INTRODUCTION

Definition and attributes of a corporation

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation) A corporation has four (4) attributes: (1) (2) (3) (4) It is an artificial being; Created by operation of law; With right of succession; Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.

CLASSIFICATION OF PRIVATE CORPORATIONS

Stock v. Non-Stock Corporations

Stock Definition Corporations which have capital stock divided into shares and are authorized to distribute to the holders of shares dividends or allotments of the surplus profits on the basis of the shares (3) Non-Stock All other private corporations (3) One where no part of its income is distributable as dividends to its members, trustees or officers. (87)

Purpose

Primarily to make profits for its shareholders

May be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry, agricultural and like chambers, or any combination thereof. (88)

Distribution of Profits

Profit is distributed to shareholders

Whatever incidental profit made is not distributed among its members

but is used for furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among its members upon its dissolution. Before then, no profit may be made by members. Composition Scope of right to vote Stockholders Each stockholder votes according to the proportion of his shares in the corporation. No shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the Code. (Sec. 6) May be denied by the AOI or the bylaws. (Sec. 89) May be authorized by the by-laws, with the approval of and under the conditions prescribed by the SEC. (Sec. 89) Board of Directors or Trustees Members Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has been limited, broadened, or denied in the AOI or by-laws. (Sec. 89)

Voting by proxy

Cannot be denied. (Sec. 58)

Voting by mail

Not possible.

Who exercises Corporate Powers 23 Governing Board

Members of the corporation

Board of Directors or Trustees, consisting of 5-15 directors / trustees.

Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by the AOI or by-laws. (Sec, 92) Board classified in such a way that the term of office of 1/3 of their number shall expire every year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and trustees so elected shall have a term of 3 years. (Sec. 92) Officers may directly elected by the members UNLESS the AOI or bylaws provide otherwise. (Sec. 92)

Term of trustees

directors

or

Directors / trustees shall hold office for 1 year and until their successors are elected and qualified (Sec. 23).

Election of officers

Officers are elected by the Board of Directors (Sec. 25), except in close corporations where the stockholders themselves may elect the officers. (Sec. 97) Any place within the Philippines, if provided for by the by-laws (Sec. 93)

Place of meetings

Generally, the meetings must be held at the principal office of the corporation, if practicable. If not, then anyplace in the city or municipality where the principal office of the corporation is located.

(Sec. 51) Transferability of interest or membership Transferable. Generally non-transferable since membership and all rights arising therefrom are personal. However, the AOI or by-laws can provide otherwise. (Sec. 90) See Sec. 94.

Distribution of assets in case of dissolution

CIR VS. CLUB FILIPINO (5 SCRA 321; 1962) FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to the operation of the club and its gold course. The club is operated mainly with funds derived from membership fees and dues. The BIR seeks to tax the said restaurant as a business. HELD: The Club was organized to develop and cultivate sports of all class and denomination for the healthful recreation and entertainment of its stockholders and members. There was in fact, no cash dividend distribution to its stockholders and whatever was derived on retail from its bar and restaurants used were to defray its overhead expenses and to improve its golf course. For a stock corporation to exist, 2 requisites must be complied with: (1) a capital stock divided into shares (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the distribution of its dividends or surplus profits.

FORMATION AND ORGANIZATION OF CORPORATION Requirements in the formation of a corporation

Who may form a corporation (See SEC. 10) INCORPORATORS Definition REQUIREMENTS stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stockholders or members mentioned in the COMMENTS compare with Corporators which include all stockholders or members, whether incorporators or joining the corporation after its incorporation.

articles of incorporation as originally forming and composing the corporation and who are signatories thereof Characteristic natural persons excludes corporations and partnerships may be more than 15 for nonstock corp. except educational corp. does not prevent the one-man (person) corporation wherein the other incorporators may have only nominal ownership of only one share of stock; not necessarily illegal

Number

not less than 5; not more than 15

Age Residence

of legal age majority should be residents of the Philippines residence a requirement; citizenship requirement only in certain areas such as public utilities, retail trade banks, investment houses, savings and loan associations, schools

Steps in the formation of a corporation

Mutual Agreement to perform certain acts required for organizing a corporation

12345-

Organize and establish a corporation Comply with requirements of corporation code Contribute capital/resources Mode of use of capital/resource and control/management of capital/resource distribution/disposition of capital/resource (embodied in constitutive documents)

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

COMMENTS

brings together persons who become interested in the enterprise aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself formulates the necessary initial business and financial plans and, if necessary, buys the

rights and property which the business may need, with the understanding that the corporation when formed, shall take over the same.

b. Drafting articles of incorporation

(See SEC. 14)

(see chart below)

c. Filing of articles; payment of fees.

AOI & the treasurers affidavit duly signed & acknowledged must be filed w/ the SEC & the corresponding fees paid failure to file the AOI will prevent due incorporation of the proposed corporation & will not give rise to its juridical personality. It will not even be a de facto corp. Under present SEC rules, the AOI once filed , will be published in the SEC Weekly Bulletin at the expense of the corp. (SEC Circular # 4, 1982).

d. Examination of articles; approval or rejection by SEC.

Process: a) SEC shall examine them in order to determine whether they are in conformity w/ law. b) If not, the SEC must give the incorporators a reasonable time w/in w/c to correct or modify the objectionable portions. Grounds for rejection or disapproval of AOI: a) AOI /amendment not substantially in accordance w/ the form prescribed b) purpose/s are patently unconstitutional, illegal, immoral, or contrary to government rules & regulations; c) Treasurers Affidavit is false; d) required percentage of ownership has not been complied with (Sec. 17) e) corp.s establishment, organization or operation will not be consistent w/ the declared national economic policies (to be determined by the SEC, after consultation w/ BOI, NEDA or any appropriate government agency -PD 902-A as amended by PD 1758, Sec. 6 (k)) Decisions of the SEC disapproving or rejecting AOI may be appealed to the CA by petition for review in accordance w/ the ROC.

e. Issuance of certificate of

Certificate of Incorporation will be issued if:

incorporation. a) SEC is satisfied that all legal requirements have been complied with; and b) there are no reasons for rejecting or disapproving the AOI. It is only upon such issuance that the corporation acquires juridical personality. (See Sec. 19. Commencement of corporate existence) Should it be subsequently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revoked by the SEC, after proper notice & hearing.

b. Drafting articles of incorporation (See SEC. 14)

CONTENTS OF AOI COMMENTS

Corporate Name

Essential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts A corporate name shall be disallowed by the SEC if the proposed name is either: (1) identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or patently deceptive, confusing or contrary to existing laws. (Sec. 18)

(2)

LYCEUM OF THE PHILS. VS. CA (219 SCRA 610) The policy underlying the prohibition against the registration of a corporate name which is identical or deceptively or confusin gly similar to that of any existing corporation or which is patently deceptive or patently confusing or contrary to existing laws is: 1. the avoidance of fraud upon the public which would have occasion to deal with the entity concerned; 2. the prevention of evasion of legal obligations and duties, and 3. the reduction of difficulties of administration and supervision over corporations.

Purpose Clause

A corporation can only have one (1) primary purpose. However,

it can have several secondary purposes. A corporation has only such powers as are expressly granted to it by law & by its articles of incorporation, those which may be incidental to such conferred powers , those reasonably necessary to accomplish its purposes & those which may be incident to its existence. Corporation may not be formed for the purpose of practicing a profession like law, medicine or accountancy

Principal Office

must be within the Philippines specify city or province street/number not necessary important in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered cannot specify term which is longer than 50 years at a time may be renewed for another 50 years, but not earlier than 5 years prior to the original or subsequent expiry date UNLESS there are justifiable reasons for an earlier extension. names, nationalities & residences of the incorporators; names, nationalities & residences of the directors or trustees who will act as such until the first regular directors or trustees are elected; treasurer who has been chosen by the pre-incorporation subscribers/members to receive on behalf of the corporation, all subscriptions /contributions paid by them. amount of its authorized capital stock in lawful money of the Philippines number of shares into which it is divided in case the shares are par value shares, the par value of each, names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated for a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each 25% of 25% rule to be certified by Treasurer paid up capital should not be less than P5,000 Classes of shares into w/c the shares of stock have been divided; preferences of & restrictions on any such class; and any denial or restriction of the pre-emptive right of stockholders should also be expressly stated in said articles. If the corporation is engaged in a wholly or partially nationalized business or activity, the AOI must contain a prohibition against a transfer of stock which would reduce

Term of Existence

Incorporators and Directors

Capital Stock

Other matters

the Filipino ownership of its stock to less than the required minimum.

Any corporation may be incorporated as a close corporation, except: a) mining or oil companies; b) stock exchanges; c) banks; d) insurance companies; e) public utilities; f) educational institutions; & g) corporations declared to be vested w/ public interest

De Facto Corporations: Requisites User of Corporate Powers

What is a de facto corporation? A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of a de jure corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that the following requisites are concurrently present: (1) That there is an apparently valid statute under which the corporation with its purposes may be formed; (2) That there has been colorable compliance with the legal requirements in good faith; and, (3) That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation. Can a corporation transact business as a de facto corporation while application is still pending with SEC? No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation.

Formation under apparently valid statute.

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

WON a corporation organized under a statute subsequently declared void acquires status as de facto corporation. No. A corporation organized under a statute subsequently declared invalid cannot acquire the status of a de facto corporation unless there is some other statute under which the supposed corporation may be validly organized. Hence, in the case at bar, the mere fact that the municipality was organized before the statute had been invalidated cannot conceivably make it a de facto corporation since there is no other valid statute to give color of authority to its creation.

Colorable compliance with the legal requirements in good faith.

BERGERON V. HOBBS (71 N.W. 1056, 65 Am. St. Rep. 85) The constitutive documents of the proposed corporation were deposited with the Register of Deeds but not on file in said office. One of the requirements for valid incorporation is the filing of constitutive documents in the Register of Deeds. Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation? No. The filing of the constitutive documents in the Register of Deeds is a condition precedent to the right to act as a corporate body. As long as an act, required as a condition precedent, remains undone, no immunity from individual liability is secured.

HARRIL V. DAVIS (168 F. 187; 1909) The constitutive documents were filed with the clerk of the Court of Appeals but not with the clerk of court in the judicial district where the business was located. Arkansas law requires filing in both offices. Was there colorable compliance enough to give the supposed corporation at least the status of a de facto corporation? No. Neither the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of incorporation which are not filed, where filing is requisite to create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and knowingly use s name to incur legal obligations from their individual liability to pay them. There could be no

incorporation or color of it under the law until the articles were filed (requisites for valid incorporation).

HALL v. PICCIO (29 SCRA 533; 1969) In the case of Hall v. Piccio, where the supposed corporation transacted business as a corporation pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation.
NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry must be through a quo warranto proceeding made by the Solicitor General. (Sec. 20)

CORPORATION BY ESTOPPEL (Sec. 21)

Distinguish a de facto corporation from a corporation by estoppel.
The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a de facto corporation are present, then the defectively organized corporation will have the status of a de jure corporation in all cases brought by and against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then the estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the defendant association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.

(De facto has status of de jure corpo, except separate personality against State, provided all requisites are present)

What are the effects of a Corporation by Estoppel in suits brought:

(1) against the Corporation? Considered a corporation in suits brought against it if it held itself out as such and denies capacity to be sued; (2) against third party? Third party cannot deny existence of corporation if it dealt with it as such.

EMPIRE vs. STUART (46 Mich. 482, 9 N.W. 527; 1881) Company was sued on a promissory note. Its defense was that at the time of its issuance, it was defectively organized and therefore could not be sued as such.

The Corporation cannot repudiate the transaction or evade responsibility when sued thereon by setting up its own mistake affecting the original organization.

LOWELL-WOODWARD vs. WOODS (104 Kan. 729; 1919) Corporation sued a partnership on a promissory note. The latter as defense alleged that the plaintiff was not a corporation. One who enters into a contract with a party described therein as a corporation is precluded, in an action brought thereon by such party under the same designation, from denying its corporate existence.

ASIA BANKING VS STANDARD PRODUCTS (46 Phil. 145; 1924) The corporation sued another corporation a promissory note. The defense was that the plaintiff was not able to prove the corporate existence of both parties. The defendant is estopped from denying its own corporate existence. It is also estopped from denying the others corporate existence. The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association is such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped from denying its corporate existence. CRANSON VS IBM (234 MD. 477, 200 A. 2D 33 ; 1964) IBM sued Cranson in his personal capacity regarding a typewriter bought by him as President of a defectively organized company whose Articles were not yet filed when the obligation was contracted. IBM, having dealt with the defectively organized company as if it were properly organized and having relied on its credit instead of Cransons, is estopped from asserting that it was not incorporated. It cannot sue Cranson personally. SALVATIERRA VS GARLITOS (103 Phil. 757; 1958) Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. Judgment against both was obtained. President complains for being held personally liable. He is liable. An agent who acts for a non-existent principal is himself the principal. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk arising from the transaction.

ALBERT VS UNIVERSITY PUBLISHING CO., INC. (Jan. 30, 1965) Mariano Albert entered into a contract with University Publishing Co., Inc. through Jose M. Aruego, its President, whereby University would pay plaintiff for the exclusive right to publish his revised Commentaries on the Revised Penal Code. The contract stipulated that failure to pay one installment would render the rest of the payments due. When University failed to pay the second installment, Albert sued for collection and won. However, upon execution, it was found that University was not registered with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego as the real defendant. University opposed, on the ground that Aruego was not a party to the case. The Supreme Court found that Aruego represented a non-existent entity and induced not only Albert but the court to believe in such representation. Aruego, acting as representative of such non-existent principal, was the real party to the contract sued upon, and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent. The Supreme Court likewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was Aruego who had induced him to act upon his (Aruego's) willful representation that University had been duly organized and was existing under the law.

BY-LAWS (Sec. 46 & 47)

When adopted: (a) official Requirement: No later than one (1) month after receipt from SEC notice of issuance of Cert. of incorporation. of

Affirmative vote of stockholders representing at least majority of outstanding capital stock (Stock Corp.) or members (Non-Stock) Must be signed by stockholders or members voting for them

(b) Prior to incorporation

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

Where kept:

(1) In the principal office of the corporation ; and (2) Securities and Exchange Commission Only upon the SECs issuance of a certification that the by-laws are not inconsistent with the Corporation Code.

When effective:

Special corporations: By-laws and/or amendments thereto must be accompanied by a certificate of the appropriate government agency to the effect that such by-laws / amendments are in accordance with

law. banks or banking institutions building and loan associations trust companies insurance companies public utilities educational institutions other special corporations governed by special laws

Contents of By-laws - Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: 1) the time, place and manner of calling and conducting regular or special meetings of the directors or trustees; the time and manner of calling and conducting regular and special meetings of the stockholders or members; the required quorum in meetings of stockholders or members and the manner of voting herein; the form for proxies of stockholders and members and the manner of voting them; the qualifications, duties and compensation of directors or trustees, officers and employees; the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; the manner of election or appointment and the term of office of all officers other than directors or trustees; the penalties for violation of the by-laws; in the case of stock corporations, the manner of issuing certificates; and

2)

3)

4) 5)

6)

7)

8) 9)

10) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.

FLEISCHER V. BOTICA NOLASCO CO. (47 Phil. 583; 1925) As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objective of the corporation and are not contradictory to the general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of stock, a corp. can do no more than prescribe a general mode of transfer on the corp. books and cannot justify an restriction upon the right of sale. GOVT. OF P.I. V. EL HOGAR

Is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel shares valid? No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law which prohibits forced surrender of unmatured stocks except in case of dissolution. Is a provision in the by-laws fixing the salary of directors valid? Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix compensation lies with the corporation. Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid? Yes. The Corporation Law gives the corporation the power to provide qualifications of its directors. CITIBANK, N.A. v. CHUA (220 SCRA 75) Where the SEC grants a license to a foreign corporation, it is deemed to have approved its foreign-enacted by-laws. Sec. 46 of the Corporation Code which states that by-laws are not valid without SEC approval applies only to domestic corporations. A board resolution appointing an attorney-in-fact to represent the corporation during pretrial is not necessary where the by-laws authorize an officer of the corporation to make such appointment.

LOYOLA GRAND VILLAS v. CA (276 SCRA 681) ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the date of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's automatic dissolution. RULING: No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It only constitutes a ground for such dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534) Incorporators must be given the chance to explain their neglect or omission and remedy the same.

THE CORPORATE ENTITY The Theory of Corporate Entity

When does the corporations existence as a legal entity commence?

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

What rights does the corporation acquire?

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

Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its stockholders, unless transferred to the corporation. Remember that the liability of the stockholders is limited to the amount of shares.

SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631) A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's Board of Directors. In this case, the sale of a piece of land belonging to Motorich Corporation by the corporation treasurer (Gruenberg) was held to be invalid in the absence of evidence that said corporate treasurer was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of Motorich, her act could not bind the corporation since she was not the sole controlling stockholder. STOCKHOLDERS OF F. GUANZON V. REGISTER OF DEEDS (6 SCRA 373) Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property, they do not represent property of the corporation. A share of stock only typifies an aliquot part of the corporation's property or the right to share in its proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation. Nor is he entitled to the possession of any definite portion of its property or assets. The act of liquidation made by the stockholders of the corp of the latters assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Since the purpose of the liquidation, as well as the distribution of the assets, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance.

CARAM V. CA (151 SCRA 373; 1987) The case of the unpaid compensation for the preparation of the project study. The petitioners were not involved in the initial stages of the organization of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corp and did not have a separate juridical personality to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authorized by its officers and directors. Granting that the petitioners benefited from the services rendered, such is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be equally and personally liable also with the petitioner for the claims of the private respondent. PALAY V. CLAVE (124 SCRA 640; 1983) The case of the reliance on a default provision of the contract granting automatic extra-judicial rescission. The court found no badges of fraud on the part of the president of the corporation. The BOD had literally and mistakenly relied on the default provision of the contract. As president and controlling stockholder of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. He cannot, therefore, be made personally liable because he appears to be the controlling stockholder. 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. MAGSAYSAY V. LABRADOR (180 SCRA 266) The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in SUBIC granting his sisters the right to intervene in a case filed by the widow against SUBIC. The words "an interest in the subject," to allow petitioners to intervene, mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. Here, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the corp, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable and beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corp as a distinct legal person.

PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity?
A: That a corporation has a personality distinct from its stockholders, and is not affected by the personal rights, obligations and transactions of the latter.

Q: When Can the Veil of Corporate Entity be Pierced?

A: 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 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.

Q: What are the effects of disregarding the corporate veil?

(1) Stockholders would be personally liable for the acts and contracts of the corporation whose existence at least for the purpose of the particular situation involved is ignored. (2) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved.

Contrary to law / public policy; evasion of liability to government

STATE V. STANDARD OIL (49 Ohio, St., 137, N.E. 279, 15; 1892) Where all or a majority of stockholders comprising a corporation do an act which is designed to affect the property and business of the company, as if it had been a formal resolution of its Board of Directors and the acts done is ultra vires, the act should be regarded as the act of the corporation, and may be challenged by the state in a quo warrranto proceeding.

LAGUNA TRANS V. SSS (107 Phil. 833; 1960) Where the corporation was formed by and consisted of the members of a partnership whose business and property was conveyed to the corporation for the purpose of continuing its business, such corporation is presumed to have assumed partnership debts.

MARVEL BLDG. CORP. V. DAVID (94 Phil. 376; 1954) The fact that: certificates in possession of Castro were endorsed in blank; Castro had enormous profits and had motive to hide them; other subscribers had no incomes of sufficient magnitude; and directors never met;

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

Evasion of liability to creditors

TAN BOON BEE CO. V. JARENCIO (163 SCRA 205; 1988) Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay. G's printing machine levied upon to satisfy claim but PADCO, another corpo intercedes, saying it is the owner of the machine, having leased such to G. Printing machine was allowed by the Court to satisfy G's liability. Both G and PADCO's corporate entities pierced because they have: the same board of directors, PADCO owns 50% of G, PADCO never engaged in the business of printing. Obviously, the board is using PADCO to shield G from fulfilling liability to T. NAMARCO v. AFCorp (19 SCRA 962; 1967) Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with wife, own 76% of AFC) contracts with NAMARCO for an exchange of sugar (raw v. refined). N delivers, AFC doesn't since it did not have sugar to supply in the first place. N sues to recover sum of money plus damages. Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced because it was used as Sycip's alter ego, corpo used merely as an instrumentality, agency or conduit of another to evade liability. JACINTO V. CA (198 SCRA 211) Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money, signs trust receipts therefor. Jacinto absconds. Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced because it was used as a shield to perpetuate fraud and/or confuse legitimate

issues. There was no clear cut delimitation between the personality of Jacinto and the corporation.

Evasion of liability / obligation to employees

CLAPAROLS V. CIR (65 SCRA 613; 1975) Both predecessor and successor were owned and controlled by petitioner and there was no break in the succession and continuity of the same business. All the assets of the dissolved Plant were turned over to the emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.

INDOPHIL TEXTILE MILL WORKERS UNION V. CALICA (205 SCRA 698) Rule: The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the CBA Indophil had with them (or it sought to include the other union in its bargaining leverage). SC: Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that businesses were related, that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the same compound - not sufficient to apply doctrine.

NAFLU V. OPLE (143 SCRA 125; 1986) Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the former must bear the consequences of the latter's unfair acts. It cannot deny reinstatement of petitioners simply because of cessation of Lawman's operations, since it was in fact an illegal lock-out, the company having maintained a run-away shop and transferred its machines and assets there. Here, the veil of corporate fiction was pierced in order to safeguard the right to selforganization and certain vested rights which had accrued in favor of the union. Second corporation sought the protective shield of corporate fiction to achieve an illegal purpose.

ASIONICS PHILS. v. NLRC (290 SCRA 164) A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. 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. Where there is nothing on record to indicate the President and majority stockholder of a corporation had acted in bad faith or with malice in carrying out the retrenchment program of the company, hecannot be held solidarily and personally liable with the corporation.

Evasion of liability on contract

VILLA-REY TRANSIT V. FERRER (25 SCRA 849; 1968) Jose M. Villarama, operator of a bus company, Villa Rey Transit, which was authorized to operate 32 units from Pangasinan to Manila and vice-versa, sold 2 CPCs to Pantranco. One of the conditions included in the contract of sale was that the seller (Villarama) "shall not, for a period of 10 years from the date of the sale, apply for any TPU service identical or competing with the buyer (Pantranco)." Barely 3 months after the sale, a corporation called Villa Rey Transit, Inc. was organized, with the wife of Jose M. Villarama as one of the incorporators and who was subsequently elected as treasurer of the Corporation. Barely a month after its registration with the SEC, the corporation bought 5 CPCs and 49 buses from one Valentin Fernando, and applied with the Public Service Commission (PSC) for approval of the sale. Before the PSC could take final action on the said application, however, 2 of the 5 CPCs were levied upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name. Shortly thereafter, he sold the said CPCs to Pantranco, and they jointly submitted their contract of sale to the PSC for approval. The PSC issued an order that pending resolution of the applications, Pantranco shall have the authority to provisionally operate the service under the 2 CPCS that were the subject of the contract between Ferrer and Pantranco. Villa Rey Transit took issue with this, and filed a complaint for annulment of the sheriff's sale of the CPCs and prayed that all the orders of the PSC relative to the dispute over the CPCs in question be annulled. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one and the same, and that Villarama and/or the Corporation is qualified from operating the CPCs by virtue of the agreement entered into between Villarama and Pantranco. Given the evidence, the Court found that the finances of Villa-Rey, Inc. were managed as if they were the private funds of Villarama and in such a way and extent that Villarama appeared

to be the actual owner of the business without regard to the rights of the stockholders. Villarama even admitted that he mingled the corporate funds with his own money. These circumstances negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause with Pantranco applies. A seller may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of one of the parties to the covenant or the restrictive agreement, it can be enjoined from competing with the covenantee.

Close Corporations
CEASE V. CA (93 SCRA 483; 1979) The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to operate already expired. The legal fiction of separate corporate personality was attempted to be used to delay and deprive the respondents of their succession rights to the estate of their deceased father. While originally, there were other incorporators of Tiaong, it has developed into a closed family corporation (Cease). The head of the corporation, Cease, used the Tiaong plantation as his instrumentality. It was his business conduit and an extension of his personality. There is not even a showing that his children were subscribers or purchasers of the stocks they own.

DELPHER TRADES V. CA (157 SCRA 349; 1988) The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher and placing the control of their properties under the corporation. This saved them inheritance taxes. This is the reverse of Cease; however, it does not modify the other cases. It stands on its own because of the facts.

Parent-Subsidiary Relationship
Q: What is the general rule governing parent-subsidiary relationship?
A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not alone sufficient to justify their being treated as one entity.

Q:

When may it be disregarded by the courts?

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

(2) where it was controlled by the parent that its separate identity was hardly discernible (3) parent corporations may be held responsible for the contracts as well as the torts of the subsidiary

Q: What are the criteria by which the subsidiary can be considered a mere instrumentality of the parent company?
1. 2. 3. 4. 5. 6. 7. 8. the parent corp. owns all or most of the capital stock of the subsidiary. the parent and subsidiary have common directors and officers the parent finances the subsidiary the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation the subsidiary has grossly inadequate capital the parent pays the salaries and other expenses or losses of the subsidiary the subsidiary has substantially no business except with the parent corp. or no assets except those conveyed to or by the parent corp. in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or division of the parent corp. or its business or financial responsibility is referred as the parents own the parent uses the property of the subsidiary as its own the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corp. in the latters interest the formal legal requirements of the subsidiary are not observed

9. 10.

11.

(Garrett vs. Southern Railway)

(Note: Sir Jack said that we must not stop after weve gone through the 11 points in order to determine whether or not there is a subsidiary or instrumentality. We must go further and consider other circumstances which may help determine clearly the true nature of the relationship. --- Em)

GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959) This case involved a Workers Compensation claim by a wheel moulder employed by Lenoir Car Works. The plaintiff sought to claim from Southern Railway Company, which acquired the entire capital stock of Lenoir Car Works. Plaintiff contended that Southern so completely dominated Lenoir that the latter was a mere adjunct or instrumentality of Southern. The general rule is that stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary, unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. In the case, it was found that there were two distinct operations. There was no evidence that Southern dictated the management of Lenoir. In fact, evidence shows that Marius, the manager of the subsidiary, was in full control of the operation. He established prices, handled

negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and maintain a Workmens Compensation Fund. There was also no evidence that Lenoir was run solely for the benefit of Southern. In fact, a substantial part of its requirements in the field of operation of Lenoir was bought elsewhere. Lenoir sold substantial quantities to other companies. Policy decisions remained in the hands of Marius. Hence, the complaint against Southern Railway was dismissed.

KOPPEL VS. YATCO (77 Phil. 496; 1946) This case involved a complaint for the recovery of merchant sales tax paid by Koppel (Philippines), Inc. under protest to the Collector of Internal Revenue. Although the Court of First Instance did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes, it dismissed the complaint saying that in the transactions involved in the case, the public interest and convenience would be defeated and would amount to a perpetration of tax evasion unless resort was had to the doctrine of "disregard of the corporate fiction." The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA. KPhil. acted as a representative of K-USA and not as an agent. K-Phil. also bore alone its own incidental expenses (e.g. Cable expenses) and also those of its principal. Moreover, K-Phils share in the profits was left in the hands of K-USA. Clearly, K-Phil was a mere branch or dummy of K-USA, and was therefore liable for merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and the consequent commission of a grave injustice to the Government. Moreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be done directly. LIDDELL & CO. VS. CIR (2 SCRA 632; 1961) Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation, 98% of the Liddel Inc.s stock belonged to Frank Liddel. As to Liddel Motors, Frank supplied the original capital funds. The bulk of the business of Liddel Inc. was channeled through Liddel Motors. Also, Liddel Motors pursued no other activities except to secure cars, trucks and spare parts from Liddel Inc. and then sell them to the general public. To allow the taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they were practically one and the same is to sanction the circumvention of tax laws. YUTIVO VS. CTA (1 SCRA 160; 1961) Southern Motors was actually owned and controlled by Yutivo as to make it a mere subsidiary or branch of the latter created for the purpose of selling vehicles at retail. Yutivo financed principally, if not wholly, the business of Southern Motors and actually exceeded the credit of the latter . At all times, Yutivo, through the officers and directors common to it and the Southern Motors exercised full control over the cash funds, policies, expenditures and obligations of the latter. Hence, Southern Motors, being a mere instrumentality or adjunct of

Yutivo, the CTA correctly disregarded the technical defense of separate corporate identity in order to arrive at the true tax liability of Yutivo. LA CAMPANA VS. KAISAHAN (93 Phil. 160; 1953) The La Campana Gaugau Packing and La Campana Coffee Factory were operating under one single business although with 2 trade names. It is a settled doctrine that the fiction of law of having the corporate identity separate and distinct from the identity of the persons running it cannot be invoked to further the end subversive of the purpose for which it was created. In the case at bar, the attempt to make the two businesses appear as one is but a device to defeat the ends of the law governing capital and labor relations and should not be permitted to prevail.