Held: Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched

reputation, wounded feelings, moral shock, social humiliation and similar injury. A corporation -There are four known forms of business establishment: being an artificial person and having existence only in legal contemplation cannot experience physical suffering and mental anguish. Thus, the prayer (a) Sole or individual proprietorship: a one-man form of business entity for moral damages must fail. conducted for profit by a single individual who owns all the assets, personally answers all the liabilities and suffer all the losses and enjoys all [(cases arranged chronologically) In Tamayo v. University of Negros, the the profits to the exclusion of others. Court held that corporations are not entitled to moral damages. In Mambulao Lumber Co. v. PNB, it was held that corporations is not entitled [Advantages: elimination of bureaucratic process common in corporations to moral damages, unless it has a good reputation which if besmirched, and ownership of all the profits. Disadvantages: Unlimited personal may be a ground for the award of moral damages. In SIMEX Intl v. CA, liability for all debts and obligations, and limited capital/resources.] moral damages were awarded to the corporation in lieu of nominal damages (it also cited Art. 2205 NCC which provides that, actual and (b) Partnership: by the contract of partnership, two or more persons bind compensatory damages may be awarded to a juridical entity for injury to themselves to contribute money, property or industry to a common fund plaintiffs business entity or commercial credits. In ACME Shoe Rubber with the intention of dividing the profits among themselves. and Plastic Corp. v. CA, the Court held that artificial persons are not entitled to moral damages. The issue, however, was finally settled in (c) Joint venture: one time grouping of two or more persons (natural or Filipinas Broadcasting Network v. Ago Medical and Educational Center juridical) in a specified undertaking. Joint venture partakes the nature of a (2005), where the Supreme Court ruled that the corporations claim for partnership contract and is created for the purpose of prosecuting a moral damages falls under Art. 2219[7] of the NCC which authorizes the particular business transaction (see Art. 783 of the NCC, partnership may recovery of moral damages in cases of libel, slander, and/or any form of also be particular or universal), and being a form of partnership, it should defamation, because there is no qualification in the said provision whether the plaintiff is a natural or juridical person. The rule now therefore is that a be governed by the law on partnership. juridical person can validly complain for libel or any other form of defamation and claim for moral damages. [Distinctions: (1) JV does not have a distinct and separate personality unlike a partnership. (2) JV has for its object a single undertaking or transaction, while a partnership usually has for its object a general business -Advantages of a corporate form of business: of a particular kind. (3) Corporations may enter into joint ventures and not partnership, because in the latter case, the identity of the corporation is lost (1) Capacity to act as a single unit or merged with that of another and the discretion of the officials is placed in the hands other than those permitted by law (BoD)] (2) Limited shareholders liability Exception: when the following requirements concur: (1) the articles of (3) Continuity of existence (see right of corporate succession) incorporation expressly authorized the corporation to enter into contracts of partnership; (2) the agreement or articles of partnership provide that all the partners will manage the firm; and (3) the articles of partnership (4) Feasibility of greater undertaking (since there is large capital) stipulate that all the partners are and shall be jointly and severally liable for all obligations of the partnership. (5) Transferability of shares (unless restricted) (d) Corporations: (see BP 68 [Corporation Code] which became effective (6) Centralized management (see Board of Directors) upon approval on May 1, 1980. See also Act 1459 [Corporation Law] and Code of Commerce of Spain on sociedad anonimas). (7) Standardized method of organization, management and finance DEFINITION AND ATTRIBUTES -Disadvantages of corporate form of business:

INTRODUCTION

-Corporation: an artificial being, created by operation of law, having the (1) Bureaucratic process (causing delay) right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Sec. 2) (2) Territoriality (it cannot act beyond the State of incorporation) -It is an artificial being: it has juridical personality, separate and distinct from the persons composing it. It exists independently from the (3) Limited Credit/Resources: (due to limited shareholders liability) stockholders, members or its officers. (4) Uniting of incompatible and conflicting interest (see transferability) -It is created by operation of law: compliance with the requirements imposed by law is necessary for its creation, such that agreement of the (5) Minority has practically no say in the management of affairs persons organizing it does not grant it independent personality. (6) Double taxation may be imposed on corporate income -It has the right of succession: the death, incapacity, or civil interdiction of one or more of the stockholders does not result in its dissolution, unlike in (7) Corporations are subject to governmental regulation and supervision partnership. In other words, it persists to exist independently of the individuals composing it. -Distinctions between a Corporation and a Partnership: -It has limited capacity: since it has the powers, attributes and properties (1) Corporation is created by operation of law, whereas partnership is expressly authorized by law or incident to its existence. created by agreement of the parties. LBC Express Inc. v. CA (1994) (2) There must be at least five (5) incorporators in order to organize a corporation (except corporation sole), whereas partnership may be formed Facts: Carloto, President and Manager of Rural Bank filed an action for by two or more natural persons. damages against LBC for wanton and reckless disregard of its obligation, after the document consigned thru LBC to Carloto arrived without the cash pack. The complaint was later amended where Rural Bank joined as (3) Corporation has limited liability, whereas a partnership can do anything by agreement of the parties provided it is not contrary to law. plaintiff seeking to recover moral damages.

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(4) Corporation must transact its business through the Board of Directors, making enterprise. The profits derived therefrom are necessarily incidental whereas in the absence of an agreement to the contrary, any one of the to the primary object of developing and cultivating sports for the healthful partners in the partnership may validly bind the firm. recreation and entertainment of the stockholders and members. Also, the fact that the capital of the Club is divided into shares does not detract from (5) Corporation has the right of succession, whereas a partnership is based the finding of the trial court that it is not engaged in the business of on mutual trust and confidence such that death etc. of a partner would operating bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose as stated in its result to its dissolution. articles and by-laws. (6) Stockholder can transfer his shares in the corporation without the consent of the other stockholders thereby making the transferee a Corporations created by Special law or Charter: stockholder, whereas a partner cannot transfer his rights or interests in the firm so as to make the transferee a partner without the consent of the other -Corporations created by special laws or charters shall be governed partners. primarily by the provisions of the special law or charter creating them, supplemented by he provisions of this Code, in so far they are applicable. (7) The stockholders liability is limited only to the extent of their (Sec. 4) subscription or promised contribution, whereas in partnership (except a limited partner in a limited partnership) are liable pro rata with all their -Among those corporations created by special law are Philippine National property and after all the partnership property has been exhausted. Oil Company, National Development Company, Philippine Export and Foreign Loan Guarantee Corporation and the Government Services and (8) The term of corporate existence is limited to 50 years unless extended Insurance System. by amendment, whereas a partnership may exist for an indefinite period subject only to the causes of dissolution. -These corporations owe their existence by virtue of the special law or charter creating them such that registration with the Securities and (9) Corporation cannot be dissolved by mere agreement of the Exchange Commission (SEC) is not required for them to acquire legal and stockholders, and the States consent is necessary for it to cease as a body juridical personality. corporate, whereas the partners can dissolve the firm any time or at will. -Unless otherwise provided by the law or charter creating them, they are immune from suits. But when the government engages in a particular CLASSIFICATION OF CORPORATION business through a corporation, it divests itself pro hoc vice of its sovereign character so as to subject itself to the rules governing private corporations. -Corporations formed or organized under this Code may either be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares -Officers and employees of government owned or controlled corporations dividends or allotments of the surplus profits on the basis of the shares created by special laws are governed by the Civil Service Law, on the other held are stock corporations. All other private corporations are non-stock hand, their subsidiaries organized under the provisions of the Corporation Code are governed by the Labor Code. The test in determining whether corporations. (Sec. 3) they are governed by the Civil Service Law is the manner of their creation. Stock Corporations: -Capital stock divided into shares; and -Authorized to distribute dividends or allotments as surplus profits to its stockholders on the basis of the shares held by each of them PNOC-Energy Devt Corp. v. NLRC (1991) Facts: Private respondent Danilo Mercado, employee of PNOC-EDC, a subsidiary of PNOC, filed a complaint for illegal dismissal before the

NLRC. Petitioner filed a motion to dismiss on the grounds of lack of jurisdiction but the same was denied by the NLRC, hence the present Non-stock Corporations: petition for certiorari alleging that PNOC-ED is a subsidiary of PNOC, which is a government entity and as such is governed by the Civil Service -no part of their income is distributable as dividends to its members, Law. trustees or officers subject to the provisions on dissolution. (see Sec. 87) Held: Under the present state of law, the test of determining whether a -primarily exist for purposes other than profit, but it does not follow that government owned or controlled corporation is subject to the Civil Service they cannot make profits as an incident to their operations. Law is the manner of its creation, such that government corporations created by special charter are subject to its provisions while those incorporated under the General Corporation Law are not within its -profits obtained are used for the furtherance of their purposes. coverage. PNOC-EDC having been incorporated under the General Corporation Law is subject to the provisions of the Labor Code. CIR v. Club Filipino Inc. De Cebu (1968) Facts: Private respondent, a civic corporation, has an authorized capital of 22,000php which was later increased to 200,000php. Its article of incorporation and by-laws do not contain any provisions relative to dividends and their distribution, rather, it was agreed that the remaining assets upon its dissolution shall be donated to a charitable institution. The Club is operating bar and restaurant to its members and guests, and whatever profits it had were used to improve its golf course. In 1951, the Club, as a result of capital surplus, declared stock dividends but no actual cash dividends were distributed to the stockholders. The BIR assessed the Club with percentage taxes on the gross receipt of its bar and restaurant. Public Corporations: -Those created, formed or organized under a special law or with original charter for political or governmental purposes for the State or any of its political subdivisions. (The same is not absolute since the Corporation Code may apply suppletorily) Private Corporations:

-Those incorporated under the general corporation law for some private purpose, and the fact that the government owns the controlling shares does Held: The liability for fixed and percentage taxes does not ipso facto attach not diminish the fact that the said corporation owes its existence to the by mere reason of the operation of a bar and restaurant. For the liability to Corporation Code. attach, the operator thereof must be engaged in the business as bar keeper and restaurateur, where profits is the purpose or livelihood is the motive. National Coal v. CIR (146 Phil 583) In the present case, the Club derived profits from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit

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Facts: Petitioner Company was created for the purpose of developing the country or state was merely for the purpose of qualifying a foreign coal industry by Act 257 and was actually engaged in the mining of coal on corporation to secure a license and to do business in the Philippines. reserved lands belonging to the government. It claimed exemption from taxes on the ground that the Philippine government is the owner of Parent or Holding Companies: substantially all of the shares of the company. -One corporation (usually owns controlling interest) controls another Held: Petitioner is a private corporation organized under the Corporation corporation or several other corporations known as its subsidiaries. The Law, and the mere fact that the government happens to be a majority former controls the latter by the power and authority to elect management. stockholder does not make it a public corporation. It has no greater rights, powers and privileges than any other private corporations. -Holding companies have a passive portfolio and hold the securities merely for purposes of control and management unlike investment companies Ecclesiastical or Religious Corporations: which are active in the sale or purchase of stock or securities -Those composed exclusively of ecclesiastics and organized for spiritual Subsidiary Corporations: purposes; administering properties held for religious ones; or to secure public worship or perpetuating the right of a particular religion. -Those which another corporation (parent) owns at least a majority of the shares, and is in effect a corporation under the control of another -Religious corporations are further classified either as religious societies corporation which is the holding company. (Sec. 116) or corporation sole (Sec. 110). Lay Corporations: -A subsidiary has an independent and separate juridical personality, distinct from that of its parent company, hence any claim or suit against the latter does not bind the former and vice versa.

-Those established for purposes other than religion or existing for secular or business purposes. It may further be classified as Eleemosynary (created Affiliates: for charitable and benevolent purposes such as those organized for the purpose of maintaining hospital and houses for the sick, aged or poor) or Civil (organized not for the purpose of public charity but for the benefit of -Those corporations which are subject to common control and operated as part of a system. They are sometimes called sister companies since the its members). stockholdings of a corporation is not substantial enough to control the former. Aggregate Corporations: Quasi-public Corporations: -Those composed of individuals vested with corporate powers, registered under the Corporation Code consisting of not less than five (5) but not -Private corporations which have accepted from the State the grant of more than fifteen (15) incorporators, except the corporation sole. franchise or contract involving the performance of public duties. They are not strictly organized for governmental purposes, but whose operations Corporation Sole: contribute to the convenience or welfare of the general public (public service corporations include telegraph and telephone companies, gas, water -Those consist of one person or individual only and who are made as and electric companies). corporate bodies in order to give them some legal capacity and advantage which they cannot have as natural persons. It may be formed by the chief Quasi Corporations: archbishop, bishop, priest, minister, rabbi or other presiding elder of religious denominations, sects or churches. (Sec. 110) -Public bodies or municipal societies such as townships, counties, school districts, road or highway districts, not vested with general powers of Close Corporations: corporations, are organized by statutes or immemorial usage. -Those whose shares of stock are held by limited number of persons like the family or other closely-knit group. Under this form of corporation, there are no public investors and the shareholders are active in the conduct of the corporate affairs. (see Sec. 96) Open Corporations: -Those formed to openly accept outsiders as stockholders or investors. They are authorized and empowered to list in the stock exchange and to offer their shares to the public such that stock ownership can widely be dispersed. Domestic Corporations: -They possess some corporate functions and attributes but they are primarily political subdivisions (agencies in the administration of civil government) and their corporate functions are granted to enable them to perform more readily their public duties. De Jure Corporations: -Juridical entities created or organized in strict or substantial compliance with the statutory requirements of incorporation and whose rights to exist as such cannot be successfully attacked even by the State in a quo warranto proceeding. De Facto Corporations:

-Those organized or created under or by virtue of the Philippine laws, -Those which exist by virtue of an irregularity or defect in the organization either by legislative act or under the provisions of the General Corporation or constitution or from some omission to comply with the conditions Law. precedent by which corporations de jure are created, but there was colorable compliance with the requirements of the law under which they Foreign Corporations: might be lawfully incorporated. Its existence can only be attacked by the State (not private person) in quo warranto proceedings. (Sec. 20) -Those formed, organized or existing under any laws other than those of the Philippines. (see Sec. 123) Corporations by Estoppel: -The requirement that the law where the foreign corporation is organized -Those which are so defectively formed as not to be either de jure or de must allow Filipino citizens and corporations to do business in its own facto corporations but which are considered as corporations in relation Page23

only to those who cannot deny their corporate existence due to their -SEC requires that a Verification Slip from the Records agreement, admission or conduct. Division of the Commission be submitted showing that the proposed name is legally permissible. -All person who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities -To distinguish corporation from other business organizations, and damages incurred or arising as a result thereof. (Sec. 21) the law requires the corporation to append the word Corporation or Incorporated in full or in abbreviated form, to its proposed name. FORMATION AND ORGANIZATION OF CORPORATION -If the proposed name contains a word already used as part of Three stages in the life of a corporation are creation; reorganization or the firm name or style of a registered entity, the proposed name must contain two other words different and distinct from the name of the quasi-reorganization; and dissolution and winding up. company already registered or protected by law. Creation: -If the name or surname of a person is used as part of a corporate name, there must be a basis for the use of such name such as it is the name (a) Promotional stage: the act of getting a corporation organized including of one of the incorporators or that of his child. the procurement of subscription to its capital stock. A promoter is an organizer or projector who brings persons to unite in forming a -If the name used is that of another person, the consent of the corporation. latter or his heirs, if already deceased, should be secured and submitted to the SEC. -Promoter may enter into contract either in his own name or in the name of the proposed corporation. Promoters could not act for a -If the corporate name contains initials, the meaning thereof projected corporation since that which had no legal existence could have no agent or be a party to a contract. However, after its incorporation, it may must be indicated in the verification slip or an explanation to the effect that adopt or ratify said contracts (express or implied by accepting its benefits it is merely a coinage with no meaning at all. with knowledge of the terms thereof). -If the corporation is a subsidiary of a foreign entity, the word -When a promoter is thus acting for a proposed corporation, the Philippines or Phils in parenthesis should be affixed in the corporate former have three options: (1) Make a continuing offer on behalf of the name. corporation, which if accepted after incorporation, will become a contract. The promoter does not assume any personal liability, whether or not the -The words engineers, architects, design or designers are corporation will accept the offer; (2) Make a contract at the same time reserve for professional partnership, except if it is descriptive of the nature binding himself, with the understanding that if the corporation, once of the business (e.g. engineering equipments). formed, accepts or adopts the contract, he will be relieved of responsibility; and (c) Bind himself personally and assume the responsibility of looking to Red Line Transportation v. Rural Transit Co. (1934) the proposed corporation, when formed, for reimbursement. Facts: Private respondent filed with the Public Service Commission an application for a certificate of public convenience for a new transportation service which was issued in the name of Bachrach Motors Co., Inc and (b) Process of incorporation: the formal and procedural requisite of Rural Transit Co. is being used by the former only as a trade name. drafting the Articles of Incorporation, preparing other necessary supporting documents, their subsequent filing with SEC, and the issuance Held: No law empowers the PSC or any court in this jurisdiction to of the Certificate of Incorporation. authorize one corporation to assume the name of another corporation as trade name. Rural Transit Co and Bachrach Motors Co. are required each -Contents of Article of Incorporation: (see Sec. 14) to adopt and certify a distinctive name. The name of a corporation is essential to its existence. It has the power of succession by its corporation name. The incorporators constitute a body politic and corporate under the -Form of Articles of Incorporation: (see Sec. 15) name stated in the certificate. It cannot change its name except in the manner provided by law. By that name alone it is authorized to transact -Prefatory Paragraph: must specify the nature of the corporation business. being organized in order to prevent difficulties of administration and supervision. (e.g. stock or non-stock corporation) Universal Mills Corp. v. Universal Textile Mills, Inc. (1977) -Corporate Name: It is the principal means of distinguishing the corporation not only from its stockholders or members but also from other firms and entities. It is essential to its existence since it is through the corporate name that it can act and perform legal acts. A corporation, once formed, cannot use any other name, unless it has been amended in accordance with law as this would result in confusion, fraud, evasion, and difficulties of administration and supervision. -No corporate name may be allowed by the SEC if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to law. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name. (Sec 18) Facts: Petitioner Universal Mills Corp. was directed by the SEC to change its corporate name on the ground that it is confusingly and deceptively similar to that of respondent Universal Textile Mills, Inc. after newspaper carrying reports on the fire created uncertainty and confusion as to the real identity of the corporation whose property was burned. Held: The corporate names in question are not identical but they are indisputably so similar that confusion will usually arise. The court cannot perceive why of all names, petitioner had to choose a name already being used by respondent firm engaged in practically the same business for more than a decade enjoying wellearned patronage and goodwill, when there are so many other appropriate names it could possibly adopt without arousing any suspicion as to its motive and the degree of confusion which could mislead even its own customers.

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-A change upon a corporate name does not in any way affect the rights, privileges or obligations previously acquired or incurred by it. The Lyceum of the Philippines v. CA (1993) corporation upon change of name is in no sense a new corporation or the successor of the original corporation. It is the same corporation with a Facts: Petitioner instituted a proceeding before the SEC compelling different name, and its character is in no respect changed. private respondents (Western Pangasinan Lyceum, Lyceum of Cabagan, Lyceum of Lallo, Lyceum of Aparri. Etc) to delete the word Lyceum from

their corporate names and to permanently enjoin them from using the -A corporation cannot be formed for purposes of practicing word as part of their respective names. The SEC, however, ruled in favor of profession like law, medicine, or accountancy, directly or indirectly, the respondents which was affirmed by the CA, hence the present appeal. because the same are reserved exclusively for professional partnerships. Held: The policy underlying the prohibition in Sec. 18 (corporate name) is -Retail trade business where the corporate capital is less than the avoidance of fraud upon the public. In the present case, all the private $2.5M, or its peso equivalent are reserved exclusively for Filipinos. respondents carry the word lyceum and any confusion or deception is precluded by the appending of geographic names to the said word. The -If corporate purpose or objective includes any purpose under word lyceum denotes a secondary school or college from the Greek word the supervision of another government agency, prior clearance or approval lykeion. Petitioner cannot validly invoke doctrine of secondary meaning. of the concerned government agencies will be required (Sec. 17) [Foreign corporation which has never done business in the Philippines, but -Principal Office: The principal office of the corporation must be is widely and favorably known in the country through the use therein of its located within the Philippines (Sec. 14[3]). Principal office may be in one product bearing its corporate and trade name has a legal right to maintain place but the business operations are actually conducted in other areas. action to protect its name or goodwill. (Puma v. IAC)] The law does not require a statement as to the place of corporate operations. Philips Export v. CA (1992) -The statement of the location of the principal office is necessary Facts: Petitioner is a foreign corporation and the authorized users of the as it establishes the residence of the corporation, including venue of actions trademark Philips since 1956. Private respondent Standard Philips for or against it. It may also serve important in determining the validity of Corporation, on the other hand, was issued a certificate of registration by meetings of stockholders or members in so far as venue thereof is the SEC on 1982. Petitioner then filed a complaint and prayed for a writ of concerned. (see Sec. 51) It also determines where the chattel mortgage of injunction to prohibit private respondent from using the word PHILIPS. shares should be registered. The SEC denied the petition and ruled that there is no confusing similarity between the two marks. Clavecilla Radio System v. Antillon (1967) Held: A corporations right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal against trespass or conversion. A corporation cannot select a name identical with or similar to one already appropriated by a senior corporation, otherwise it will mislead and cause injury to the public. The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption. In the present case, PHILIPS is the dominant word and will inevitably lead one to conclude that respondent is affiliated or associated with petitioner. Facts: The New Cagayan Grocery filed a complaint for damages against petitioner CRS before the City Court of Cagayan when the latter's branch office in Cagayan omitted the word not in transmitting the message thereby changing entirely its context. CRS filed a motion to dismiss on the ground of improper venue. Held: When the action is not upon a written contract, the same must be filed in the municipality where the defendant or any of the defendants reside or may be served with summons. Settled is the principle that the residence of a corporation is the place where its principal office is established, which in this case is in the City of Manila. The fact that CRS maintains branch office in some parts of the country does not mean that it can be sued in any of these places, because to allow an action to be instituted in any place where a corporate entity has its branch office would create confusion and work untold inconveniences to the corporation.

-Purpose Clause: defines the scope of the authority of the corporate enterprise or undertaking. It both confers and limits the actual authority of the corporate representatives. A corporation has only such powers as are: (1) expressly granted to it by law and by its article of incorporations; (2) incidental to such conferred powers; and (3) those reasonably necessary to accomplish its purse and incidental to its -Term of Existence: A corporation shall exist for a period not existence. (see Doctrine of Limited Liability) The statement of purposes or exceeding fifty (50) years from the date of incorporation unless sooner objectives enables the: dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation, may be extended for (a) Stockholder to know within what lines of business his money periods not exceeding fifty (50) years in any single instance by a is to be put at risks: amendment of the articles of incorporation, in accordance with this Code: Provided, that no extension can be made earlier than five (5) years prior to (b) Board of directors and management to know within what the original or subsequent expiry date(s) unless there are justifiable lines of business they are authorized to act; and reasons for an earlier extension as may be determined by the SEC. (Sec.11) (c) Anyone who deals with the company to ascertain whether a -A corporation can sue or be sued and transact business only contract or transaction which he contemplates entering is one within the while it possesses a juridical personality. However, despite termination of general authority of the management. its existence, whether by expiration of its own term or by forfeiture, the corporation continues as a body corporate, for three (3) years after the time -There are at least four general limitations on the purpose clause: when it would have been dissolved, for the purpose of prosecuting and (1) it must be lawful; (2) it must be specific or stated concisely although in defending suits for or against it and by enabling it gradually to settle and broad or general terms; (3) if there is more than one purpose, the primary close its affairs. (see Sec. 122) as well as the secondary ones must be specified; and (4) the purpose must be capable of being lawfully combined. -The Incorporators: Corporators are those who compose a corporation whether as stockholders or members. Incorporators are those -Special laws prohibit certain business undertaking with regard stockholders or members mentioned in the articles of incorporation as to their purpose: (a) educational, religious, and other non-stock originally forming and composing the corporation and who are signatories corporations cannot include any other purpose which would change or thereof. (Sec. 5) Corporators in a stock corporation are called stockholders contradict its nature or to engage in any enterprise to make profits for its or shareholders. Corporators in non-stock corporation are called members. members; (b) insurance companies cannot engage in commercial banking at the same time and vice versa (except when it involves two separate -Any number of natural persons not less than five (5) but not entities); (c) stock brokers can have no other line of business not peculiar more than fifteen (15), all of legal age and a majority of whom are residents to them. of the Philippines may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (Sec. 10)

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-As a rule, only natural persons can be incorporators, except cooperatives and corporations primarily organized to hold equities in rural banks and may rightfully become incorporators thereof. Minors cannot become incorporators, but they can become stockholders (corporators) provided they are legally represented by their parents, guardian, or administrator.

paid to the corporation in consideration of the subscriptions made thereon. It may either be in cash, property or services (see Sec. 62)

-Shares of Stock: designate the units into which the proprietary interest in a corporation is divided or the interest or right which the stockholder has in the management of the corporation, in the surplus profits, and in case of dissolution, in all assets remaining after the payment -Take note of certain areas of activity or industry wherein the of its debts. ownership of shares of stock are reserved wholly (i.e. Retail Trade Business which capital is less than 2.5M$) or partially to Filipino citizens. -Certificate of Stocks: a document or instrument evidencing the interest of a stockholder in the corporation or ownership of shares. It is a -Directors and Trustees: The number of directors (governing convenient instrument for transfer of shares. board in stock corporations) or trustees (governing board in non-stock corporations) shall not be less than five (5) but not more than fifteen (15) -Classification of Shares: The purpose of classification are: (1) to specify the rights and privileges of the stockholders; (2) for regulation and Exceptions: (a) educational corporations registered as non-stock control of the issuance or sale of corporate securities for the protection of corporation whose number of trustees, though not less than five and not purchasers and stockholders (e.g. close corporations); (3) management more than fifteen should be divisible by five; (b) close corporations where control device (e.g. founders' shares); (4) to comply with statutory all the stockholders are considered as members of the board of directors requirements (e.g. limitations on ownership); (5) to insure return of (maximum of 20, see Sec. 96); and (c) Corporation sole. investment (e.g. redeemable or preferred shares); (6) for flexibility in price (e.g. no par value shares) -Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in (a) Common Shares: one which entitles its owner to an equal his name in the books of the corporation. Any director who ceases to be the pro-rata division of profits, without preference or advantage over any owner of at least one (1) share of the capital stock of the corporation of stockholder. It usually carries with it the right to vote which he is a director shall thereby cease to be a director/trustee. Trustees of non-stock corporations must be a member thereof. A majority of -Except as otherwise provided by the article of incorporation and directors or trustees of all corporations organized under this Code must be stated in the certificate of stock, each share shall be equal in all respects to residents of the Philippines. (Sec. 23) every other share. (Sec. 6) -Although what is required in only residency, it should be noted (b) Preferred Shares: those which give the holders a preference that aliens, whether or not residents of the Philippines, may not qualify or over the holders of common stocks with respect to the payment of be elected as such, in any activity or business undertaking exclusively dividends or with respect to the distribution of capital upon liquidation. It reserved to Filipino citizens like the management of educational may include such other preferences not inconsistent with the Code. institutions and those governed by the Retail Trade Law. -Preferred stocks can be issued only with a stated par value and -Nevertheless, if the business undertaking or activity is only the preference must be stated in the articles of incorporation and in the partly nationalized, aliens can be elected as such directors (unless the law certificate of stock, otherwise, each share shall be, in all respect, equal to provides otherwise) but their number shall only be in proportion to their every other share. equity or participation in the capital stock of the corporation. -No person convicted of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation. (Sec. 27) The corporate by-laws may provide for additional qualifications and disqualifications but cannot do away with the minimum standards provided by law. -Participating preferred shares: those where the holders thereof are still given the right to participate with common stockholders in dividends beyond their stated preference. (as compare with nonparticipating stock)

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-Cumulative preferred shares: those that entitle the owner thereof to the payment not only of current dividends but also back dividends not previously paid whether or not, during the past years, dividends were declared or paid. In other words, arrears or back dividends -Capitalization: All domestic corporations proposing to organize must be made up in subsequent years, whether earned/declared or not, under the Philippine laws are required to provide in its articles of before any dividends can be declared or paid on common shares. incorporation its *authorized capital stock, the *number of shares and/or kind of shares into which the authorized capital stock is divided, the *par -If the corporation does not intend to grant preferred stocks such value of each share, if there be any, the *names, nationalities and residences of the original subscribers, and the *amount subscribe and paid privilege, the same must be indicated in the contract of subscription lest by each on his subscription. At least 25% of the total subscribed capital they are deemed cumulative. This, however, is not true in our jurisdiction must be paid and in no case may the paid-up capital be less than five because shares are presumed to be equal in all respects unless otherwise stated in the articles of incorporation and in the certificate of stock. thousand (Php 5,000). (see Sec. 14[8]). Therefore, in order that a preferred stock may be considered cumulative, the same must be provided for and specified. (a) Authorized capital: refers to the maximum amount fixed in the articles to be subscribed and paid-in or secured to be paid by the -Non-cumulative preferred shares: those which grant to the subscribers. It may also refer to the maximum number of shares that the holders of such shares only the payment of current dividends and not back corporation can issue. dividends. Thus, if there were no profits in previous years, no dividends should be given for that year and does not have to be made up in later (b) Subscribed Capital Stock: refers to the total number of shares years, avoiding undue accumulation of arrears of dividends. This type may and its total value for which there are contracts for their acquisition or be further classified into: subscription. It is in effect the stockholder's equity account showing that part of the authorized capital stock which has been paid or promised to be (a) Discretionary dividend type: the holders right to have paid, or that portion of the authorized capital stock which has been dividends paid thereon in a particular year is dependent on the judgment subscribed by the subscribers or stockholders. or discretion of the board of directors (unless there is fraud, oppression and unfair discrimination, the dividend right of stockholders cannot be (c) Paid up Capital Stock: also known as paid-in capital which made up in subsequent years) refers to the actual amount or value which has been actually contributed or

(b) Mandatory if earned type: impose a positive duty on directors to declare dividends every year when profits are earned. In effect, it gives the preferred stockholders a right to annual profit and leaves the directors no discretion to withhold dividends. Moreso, the dividend right of stockholders will not be lost by failure of the directors to declare dividends each year when earned.

-Redeemable shares: issued by a corporation subject to redemption as may be provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon, such other terms and conditions as maybe stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares. (Sec. (c) Earned cumulative or Dividend credit type: gives the holder 8) Redemption may either be optional or mandatory at a fixed or future thereof the right to arrears in dividends if there were profits earned during date. the previous years but dividends were not declared. In effect, the right to receive dividends is merely postponed. -The purchase price thereof is based on the face or issued value thereof plus a specified premium. The right of a corporation to redeem -Preferred shares together with redeemable shares are regardless of the existence of unrestricted retained earnings is a departure usually denied voting rights, provided the right to vote is clearly withheld. from the established rule that a corporation may acquire its own shares if it It should be noted, however, that the Code grants even non-voting shares has unrestricted retained earnings (see Sec. 41) the right to vote in specified instances (see Sec. 6) -Treasury shares: issued and fully paid for, but subsequently -Preferred shares are also given preference in the distribution of reacquired by the issuing corporation by purchase, redemption, and corporate assets upon liquidation or termination of the corporate existence. donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. -Par value shares: those whose value are fixed in the articles of -It may be issued for a price even for less than par, and the incorporation. Its primary function is to fix the minimum subscription or original issue price. The said amount also represents the limited liability of purchaser will not be liable to the creditors of the corporation for the the stockholder. To arrive of the true or book value of the shares, difference, since the full value had previously been paid in full. determination of the net worth of the company must be made and dividing the same by the number of outstanding shares. -Treasury shares, while in the possession of the corporation, have no dividend or voting rights since, in all instances, voting and -Par value shares cannot be issued nor sold by the corporation at dividend rights are granted only to the outstanding shares of stock. less than par, to do so would violate the provisions on watered stocks or shares issued at less than par where the stockholders will remain liable for -Treasury shares may, however, be declared as dividends since the difference between what he paid and the actual par value. they are properties of the corporation. -No par value shares: those whose issue price is not stated in the certificate of stock but which may be fixed in the articles of incorporation, or by the board when so authorized by the said articles or by-laws, or in the absence thereof, by the stockholders themselves. [Note: *Differentiate subscribed capital stock from outstanding capital stock (subscribed and paid, see Sec. 137). *Common share, aside from preferred and redeemable shares, can also be deprived of voting rights (see Founders shares). *Redeemable shares can be reacquired whether or not there is unrestricted retain earnings (see General Rule on Sec. 41). *Treasury shares may be issued below par value stated in the certificate. *Treasury shares have no dividend/voting rights as long as they are in the possession of the corporation (see Sec. 57), but once issued, they become outstanding stock (with dividend/voting rights).

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-Issuance of no par value shares are subject to the following limitations: (1) Such shares, once issued, are deemed fully paid and thus, non-assessable; (2) the consideration for its issuance should not be less than five [5] pesos; (3) the entire consideration for its issuance constitutes capital, hence, not available for dividend declaration; (4) they cannot be issued as preferred stock; and (5) they cannot be issued by banks, trust CIR v. Manning (1975) companies, insurance companies, public utilities and building and loan associations. Facts: Manta Trading and Supply Co. (MANTRASCO) had an authorized capital stock of 2.5 million divided into 25,000 shares; 24,700 of those -The issuance of no par value shares have the following were owned by Julius Reese and the rest by the respondents (John advantages: (1) flexibility in price since it may be issued from time to time Manning, McDonald and Simmons). In view of Resses desire that upon his at different prices; (2) evasion of danger of liability upon watered stock in death, MANTRASCO would continue under the management of case of overvaluation of the consideration paid for it; (3) disappearance of respondents, a trust agreement was executed, the law firm of Ross, personal liability on the part of the holder thereof for unpaid subscription, Carrascoso and Janda as trustees and respondents as managers. The since they are deemed fully paid and non-assessable. MANTRASCO stockholders passed a resolution reverting Reeses shares back to the capital of the company, terminating the trust agreement. It was -Voting shares: give the holders thereof the right to vote and discovered that respondents failed to declare the stock dividends actually participate in the management of the corporation through the exercise of distributed in 1958 as part of their taxable income. The respondents were such right, either at the election of the board of directors or in any matter thus assessed deficiency income tax. requiring stockholders' approval. Held: After examining the trust agreement, the 24,700 shares declared as -Non-voting shares: do not give the holders thereof a voice in the stock dividends were not treasury shares. Treasury shares are stock issued election of directors and some other matters requiring stockholders' and fully paid for and reacquired by the corporation. Treasury shares do no approval. Only preferred or redeemable shares may, however, be denied have the status of outstanding shares; consequently, it may be re-issued or sold again. It neither participates in dividends, because dividends cannot the right to vote. be declared by the corporation to itself nor in meetings of the corporation as voting stock. In the present case, the shares of stock of Reese -Founders' shares: shares of stock issued to the founders of the participated in dividends which the trustee received and the said shares corporation. Founders' shares classified as such in the articles of were voted upon by the trustee in all corporate meetings. It is therefore not incorporation may be given certain rights and privileges not enjoyed by the treasury shares. A stock dividend, being one payable in capital stock, owners of other stocks, provided that where the exclusive right to vote and cannot be declared out of outstanding corporate stock but only from be voted for in the election of directors is granted, it must be for limited retained earnings. Corporate earnings used to purchase outstanding stock period not to exceed five (5) years subject to the approval of the SEC. The as treasury shares are a prohibited device to avoid the effects of income five (5) year period shall commence from the date of the aforesaid approval taxation. Distribution of said corporate earnings in the form of stock by the SEC, (Sec. 7) the five year period is non-extendible because it may dividends will subject the stockholders receiving them to income tax. result in perpetual disqualification of other stockholders to elect or be elected as members of the board.

-Capital Requirement:

-De Facto Corporations: may exist as a corporation separate and distinct from the stockholders if the following conditions are met:

Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall not be required to have (1) Valid statute under which the corporation could have been created as de any minimum authorized capital stock except as otherwise specifically jure corporation (or according to some apparently valid statute) provided for by special law, and subject to the provisions of the following section. (Sec. 12) (2) An attempt in good faith to form a corporation according to the requirements of law (amounting to colorable compliance) Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least twenty-five percent (25%) of the (3) Use of corporate powers or the transaction of business as if it were a authorized capital stock as stated in the articles of incorporation must be corporation subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription (4) Good faith in claiming to be and doing business as a corporation. without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall -The recognition of de facto corporation has been found necessary to the paid-up capital be less than five Thousand (P5,000.00) pesos. (Sec 13) promote security of business transactions, to protect third persons and to eliminate quibbling over irregularities. -Take note of minimum paid-up capital required in certain businesses (i.e. Holding companies 100T; Real Estate Brokerage 50T; Pawnshops 100T; Municipality of Malabang v. Benito, et al. (1969) Security Agency 500T; Non-stock foundations 1M working capital) Facts: Petitioner Amer Macario (mayor of Malabang) filed an action for -Restrictions and Preferences on transfer of shares: As a general rule, prohibition to nullify Executive Order 386 and to restrain respondents corporations are not required to provide restrictions and preferences (municipal officials of Balabagan) from performing functions of their regarding transfer of shares, except close corporations (see Sec. 96), in respective offices, on the ground that Executive Order by virtue of which which the restrictions imposed must not only be indicated in the articles of the Municipality of Balabagan was created is null and void for being undue incorporation and certificate of stocks (as in other corporations) but also in delegation of legislative power (invoking the ruling in Pelaez case). On the by-laws of the close corporation, otherwise it may not bind purchasers of other hand, respondents argue that Pelaez case has no application in the such shares in good faith (see Sec. 98). Restrictions imposed should not be present case, because unlike barrios, the municipality of Balabagan is at more onerous than granting the existing shareholders the preferential right least a de facto corporation, having been organized under color of statute before the same was declared unconstitutional, officers having been to buy the shares of the selling stockholder (right of first refusal). elected, and discharging functions for the past five years from the time this action was filed. -The No Transfer Clause: (see Sec. 15 eleventh article) -The Treasurer: (see Sec 15) -The Execution Clause: part of the document where the incorporators sign the document with an indication as to where it was signed and when the same was executed, witnessed by two disinterested persons. (see Sec. 15). -Acknowledgment: notarial part of the articles of incorporation, where the signatories thereof acknowledge before a notary public that they have executed and signed the articles in their own free, voluntary act and deed. Held: In cases where a de facto municipal corporation was recognized as such despite the fact that the statute creating was later invalidated, the decision could fairly be made to rest on consideration that there was some other valid law giving it corporate existence. In the case at bar, however, there is no other valid statute existing that can give color of authority to its creation. Furthermore, an unconstitutional act is not a law; it confers no rights, it imposes no duties, it affords no protection, it creates no office, it is in legal contemplation, as inoperative as though it had never been passed. The actual existence of a statute, prior to such a determination of unconstitutionality is an operative act and may have consequences which cannot justly be ignored, this exception however has no application to the present case.

-Grounds for disapproval: (see Sec 17) The grounds, however is not exclusive (i.e. corporate name is not legally permissible or the minimum capital requirement s not sufficient. Hall v. Piccio (1950)

-Commencement of Corporate Existence: (see Sec. 19) reckoned at the time Facts: On May 1947, petitioner along with private respondents (Fred, of the issuance of its certificate of incorporation. Brown, Chapman, and Abella) signed and acknowledged the articles of incorporation of Far East Lumber and Commercial Co. Inc. Immediately after its execution, the corporation proceeded to do business with the Cagayan Fishing Dev't Co. v. Sandiko (1937) adoption of by-laws and election of its officers. It was only on December 1947 that the said articles of incorporation was filed with the SEC. Pending Facts: On May 1930, Manuel Tabora sold four parcels of land to petitioner approval of the articles of incorporation, private respondents filed an corporation, said to be under the process of incorporation. The petitioners action before the CFI to have the Corporation dissolved on the ground that articles of incorporation were filed with the Bureau of Commerce and the same was an unregistered partnership. Petitioner, on the other hand, Industry on October 22, 1930. In 1931, its board of directors adopted a argued that CFI has no jurisdiction over the case alleging that Far East is a resolution authorizing its president to sell the parcels of land to Teodoro de facto corporation, the dissolution of which may be ordered only in a quo Sandiko. warranto proceedings, and that private respondents were estopped from claiming otherwise. Held: Petitioner was not incorporated when it entered into the contract of sale Tabora and neither can it be considered a de facto corporation at that Held: Far East is not a de facto corporation and its stockholders cannot time. Not being in legal existence then, it did not possess juridical claim its due incorporation in good faith in the absence of certificate of personality to enter into contracts. Corporations are creatures of law, and registration with the SEC. The claim of due incorporation in good faith by can only come into existence in the manner prescribed by law. de facto corporations is compatible with the existence of error and Consequently, if the company could not and did not acquire the four irregularities, but not with a total or substantial disregard of the law. All of parcels of land here involved, it follows that it did not have the resultant the parties know and ought to know that the personality of the corporation right to dispose the same to respondent Sandiko. begins only from the moment the certificate of incorporation is issued. The Page23 -Defectively Formed Corporations: present case, also, is not a suit in which the corporation is a party but a litigation between stockholders of the alleged corporation, for the purpose of obtaining its dissolution, which can be made without the intervention of the State.

-Corporation by Estoppel: applies to both the alleged corporation or to a third person transacting with the former. Members or agents of the association may be stopped to deny the existence of corporation if their acts, relied upon by third persons, is equivalent to a representation or admission of corporate existence. Third person is stopped from denying the existence of the corporation if he dealt with or treated it as a corporation or dealt with it knowing that it is not a corporation and tries to escape liability on a contract entered with the corporation. -Estoppel does not apply if the third person does not know or is not chargeable with knowledge, but rather supposes that the corporation is doing business as an unincorporated association and not claiming to be a corporation. Estoppel likewise cannot be invoked by members of an association (trying to escape liability) who are presumed to know that it is not a corporation. -Remedy: if a corporation by estoppel exists and entered into a contract or transacts business with a third party, the latter has three possible remedies: (1) File a suit against the ostensible corporation to recover from corporate properties; (2) File a case directly against the associates personally who held out the association as a corporation; and

Facts: Petitioner sued respondent, alleged as a corporation duly organized and existing under Philippine laws, for breach of contract entered by its President Jose Aruego in behalf of the corporation. The trial court rendered judgment in favor of petitioner, but the writ of execution was issued against Aruego, as the real defendant, after the court discovered that University Publishing is neither a corporation nor a partnership registered with the SEC. Held: The fact of non-registration is not disputed, and on account thereof, University Publishing cannot be considered as a corporation, not even a de facto one. It therefore cannot be sued independently since it has no personality separate and distinct from Aruego. The doctrine of corporation by estoppel has not been invoked. At any rate, the same is inapplicable in the present case. Aruego represented a non-existent entity, and one who 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. Even with regard to corporations duly organized and existing under the law, we have in many cases pierced the veil of corporate fiction to administer the ends of justice. A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent. Consequently, Aruego, acting as representative of a non-existent principal, was the real party to the contract sued upon.

Salvatierra v. Garlitos, et al. (1958) (3) File an action against both the ostensible corporation and persons forming it, jointly and severally. Facts: Petitioner, owner of a parcel of land, entered into a contract of lease with Philippine Fibers Process Co. Inc. (PFPC) allegedly a corporation duly [Note: The last two remedies may not be availed of if the third party by his organized and existing under the laws of the Philippines, represented by its conduct is stopped from denying the existence of the association as a president Segundino Refuerzo. Petitioner thus filed an action for corporation, in which case recovery is limited only against the corporate accounting, rescission and damages against PFPC before the CFI, after assets.] corporation breach its obligations under the lease contract. The trial court held Refuerzo personally liable, but the same was reversed on appeal. [In earlier cases before the Corporation Code, principles of agency are applied to determine liability of member/s of the corporation by estoppel, Held: PFPC is not a registered corporation, and Refuerzo acting on behalf however, from May 1, 1980, Sec. 21 of the Code must apply (persons who of a corporation which he knew to be unregistered assumed the risk of assume are liable as general partners)] reaping the consequential damages resulting from the transaction. An organization which before the law is non-existent has no personality and would be incompetent to act and appropriate for itself the powers and Lozano v. De Los Santos (1977) attributes of a corporation as provided by law. It cannot create agents or confer authority on another to act on its behalf, thus, those who act or Facts: Petitioner and respondent agreed to consolidate their respective purport to act as its representatives or agents do so without authority and associations and form the United Mabalacat-Angeles Jeepney Operators at their own risk. It is elementary principle that a person who acts as an and Driver's Association Inc. Petitioner won as president but private agent without authority or without principal is himself regarded as the respondent protested on grounds of fraud and refused to abide by their principal. As a rule, a person who contracted with an association in such a agreement and continue collecting dues from the members of his way as to recognize its existence as a corporate body is estopped from association. Petitioner was thus constrained to file the complaint for denying the same in an action arising out of such contract or transaction, damages against private respondent before the MCTC. The trial court held yet this doctrine is not applicable where fraud takes part in the said that the dispute was intra-corporate, hence, subject to the jurisdiction of transaction. In the present case, Salvatierra was made to believe that such SEC. corporation was duly organized in accordance with law. Held: There is no intra-corporate nor partnership relation between petitioner and private respondent. The unified association was, however, still a proposal. It had not been approved by the SEC, neither its officers and members submitted their articles of consolidation nor a certificate of consolidation issued. The dispute is between two separate entities, and not intra-corporate in the absence of intra-corporate relations. Consequently, the SEC has no jurisdiction over the complaint. The doctrine of estoppel advanced by respondent cannot override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to agreement of the parties. It cannot be acquired, enlarged or diminished by any act or omission of the parties; neither can it be conferred by the acquiescence of the court. The doctrine of corporation by estoppel is founded on principle of equity and is designed toprevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming to form a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. Albert v. University Publishing Co. Inc. (1965) Chang Kai Shek School v. CA (1989) Facts: Private respondent Faustina Oh filed before the CFI a complaint demanding separation pay and other benefits after the school terminated his services as teacher. The complaint was later amended to include certain school officials as solidarily liable with the school. The CFI held the school liable and absolved its officials. Held: The school although unincorporated may be sued by reason of estoppel. The omission to register should not prejudice private respondent in the assertion of her claim against the school. There is no question that petitioner contracted with private respondent for 32 years and thus represented itself as possessed of juridical personality to do so, the petitioner is now estopped from denying such personality to defeat her claim against it. Article 1431 of the NCC provides that through estoppel, an admission or representation is rendered conclusive upon the person making it and it cannot be denied as against the person relying on it. As the school itself may be sued in its own name, there is no need to apply the rule that persons associated under a common name without juridical personality may be sued under said common name. Asia Banking Corp. v. Standards Products Co. Inc. (1924)

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Facts: The trial court rendered a judgment in favor of the plaintiff (Asia [Note: General Rule laid on Asia Banking case is subject to exceptions Banking) in a complaint to recover a certain sum in money (balance due on namely, Salvatierra case (if third party is defrauded) and International the promissory note). Defendant appealed and argued that plaintiff failed Express Travel case (if third party is claiming or enforcing the contract).] to prove affirmatively the corporate existence of the parties. (c) Organization and commencement of business: refers to certain overt Held: In the absence of fraud, a person who has contracted or otherwise acts after incorporation such as adoption of by-laws, election of corporate dealt with an association in such a way as to recognize and admit its legal officers and other acts tending to show intent of transacting its business. and corporate existence is estopped from claiming otherwise, this principle applies to foreign as well as domestic corporations. In the present case, the -After the issuance of the certificate of incorporation or defendant having recognized the corporate existence of the plaintiff by registration, the corporation must formally organize and commence its making a promissory note in its favor and making partial payments on the business lest it will be deemed dissolved. same is therefore estopped to deny plaintiffs corporate existence. Defendant is also estopped from denying its own corporate existence. -Effect of non-use of corporate charter and continuous Under the circumstances, it was unnecessary for the plaintiff to present inoperation of a corporation: If a corporation does not formally organize other evidence of the corporate existence of either party. and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate International Express Travel and Tours Services, Inc. v. CA powers cease and the corporation shall be deemed dissolve. However, if a (2000) corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five Facts: Petitioner filed a complaint against Henri Khan, president of the (5) years, the same shall be a ground for the suspension or revocation of its Philippine Football Federation before the RTC for failure of the latter to corporate franchise or certificate of registration. (Sec. 22) This provision pay its outstanding balance under a contract entered by Henri Khan in shall not apply if the failure to organize, commence the transaction of its behalf of the Federation. Henri Khan sought to dismiss the complaint for business or the construction of its works, or to continuously operate is due lack of cause of action, arguing that he cannot be made personally liable. to causes beyond the control of the corporation as may be determined by The RTC, however, held Khan liable, but the same was reversed by the CA, the SEC. applying doctrine of estoppel. -Formal organization: refers to the process of structuring the Held: National sports associations may be granted corporate status, but corporation to enable it to effectively pursue the purpose for which it was such does not automatically takes place, because the law requires that said organized, and includes the following: (1) Organizational meeting of the national associations be accredited and recognized by the Philippine stockholders to elect its board of directors; (2) Adoption of by-laws (Sec. Amateur Athletic Federation and the Department of Youth and Sports 46); and (3) Organizational meeting of the board of directors elected to Development. In the absence of such accreditation, the national association elect the corporate officers, adoption of corporate seal, accepting precannot be considered as a corporate body having separate and distinct legal incorporation subscriptions; establishing the principal office and such personality. Consequently, Henri Khan should be held liable for the unpaid other steps necessary to transact the legitimate business for which the obligations of the unincorporated Federation. It is settled in corporation corporation was formed. law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes privileges and obligations and -Commencement of business/transaction: refers to the actual becomes personally liable for contracts entered into or for other acts functioning or engaging of the corporation in the business for which it was performed as such agents. As president of the Federation, Henri Khan is organized, like entering into contracts which tend to pursue its business presumed to have known about the corporate existence or non-existence of undertaking or other acts related thereto. the Federation. The CA erred in applying the doctrine of corporation by estoppel. The doctrine applies to a third party only when he tries to escape CORPORATE CHARTER AND ITS AMENDMENTS liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. In case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the Corporate Charter contract. -Signifies an instrument or authority from the sovereign bestowing rights and power. Georg Grotjahn GMBH and Co. v. Isnani (1994) Facts: Petitioner, a multinational company organized in Germany, filed an application with SEC for the establishment of regional or area headquarters in the Philippineas, and corresponding cerificate of registration was thus issued. Private respondent Romana Lanchinebre was a sales representative of petitioner, and she secured loans several times from petitioner. Private respondent failure to settle her obligation caused the petitioner to file a complaint for collection of sum of money. Private respondent moved to dismiss the complaint on the ground that petitioner has no capacity to sue because the same is not doing business in the Philippines, which was granted by the RTC. Held: From uninterrupted performance (since 1983) by petitioner of acts pursuant to its primary purpose and functions as regional/area headquarters for its home office, it is clear that petitioner is doing business in the country. Moreover, private respondent is estopped from assailing the personality of petitioner. The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into contract with it. The doctrine of estoppel to deny the corporate existence applies to foreign as well as domestic corporation. The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its non-compliance with the statutes chiefly in cases where such person has received the benefits of the contract. Foreign corporation doing business in the Philippines may sue in Philippine courts although not authorized to do business here against the Philippine citizen who had contracted with and been benefited by said corporation. -Act of Incorporation: the corporation was formed under a special act of the legislature. As to this type of corporation (see Sec. 4), the term charter consists of the special law creating the same and all laws, rules and regulations affecting or applicable to them. -Articles of Incorporation: the corporation was formed under a general law (Corporation Code). As to this type of corporation, the term charter consists of articles of incorporation and the relevant laws under which it is created inclusive of the by-laws and all pertinent provisions of any statute governing them. -The charter of a corporation, whether formed under a special law or by virtue of the general corporation law is regarded as a three-fold contract: (1) between the corporation and the State [as it concerns its primary franchise to be and act as a corporation]; (2) between the corporation and the stockholders or members [insofar as it governs their respective rights and obligations]; and (3) between and among the stockholders [as far as their relationship with one another is concerned]. -Franchise refers to the right or privilege itself to be and act as a corporation or to do a certain act, while charter applies to the instrument by which the state vests such right or privilege (maybe congressional/national or municipal franchise).

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-Primary Franchise: the right or privilege of being a corporation or the Held: The president and manager of a corporation who entered into and right to exist as a corporation as conferred by the State. signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to -Secondary Franchise: the powers and privileges vested and to be the personality of the corporation being separate and distinct from the person composing it. exercised by the corporation (also known as special franchise) [e.g. SEC issues certificate of incorporation in favor of an Employment Cruz v. Dalisay (1987) Agency (primary), to legally act as such, it must secure a license or authority from POEA (secondary).] Facts: Adelio Cruz charged Sheriff Quiterio Dalisay with malfeasance and serious irregularities when the latter attached and levied the money belonging to the former, on the ground that he is not the judgment debtor The Corporate Entity Theory in a labor case but rather the company known as Qualitrans Limousine Service Inc. Sheriff Dalisay explained that when he granished Cruzs cash -A corporation comes into existence or acquires juridical personality upon deposit, he was merely performing a ministerial duty and that Cruz the issuance of the certificate of incorporation. As a legal entity, the executed an affidavit stating that he is the owner/president of the corporation is possessed with a personality separate and distinct from the corporation. individual stockholders or members and is not affected by the personal rights, obligations or transactions of the latter. Held: Considering the ministerial duty in enforcing writs of execution, it is incumbent upon the sheriff to ensure that only that portion of a decision [e.g. properties belonging to the corporation cannot be attached by the ordered or decreed should be the subject of execution. Sheriff Dalisay, personal creditors of its stockholders, the corporation cannot be liable for however, chose to pierce the veil of corporate entity usurping a power the debts, obligations or liabilities of its stockholders.] belonging to the court, which act calls for disciplinary action. It is well settled, both in law and equity that as a legal entity, the corporation has a Sulo ng Bayan Inc. v. Gregorio Araneta, Inc. (1976) personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not Facts: Petitioner filed an accion reinvindicatoria before the CFI against the render the properties he owns or possesses as properties of the defendant to recover the ownership of land for and in behalf of its corporation, since the president and the corporation are separate entities. members. Defendant filed a motion to dismiss on the ground that the complaint states no cause of action. Palay Inc. v. Clave (1983) Held: Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its stockholders. Conversely, a corporation ordinarily has no interest in the individual property of its stockholders, unless transferred to the corporation, even in the case of a one-man corporation. In the present case, the stockholders did not assigned or transferred whatever rights they may have on the land to the plaintiff corporation, and absent any showing of interest, the latter has no personality to bring an action for and in behalf of its stockholders. It is fundamental that there can be no cause of action without an antecedent primary legal right, and there can be no wrong without a corresponding right. Fermin and Rosa Caram v. CA and Alberto Arellano (1987) Facts: The Court of Appeals held petitioners jointly and severally liable with their co-defendants in the lower court for technical services rendered by private respondent that led to the organization of defendant corporation. Petitioners claim that they have no contract whatsoever with private respondent, and as subsequent investors in the corporation, they cannot be held solidarily liable with Filipinas Orient Airways, a separate juridical entity and Barreto and Garcia (promoters) who requested the said services from private respondent. Held: Petitioners were not involved in the initial stages of the organization of the Airline Corporation, but were merely among the financiers whose interest was to be invited and who were in fact persuaded. The Corporation is not fictitious but in fact has a separate juridical personality. Consequently, petitioners, as principal stockholders cannot be made responsible for the corporate obligations. It is important to note that petitioners did not contract such services; it was only the result of such services which the promoters presented to them and which persuaded them to invest in the proposed airline. Petitioners benefited from that such services, but that surely is no justification to hold them personally liable therefore. Rustan Pulp and Paper Mills Inc. v. IAC (1992) Facts: A contract of sale of raw materials was executed between Rustan and Lluch. Bienvenido Tantoco as president manager of Rustan signed the contract. In 1968, Romeo Vergara, resident manager of Rustan, sent a letter to Lluch for the stoppage of delivery. Lluch filed a complaint for breach of contract and damages against petitioner corporation including Tantoco and Vergara. Facts: Petitioner through its president Albert Onstott executed in favor of private respondent Nazario Dumpit a contract to sell a parcel of land on which the latter paid down payment and several installments. When private respondent updated his account, petitioner informed him that his contract to sell had long been rescinded. Hence, Dumpit questioned the validity of the rescission before the NHA. The latter ruled that the rescission in void in the absence of judicial or notarial demand, ordered petitioner including Albert Onstott, jointly and severally, to refund Dumpits payment. Held: As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice-versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. Onsott, being the president of the corporation and controlling stockholder cannot be held liable in the absence of sufficient proof that he used the corporation t defraud private respondent. Mere ownership by a single stockholder 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 personality. Soriano v. Court of Appeals and Cu (1989) Facts: The president, manager, treasurer and director representative of Bacarra Facome, Inc. executed a document for the receipt of truckload of tobacco from Mr. Geruacio Cu. The latter however was not paid his tobacco prompting him to file a complaint for the collection of sum of money against all the signatories to the receipt. The trial court held the signatories/officers jointly and severally liable in their personal capacity. Held: The designations of the petitioners written on the document cannot be considered meaningless and hollow decorations without any relevance to the liability of the corporation these officers obviously represented. Indeed, the receipt discloses the capacity by which the petitioners enter into the contract with private respondent. The Association referred to in the receipt does not refer to the signatories but to Bacarra Facoma Inc. It is clear that the liability of the petitioners under the subject document is not personal but corporate, and therefore attached to Bacarra Facoma Inc., having a personality distinct and separate from that of the petitioners. Also,

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there is no showing that petitioners used the corporation to defraud private Yutivo paid no sales tax on its sale to the public, since under the Tax Code, respondent which would otherwise pierce the veil of corporate fiction. sales tax are collected only once on original sales. GM then appointed Yutivo Corp. as importer, and the latter sold cars and trucks it purchased from GM to Southern Motors (SM), a corporation organized by Yutivo Piercing the Veil of Corporate Fiction family. Yutivo Corp. paid sales taxes, and SM paid no sales tax on its sales to the public. The Collector of Internal Revenue assessed upon Yutivo -The application of corporate entity theory is confined to legitimate deficiency sales tax which the CTA affirmed and held that SM was transactions and is subject to equitable limitations. The legal fiction or organized as tax evasion device. personality of a corporation is introduced for the purpose of convenience and to prevent its being used as cloak or cover for fraud or illegality, or to Held: SM was not organized as tax evasion device since there was no tax to work an injustice. evade, because Yutivo Corp.s liability to pay sales tax arises only when it became an importer. However, SM was actually owned and controlled by -When the notion of legal entity is used to defeat public convenience, petitioner as to make it a mere subsidiary or branch of the latter created for justify a wrong, protect fraud or defend crime, the law will regard the the purpose of selling the vehicles at retail. First, the founders of SM are corporation as a mere association of persons, or in the case of two closely related by blood or affinity and most of its stockholders are corporations, merge them into one, the one being merely regarded as part members of the Yu family. Second, additional subscriptions to the capital or instrumentality of the other. stock of SM and subsequent transfers thereof were paid by Yutivo Corp., without any transfer of funds from Yutivo Corp. to SM. Third, the -The same is true where a corporation is a mere dummy and serves no controlling majority of the Board of Directors of Yutivo is also the business purpose and is intended only as a blind, or an alter-ego or controlling majority of the Board of SM, and the principal officers of both business conduit for the sole benefit of the stockholders. corporations are identical. Fourth, Yutivo financed principally the business of SM in form of advances and loan when the latters capital had been -This theory also applies when the corporate entity is used to evade taxes, exhausted. Lastly, SM made reference to Yutivo as its head or home office or when necessary to protect creditors. In such cases, liability will attach as shown by the various letter of remittances and correspondences. With all directly to the officers and stockholders, at least, in so far as that particular the foregoing, Southern Motors separate corporate personality, being a mere instrumentality, adjunct, alter-ego or business conduit of Yutivo act is concerned. Corporation may be disregarded in order to arrive at the true tax liability of the latter. Palacio v. Fely Transportation Company (1962) Facts: Plaintiff filed a complaint for damages against defendant company after its driver, Alfredo Carillo, recklessly run over his child. The CFI, however, ruled that the action is barred by the judgment in the criminal case and held Isabelo Calingasan subsidiarily liable to pay civil liability exdelicto. Plaintiff contends that defendant corporation should be made subsidiarily liable. CIR v. Norton and Harrison Co. (1964)

Facts: Norton Co. and Jackbilt Co. entered into a distribution or agency agreement whereby Norton was made the sole distributor of concrete blocks manufactured by Jackbilt. Payment for the goods was, however, made to Norton which in turn pays to Jackbilt the amount charged the customer less certain amount as compensation. During the agreement, Norton acquired by purchase all the outstanding stocks of Jackbilt. The Held: The corporation and Isabelo Calingasan may be regarded as one and CIR then assessed Norton deficiency sales tax after considering the sale of the same person. Calingasans main purpose in forming the corporation Norton to the public as the original sale and not the transaction from was to evade his subsidiary civil liability resulting from the conviction of Jackbilt. his driver. This conclusion is borne out by the fact that the incorporators of Fely Transportation are his family members. The defendant corporation cannot be allowed to invoke its separate and distinct personality when the Held: Ownership of all the stocks of a corporation by another corporation same would sanction the use of corporate fiction as a shield to further an does not necessarily breed an identity of corporate interest between the two end subversive of justice. Furthermore, failure of the corporation to prove companies and be considered as sufficient ground for disregarding the that it has other property than the jeep sold to it by Calingasan strengthens distinct personalities. In the present case, however, the separate identities the conviction that its formation was for the purpose above indicated. of two companies should be disregarded for the following reasons: (a) there Isabelo Calingasan and the corporation should be held subsidiarily liable are the same officers of the board for both companies; (b) Norton financed the operations of Jackbilt; (c) Norton treats Jackbilts employees as its on account of Alfredo Carillos insolvency. own; and (d) Payments were effected by Norton of accounts for Jackbilt and vice versa. These circumstances yield to the conclusion that Jackbilt is Marvel Building Corporation v. David (1954) merely an adjunct, business conduit or alter-ego of Norton and Harrison Corporation and consequently, the doctrine of piercing the veil of corporate Facts: Plaintiff filed an action to enjoin the defendant Collector of Internal fiction should be made to apply when the separate corporate entity is used Revenue from selling the corporate properties at public auction for the as a shield for tax evasion. purpose of collecting profits taxes assessed against Maria Castro, a stockholder. Defendant claims that Maria Castro is the true and sole owner La Campana Coffee Factory Inc. v. KKM (1953) of all the subscribed stock of the corporation. Held: Maria Castro is the sole and exclusive owner of the shares of stock of the corporation and the other stockholders are her dummies for the following facts and circumstances: First, endorsements in blank of the shares of stock issued in the name of the other incorporators were discovered to be in the possession of Maria Castro. Second, the other stockholders did not have incomes in such amount proportionate to their subscription, and in fact, it was Maria Castro who made enormous gains and profits. Third, the directors never met to discuss the business of the corporation. Fourth, Maria Castro advance big sums of money to the corporation without any previous arrangements or accounting. Lastly, the other stockholders failed to deny or refute the charge that they were mere dummies which is equivalent to an admission. Facts: Respondent labor organization presented a demand for higher wages and more privileges from La Campana Starch (gau gau) and Coffee Factory. The demand, however, was not granted and the conciliation yields no result, thus, the dispute was certified to the Court of Industrial Relations. Petitioner filed a motion to dismiss on the ground that the action is directed against two different entities (La Cammpana Gaugau Factory and La Campana Coffee Factory) with distinct personalities and that the workers of La Campana Coffee factory is less than 30.

Held: The two corporations are operating as a single business with two trade names; and it is settled that corporate fiction cannot be invoked to further an end subversive to the ends of justice. In the present case, the coffee factory is exclusively owned by Tan Tong and his family. The two factories have one office, one management, and one payroll. Also, the Yutivo and Sons Corp. v. CTA (1961) laborers of the gaugau and coffee factory were interchangeable. In view of the foregoing, the attempt to make the two factories appear as two separate Facts: Petitioner (Yutivo Corp.) imports cars and trucks from General businesses to defeat the ends of law cannot be permitted. Consequently, the Motors Overseas Corp (GM), where the latter, as importer, paid sales taxes. employees involved being more than the jurisdictional requirement

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(combined number of employees of the factories is 31), the petition is Facts: National Federation of Labor Union charges the management of denied. Lawman Industrial with unfair labor practice and non-payment of certain money claims. It appears moreover that Lawman changed its name to Libra Garments, which manufacture the same products, and when the workers Emilio Cano Enterprises, Inc v. CIR (1965) discovered the same, Libra Garments was changed to Dolphin Garments. Facts: The lower court rendered a decision finding Emilio Cano (president) and Rodolfo Cano (manager) guilty of unfair labor practices and ordered the reinstatement of their dismissed employees. The order of execution, however, was directed against the properties of the corporation instead of its officers. Petitioner moved to quash the writ invoking the theory of corporate entity. Held: It is very obvious that the second corporation seeks the protective shield of corporate fiction to achieve an illegal purpose. It is an established principle that when the veil of corporate fiction is made as shield to perpetrate fraud, confuse legitimate issues, or when deliberately and maliciously designed to evade its financial obligations to its employees, the same must be pierced. In the present case, Libra/Dolphin Garments is but an alter-ego of the old employer and must bear the consequences of its Held: Petitioner corporation is a closed family corporation where the unfair acts. incorporators and directors belong to a single family, and is considered as one with its stockholders. To hold such entity liable for the acts of its stockholders is not to ignore the legal fiction but rather to give meaning to A.C. Ransom Labor Union-CCLU v. NLRC (1987) the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end subversive of justice. Also, Emilio and Rodolfo Facts: The Court of Industrial Relations declared A.C. Ransom Phil. Corp., having been sued in their official capacity, the order of execution is in effect guilty of unfair labor practice (interference and discrimination. Writs of against the corporation. execution was issued against the corporation, but the Union filed a motion that the writ be issued also against its officers. The NLRC however relieve the officers of any liability. Telephone Engineering Service Co. v. WCC (1981) Held: The facts of the present case is similar with Claparols v. CIR, where this Court held that where the incorporators and directors belong to a single family, the corporation and its members can be considered as one in order to avoid the corporate entity theory for being used as an instrument to commit injustice or evade financial obligations to its employees. Aggravating the clear evasion of its obligation is the organization Rosario Industrial Corporation, a run-away shop corporation, with the same officers and stockholders, the same compound and engaged in the same line of business as that of A.C. Ransom Corp. The organization of Rosario Industrial proved to be an instrument to avoid payment of back wages and Held: It was only the first time that petitioner denied the employer- reinstatement of the laborers. Consequently, Rosario Industrial employee relationship, after it filed several motions representing and Corporation and its officers should be held solidarily liable to private defending itself as the employer of the deceased. Petitioner even admitted respondents. that UMACOR is its sister company operating under a single management and housed in the same building. Respect for corporate personality is a general rule, but in appropriate cases, the veil of corporate fiction may be Concept Builders Inc. v. NLRC (1996) pierced as when the same is made as a shield to confuse the legitimate issues. TESCOs denial at this stage is obviously an afterthought devise to Facts: Private respondent filed a complaint against petitioner corporation defeat the law and evade its obligations. The denial also constitutes a for illegal dismissal. The labor arbiter rule in favor of the employees and change of theory on appeal which is not allowed in this jurisdiction. issued a writ of execution against petitioner. However, the sheriff was prevented on levying the properties stated in the address of the corporation on the ground that the same belongs to Hydro Pipes Phil. Inc. (HPPI), a Claparols v. Court of Industrial Relations (1975) corporation separate and distinct from Concept Builders. Facts: Utilities Management Corporation (UMACOR) and petitioner TESCO are sister companies, both under the management of Jose Luis Santiago. UMACOR employed Pacifico Gatus which was later detailed with petitioner company. When Gatus reported back to UMACOR he contracted liver cirrhosis and died. The heir filed a notice and claim for compensation with the Regional Office Workmens Compensation Commission and indicated TESCO as the employer. TESCO opposed the same on the ground that there was no employer-employee relationship between them. Facts: Respondent court rendered a decision finding Mr. Eduardo Claparols guilty of union busting and illegal dismissal, after Claparols Steel Held: The conditions under which the corporate fiction may be and Nail Plant ceased operations and succeeded by Claparols Steel disregarded vary according to the peculiar facts and circumstances, but certainly there as some probative factors of identity that will justify the Corporation. application of the doctrine of piercing the corporate veil: (a) stock ownership by one or common ownership of both corporations; (b) identity Held: It is very clear that the latter corporation was a continuation and of directors and officers; (c) manner of keeping corporate books and successor of the first entity, and its emergence was skillfully timed to avoid records; and methods of conducting the business. The test in applying the the financial liability that already attached to its predecessor. It is also instrumentality rule or alter ego doctrine is as follows: (1) Control, not important to note that both predecessor and successor corporation were mere majority or complete stock control, but complete domination not only owned and controlled by petitioner Eduardo Claparols and there was no of its finances but of policy and business practice in respect of the break in the succession and continuity of the same business. The avoiding- transactions, so as the corporate entity had at the time no separate mind, the-liability scheme is very patent, considering that 90% of the subscribed will or existence of its own; (2) Such control must have been used by the shares of stocks of Claparols Steel Corporation were owned by Mr. defendant to commit fraud or wrong, to perpetuate the violation of a Claparols himself, and all the assets of the dissolved Claparols Steel and statutory or other positive legal duty or dishonest and unjust act in Nail Plant were turned over to the emerging corporation. The veil of contravention of plaintiff's legal rights; and (3) The aforesaid control and corporate fiction invoked by the second corporation should be pierced as it breach of duty must be the proximate cause of the injury or unjust loss was deliberately and maliciously designed to evade its financial obligations complained of. It must be kept in mind that the control must be shown to to its employees. The law will regard the corporation as an association of have been exercised at the time the acts complained of took place. In the persons or, in the case of two corporations, will merge them into one, when present case, petitioner corporation ceased its business operations in order the notion of legal entity is used to defeat public convenience, justify to evade the payment of private respondents back wages. After which, wrong, protect fraud, or defend crime (Yutivo v. CTA 1 SCRA 160); or when HPPI filed an information sheet stating the same address with that of the the corporation is a dummy and serves no business purpose and is petitioner. The said sheet was filed by Virgilio Casio, the corporate intended only as a blind, the corporate fiction may be ignored (Liddel Inc. secretary of both corporations, who in fact have the same president and v. CIR, 2 SCRA 632); or when the corporation is merely an adjunct, board of directors. business conduit or alter-ego of another corporation (CIR v. Norton 11 SCRA 714). Mcconnel v. CA (1961) NAFLU v. Ople (1986)

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Facts: Park Rite Co. Inc. occupied the lot of private respondent Padilla without paying reasonable rents thereon, causing the latter to file a complaint for forcible entry against the corporation. Upon execution, the corporation was found to be without any assets; hence private respondent Padilla filed a suit against its past and present stockholders. The latter invoked the separate and distinct personality of the stockholders. Held: The evidence clearly shows that the stockholders completely dominated and controlled the corporation and that the functions of the corporation were solely for their benefit. First, the offices of Cirilo Paredes and Ursula Tolentino (stockholders) and that of the corporation were located in the same building. Second, the funds of the corporation were kept by Cirilo Paredes in his own name. Although mere ownership of all or nearly all of the capital stock of a corporation does not necessarily mean that it is a mere business conduit of the stockholder, the conclusion that the corporation was a mere extension of the personality of the stockholders is justified where it is shown that the operations of the corporation were so merged with the stockholders as to be practically indistinguishable from them. Tan Boon Bee and Co. Inc. v. Jarencio (1988)

-Likewise, corporate entity is disregarded only if it is sought to hold the stockholders or officers directly liable for corporate debt or obligation. If the plaintiff does not seek to impose a claim against said persons, piercing the veil of corporate fiction would not be available nor justified. Remo v. IAC (1989) Facts: The Board of Directors of Akron Customs Brokerage Corp. adopted a resolution authorizing the purchase of 13 trucks from private respondent E.B. Marcha Transport Co., Inc. to be paid out of a loan from DBP. It appears, however, that no loan application was in fact made. Private respondent thus filed a complaint for the recovery of the trucks and damages against Akron and its officers and directors, including petitioner herein. Petitioner, during the pendency of the case sold all his shares to Floriano Coproda, president of Akron Corp. Held: The fact that petitioner was still a member of the board of directors at the time the resolution was adopted, the same however, is not intended to defraud anyone particularly private respondent. In fact, it was the president Floriano Coproda who negotiated with private respondent. The word We in the promissory note must refer to the corporation, and the fact that petitioner did not sign the said promissory note; he cannot be bound thereby personally. If there was any fraud or misrepresentation that there was a forthcoming loan from DBP when in fact there was none, it is Coproda who should account for the same and not petitioner. Since petitioner has no personal obligations to private respondent, he can dispose of his shares of stock as an inherent right of a stockholder.

Facts: Petitioner, doing business in the name and style of Anchor Supply Co sold to herein private respondent Graphic Publishing Inc, paper products. Graphics, however, defaulted payment; hence a complaint for collection of sum of money was filed against it. Upon execution, the sheriff levied the properties found in the office of Graphics including a printing machine. However, a third party claim was filed by Philippine American Drug Co. (PADCO) claiming to be the owner of the said property and Del Rosario v. NLRC (1990) invoking corporate entity theory. Held: PADCO's claim of ownership is not only farce and sham but also unbelievable. First, PADCO was never engaged in the printing business, and the allegation that it only leased the same to Graphic in 1966 which was even before PADCO purchased it. On the issue of corporate entity theory, the court consistently held that separate personality of the corporation may be disregarded or the veil of corporate fiction be pierced when necessary to protect creditors. In the instant case, evidence established that the board of directors and officers of Graphic and PADCO were the same and that PADCO holds 50% shares of stock of Graphic. Cease v. CA (1979) Facts: Forest Cease and other five American citizens organized the Tiaong Milling and Plantation Company. When Forest died, his six children succeeded him. However, two of the heirs wanted partition while the other wanted to continue the corporation. The four heirs with the other stockholders incorporate themselves into FL Cease Plantation and Company, which later became the trustee of the properties of Tiaong Milling by virtue of a trust agreement. The two heirs who wanted partition seeks to include the properties of Tiaong Milling on the ground that the same forms part of the estate of their father Forest Cease. Held: The corporate fiction of Tiaong Milling and Plantation Company must be pierced; the company is only a business conduit and alter ego of the deceased Forest Cease. First, Forest Cease always retained the majority stocks of the corporation and the control and management of its affairs. Second, the corporation never had any account with banks, and if there were any, the same was in the name of Forest Cease. Third, the corporation later developed into a close family corporation (the heirs being nominal stockholders) It is clear therefore that the account and operation of the corporation and the family appears to be indistinguishable and joined together. In brief, the operation of the corporation is merged with those of the majority stockholders, the latter using the former as his instrumentality and for the exclusive benefit of all his family. Consequently, properties of the corporation must be divided, share and share alike, among the heirs. When Piercing the Corporate Fiction is Not Justified -In piercing the veil or disregarding the separate corporate personality, the grounds thereof (as enunciated in previous cases) must be clearly and convincingly established. Fraud must be proven by clear and convincing evidence amounting to more than preponderance. It cannot be justified by speculation and can never be presumed.

Facts: In a complaint for money claims, the NLRC ordered the PHILSA Construction and Trading Co. Inc (recruiter) and Arieb Enterprises (employer) jointly and severally liable to pay private respondent Leonaldo Atienza salary differentials and other benefits. The POEA issued a writ of execution against the property of petitioner Francisco del Rosario after the writ issued against PHILSA was returned unsatisfied since the same has ceased operation. Petitioner appealed to the NLRC, but the same was dismissed. Held: The separate juridical personality of a corporation to be disregarded, the wrongdoing cannot be presumed but rather must be clearly and convincingly established. The conclusion that PHILSA allowed its license to expire so as to evade payment of private respondent's claim is not supported by facts, because at the time of the expiration of the license, there was no judgment yet in favor of private respondent. Likewise, the creation of Philsa International Placement and Services Corp. (second corporation) took place even before private respondent filed a complaint with the POEA. The organization of the second corporation cannot therefore be considered as an anticipation of adverse judgment against PHILSA. Moreover, substantial identity of the incorporators of the two corporations does not necessarily imply fraud. Neither it was shown that del Rosario is personally liable. Lastly, it was surprising why the POEA ordered execution against properties of Francisco del Rosario in complete disregard of the rules outlined in POEA rules and regulations, where the cash bond shall answer for all valid and legal claims against the agency. Indophil Textile Mill Workers Union v. Calica (1992) Facts: Petitioner Union and Indophil Textile Mills Inc. executed a CBA. Later, Indophil Acrylic Manufacturing Corp. was formed and a year after its creation, its workers unionized and entered into a CBA. Petitioner Union now claims that the plant facilities built and set up by Acrylic Corp. should be considered as an extension or expansion of the facilities of Indophil Textile Mills Inc. In other words, petitioner contends that Acrylic is part of Indophil bargaining unit, and that the creation of Acrylic is a devise to evade the application of the CBA between petitioner Union and Indpophil to the workers of Acrylic. Held: When the corporate fiction is pierced, the corporation will be considered as a mere association of persons. The members or stockholders then will be considered as the corporation, that is, liability will attach directly to them. In the present case, however, the fact that the business of private respondent and Acrylic are related, and that some of the employees of Indophil are the same persons manning and providing for the auxiliary

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services of Acrylic, and that the physical plants, offices and facilities are situated in the same compound are not sufficient to justify the piercing of the corporate veil. The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. In the instant case, petitioner does not seek to impose a claim against the members of the Acrylic. Lastly, it is grave abuse of discretion to treat two companies as a single bargaining unit when these companies are indubitably distinct entities with separate juridical personalities. PNB v. Ritratto Group, Inc. et al (2001)

[Express powers of the corporation are enumerated from Sec. 36 to Sec. 44] Power to sue and be sued: -As to venue of actions filed against a corporation, the rule is that the same must be instituted at its residence which is the place of the principal office of the corporation. -As to service of summons, Section 11 Rule 14 of the Revised Rules of Civil Procedure provides: Service upon domestic private juridical entity when the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made upon the president, managing partner, general manager, corporate secretary, treasurer, or in house counsel. The service of summons upon persons other than those named would render the same without force and effect.

Facts: PNB International Finance Ltd. (PNB-IFL), a subsidiary company of PNB, extended a letter of credit in favor of respondent secured by a real estate mortgage. When respondent defaulted payment, it filed a complaint for injunction to restrain foreclosure of real estate mortgage. Petitioner filed petition certiorari, but the same was opposed by respondent on the ground that petitioner PNB is only an agent and not privy to the loan Delta Motor Sales Corp. v. Mangosing (1976) contract, nevertheless, respondent prayed in the complaint that petitioner PNB be ordered to re-compute the rescheduling of interests. Facts: Pamintuan sued Delta Motor for the recovery of damages after the latter as seller failed to fulfill it warranty. The summons for the corporation Held: Petitioner not being a party to the contract has no power to re- was served on April 19 on its employee Dionisia Miranda, who compute interest. The mere fact that a corporation owns all of the stocks of acknowledged its receipt. The corporation, however, did not answer the another corporation, taken alone, is not sufficient to justify their being complaint until it was declared in default, and judgment by default was treated as one entity. If used to perform legitimate functions, a subsidiarys rendered against it. separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. Unless the corporate existence of the subsidiary Held: A strict compliance with the mode of service of summons is is a mere sham or unless the control of the subsidiary existence is such that necessary to confer jurisdiction of the court over a corporation. The officer it is but an instrumentality or adjunct of the dominant corporation, the upon whom service is made must be one who is named in the statute, corporate fiction cannot be disregarded. In the present case, the fact that otherwise the service is insufficient. The purpose of the rule is to render it PNB-IFL is a wholly owned subsidiary of PNB is not sufficient to disregard reasonably certain that the corporation will receive prompt and proper their separate entity, there being no showing that the former is a mere notice in an action against it or to insure that the summons be served on a representative so integrated with the corporation that such person will instrumentality of the latter. know what to do with the legal papers served on him. In the instant case, the court did not acquire jurisdiction over the corporation because it was Yu v. NLRC (1995) not properly served with summons, Dionisia Miranda is not one of those mentioned in Section 11 Rule 14. Consequently, the default judgment is Facts: Private respondents filed a case of illegal dismissal against Tanduay void and should be set aside. Distillery Inc. (TDI) which was granted by the labor arbiter. Later, Twin Ace Holdings, Inc. purchased the assets of TDI and adopted the business E.B. Villarosa and Partner Co., Ltd. v. Benito (1999) name Tanduay Distillers. Private respondents applied for writ of execution which was issued by the labor arbiter against TDI and Twin Ace Holdings. Petitioner argued that it is TDI alone who must be ordered to reinstate the Facts: Petitioner (limited partnership) and private respondent executed a deed of sale with development agreement of parcels of land. Private private respondents. respondent, however, filed a complaint against petitioner for breach of contract and damages after the latter failed to comply with its obligation. Held: The order of execution in effect amended the decision, because the Summons was served upon the partnership through its branch manager. writ goes beyond the scope of the judgment when it ordered both TDI and Petitioner filed a motion to dismiss on the ground of improper service of Twin Ace Holdings to reinstate private respondents. In the present case, summons and lack of jurisdiction over the person of the defendant. the use of a similar sounding or almost identical name is an obvious device to capitalize on the goodwill of TDI which was included in the purchase. Private respondents did not present any proof as to the identity of Held: The designation of persons or officers who are authorized to accept ownership and management to support their contention that the two summons for a domestic corporation or partnership is now limited and corporations are closely related. Moreover, Twin Ace did not take over nor more clearly specified in Section 11 Rule 14 of the Revised Rules of Civil absorbed the corporate personality of TDI, the latter therefore does not Procedure. The liberal construction rule cannot be invoked and utilized as a ceased to exist as a separate corporation. The corporate fiction cannot be substitute for the plain legal requirements as to the manner in which disregarded without any showing that the second corporation is a dummy summons should be served on a domestic private juridical entity. Accordingly, the service of summons upon the branch manager instead of or serves as a client of the first corporate entity. the general manager is improper. Consequently, the trial court did not acquire jurisdiction over the person of the petitioner. CORPORATE POWERS AND AUTHORITY Power of succession: -A corporation cannot do all things that a natural person or ordinary partnership might do for the corporation has no natural rights. A corporation merely exists by virtue of grant by the State and may, -Right of succession means that the corporation persists to exist despite the therefore, only exercise such powers, authority or functions that the State death, incapacity, civil interdiction or withdrawal of the stockholders or members thereof. allows it to do (Doctrine of Limited Capacity). -Corporate authority may be classified into three classes: (1) Those expressly granted or authorized by law inclusive of the corporate charter or articles of incorporation; (2) Those impliedly granted as are essential or reasonably necessary to the carrying out of the express powers; and (3) Those that are incidental to its existence. Power to adopt and use a common seal: -The use of common seal is not mandatory but merely permissive. A corporation may exist without a seal because it performs no further or greater function than to impart prima facie evidence of the due execution by the corporation of a written document or obligation, which, however, may be proven by evidences other than the corporate seal.

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Power to amend articles of incorporation:

Facts: Respondent purchased a land where its new office building was constructed. It was, however, contested that the acquisition of the land, the -Amendment of articles of incorporation is a matter of right granted to construction of the new office building, and the subsequent renting of the corporations created under the Corporation Code. On the other hand, same to third persons are ultra vires acts on the part of the corporation. corporations created by special law may or may not be authorized by the law creating them to make any changes on its charter. The Congress may Held: Every corporation has the power to purchase, hold and lease such even amend or repeal its corporate charter by virtue of its inherent property as the transaction of the lawful business of the corporation may authority to amend or repeal laws. reasonably require (Section 13 [5]). In the present case, it cannot be said that the area of the lot (1,413 sqm) was in excess of its reasonable requirements. The law expressly provides that corporation may acquire Power to adopt by-laws: such real estate as is reasonably necessary to enable themto carry out the purposes for which they were created, and owning a business lot upon -The Corporation Code not only authorizes but in fact requires a which to construct and maintain its main offices is reasonably necessary. A corporation formed or organized under its provisions to adopt its by-laws, different rulin on this point would compel enterprises to conduct heir which must not be contrary to law, morals, or public policy, within one (1) business excluysively in leased offices. month from receipt of official notice of the issuance of certificate of incorporation or registration. (see Sec. 46) Director of Lands v. CA (1988) -The amendment or repeal of by-laws is specially allowed subject to the Facts: Iglesia ni Cristo filed an application with the CFI for the registration procedure and requirement provided for in Section 48 of the Code. in its name of a parcel of land having acquired title thereto by virtue of a deed of sale executed in 1947 by Aquelina de la Cruz. The Director of Lands Power to issue or sell stocks and to admit members: opposed the application on the ground that the subject parcel of land is an alienable public land, which ceases to be public only upon issuance of title -The power of the corporation to issue or sell its stock is governed by the to any Filipino citizen claiming it under Section 48[b] of CA 141. This rule, provisions of Title VII of the Corporation Code. With respect to the according to petitioner is consistent with the courts ruling in Meralco v. issuance or sale of stocks belonging to other corporations, the Securities Castro-Bartolome. Regulation Code and the SEC rules relative to the sale of securities may be made to apply. Held: The ruling in Meralco is no longer a binding precedent. The correct rule is that alienable public land held by a possessor, personally or through his predecessor-in-interest, openly, continuously, and exclusively for the prescribed statutory period of 30 years is converted to private property by mere lapse or completion of said period. The said period was completed in 1966 and hence converted ipso jure into private land and remained so in 1974 when registration proceedings were commenced. This being the case, the prohibition under the 1973 Constitution disqualifying corporation from Power to acquire or alienate real or personal property: acquiring and registering alienable public lands in their name, would have no application. Iglesia ni Cristo have acquired a vested right, which cannot -The power to acquire, own, hold or alienate property is subject to express be impaired or defeated by the 1973 Constitution. limitations under Section 36 to the effect that it must be so acquired, held or conveyed as the transaction of the lawful business of the corporation may reasonably and necessarily require, and it shall be subject to the Power to enter into merger and consolidation: limitations imposed by law and the Constitution. The purpose clause in the articles of incorporation likewise practically sets the limit of the -This is an express power granted by law (Sec. 38[8]). Merger and corporate authority with respect to the exercise of this power. consolidation, as early as the Corporation Law, has been allowed under Philippine Jurisprudence (see Reyes v. Blouse 91 Phil 305). Luneta Motors Company v. A.D. Santos, Inc. (1962) Power to make reasonable donations: Facts: Concepcion executed a chattel mortgage over his certificate of public convenience to operate a taxicab, in order to secure a loan, in favor -A business corporation is carried on primarily for profit, and a donation by of petitioner. Concepcion obtained another loan from Rehabilitation a corporation not created for charitable purpose is not authorized and Finance Corporation (RFC) and executed a second chattel mortgage on the would constitute a violation of the rights of its stockholders, unless it is same certificate. In view of the failure of Concepcion to pay their overdue empowered by statute. There are circumstances, however, under which a account, petitioner filed an action to foreclose the chattel mortgage. While donation by a corporation may be made as a means of increasing its the case was pending, RFC also instituted foreclosure of the second business or promoting patronage, subjec to limitations imposed by Sec. mortgage, which was decided in its favor. The certificate was sold at public 36[9], to wit: auction in favor of Amador D. Santos which was approved subject to mortgage lien in favor of petitioner. Amador transferred all his right in the (a) donation must be reasonable; (b) donation must be for public welfare, certificate to A.D. Santos Inc. (private respondent) When the first mortgage or for hospital, charitable, scientific, cultural or similar purpose; and (c) was finally foreclosed and the certificate of public convenience sold to donation shall not be in aid of political party or candidate, or for purposes petitioner, the latters application for the approval of the sale was opposed of partisan political activity. by private respondent. -Admission and termination of members are prerogatives granted by law to non-stock corporations and the manner, requirements or procedure for such admission or termination may be contained in its articles of incorporation or by-laws. Held: Petitioners corporate purpose (to engage in the transportation of persons by water) as indicated in its articles of incorporation serves as best evidence that it has no authority to engage in the business of land transportation and operate a taxicab. The two are entirely different line of business. If the corporation could not engage in land transportation business, it follows that it may not acquire a certificate of public convenience to operate a taxicab service, because such acquisition would be without purpose and would have no necessary connection with petitioners legitimate business. Government v. El Hogar Filipino (50 Phil 399) Power to establish pension, retirement and other plans: -The directors/trustees, officers and employees are the very persons responsible for the success of any business undertaking and granting them certain benefits and privileges would necessarily be to the advantage of the corporation. In fact, the power may include any act to promote the convenience, welfare and banefit of the employees or officers. Republic v. Acoje Mining Co. Inc. (1963) Facts: Respondent corporation requested the Director of Posts the opening of a post, telegraph and money order offices at its minng camp to service its employees and their families. As a requirement imposed by the Page23

Bureau, respondent corporation passed a board resolution that it will accept full responsibility for pecuniary loss that may be suffered by the Bureau of Posts by reason of dishonesty or carelessness on the part of its employee assigned to take charge of the office. The post office branch was opened and Hilario Sanchez (employee of Acoje) was assigned as postmaster, who diappeared and never returned; and when the accounts of the postmaster was checked, a shortage was found. The company denied liability on the ground that the board resolution is ultra vires, and that it only acted as a guarantor entitled to the benefit of excussion.

Held: It is important to note that the request for the opening of the post office branch came from the respondent corporation in order to promote the convenience and wlefare of its employees. The claim that the resolution adopted by the board is ultra vires has no merit. As a rule, an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization or those beyond the powers conferred upon it by law. However, certain corporate acts may be performed outside Powers v. Marshall (1988) the scope of the powers expressly conferred if they are necessary to promte the interest, welfare, benefit and convenience of its employees and their Facts: The Board of Trustees of International School Inc. decided to families or is reasonably neceaary or proper to the conduct of its business. construct new buildings and remodel existing ones in order to accommodate the increasing enrollment in the school. One of the sources Implied powers: of the needed funds is by collecting the so called development fee in an amount of Php 2,625 per student which was vehemently opposed by the -The corporation is granted the power to exercise such other powers members of the corporation.

Held: Respondent judges finding is erroneous. In fact, NPCs charter grants it the authority to exercise powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which from time to time, may be declared by the Board to be necessary, useful and incidental or auxiliary to accomplish said purpose. In the present a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPCs charter. The stevedoring services which involve the unloading of coal shipments into the NPC pier for its eventual conveyance to the power plant are incidental and indispensable to the operation of the plant. It is a settled rule that if the act is one which is lawful in itself and not otherwise prohibited and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of thos eends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporations charter powers.

essential or necessary to carry out its purposes (Sec. 36[11]) or those necessary or incidental powers (Sec. 45). Held: The by-laws of the corporation provides that the Board of Trustees shall have the powers which may be lawfully exercised or performed by the -Incidental powers are those attach to the corporation from the date of its corporation subject to applicable laws and to the provisions of the articles of incorporation and the by-laws. Under Sec. 2 of PD 732, the Board of incorporation or inherent to its corporate existence. Trustees of the school, upon consulation with the Secretary of Education, may determine the amount of fees and assessments which may be -Powers essential or necessary to carry out the corporate purpose depends reasonably imposed upon its students, to maintain or conform to the upon the particular facts/circumstances and upon the nature of the power schools standard of education. In the present case, such consultation had granted. The test to be applied is whether or not the act in question is in been made and the collection of development fee had been approved by the direct and immediate furtherance of the corporations business, fairly Board of Trustees as a valid exercise of corporate powers. Moreover, the incident to the express powers and resonable necessary to their exercise. expansio of school facilities by improving old buildings and constructing new ones is an ordinary business transaction well within the competence of -Classification of implied powers: (a) acts in the usual course of business; the Board to act upon, being directly related to the purpose of elevating and (b) acts to protect debts owing to the corporation; (c) embarking in a maintaining the schools standard of instruction. different business (if part of regular business, it is not an implied power); (d) acts in part or wholly toprotect or aid employees; and (e) acts to Power to extend or shrten corporate term: increase business. -The exercise of this power involves special amendment of the articles of incorporation by complying the requirements in Sec. 37 and Section 11. In case of extension, the same must be made during the lifetime of the Facts: Filipinas Cement Corporation (FCC) filed an application with the corporation. A dissenting sockholder may exercise his appraisal right (Sec. PSC for a certificate of public convenience and necessity to install, maintain 81[1]). and operate an electric plant for the purpose of supplying electricity and light to its cement factory and its employees living within its compound. Power to increase or decrease capital stock; incur, create or increase Petitioner opposed the application on the grounds that it is the duly bonded indebtedness (see Sec. 38): authorized operator in the locality; that FCC is not authorized by its articles of incorporation or by the municipal council to operate an electric plant. -It partakes the nature of a special amemdment. Teresa Electric and Power Co. Inc v. PSC (1967) Held: A municipal legislative franchise is a condition precedent for a corporation who desires a franchise to operate and maintain an electric -There are three (3) ways of increasing the capital stock which may vary plant and render service to the general public at such rat eof compensation depending on the purpose or need of the corporation: approved by the government. This requirement, however, cannot apply to FCC who desires to operate and maintain electric plant exclusively for its (a) increasing the par value of the existing number of shares without own use in coonection with the operation of its cement factory and for the increasing the number of shares; use of its employees, the latter to receive service free of charge. Furthermore, the articles of incorporation of FCC grant it the authority to (b) increasing the number of existing shares without increasing the secure, utilize and dispose of in any lawful manner privileges, franchises par value thereof; and and concessions, and that it may perform any and all acts connected or incidental with the business of manufacturing cement. (c) increasing the number of existing shares and at the same time increasing the par value of the shares. Napocor v. Vera (1989) Facts: Private respondent (Sea Lion International Port Terminal Services Inc.) filed a complaint for prohibition and mandamus against petitioner NPC in not renewing its contract for stevedoring services and taking over the said services. Public respondent judge ruled in favor of Sea Lion after finding that NPC was not empowered by its charter to engage in stevedoring and arrastre services. -The existence of unissued or unsubscribed shares out of the original authorized capital stock will not prohibit the corporation from increasing its capital stock. As in the case of original subscription, increase in capital stock requires that at least 25% of such increased capital must be subscribed and that at least 25% of the subscriptions must be paid either in cashor property.

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-In decreasing capital stock, any reduction shall not be approved by the SEC if its effect shall prejudice the rights of corporate creditors. This is consistent with the trust fund doctrine which states that subscription to capital stock of the corporation constitute a fund which the creditors have a right to look up to for the satisfaction of their claim (see PNB v. Bitulok Sawmill 23 SCRA 136 and Veloso v. Poizat 37 Phil 802).

-All stockholders shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto (Sec. 39)

-The basis for the grant of this right is to preserve and maintain unimpaired or undiluted the relative and proportionate voting strength and -Reasons for decrease of capital stock include: (1) to reduce or control of all stockholders. Absent this right, a controlling stockholder may wipe out existing deficit where no creditors would thereby be affected; (2) easily strengthen his hold and control of the corporate affairs by simply to reduce capital surplus or when the capital is more than what is necessary arrogating unto himself all subsequent issuance or disposition of corporate to procreate the business; and (3) to write down the value of its fixed assets shares. to reflect their present actual value in case where there is a decline in the value of the fixed assets of the corporation. -The right of preemption may be lost by waiver of the stockholder, expressly or impliedly by his inability or failure to exercise it after having Philippine Trust Company v. Rivera (1923) been notified of the proposed issuance or disposition of shares. Facts: Petitioner, as assignee in bankruptcy of the insolvent corporation -The right of preemption may be denied or does not extend to: Cooperative Naval Filipina, instituted an action to recover one-half of the stock subscription of defendant Mariano Rivera (incorporator of Naval (a) shares to be issued in compliance with laws requiring stock Filipina), which admittedly has never been paid. Rivera argued that prior to offerings or minimum stock ownership by the public; and insolvency, the Board adopted a resolution reducing the capital stock by 50%, thus releasing the subscribers from the obligation to pay any unpaid (b) shares to be issued in good faith with the approval of the balance of their subscription in excess of 50%. stockholders representing 2/3 of the outstanding capital stock, either in exchange for property needed for corporate purposes or in Held: Formalities prescribed for reduction of capital stock was not payment of a previously contracted debt. complied with and no certficate to that effect was filed in the Bureau of Commerce and Industry. Thus, the withdrawal of so much capital from the fund effected without compliance with the statutory requirement was -The aforesaid exceptions do not apply to close corporations where the wholly ineffectual. It is a established doctrine that subscription to the pre-emptive right of a stockholder in a close corporation shall extend to all capital stock of a corporation constitute a fund to which the creditors have stock to be issued, including reissuance of treasury shares, whether for a right to look upon for satisfaction of their claims and that the assignee in money, property or personal services or in payment of a corporate debt, insolvency can maintain an action upon any unpaid stock subscription in unless the articles of incorporation provides otherwise (Sec. 102). Hence, order to realize assets for the payment of its debts. Furthermore, a the preemptive right of stockholders in close corporations is broader in that corporation has no power to release an original subscriber to its capital it extends to all issuance and dispositions of shares. stock from the obligation of paying his shares, without a valuable consideration for such release; and as against creditors, a reduction of the Benito v. SEC (1983) capital stock can only take place in the manner and conditions prescribed by law, and strict compliance therewith is necessary. Facts: The corporation issues the unsubscribed portion of its original capital stock as well as shares of the increased capital stock. Benito (stockholder) filed a petition before the SEC on the ground that the said Madrigal and Company v. Zamora (1987) issuances were made in violation of his pre-emptive right considering that Facts: The Union demanded from petitioner wage increase after the latter he was not notified. The SEC ruled that petitioner is not entitled to premade large profits. The corporation, however, denied the request on emptive rights with respect to the unsubscribed portion of the original grounds of operational losses. It was found out that the corporation passed authorized capital stock, but nevertheless can exercise his pre-emptive resolution reducing its capital stock through the distribution of marketable right to subscribe to the increase capitalization. securities owned by the corporation to its stockholders in exchange for their shares in the corporation. A complaint for unfair labor practice was Held: Pre-emptive right is recognized only with respect to new issue of filed by the Union which was decided by the labor arbiter in favor of the shares, and not with respect to additional issues of originally authorized shares. In the latter, when the shares left unsubscribed are reoffered, the Union. stockholder cannot therefore claim a dilution of interest. Petitioner, Held: The records reveal that the corporation decided to evade its however, was able to establish that he was not notified of the said meeting responsibility towards the employees by reducing its capital. The reduction where the proposed increase in capital was one of the agenda. Hence, created an apparent need for retrenchment, which by all indications, just a petitioner had not waived his pre-emptive right and may be allowed to mask to purge membership in the Union, who agitated for wage increases. subscribe to the increased capital stock proportionate to his present It is clear from the records also that the corporation made huge profits, shareholdings. which gives the unionists the right to demand salary adjustments. There is no merit in the corporations claim that the profits were in the nature of dividends (hence an absolute property of the stockholders) which the employees had no participation whatsoever. The profits are in fact corporate earnings arising from corporate investment, where the petitioner was acting as stockholder itself, and in that case, the right to share in such dividends, by way of salary increases, may not be denied its employees. [Note: This case arose when the Corporation Code was not yet in force, and thus the above ruling may no longer hold true. By virtue of Sec. 39 of the Code, the coverage of pre-emptive right was broadened to include all issues or dispositions of shares of any class which is construed to include not only new shares to be issued pursuant to an increase in capital stock but also unissued shares which form part of the original authorized capital stock as well as treasury shares (see SEC Opinion dated January 14, 1993 [As regards increasing, creating or incurring bonded indebtedness, the addressed to Ms. Imelda P. Marquez).] authority is that a corporation may need additional funds to carry its purpose such that it may source its funds by borrowing evidenced by Power to sell or dispose of assets (see Sec. 40): bonds, notes or debentures. The absence of statutory authority will not bar the corporation from incurring or creating bonded indebtedness. This is -The procedure and requirements in Sec. 40 will not apply if the sale or because whenever a corporation has the power to borrow in pursuit of its disposition does not involve all or substantially all of the assets of the business, it has the implied or incident power to issue bonds in payment or corporation as to render it incapable of continuing the business or as security provided it violates no prohibition or restriction in its charter or accomplishing the purpose for which it was incorporated. Thus, if the any other statutes.] same is necessary in the usual and regular course of business of the corporation or if the proceeds of the sale and other disposition will be Power to deny pre-emptive rights:

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appropriated for the conduct of its remaining business Sec. 40 will not apply. [e.g. The normal business of a realty company would be the acquisition and sale of real properties, the board of directors in this case may validly sell the asset of the corporation (lands and other realties) without the consent of its stockholders since this is the very purpose of its existence]

(2) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; (3) To pay dissenting or withdrawing stockholders entitled to payment for their shares (in the exercise of their appraisal rights under Section 105)

-Despite authorization from stockholders, the Code allows the Board to (4) To redeedm redeemeable shares under section 8 of the Code. abandon the sale or disposition, without further action or approval of the stockholders or members, subject only to the rights of third parties under -The phrase unrestricted retained earnings is used in a sense that the the contract. corporation cannot use its capital stock to purchase its own shares, that is, corporate assets below the legal or stated capital, but only from surplus -The sale or disposition of all or substantially all of the corporate assets profits. Except: (1) redeemable shares, which the corporation may acquire may have the effect of merger or ocnsolidation, and creation of a parent or regardless of the existence of unrestricted retained earning and (2) in the holding company (e.g. the selling corporation having become a subsidiary exercise of stockholders right to compel a close corporation to purchase of the purchasing corporation). In merger and consolidation, however, it is his shares, for any reason, under Section 105, when the corporation has a general rule that the transferee of all the assets of another corporation is sufficient assets in the book to cover its debts and liabilities exclusive of not liable for the debts and liabilities of the latter (transferor). capital stock. Islamic Directorate of the Philippines v. CA (1997) Facts: After martial law was declared, IDP was divided in to two groups each claiming to be the legitimate board of directors after holding their own separate elections. Petitioner IDP-Abbas Group now filed a petition before the SEC seeking the nullification of the sale by IDP-Carpizo Group of the only asset (land) of the corporation to INC. Held: In previous ruling of the SEC, it declared that the election of the Carpizo Group as well as the Abbas Group is null and void, thus it becomes more settled that IDP-Carpizo is a fake board. IDP which is the owner of the land, therefore, never gave its consent rendering the sale between Carpizo Group and INC void ab initio. It appears also from the records that the object of the sale was the only property of IDP, hence, equivalent to a disposition of all or substantially all of the corporate assets governed by Sec. 40 of the Corporation Code. For the sale to be valid, Sec. 40 requires majority vote of the legitimate Board of Trustees concurred by the vote of at least 2/3 of the bona fide members of the corporation. Failure of the IDP-Carpizo Group to comply with the procedures under the said section deems the transaction null and void. Edward J. Nell Co. v. Pacific Farms, Inc. (1965) Facts: Appellant after obtaining favorable judgment, in an action to collect the unpaid price of articles sold to Insular Farms Inc., sought the execution of the same. The writ of execution was returned unsatisfied by reason that the judgment debtor has no leviable property. Appellant now filed an action against Pacific Farms Inc. upon the theory that the appellee is an alter ego of Insular Farms Inc, after it purcahsed all the shares of stock and properties of the latter. -The reacquired shares may be reissued, they are not extinguished unless it is acquired with that intention. Reacquired shares while in the possession of the corporation is considered as treasury shares which do not have voting and dividend right. If the corporation has no intention of reissuing the reacquired shares, the same may be retired and cancelled or removed effectively reducing the number of shares stated in the articles of incorporation. -Th underlying reason for limiting reacquisition of shares is to prevent depletion and impairment of corporate assets and capital, because under the Trust Fund Doctrine, subscriptions to the capital stock of a corporation, including any unpaid portion thereof, constitute a fund which the creditors have the right to look up to for the satisfaction of their claims. Thus the reacquisition of shares of stock by the corporation must be made in good faith, that the corporation is not insolvent, and that the rights of the creditors and other stockholders are in no way prejudiced or injuriously affected Steinberg v. Velasco (1929) Facts: The Board of Directors of Sibuguey Trading Company approved and authorized the purchase of large portion of the capital stock from various stockholders. The plaintiff is now questioning the validity of the said sales: Held: The corporation has an authorized capital stock of 20,000php and only 10,030php were subscribed and paid. The corporation spent 3,300php of the outstanding capital for the above purchase of shares of stock The corporation likewise distributed divedends in the amount of 3,000php likewise deducted from the outstanding capital. In this situation, it is very apparent that the directors did not act in good faith or that they were grossly ignorant of their duties. Prevailing jurisprudence held that directors are bound to care for the property of the corporation and manage its affairs in good faith, and for a violation of these duties resulting in wastage of its assents or injury to its property, they are liable as trustees and will be required to make good the loss out of their private assets. Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare dividends to stockholders when the corporation is insolvent.

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Held: Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is no tliable for the debts and liabilities of the transferor, except: (1) when the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts. In the case at bar, none of the exceptions are present, worse, the appellants theory that the appellee is an alter ego of Insular Farms Inc. negates consolidation or merger, for a corporation Power to invest funds (see Sec. 42): cannot be its own alter ego. -The phrase may invest its funds has been held to mean as an investment Power to acquire own shares (see Sec. 41): in the form of money, stock, bonds, and other liquid assets and does not include real properties or other fixed assets. -The corporation may acquire its own shares, provided that it is for a legitimate corporate purpose and that the corporation has unrestricted -The phrase for any purpose other than the primary purpose signify that retained earnings, in the following instances: even if the business is allowed in the secondary purpose of the corporation, the provision of Section 42 must be complied with (take note of the requirements). Except: investment which is reasonably necessary to (1) To eliminate fractional shares arising out of stock dividends; accomplish its pimary purpose, where the ratification or approval of the stockholders is not required.

Dela Rama v. Ma-Ao Sugar Central Co. Inc. (1969)

Facts: Plaintiff, a foreign corporation, filed an action against defendant, a domestic corporation, for collection of unpaid balance of goods ordered by Facts: Ma-Ao Sugar Co. Inc (engage in the manufacture of sugar) defendant from plaintiff. Defendant contends that plaintiff has no legal subscribed 300,000php worth of capital stock of Philippine Fiber capacity to sue for failure to obtain the required license to do business in Processing Co. Inc (engage in the manufacture of sugar bags). The the Philippines. investment/subscription, however, was not authorized by the board and it was only after several months that the said act of subscription/investment Held: The purpose of the statute requiring license to do business is to was ratified. The plaintiff are now questioning the legality of the said subject the foreign corporation, doing business in the country, to the investment since the same was not approve by 2/3 votes of the jurisdiction of Philippine courts. The statute was not intended to prevent stockholders. the foreign corporation from performing isolated or single acts, but to prevent it from acquiring a domicile for the purpose of pursuing its Held: The investment made is reasonably necessary to accomplish the business without taking steps to render it amenable to suit in the local primary purpose of the corporation, and to require the approval of the courts. Thus, a foreign corporation engaged in an isolated transaction in stockholders would be to unduly curtail the power of the Board. An act if the Philippines cannot be excluded from securing redress in Philippine done in pursuance of the corporate purpose does not need the approval of courts; otherwise unscrupulous persons can easily avoid or repudiate their the stockholders, but when the purchase of shares of another corporation is contracts with such foreign corporations, simply because the latter is not done solely for investment and not to accomplish the corporate purpose licensed to do business in the country. The requirement of license cannot (the primary purpose or the reason for which the corporation was be improperly applied or unduly extended to cover isolated transactions. incorporated), the vote or approval of the stockholders is necessary. Bulakhidas v. Navarro (1986) Gokongwei Jr. v. SEC (1979) Facts: Petitioner, a foreign corporation, filed an action against Diamond Facts: SMC invested corporate funds in SMI (a tax free reorganization in Shipping, a domestic corporation, for recovery of damages after the latter Bermuda) and purchased beer manufacturing facilities. Petitioner is now failed to deliver goods shipped to it by petitioner. Diamond Shipping questioning the validity of the said investment for having been made contends that petitioner is not doing business in the Philippines and without the stockholders approval and imputes grave avuse of discretion to therefore has no capacity to sue in Philippine courts. SEC when it allowed the stockholders meeting where the questioned acts of investing corporate funds was ratified. Held: An isolated transaction, like in the present case, does not constitute engaging or transacting business; therefore a license to do business is not Held: The investment was for the purchase of beer manufacturing necessary. In fact, when a foreign corporation has no license to transact facilities which is apparently relevant to the corporate purpose, hence business in the Philippines, it does not follow that it has no capacity to requires no approval from the stockholders. Assuming that authorization is maintain suit in Philippine courts. It is settled that a foreign corporation, necessary and that the Board was not authorized by the stockholders, there not doing business in the Philippines, cannot be denied the right to file is no question that a corporation like an individual may ratify and thereby action in Philippine courts for isolated transactions. The purpose of the law render binding upon it the previously unauthorized acts of its officers. This is not to prevent foreign corporation from performing isolated or single is true because the questioned investment is neither contrary to law, acts, but to prevent it from acquiring a domicile for the purpose of pursuing morals, public order or public policy. Furthermore, mere ultra vires acts its business without taking steps to render it amenable to suit in the local are not void ab initio but are viodable subject to ratification. Lastly, the courts. mere fact that SMC submitted the assailed investment to the stockholders for their ratification cannot be construed as an admission that the Board Swedish East Asia Co. v. Manila Port Service (1968) had committed an ultra vires act. Again, it must be noted that the questioned investment is in pursuance of the corporate purpose, and to Facts: Petitioner, a foreign corporation, filed a complaint against require the stockholders vote would be to unduly curtail the power of the respondent, operator of arrastre services, for recovery of the value of the Board of Directors. missing goods erroneously discharge in the Philippines. Respondent assails the capacity of petitioner to maintain the present suit, it being admittedly a CASES IN FOREIGN CORPORATIONS foreign corporation not licensed to business in the Philippines. Mentholatum Co. Inc. v. Mangaliman (1941) Held: The rule which bars foreign corporation, doing business in the Philippines without license, from access to Philippines courts is not applicable to foreign corporations performing single acts or isolated transactions. In the present case, it was not shown that petitioner has been engaged in the Philippines in a continuing business or enterprise for which it was organized. In fact, the erroneous discharge of goods was not the result of a business transaction, but of the mistaken belief and negligence of respondent.

Facts: Plaintiff, a foreign corporation, filed an action for infringement and unfair competition against defendants for manufacturing and selling products using the plaintiffs trademark and packaging. The complaint alleges among others that Philippine Drug Co. Inc. is its exclusive and authorized distributing agent in the Philippines. It is also undisputed that plaintiff has no license to do business in the Philippines. The issue is whether plaintiff is transacting business in the Philippines and can maintain the present suit. Antam Consolidated Inc. v. Court of Appeals (1986) Held: The true test in determining what constitute doing, engaging, or transacting business is whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. The term implies a continuity of commercial dealings and arrangements, and contemplates the performance or exercise of acts, works or functions normally incident to, and in progressive prosecution of, the purpose and object of its organization. In the present case, the transaction concerning the sale and distribution of plaintiffs product by its exclusive and authorized distributor is in effect the act of the plaintiff. Thus, being a foreign corporation doing business in the Philippines without the required license, it cannot maintain and prosecute the present suit. Marshall-Wells Co. v. Henry Elser and Co. (1942)

Facts: Respondents Stokely Van Camp. Inc, a foreign corporation, and its subdivision Capital City Product Co, filed a suit for collection of sum of money against petitioners Antam Inc. and Philippine Coconut Oil Manufacturing (Comphil), after the latter failed to deliver the coconut crude oil pursuant to an agreement entered into by the parties. Petitioner questions the personality of respondents to maintain the suit, on the ground that they are doing business in the Philippines without license. Held: The records reveal that petitioners and respondents entered into three similar transactions, however, the second and third transaction was entered into because respondents wanted to recover the loss they sustained from the repeated failure of petitioners to deliver the coconut crude oil. From these, it can be deduced that in reality there was only one agreement which in no way indicates the intention on the part of the respondents to engage in a continuous transactions with petitioners which will categorize it as a foreign corporation doing business in the Philippines. Thus,

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respondents which are not doing business in the Philippines do not need to obtain a license in order to have the capacity to sue. Doing, transacting or engaging in business should be distinguished from a single and isolated transaction, like in the present case. However, where a single act or transaction is not merely incidental or casual but indicates the foreign corporations intention to do other business in the Philippines, said single act or transaction is not isolated but constitutes doing, engaging or transacting business. Facilities Management Corp. v. De la Rosa (1979)

entered into a Representative Agreement. The principle of estoppel is applied to prevent a person contracting with a foreign corporation from later taking advantage of the latters non-compliance with the statute requiring the procurement of license. Western Equipment and Supply Co. v. Reyes (1927) Facts: Plaintiff, a foreign corporation, filed an action to restrain Henry Herman from organizing a corporation with a trade name Western Electric similar to the registered trademark used by the plaintiff. Plaintiff argued that Herman has knowledge of the existence of its trademark because its products bearing the trademark have reached the Philippines. Herman argued that plaintiff has no right to maintain the present suit because it has never done business in the Philippines or obtained the proper license.

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Facts: Leonardo dela Rosa filed a complaint against petitioner, a foreign corporation, for the recovery of overtime pay and other differentials. Petitioner answered by denying liability on the ground that it is domiciled beyond the territorial jurisdiction of the Philippines. The answer also averred that Jaime Catuira, an employee of petitioner stationed in Manila is without power and authority to represent the corporation. Held: Plaintiffs action does not seek to enforce any legal or contractual right arising from business transacted in the Philippines. Consequently, the Held: Petitioner is doing business in the Philippines. Under the rules defense that the foreign corporation is not doing business in the promulgated by the Board of Investments, the phrase doing business Philippines nor without license cannot be properly invoked to prevent shall include the opening of offices, whether called liaison offices, agencies, plaintiff from having access in the Philippine courts. The sole purpose of or branches. In the present case, Jaime Catuira was appointed as agent for the plaintiffs action is to protect its reputation, corporate name and petitioner with authority to execute employment contracts and receive on goodwill from unjust and unfair scheme of Henry Herman by capitalizing behalf of the corporation legal processes from Philippine courts. In effect, upon the good name and business reputation of plaintiff. Under the law, a Catuira was a liaison officer representing petitioner in the Philippines. trademark acknowledges no territorial boundaries and must be protected Indeed, a foreign corporation not engaged in business in the Philippines is to every market where it has become known. A foreign corporation which not banned from seeking redress from Philippine courts, a fortiori, a has never done business and is unlicensed to do business in the corporation doing business in the Philippines (with or without a license) Philippines, but is widely and favorably known in the Philippines through cannot claim exemption from being sued in Philippine courts for acts done the use therein of its products bearing its corporate/trade name has legal against persons in the Philippines. capacity to maintain suits in the Philippines for the protection of its reputation and goodwill. Far East Intl v. Nankai Kogyo Co. Ltd. (1962) General Garments v. Director of Patents (1971) Facts: Petitioner, a domestic corporation, filed an action against respondent, a foreign corporation, for specific performance to surrender Facts: Puritan Sportswear, a foreign corporation, filed a petition before the bill of lading after petitioner has complied with its obligation to deliver the Philippine Patent Office for the cancellation of trademark Puritan the steel scrap to respondent. Respondent filed motion to dismiss on the registered in the name of petitioner. Puritan Sportswear claims ownership ground that Philippine court has no jurisdiction over it and that it was not and prior use of the mark. Petitioner assails the capacity of Puritan doing business in the Philippines. Sportswear to maintain the action on the ground that it is not doing business nor have the required licensed to do business in the Philippines. Held: Philippine court has jurisdiction and respondent is doing business Petitioner also insists that before the action for infringement may prosper, in the Philippines. First, Mr. Ishida, officer of Nankai and who signed the the trademark allegedly infringed must be registered in the Philippines. contract in behalf of respondent for the purchase of steel scrap, was properly served with summons. Second, Mr. Yoshida, another officer of Held: Under the law, a foreign corporation can bring an action for Nankai, was sent to the Philippines to look into the operations of mines, infringement or unfair competition whether or not it has been licensed to which reveal the respondents desire to continue engaging in business in do business in the Philippines. Puritan Sportswear, however, is not suing the Philippines, after receiving the shipment of steel scrap. As a rule, a for infringement but for the cancellation of a trademark, an administrative single or isolated act does not constitute doing business within the meaning proceeding before the Patent Office, which does not require registration as of the law. However, if the single act is pursuant to the ordinary business of condition before the suit can prosper. In fact, a trademark identical to a the corporation, not merely incidental or casual, and is of such character mark or trade name previously used in the Philippines should not have which indicates the foreign corporations intention or purpose to continue been registered, and a foreign corporation which has never done business business in the Philippines, the same shall constitute doing business. and is unlicensed to do business in the Philippines, but is widely and favorably known in the Philippines through the use therein of its products bearing its corporate/trade name, like Puritan Sportswear, has legal Communication Materials Inc. v. CA (1996) capacity to maintain suits in the Philippines for the protection of its reputation and goodwill. Facts: Private respondent ITEC, a foreign corporation and petitioner, a domestic corporation, entered into a Representative Agreement. By virtue of said agreement, petitioner sells the electronic products exported by ITEC Puma Sportschufabriken v. Milo-Oro Corp. (1988) for a stipulated commission. Upon termination of the agreement, ITEC filed an injunction suit against petitioner from manufacturing and selling Facts: Petitioner, a foreign corporation organized under the laws of identical electronic products. Petitioner contends that ITEC cannot Germany, filed a complaint against respondent for infringing its trademark maintain the present suit because it is doing business without license. PUMA. Respondent, on the other hand, argued that petitioner has no legal capacity to maintain the present suit. Held: ITEC is engaged in business in the Philippines as revealed by the various contracts and agreement entered in the country, especially the Held: A foreign corporation, not doing business in the Philippines, needs Representative Agreement which contains highly restrictive provisions no license to sue before Philippine courts for infringement and unfair such as to reduce petitioner to a mere extension or instrument of ITEC. competition. In fact, a foreign corporation which has never done business Notwithstanding the finding that ITEC is doing business in the Philippines, and is unlicensed to do business in the Philippines, but is widely and petitioner is estopped from raising the defense that ITEC is unlicensed. A favorably known in the Philippines through the use therein of its products foreign corporation doing business in the Philippines without license may bearing its corporate/trade name has legal capacity to maintain suits in the sue in the Philippine courts, if the other party is estopped to challenge its Philippines for the protection of its reputation and goodwill. Also, the Paris personality after having acknowledge the same by entering into a contract Convention, where both Germany and Philippines is a signatory, provides with it and receiving benefits therefrom. In the present case, petitioner is that a trade name shall be protected in all the member-countries without charged with knowledge that ITEC was not licensed to do business when it the obligation of registration.

Le Chemise Lacoste v. Fernandez (1984) Facts: Petitioner, a foreign corporation, filed a complaint for unfair competition (under Article 189 of RPC) against private respondent Hemandas and Co., a domestic corporation, for manufacturing and selling clothings and sporting apparels bearing the petitioners trademarks LACOSTE, CHEMISE LACOSTE, and a CROCODILE DEVICE. Private respondent averred that it had the prior registration of the trademark (in the supplemental register) and that petitioner has no capacity to sue before Philippine courts, because it is not doing business in the Philippines and not licensed to do so. In support, private respondent cited the rulings in Leviton Case and Mentholatum case.

the failure to allege facts showing the capacity of plaintiff to sue renders the complaint dismissible. Where the law denies to a foreign corporation the right to maintain suit unless it has complied with a certain requirement (e.g. procurement of license to do business), compliance therewith or the fact that the suing corporation is exempt from such requirement becomes a necessary averment in the complaint. Olympia Business Co. v. E. Razon Inc. (1987)

Facts: Plaintiff, a domestic corporation, and California Insurance Co., a foreign corporation and subrogee of petitioners right, filed an action against E. Razon, after the typewriters owned by plaintiff under Razons custody was stolen. Razon contends that California is a foreign corporation Held: The rulings in Leviton and Mentholatum are not applicable in the which is not licensed to do business in the Philippines, and that there is no present case (see reason below). As early as 1927 (Western Equipment and allegation in the complaint of its capacity to sue. Supply Co. vs. Reyes), the Court is of the view that a foreign corporation not doing business in the Philippines needs no license to sue before Held: Even assuming incapacity on the part of Califormia Insurance, no Philippine courts for infringement of trademark and unfair competition. such incapacity may be attributed to its co-plaintiff Olympia Business Co., Moreover, where a violation of our unfair trade lanes, which provides a whose capacity to sue is undisputed. If necessary, the latter can execute a penal sanction is alleged, lack of capacity to sue of injured foreign cancellation of deed of subrogation to maintain this suit. California corporation becomes immaterial. License is not necessary before a foreign Insurance is likewise not barred from instituting the same action by corporation may sue before Philippine courts where the action is based on alleging in its complaint that it was suing on a single or isolated a violation of the Revised Penal Code. Also, the Philippines being a party to transaction. Also, the Court of Appeals ruled that defendant has no the Paris Convention for the Protection of Industrial Property is meritorious defense except the lack of capacity to sue on the part of recognizing and enforcing a solemn international commitment, the right of plaintiff. These circumstances proscribe the application of the ruling in foreign corporation to file suit in our courts to protect its trademark. The Atlantic v. Cebu Stevedoring. Thus, the dismissal of the case based on the Convention is not premised on the idea that laws of each member shall be failure of the foreign corporation to aver its capacity to sue would not be given extra-territorial application but on the underlying principle that allowed if the same would not bar the institution of the same action by the foreign nationals are, by treaty, entitled to the same protection as Filipino plaintiff (foreign corporation) or when dismissal would be an idle, citizens against unfair competition. To allow private respondent to circuitous ceremony considering the absence of any meritorious and continue using the trademark for the simple reason that it was the first substantial defense of the defendant, because technical rules should not be registrant in the supplemental register of a trademark used in international accorded undue importance to frustrate and defeat a plainly valid claim. commerce and not belonging to it is to render nugatory the very essence of the law on trademarks. Time Inc. v. Reyes (1971) [Leviton case involves complaint for unfair competition under Sec. 21-A of RA 166 which explicitly requires that a foreign corporation may bring complaint only when its trademark is registered under RA 166 with corresponding license to do business. The present case, however, involves a complaint for violation of Article 189 of the RPC, the information shall be in the name of the People of the Philippines and no longer the petitioner, since criminal offense is essentially an act against the State. The Court cannot allow a possible violator of criminal statutes to escape prosecution upon a far-fetched contention that the aggrieved party has no standing to sue. In fact, capacity to sue by the foreign corporation need not be averred in the pleadings if the complaint involves a violation of the Revised Penal Code.] Facts: Antonio Villegas and Juan Ponce Enrile filed an action for damages against petitioner, a foreign corporation, upon an alleged libel arising from an article published in petitioners magazine. The RTC ruled in favor of Villegas and Enrile, which prompted petitioner to file certiorari and prohibition. Villegas and Enrile filed a motion to dismiss the petition for certiorari and prohibition on the ground that petitioner failed to alleged its capacity to sue, invoking the ruling in Atlantic case.

Held: The doctrine in Atlantic v. Cebu Stevedoring is not applicable. Petitioner, in this case, is not maintaining any suit but is merely defending one filed against it. It did not file any complaint but only a corollary defensive petition to prohibit the lower court from further proceeding with [Mentholatum case involves a foreign corporation, acting through a local the suit that it had no jurisdiction to entertain. Thus, averment of capacity distributing agent, as deemed doing business in the Philippines. However to sue is not necessary when the foreign corporation is not suing or without the license required by Sec. 68 of the Corporation Law, it may not maintaining a suit but is merely defending itself from one filed against it. sue for violation of trademark and unfair competition. In the present case, however, petitioner is not doing business in the Philippines. Rustan is actually a middleman acting and transacting business in its own name and its own account and not in the name and account of the petitioner ( see CASES IN TRANSFER OF STOCKS definition of doing business under Rule I, Sec 1(g) of PD 1789 )] Monserrat v. Ceron (1933) [A foreign corporation not licensed to do and not doing business in the Philippines may file a petition for the cancellation of trademark before the Facts: Enrique Monserrat assigned the usufruct of his shares in Manila Patent Office (General Garments Corporation vs. Director of Patents ).] Yellow Taxicab Co. Inc. (MYTC) to Carlos Ceron. Accordingly, Stock Certificate No. 7 was recorded in the name of Ceron. In 1931, Ceron Atlantic Insurance Co. v. Cebu Stevedoring (1996) mortgaged the shares to Eduardo Matute without informing the latter of the conditions imposed on the shares. Due to non-payment, the mortgaged Facts: Plaintiff, a foreign corporation and subrogee to the rights of was foreclosed and the shares were sold at public auction. Monserrat is shipper/consignee, filed an action for recovery of sum of money against now claiming ownership of the shares, arguing that the mortgage on the defendant, after it failed to deliver the copra products in good condition. usufruct is void, for not having been registered in the books of the Defendant moved to dismiss the complaint on the ground that plaintiff has corporation, which the lower court affirmed. no personality to maintain the present suit. Held: It is not necessary to enter upon the books of the corporation a Held: The complaint only states that the plaintiff is a foreign corporation mortgage constituted on common shares of stock in order that such without alleging its capacity to sue. This averment conjures two mortgage may be valid and may have the force and effect as against third possibilities; either plaintiff is engaged in business in the Philippines or not persons. Section 35 of the Corporation Law used the word transfer as so engaged. If it is engaged in business in the Philippines, it must be duly properly referring to absolute conveyance of ownership, which requires licensed to maintain the present suit, and if not so engaged, it must proved entry and notation upon the books of the corporation. A chattel mortgage, that the transaction is isolated to maintain the action. In the present case, however, is not an absolute transfer of ownership but a mere security for

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the payment of the mortgage debt, the transfer (conditional sale) becomes share of stock could not sell it to another person except to Defendant null and void from the time the mortgage debtor complies with his Corporation is illegal and void. The only restraint imposed by the obligation to pay his debt. Judgment appealed from is reversed. Corporation Law upon transfer of share is provided in Section 35. These restrictions are necessary in order that the officers of the corporation may know who the stockholders are. Any restrictions imposed, other than those Chua Guan v. Samahang Magsasaka, Inc. (1935) in Section 35, is ultra vires and violative of the property rights of the shareholders. Facts: Gonzalo H. Co Toco, a resident of Manila, is the owner of 5,894 shares of the corporation Samahang Magsasaka, Inc. with principal office located in Cabanatuan Nueva Ecija. Co Toco delivered his certificate of Lambert v. Fox (1914) stocks to Chua Chiu to secure a mortgage debt. Chiu assigned all his right to Chua Guan, who registered the mortgage in the Office of the Register of Facts: Palintiff and Defendant agreed not to sell, transfer, or dispose of Deeds of Manila. Co Toco defaulted payment, and the shares were sold at any part of their present shares in the corporation till after one year from public auction to Guan as the highest bidder. Guan demanded the the date of the agreement. Notwithstanding the contract, defendant Fox corporation to issue new certificates of stock in his name. The corporation sold his stocks in another firm. refuses on the ground that nine writ of attachments over the said shares have been noted in its books prior to the registration of the mortgage in the Held: The stipulation suspending the power to sell stock is valid. The same books of the corporation. Guan argued that the mortgage must take suspension has beneficial purposes and results in the protection of the priority over the writ of attachments, considering that it was registered corporation (who is financially unstable) as well as the stockholders. There prior to the attachments in the Office of the Register of Deeds, hence the is also reasonable length of time for the suspension. attaching creditors has constructive notice of the mortgage. Held: Act 1508 provides that a chattel mortgage shall be effective against third persons either (1) by delivering the possession of the property mortgage to the mortgagee or (2) recording the mortgage in the registry of deeds, even without delivery of possession. The proper place of registration of the chattel mortgage refers to the situs of the shares which may be at the (a) domicile of the owner or (b) domicile of the corporation. In the former, however, the creditors would be confronted with difficulty of searching every province in which the mortgagor might have been domiciled. Thus, it seems that the reasonable construction of Act 1508 is to hold the shares to be situated in the place in which the corporation has its principal office, which in this case is Cabanatuan and not Manila, which is the residence of the mortgagor-owner. This is consistent with the rule that in mortgage of shares of stocks, it is not the certificate but the participation and share of the owner in the assets of the corporation which is subjected to mortgage. In view thereof, the attaching creditors are entitled to priority over the defectively registered mortgage. Uson v. Diosomito (1935) Facts: In January 1932, on account of pending civil action, Toribia Uson attached the shares of Vicente Diosomito in North Electric Co. Inc. After obtaining a favorable judgment against Diosomito, the latter shares were sold at public auction to Uson as the highest bidder. H.P.L. Jollye, however, claims ownership of the shares evidenced by a certificate of stock. It appears that Diosomito sold his shares to Emeterio Barcelon in 1931 without recording the same in the books of the corporation, until September 16, 1932. In 1933, Barcelon transferred the said shares to H.P.L. Jollye. The main legal question is whether or not a bona fide transfer of shares not registered or noted in the books of the corporation, is valid against a subsequent lawful attachment, regardless of whether the attaching creditor has actual notice of said transfer or not. Embassy Farms, Inc. v. Court of Appeals (1990) Facts: Alexander Asuncion and Eduardo Evangelista entered into a MOA, where the latter obligated himself to transfer his share in and turn over the management of Embassy Farms Inc. to Asuncion. On the other hand, Asuncion obligated himself to organize a new corporation. Evangelista indorsed in blank his certificates of stock to Asuncion without delivering the same.. Notwithstanding the non-delivery of the certificates, Asuncion transferred the shares to other persons. Evangelista intimated the institution of appropriate action, but Asuncion preempted him by filing an action to rescind the MOA. Held: Effective transfer of shares of stock must follow the mode and manner prescribed by law, that is under Section 63 of the Corporation Code which provides that shares of stock may be transferred by delivery to the transferee of the certificates properly indorsed. In other words, title is vested in the transferee by delivery of the duly indorsed certificate of stock. However, no transfer shall be valid, except as between the parties, until the transfer is properly recorded in the books of the corporation. In the case at bar, the indorsed certificate of stock was not actually transferred to Asuncion, hence the latter cannot effectively transfer the share to other persons. Also, it would be unjust and unfair to allow Asuncion and his transferees to control and manage Embassy Farms Inc. despite the fact that Asuncion who is the source of their supposed shares of stocks is seeking for the rescission of the MOA. Razon v. IAC (1992)

Facts: Enrique Razon is claiming ownership the 1500 shares of stock of E.Razon Inc. organized for the purpose of participating in bidding for arrestre services. Razon alleged that some of the incorporators withdrew from the corporation and gave their shares to Juan Chuidian as a nominal Held: Section 35 of the Corporation Law provides that no transfer shall stockholder with option to buy the same; that Chuidian delivered the be valid, except as between the parties, until the transfer is entered and certificate of stock covering the said shares to him. noted upon the books of the corporation xxx. It is clear therefore that transfer of shares not so entered are invalid/void as to attaching or Held: In the absence of by-law provisions or rules governing effective execution creditors as well as to the corporation and to subsequent transfer of shares of stock, the provisions of Corporation Code must be purchaser in good faith, except the parties to such transfer, not because made applicable. The law is clear that in order to have an effective transfer they are without notice or because the transfer is fraudulent, but because of shares, the certificate of stock must be properly indorsed and that title they are made so void by the statute. Hence, the earlier transfer of shares to to such shares is vested in the transferee by the delivery of the duly indorsed certificate of stock. In the present case, the certificate of stock was Barcelon is void as to Uson. delivered but never indorsed to Enrique Razon, hence the inevitable conclusion is that the subject shares of stock belong to Chuidian. Padgett v. Babcock and Templeton (1933) Endorsement of certificate of stock is a mandatory requirement of law for an effective transfer. Razon's assertion that endorsement is not required in Facts: In the certificate of stocks issued to Padgett, the word non- view of his intimate friendship with Chuidian can not overcome the transferable appears. Padgett offered the corporation to buy his shares or procedural requirement of the law for the proper conduct of business. he be authorized to sell his shares to other persons. Is the restriction imposed on the right to transfer valid? May the corporation be compelled Rural Bank of Salinas v. Court of Appeals (1992) to buy the shares of the selling stockholder? Held: The restriction is null and void on the grounds that it constitutes an Facts: Clemente Guerrero, President of the petitioner Corporation, unreasonable limitation on the right of ownership and is in restraint of executed an SPA in favor of his wife Melania Guerrero, granting the latter trade. In Fleischer v. Botica Nolasco, the condition that the owner of a full power and authority to sell his shares of stock. The shares were effectively transferred before the death of Clemente and when Melania Page23

Guerrero presented the deeds of assignment for registration in the books of the corporation, the latter refused, causing Melania to file an action for mandamus before the SEC. The adopted daughter of the spouses Guerrero intervened on the ground that a petition for the administration of Clemente's estate had been filed with the RTC and further claims that the deeds of assignment were fictitious. The SEC denied the intervention and instead issued mandamus. Held: Section 63 of the Corporation Code provides that shares of stock so issued are personal property and may be transferred by delivery of the certificate/s indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. The owner of the shares is at liberty under the said section to dispose his shares. The only limitation imposed by law is when the corporation holds any unpaid claim against the shares intended to be transferred, which is absent here. A corporation, either by its board or officers cannot create restriction in the transfer of stocks. Restrictions must have their source in legislative enactment. By-laws are intended for the protection of the corporation and can prescribed only regulations, not restrictions. In the present case, the right of the transferee/assignee to have the stocks registered in his name in the books of the corporation is an inherent right flowing from his ownership of the stocks. The obligation to register is purely ministerial and cannot include discretion to decide questions of ownership. Consequently, whenever the corporation refuses registration, mandamus will lie to compel it. Otherwise, it will render nugatory the provisions of Section 63 of the Corporation Code. At all events, the registration is without prejudice to the proceedings in court to determine the validity of the deeds of assignment. Tay v. Court of Appeals (1998)

made until fully paid. The right therefore of the corporation to demand payment is incontestable, and a corporation cannot release an original subscriber from paying for his shares without valuable consideration (PNB v. Bitulok Sawmill) or without unanimous consent of the stockholders (LGEF v. Baltazar). From the foregoing, there is no clear legal duty on the part of the corporation to register the transferred shares in Nava's name. Hence, there is no cause of action for mandamus. Rural Bank of Lipa City Inc. v. Court of Appeals (2001) Facts: Private respondent Reynaldo Villanueva Sr. executed a deed of assignment of his shares in favor of the Board of Directors as a condition for the payment of his debts to the corporation. When Villanueva failed to settle the obligation, the Corporation demanded the surrender of his certificates of stock. Upon Villanueva's refusal, the corporation converted his shares into treasury shares, excluding Villanueva from the stockholders' meeting and from enjoying the rights of a stockholder. The SEC and the Court of Appeals ruled that the transfer is ineffective, hence, this petition. The Bank argued that the deed of assignment operates to relinquish the rights of Villanueva as stockholder Held: While it may be true that there was an assignment of private respondent's shares to petitioner, said assignment was not sufficient to effect the transfer of shares since there was no endorsement of the certificates of stocks by the Villanueva and delivery thereof to petitioner. The rule is that 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 transferee. Title may be vested in the transferee only by delivery of the duly indorsed certificate of stock. The requirements of an effective transfer therefore are: (1) delivery of the stock certificate; (2) certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (3) the transfer must be recorded in the books of the corporation to be valid against third parties. It may be argued that despite non-compliance with the said requirements, the assignment was still valid between the parties, however, it does not necessarily make the transfer effective.

Facts: Private respondents Sy Guiok and Sy Lim obtained loans from petitioner Lim Tay secured by way of pledge over their shares of stock in Go Fay and Co. Inc. Private respondents endorsed their respective certificates of stocks and delivered the same to petitioner. After the private respondents defaulted payment, petitioner filed a petition for mandamus before the SEC against Go Fay and Co. Inc. for the issuance of new Tan v. SEC (1993) certificates of stock in his name. The SEC denied the petition. Held: Petitioner's reliance on the case of Rural Bank of Salinas v. CA and Abejo v. De la Cruz is misplaced. In the said cases, the transferees are already prima facie shareholders when the deed of assignments were questioned. Even if the said deeds were annulled, the transferees would still be considered shareholders from the time of the assignment until annulment of the deeds. In the present case, however, petitioner's ownership is not yet perfected at the time the petition for mandamus is filed. The contract of pledge does not make him the owner of the shares pledged. The law on pledge provides that ownership of the thing pledge remains to the pledgor until the pledge is foreclosed and public/private auction sale is conducted, which petitioner made no any attempt. In order that mandamus may issue, the petitioner must have a clear legal right to the thing demanded and that it is the imperative duty of the respondent to perform the act required. Petitioner failed to establish a clear legal right. It is settled that mandamus will not issue to establish a legal right, but only to enforce one that is already clearly established. Nava v. Peers Marketing (1976) Facts: Teofilo Po, an incorporator of Peers Marketing Corporation, was not issued a certificate of stock covering his subscription. Notwithstanding the same, Po sold his shares to Ricardo Nava. After the sale, Nava presented the deed for registration in the books of the corporation but the latter refused on grounds that Po was a delinquent shareholder and the Corporation has a claim against the said unpaid subscription. Nava filed mandamus before the CFI. Held: As a rule, the shares which may be alienated are those which are covered by certificates of stock. In the present case, no certificate of stock was issued to Po. Without stock certificate, which is the evidence of ownership of corporate stock, the assignment of corporate shares is effective only between the parties to the transaction. The delivery of the stock certificate, which represents the shares to be alienated, is essential for the protection of both the corporation and its stockholders. Moreover, a stock subscription is a subsisting liability from the time the subscription is

Facts: Petitioner Alfonso Tan, president and owner of the 400 shares in Visayan Educational Supply Corp. sold 50 of his shares to his brother Angel Tan so as to complete the required number of Board of Directors after the incorporators withdraw from the corporation. Consequently, Certifcate of Stocks No. 2 in the name of petitioner was canceled and Certificate No. 6 and 8 were issued to Alfonso and Angel. The canceled certificate No. 2 was returned to petitioner for his endorsement but he deliberately kept it. Petitioner is now questioning the cancellation of his certificate of stock No. 2 on grounds of non-endorsement contrary to the mandatory requirement of the Corporation Code. Held: The use of the word may in Section 63 of the Corporation Code indicates that the transfer may be effected in a manner different from that provided by law. In the instant case, there was already (1) delivery of unendorsed Stock Certificate No. 2; (2) its cancellation reported to the SEC; and (3) registration in the books of the corporation of the transfer resulting to the issuance of certificates No 6 and 8. Moreover, the transferee Angel Tan has already exercised his rights and prerogatives as stockholder and was clothed with rights and responsibility in the Board when he was elected as officer. In Tuason v. La Provisora, the Court held that delivery is not essential where it appears that the person sought to be held as stockholder are officers of the corporation. Moreover, a certificate of stock is not necessary to render one a stockholder, the certificate is merely an evidence of the stockholder's interest in the corporation. Lastly, certificates of stock are not negotiable instrument although it is sometimes regarded as quasi-negotiable because the holder thereof takes it without prejudice to such rights or defenses as the registered owner or transferor may have under the law, except in so far as the principles governing estoppel may apply.

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