Tiu, 375 SCRA 614 (2002).
The assignment of the subscription agreement is a form of novation by substitution of
a new debtor, which requires the consent of the creditor. In this case, the change of
debtor took place when R.C. Lee assigned the Oceanic shares under Subscription
Agreement Nos. 1805, and 1808 to 1811 to SSI so that the latter became obliged to settle
the 75% unpaid balance on the subscription. Interport Resources Corp. v. Securities
Specialist, Inc., 792 SCRA 155 (2016).
7. CONSIDERATION FOR SUBSCRIPTION (Sec. 61):
• Actual cash paid to the corporation
• Property, tangible or intangible, actually received by the corporation and necessary
or convenient for its use and lawful purposes at a fair valuation equal to the par
value or issued value of the stock issued
• Labor performed for or services actually rendered to the corporation
• Previously incurred indebtedness of the corporation
• Amount transferred from unrestricted retained earnings to stated capital
• Outstanding shares exchanged for stocks in the event of reclassification or
conversion
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• Shares in another corporation; and/or
• Other generally accepted form of consideration
Stock dividends are in the nature of shares issued to the shareholders, whereby amount
of unrestricted retained earnings converted into equity in the corporation’s books. Lincoln
Phil. Life v. Court of Appeals, 293 SCRA 92 (1998). 142
a. Liability of Directors for Watered Stocks (Sec. 64)
b. Unpaid Subscription (Secs. 65 and 66)
Under the trust fund doctrine, a board resolution releasing the shareholders from
payment of the balance of their subscription is wholly ineffectual; and the trustee of the
insolvent corporation has still recover the amounts waived. Philippine Trust Co. v. Rivera,
44 Phil. 469 (1923).
A stipulation that the subscription shall be payable from the first dividends to be paid
on the shares is unlawful in so far as it purports to relieve the subscriber from liability to
be sued; and the subscriber is liable for the par value of the stock to the same extent as if
such stipulation had not been inserted in the contract. National Exchange Co., Inc. v.
Dexter, 51 Phil. 601 (1928).
A valid and binding subscription for shares cannot be cancelled so as to release the
subscriber from liability thereon without the consent of all the shareholders. From this
rule, however, there are exceptions: where it is given pursuant to a bona fide compromise,
or to set off a debt due from the corporation, a release, supported by consideration, will
be effectual as against dissenting shareeholders and subsequent and existing creditors.
Lingayen Gulf Elect Power v. Baltazar, 93 Phil. 404 (1953).
The doctrine is established that subscriptions to the capital of a corporation constitute
a fund to which creditors have a right to look for satisfaction of their claims. The
corporation has no power to release a subscriber to its capital stock from the obligation of
paying for his shares without valuable consideration for such release. Against creditors, a
reduction of the capital stock can take place only in the manner prescribed by the statute.
PNB v. Bitulok Sawmill, 23 SCRA 1366 (1968).
A shareholder who is employed with the company, cannot offset his unpaid
subscription against his awarded claims for wages, where there has been no call for the
payment of such subscription. Apodaca v. NLRC, 172 SCRA 442 (1989).
c. Delinquency on Subscription (Secs. 67 to 70)
In spite of a specific provision in the bylaws providing for the manner of collection of
unpaid subscriptions, the Board still has the business judgment prerogative to determine
the best manner of collecting unpaid subscriptions, which may include the filing of a
collection suit. De Silva v. Aboitiz & Co., 44 Phil. 755 (1923).
The power of the Board of Directors to make a call on unpaid subscription cannot be
limited by the provisions of the subscription contract. Miranda v. Tarlac Rice Mill Co., 57
Phil. 619 (1932).
A stock subscription is a subsisting liability from the time the subscription is made. The
subscriber is as much bound to pay the amount of share subscribed as he would be to pay
any other debt, and the right of the company to demand payment is non less
incontestable. Velasco v. Poizat, 37 Phil. 802 (1918); Lumanlan v. Cura, 59 Phil. 746 (1934).
The prescriptive period to recover on unpaid subscription commences not from the
time of subscription but from the time of demand by Board of Directors to pay the balance
of subscription. Garcia v. Suarez, 67 Phil. 441 (1939).
8. CERTIFICATE OF STOCK (Secs. 62 and 63)
142The basis for determining the documentary stamps due on stock dividends declared would be their book value as indicated in the latest audited
financial statements of the corporation, and not the par value thereof. Commissioner of Internal Revenue v. Lincoln Phil. Life Insurance Co., 379 SCRA
423 (2002).
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a. Nature of Certificate: 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. [Lao v. Lao, 567 SCRA 558 (2008)]. A
certificate, however, is merely a tangible evidence of ownership of shares. [Republic v.
Estate of Hans Menzi, 476 SCRA 20 (2005)]. It is not a stock in the corporation and merely
expresses the contract between the corporation and the shareholder. [✓Makati Sports
Club v. Cheng, 621 SCRA 103 (2010)]. The shares evidenced by said certificates,
meanwhile, are regarded as property and the owner of such shares may, as a general rule,
dispose of them as he sees fit, unless the corporation has been dissolved, or unless the
right to do so is properly restricted, or the owner's privilege of disposing of his shares has
been hampered by his own action. [Padgett v. Bobcat & Templeton, 59 Phil. 232 (1933)].
✓Teng v. SEC, 784 SCRA 216 (2016).
A stock certificate is not necessary to render one a shareholder in a corporation;
nevertheless, it is the paper representative or tangible evidence of the share itself and the
various interests therein. The stock certificate expresses the contract between the
corporation and the shareholder, but it is not essential to the existence of a share in or the
creation of the relationship with the shareholder. ✓Tan v. SEC, 206 SCRA 740 (1992).143
A stock certificate could not be considered issued in contemplation of law unless
signed by the president or vice-president and countersigned by the secretary or assistance
secretary. ✓Bitong v. Court of Appeals, 292 SCRA 503 (1998).
The fact that the stock certificates registered in the name of one person are found in
the possession of another shareholder does not prove that the possessor is the owner of
the covered shares. A stock certificate is merely a tangible evidence of ownership of
shares. Its presence or absence does not affect the right of the registered owner to dispose
of the shares covered by the stock certificate. Republic v. Estate of Hans Menzi, 475 SCRA
20 (2005).
BUT SEE: Uncertificated or Scripless Shares Traded in Trading Markets (Sec. 62)
b. Quasi-Negotiable Character of Certificate of Stock: A stock certificate is merely a quasi-
negotiable instrument in the sense that it may be transferred by endorsement, coupled
with delivery; but it is not negotiable because the holder thereof takes it without prejudice
to such rights or defenses as the registered owners or transferor’s creditors may have
under the law, except only insofar as such rights or defenses are subject to the limitations
imposed by the principles governing estoppel. ✓Delos Santos v. Republic, 96 Phil. 577
(1955).
The rule is that the endorsement of the stock certificate by the owner or his attorney-
in-fact or any other person legally authorized to make the transfer shall be sufficient to
effect the transfer of shares only if the same is coupled with delivery. The delivery of the
stock certificate duly endorsed by the owner is the operative act of transfer of shares from
the lawful owner to the new transferee. But to be valid against third parties, the transfer
must be recorded in the corporate books. ✓Bitong v. Court of Appeals, 292 SCRA 503
(1998).144
Since physical delivery of stock certificates is one of the essential requisites for the
transfer of ownership of the stocks purchased, then the failure of the seller-registered
owner to delivery the stock certificates would constitute a material breach that warrants
the rescission of the sale of the shares upon the option of the buyer. Fil-Estate Golf v.
Vertex Sales and Trading, 698 SCRA 272 (2013).
143C.N. Hodges v. Lezama, 14 SCRA 1030 (1965); Lincoln Phil. Life v. CA, 293 SCRA 92 (1998); Ponce v. Alsons Cement Corp., 393 SCRA 602
(2002); Nautica Canning Corp. v. Yumul, 473 SCRA 415 (2005); Makati Sports C;ib .
144Rivera V. Florendo, 144 SCRA 643 (1986); Razon v. IAC, 207 SCRA 234 (1992); Rural Bank of Lipa City v. CA, 366 SCRA 188 (2001); Raquel-
Santos v. CA, 592 SCRA 169 (2009); Teng v. SEC, 784 SCRA 216 (2016); Tee Ling Kiat v. Ayala Corp., 857 SCRA 533 (2018).
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c. Right to Stock Certificate for Fully Paid Shares (Sec. 63)
Board resolution which prohibited not-fully shares from voting (although certificates
have been issued) is void, since not fully paid shares which are not delinquent may not be
denied their voting rights. Unless prohibited by bylaws, stock certificates may be issued for
less than the number of the shares subscribed for provided the par value of each of the
stocks represented by each of the certificates has been paid. ✓Baltazar v. Lingayen Gulf
Elect. Power Co., 14 SCRA 522 (1965).
d. Lost or Destroyed Certificates (Sec. 72)
While [Sec. 72 of RCC] appears to be mandatory, the same admits exceptions, such
that a corporation may voluntarily issue a new certificate in lieu of the original stock
certificate which has been lost without complying with the requirements under said
section. It would be an internal matter for the corporation to find measures in ascertaining
who are the real owners of shares for purposes of liquidation. It is well-settled that unless
proven otherwise, the “stock and transfer book” is the best evidence to establish stock
ownership. SEC Opinion 28 Jan. 1999, addressed to Ms. Ma. Cecilia Salazar-Santos
e. Forged and Unauthorized Transfers
A bona fide pledgee or transferee of a share from the apparent owner is not
chargeable with knowledge of the limitations laced on said certificates by the real owner,
or of any secret agreement relating to the use which might be made of the stock by the
holder. When a stock certificate has been endorsed in blank by the owner thereof, it
becomes a “street certificate” so that upon its face the holder is entitled to demand its
transfer into his name from the issuing corporation. As such the certificate if quasi-
negotiable and the transferee thereof is justified in believing that it belongs to the older
and transferor. ✓J. Santamaria v. HSBC, 89 Phil. 780 (1951).
Since stock certificates are only quasi-negotiable instruments, a transferee in good
faith under a forged assignment acquires no title which can be asserted against the true
owner, unless the true owner’s own negligence has been such as to create an estoppel
against him. ✓Delos Santos v. Republic, 96 Phil. 577 (1955).
When the stock certificates have been endorsed in blank for purposes of showing the
nominee relations, the eventual delivery and registration of the shares in violation of the
trust relationship and after their having been stolen, would be void, even when such
transfers have been registered in the stock and transfer book. ✓Neugene Marketing, Inc.
v. Court of Appeals, 303 SCRA 295 (1999).
We uphold rule in Santamaria v. HSBC that when a stock certificate is endorsed in
blank bythe owner it constitutes what is termed as “street certificate” so that upon its
face, the holder is entitled to demand its transfer into his name form the issuing
corporation. The ruling in Neugence Marketing, Inc. v. Court of Appeals, is merely an
exceptional one borne out of the fact that the stock certificates endorsed in blank were
stolen from the possession of the beneficial owner (i.e., there was no intention for the
certificates to go into commercial negotiation). Indeed, in this case Gilberts blank
endorsement of the certificates was effective since they were in the possession and control
of the parents who were the benefical owners over the underlying shares. Guy v. Guy, 680
SCRA 214 (2012).
9. SALES AND OTHER DISPOSITIONS OF SHARES: “Doctrine on Free-Transferability of Shares”
a. Share Dispositions and the Stock and Transfer Book (STB) (Secs. 62, 71 and 73):
Shares are not owned or are the assets of the corporation—they are owned by the
shareholders of record. The corporation whose shares are the subject of transfer
transaction (through sale, assignment, donation, or any other mode of conveyance) need
not be a part to transaction to be valid; however, to bind the corporation as well as third
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parties, it is necessary that the transfer is recorded in the corporate books. ✓Forest Hills
Golf & Country Club v. Vertex Sales and Trading, Inc., 692 SCRA 706 (2013).
Under [Sec. 62 of RCC], certain minimum requisites must be complied with for there
to be a valid transfer of stocks, to wit: (a) there must be delivery of the stock certificate;
(b) the certificate must have been endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and (c) to be valid against third parties,
the transfer must be recorded in the corporate books. Rural Bank of Lipa City v. CA, 366
SCRA 188 (2001).
[Section 62 of RCC] the manner by which a share may be transferred. Said provision is
essentially the same as Section 35 of the old Corporation Law, which, as held in Fleisher v.
Botica Nolasco Co., defines the nature, character and transferability of shares. Fleisher also
stated that the provision on the transfer of shares contemplates no restriction as to whom
they may be transferred or sold. As owner of personal property, a shareholder is at liberty
to dispose of them in favor of whomsoever he pleases, without any other limitation in this
respect, than the general provisions of law. ✓Teng v. SEC, 784 SCRA 216 (2016).
When the subscriber under a Subscription Agreement assigns the shares to another
party, the same partakes of the nature of a novation through the substitution of the person
of the debtor, which is effective only with the consent of the creditor; but that in the case
of the corporation issuing the shares, such assignment would be valid and binding upon
notice by the transferee of the transfer of the shares coupled with a tender of the balance
of the unpaid subscription pursuant to the call made by the corporation. The provisions of
[Sec. 62 of RCC] to the effect that a transfer of shares does not bind the corporation unless
it is registered in the corporate books cannot apply in this case since formal notice of the
transfer was given to the corporation. ✓Interport Resources Corp. v. SSI, 792 SCRA 155
(2016).
(i) Nature of the STB: The stock and transfer book records the names and addresses of
all shareholders arranged alphabetically, the installments paid and unpaid on all
shares for which subscription has been made, and the date of payment thereof, a
statement of every alienation, sale or transfer of shares made the date thereof and by
and to whom made, and such other entries as may be prescribed by law. A stock and
transfer book, like other corporate books and records, is not in any sense a public
record, and thus is not exclusive evidence of the matters and things which ordinarily
are or should be written therein. Lanuza v. CA, 454 SCRA 54 (2005).
As between the General Information Sheet and the corporate books, it is the latter
that is controlling as to the number of shares held by shareholders. Lao v. Lao, 567
SCRA 558 (2008).
Who May Make Entries in the STB – Entries made on the stock and transfer book
by any person other than the corporate secretary, such as those made by the
President and Chairman, cannot be given any valid effect. Torres, Jr. v. Court of
Appeals, 278 SCRA 793 (1997).
Absence of a deed of sale evidencing sale of shares does not necessarily show
irregularity since [Sec. 62 of RCC] itself does not require any deed for the validity of
the transfer of shares stock, it being sufficient that such transfer be effected by
delivery of the stock certificates duly endorsed. It has been held in Rural Bank of Lipa
City, Inc. v. Court of Appeals, 366 SCRA 188 (2001), that the execution of a deed of sale
does not necessarily make the transfer effective. Republic v. Estate of Hans Menzi, 475
SCRA 20 (2005).
Sales and other dispositions of shares must be registered in the stock and transfer
book: (a) to enable the corporation to know at all times who are the actual
shareholders, and who have standing to exercise the rights pertaining to the shares;
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(b) to afford the corporation an opportunity to object or refuse its consent to such
transfer when it has claims against such shares; and (c) to avoid fictitious or fraudulent
transfers. Escaño v. Filipinas Mining Corporation, 74 Phil. 71 (1944).145
(ii) Effects of Registration/Non-Registration of Transfers in the STB: The failure to
register a sale or disposition of shares in the corporate books would render the same
invalid to all persons, including the attaching creditors of the seller. ✓Uson v.
Diosomito, 61 Phil. 535 (1935).
Until challenged in a proper proceeding, a shareholder of record has a right to
participate in any meeting; his vote can be properly counted to determine whether a
shareholders’ resolution was approved, despite the claim of the alleged transferee.
On the other hand, a person who has purchased stock, and who desires to be
recognized as a shareholder for the purpose of voting, must secure such a standing by
having the transfer recorded on the corporate books. Until the transfer is registered,
the transferee is not a shareholder but an outsider. ✓Batangas Laguna Tayabas Bus
Company, Inc. v. Bitanga, 362 SCRA 635 (2001).146
A transfer of shares which is not recorded in the corporate books is valid only as
between the parties. Hence, the transferor has the right to dividends as against the
corporation without notice of transfer but it serves as trustee of the real owner of the
dividends, subject to the contract between the transferor and transferee as to who is
entitled to receive the dividends. Cojuangco v. Sandiganbayn, 586 SCRA 790 (2009).
10. PLEDGE, MORTGAGE AND OTHER ENCUMBRANCES ON SHARES
Shares for which no stock certificate has been issued may validly be mortgaged in whole
(an not just with respect to the portion paid-up) and the corporation receiving notice thereof
is bound to respect the security arrangement. The “unpaid claims” under [Sec. 62 of RCC]
refers to any unpaid subscription, and not to any indebtedness which a shareholder may owe
the corporation arising from any other transactions, like unpaid monthly dues. ✓Fua Cun v.
Summers, 44 Phil. 704 (1923).147
When the shares are covered by a stock certificate issued in the name of the usufructuary
by the original owner with the agreement between them that they should not be disposed or
sold, but the registered owner had pledged the shares by endorsement and delivery of the
certificate to one who took them in good faith and for value, the latter shall be preferred
since registration of a security arrangement covering shares does not require, for its validity
and binding effect on the world, to be registered in the stock and transfer book. ✓Monserrat
v. Ceran, 58 Phil. 469 (1933).
In order for the chattel mortgage on shares be valid and binding on third parties,
registration thereof in the stock and transfer book is not required and not legally effective.
What is necessary is that the chattel mortgage over the shares be registered in the Registry
of Deeds of the principal place of business of the corporation, as well as in the Registry of
Deeds of the shareholders’ domicile. ✓Chua Guan v. Samahang Magsasaka, Inc., 62 Phil.
472 (1935).
The pledge of shares covered by a certificate is valid and binding on third parties, when
the stock certificate has been endorsed and delivered to the creditor, notwithstanding the
fact that the contract does not appear in a public instrument (chattel mortgage). “Certificates
of stock … are quasi-negotiable instruments in the sense that they may be given in pledge or
mortgage to secure an obligation.” ✓Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681
(1937).
145Batangas Laguna Tayabas Bus Company, Inc. v. Bitanga, 362 SCRA 635 (2001).
146Magsaysay-Labrador v. CA, 180 SCRA 266 (1989); Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
147China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
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Only fully paid shares for which stock certificates have been issued are subject to the
registration requirement in the stock and transfer book in cases dealing with their sales and
absolute disposition. ✓Nava v. Peers Marketing Corp., 74 SCRA 65 (1976).
The process of registering lis pendens is inapplicable to shares which are personal
properties; however, however, formal notice given to the Corporate Secretary of claims to
the shall be deemed equivalent of registration of an encumbrance or assignment of the shares
on the corporate books; and that by virtue of such registration through notice to the
corporation, pending litigation, third parties, or potential transferees pendente lite, may
therefore be charged with constructive notice of claimants lien/title over the subject shares
and the pending litigation involving the same. ✓MR Holdings, Ltd. V. Bajar, 683 SCRA 336
(2012).
a. Equitable Mortgage Assignment: The assignment of voting shares as security for a loan
operates to give the assignee not only the right to vote on the shares, but would also treat
the assignee as the owner of the shares (not just an equitable mortgage): “It is true that
the assignment was predicated on the intention that it would serve as security vis-à-vis
DBP’s financial accommodation extended to PJI, but it was a valid and duly executed
assignment, subject to a resolutory condition, which was the settlement of PJI’s loan
obligation with DBP.” APT v. Sandiganbayan, 341 SCRA 551, 560 (2000).
11. ATTACHMENTS, EXECUTION AND OTHER INVOLUNTARY DEALINGS ON SHARES
Attachments of shares are not included in the term “transfer” as provided in [Sec. 62 of
RCC]. Both the Revised Rules of Court and [Revised] Corporation Code do not require
annotation in the stock and transfer book for the attachment of shares to be valid and binding
on the corporation and third parties. ✓Chemphil Export & Import Corp. v. CA, 251 SCRA 257
(1995).
A Corporate Secretary’s obligation under [Sec. 62 of RCC] to record in the stock and
transfer book alienations involving the shares, does not cover any obligation to record the
attachment of banks against the shares of a debtor, since attachments are not transfer of
shares, but merely a burden on the title of the owner. Only absolute transfers of shares are
required to be recorded in the stock and transfer book in order to have “force and effect as
against third persons.” Ferro Chemicals, Inc. v. Garcia, 804 SCRA 528 (2016).
A bona fide transfer of shares, not registered in the corporate books, is not valid as
against a subsequent lawful attachment of said shares, regardless of whether the attaching
creditor had actual notice of said transfer or not. All transfers not so entered on the corporate
books are absolutely void; not because they are without notice or fraudulent in law or fact,
but because they are made so void by statute. ✓Garcia v. Jomouad, 323 SCRA 424 (2000).
12. Situs of Shares of Stocks
Situs of shares is the domicile of the corporation that issued them. Wells Fargo Bank and
Union v. Collector, 70 Phil. 325 (1940).148
XI. ACQUISITIONS, MERGERS AND CONSOLIDATIONS
A. ACQUISITIONS AND TRANSFERS
1. “Assets-Only” Transfers
As a Rule, a corporation that purchases the assets of another will not be liable for the
debts of the selling corporation, provided the former acted in good faith and paid adequate
consideration for such assets; EXCEPT: When any of the following circumstances is present: (1)
where the purchasers expressly or impliedly agrees to assume the debts; (2) where the selling
corporation fraudulently enters into the transactions to escape liability for those debts (3)
where the purchasing corporation is merely a continuation of the selling corporation, and (4)
148Tayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. Perkins v. Dizon, 69 Phil. 186 (1939).
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where the transaction amounts to a consolidation or merger of the corporations. ✓Edward J.
Nell Co. v. Pacific, 15 SCRA 415 (1965).149
The disposition of the assets of a corporation shall be deemed to cover substantially all
the corporate property and assets, if thereby the corporation would be rendered incapable
of continuing the business or accomplishing the purposes for which it was incorporated. Such
a sale or disposition must be understood as valid only if it does not prejudice the creditors of
the assignor, which necessarily implies that the assignee assumes the debts of the assignor.
Even under the provisions of the Civil Code, a creditor has a real interest to go after any person
to whom the debtor fraudulently transferred its assets. ✓Caltex (Phils.), Inc. v. PNOC
Shipping and Transport Corp., 498 SCRA 400 (2006).
PSALM took ownership over most of NPC’s assets by operation of law—these properties
may be used to satisfy the Court’s judgment, and such being the case, the employees may go
after such properties. NPC Drivers and Mechanics Assn. (NPC DAMA) v. NPC, 606 SCRA 409
(2009).
2. “BUSINESS ENTERPRISE” TRANSFERS
A business enterprise operated under a partnership and later incorporated, or where a
corporation assumed all the assets and liabilities of the partnership, then the corporation
cannot be regarded, for purposes of the obligations imposed under the SSS Law, as having
come into being only from its incorpor-ation but from the date the partnership commenced.
Laguna Trans. Co. v. SSS, 107 Phil. 833 (1960).150
The judgment in a suit for workmen’s compensation can be pursued against the
corporation organized by the controlling shareholder who as the sole proprietor organized
the corporation to insulate properties transferred thereto against the judgment debt. A.D.
Santos v. Vasquez, 22 SCRA 1156 (1968).
When the bus operations belonging to the estate of the deceased spouses is duly
incorporated by the administratrix with the intention to make the corporation liable for past
and pending obligations of the estate as the transportation business itself, then that liability
on the part of the corporation, vis-à-vis the estate, should continue to remain with it even
after the percentage of the estate’s shares in the corporation should have been diluted. Buan
v. Alcantara, 127 SCRA 845 (1984).
An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully
supported by Philippine statutes. The general rule expressed by the doctrine reflects the
principle of relativity under Article 1311 to 34 of the Civil Code. Contracts, including the rights
and obligations arising therefrom, are valid and binding only between the contracting parties
and their successors-in-interest. Thus, despite the sale of all corporate assets, the transferee
corporation cannot be prejudiced as it is not in privity with the contracts between the
transferor corporation and its creditors. Jurisprudence has held that in a business-enterprise
transfer, the transferee is liable for the debts and liabilities of his transferor arising from the
business enterprise conveyed. Many of the application of the business-enterprise transfer
have been related by the Court to the application of the piercing doctrine. ✓Y-I Leisure Phils.,
Inc. v. Yu, 770 SCRA 56 (2015), citing VILLANUEVA, PHILIPPINE CORPORATE LAW, 2010 ed., pp. 686,
687-689.
3. “EQUITY” TRANSFERS
The disposition by the controlling shareholder of all of its equity in the corporation
warrants the application of the alter ego piercing doctrine since it shows that the transferor
had complete control of the corporation (?). ✓PHIVIDEC v. Court of Appeals, 181 SCRA 669
(1990).
Where a corporation transferred all its assets to another corporation “to settle its
obligations” and not amounting to a fraudulent transfer, that does not authorize application
of the piercing doctrine to make the transferee liable for labor claims against the transferor.
McLeod v. NLRC, 512 SCRA 222 (2007).
Settled now is the rule that where one corporation sells or otherwise transfers all its
assets to another corporation for value, the latter is not, by that fact alone, liable for the debts
and liabilities of the transferor. Pantranco Employees Assn. (PEA-PTGWO) v. NLRC, 581 SCRA
598 (2009).
3. “Equity” Transfers
Where the change of ownership is done in bad faith, or is used to defeat the rights of
labor, the successor-employer is deemed to have absorbed the employees and is held liable
for the transgressions of his or her predecessor. Peñafrancia Tours and Travel Transport v.
Sarmiento, 634 SCRA 279 (2010).
Where transfer of ownership is in good faith, the transferee is under no legal duty to
absorb the transferor’s employees as there is no law compelling such absorption. For reasons
of public policy and social justice, transferee may give preference to the qualified separated
employees in the filling of vacancies in the facilities of the purchaser. ✓Manlimos v. NLRC,
242 SCRA 145 (1995).155
4. Mergers and Consolidations
Employees of a predecessor-constituent corporation cannot avail of their previous
tenure when determining their termination benefits with the surviving corporation in the
merger. Filipinas Port Services, Inc. v. NLRC, 177 SCRA 203 (1989).
CONTRA: In the case of merger or consolidation, the employees have a right to their retirement
benefits computed from the time worked with the predecessor-constituent corporations,
NLRC, 258 SCRA 704 (1996); Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 (1995).
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saying there was no break in the employer-employee relationship. Filipinas Port Services v.
NLRC, 200 SCRA 773 (1991).156
It is more in keeping with social justice of according full protection to labor to deem
employment contracts as automatically assumed by the surviving corporation in a merger,
even in the absence of an express stipulation in the articles of merger or the merger plan. This
ruling strengthens judicial protection of the right to security of tenure of employees affected
by a merger and avoids confusion regarding the status of their various benefits. ✓BPI. v. BPI
Employees Union, 658 SCRA 828 (2011).157
It is worthy to stress that both AMSFC and DFC are guilty of acts constitutive of
constructive dismissal performed against Baya. As such, they should be deemed as solidarily
liable for the monetary awards in favor of Baya. Meanwhile, Sumifru, as the surviving entity
in its merger with DFC, must be held answer for the latter’s liabilities, including its solidary
liability with AMSFC arising herein. Verily, jurisprudence and [Sec. 79 of RCC], state that “in
merger of two existing corporations, one of the corporations survives and continues the
business, while the other is dissolved and all its rights, properties and liabilities are acquired
by the surviving corporation.” [quoting from Babst v. Court of Appeals, 350 SCRA 341 (2001)]
Sumifru (Phils.) Corp. v. Baya, 822 SCRA 564 (2017).
5. SPIN-OFFS
Where a spin-off by the corporation of a division into another corporation is done for a
valid business reason and in good faith, the employees in the spun-off unit no longer belong
to the bargaining unit of the mother company, and that the employees in the new
corporations constitute new bargaining unit. SMC Employees Union-PTGWO v. Confessor, 262
SCRA 81 (1996).
In business parlance, a corporate spin-off occurs when a department, division or portions
of the corporate business enterprise is sold-off or assigned to a new corporation that will arise
by the process which may constitute it into a subsidiary of the original corporation. To spin-
off and the attendant transfer of employees are legitimate business interests of Marsman.
The transfer of employees through the Memorandum of Agreement was proper and did not
violate any existing law and jurisprudence. Thus, the employment of the doctrine of piercing
the veil of corporate fiction cannot be applied in the case of a spin-off since no fraud attended
the transaction. Marsman & Company, Inc. v. Sta. Rita, 862 SCRA 211 (2018), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW, p. 705 (2010).
XII. CORPORATE DISSOLUTION AND LIQUIDATION
1. No Vested Rights to Corporate Fiction: No person who has a claim against a juridical entity
can claim any constitutional right to the perpetual existence of such entity. Gonzales v. Sugar
Regulatory Authority, 174 SCRA 377 (1989).
2. Voluntary Dissolution (Sec. 133)
a. When There Are No Creditors Affected (Sec. 134)
b. When There Are Creditors Affected (Sec 135)
c. Shortening of Corporate Term (Sec. 136)
A board resolution to dissolve the corporation does not operate to so dissolve the
juridical entity, since to be effective “[t]he requirements mandated by the [Revised]
Corporation Code should have been strictly complied with.” Vesagas v. Court of Appeals,
371 SCRA 509 (2002).
When a corporation is contemplating dissolution, it must submit tax return on the
income earned by it from the beginning of the year up to the date of its dissolution and
pay the corresponding tax due. BPI v. Court of Appeals, 363 SCRA 840 (2001).
d. Withdrawal of Request or Petition for Dissolution (Sec. 137)
156National Union Bank Employees v. Lazaro, 156 SCRA 123 (1988); First Gen. Marketing Corp. v. NLRC, 223 SCRA 337 (1993); Pharmacia and
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e. Expiration of Term: Where the corporate life of a corporation as stated in its articles of
incorporation expired, without a valid extension having been effected, it was deemed
dissolved by such expiration without need of further action on the part of the corporation.
Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011), citing
VILLANUEVA, PHILIPPINE CORPORATE LAW (2010 ed.), p. 841.
3. Involuntary Dissolution (Sec. 133, 138; Sec. 6(l), P.D. 902-A)
a. Involuntary Dissolution a Form of Quo Warranto: Dissolution is a serious remedy granted
only in extreme cases to ensure that there is an avoidance of prejudice to the public. Even
when the prejudice is public in nature, the remedy is to enjoin or correct the mistake; and
only when it cannot be remedied that dissolution is imposed. Government v. El Hogar
Filipino, 50 Phil. 399 (1927).158
Corporate dissolution due to mismanagement of majority shareholder is too drastic a
remedy, especially when the situation can be remedied such as giving minority
shareholders a veto power to any decision. Chase v. Buencamino, 136 SCRA 365 (1985).
b. Non-User of Charter and Continuous Inoperation (Secs. 21 and 138)
To “organize” involves the election of officers, providing for the subscription and
payment of the capital stock, the adoption of bylaws, and such other steps as are necessary
to endow the legal entity with the capacity to transact the legitimate business for which
the corporation was created. “Organization” relates merely to the systematization and
orderly arrangement of the internal and managerial affairs of the corporation. Benguet
Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).
The failure to file the bylaws does not automatically operate to dissolve a corporation
but is now considered only a ground for such dissolution. Chung Ka Bio v. IAC, 163 SCRA
534 (1988).
4. Legal Effects of Dissolution
When the corporate term expires, the corporation ceases to be a body corporate for the
purpose of continuing the business for which it was organized. PNB v. CFI of Rizal, 209 SCRA
294 (1992).
A corporation that has reached the stage of dissolution is no longer qualified to receive a
secondary franchise, Buenaflor v. Camarines Industry, 108 Phil. 472 (1960); nor can it extend
its life through an amendment of the articles of incorporation, Alhambra Cigar & Cigarette
Mfg. Co. v. SEC, 24 SCRA 269 (1968); since either of these two corporation actions would
The dissolution of a juridical entity does not by itself cause the extinction or diminution
of the rights and liability of such entity, since it is allowed to continue as a juridical entity for
3 years for the purpose of prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property, and to distribute its assets.
Republic v. Tancinco, 394 SCRA 386 (2002).
The executed waivers and quitclaims over labor claims are valid even when executed 6
years after the revocation of certificate of incorporation—revocation does not result in
termination of liabilities. [Sections 139 and 184 of RCC] provide for a 3-year winding up period
for a corporation whose charter is annulled by forfeiture or otherwise to continue as a body
corporate for the purpose, among others, of settling and closing its affairs. ✓Vigilla v.
Philippine College of Criminology, 698 SCRA 247 (2013).
Since [Secs. 139 and 184 of RCC] explicitly provide for the continuation of the body
corporate for 3-years after dissolution, then the rights and remedies against, or liabilities of,
the officers shall not be removed or impaired by reason of the dissolution of the corporation.
✓Chua v. People, 801 SCRA 436, 449 (2016).
Mere revocation of the charter of a corporation does not result in the abatement of
proceedings, since the Board of Directors are considered trustees by legal implication even
158Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 (1967); Republic v. Bisaya Land Trans., 81 SCRA 9 (1978).
87
without Bancom conveying its assets to a receiver/assignee. Under [Sec. 184 of RCC], the
corresponding liabilities of the debtors of a dissolved corporation remain subsisting;
otherwise, this would sanction the unjust enrichment of debtors. ✓Reyes v. Bancom Dev.
Corp., 851 SCRA 133 (2018).
Any new business in which a dissolved corporation would engage in, other than those for
the purpose of liquidation, “will be a void because of the non-existence of the corporate
party.” Thus, if a dissolved corporation enters into a real estate mortgage after dissolution, it
would be void ab initio; however, if the mortgage was entered into prior to dissolution, then
the corporation’s redemption of the mortgaged property, even if already after its dissolution,
would be valid because of the liquidation/winding up powers accorded under [Sec. 139 of
RCC]. ✓Rich v. Paloma III, 858 SCRA 27 (2018).
5. METHODS OF CORPORATE LIQUIDATION (Sec. 139)
Liquidation, in corporation law, connotes a winding up or settling with creditors and
debtors. It is the winding up of a corporation so that assets are distributed to those entitled
to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing
surplus or loss. PVB Employees Union-N.U.B.E. v. Vega, 360 SCRA 33 (2001).
A derivative suit is fundamentally distinct and independent from liquidation
proceedings—they are neither part of each other nor the necessary consequence of the
other. There is therefore no basis from one action to result in the other. Following the
dissolution of a corporation, liquidation or the settlement of its affairs consists of adjusting
the debts and claims, i.e., collecting all that is due to the corporation, the settlement and
adjustment of claims against it and the payment of its just debts. Yu v. Yukayguan, 589 SCRA
588 (2009).159
a. Board of Directors/Trustees Pursuing Liquidation; Subject to the 3-Year Period
Since the old Corporation Law did not contain any provision that allowed any action
after the 3-year period for liquidation, then all actions for or against the corporation as
abated after the expiration thereof. National Abaca Corp. v. Pore, 2 SCRA 989 (1961).
After the expiration of the 3-year period, corporate creditors can still pursue their
claims against corporate assets against the officers or shareholders who have taken over
the properties of the corporation. Tan Tiong Bio v. Comm. of Internal Revenue, 100 Phil.
86 (1956).160
Although a corporate officer is not liable for corporate obligations, such as claims for
wages, when, however, such corporate officer takes corporate property to apply to his
own claims against the corporation, he shall be liable to the extent thereof to corporate
liabilities, since knowing fully well that certain creditors had similarly valid claims, he took
advantage of his position as general manager and applied the assets exclusively to his own
claims. De Guzman v. NLRC, 211 SCRA 723 (1992).
It immaterial that the present action was filed after the 3-year liquidation period, for
at the very least, and assuming that judicial enforcement of taxes may not be initiated after
said three years despite the fact that actual liquidation has not terminated and the one in
charge thereof is still holding the corporate assets, obviously for the benefit of all the
creditors thereof, the assessment made within the three years, definitely established the
Government as a creditor for whom the liquidator is supposed to hold assets of the
corporation.” Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).161
A corporation’s Board is not rendered functus officio by its dissolution, since [Sec. 139
of RCC] prohibits a dissolved corporation from continuing its business, but allows it to
continue with a limited personality in order to settle and close it affairs, including its
159Majority Stockholders of Ruby Industrial Corp. v. Lim, 650 SCRA 461 (2011).
160Republic v. Marsman Dev. Co., 44 SCRA 418 (1972).
161Paramount Insurance Corp. v. A.C. Ordonez Corp., 561 SCRA 327 (2008).
88
complete liquidation. Necessarily there must be a Board that will continue acting for that
purpose. Aguirre II v. FQB+7, Inc., 688 SCRA 242 (2013).
b. Liquidation Pursued Thru a Court-Appointed Receiver
Under the Corporation Law, Legislature intended to let the shareholders have control
of the assets of the corporation upon dissolution, by having the directors and executive
officers have charge of the winding up operations, though there is the alternative method
of assigning the property of the corporation to the trustees for the benefit of its creditors
and shareholders. “While the appointment of a receiver rests within the sound judicial
discretion of the court, such discretion must, however, always be exercised with caution
and governed by legal and equitable principles, the violation of which will amount to its
abuse, and in making such appointment the court should take into consideration all the
facts and weigh the relative advantages and disadvantages of appointing a receiver to wind
up the corporate business.” China Banking Corp. v. M. Michelin & Cie, 58 Phil. 261 (1933).
When the liquidation of a dissolved corporation has been placed in the hands of a
receiver or assignee, the 3-year period prescribed by law for liquidation cannot be made
to apply, and that the receiver or trustee may institute all actions leading to the liquidation
of the assets of the corporation even after the expiration of said period. Sumera v.
Valencia, 67 Phil. 721 (1939).
It is evident from the foregoing discussion of law and jurisprudence that the mere
revocation of the charter of a corporation does not result in the abatement of proceedings.
Since its directors are considered trustees by legal implication, the fact that Bancom did
not convey its assets to a receiver or assignee was of no consequence. It must also be
emphasized that the dissolution of a creditor-corporation does not extinguish any right or
remedy in its favor under [Se. 184 of RCC]. As a necessary consequence of the above rule,
the corresponding liability of the debtors of a dissolved corporation must also be deemed
subsisting. To rule otherwise would be to sanction the unjust enrichment of the debtor at
the expense of the corporation. ✓Reyes v. Bancom Development Corp., 850 SCRA 544
(2018).
c. Liquidation Pursued Through a Trustee
Where the affairs of the dissolved corporation were placed in a Board of Liquidators,
they were duly constituted as trustees for the liquidation of the corporate affairs, and
there being no term placed on the Board, their power to pursue liquidation did not
terminate upon the expiration of the 3-year period. Board of Liquidators v. Kalaw, 20 SCRA
987 (1967).
For purposes of dissolution and liquidation of a corporation, the term “trustee” should
include counsel of record who may be deem to have authority to pursue pending litigation
after the expiration of the 3-year liquidation period. ✓Gelano v. Court of Appeals, 103
SCRA 90 (1981).
If the 3-year extended life has expired without a trustee or receiver having been
designated, the Board of Directors itself, following the rationale of the decision in Gelano,
may be permitted to so continue as “trustees” to complete liquidation; and in the absence
of a Board, those having pecuniary interest in the assets, including the shareholders and
the creditors of the corporation, acting for and in its behalf, might make proper
representations with the appropriate body for working out a final settlement of the
corporate concerns. ✓Clemente v. Court of Appeals, 242 SCRA 717 (1995).162
A trustee appointed for purposes of liquidation does not become personally liable for
the outstanding obligations of the corporation. Republic v. Tancinco, 394 SCRA 386 (2003).
162Reburiano v. CA, 301 SCRA 342 (1999); Knecht v. United Cigarette Corp., 384 SCRA 48 (2002); Pepsi-Cola Products Phils. v. CA, 443 SCRA 571
(2004).
89
There is no time limit within which the trustees must complete a liquidation placed in
their hands. What is provided in [Sec. 139 of RCC] is that the conveyance to the trustees
must be made within the 3-year period. But it may be found impossible to complete the
work of liquidation within the 3-year period or to reduce disputed claims to judgment.
Furthermore, [Sec. 184 of RCC] clearly provides that “no right or remedy in favor of or
against any corporation, its shareholders, members, directors, trustees, or officers, nor any
liability incurred by any such corporation, shareholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent dissolution of said
corporation.” ✓Vigilla v. Philippine College of Criminology, Inc., 698 SCRA 247 (2013).
Trustee may continue to prosecute a case commenced by the corporation within 3
years from its dissolution until rendition of the final judgment, even if such judgment is
rendered beyond the 3-year period allowed by [Sec. 139 of RCC]. However, there is nothing
in the said cases that allows an already defunct corporation to initiate a suit after the lapse
of the said 3-year period. To allow petitioner to initiate the subject complaint and pursue
it until final judgment, on the ground that such complaint was filed for the sole purpose of
liquidating its assets, would be to circumvent the provisions of [Sec. 139 of RCC].
✓Alabang Dev. Corp. v. Alabang Hills Village Assn., 724 SCRA 321 (2014).
XIII. CLOSE CORPORATIONS
1. Definition (Sec. 95)
The concept of a close corporation organized for the purpose of running a family business
or managing family property has formed the backbone of Philippine commerce and industry.
Through this device, Filipino families have been able to turn their humble, hard-earned life
savings into going concerns capable of providing them and their families with a modicum of
material comfort and financial security as a reward for years of hard work. A family corporation
should serve as a reward for years of hard work— as a rallying point for family unity and
prosperity, not as a flashpoint for familial strife. It is hoped that people reacquaint themselves
with the concepts of mutual aid and security that are the original driving forces behind the
formation of family corporations and use these tenets in order to facilitate more civil, if not
more amicable, settlements of family corporate disputes. Gala v. Ellice Agro-Industrial Corp.,
418 SCRA 431 (2003).
a. De Jure Close Corporations: Other Articles of Incorporation Requirements (Sec. 96)
(i) Restriction on Transfer of Shares (Secs. 97 and 98)
(ii) Pre-Emptive Rights (Sec. 101)
(iii) Amendment (Sec. 102)
The articles of incorporation of Motorich Sales Corp. does not contain any provision
required under [Sec. 95 of RCC], and therefore from its very articles of incorporation, it is
not a close corporation. It does not become one either, just because Spouses Reynaldo and
Nenita Gruenberg owned 99.866% of its subscribed capital stock. The “[m]ere ownership by
a single shareholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate
personalities.” ✓San Juan Structural v. Court of Appeals, 296 SCRA 631 (1998).
The application of [Sec. 97 of RCC on validity of restrictions on transfer of shares] applies
only to close corporations. Before courts can allow the operation of [Sec. 97 of RCC] to a
case, there must first be a factual determination that the corporation is indeed a close
corporation. There needs to be a presentation of evidence on the relevant restrictions in the
articles and bylaws. Here, there is no such determination or even allegation based on the
records or the RTC decision that would assist this Court in ruling on these two major factual
matters. ✓Andaya v. Rural Bank of Cabadbaran, 799 SCRA 325 (2016).163
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In a mutual life insurance company organized as a nonstock non-profit corporation, the
so-called “dividends” received by members-policyholders are not a portion of profits set aside
for distribution to the shareholders. One, a mutual company has no capital stock to which
subscription is necessary; there are no shareholders to speak of, but only members. Two, the
amount they receive does not partake of the nature of a profit or income, such distribution
represents overpayment, a benefit to which the member-policyholder is equitably entitled.
Republic v. Sunlife Assurance Co., 473 SCRA 129 (2005).
2. Non-Applicability of the Nationalization Laws to Nonstock Corporations
A foreigner may become a member or an officer of a nonstock corporation. Save for the
position of the Secretary, who must be a Filipino citizen and a resident of the Philippines, the
prohibition of foreign citizens becoming officers in corporations engaged in business does not
apply to the activities of a nonstock corporation which do not fall within the coverage of a
nationalized industry or area of business reserved by law exclusively to Filipino citizens. SEC
Opinion No. 12, 21 Nov. 2002.
3. Voting Rights of Members
Under the bylaws, membership in the corporation shall, among others, be terminated by
the death of the member. Further, applying [Section 90] that provides that termination
extinguishes all the rights of a member, unless otherwise provided in the articles of the
incorporation or the bylaws, we hold that dead members who are dropped from the
membership roster in the manner for the cause provided for in the byLaw are not to be
counted in determining the requisite vote in corporate matters or the requisite quorum for
the annual members’ meeting. With 11 remaining members, the quorum in the present case
should be 6; therefore, there being a quorum, the annual members’ meeting, conducted with
six members present, was valid. Tan v. Sycip, 499 SCRA 216 (2006).
When membership has not been terminated in accordance with the provisions provided
for in the articles of incorporation and/or bylaws, then such termination is void, and such
individual remains a member with concomitant rights inspect corporate books and to demand
accounting of the corporate funds. Agdao Landless Residents Assn. v. Maramion, 806 SCRA
74 (2016).
4. Delinquency of Membership Dues
[Section 66 of RCC] refers specifically to unpaid subscriptions to capital stock, the sale of
which is governed by [Sec. 67 of RCC], and utterly inapplicable to nonstock corporations. In
such recovery claims, Article 1140 of the Civil Code governs and provides that an action to
recover movables shall prescribe in 8 years. Calatagan Golf Club, Inc. v. Clemente, Jr., 585
SCRA 300 (2009).
A nonstock corporation may seize and dispose of a fully-paid membership share on
account of his unpaid monthly dues, when authorized to do so under the bylaws, even when
no provision on the matter appears in the articles of incorporation, and in spite of the fact
that [Sec. 67 of RCC] on delinquency sale pertains to payment of shares subscription. [Section
90 of RCC] provides that membership shall be terminated in the manner and for causes
provided in the articles of incorporation or the bylaws of a nonstock corporation, then the
right of a nonstock corporation to expel a member through the forfeiture of such member’s
share may be established in the bylaws alone, and need not be embodied in the articles of
incorporation. ✓Valle Golf & Country Club v. Vda. De Caram, 585 SCRA 218 (2009).164
5. Board of Trustees and Corporate Officers
[Section 106 of RCC], although setting the term of the members of the Board of Trustees
at 5 years, has a proviso subjecting the term to what is otherwise provided in the articles or
bylaws of educational corporations—that contrary provision control on the term of office. A
trustee occupying his office in a hold-over capacity could be removed at any time, without
165Agilent
Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004).
166La
Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 (1984); Schmid & Oberly v. RJL, 166 SCRA 493 (1988); Wang Laboratories v. Mendoza,
156 SCRA 44 (1974).
96
in the Philippines, that is, perform specific business transactions within the Philippine
territory on a continuing basis in its own name and for its own account. B. Van Zuiden
Bros., Ltd v. GTVL Manufacturing Industries, Inc., 523 SCRA 233 (2007), citing
VILLANUEVA, PHILIPPINE CORPORATE LAW 813 (2001).
(ii) “Contract Test” – Pacific Vegetable Oil Corp. v. Singson, G.R. No. L-7917, 29 April
1955, Advanced Decision Supreme Court, April 1955 Vol., p. 100-A; Aetna Casualty
& Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977).167
(iii) “Profit-Seeking Transactions Rule” – Although each case must be judged in light of
attendant circumstances, jurisprudence has evolved several guiding principles for the
application of these tests. “By and large, to constitute ‘doing business,’ the activity to
be undertaken in the Philippines is one that is for profit-making.” ✓Agilent
Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427
SCRA 593 (2004), citing VILLANUEVA, PHILIPPINE CORPORATE LAW 596 et seq. (1998 ed.);
Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304 (2010), citing VILLANUEVA,
PHILIPPINE CORPORATE LAW 801-802 (2001).
Examples:
• Insurance Business – A foreign corporation with a Philippine settling agent that
issues twelve marine policies covering different shipments to the Philippines is
doing business here. General Corp. of the Phil. v. Union Insurance Society of Canton,
Ltd., 87 Phil. 313 (1950).
A foreign corporation which had been collecting premiums on outstanding
policies is doing business in the Philippines. Manufacturing Life Ins. v. Meer, 89 Phil.
351 (1951).
Those that file collection suits with Philippine courts arising from insurance
contracts entered into and premiums paid abroad are not doing business in the
Philippines. Aetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 (1977).168
• Air Carriers – Off-line air carriers having general sales agents in the Philippines are
engaged in business in the Philippines and that their income from sales of passage
here (i.e., uplifts of passengers and cargo occur to or from the Philippines) is income
from within the Philippines. South African Airways v. Commissioner of Internal
Revenue, 612 SCRA 665 (2010).
d. Special Cases on Infringement of Business Names and Trademarks: The right to corporate
name and trade name of a foreign corporation is a property right in rem, which it may
assert and protect in any of the courts of the world even in countries where it does not
personally transact any business. Western Equipment & Supply Co. v. Reyes, 51 Phil. 115
(1927).
Infringement of trademark may be pursued in local courts separate from the issue of
whether there is the proper license to do business in the Philippines. General Garments
Corp. v. Director of Patens, 41 SCRA 50 (1971).169
e. Doctrine on Unrelated or Isolated Transactions: Isolated acts, contracts, or transactions
of foreign corporations are not regarded as carrying on of business. Typical examples:
making of a single contract, sale with the taking of a note and mortgage in the state to
secure payment thereof, purchase, or note, or the mere commission of a tort. MR.
Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).170
A foreign corporation needs no license to sue before Philippine courts on an isolated
transaction. Even a series of transactions which are occasional, incidental and casual—not
of a character to indicate a purpose to engage in business—do not constitute the doing or
97
engaging in business as contemplated by law. Lorenzo Shipping v. Chubb and Sons, Inc.,
431 SCRA 266 (2004).
The performance of services auxiliary to an existing isolated contract of sale which are
not on a continuing basis do not constitute “doing business in the Philippines.” ✓Antam
Consolidated v. Court of Appeals, 143 SCRA 288 (1986).171
(i) Examples of Isolated Transactions:
• Recovery on the collision of two vessels at the Manila Harbor. Dampfschieffs
Rhederei Union v. La Campañia Transatlantica, 8 Phil. 766 (1907).
• Loss of goods bound for Hongkong but erroneously discharged in Manila. The
Swedish East Asia Co., Ltd. v. Manila Port Service, 25 SCRA 633 (1968).
• Recovery of damages on cargo shipped to the Philippines. Bulakhidas v. Navarro, 142
SCRA 1 (1986).
• Sale of construction equipment to the Government with no intent of continuity of
transaction. Gonzales v. Raquiza, 180 SCRA 254 (1989).
• Recovering a Hongkong judgment from local resident. Hang Lung Bank v. Saulog, 201
SCRA 137 (1991).
• Appointment of local lawyer by foreign movie companies who have registered
intellectual property rights over their movies in the Philippines, to protect such rights
for piracy does not constitute doing business in the country. Columbia Pictures Inc.
v. CA, 261 SCRA 144 (1996).
(ii) When Single Transactions Constitute Doing Business
• Where a single act or transaction is not merely incidental or casual but indicates
the foreign corporation’s intention to do other business in the Philippines, said
single act or transaction constitutes doing business. Far East Int'l v. Nankai Kogyo,
6 SCRA 725 (1962).
• When a foreign corporation engaged in the manufacture of uniforms purchases
through a local agent 7,770 dozens of soccer jerseys from a local company, it was
engaged in business here for the single act was not merely incidental or casual but
is of such character as distinctly to indicate a purpose on the part of the foreign
corporation to do other business in the state. Litton Mills, Inc. v. CA, 256 SCRA 696
(1996).
• Participating in a bidding process constitutes “doing business” because it shows the
foreign corporation’s intention to engage in business in the Philippines. It is the
performance by a foreign corporation of the acts for which it was created,
regardless of volume of business, that determines whether a foreign corporation
needs a license or not. European Resources and Technologies, Inc. v. Ingenieuburo
Birkhanh + Nolte, 435 SCRA 246 (2004).
4. Local Suits BROUGHT BY Foreign Corporations
a. Need to Allege Capacity to Sue: That a foreign corporation is not doing business in the
Philippines must be alleged if a foreign corporation desires to sue in Philippines courts
under the “isolated transactions rule.” ✓Atlantic Mutual Inc. v. Cebu Stevedoring Co., 17
SCRA 1037 (1966).172
The filing of an action by a foreign corporation before Philippine courts would mean
that by voluntary appearance, the local courts have actually obtained jurisdiction over the
“person” of the foreign corporation. Communication Materials v. Court of Appeals, 260
SCRA 673 (1996).
171Eastboard Navigation, Ltd. v. Juan Ysmael and Co., 102 Phil. 1 (1957).
172Thisoverturned the previous doctrine in Marshall-Wells (as well as in In re Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938),
that the lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense. Also
Commissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990).
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b. Need to Allege Resident Agent: A complaint filed by a foreign corporation is fatally
defective for failing to allege its duly authorized representative or resident agent in
Philippine jurisdiction. New York Marine Managers, Inc. Court of Appeals, 249 SCRA 416
(1995).
c. Certificate of Non-Forum Shopping: A resident agent is not per se authorized to execute
the requisite certification against forum shopping—while a resident agent may be aware
of actions filed against his principal, he may not be aware of actions initiated by its
principal, whether in the Philippines or abroad. Expertravel & Tours, Inc. v. Court of
Appeals, 459 SCRA 147 (2005).
d. Discredited Pari Delicto Doctrine: The local party to a contract with a foreign corporation
that does business in the Philippines without license cannot maintain suit against the
foreign corporation just as the foreign corporation cannot maintain suit, under the
principle of pari delicto. Top-Weld Mfg. v. ECED, 119 SCRA 118 (1985).
e. ESTOPPEL DOCTRINE: Under the principle of estoppel, a foreign corporation doing business in
the Philippines may sue in Philippine courts even without license to do business against a
Philippine citizen who had contracted with and been benefited by said corporation and
knew it to be without the necessary license to do business. ✓Merrill Lynch Futures, Inc. v.
CA, 211 SCRA 824 (1992).173
PROPER DOCTRINE: Foreign corporations which conduct regular business should be denied
any access to courts until they secure a license so as to ensure that they will abide by the
decisions of our courts, even if adverse. Dismissal of the petition would be without
prejudice to the foreign corporation subsequently re-filing when it has obtained the
license. ✓Eriks Ltd. v. CA, 267 SCRA 567 (1997).
5. Local Suits AGAINST Foreign Corporations: A fundamental international law principle is that
no state can by its laws, and no court as a creature thereof, can by its judgments and decrees
directly bind or affect property or persons beyond state limits. Times, Inc. v. Reyes, 39 SCRA
303 (1971).
a. Jurisdiction Over Foreign Corporations (Sec. 12, Rule 14, Rules of Court)
For purposes of venue, a foreign corporation, its “residence” includes the country
where it exercises corporate functions or the place where its business is done. State
Investment House v. Citibank, 203 SCRA 9 (1991); Northwest Orient Airlines v. Court of
Appeals, 241 SCRA 192 (1995).
For service of summons under Sec. 14, Rule 14, it is sufficient that it be alleged in the
complaint that the foreign corporation is doing business in the Philippines. Hahn v. CA, 266
SCRA 537 (1997).
When a foreign corporation has designated a person to receive service of summon,
the designation is exclusive and service of summons on any other person is inefficacious.
H.B. Zachry Company Int’l v. Court of Appeals, 232 SCRA 329 (1994).
When a foreign corporation is doing business in the Philippines, summons may be
served on (a) its designated resident agent; (b) if there is no resident agent, the
government official designated by law to that effect; or (c) any of its officers or agent within
the Philippines. The mere allegation in the complaint that a local company is the agent of
the foreign corporation is not sufficient to allow proper service to such alleged agent; it is
necessary that there must be specific allegations that establishes the connection between
the foreign corporation and its alleged agent with respect to the transaction in question.
French Oil Mills Machinery Co. v. Court of Appeals, 295 SCRA 462 (1998).
173Georg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994); Communications Material and Design, Inc. v. CA, 260 SCRA 673 (1996); Agilent
Technologies Singapore (PTE) Ltd. v. Integrated Silicon Technology Phil. Corp., 427 SCRA 593 (2004); European Resources and Technologies, Inc. v.
Ingenieuburo Birkhanh+Nolte, 435 SCRA 246 (2004); Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corp., 470 SCRA 650 (2005);
Global Business Holdings, Inc. v. Surecomp Software, B.V., 633 SCRA 470 (2010); Steelcase, Inc. v. Design International Selections, Inc., 670 SCRA 64
(2012).
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b. Objection to Jurisdiction: Appearance of a foreign corporation to a suit precisely to
question the tribunal’s jurisdiction over its person is not equivalent to service of summons,
nor does it constitute acquiescence to the court’s jurisdiction. Avon Insurance PLC v. CA,
278 SCRA 312 (1997).
Participation of a foreign corporation’s counsel in the trial process, e.g., cross-
examination of witnesses, agreement and objection to documentary evidence, and the
introduction of witnesses and documentary evidence, vacates the plea of lack of
jurisdiction over such foreign corporation. ✓General Corp. of the Phil. v. Union Insurance
Society of Canton, Ltd., 87 Phil. 313 (1950).174
c. ODD DOCTRINE: “Indeed, if a foreign corporation, not engaged in business in the Philippines,
is not barred from seeking redress from the courts in the Philippines, a fortiori, that same
corporation cannot claim exemption from being sued in Philippine courts for acts done
against a person or persons in the Philippines.” ✓Facilities Management Corp. v. De la
Osa, 89 SCRA 131 (1979).175
CONTRA: Sine qua non requirement for service of summons and other legal processes or
any such agent or representative is that the foreign corporation is doing business in the
Philippines. ✓Signetics Corp. v. Court of Appeals, 225 SCRA 737 (1993).176
PRESENT RULE: There is no reason to subject to Philippine jurisdiction foreign corporations
not doing business here; insofar as the State is concerned, such foreign corporations have
no legal existence, and to subject foreign corporations not doing business to the courts’
jurisdiction would violate the essence of sovereignty. The Court is not persuaded by the
position taken invoking the ruling in Facilities Management. ✓Avon Insurance PLC v. Court
of Appeals, 278 SCRA 312 (1997).
d. STIPULATION ON VENUE: When the contract sued upon has a venue clause within the
Philippines, it is deemed a confirmation by the foreign corporation, even though not doing
business in the Philippines, to be sued in local courts. Linger & Fisher GMBH v. IAC, 125
SCRA 522 (1983).
6. Laws Applicable to Foreign Corporations (Sec. 146)
The provision in the New York law which allowed only shareholders with a minimum
number of shareholdings (3%) to be entitled to exercise the right of inspection is valid in the
case of a foreign corporation licensed to do business in the Philippines which in its internal
relationship was bound by the New York law. Grey v. Insular Lumber Co., 67 Phil. 139 (1938).
7. Amendment of Articles of Incorporation (Sec. 147)
8. Merger and Consolidation (Sec. 149)
9. Withdrawal of Foreign Corporation (Sec. 153)
XVII. SANCTIONS, OFFENSES AND PENALTIES
1. SEC Has Been Granted the Following Powers:
(a) To Investigate and Prosecute Offenses Defined under the RCC and to Publish Its
Findings, Orders, Opinions, Advisories or Information (Sec. 154)
(b) To Issue Cease and Desist Orders (Sec. 156)
(c) To Hold in Contempt and Impose Fine (Sec. 157)
(d) To Impose Administrative Sanctions (Sec. 158):
(i) Impose a Fine ranging from P5,000 to P2.0 Million, and not more than P1,000 for
each day of continuing violation, but not to exceed P2.0 Million;
(ii) Issuance of a permanent CDO;
(iii) Suspension or revocation of the Certificate of incorporation; and
174Johnlo Trading Co., v. Flores, 88 Phil. 741 (1951); Johnlo Trading Co. v. Zulueta, 88 Phil. 750 (1951); Pacific Micronisian Line v. Del Rosario, 96
Phil. 23 (1954); Far East Int’l Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 (1962).
175FBA Aircraft v. Zosa, 110 SCRA 1 (1981); Royal Crown Int’l v. NLRC, 178 SCRA 569 (1989); Wang Laboratories v. Mendoza, 156 SCRA 44 (1987).
176Hyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1(988).
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(iv) Dissolution of the corporation and forfeiture of its Assets under conditions in Title
XIV.
2. Willful Holding of Office Despite Knowledge of Disqualification or Willful Concealing of Such
Disqualification (Sec. 160)
3. Violation of Duty to Maintain Records, To Allow Their Inspection, or Reproduction; BUT:
Without prejudice to the SEC Exercise of Contempt Powers (Sec. 161)
4. Willful Certification of Incomplete, Inaccurate, False, Misleading Statements or Reports
(Sec. 162)
5. Independent Auditor’s Collusion with Directors or Representatives, Certifies to Incomplete
or Inaccurate Reports on the Corporation’s Conditions (Sec. 163)
6. Obtaining Corporate Registration Through Fraud: Those responsible for the formation of a
corporation through fraud, or who assisted directly or indirectly therein, shall be punished
with a fine.
7. Corporation’s Conduct of Its Business Through Fraud (Sec. 165)
8. Acting as Intermediaries for Graft and Corrupt Practices: Corporation Use for Fraud, or For
Committing or Concealing Graft and Corrupt Practices as Defined by Pertinent Statutes (Sec.
166)
9. Engaging Intermediaries for Graft and Corrupt Practices: Corporation’s Appointment of an
Intermediary Who Engages in Graft and Corrupt Practices for the Corporation’s Benefit or
Interest (Sec. 167)
10. Tolerating Graft and Corrupt Practices: A Director, Trustee, or Officer Who Knowingly Fails
to Sanction, Report, or File the Appropriate Action, Allows or Tolerates the Graft and
Corrupt Practices or Fraudulent Acts Committed by a Corporation’s Directors, Trustees,
Officers, or Employees (Sec. 168)
11. Retaliation Against Whistleblowers: Any Person Who knowingly and With Intent to
Retaliate, Commits Acts Detrimental to a Whistleblower such as Interfering with the Lawful
Employment or Livelihood of the Whistleblower (Sec. 169)
12. Violations of the RCC Not Specifically Penalized: Violations of Any Other Provisions of the
RCC, its Amendments, Not Otherwise Specifically Penalized Therein;
BUT: If Violation is Committed by a Corporation, it shall be dissolved in appropriate
proceedings with the SEC;
ALSO: Liability for the foregoing shall be separate from any other administrative, civil,
criminal liability under this Code and other laws. (Sec. 170)
a. Historical Background of Sec. 170 (Sec. 144 of the old Corporation Code; Sec. 190 of the
old Corporation Law)
Sec. 190 was not intended to make every casual violation of one of the (old)
Corporation Law provisions ground for involuntary dissolution of the corporation and that
the court was entitled to exercise discretion in such matters. Government of P.I. v. El Hogar
Filipino, 50 Phil. 399 (1927).
Penalties imposed in Sec. 190(A) of the old Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a criminal
prosecution or by an action of quo warranto. These proceedings can be maintained only by
the Solicitor General in representation of the Government. Harden v. Benguet Consolidated
Mining Co., 58 Phil. 141 (1933).
b. Doctrine on the Coverage of Section 144 of the Old Corporation Code
Section 133 of the (old) Corporation Code, unlike its counterpart Sec. 69 in the old
Corporation Law which specifically provided for penal sanctions for foreign corporations
engaging in business in the Philippines without obtaining the requisite license, should be
deemed to have a penal sanction by virtue of Sec. 144 of the (old) Corporation Code.
✓Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424 (1983).
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The lack of language imposing criminal liability in [Secs. 30 and 33 of RCC] shows the
legislative intent to limit the consequences of their violation to the civil liabilities
mentioned therein. Had it been the intention of the drafters of the law to define [Secs 30
and 33 of RCC] as offenses, they could have easily included similar language as that found
in [Sec. 73 of RCC]. The (old) Corporation Code was intended as a regulatory measure, not
primarily as a penal statute. ✓Ient v. Tullett Prebon (Phils.), Inc., 814 SCRA 184 (2017).
13. Liability of Directors, Trustees, Officers, or Other Employees: If the offender is a corporation,
the penalty may, at the discretion of the court, be imposed upon such corporation and/or
upon its directors, trustees, shareholders, members, officers, or employees responsible for
the violation or indispensable to its commission. (Sec. 171)
14. Aiders and Abettors: “Anyone who shall aid, abet, counsel, command, induce, or cause any
violation of the [RCC, its IRR, or SEC orders] shall be punished with a fine not exceeding that
imposed on the principal offenders, at the discretion of the court, after taking into account
their participation in the offense.” (Sec. 172)
XVIII. SEC POWERS UNDER THE RCC
1. SEC Granted Fiscal Autonomy to Collect, Retain and Use Fees, Fines, and Other Chargers
pursuant to the RCC and its IRR (Sec. 175)
2. SEC’s Visitorial Powers and Confidential Nature of Examination Results (Sec. 178)
3. SEC’s Power to Administer Oaths, Subpoena Witnesses and Documents (Sec. 155)
3. Powers, Functions and Jurisdiction of the SEC (Sec. 179):
4. SEC’s Mandate to Develop and Implement Electronic Filing and Monitoring System (Sec.
180)
5. BSP and Insurance Commission Shall Exercise Primary Authority Over Special Corporations
Such as Banks, Nonbank Financial Institutions and Insurance Companies under their
Supervision and Regulation (Sec. 183)
IX. MISCELLANY
1. NEDA and Congress Power to Set Maximum Limits for Stock Ownership in Corporations
Vested with Public Interests (Sec. 176)
2. Provision of Arbitration Agreement in the Articles or Bylaws (Sec. 181)
3. Effect of Repeal of the Code: No Right or Remedy in Favor or Against Any Corporation, Its
Shareholders, Members, Directors, Trustees or Officers, Nor any Liability Incurred by Any
Such Corporation, Shareholders, Members, Directors, Trustees or Officers, Shall be Removed
or Impaired Either by the Subsequent Amendment or Repeal of this Code or Any part
Thereof. (Sec. 184)
4. Existing Corporation at Adoption of RCC: A corporation lawfully existing and doing business
in the Philippines affected by the new requirements of the Revised Corporation Code shall
be given a period of not more than two (2) years from its effectivity (23 February 2019)
within which to comply. (Sec. 185).
—oOo—
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