Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
1
Atty. CESAR L. VILLANUEVA
OUTLINE IN PHILIPPINE CORPORATE LAW1
2ND SEMESTER, SY 2004-2005
I. HISTORICAL BACKGROUND
2
A public corporation can only exist when a legislative grant is conferred. A corporation will be formed only
when 5 individual persons, as incorporators, agree to form a corporation.
Unless otherwise indicated, all references to sections pertain to The Corporation Code of the Philippines.
The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as "Corporate Law" to
differentiate it from the old statute known as "The Corporation Law," or Act No. 1459.
- created by law its existence is dependent upon the onset or grant of the state
EXCEPT corporation by estoppel and de facto corporation
- the definition of a corporation is merely a guide and does not really provide for the basis of a
corporation
A corporation upon coming to existence, is invested by law with a personality separate and distinct from
those persons comprising it as well as from any other legal entity to which it may be related. (Construction
Dev. Corp of the Phils v. Cuenca 466 SCRA 714, 2005)
Corporation is a creature of Limited Powers- Except for those powers which are expressly conferred
on it by the Corporation Code and those that are implied by or are incidental to its existence, a
corporation has no powers. It exercises its powers through its board of directors and/or its duly authorized
officers and agents. (Pascual and Santos v. The Members of the Tramo Wakas Neighborhood
Association, INC., 442 SCRA 438, 2004)
(b)
(c)
(d)
Has the powers, attributes and properties expressly authorized by law or incident to its
existence (Creature of Limited Powers)
The state cannot destroy a corporation without observing due process of law.
B) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual
relationship on four (4) levels:
1. Between the corporation and its agents or representatives to act in the real world, such as its
directors and its officers, which is governed also by the Law on Agency
2. Between the corporation and its shareholders or members
3. Between and among the shareholders in a common venture
C) EXTRA-CORPORATE LEVEL, which views the relationship between the corporation and thirdparties or outsiders, essentially governed by Contract Law and Labor Law.
-
Most important level, highest form of law in this level is contract law.
To organize a corporation that could claim a juridical personality of its own and transact
business as such, is not a matter of absolute right but a privilege which may be enjoyed only under
such terms as the State may deem necessary to impose. cf. Ang Pue
& Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962)
It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act, and the procedure
and conditions provided under the law for the acquisition of such juridical personality must be
complied with. Although the statutory grant to an association of the powers to purchase, sell, lease and
encumber property can only be construed the grant of a juridical personality to such an association . .
. nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a
finding that such association acquired a separate juridical personality, even when it adopts sets
of constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court of Appeals, 343
SCRA 674 (2000).
The Court held that the appeal cannot prosper. Judgment affirmed. Benguet bound by order.
The challenged order represents a response & expresses a policy arising out of a specific problem,
addressed to the attainent of specific ends by the use of specific remedies, w/ full & ample support from
legal doctrines of weight and significance.
A disagreement ensued between the ancillary and the domicillary administrator as to who was entitled to
the certificate of stocks
- The CFI ordered County Trust to produce and deposit the stocks with the court which was not
complied with. Thus the order of the CFI.
Benguet did not dispute Tayags authority to gain control and possession of all the assets of the
dependent within the Philippines. The corporation, like every Juan and Maria given life by God acts on it
Corporation is an artificial being created by operation of law. It owes it life to the state its birth
being purely dependent on its will.
Flether: A corp. is not in fact and in reality a person, but the law treats it as though it were a
person by process of fiction, or by regarding it as an artificial person distinct and separate from its
individual stockholders.
TAYAG DOCTRINES: Formally adopts the concession theory; corp. w/o imprimatur outside the state grant:
1. Even if it has its own set of by laws etc., the corp would still have to obey the order of the state.
2. Repudiated the application of EET- corp as reality of the group as a social and legal entity independent of state
recognition.
As a matter of fact, a corp. once it comes into being comes more often w/n the ken of the judiciary
than the other two coordinate branches. It institutes the appropriate court action to enforce its right.
Correlatively, it is not immune from judicial control in those instances, where a duty under the law as
ascertained in an appropriate legal proceeding is cast upon it.
c) Theory of Enterprise Entity (BERLE, Theory of Enterprise Entity, 47 COL. L. REV. 343 [1947])
-
juridical personality
CLV: Fiction cannot be created unless there is an enterprise or group of persons upon whom it would be conferred.
But in spite of the underlying contract among the persons wanting to form a corp., the grant is only by virtue of a
primary franchise given by the state. And it is within the power of the state to grant it or not. But once granted
corporate life of its own tells it to go and multiply profitably. Once juridical personality is acquired, however, this
doesnt mean that the group becomes a creature of the state, but actually becomes a creature of its own volition
and remains as a distinct personality.
its existence is dependent upon the consent or grant of the state EXCEPT corporation by estoppel
and de facto corporation
C) WITH RIGHT OF SUCCESSION (Strong Juridical Personality)
the corporation exist despite the death of its members as a corporation has a personality
separate and distinct from that of its individual stockholders. The separate personality remains even if
there has been a change in the members and stockholders of the corporation.
(b) Disadvantages:
(i) Abuse of corporate management
(ii) Abuse of limited liability feature
(iii) High cost of maintenance
(iv) Double taxation
Dividends received by individuals from domestic corporations are subject to final 10% tax for income
earned on or after 1 January 1998 (Sec. 24(b)(2), 1997 NIRC)
Inter-corporate dividends between domestic corporations, however, are not subject to any income tax
(Sec. 27(d)(4), 1997 NIRC)
There is re-imposition of the 10% improperly accumulated earnings tax for holding companies (Sec. 29,
1997 NIRC)
Sole Proprietorship
Corporation
Owner stands to lose more than what he put Investors have limited liability
into the venture
(b) Partnerships and Other Associations
Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of the
partners, even in case of failure to comply with requirements of Art. 1772 first paragraph.
Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any
pone of the members may contract in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions relating to co- ownership.
Partnership
Centralized management
Q. How does the contractual management of a corporation compare with the management of
a partnership?
A. Every partner, in the absence of a stipulation in the articles of partnership, binds the partnership
as every partner is an agent of the others (delectus personarum). In a corporation, only the BoD
and not the stockholders can bind the corporation.
Disadvantages
(i) Abuse of corporate
management
- no delectus personarum
Q. If limited liability as shown in a corporation setting good for the investors, does it mean that
delectus personarum is a bad thing?
A. No. It is good in one way, since persons are bound by the contracts they enter into.
CLV: The principle in constitutional law that delegated power cannot be further delegated has no application in a
corporate setting because a corp. is not a product of political context- it is a product of business. A corporate
setting is best described as hierarchical and flat. Just because the BoD are to be elected by the stockholders does
not mean that the former derives its power from the latter. The powers of the BoD is original, said powers are
not delegated by the stockholder. The powers are vested by law (and by the AoI). The BoD sit on the board not as
representatives of the stockholders but because they are directors.
Q. What are the 2 types of partnerships?
A. Regular (General and Limited) and Joint venture
Q. Can a corporation be a partner in a regular partnership?
A. No. Because a partner must be a natural person. It is against public policy for corporation to be a
partner in a regular partnership.
Q. If limited liability is something that can be contracted in a partnership, why did the legislature
put such limited liability as an attribute of a corporation? If the feature of limited liability
costs money then why not take it out? Why not leave it up to the investors who can decide if
they want limited liability or not?
A. Even though limited liability will cost a lot of money, borrowing makes a lot more sense. If I have
P100M, it would be foolish to put all my eggs in one basket (if the basket falls, all eggs break). So, I
merely put P10M in one corporation and then borrow the P90M while the rest of my money I put
somewhere else. If the corporation fails, I do not lose all my P100M, I lose only my P10M. But if the
corp. succeeds and I get to pay my creditor, I retain the P10M plus the profits acquired from the
P90M paid up loan. This is the concept of LEVERAGING, using other peoples money to make a profit
for yourself. This is why borrowing is an integral part of corporate life and it is up to the creditors to make
a diligent appraisal of the credit standing of the corp.
Q. In cases where there is a defective attempt to form a corp. which is the prevailing rule, a
partnership inter se is created or a corporation by estoppel?
A. It depends wholly on the extent of the participation of the party on who a claim is being mind. In the
case at bar, there was no intent on the other parties to enter into a partnership but a corporation. As to
the Cervanteses & BORMAHECO, they cannot be considered to have entered even into a partnership
inter se, since there was no intention to do so and to be held liable as such.
But if it were the Cervanteses or BORMAHECO, who entered into the contracts using the corporate
name and actively participated in the activities of the corporation, then they are to be held liable as
partners.
Q. Why are we taking up Pioneer? Why were they not liable?
A. Because Pioneer shows us that for a person to be liable as a partner, he should have actively
participated in the conduct of the business, the SC held in this case that to be able to be held liable the
person should possess powers of management.
Q. What is the difference between Pioneer and Lim Tong Lim?
A. In the case of Pioneer, the SC stopped when it declared that to be liable, you have to possess
powers of management. In Lim tong Lim, it continues its pronouncement, by saying that if you have
beneficial ownership over the business, then you are also liable as a partner.
LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES
Facts: Antonio Chua and Peter Yao on behalf of Ocean Quest Fishing Co. entered into a contract with
Phil. Fishing Gear Industries Inc. for the purchase of fishing nets and floats. They claimed that they
were a fishing venture with Lim Tong Lim who was however not a signatory to the contract. They failed
to pay and so PFGI filed a collection case with a prayed for a writ of preliminary attachment. The case
was filed against Chua, Yao and Lim because it was found that Ocean Quest was a non- existent
corporation as shown by the certification from SEC. Chua admitted liability and Yao waived his right to
cross-examine and present evidence because he failed to appear while Lim filed a counterclaim
and a cross-claim. Court granted the writ of attachment and ordered the Auction Sale of the F/B
Lourdes which was previously attached. Trial court ruled that PFGI was entitled to the Writ and Chua,
Yao and Lim were jointly liable as general partners.
Held:
(d) Cooperatives
A cooperative is a duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve a lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative principles.
Cooperatives are established to provide a strong social and economic organization to ensure that the
tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe,
333 SCRA 425 (2000).
Cooperative
Corporation
Separate Juridical Personality
Governed
by
principles
of SH vote their percentage share of
democratic
control
where
the the stocks subscribed by them
members have equal voting rights on a
one-member-one vote principle
BoD manage the affairs of the coop. But it
is the GA of full membership that
exercises all the rights and performs all
of the obligations of the coop.
Under the supervision of the coop.
Development Authority
Organized
for
the
purpose
of Stock Corp. for profit; Non-Stock
providing goods and services to its
Corp eleemosynary (charitable,
members and thus to enable them to attain philantrophic) purpose
increased
income and
saving, etc.
e) Business Trusts (Article 1442, Civil Code) Art. 1442
Q. What is the difference between a business trust and a corporation?
A. The relationship in a business trust is essentially a trust relationship. The business trust does not
have a personality which is apart from the trustor or the trustee/beneficiary.
The concept of a separate juridical personality is absent from a business trust.
The Congress shall not except by general law, provide for the formation, organization or regulation
of private corporations, Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good and subject to the test of economic
viability.
P.D. 1717, which created New Agrix, Inc. violates the Constitution which prohibits the formation of
a private corporation by special legislative act which is neither owned nor controlled by the
government, since NDC was merely required to extend a loan to the new corporation, and the new
stocks of the corporation were to be issued to the old investors and stockholders of the insolvent
Agrix upon proof of their claims against the abolished corporation. NDC v. Philippine Veterans
Bank, 192 SCRA 257 (1990).
Congress cannot enact a law creating a private corporation with a special charter, and it follows that
Congress can create corporations with special charters only if such corporations are government-owned
or controlled. Feliciano v. Commission on Audit, 419 SCRA 363 (2004)
Q: What distinguishes a public corporation from a private corporation owned by the
government?
A: It is not ownership which distinguishes a public corporation from a private corporation. It is the civil
service eligibility of its employees and if the financial records are subject to the examination of the
Commission on Audit. A public corporation is created by its charter whereas a private corporation is
created under the Corporation Code.
2. CORPORATION AS A PERSON:
(a) Entitled to Due Process and Equal Protection Clause
The due process clause is universal in its application to all persons without regard to any
differences of race, color, or nationality. Private corporations, likewise, are persons within the scope
of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136, 144
(1920).
(b) Unreasonable Searches and Seizure
A corporation is protected by the constitutional guarantee against unreasonable searches and
seizures, but its officers have no cause of action to assail the legality of the seizures, regardless of the
amount of shares of stock or of the interest of each of them in said corporation, and whatever the
offices they hold therein may be, because the corporation has a personality distinct and separate
from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967).
A corporation is but an association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for
such body. Its property cannot be taken without compensation; can only be proceeded against by due
process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37
SCRA 823, 837 (1971), quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.
Q: Why is a corporation entitled to the rights of due process and equal protection?
CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection the law
grants to an individual. A corporation is entitled to due process and equal protection by virtue of the
juridical personality given by the State through the primary franchise of the corporation. The constitution
did not distinguish whether the term person in Sec. 1 Art. III of the Constitution refers to an individual or
However, a corporation is also entitled to protection against unreasonable searches and seizures.
This right however does not emanate from the grant of the State by way of primary franchise but is
sourced through the Theory of Enterprise Entity which recognizes that regardless of Section 2 of the
Corporation Code, a corporation is still for all intents and purposes an association of individuals
under an assumed name and with a distinct legal personality. In organizing itself as a collective body,
it waives no constitutional immunities for such body. (1) Its properties cannot be taken without just
compensation (2) it can only be proceeded against by due process of law (3) it is protected against
unlawful discrimination.
In the same line of reasoning, although a corporation is a legal fiction, a search and seizure involves
physical intrusion into the premises of the corporation, and therefore also intrudes into the personal
and business privacy of the stockholders or members who compose it. It can be seen that the right of the
individual against unreasonable searches and seizures is extended to corporations upon whom they are
members.
(c) But Not Entitled to Privilege Against Self incrimination
It is elementary that the right against self-incrimination has no application to juridical persons.
Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987).
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special privileges and franchises,
may refuse to show its hand when charged with an abuse of such privilege. Hale v. Henkel, 201
U.S. 43 (1906); Wilson v. United States, 221
U.S. 361 (1911); United States v. White, 322 U.S. 694 (1944).
Q: Why is a corporation entitled to equal protection but not the right against selfincrimination?
A: Any individual is entitled to equal protection whether they be juridical or natural. The corporation being
in the same class should be treated equally. However, the right to self-incrimation is not extended to
corporation because:
1. The right is meant to prevent individuals from having to lie under oath in order to protect his interest.
It is to protect the individual from having to commit perjury just to keep himself from going to jail.
However, if a corporation lies under oath, who would you bring to jail when in fact, a corporation is just a
legal fiction.
2. The corporation is subject to the reportorial requirements of the law. The corporation being a mere
creature of the State is subject to the whims of its Creator. The corporation powers are limited by law.
CLV: Beats me! Perhaps such right is attributable to the moral dimension of an individual, and since the
corporation is of an amoral personality, such right may not be attributable to it.
NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous act
committed by an officer can be ascribed to the corporation as its liability, for it is reasonable to presume
that in the granting of authority by the corporation to its agent, such a grant did not include a direction to
commit tortuous acts against third parties. Only when the corporation has expressly directed the
commission of such tortuous act, would the damages resulting therefrom be ascribable to the
corporation. And such a direction by the corporation, is manifested either by its board adopting a
resolution to such effect, as in this case, or having taken advantage of such a tortuous act the
corporation, through its board, expressly or impliedly ratifies such an act or is estopped from impugning
such an act.
Section 123: Definition and rights of foreign corporations For the purposes of this Code, a
foreign corporation is one formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in the Philippines
after it shall have obtained a license to transact business in this country in accordance with this
Code and a certificate of authority from the appropriate government agency.
There are three tests to determine the nationality of the corporation, namely:
1.) Place of incorporation that a corporation is of the nationality of the country under whose laws it
has been organized and registered, embodied in Sec. 123 of the Corporation Code.
2.) Control test nationality determined by the nationality of the majority stockholders, wherein control is
vested.
Situation #1: 51% Filipino 49% Japanese: Under the control test, the nationality cannot be
determined because for a group of stockholders to exercise control over a corporation it is required by
the Corporation Code that they at least control 60% of the corporation.
Why 60%? Because under the Corporation Code for a group of persons to incorporate a
corporation, at least 5 persons are required by law. A majority of the 5 is 3 and converting it into
percent, one gets 60%. We can say that in fact 51% is majority but in a group of 5 people 51% is 2 &
1/5, there really is no 1/5 of a person.
Situation #2: 60% Filipino 40% Japanese
corporation
Q: It was said that the place of incorporation is the primary test to determine the nationality of the
corporation, why then are there other tests used?
A: There are certain aspects of the Philippine economy that require that the controlling test in
corporations engaging in said type of business be that of Filipinos. The nationalized economic sectors are
primarily focused at making Filipino interests benefit directly from the bounties of this country. The place
of incorporation test need not have been expressly provided by the Constitution since it is an integral part
of our law specifically the power of Congress to grant primary franchise to corporations. The place of
incorporation test is deemed the primary test. It is a true test of nationality. Being a creature of law of the
place where it was incorporated, the corporation cannot escape said law. By providing for the control
test, the Constitution is providing for a secondary test to determine which corporations are entitled to
entry in nationalized sectors.
Q: What is the implication of having a primary test and a secondary test?
A: Simply put, if a corporation does not pass the first test, which the place of incorporation test,
automatically it is deemed to be a foreign corporation. However, having passed the first test, the
nationality of the corporation may have been established but this does not mean that the corporation is
entitled to enter every single economic sector of the Philippines. The control test determines now whether
the corporation fulfills the equity requirements of the Constitution. In doing this, the other tests are made
such as: war-time test, investment test and grandfather rule.
EXCEPTIONS: TEST OF CONTROLLING OWNERSHIP also applies in:
(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; a Roman
Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102
Phil. 596 [1957]).
Sec. 140 Stock ownership in certain corporations Pursuant to the duties specified by Article XIV
of the Constitution, the National Economic Development Authority shall, from time to time, make a
determination of whether the corporate vehicle has been used by any corporation of by business or
industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their
prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations
declared by it to be vested with a public interest pursuant to the provisions of this section,
belonging to the individuals or groups of individuals related to each other by consanguinity or affinity or
by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal
The registration of the donation of land to an unincorporated religious organization, whose trustees
are foreigners, would violate constitutional prohibition and the refusal would not be in violation of
the freedom of religion clause. The fact that the religious association has no capital stock does not
suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign
nationality. . . and the spirit of the Constitution demands that in the absence of capital stock, the
controlling membership should be composed of Filipino citizens. Register of Deeds of Rizal v. Ung Sui
Si Temple,
97 Phil. 58 (1955).
(b) Public Utilities (Sec. 11, Art. XII, Constitution; a People v. Quasha, 93 Phil. 333)
Sec. 11 Art. XII
No franchise, certificate or any other form of authorization for the operation of public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized under the laws
of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such
franchise, certificate or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be subject to
amendment, alteration or repeal by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise shall be limited to their proportionate share
in its capital, and all the executive and managing officers of such corporation or association must be
PEOPLE v QUASHA
Facts:
William Quasha, a member of the Philippine Bar was charged with falsification of public and
commercial documents in the CFI. He was entrusted with the preparation and registration of the articles
of incorporation of Pacific Airways Corporation but he caused it to appear that Arsenio Baylon, a
Filipino had subscribed to and was the owner of 60% of subscribed capital stock. Such was not case
because the real owners of said portions were really American citizens. The purpose of such false
statement was to circumvent the Constitutional mandate that no corporation shall be authorized to
operate as a public utility in the Philippines unless
60% of its capital is owned by Filipinos.
Held:
The falsification imputed to Quasha consists in not disclosing in the Articles of Incorporation that
Baylon was a mere trustee of the Americans, thus giving the impression that Baylon subscribed to
60% of the capital stock. But contrary to the lower courts assumption, the Constitution does not
prohibit the mere formation of a public utility corporation without the required proportion of Filipino
capital. What it does prohibit is the granting of a franchise or other form of authorization for the
operation of a public utility to a corporation already in existence but without the requisite proportion
of Filipino capital. From the language of the text, the terms franchise, certificate, and other form of
authorization are qualified by the phrase for the operation of public utility. As such, these terms cannot
and do not refer to the corporations primary franchise, which vests a body of men with corporate
existence, but to its secondary franchise, or the privilege to operate as public utility after the
corporation has already gone into being.
Primary franchise refers to that franchise which invests a body of men with corporate existence,
while the secondary franchise is the privilege to operate as a public utility after the corporation has
already come into being.
For the mere formation of the corporation, such revelation was not essential and the corporation
law does not require it. Therefore, Quasha was under no obligation to make it. In the absence of such
obligation and of the alleged wrongful intent, Quasha cannot be legally convicted of the crime with
which he is charged. A corporation formed with capital that is entirely alien may subsequently change
the nationality of its capital through transfer of shares to Filipino citizens. The converse may also
happen. Thus for a corporation to be entitled to operate a public utility, it is not necessary that it be
organized with 60% of its capital owned by Filipinos from the start. Said condition, may at any time be
attained through the necessary transfer of stocks. The moment for determining whether a corporation is
entitled to operate as public utility is when it applies for a franchise, certificate or any other form of
authorization for that purpose and that can only be done after the corporation has already come into
being not while being formed.
Q: Why are we studying Quasha?
A: This case makes a distinction with the grant by the government of primary and secondary franchise. As
far as doctrinal pronouncements are concerned, any and all type of corporations may be incorporated, so
long as the requirements for incorporation are fulfilled and that its purpose is lawful and not contrary to
law or public policy. The violation of equity requirements with regard to entry into nationalized sectors as
provided by the Constitution come only into play when the secondary franchise is granted. In granting the
secondary franchise considerations of equity are now made.
69%
Filipino stockholdings
31%
SITUATION #2 Whether or not there may be an investment made by Pinoy Inc. in Mass Media
which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a Filipino, while 60%
is owned by ABC, Inc. ABC on the other hand, is a corporation registered in the Philippines 60%
of which is owned by Maria, a Filipino, while 40% is owned by George, a German.
Q: Can Pinoy, Inc. enter into the operation of a television station?
A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified since 24% of Pinoy is
owned by George. But under the present investment regime of the Philippines, the FIA provides that
corporations which are 60% owned by Filipino citizens shall be considered of Philippine nationality. It is
defined under said law that for the purposes of investment such a corporation of 60% Filipino and 40%
foreign equity is allowed to invest in a corporation engaged in a nationalized sector.
Q: Does this not contradict the very provisions of the Constitution?
A: It does not because the main purpose of such provision of the law is to spur investments into the
Philippine economy. What it specifically prohibits is for a corporation with a foreign equity to engage in
nationalized industries. Note the difference in the use of terms, namely to engage as opposed to to
invest. Engaging in nationalized industries involve direct participation in the exploitation or use of natural
Held: The CBCI is not a negotiable instrument because it lacks the words of negotiability. It is
payable only to Filriters and the transfer by a non-owner i.e. Philfinance, to TRB should have put the
latter on guard as to the title of Philfinance to dispose of the CBCI. Also the assignment of
Filriters toPhilfinance was fictitious as the same is without consideration and was contrary to the rules
of CB Circular 70 which provides that any assignment shall not be valid unless made by the registered
owner in person or by a duly authorized representative in writing. Philfinance merely borrowed the CBCI
from Filriters a sister corporation to guarantee financing corporations.
The doctrine of piecing the corporate veil is an equitable remedy which may only be awarded in cases
when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime or where a corporation is a mere alter ego or business conduit of a person. It requires
the court to see through the protective shroud which exempts its stockholders from liabilities that
ordinarily, they could be subject to or distinguishes one corporation from a seemingly separate one,
were it not for the existing corporate fiction. The court must be sure that the corporate fiction was
misused.. It is the protection of innocent 3rd parties dealing with corporate entity that the law seeks to
protect by this doctrine. In this case, other than the allegation that Filriters is 90% owned by
Philfinance and the identity of one shall be maintained as to the other, there is nothing else which could
lead the court under the circumstances to disregard their separate corporate personalities. There is no
showing that TRB was defrauded at all when it acquired the subject certificate of indebtedness from
Philfinance.
EQUITY- to do
justice
The application of the doctrine to a particular case does not deny the corporation of legal personality for
any and all purposes, but only for the particular transaction or instance for which such doctrine was
applied.
(a) Equitable Remedy: The doctrine of piercing the corporate veil is an equitable doctrine developed
to address situations where the separate corporate personality of a corporation is abused or
used for wrongful purposes. a PNB v. Ritratto Group, Inc., 362
SCRA 216 (2001).
(b) Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available
when other remedies are still available. a Umali v. Court of Appeals, 189 SCRA
529 (1990).
UMALI v. COURT OF APPEALS
Facts:
The Castillo family is the owner of a parcel of land which was given as security for a loan from the
DBP. For failure to pay the amortization, foreclosure of the property was initiated. This was made
known to Santiago Rivera, the nephew of plaintiff Mauricia Meer vda. De Castillo and president of
Slobec Realty Dev. Corp. Rivera proposed to them the conversion into a subdivision lot of the four
parcels of land adjacent to the mortgaged property to raise the money. The Castillos agreed so a
MOA was executed between Slobec represented by Rivera and the Castillos. Rivera obliged himself to
pay the Castillos P70T after the execution of the contract and P400T after the property had been
converted into a subdivision. Rivera armed with the agreement approached Cervantes, president of
Bormaheco and bought a Caterpillar Tractor with P50T down payment and the balance of P180T
payable in installments. Slobec through Rivera executed in favor of Bormaheco a chattel mortgage
over the said equipment as security for the unpaid balance. As further security, Slobec obtained
through the Insurance Corporation of the Philippines a Surety Bond in favor of Counter-Guaranty with
REM executed by Rivera as president of Slobec and the Castillos as mortgagors and ICP as mortagee.
The Caterpillar Tractor was delivered to Slobec.
Meanwhile for violation of the terms and the conditions of the Counter-Guaranty Agreement, the
properties of the Castillos was foreclosed by ICP. As the highest bidder, a Certificate of Sale was
issued in its favor and TCTs over the parcels of land were issued by the Register of Deeds in favor of
ICP. The mortgagors had one year from the registration of the sale to redeem the property but they
(e) Parent-subsidiary; Affiliated Companies: Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946);
PHIVIDEC v. Court of Appeals, 181 SCRA 669 (1990).
The person who invokes the doctrine must always be the injured party.
Absence of proof that control over a corporation is being used by a mother company to
commit fraud or wrong, there would be no basis to disregard their separate juridical personalities.
Ramoso v. Court of Appeals, 347 SCRA 463 (2000); Guatson Intl Travel and Tours, Inc. v. NLRC, 230
SCRA 815 (1990).
If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the
liability of the parent corporation as well as the subsidiary will be confined to those arising in their
respective businesses. Even when the parent corporation agreed to the terms to support a standby
credit agreement in favor of the subsidiary, does not mean that its personality has merged with that of
the subsidiary. MR. Holdings, Ltd. V. Bajar, 380 SCRA 617 (2002).
(h) Guiding Principles in Alter-Ego Cases:
Doctrine applies even in the absence of evil intent, because of the direct violation of a central
corporate law principle of separating ownership from management;
Doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity,
others cannot also be expected to be bound by the separate juridical entity
b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991);
- marriage of both a public and a private corp.
- it is granted the same powers as a private corp. but they have no incorporators, SHs or
members
(example: A water district, although established as a corporation, it was established for the greater
good and with no stockholders. They are also placed under the jurisdiction of the LWUA not the SEC)
But being a GOCC makes it liable for laws and provisions applicable to the Government or its entities
and subject to the control of the Government. Cervantes v. Auditor General, 91 Phil. 359 (1952).
Beyond cavil, a GOCC has a personality of its own, distinct and separate from that of the
government, and the intervention in a transaction of the Office of the President through the
Executive Secretary does not change the independent existence of a government entity as it
deals with another government entity. PUP v. Court of Appeals,
368 SCRA 691 (2001).
The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries
under the general corporation law are governed by the Civil Service Law and not by the Labor
Code, has been supplanted by the 1987 Constitution. The present doctrine in determining whether
a GOCC is subject to the Civil Service Law is the manner of its creation, such that government
corporations created by special charter are subject the Civil Service Law, while those incorporated
under the general corporation law are governed by the Labor Code. PNOC-Energy Development
Corp. v. NLRC, 201 SCRA 487 (1991); Davao City Water District v. Civil Service Commission, 201
SCRA 593 (1991).
incorporated in another country and that country grants the same rights to Filipinos in terms of doing
business there; it shall have the right to transact business in the Philippines after it shall have obtained
a license to transact business in this country in accordance with this code & a certificate of authority
from the appropriate government agency ( SEC license after obtaining BOI certificate )
3. As to Purpose of Incorporation:
(a) Municipal Corporation LGUs
can sue be sued without their consent ( as provided for by the LGC)
- in certain instances considered as an adjunct to the national government but has been recognized
to have a personality separate and distinct from the national government.
(b) Religious Corporation (Secs. 109 and 116)
Section 109. Classes of religious corporations. - Religious corporations may be incorporated by one
or more persons. Such corporations may be classified into corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general provisions on non-stock
corporations insofar as they may be applicable.
Section 116. Religious societies. - Any religious society or religious order, or any diocese, synod,
or district organization of any religious denomination, sect or church, unless forbidden by the
constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a
part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting
called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration
of its temporalities or for the management of its affairs, properties and estate by filing with the
Securities and Exchange Commission, articles of incorporation verified by the affidavit of the presiding
elder, secretary, or clerk or other member of such religious society or religious order, or diocese,
synod, or district organization of the religious denomination, sect or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or district
religious organization of a religious denomination, sect or church;
organization is a
2. That at least two-thirds (2/3) of its membership have given their written consent or have voted
(c) Educational Corporations (Secs. 106, 107 and 108; Sec. 25, B.P. Blg. 232)
Section 106. Incorporation. - Educational
by the general provisions of this Code. (n)
The doctrine in Republic v. Villanueva, 114 SCRA 875 (1982) and Republic v. Iglesia ni Cristo, 127
SCRA 687 (1984), that a corporation sole is disqualified to acquire/hold alienable lands of the
public domain, because of the constitutional prohibition qualifying only individuals to acquire land and
the provision under the Public Land Act which applied only to Filipino citizens or natural persons, has
been expressly overturned in Director of Land v. IAC, 146 SCRA 509 (1986). (3Overturning affirmed in
Republic v. Iglesia ni Cristo, 127 SCRA 687 (1984); Republic v. IAC, 168
SCRA 165 (1988).)
5. As to Legal Status:
(a) De Jure Corporation
(b) De Facto Corporation (Sec. 20)
Section 20. De facto corporations. - The due incorporation of any corporation claiming in good
faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired
into collaterally in any private suit to which such corporation may be a party. Such inquiry may be
made by the Solicitor General in a quo warranto proceeding.
(c) Corporation by Estoppel (Sec. 21) S
Section 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof
on the ground that there was in fact no corporation.
Q. Why is there piercing in a de facto corporation?
A. Piercing is allowed because the intention of the law is to protect the contracts entered into by the
corporation.
6. As to Existence of Shares (Secs. 3 and 5):
Sec. 3 Classes of Corporation Corporations formed or organized under this Code may 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 dividends or allotments of the surplus profits on the basis
of the shares held are stock corporations. All other corporations are non-stock corporations.
Sec. 5 Corporations and incorporators, stockholders and members Corporators are those who
compose a corporation, whether as stockholders or as members. Incorporators are those stockholders
or members mentioned in the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in a nonstock corporation are called members.
(a) Stock Corporation
(b) Non-Stock Corporation
C. BY ESTOPPEL
DE FACTO or DE JURE
DISSOLUTION
Q: In order to reach the level of corporation by estoppel, what is the essential ingredient of such
doctrine?
A: When there is a representation that a corporation exists when in fact there is none and at least one
party thought that there was a corporation.
Q: Distinguish promoters contract principles from the corporation by estoppel doctrine?
A: In both the corporation does not exist. But in promoters contracts there is no misrepresentation that
the corporation does not yet exist. When the contracts are entered into by persons who in behalf of the
corporation, acknowledging that the corporation does not yet exist and is still in the process of
incorporation, you do not apply the doctrine of corporation by estoppel. It is still what one may call as
the promoters contract. (The moment there is no corporation and contracts are entered into under the
representation that the corporation does exist then that is the only time you apply the doctrine of
corporation by estoppel.)
1. Pre-Incorporation Contracts
(a) Who Are Promoters?
Promoter is a person who, acting alone or with others, takes initiative in founding and organizing
the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, Securities
Regulation Code [R.A. 8799])
CLV: The definition of promoter is important to determine the liability for promoters contract. Before
you can make a promoter liable, you must be able to determine who is the promoter. He must be the one
who takes initiative on the founding and organization of the business venture which eventually ends up
as the corporation being organized.
Q: At the promoters stage there is no juridical personality until the SEC issues the certificate of
incorporation. Until the certificate is issued, the stage of the de facto corporation has not yet been
reached. Prior to the de facto corporation stage what then is the status of the contract entered
into by a promoter for and in behalf of the person or agent who had undertaken the transaction?
A: Unenforceable. It is not binding upon the corporation because it has not given consent to the authority
of the person or agent who had undertaken the transaction.
Facts: Rizal Light and Ice Co. Inc. is a domestic corporation granted by the Public Service
Commission, a certificate of public convenience for the installation, operation and management of an
electric light, heat, and power service in Morong, Rizal. PSC required Rizal light to show cause why it
should not be penalized for violation of the conditions of its CPC and for failure to comply with
directions to raise its service voltage, etc. Rizal failed to comply so the PSC ordered the cancellation
and revocation of Rizals CPC and forfeiture of its franchise. The order of revocation was set aside
when it was known that the company representative failed to appear due to illness.
The municipality of Rizal formally asked the PSC to revoke Rizals CPC and forfeiture of its franchise.
there is no estoppel.
When the incorporators represent themselves to be officers of the corporation which was never
duly registered with the SEC, and engage in the name of the purported corporation in illegal
recruitment, they are estopped from claiming that they are not liable as corporate officers under Sec. 25
of Corporation Code which provides that all persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners for all the debts, liabilities and damages
incurred or arising as a result thereof. People v. Garcia, 271 SCRA 621 (1997); People v. Pineda, G.R.
No. 117010,
18 April 1997 (unpub).
4. TRUST FUND DOCTRINE
See VILLANUEVA, "The Trust Fund Doctrine Under Philippine Corporate Setting," 31
ATENEO L.J. (No. 1, Feb. 1987).
The capital stock of the corporation especially its unpaid subscriptions is a trust fund for the benefit of
the general creditors of the corporation.
a) Commercial/Common Law Premise: Equity versus Debts (Art. 2236, Civil Code)
Art. 2236 The debtor is liable with all his property, present and future, for the fulfillment of his
obligations, subject to the exceptions provided by law.
b) Nature of Doctrine: Ong Yong v. Tiu, 401 SCRA 1 (2003).
ONG YONG v. TIU
Facts: In 1994, the construction of the Masagana Citimall in Pasay City by First Landlink Asia
Development Corporation (FLADC) owned by the Tiu family was threatened by the foreclosure by the
PNB for their P 190 M debt. In order to stave off the threat the Tiu family together with the Ong family
agreed to restructure FLADC and created a pre-subscription agreement and each were to maintain
equal shareholdings. The Ong family invested a total sum of P 190 M to the corporation while the Tiu
family included several real estate properties as added capital for the restructured corporation. The
Ong and Tiu families now owned 1,000,000 shares each of FLADC. After all the debts were paid,
the peace between Ong and Tiu did not last. Tiu claimed rescission based on substantial breach by
Ong upon the pre-subscription agreement. Ong, on the other hand maintained that it was Tiu who
committed the breach because one of the properties that they were supposed to include in the agreement
was in fact already in the real estate owned by FLADC. The SEC approved the rescission (both
parties were return to status quo, P 190 M to the Ong family and all the remaining FLADC assets to
the Tiu family, which included the now finished mall valued at more than P 1B) and the CA affirmed the
decision with slight modifications.
Held:
1.) Is rescission the proper remedy for an intra-corporate dispute
No, the Corporation Code, SEC
rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other
than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking
for it has no legal personality to do so (because it is a corporation, Tiu family is not the corporation) and
the requirements of the law therefore have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or imagined
offense, to demand rescission of his subscription and call for the distribution of some part of the
corporate assets to him without complying with the requirements of the Corp. Code.
2.) Granting rescission is a proper remedy, does it violate the TFD
a.
b.
c.
d.
Neither petitioner nor respondents Yap spouses are stockholders or officers of PAMBUSCO.
Consequently, the issue of the validity of the series of transactions may be resolved only by the
regular courts.
Neither can we concede that such contract would be invalid just because the signatory thereon
was not the Chairman of the Board which allegedly violated the corporations by-laws. Since by-laws
operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons
who deal with the corporation, unless they have knowledge of the same. a PMI Colleges v. NLRC,
277 SCRA 462 (1997).
PMI COLLEGES v. NLRC
FACTS: PMI is an educational institution offering courses on basic seaman training and other marinerelated courses hired private respondent as contractual instructor with an agreement that the latter shall
be paid at an hourly rte of P30 t P50. PR then organized classes in marine engineering. PR and other
instructors were compensated for services rendered during the first three periods of the abovementioned contract. However, for reasons unknown to PR, he stopped receiving payment for the
succeeding rendition of services.
Repeated demands having likewise failed, PR was soon constrained to file a complaint seeking
payment for salaries earned. PMI contended that classes in the courses offered which complainant
claimed to have remained unpaid were not held in the school premises of PMI. Only PR knew whether
classes were indeed conducted. Later in the proceedings, petitioner manifested that Mr. Tomas
Cloma Jr., a member of the petitioners BoD wrote a letter to the Chairman of the Board clarifying the
case of PR and stating therein that under PMIs by-laws, only the Chairman is authorized to
sign any employment contract. A decision was rendered by the Labor Arbiter finding for PR. The
NLRC affirmed.
HELD: The contract would be invalid just because the signatory was not the chairman which
allegedly violated PMI by-laws but since by-laws operate merely as internal rules among the stock
holders, they cannot affect or prejudice 3rd persons who deal with the corporation in good faith unless
they have knowledge of the same. No proof appears on record that PR ever knew anything about the
provisions of said by-laws. Petitioner itself merely asserts the same without even bothering to attach a
copy or excerpt thereof to show that there is such a provision. That this allegation has never been
denied by PR does not necessarily signify admission.
Section 48. Amendments to by-laws. - The board of directors or trustees, by a majority vote
thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority
of the members of a non-stock corporation, at a regular or special meeting duly called for the
purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of
the outstanding capital stock or two-thirds (2/3) of the members in a non-stock corporation may
delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new
by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal
any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or a majority of the members in non-stock
corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall
be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with
the Securities and Exchange Commission the same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and
Exchange Commission of a certification that the same are not inconsistent with this Code. (22a
and 23a)
Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in the
exercise of management prerogative or business judgment. However this right, extensive as it may
be, cannot impair the obligation of existing contracts or rights. . . If we were to rule otherwise, it would
enable an employer to remove any employee from his employment by the simple expediency of
amending its by-laws and providing that his/her position shall cease to exist upon the occurrence of
a specified event. Salafranca v. Philamlife (Pamplona) Village Homeowners, 300 SCRA 469
(1998).
Sub-paragraph 11 of Sec. 36
provide that a corporation has
the power and capacity to
exercise such powers as may
be essential or necessary to
carry out its purpose or
purposes as stated in
its articles of incorporation.
Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent authority and of
(2) estoppel.
One has to look at the corporation as a person before the law because of the (1) issue of
consent and (2) liability who commits itself to obligation. The state only gives a corporation limited
powers and not general powers as an individual has because of the consent and liability.
(b) Where Corporate Power Lodged
A corporation has no power except those expressly conferred on it by the Corporation Code and
those that are implied or incidental to its existence. In turn, a corporation exercises said powers
through its board of directors and/or its duly authorized officers and agents. . . In turn, physical acts of
the corporation, like the signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate by-laws or by a specific act of the board of directors.
Shipside Inc. v. Court of Appeals, 352 SCRA
334 (2001).
Unless otherwise provided by the Corporation Code, corporate powers are exercised by the Board of
Directors, which they may delegate to either an executive committee, officers or contracted
managers. The delegation, except for the executive committee, must be for specific purposes, which
makes the officers the agents of the corporation, and accordingly the general rules of agency as to the
binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation
to exercise a power of the Board, the latter must specially authorize them to do so. ABS-CBN
Broadcasting Corp. v. Court of Appeals, 301 SCRA 572 (1999).
PRIMARY RULE: The Board of Directors/Trustees is the repository of all corporate powers (sec.
23)
The source of power of the board of directors is therefore primary and not delegated power from
the stockholders or members of the corporation. However, there are specified instances in the
Corporation Code where the particular exercise of power of the corporation by the board, in order to
be binding and effective, requires the consent and ratification of the stockholders or members, on
one hand, and the State, on the other hand.
IN CONSONANCE WITH CONTRACT LAW PRINCIPLES in conformity with the principles of
contract law, that a party cannot relieve himself from the contractual terms and conditions, much less
amend or alter them, without the consent or approval of the other party or parties.
EXCEPTION TO THE GENERAL RULE, in cases where the stockholders consent is required,
majority rules. The consent or dissent of the stockholders is recognized by their majority vote or their
qualified two-thirds as the case may be which would bind even those who abstained or dissented. For
those who dissented, there is a way out for them by way of exercising their appraisal right (depending
on the issue).
2. ULTRA VIRES DOCTRINE
See relevant portions of VILLANUEVA, Corporate Contract Law, 38 ATENEO L.J. 1 (No. 2, June
VOID
2.) acts done beyond the powers of the corporation as provided for in the law or its articles of
incorporation; and VOID or VOIDABLE?
3.) acts or contracts entered into in behalf of the corporation by persons who have no corporate
authority
UNENFORCEABLE
Ultra vires acts of the second type are void as between the corporation and the State or in the first
level of corporate existence while it is merely voidable in the third level because of public policy. The
public who deals in good faith with the corporation has the right to expect that the obligation entered into
shall be complied with.
First Type Ultra Vires: An ultra vires act is one committed outside the object for which a
corporation is crated as defined by the law of its organization and therefore beyond the power
conferred upon it by law. The term ultra vires is distinguished from an illegal act for the former is
merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is
void and cannot be validated. a Atrium Management Corp. v. Court of Appeals, 353 SCRA 23
(2001).
ATRIUM MANAGEMENT CORP. v. COURT OF APPEALS
Facts: Hi-Cement through the corporate signatories (De Leon treasurer, Delas Alas chairman)
issued checks in favor of E.T. Henry & Co. Inc. as a collateral for a loan) E.T. Henry endorsed the four
checks to Atrium for valuable consideration. Upon presentment for payment, the bank dishonored all
four checks because the payment was stopped. Atrium filed with the RTC an action for collection of
the proceeds of four postdated checks amounting to P2M. The TC ordered that De Leon, ET Henry
and Hi-Cement pay Atrium jointly and severally the value of the four checks plus interest. The CA on the
other hand absolved Hi-Cement from liability.
Issue: WON De Leon was not authorized to issue the checks
WON the issuance of the checks were ULTRA VIRES ACTS
Held: De Leon was authorized and such issuance is not an ultra vires act.
Ratio: De Leon as treasurer of the corporation is authorized to sign checks for the corporation. As a
rule, the act of issuing checks is within the ambit of a valid corporate act. And securing a loan to
finance the activities of the corporation is not an ultra vires act. While an ultra vires act is one
committed outside the object or which a corporation is created as defined by law of its organization
and therefore beyond the power conferred upon it by law, the act pertained to in the case is not an
illegal act.
De Leon on the other hand was negligent in confirming that such checks were issued to ET Henry as
payment for their companys debt with the former. That is why she was held to be personally liable
If a corporation knowingly permits one of its officers to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from denying the agents
authority. Soler v. Court of Appeals, 358 SCRA 57 (2001).
The authority of a corporate officer dealing with third persons may be actual or apparent . . . the
principal is liable for the obligations contracted by the agent. The agent apparent representation
yields to the principal's true representation and the contract is considered as entered into between the
principal and the third person. First Philipine International Bank v. Court of Appeals, 252 SCRA 259
(1996).
Persons who deal with corporate agents within circumstances showing that the agents are acting in
excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v. Court of
Appeals, 269 SCRA 601 (1997).
Apparent authority may be ascertained through (1) the general manner in which the corporation holds
out an officer or agent as having the power to act, or, in other words the apparent authority to act in
general with which is clothes them; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. InterAsia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003).
When a banking corporation, when an officers arranges a credit line agreement and forwards the same
to the legal department at its head officer, and the bank did no disaffirm the contract, then it is bound
by it. Premier Dev. Bank v. Court of Appeals, G.R. No. 159352, 14 April 2004.
A corporation cannot disown its Presidents act of applying to the bank for credit accommodation,
simply on the ground that it never authorized the President by the lack of any formal board resolution.
The following placed the corporation and its Board of Directors in estoppel in pais: Firstly, the bylaws provides for the powers of the President, which includes, executing contracts and
agreements, borrowing money, signing, indorsing and delivering checks; secondly, there were
already previous transaction of discounting the checks involving the same personalities wherein
any enabling resolution from the Board was dispensed with and yet the bank was able to collect from
the corporation. a Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 (1991).
(f) Invest Corporate Funds for Non-Primary Purpose Endeavor (Sec. 42; De la Rama v. Ma-ao
Sugar Central Co., 27 SCRA 247 [1969])
Sec. 42 Power to invest corporate funds in another corporation or business or for any other business
purpose Subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified by the stockholders
representing at least 2/3 of the outstanding capital stock, or at least by 2/3 of the members in the
case of non-stock corporations, at a stockholders or members meeting duly called for that purpose.
Written notice of the proposed investment and the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage prepaid or served
personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this
Code: Provided however, That where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders
or members shall not be necessary.
DE LA RAMA v. MA-AO SUGAR CENTRAL CO.
Facts: De la Rama et.al. contend that Ma-ao Sugar Central through its President, subscribed P300,000
worth of capital stock of the Philippine Fiber Processing Co. Inc. They allege that the time of the first
two payments were made there was no board resolution authorizing the investment and that it was only
before the third payment that the President was so authorized by the Board of Directors. De la Rama
also contends that even assuming, arguendo, that the said Board Resolutions are valid, the
transaction is still wanting in legality, no resolution having been approved by the affirmative vote of the
stockholders holding shares in the corporation, entitling them to at least 2/3 of the voting power.
STATUTORY REQUIREMENT
Power to shorten or
1. Approved by a majority vote of
extend corporate term the Board of Directors (majority of
the quorum)
(Sec. 37)
PROCEDURE
1.
Written notice to
each stockholder
2. Ratified by at least
2/3 of the OCS or
2/3 of members in a non-stock
corporation.
Power to increase
1.
Approved by a majority vote 1. Written notice to
capital stock and also of the Board of Directors (majority each stockholder
the power to decrease of quorum)
capital stock (Sec. 38)
Special documentary
2.
Ratified by at least
requirements:
2/3 of the OCS
Prior approval of the
SEC; SEC shall not
accept for filing unless
with a sworn statement
by treasurer that 2525 rule complied with
SEC approval triggers
effectivity
WITH
OR
WITHOUT
APPRAISAL RIGHT
Extension: Yes, such constitutes
a novation of the contract.
Shortening: No, but not because
such is inherent, because such is
not inherent as it constitutes an
alteration of the powers granted it
by the State.
None
drains
the
Corporation of financial
resources contrary to the
purpose for which the power is
exercised.
None
1.
2.
Approved
by
a
majority vote of the
Board of Directors
(majority of quorum)
Ratified by at least
2/3 of the OCS
As a g e n e r a l
rule,
section 42 applies if the
i n ve st m e n t
is
for
secondary or other than
the primary purpose.
Exception: If the
investment is
reasonably necessary
to accomplish its
primary purpose as
stated in the Articles of
Incorporation, approval
of the stockholders is
not necessary as it is
included in the Business
Judgment of theBOD
Power
to
declare Cash dividends:
dividends(Sec.43)
(1)Absolute majority of
Board of Directors in
accordance with the
Business Judgment Rule
(2) Only declared out of the
URE which shall be payable
in cash, in property or in
stock
(3)However,
cash
dividends
due
on
delinquent shares shall be
first applied to the unpaid
balance
while
stock
dividends shall be withheld
until fully paid
Stock dividends:
Approval of 2/3of the OCS at
a regular or special meeting
called for that purpose.
Yes, because
minus
the ratificatory vote, the
contractor
transaction
falls under the realm of
ultra vires transactions
of the third type.
Yes.
1. When justified by
definite corporate
expansion projects or
programs as approved
by the Board of
Directors
2. When corporation is
prohibited under any
loan agreement from
declaring dividends
without its consent and
such consent has not yet
been secured, or