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01 - Tayag v. Benguet Consolidated, Inc. (1968) (Concession Theory)
Doctrines:
• A corporation is an artificial being created by operation of law.
Facts:
Idonah Slade Perkins owned 2 stock certificates covering 33,002 shares of stock of Benguet Consolidated Inc.
Perkins died in 1960 in New York City. The stock certificates were then held by County Trust Company [CTC] of New
York, who was the domiciliary administrator of her estate.
Thereafter, Renato D. Tayag was appointed ancillary administrator of Perkins’ properties in the Philippines. A
dispute arose between the domiciliary administrator in new York and the ancillary administrator in the Philippines as to
which of them was entitled to the possession of the stock certificates.
The CFI of Manila then ordered CTC to produce and deposit the certificates with the ancillary administrator. The
domiciliary administrator refused to do so. As a result, the ancillary administrator petitioned the court to issue an order
declaring the certificates to be lost. The order was issued and Benguet was ordered to issue new certificates to be
delivered to the ancillary administrator.
Benguet Consolidated now questions such ruling, admitting that as far as it was concerned, it is immaterial as to
who is entitled to the possession of the stock certificates, but opposing the declaration that such certificates were lost, as
they were in fact known to be in the possession of the domiciliary administrator in New York. In its view, under the
circumstances, the stock certificates cannot be declared or considered as lost.
Issues:
1. W/N the CFI erred in declaring the certificates lost?
Held/Ratio:
1. NO. Since there was a refusal by the domiciliary administrator in New York to deliver the shares of stocks of
Benguet to the ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in
considering them as lost and requiring the appellant to issue new certificates in lieu thereof. Any other view
would result in the compliance to a valid judicial order being made to depend on the uncontrolled discretion of the
domiciliary administrator. To sustain Benguet’s contentions would mean that a judicial decree could be treated as
a mere scrap of paper, the court issuing it being powerless to remedy its flagrant disregard. What cannot be
disputed is the indispensable role that legal fictions play in the law.
Moreover, the view adopted by Benguet Consolidated is fraught with implications at war with the basic postulates
of corporate theory. A corporation is an artificial being created by operation of law. According to Fletcher, “A
corporation 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.” Dean
Pound’s terse summary that a corporation is a juristic person, resulting from an association of human beings
granted legal personality by the State, puts the matter neatly. A corporation as known to Philippine jurisprudence
is a creature without any existence until it has received the imprimatur of the State acting according to law. It is
logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator.
More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, specifically the
judiciary. It is not immune from judicial control. To assert that it can choose which court order to follow and
which to disregard is to confer upon it not autonomy which may be conceded but license which cannot be
tolerated.

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02 - Stockholders of Guanzon v. Register of Deeds (1962) (transfer or distribution)
Doctrines:
• A corporation is a juridical person distinct from the members composing it. Properties registered in the name of
the corporation are owned by it as an entity separate and distinct from its members.
Facts:
The five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets of the
corporation reciting, among other things, that by virtue of a resolution of the stockholders, they are dissolving the
corporation; they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the
assets of said corporation, including real properties located in Manila. The certificate of liquidation, when presented to the
Register of Deeds of Manila, was denied registration on seven grounds, of which the following were disputed by the
stockholders:
1. The number of parcels was not certified to in the acknowledgment;
2. P430.50 registration fees need be paid;
3. P940.45 documentary stamps need to be attached to the document;
4. The judgment of the Court approving the dissolution and directing the disposition of the assets of the corporation
needs to be presented.
Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled the last
disputed ground and sustained the first three. The stockholders appealed, contending that the certificate of liquidation is
not a conveyance or transfer but merely a distribution of the assets of the corporation which has ceased to exist for having
been dissolved.
Note: If it is merely a distribution, the certificate need not contain a statement of the number of parcel of land
involved in the distribution in the acknowledgment appearing therein. Not being a conveyance the certificate need not
contain a statement of the number of parcel of land involved in the distribution in the acknowledgment appearing therein.
Hence the amount of documentary stamps to be affixed thereon should only be P0.30 and not P940.45, as required by the
Register of Deeds.
Issues:
1. W/N the certificate merely involves a distribution of the corporation’s assets or such should be considered a
transfer or conveyance.
Held/Ratio:
1. IT IS A TRANSFER OR CONVEYANCE. A corporation is a juridical person distinct from the members
composing it. 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. The corporation has property of its own which consists chiefly of real estate. 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 stockholder is not a co-
owner or tenant in common of the corporate property.
Since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their
title from the corporation to the stockholders in proportion to their shareholdings — and this is in effect the
purpose which they seek to obtain from the Register of Deeds of Manila — that transfer cannot be effected
without the corresponding deed of conveyance from the corporation to the stockholders

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03 - Pioneer Insurance & Surety Co. v. CA (1989) (Southern Airlines, No Corporation)
Doctrines:
1. Can a defective attempt to form a corporation result at least in a Partnership?
a. General Rule: Yes. It is ordinarily held that persons who attempt, but fail, to form a corporation and who
carry on business under the corporate name occupy the position of partners inter se.
b. Exception: (Pioneer) One who takes no part except to subscribe for stock in a proposed corporation which
is never legally formed does not become a partner with other subscribers who engage in business under
the name of the pretended corporation.
2. COCHINGYAN: Pioneer is an exception because the supposed “partners” were passive. They had no
participation in the venture except to contribute stocks. They did not represent themselves to the public to be
partners.
Facts:
[This is a consolidated case; one is an appeal by Pioneer from the decision of the CA dismissing their complaint against
Lim, Bormaheco, the Cervanteses and Maglana. The second is an appeal by Jacob Lim from the CA’s decision ordering
him to reimburse the contributions of Bormaheco, the Cervanteses and Maglana. The relevant issue is found in the second
case.]
Jacob Lim owned Southern Air Lines (SAL), a single proprietorship. In 1965, Lim went to Tokyo, Japan to
purchase from Japan Domestic Airlines (JDA) two (2) aircrafts and a set of necessary spare parts worth $109,000, payable
in installments. Pioneer insurance engaged itself as surety on behalf of Lim and executed a surety bond in favor of JDA.
Respondents Bormaheco Inc., Modesto and Francisco Cervantes and Constancio Maglana contributed to the purchase
of the aircrafts and spare parts. The funds were supposed to be contributions to a new corporation proposed by Lim
to expand his airline business. Lim, Bormaheco, the Cervanteses and Maglana also executed an indemnity agreement
whereby they engaged to be solidarily liable to Pioneer in case the latter is forced to pay JDA. Moreover, Lim executed a
deed of chattel mortgage on the aircrafts as security for Pioneer’s suretyship.
Not long after, Lim defaulted on paying his installments. Pioneer was forced to pay JDA the remaining balance of
the purchase price. Pioneer instituted a case against Lim, Bormaheco, the Cervanteses and Maglana for extrajudicial
foreclosure with an application for a writ of preliminary attachment over the aircrafts. Maglana, Cervanteses and
Bormaheco, by way of a counterclaim, alleged that they were not privy to the chattel mortgage contract and sought
damages as well as recovery of their contributions from Lim. The trial court upheld Pioneer’s claim against Lim but
dismissed the claim against Maglana, the Cervanteses and Bormaheco and ordered Lim to reimburse them the value they
contributed to the purchase of the aircrafts.
The CA dismissed Pioneer’s claim altogether but upheld the right of Bormaheco, Maglana and the Cervanteses to
be reimbursed their contribution. Thus this appeal was made. Lim contends that for failure to incorporate, at the very
least, what existed between him, Bormaheco Inc., the Cervanteses and Maglana was a partnership wherein all of
them shall be liable for the losses of the venture.
Issue:
1. W/N a partnership existed between Lim, Bormaheco Inc., Maglana, and the Cervanteses.
Held/Ratio:
1. NO. As a general rule, persons who attempt, but fail, to form a corporation and who carry on business under the
corporate name occupy the position of partners inter se. However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist and it should be implied only when necessary to do justice between
the parties. One who takes no part except to subscribe for stock in a proposed corporation, which is never
legally formed, does not become a partner.

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A partnership relation between certain stockholders and other stockholders, who were also directors, will
not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of
debts illegally contracted by the latter.
In the case at bar, the SC held that Lim had no intent to form a corporation with Bormaheco, Maglana and the
Cervanteses. What Bormaheco, Maglana and the Cervanteses made were mere contributions to a proposed
corporation. They did not intend to become partners. They were merely stockholders. The chattel mortgage
entered into was an action of Lim in his personal capacity and not as a representative of the supposed
“partnership.” They cannot be held liable for the losses.
Side Notes:
• Pioneer’s case (1st case) was dismissed because the Court found out that Pioneer had their suretyship reinsured
with another company who already paid them for their loss.
• Ano ba ‘yung reinsurance bakit parating lumalabas? Reinsurance = The insurance company, pina-insure yung
risks na pinasok nila sa isa pang insurance company.

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04 - Lim Tong Lim v. Philippine Fishing Gear Industries, Inc. (1999) (by estoppel)
Doctrines:
• Under the law on estoppel, including that under Sec 21 of the Corporation Code, not only those who actually
participated in the contract or transactions can be held as general partners, but also those who may not have
directly transacted on its behalf, but reaped the benefits from the contract.1
Facts:
This is Petition for Review on Certiorari filed by petitioner-LIM assailing the CA’s decision, affirming the trial
court’s ruling finding the petitioner jointly liable (along with Antonio Chua and Peter Yao) for unpaid purchase price of
fishing nets and nets owing to Philippine Fishing Gear Industries, Inc. (PFGI).
Chua and Yao, on behalf of Ocean Quest Fishing Corp., entered into a contract for the purchase of fishing nets
from respondent-PFGI. They claimed that they were engaged in a business with petitioner-LIM who was not a signatory
of the agreement. However, the buyers failed to pay for their purchases; hence, PFGI filed a collection suit against Chua,
Yao and Lim with a prayer for a writ of preliminary attachment.
Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to pay. Yao, on
the other hand, filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to
present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim filed an Answer
with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.
The trial court ruled that a partnership existed among the Lim, Chua and Yao and held them jointly liable to pay
PFGI based on the testimonies of witnesses presented and the Compromise Agreement executed by the three.
The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of the profit and loss. The evidence establishes that all the
defendants undertook a partnership for a specific undertaking (commercial fishing). The ultimate undertaking of the
defendants was to divide the profits among themselves, which is what a partnership essentially is. Petitioner-LIM claims
that he should not be held liable for the purchase price since he was not part of the negotiations with respondent-PFGI.
Furthermore, he claims that the trial court and the CA, should not base the existence of a partnership on the sole basis of
the Compromise Agreement.
Issues:
1. W/N by their acts, Lim, Chua, and Yao could be deemed to have entered into a partnership.
2. W/N under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao and not to Lim.
Held/Ratio:
1. YES. From the factual findings of both lower courts, it is clear that Chua, Yao and Lim are partners. In
their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among them the excess or loss. That the parties agreed that any loss or
profit from the sale and operation of the boats would be divided equally among them also shows that they had
indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets
and the floats in furtherance of their business. It would have been inconceivable for Lim to involve himself so

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1. Sec 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.

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much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could
not have proceeded.
2. NO. Under the doctrine of corporation by estoppel, all those who benefited from the transaction made by
the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they
impliedly assented to or took advantage of. Unquestionably, petitioner benefited from the use of the nets found
inside F/B Lourdes, the boat that has earlier been proven to be an asset of the partnership.
Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the
three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the
benefits of the contract entered into by persons with whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel.

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NATURE AND ATTRIBUTES OF A CORPORATION


05 - PNB v. CA, Tapnio and Phil-Am (1978) (torts; from 2.8 to 3.0)
Doctrines:
• A corporation is civilly liable in the same manner as natural persons for torts. That a principal is liable for every
tort which he expressly directs or authorizes, is just as true of a corporation as a natural person.
Facts:
Phil-Am General Insurance executed its bond with a certain Rita Tapnio as principal, in favor of itself, to
guarantee the payment of Tapnio’s account with said bank. In turn, to guarantee the payment of whatever amount the
bonding company would pay to the PNB, both Tapnio and her husband executed an indemnity agreement, under the terms
and conditions of which there was stipulations of 12% interests and 15% attorney’s fees.
Needless to say, Tapnio defaulted on her obligations. Even after having sent several reminders of her debt both
from the bank and Phil-Am, she did not pay. Frustrated, PNB demanded payment from Phil-Am, Phil-Am paid, and Phil-
Am then went after Tapnio, sending both oral and written demands.
Tapnio claims, however, that she did not consider herself to be indebted to the bank at all because she had an
agreement with one Tuazon whereby she had leased to the latter her unused export sugar quota consisting of 1000 piculs
at the rate of P2.80 per picul, or for a total of P2800, which was already in excess of her obligation. Apparently, she
mortgaged this lease agreement to the bank. However, PNB has placed obstacles to the consummation of the lease, most
important of which is insisting on a P3.0 per picul rate, which would have earned only an additional P200 for PNB. The
delay caused by said obstacles forced Tuazon to ditch Tapnio. Thus, Tapnio filed her third-party complaint (based on tort)
against PNB to recover from the latter any and all sums of money which may be adjudged against her and in favor of Phil-
Am plus moral damages, attorney’s fees and costs.
There is no question that Tapnio’s failure to utilize her sugar quota was due to the disapproval of the lease by the
PNB.
Issues:
1. W/N PNB is liable for the damage caused to Tapnio.
2. COROLLARY: W/N a corporation can be liable for torts.
Held/Ratio:
1. YES. While PNB had the ultimate authority of approving or disapproving the proposed lease since the quota was
mortgaged to it, the law makes it imperative that every person “must in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.” In other
words, PNB should have exercised reasonable case. In this case, PNB failed to do so. Certainly, it knew that the
agricultural year was about to expire, that by its disapproval of the lease Tapnio would be unable to utilize the
sugar quota in question. In failing to observe the reasonable degree of care and vigilance which the surrounding
circumstances reasonably impose, PNB is consequently liable for the damages caused on Tapnio.
2. YES. A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking,
the rules governing the liability of a principal for a tort committed by an agent are the same whether the principal
be a natural person or a corporation, and whether the agent be a natural or artificial person. A principal is liable
for every tort which he expressly directs or authorizes, and this is just as true of a corporation as of a natural
person. A corporation is liable, therefore, whenever a tortious act is committed by an officer or agent under
express direction or authority from the stockholders or members acting as a body, or, generally, from the directors
as the governing body.

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06 - Professional Services v. CA (2010) (ForMed case, 2 gauzes)
Doctrines:
• While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors, surgeons and
medical practitioners in the conduct of its business of facilitating medical and surgical treatment. Within that
reality, three legal relationships crisscross: (1) between the hospital and the doctor practicing within its premises;
(2) between the hospital and the patient being treated or examined within its premises; and (3) between the patient
and the doctor. Regardless of its relationship with the doctor, the hospital may be held directly liable to the patient
for its own negligence or failure to follow established standard of conduct to which it should conform as a
corporation
Facts:
In 1984 Natividad Agana was suffering from “cancer of the sigmoid”. She had a surgery (hysterectomy) in
Medical City, performed by Drs. Ampil (the Agana’s neighbor) and Fuentes. But the surgery appeared flawed. The
attending nurses entered these remarks:
“Sponge count lacking 2” “announced to surgeon search done but to no avail.”
After a couple of days Natividad complained of pain in her anal region. She consulted both her doctors but they
said it was the natural consequence of the surgery. Dr. Ampil later recommended that she see an oncologist.
Consequently, she went to the states for consultation, and there she was told she was fee of cancer. When she came back
to the Phil. still suffering from pains, her daughter found a piece of gauze protruding from her vagina. Dr. Ampil then
proceeded to the Aganas and removed from Natividad a gauze measuring 1.5 in.
Afterwards, Natividad’s pains intensified, despite the assurance of Dr. Ampil that the pain would soon go away.
Then, Natividad went to Polymedic General Hospital, where it was detected a presence of a (foul smelling) gauze
measuring 1.5 inches in width. The gauze had badly infected her vaginal vault. A recto-vaginal fistula had formed in her
reproductive organ which forced stool to excrete through the vagina. Therefore Natividad underwent another surgery.
Natividad and her husband filed with the RTC, a complaint for damages against PSI (owner of Medical City), Dr.
Ampil and Dr. Fuentes. During the pendency of the case Natividad died and was substituted by her children.
The RTC held PSI solidarily liable with Dr. Ampil and Fuentes. On appeal, the CA absolved Dr. Fuentes but held
Ampil liable with PSI, subject to the right of PSI to claim from Ampil.
Professional Services, Inc. (PSI) filed a second motion for reconsideration urging referral thereof to the Court en
banc and seeking modification of the decision dated January 2007 and resolution dated February 2008 which affirmed its
vicarious and direct liability for damages to respondents Enrique Agana and the heirs of Natividad Agana (Aganas).
Manila Medical Services, Inc. (MMSI), Asian Hospital, Inc. (AHI), and Private Hospital Association of the
Philippines (PHAP)5 all sought to intervene in these cases invoking the common ground that, unless modified, the assailed
decision and resolution will jeopardize the financial viability of private hospitals and jack up the cost of health care.
Issues:
1. W/N PSI is liable to the Aganas under the principle of ostensible agency.
2. W/N PSI was liable to Natividad under the doctrine of corporate negligence.
Held/Ratio:
1. YES. This Court holds that PSI is liable to the Aganas, not under the principle of respondeat superior for lack of
evidence of an employment relationship with Dr. Ampil but under the principle of ostensible agency for the
negligence of Dr. Ampil and, pro hac vice, under the principle of corporate negligence for its failure to perform
its duties as a hospital.
While in theory a hospital as a juridical entity cannot practice medicine, in reality it utilizes doctors, surgeons and
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reality, three legal relationships crisscross: (1) between the hospital and the doctor practicing within its premises;
(2) between the hospital and the patient being treated or examined within its premises and (3) between the patient
and the doctor. The exact nature of each relationship determines the basis and extent of the liability of the hospital
for the negligence of the doctor.
The reasons the patient had for choosing Dr. Ampil was not only because he was a specialist in that body part as a
surgeon but also because he was known to be a staff member of Medical City. Clearly, the decision made was
clearly influenced by this impression of Dr. Ampil not as an independent but as integrally related to Medical City.
Also, it is of record that PSI required a “consent for hospital care” to be signed preparatory to the surgery of
Natividad. The form reads:
Permission is hereby given to the medical, nursing and laboratory staff of the Medical City
General Hospital to perform such diagnostic procedures and to administer such medications and
treatments as may be deemed necessary or advisable by the physicians of this hospital for and
during the confinement ... .
By such statement, PSI virtually reinforced the public impression that Dr. Ampil was a physician of its hospital,
rather than one independently practicing in it; that the medications and treatments he prescribed were necessary
and desirable; and that the hospital staff was prepared to carry them out.
So, the two factors that determine apparent authority are present: (1) The hospital’s implied manifestation to the
patient which led the latter to conclude that the doctor was the hospital’s agent; and (2) the patient’s reliance upon
the conduct of the hospital and the doctor, consistent with ordinary care and prudence.
2. YES. First, it already constitutes a judicial admission that PSI had the power to review or cause the review of that
may have irregularly transpired within its walls.
Second, it is already a judicial admission because of the nature of its business as well as its prominence in the
hospital industry; it assumed a duty to tread on “the captain of the ship” role of doctor rendering services within
its premises.
Third, by such admission, PSI defined the standards of its corporate conduct under the circumstances of this case,
specifically: (a) that it had a corporate duty to Natividad even after her operation to ensure her safety as a patient;
(b) that its corporate duty was not limited to having its nursing staff note or record the two missing gauzes and (c)
that its corporate duty extended to determining Dr. Ampil’s role in it, bringing the matter to his attention, and
correcting his negligence.

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07 - West Coast Life Insurance v. Hurd (1914) (libel)
Doctrines:
• Corporations, as such, cannot commit a crime in which malicious intent or purpose is required. Criminal actions,
in these cases, are limited to the officials of such corporation.
Facts:
West Coast Life Insurance is a foreign life-insurance corporation duly organized in California and doing business
regularly and legally in the Philippines. In December 1912, an information was filed against the corporation — along with
the general manager and the treasurer — charging them of the crime of libel. The information alleged that West Coast
Life and the two others feloniously confederated to print and distribute circulars to policy holders of Insular Life
Insurance Company, stating that the rumor about it is true regarding it being in a bad shape and its capital having been
severely depleted. The CFI Judge, acting on this, issued a summons (order to appear before the court) directed to the
corporation and the other accused.
The corporation countered, saying that Court of First Instance has no power or authority to proceed against a
corporation, as such, criminally, to bring it into court for the purpose of making it amenable to the criminal laws.
Issues:
1. W/N a corporation can also be criminally charged.
Held/Ratio:
1. NO. First, the provisions of the General Orders (aka the 1900’s Rules of Court), especially those which relate to
the defendant’s name, arraignment and counsel, and to demurrers and pleas, indicate clearly that the legislature
had no intention or expectation that corporations would be included among those who would fall within the
provisions thereof.
Second, the only process that a court can issue under the procedural laws is an order of arrest. As a necessary
consequence, the process issued in this case, a summons, is without express authorization of statute.
Third and most importantly, corporations cannot have malicious intent, an essential element in felonies. Under the
Spanish criminal law and procedure, a corporation could not have been proceeded against criminally; it could not
have committed a crime in which a willful purpose or a malicious intent was required. Criminal actions are
restricted or limited to the officials of such corporations and must never be directed against the corporation itself.
Note:
• There are cases in which corporations have been proceeded against criminally by indictment and have been
punished by the courts. However, in these cases, a statute, by express words or by necessary intendment, included
corporations within the persons who could offend against the criminal laws; and the legislature, at the same time
established a procedure applicable to corporations. In this case, the general criminal laws apply, and nowhere in
the laws is it mentioned that corporations can commit libel.

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08 - People v. Tan Boon Kong (1930) (Manager Kong)
Doctrines:
• The corporation can act only through its officers and agents where the business itself involves a violation law, the
correct rule is that all who participate in it are criminally liable.
Facts:
[one page case, you can choose to read the case if you want ]
During 1924, in Iloilo, Tan Boon Kong as manager of the Visayan General Supply Co. engaged in the purchase
and sale of sugar, bayon, copra, and other native products and as such must pay internal revenue taxes upon is sales.
However, he only declared P2.3 million in sales but in actuality the sales amounted to P2.5 million, therefore failing to
declare for the purpose of taxation about P200,000, not having paid the government P2,000 in taxes. Upon filing by the
defendant of a demurrer, the lower court judge sustained said motion on the ground that the offense charged must be
regarded as committed by the corporation and not its officials.
Issues:
1. W/N the defendant (Kong) as manager may be held criminally liable
Held/Ratio:
1. YES. Ruling reversed. Case remanded. The court held that the judge erred in sustaining the motion because it is
contrary to a great weight of authority. The court pointed out that, a corporation can act only through its officers
and agents where the business itself involves a violation law, the correct rule is that all who participate in it are
criminally liable. In the present case, Tan Boon Kong allegedly made a false return for purposes of taxation of the
total amount of sales for year 1924. As such, the filing of false returns constitutes a violation of law. Him being
the author of the illegal act must be held liable.
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09 - Sia v. People (1983) (Estafa and trust receipts)
Doctrine:
• A corporate officer can be held personally liable for a crime committed in behalf of a corporation only if the
corporation was directly required by law to do the act in a given manner and the same law makes the person who
failed to act in such manner liable
Facts:
Jose Sia was the the President and General Manager of the Metal Manufacturing Co. engaging in the production
of steel office equipment. In 1963, in the need for raw materials to be imported for the company, he transacted under a
trust receipt agreement with Continental Bank for purchase of steel sheets from Japan where such materials shall be
consigned to the same bank. The bank alleged that Sia failed to fulfill his obligation of returning the sheets or accounting
for the proceeds, if sold, which Sia willfully and unlawfully misappropriated to his own personal benefit, to the damage of
Continental Bank. The Bank sues for Sia for Estafa.
Issue:
1. W/N Sia, having only acted for and in behalf of the company as President, may be liable for estafa.
Held/Ratio:
1. NO. The Solicitor General pushes for the applicability of the Tan Boon Kong Doctrine, but the SC disagreed for
the following reasons:
a. A corporate officer can be held personally liable for a crime committed in behalf of a corporation only if
the corporation was directly required by law to do the act in a given manner and the same law makes the
person who failed to act in such manner liable. In all criminal prosecutions, the existence of criminal
liability for which the accused is made answerable must be clear and certain.
The act was committed prior to PD 115 (Trust Receipts Transactions Regulation) which penalizes
responsible officers. Only the RPC was in force at that time, where we can see “trust” under estafa is not
the same as the trust in the commercial sense of trust receipts. Therefore, upholding the principle that all
cases of doubts must be resolved in favor of the accused, Sia must not be made liable.
b. The trust receipt agreement gives rise only to civil liability. The parties to such agreements consciously
entered into a purely commercial transaction where no criminal prosecution which could give rise to
imprisonment for non-payment of a debt.—a debt that should be exclusively paid by the Metal Company
since Sia never intended to be equally liable as a corporation.
Teehankee’s Concurring Opinon:
The acts committed by Sia were all corporate acts. There is no evidence that the corporate acts were unauthorized, or that
he had personally committed fraud or deceit, or that he personally benefited.

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10 - Ching v. Secretary of Justice (2006) (13 trust receipts signed by VP of corporation)
Doctrines:
• If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other
officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the
nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined.
Facts:
Ching was the Senior VP of Philippine Blooming Mills Inc (PBMI). In Sept-Oct 1980, PBMI through Ching,
applied with RCBC for the issuance of commercial letters of credit to finance its importation of assorted goods.
RCBC approved the application, and irrevocable letters of credit were issued in favor of Ching. Afterwards, the goods
were purchased and delivered in trust to PBMI.
Ching signed 13 trust receipts as surety, acknowledging delivery of the goods. Under these receipts, Ching
agreed to hold the goods in trust for RCBC, with authority to sell but not by way of conditional sale, pledge or otherwise.
In case the goods were sold, he’ll turn over the proceeds as soon as he receives it and apply against the relative
acceptances and payment of other debts to RCBC. In case the goods remain unsold within the given period, they will be
returned to RCBC without need for demand. All goods whether manufactured products or its proceeds whether in money,
receivables or accounts will are RCBC’s property.
Trust receipts matured but Ching failed to return the goods nor return their value amounting to
P6,940,280.66 despite demands. This prompted RCBC to file a criminal complaint for estafa in the Office of the City
Prosecutor of Manila. The Prosecutor found probable cause for estafa in relation to the Trust Receipts Law. 13
informations were filed against Ching at the RTC of Manila. He then appealed to the DOJ but was dismissed. Moved for
reconsideration and the DOJ eventually reversed its previous decision. City Prosecutor was ordered to withdraw the 13
informations. RCBC filed an MR which was denied.
In Feb 1995, the bank re-filed the criminal complaint for estafa with the City Prosecutor of Manila again.
Dec 1995, Prosecutor found no probable cause as petitioner’s liability was only civil, not criminal, having signed the
trust receipts as surety.
RCBC appealed the resolution to the DOJ via petition for review. July 1999, DOJ reversed the resolution of the
City Prosecutor. It said that execution of said receipts is enough to indict Ching as the official responsible for
violating the Trust Receipts Law.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the resolutions of
the DOJ but it was dismissed. Thus, this petition.
Issues:
1. W/N the CA erred in ruling that no grave abuse of discretion amounting to lack or excess of jurisdiction was
committed by Secretary of Justice in deciding the resolutions
2. W/N Ching should be held criminally liable
Held/Ratio:
1. NO, the CA is correct.
Petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in issuing the
assailed resolutions. Indeed, Secretary acted in accord with law and the evidence.

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2. YES
There is no dispute that Ching executed the 13 trust receipts and this proves that he is the official responsible for
the offense. Since a corporation CANNOT be proceeded against criminally because it CANNOT commit
crime in which personal violence or malicious intent is required, criminal action is limited to the corporate
agents guilty of an act amounting to a crime and never against the corporation itself.
Ching’s being Senior VP of the PBMI does not exculpate him from any liability.2 He cannot, thus, hide behind
the cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl Warren, a
corporate officer cannot protect himself behind a corporation where he is the actual, present and efficient actor
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11 - Consolidated Bank v. CA, Continental Cement, and Sps. Lim (2001) (Trust Receipts, Not Personally
Liable)
Doctrine:
1. The personality of the corporation is separate and distinct from the persons composing it. (Obiter Dictum)
Facts:
Continental Cement entered into a letter of credit agreement with Consolidated Bank. The letter of credit
agreement was used to purchase bunker fuel from Petrophil. The fuel was delivered to Continental Cement after payment.
Two months thereafter, in relation to the agreement between Consolidated and Continental, a trust receipt was signed
Gregorio Lim, Executive Vice President of Continental.
Consolidated filed a case against Continental, also impleading Lim as respondent. Consolidated alleges that the
goods subject of the trust receipt were not delivered to them. Continental claimed that the agreement was not a trust
receipt agreement but a simple loan. Lim also interposed the defense of separate juridical entity.
Issues:
1. W/N the agreement was a trust receipt agreement.
2. W/N Lim can be made personally liable.
Held/Ratio:
1. NO. The trust receipts were signed two months after the delivery of the fuel by Petrophil to Consolidated. The
Court held that the trust receipt was in truth a contract of adhesion made by the bank to further secure its loan
agreement with Continental. The transaction is a simple loan. The goods need not be delivered to them.
2. NO. The transactions sued upon were clearly entered into by respondent Lim in his capacity as Executive
Vice President of respondent Corporation. We stress the hornbook law that corporate personality is a shield
against personal liability of its officers. Thus, we agree that respondents Gregory T. Lim and his spouse cannot be
made personally liable since respondent Lim entered into and signed the contract clearly in his official capacity as
Executive Vice President. The personality of the corporation is separate and distinct from the persons
composing it.

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2. The crime defined in P.D. No. 115 is malum prohibitum but is classified estafa with abuse of confidence. It may be committed by a corporation
or other juridical entity or by natural persons. However, the penalty for the crime is imprisonment for the periods provided in said Article 315.
It specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of
such corporation and/or board of directors, officers, or other officials or employees responsible for the offense

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12 - Gamboa v. Finance Secretary Teves (2011) (PLDT voting shares as “capital”)
Doctrines:
• The 1987 Constitution “provides for the Filipinization of public utilities by requiring that any from of
authorization for the operation of public utilities should be granted only to ‘citizens of the Philippines or to
corporation or associations organized under the laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens.’ The evident purpose of the citizenship requirement is to prevent aliens from assuming
control of public utilities, which may be inimical to the national interest. This specific provision explicitly
reserves to Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987
Constitution: to “conserve and develop our patrimony” and to ensure a “a self-reliant and independent national
economy effectively controlled by Filipinos.” We rule that the term “capital” in Sec. 11, Art. XII of the
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not the total outstanding capital stock comprising both common
and non-voting preferred shares. (p. 6 of CLV syllabus)
• In the absence of provisions in the articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are often excluded from
any control, that is, deprived of the right to vote in the election of directors and on other matters, on the theory
that the preferred shareholders are merely investors in the corporation for income in the same manner as
bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right
to vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the
articles of incorporation restricting the right of common shareholders to vote is invalid. (p. 47 of CLV syllabus)
Facts:
Prime Holdings, Inc. (PHI) owned 46% of the outstanding capital stock of Philippine Telecommunications
Investment Corporation (PTIC). PTIC owned 26% of the outstanding common shares of PLDT. The PTIC shares held by
PHI were sequestered by the PCGG, and subsequently declared by this Court as part of the ill-gotten wealth of former
President Ferdinand Marcos.
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54% of
the remaining outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of
the Philippine Government announced that it would sell the sequestered 46% percent of the outstanding capital stock of
PTIC, through a public bidding to be conducted on 4 December 2006. First Pacific exercised its right of first refusal as
authorized by the articles of incorporation of PTIC, and bought the 46% (through an affiliate company).
Upon consummation of the sale, First Pacific’s equity in PLDT will go up, and the two largest foreign investors in
PLDT — First Pacific and Japan’s NTT DoCoMo - will collectively own over 40% of PLDT’s common equity. The 1987
Constitution provides under Section 11, Article XII that “No franchise, certificate, or any other form of authorization for
the operation of a 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”
In essence, the facts show that (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only
35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn; (5) preferred shares have twice the par value of common shares; and (6) preferred
shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%.
If the preferred shares is calculated as part of capital, then the sale would not have violated the constitution
limitation. If “capital” is construed as only voting shares, then the sale is unconstitutional.
Issues:
1. W/N the term “capital” in Section 11, Article XII of the Constitution refers to the total outstanding capital stock
(combined total of common and non-voting preferred shares) of PLDT, a public utility.
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Held/Ratio:
1. NO.
Indisputably, construing the term “capital” in Section 11, Article XII of the Constitution to include both voting
and non-voting shares will result in the abject surrender of our telecommunications industry to foreigners,
amounting to a clear abdication of the State’s constitutional duty to limit control of public utilities to Filipino
citizens. Such an interpretation certainly runs counter to the constitutional provision reserving certain areas of
investment to Filipino citizens, such as the exploitation of natural resources as well as the ownership of land,
educational institutions and advertising businesses. This interpretation is supported by the deliberations on the
provision by the Constitutional Commission.
[There were other issues that were passed upon by the court, but are not relevant to corporation law. These include
jurisdiction, locus standi, and the presumption of the provisions of the Constitution to be self-executory.]
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13 - Strategic Alliance Dev. Corp v. Radstock Securities Ltd. (2009) (NLEX/SLEX franchise, void compromise
agreement)
Doctrines:
• The Constitution prohibits foreign corporations from owning lands in the Philippines. Therefore, it is also
prohibited from owning the rights to ownership of lands in the Philippines.
• Radstock, a foreign corporation with unknown owners whose nationalities are also unknown, is not qualified to
own land in the Philippines, and therefore also disquialified to own the rights to ownership of lands in the
Philippines—it is basic that an assignor or seller cannot assign or sell something he does not own at the time of
ownership, or the rights to ownership, are to be transferred to the assignee or buyer. The assignment by PNCC of
the real properties to a nominee to be designated by Radstock is a circumvention of the constitutional prohibition
against a private corporation owning lands in the Philippines.
Facts:
The Construction Development Corporation of the Philippines (CDCP) had a 30-year franchise to construct,
operate and maintain toll facilities in the North and South Luzon Tollways. Basay Mining Corporation, an affiliate of
CDCP, obtained loans from Marubeni Corporation of Japan amounting to P10 billion. A CDCP official issued
letters of guarantee for the loans, committing the CDCP to pay solidarily. Thereafter, CDCP changed its corporate
name to PNCC to reflect the government’s shareholding in the corporation. The government owned 90.3% of the equity
of PNCC. (Isa lang ang PNCC at CDCP, wag ka ma-confuse. CDCP siya nung time na nangutang kay Marubeni tapos
privately owned pa siya nun. Pagkatapos, naging PNCC tapos government owned na.)
The money owing to Marubeni remained unpaid. For so long, this loan, which was secured by CDCP later
renamed PNCC, was not recognized by PNCC in its accounting. But in October 2000, after 20 years, PNCC suddenly
recognized this financial obligation to Marubeni amounting to P10 Billion. Barely 3 months after PNCC recognized their
liability, Marubeni assigned its entire credit to Radstock Corporation for less than P100 million. (Sobrang wtf kasi
20 years hindi inaamin ni PNCC/CDCP na may utang siya kay Marubeni tapos out of nowhere, biglang inacknowledge ni
PNCC na may utang nga siya na 10 billion after all. Tapos 3 months pagkatapos nun, biglang inassign ni Marubeni yung
collectable 10 billion utang na yun kay Radstock for only 100 million.)
Radstock immediately sought to collect this 10 billion loan from PNCC. They filed an action for collection
and damages against PNCC in the RTC of Mandaluyong. Eventually, Radstock and PNCC entered into the
compromise agreement which is the crux of the controversy. The compromise agreement contained the following
stipulations:
• That the obligation of PNCC to Radstock would be reduced to P6 billion
• MOST IMPORTANT THING HERE: That PNCC shall assign to a third party assignee, to be designated
by Radstock, all its rights and interests in specified real properties provided the assignee shall be duly
qualified to own real properties in the Philippines. There are 19 pieces of real estate properties specified
constituting 13 hectares of valuable property with an appraised value of P6 billion. (So ganito, ang gusto nila
mangyari, iaassign ni PNCC yung real property kay yet unnamed third person. Pero si third person ay pipiliin ni
Radstock dahil si Radstock ay foreign corporation at hindi pwede sa kanya i-assign yung real property dahil sa
constitutional prohibition.)
• Less importantly, PNCC shall also assign to Radstock 20% of the outstanding capital stock of PNCC, and 6%
share in the gross toll revenue of the Manila North Tollways Corporation from 2008-2035
Issues:
1. W/N the compromise agreement is valid

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Held/Ratio:
1. NO, the compromise agreement is not valid.
There are many grounds for the invalidity of the compromise agreement but the main focus for our topic would be
the unconstitutionality of the stipulation in the compromise agreement assigning real properties to a third party to
be designated by Radstock.
We will first discuss why Radstock, a foreign corporation cannot own real property in the Philippines. Section 7,
in relation with Section 3, Article XII of the 1987 Constitution prohibits it.
Section. 3. Private corporations or associations may not hold such lands of the public domain
except by lease, for a period not exceeding twenty-five years, renewable for not more than
twenty-five years, and not to exceed one hundred thousand hectares in area. Citizens of the
Philippines may lease not more than five hundred hectares, or acquire not more than twelve
hectares thereof by purchase, homestead, or grant.
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or
conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of
the public domain.
While it is admitted that Radstock as a foreign corporation cannot own real property by itself, it is contended that
Radstock can own the rights to ownership of real property. Those who argue for the validity of the compromise
agreement say that Radstock can be allowed to designate the party to whom the real property is assigned instead
of to itself. This argument cannot be countenanced because it will be a circumvention of the constitutional
prohibition.
Radstock cannot transfer the rights to ownership of land in the Philippines if it cannot own the land itself.
It is basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or
the rights to the ownership, are to be transferred to the assignee or buyer. (Sales concept, ingat ka.) The third party
assignee under the Compromise Agreement who will be designated by Radstock can only acquire rights
duplicating those which its assignor (Radstock) is entitled by law to exercise. Thus, the third party assignee can
acquire ownership of the land only if its assignor, Radstock, owns the land. Clearly, the assignment by PNCC of
the real properties to a nominee to be designated by Radstock is a circumvention of the Constitutional
prohibition against a private foreign corporation owning lands in the Philippines. Such circumvention
renders the Compromise Agreement void.
***Just in case sir asks, the other grounds for invalidity of the compromise agreement are:
• Remember the less important assignments of 6% of revenues from toll payments, and 20% stock capital to
Radstock in the compromise agreement? This is also not allowed because the franchise of PNCC has already
expired and all its assets turned over to the government. Therefore, the revenues and stock capital belong to the
government. There can be no disbursement of public funds without appropriation by congress. The compromise
agreement is not an appropriation by congress.
• Public bidding is required to dispose of governmental property. Mere assignments are prohibited.
• PNCC must follow preference of credit. PNCC has other creditors, among them the national government which
should be paid first, and other creditors who have final and executory judgements against PNCC. The loan from
Marubeni is unsecured and should be one of the last to be paid. So the compromise agreement effectively
satisfying the unsecured loan to Marubeni before the preferred creditors is invalid. (Hello, Sectrans? Please love
me.)

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14 - The Roman Catholic Apostolic Administrator of Davao, Inc. v the LRC (1957)
Facts:
Mateo Rodis executed a deed of sale over a parcel of land in favor of The Roman Catholic Apostolic
Administration of Davao Inc — a corporation sole. Msgr. Clovis Thibault, a Canadian citizen, was then the actual
incumbent of the church. When the deed was presented for registration to the register of deeds and then elevated to the
Land Registration Commission, the commissioner denied the registration. The commissioner contends that it failed to
comply with the constitutional requirement that at least 60% of the capital of the corporation must be owned by Filipino
citizens.
Issue:
1. W/N the Roman Catholic Apostolic Administration in the Philippines may acquire or be assigned and hold private
agricultural lands.
Held/Ratio:
1. Yes.
A corporation sole, unlike the ordinary corporations, is composed of only 1 person, a unit which is not subject to
expansion for the purpose of determining any percentage whatsoever. It is a special form of corporation usually
associated with the clergy; it was designed to facilitate the exercise of the functions of ownership carried on by
the clerics for and on behalf of the church. It consists of one person only, and his successors (who will always be
one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities
and advantages, particularly that of perpetuity, which in their natural persons they could not have had.
A corporation sole is only the administrator and not the owner of the temporalities located in the territory
comprised by it. The corporation sole merely holds the properties in trust for the benefit of the faithful,
residing within its territorial jurisdiction. The nationality of its constituents, and not that of its incumbent, should
therefore be taken into consideration.
A corporation sole has no nationality as to disqualify it from owning agricultural lands in the Philippines. The
court believes that the framers of the constitution had not in mind the corporation sole, nor intended it to apply to
the provisions of section 1 and 5 of article XIII (1935 Constitution) when they passed and approved the same,
otherwise it would lead to an absurd interpretation.
Differentiate with Rod v Ung Sui Si Temple:
The SC held in Sui Si Temple that even when the religious organization has no capital stock, it would still not
suffice to escape the constitutional inhibition since its members are of foreign nationality. The spirit of the
constitution demands that in the absence of capital stock, the controlling membership should be composed of
Filipino citizens.
The difference between Sui Si Temple and the present case is that the former was not a corporation sole but a
corporation aggregate. The present case involves a registered corporation sole, evidently of no nationality and
registered mainly to administer the temporalities and manage the properties belonging to the faithful of said
church residing in Davao. In the issue of citizenship requirement, the members of the Roman Catholic Apostolic
faith within the territory of Davao are predominantly Filipino Citizens (more than 80%). As to its clergy and
religious composition, counsel for the petitioner presented the Catholic Directory of the Philippines for 1954
which revealed that as of that year, Filipino Clergy and women novices comprises already 60.5% of the group. It
was therefore clear that the constitutional requirement was fully met and satisfied.

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15 - People v. Quasha (1953)
Doctrines:
• The Constitution does not prohibit the mere formation of public utility corporation without the required formation
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.
• “Primary franchise” refers to the franchise which invests a body of men with corporate existence while
“secondary franchise” is the privilege to operate as a public utility after the corporation has already come into
being.
Facts:
William Quasha, a member of the Philippine Bar was charged in the CFI of Manila with falsification of a public
and commercial document. Having been entrusted with the preparation and registration of the articles of incorporation
of Pacific Airways Corporation, a domestic corporation engaged in business as a common carrier, he caused it to appear
that one Arsenio Baylon, a Filipino has subscribed to and was the owner of 60.005% of the subscribed capital stock.
However, in truth, the real owner of said portion were American citizens whose name did not appear in the articles of
incorporation. The purpose of such 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 stock is owned by Filipinos.
CFI found him guilty. He appeals.
Issue:
1. W/N Quasha is guilty of falsification of public and commercial document.
Held/Ratio:
1. It is admitted that the money paid on Baylon’s subscription did not belong to him but to the American subscribers
to the corporate stock. Baylon explained that in the process of the organization of the corporation, he was made a
trustee for the American incorporators who had a difficulty in deciding what their respective share holdings would
be.
The falsification imputed in the accused consists in not disclosing in the articles of incorporation that
Baylon was a mere trustee (or dummy) of his American co-incorporators, thus giving the impression that he was
the owner of the shares subscribed to by him which amounted to 60.005% of the subscribed capital stock.
Contrary to the lower court’s assumption, the Constitution does not prohibit the mere formation of public
utility corporation without the required formation 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.
For the mere formation of the corporation, Quasha was under no obligation to disclose the fact that he was merely
a trustee of his American co-incorporators. The Corporation Code likewise does not require such revelation. 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.
Moreover, from the context of the law, the provision qualifies the terms, “franchise,” “certificate,” or “any other
form of authorization” with the phrase “for the operation of a public utility.” Therefore, it is clear that the
franchise meant is not the “primary franchise” that invests a body of men with corporate existence but rather
it pertains to the “secondary franchise” or the privilege to operate as a public utility after the corporation
has already come into being.
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. A corporation formed with capital that is entirely alien may
subsequently change the nationality of its capital through transfer of shares to Filipino citizen. The converse may
also happen. The moment for determining whether the corporation is entitled to operate as a public utility is when
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it applies for franchise, certificate, or any other form of authorization for that purpose. At that time, the
corporation must show that it has complied with the necessary capital requirements of Filipino capital.

16 - Tatad v. Garcia Jr. (1995) (EDSA LRT)


Doctrines:
• The Constitution requires a franchise for the operation of a public utility; however, it does not require a franchise
before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the
public. There is a clear distinction between “operation” of a public utility and the ownership of the facilities and
equipment used to serve the public.
Facts:
In 1989, the DOTC planned to construct the EDSA LRT. By 1990, the BOT law was passed and provided for two
schemes for the financing, construction, and operation of government projects through private initiative and investment:
Build-Operate-Transfer (BOT) or Build-Transfer (BT). Pursuant to the BOT law, DOTC issued Department Orders for the
prequalification of interested corporations. Five groups responded to the invitation, but based on the prequalification
criteria, only EDSA LRT Consortium met the requirements. EDSA LRT Consortium was composed of ten foreign and
domestic corporations. Because it was the only qualified bidder, the President ordered the DOTC to proceed with
negotiations. EDSA LRT Consortium presented its bids; the DOTC found them to be in compliance with bid
requirements; then they entered into an “Agreement to Build, Lease, and Transfer a Light Rail Transit System for EDSA”
under the terms of the BOT law.
When the DOTC Secretary asked for approval of the contract, the Executive Secretary informed him that the
President could not grant the requested approval based on a number of reasons, the main contention being that there was
no public bidding, in contravention of the BOT law. There was a subsequent revision of the contract, Ramos replaced
Cory (and other officers involved), and the contract was approved by Ramos. According to the agreements, EDSA LRT
Corp. Ltd. (substituted EDSA LRT Consortium) would build and finish the LRT system in 3 years. Upon completion,
EDSA LRT Corp. Ltd. would deliver the use and possession of the LRT system to the DOTC, which shall operate it.
DOTC would pay EDSA LRT Corp. Ltd. rentals on a monthly basis, which would come from the earnings of the LRT.
After 25 years of complete payment of rentals, ownership of the project shall be transferred to the DOTC for $1.
Subsequently, in 1994, RA 7718, which amended the BOT law, was enacted and expressly recognized the Build-Lease-
Transfer scheme and allowed direct negotiation of BLT contracts.
Tatad, Osmena, and Biazon, as senators and taxpayers, challenge the validity of the agreements on constitutional
grounds, stating that since EDSA LRT Corp. Ltd. was a foreign corporation (duly incorporated and existing under the
laws of Hongkong), it could not own the LRT, being a public utility. They also contend that there was no public bidding,
that the agreements contravened the BOT law (in many ways), and that the contracts are disadvantageous to the
government.
Issues:
1. W/N the BLT agreements with EDSA LRT Corp. Ltd. are constitutional
2. W/N the BLT agreements are allowed under the BOT law
3. W/N the lack of public bidding invalidates the agreements
Held/Ratio:
1. YES, the agreements are constitutional.
What EDSA LRT Corp. Ltd. owns are the rail tracks, coaches, rail stations, terminals, and the power plant, not a
public utility. While a franchise is needed to operate these facilities to serve the public, they do not by themselves
constitute a public utility. What constitutes a public utility is not their ownership but their use to serve the public.

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The Constitution requires a franchise for the operation of a public utility. However, it does not require a franchise
before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the
public.
The Constitution (art. XII, § 11) provides that, “[n]o franchise ... for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations ... organized under the laws of the Philippines at
least sixty per centum of whose capital is owned by such citizens ... .” There is a clear distinction between the
“operation” of a public utility and the ownership of the facilities and equipment needed to serve the public. The
exercise of the rights encompassed in ownership is limited by law so that a property cannot be operated and used
to serve the public as a public utility unless the operator has a franchise. The right to operate a public utility may
exist independently and separately from the ownership of the facilities thereof.
In the instant case, DOTC shall operate the LRT while EDSA LRT Corp. Ltd. shall own the facilities and provide
technical support. EDSA LRT Corp. Ltd. will not run the light rail vehicles and will not collect fees from the
riding pubic. It will have no dealings with the public and the public will have no right to demand any services
from it. Therefore, EDSA LRT Corp. Ltd. will not operate a public utility, thereby not violating any constitutional
provision.
2. YES, they are allowed. Under the BOT scheme, the contractor undertakes the construction and financing of the
facility, then operates the same for a fixed period or rate of return, then upon expiration of the term, transfers the
ownership and operation to the government. On the other hand, in a BT scheme, the contractor undertakes the
construction and financing of the facility, then immediately after completion transfers the ownership and
operation to the government.
Under the BOT scheme, the citizenship requirement must be complied with; however, no such requirement is
imposed in the BT scheme, as the public utility is not operated. In the instant case, the BLT scheme is but a
variation of the BT scheme under the BOT law. The agreements are, in effect, lease-purchase agreements.
3. NO, the agreements are still valid even without public bidding.
EDSA LRT Corp. Ltd. was the only corporation that passed the prequalification requirements. Under PD 1594
(“Prescribing Policies, Guidelines, Rules, and Regulations for Government Infrastructure Contracts”), negotiated
award of government projects are allowed “in exceptional cases where time is of the essence, or where there is a
lack of qualified bidders or contractors ... .” In fact, direct negotiation of contracts is specifically provided for in
RA 7718 (which amended the BOT law) in cases where there is only one complying bidder, rendering the
contention moot and academic.

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17 - Unchuan v. Lozada (2009) (investment test as to Phil. Nationals, at least 60% of the capital stock)
Doctrines:
• Under Sec. 3 of the FIA ‘91, a corporation organized under the laws of the Philippines of which at least 60% of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Phil., is considered a
Philippine national.
Facts:
Anita and Peregrina, sisters who are based in the USA, are co-owners of 2 lots in Cebu. They sold the lots to
their nephew (Antonio) under a Deed of Sale. Armed with a special power of Attorney from Anita, Peregrina went to
the house of their brother (Dr. Lozada AN AMERICAN CITIZEN) who agreed to advance the purchase price of 10
million for Antonio. The Deed of sale was notarized and authenticated and forwarded everything in the Philippines.
Upon receipt of said documents, Antonio recorded the sale with the Register of Deeds. The corresponding TCT’s were
then issued to Antonio.
Pending registration of the deed, Marissa Unchuan (petitioner) caused the annotation of an adverse claim because
she claimed that Anita donated an undivided share in the lots to her under an unregistered Deed of Donation. Anita and
Antonio filed for quieting of title while Unchuan wanted the Deed of Sale to be declared void.
At the trial, Dr. Lozada testified that he agreed to advance payment for Antonio in preparation for their plan to
form a corporation. The lots are to be eventually infused in the capitalization of DAMASA Corp., where he and
Antonio are to have 40% and 60% stake, respectively.
Issues:
1. CORP RELATED: W/N Antonio and Dr. Lozada violated the public policy prohibiting aliens from owning lands
in the Philippines?
Held/Ratio:
1. NO
We find nothing to show that the sale between the sisters and and their nephew Antonio violated the public policy
prohibiting aliens from owning lands in the Philippines. Even as Dr. Lozada advanced the money for the payment
of Antonio’s share, at no point were the lots registered in Dr. Lozada’s name.
Nor was it contemplated that the lots be under his control for they are actually to be included as capital of
Damasa Corporation. According to their agreement, Antonio and Dr. Lozada are to hold 60% and 40% of the
shares in the corporation, respectively. Under RA 7042, a corporation organized under the laws of the
Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines, is considered a Philippine National. As such, the corporation may acquire
disposable lands in the Philippines.

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18 - Palting v. San Jose Petroleum (1966) [Parity Agreeement]
Doctrines:
• Our Constitution provides that, the exploitation of natural resources shall be limited to citizens of the Philippines
or to corporations or associations at least 60% of the capital of which is owned by such citizens. However,
this right was earlier extended to US citizens by virtue of the Parity Agreement. Said US citizens can either
directly or indirectly own or control the business enterprise.
Facts:
This is a petition for review of the order of the Securities and Exchange Commission (SEC) denying the
opposition to, and instead, granting the registration, and licensing the sale in the Philippines, of 5,000,000 shares of
the capital stock of the respondent- appellee San Jose Petroleum, Inc. (SJ PETROLEUM), a corporation organized and
existing in the Republic of Panama.
The respondent Corporation filed with the SEC a sworn registration statement for the registration and licensing
for sale in the Philippines, Voting Trust Certificate representing 2 million shares of its capital stock of a par value of
$0.35/share at P1/share. It was alleged that the proceeds thereof will be used to finance the operations of San Jose Oil Co.
which has 14 petroleum exploration concessions in various provinces. It was expressly conditioned that instead of stock
certificates, registered or bearer-voting trust certificates from voting trustees (Americans) will be given. San Jose
Petroleum amended the application from P2M to P5M at reduced offering at P0.70/share.
Palting and the other prospective investors is the shares, filed with the SEC an opposition to said registration on
the following grounds: (1) the tie-up between SJ Petroleum, a Panamanian corporation and SJ Oil, a domestic corporation
violates the Constitution, the Corp. Law and the Petroleum Act of 1949 (2) the issuer is not licensed to transact business in
the Philippines (3) the sale of shares is fraudulent (4) the issuer is based on unsound business principles (sic).
In Answer to the above claims, SJ Petroleum stated that it was a “business enterprise” enjoying parity rights,
with respect to mineral resources in the Philippines, which may be exercised pursuant to the Laurel-Langley
Agreement, through a medium, the SJ Oil. It contends that giving SJ Oil financial assistance did constitute transaction of
business in the Philippines, which would have required it to register.
The SEC then issued the currently assailed order. Hence this appeal to the SC.
Issues:
1. W/N Palting, as a “prospective investor” in respondent’s securities, has personality to file the present petition for
review of the order of the SEC.
2. W/N the “tie-up” between the respondent SAN JOSE PETROLEUM, a foreign corporation, and SAN JOSE OIL
COMPANY, INC., a domestic mining corporation, is violative of the Constitution, the Laurel- Langley
Agreement, the Petroleum Act of 1949, and the Corporation Law;
Held/Ratio:
1. YES, any person (who may not be “aggrieved” or “interested” within the legal acceptation of the word) is
allowed or permitted to file an opposition to the registration of securities for sale in the Philippines.
Contrary to respondent’s claim that as a mere investor, Palting was neither an “aggrieved” nor an “interested”
party, citing a Utah State Supreme Court ruling, the SC ruled that said decision was not controlling on the issue in
this case.
2. YES, because SJ Petroleum is not accorded with Parity Rights, which would have allowed the Company to
interest in mining.
SJ Oil is a domestic corporation 90% of which is owned by SJ Petroleum, a Panamanian Corp. the majority
interest of which is owned by Oil Investments, Inc. another Panamanian Corp. The latter is in turn owned by
Pantepec Oil Co. & PanCoastal Petroleum, both organized and existing under the laws of Venezuela.

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Our Constitution provides that, the exploitation of natural resources shall be limited to citizens of the Philippines
or to corporations or associations at least 60% of the capital of which is owned by such citizens. However,
this right was earlier extended to US citizens by virtue of the Parity Agreement. Said US citizens can either
directly or indirectly own or control the business enterprise.
Based on the foregoing, it is clear that, San Jose Petroleum is not entitled to Parity Rights, based on the following
grounds:
1. It is not owned or controlled directly by US citizens because it is owned and controlled by Panamanian
corporation;
2. Neither can it be said that it is indirectly owned and controlled by US citizens because the controlling
corporation is in turn owned by two Venezuelan corporations;
3. Although the two Venezuelan corporations claim to be owned by stockholders residing in the US, there is
no showing that said stockholders were US citizens;
4. Even granting that these stockholders are US citizens, it is still necessary to establish that their
different states allow Filipino corporations and citizens to engage in the exploitation of natural
resources. However, there is no such proof to this;
5. The word indirectly should not be unduly stretched in application.
The motion of respondent to dismiss this appeal, is denied and the orders of the Securities and Exchange
Commissioner, allowing the registration of Respondent’s securities and licensing their sale in the Philippines are
hereby set aside. The case is remanded to the Securities and Exchange Commission for appropriate action in
consonance with this decision.

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SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE


FICTION
19 - DBP v. NLRC (1990) (foreclosing creditor, preference of credits)
Doctrine:
• Being the majority stockholder and constituting the majority of membership in the board of directors does not
indicate the existence of an employee-employer relationship between the former and the employees of the
corporation.
Facts:
Philippine Smelters Corporation obtained a loan from the Development Bank of the Philippines to finance its
manufacturing and smelting business. As security, PSC executed a mortgage over its real properties in favor of DBP.
Also, by virtue of their loan agreement, DBP became the majority stockholder of PSC and subsequently took over the
management of PSC.
When PSC failed to pay its obligations, DBP foreclosed and acquired the properties of PSC. Prior to the judicial
sales, a Petition for Involuntary Insolvency had been filed with the RTC. Around the same time, the private respondents in
this case filed a complaint with the Department of Labor against PSC for nonpayment of salaries, 13th month pay,
incentive leave pay and separation pay. They subsequently amended the complaint to include DBP as a respondent. The
labor arbiter ruled in favor of the employees and directed that “DBP as foreclosing creditor is hereby ordered to pay all the
unpaid wages and benefits of the workers which remained unpaid due to PSC’s foreclosure.” The DBP appealed but the
NLRC upheld the decision of the labor arbiter hence, this petition.
Issue:
1. W/N the NLRC had jurisdiction over the DBP
2. W/N DBP, as foreclosing creditor, could be held liable for the labor claims of the PSC employees
Held:
1. NOT INITIALLY, but was cured by DBP’s participation in the proceeding. In their comment, the private
respondents tried to prove the existence of an employee-employer relationship based on the fact that DBP is the
majority stockholder of PSC and that the majority of the members of the board of directors of PSC are from DBP.
The Court opines that such facts aren’t enough to constitute an employee-employer relationship as to put the DBP
under the jurisdiction of the NLRC. The defect in jurisdiction was nonetheless cured by active participation. The
nonexistence of the employee-employer relationship is shown in the decision where DBP was ordered to pay, not
as an employer, but as the foreclosing creditor.
2. NO. The right to preference given to workers under the Labor Code cannot exist in any effective way prior to the
time of its presentation in distribution proceedings. (The Court also made a distinction between a preference of
credit and a lien; the former not constituting a lien on the property of the insolvent debtor in favor of the workers,
the latter creating a charge on particular property.) [a huge chunk of the case discussed credit transactions]
[Sarmiento, J. dissents pointing out that due to an amendatory law, workers now enjoy “absolute preference” I payment of
labor claims]

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20 - Remo, Jr. v. IAC (1989) (stockholder sold all his shares)
Doctrines:
• The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection
case against the corporation, does not make such stockholder personally liable for the corporate debt, since the
disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to
dispose of his shares of stock anytime he so desires.
• The corporate fiction or the notion of legal entity may be disregarded when it “is used to defeat public
convenience, justify wrong, protect fraud, or defend crime” in which instances “the law will regard the
corporation as an association of persons, or in case of two corporations, will merge them into one.”
• The corporate fiction may also be disregarded when it is the “mere alter ego or business conduit of a person.”
Facts:
Akron Customs Brokerage Corporation purchased thirteen trucks from private respondent (E.B. MARCHA
TRANSPORT COMPANY, INC.) for P525,000.00. The agreement being that Akron is to make a down payment in the
amount of P50,000.00 and that the balance shall be paid within 60 days from the date of the execution of the agreement.
The parties also agreed that until said balance is fully paid, the down payment of P50,000.00 shall accrue as rentals of the
13 trucks.
The obligation was further secured by a promissory note executed by Coprada, the President and Chairman of
Akron, in favor of the said company. The note states that the balance is to be paid from the proceeds of a loan obtained
from the DBP within 60 days. After the lapse of 90 days, private respondent tried to collect from Coprada but the latter
promised to pay only upon the release of the DBP loan. Private respondent sent Coprada a letter of demand, to which he
replied that he was applying for a loan from the DBP from the proceeds of which payment of the obligation shall be made.
Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. Akron also
failed to pay the rentals as agreed upon in their previous agreement.
Private respondent then filed a compliant for the recovery of P525,000.00 or the return of the 13 trucks with
damages against Akron and its officers and directors (one of which is the petitioner) with the CFI. Only petitioner
answered the complaint denying any participation in the transaction and alleging that Akron has a distinct corporate
personality.
In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended its
articles of incorporation thereby changing its name to Akron Transport International, Inc. which assumed the liability of
Akron to private respondent.
The CFI ruled in favor of the plaintiff and against the defendants.
A motion for new trial filed by petitioner was denied so he appealed to the IAC wherein in due course a decision
was rendered setting aside the said decision as far as petitioner is concerned. However, upon the respondent’s motion for
reconsideration, the IAC set aside its previous decision and affirmed the decision of the trial court.
Issues:
1. W/N petitioner should be liable to private respondent.
Held/Ratio:
1. NO. There is no basis to pierce the corporate veil of Akron and hold petitioner personally liable for its obligation
to private respondent. It was Coprada who negotiated with said respondent for the purchase of 13 cargo trucks and
signed a promissory note to guarantee the payment of the unpaid balance of the purchase price out of the proceeds
of a loan he supposedly sought from the DBP. Petitioner did not sign the said promissory note so he cannot be
personally bound thereby.

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Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there was a
forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for the same and
not petitioner.
As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron Transport
International, Inc., petitioner alleges that the change of corporate name was in order to include trucking and
container yard operations in its customs brokerage of which private respondent was duly informed in a letter.
Indeed, the new corporation confirmed and assumed the obligation of the old corporation. There is no indication
of an attempt on the part of Akron to evade payment of its obligation to private respondent.
The fact that petitioner sold his shares in Akron to Coprada during the pendency of the case does not make
petitioner liable to the debt of Akron. Since petitioner has no personal obligation to private respondent, it is his
inherent right as a stockholder to dispose of his shares of stock anytime he so desires.

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21 - US v. Milwaukee Refrigerator Transit Co. (1905) (dummy corporation)
Doctrines:
• General Rule: A corporation will be looked upon as a legal entity, until sufficient reason to the contrary appears.
o Exception: when the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, defend crime, the law will regard the corporation as an association of persons; and, where one
corporation was organized and is owned by the officers and stockholders of another, making their
interests identical, they may be treated as identical when the interests of justice require it.
Facts:
The Elkins Act was enacted to prohibit railroads from giving and receiving of unlawful rebates. After the
enactment of the said Act, officers of a brewing company, who were also its controlling stockholders, organized a transit
company named Milwaukee Refrigerator Transit, et al and became its officers and the owners of all of its stock.
On behalf of the brewing company, the officers contracted with the transit company to make all the shipments for
the brewing company. The transit company contracted for shipments with interstate carriers, where they would only pay it
from 1/10 to 1/8 of the published rate, for the transportation, supposedly as a commission for obtaining the business, but
was known really a rebate for the benefit of the brewing company.
Thus, the US filed a suit against the brewing company to enjoin them from receiving rebates from carriers.
Issues:
1. W/N the piercing of the veil is in order (whether a corporation organized and owned by the officers and
stockholders of another is in fact an independent corporation or was organized merely as a dummy to enable the
other through it to solicit and obtain illegal rebates from carriers)
Held/Ratio:
1. Yes, the piercing is in order. As a general rule, a corporation will be looked upon as a legal entity, until sufficient
reason to the contrary appears. An exception to this is when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, defend crime, the law will regard the corporation as an association of
persons; and, where one corporation was organized and is owned by the officers and stockholders of another,
making their interests identical, they may be treated as identical when the interests of justice require it.
The bill shows the creation, by the controlling interests of the brewing company, of a dummy corporation, and
with dummy directors, with intent to evade the law making the transit company as a mere alter ego of the brewing
corporation, both being substantially identical in interest and control, and the brewing company the ultimate
beneficiary.
Applying the rule here laid down to the circumstances shown to surround the brewing company and transit
company, it clearly appears that the shipper practically controls the transit company, and this shows a sufficient
identity of interest among the shareholders of both in these repayments to make them rebates, if paid and received
with unlawful intent.
It is the argument of Milwaukee that the procurement of the shipments through the contract is the mere soliciting
of them for the carriers, for which they are lawfully authorized to pay a part of the rate, in order to get the
business; and the transit company, owing a large number of refrigerator cars, and wishing to keep them employed,
simply gives the freight to those competing shippers who will make the best terms, the business being of great
volume, and the sums paid for the freights large. But this theory of innocence is exploded by the fact that the
transit company is a mere separate name for the brewing company, being in fact the same collection of persons
and interests.

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22 - Francisco Motors Corporation v. CA (1999)
Doctrine:
• In the case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the
situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal
liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the
doctrine has been turned upside down because of its erroneous invocation.
Facts:
Francisco Motors Corporation (FMC) filed a complaint against Spouses Gregorio and Librada Manuel to recover
P3,412.06 representing the balance of the jeep body purchased, an additional sum of P20,454.80 representing the unpaid
balance on the cost of repair of the vehicle; and P6,000 for cost of suit and attorney’s fees. In their answer, Spouses
Manuel interposed a counterclaim for unpaid legal services by Gregorio Manuel in the amount of P50,000 which
was not paid by the incorporators, directors and officers of the FMC. Manuel alleges that he represented members
of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, after the termination
of the proceedings, his services were not paid. Said family members, he said, were also incorporators, directors and
officers of petitioner.
FMC questions the propriety of its being made party to the case because it was not the real party in interest but
the individual members of the Francisco family concerned with the intestate case.
The RTC ruled in favor of Manuel and on appeal, the CA applied the doctrine of “piercing the veil of
corporate fiction” and held that the “separate personality of the corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or cover for illegality, or to work an injustice, or where necessary to
achieve equity or when necessary for the protection of creditors. Equity and justice demands FMC’s veil of corporate
identity be pierced and Gregorio Manuel be compensated for legal services rendered to the heirs, who are directors of the
plaintiff-appellant corporation.”
Issue:
1. W/N the doctrine of “piercing the veil of corporate fiction” was properly applied.
Held/Ratio:
1. No. - Given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no relevant
application here. The rationale behind piercing a corporation’s identity in a given case is to remove the barrier
between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who
use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been
reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears that the doctrine has
been turned upside down because of its erroneous invocation. Note that according to private respondent
Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent them in
the intestate proceedings over Benita Trinidad’s estate. These estate proceedings did not involve any business
of FMC. His move to recover unpaid legal fees through a counterclaim against Francisco Motors Corporation, to
offset the unpaid balance of the purchase and repair of a jeep body could only result from an obvious
misapprehension that FMC’s corporate assets could be used to answer for the liabilities of its individual directors,
officers, and incorporators. Such result if permitted could easily prejudice the corporation, its own creditors, and
even other stockholders; hence, clearly inequitous to petitioner. Furthermore, considering the nature of the legal
services involved, whatever obligation said incorporators, directors and officers of the corporation had
incurred, it was incurred in their personal capacity. In conclusion, FMC cannot be held responsible for the
personal obligations of its incorporators, but the decision is without prejudice to the filing of the proper suit
against concerned members of the Francisco family in their personal capacity.

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23 - Traders Royal Bank v. CA (1997) (Central Bank Certificates of Indebtedness)
Doctrine:
• Piercing the veil of corporate entity is merely an equitable remedy and may be awarded only in cases when
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.
• To do this [to pierce the veil of corporate entity], the court must be sure that the corporate fiction was misused, to
such extent that injustice, fraud, or crime was committed upon another, disregarding, thus, his/her personal rights.
Facts: (we’ve taken this case up in nego )
This case involves the transfer of Central Bank Certificates of Indebtedness (CBCIs) under the name of
Filriters. These CBCIs formed part of Filriters’ capital reserves which are, by law, required to be maintained at a certain
level. These were transferred by the Filriters Senior Vice President for Treasury Alfredo Banaria to PhilFinance (a
company which also owns 90% of Filriters).
PhilFinace then entered into a repurchase agreement with the petitioner Traders Royal Bank wherein
PhilFinace sold the CBCIs to TRB then pay installments to buy back the same. PhilFinance defaulted in its payments and
hence, forfeited the CBCIs in favor of TRB. TRB sought to transfer the CBCIs (still under the name of Filriters) under its
name but was refused by the Central Bank. Such refusal was based on the CB Circular requiring that the payee (in this
case Filriters) be the one to effect such transfer. TRB sought recourse from the CA to compel the Central Bank to transfer
the CBCIs to it but was denied because Filriters interposed the defense of invalidity ofthe initial transfer to Philfinance.
The initial transfer was done by Banaria without any board resolution knowledge or consent of the Board of Directors,
and without authority from the Insurance Commissioner.
Issues:
1. [Nego related] W/N
a. the CBCIs were negotiable instruments;
b. and TRB was a holder in due course
2. [Corp related] W/N the veil of corporate entity must be pierce on the basis of the allegation that Filriters was 90%
owned by PhilFinace and that although they are separate entities on paper, they have used their corporate fiction
to defraud TRB
Held/Ratio:
1. No on both counts; [just in case, since he also teaches commercial law review]
a. Payable to Filriters; not an order or bearer instrument
b. The fact that it was transferred by one who wasn’t the registered owner should have alerted TRB to
inquire on transferor’s title
2. No. Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical
personality separate from its stockholder and from other corporations may be disregarded. In the absence of these
grounds, the general rule must be upheld. The fact that PhilFinance owns majority shares in Filriters is not by
itself a ground to disregard the independent corporate status of Filriters. Because the transfer of the CBCIs from
Filriters to PhilFinance was fictitious, PhilFinance had no title to convey to TRB. Consequently, the title of
Filriters over the CBCIs must be upheld over the interest claimed by TRB.

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24 - PNB v. Rittrato Group (2001)
Doctrine:
• 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. The doctrine applies
when the 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.
Facts:
Philippine National Bank, Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are
all domestic corporations organized and existing under Philippine law.
Rittrato Group procured a letter of credit worth US$300,000 from PNB International Finance Ltd. (PNB-IFL) a
subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of the
Ritratto Group secured by real estate mortgages over 4 parcels of land in Makati City. This credit was later eventually
increased to US$1,425,000.00 in February 1997; and decreased to US$1,421,316.18 in April 1998. Respondents made
repayments of the loan by remitting those amounts to their loan account with PNB-IFL in Hong Kong.
However, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms of the real estate
mortgages, PNB-IFL, through PNB, notified the respondents of the foreclosure of all the real estate mortgages and that the
properties were to be sold at a public auction.
Respondents maintain that the entire credit facility is void as it contains stipulations in violation of the principle of
mutuality of contracts. In addition, respondents justified the act of the court a quo in applying the doctrine of “Piercing the
Veil of Corporate Identity” by stating that petitioner is merely an alter ego or a business conduit of PNB-IFL.
Respondents argue that even assuming that PNB and PNB-IFL are two separate entities, PNB is still the party-in-interest
in the application for preliminary injunction because it is tasked to commit acts of foreclosing respondents’ properties.
Issue:
1. W/N PNB is an alter-ego of PNB-IFL.
Held/Ratio:
1. NO. The contract questioned is one entered into between respondent and PNB-IFL. PNB is a mere attorney-in-
fact for the PNB-IFL with full power and authority to foreclose on the properties mortgaged to secure their loan
obligations with PNB-IFL. In other words, PNB is an agent with limited authority and specific duties under a
special power of attorney incorporated in the real estate mortgage. It is not privy to the loan contracts entered into
by respondents and PNB-IFL.
The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual
stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. The
mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify
their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in
their respective business. The courts may in the exercise of judicial discretion step in to prevent the abuses of
separate entity privilege and pierce the veil of corporate entity.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship
involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the
petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A
suit against an agent cannot without compelling reasons be considered a suit against the principal.

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Note:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite
variations of fact that can arise but there are certain common circumstances which are important and which, if present in
the proper combination, are controlling.
These are as follows:
1. The parent corporation owns all or most of the capital stock of the subsidiary.
2. The parent and subsidiary corporations have common directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.
5. The subsidiary has grossly inadequate capital.
6. The parent corporation pays the salaries and other expenses or losses of the subsidiary.
7. The subsidiary has substantially no business except with the parent corporation or no assets except those
conveyed to or by the parent corporation.
8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its business or financial responsibility is referred to as the
parent corporation’s own.
9. The parent corporation uses the property of the subsidiary as its own.
10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take
their orders from the parent corporation.
11. The formal legal requirements of the subsidiary are not observed.

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25 - Umali v. Court of Appeals (1990) (Piercing the veil of corporate fiction)
Doctrines:
• Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction,
since petitioners do not intend to hold the officers and/or members of respondent corporations personally
liable thereof.
Facts:
This is a petition for review for the decision made by the CA reversing the decision of the trial courts, who
originally held the foreclosure of the petitioner’s property null and void.
The original complaint for annulment of title filed in the court a quo by herein petitioners included as party
defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the Philippines
(ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera).
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo family are the
owners of a parcel of land located in Lucena City which was given as security for a loan from the Development Bank
of the Philippines. For their failure to pay the amortization, foreclosure of the said property was about to be initiated.
This problem was made known to Santiago Rivera, who proposed to them the conversion into subdivision of the four (4)
parcels of land adjacent to the mortgaged property to raise the necessary fund. The Idea was accepted by the Castillo
family and to carry out the project, a Memorandum of Agreement was executed. Rivera obliged himself to pay the
Castillos P70,000 after the execution of the contract and P400,000 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 P50,000 down payment and the balance of P180,000 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 from Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as
surety and Slobec as principal. The aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty with
Real Estate Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of Slobec and Mauricia Meer Vda. de
Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo
Jalbuena, as mortgagors and Insurance Corporation of the Philippines (ICP) as mortgagee. In giving the bond, ICP
required that the Castillos mortgage to them the properties in question.
There was a violation of the terms and conditions of the Counter-Guaranty Agreement, hence the properties of the
Castillo’s were foreclosed by ICP As the highest bidder with a bid of P285,212.00, a Certificate of Sale was issued by the
Provincial Sheriff of Lucena City and Transfer Certificates of Title over the subject parcels of land were issued by the
Register of Deeds of Lucena City in favor of ICP
Subsequently, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts)
the four (4) parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles over the lots in
dispute so that said parcels of land. Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated
August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to vacate the subject
property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to comply with his demands.
The heirs of the late Felipe Castillo filed an action for annulment of title before the CFI of Quezon contending that
all the aforementioned transactions are void for being entered into in fraud and without the consent and approval of the
CFI of Quezon before whom the administration proceedings was proceeding.
The CFI ruled in favor of the Heirs but on appeal to the CA, the latter reversed the decision of the trial court and
rendered the judgment subject of this petition.

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Issues:
1. W/N the transactions entered into between Santiago M. Rivera, as President of Slobec Realty and Development
Company (Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales Agreement, Chattel
Mortgage and the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage are all fraudulent and
simulated, and should be declared null and void.
2. CORP RELATED: W/N the doctrine of piercing the veil of corporate entity should be applied against the
respondent-Corporations.
3. W/N there was a valid foreclosure of the mortgaged properties by ICP
4. W/N PM Parts is a buyer in good faith and therefore acquired valid title over the subject properties.
Held/Ratio:
1. NO, the evidence of record, overall does not convince us the validity of petitioners’ contention that the
contracts entered into by the parties are either absolutely simulated or downright fraudulent.
The SC stated that this was a question of fact. Respondent CA made several findings to the effect that the
questioned documents are valid and binding upon the parties, that there was no fraud employed by private
respondents in the execution thereof, and that, contrary to petitioners’ allegation, the evidence on record reveals
that petitioners had every intention to be bound by their undertakings in the various transactions had with private
respondents
The basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really
desired or intended to either produce legal effects or in any way alter the juridical situation of the parties.
The subsequent act of Rivera in receiving and making use of the tractor subject matter of the Sales
Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco,
concomitant with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage,
conduce to the conclusion that petitioners had every intention to be bound by these contracts.
To set aside a document solemnly executed and voluntarily delivered, the proof of fraud must be clear and
convincing. We are not persuaded that such quantum of proof exists in the case at bar.
2. NO, while we do not discount the possibility of the existence of fraud in the foreclosure proceeding, neither
are we inclined to apply the doctrine invoked by petitioners in granting the relief sought.
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders
may be disregarded. In such cases, the corporation will be considered as a mere association of persons.
The doctrine applies in the following instances, when corporation fiction is used:
1. Defeat public convenience;
2. Justify wrong, protect fraud, or defend crime;
3. As a shield to confuse the legitimate issues;
4. Where a corporation is the mere alter ego or business conduit of a person;
5. 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.
Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction,
since petitioners do not intend to hold the officers and/or members of respondent corporations personally
liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which
relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent
corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private
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respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole
intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for
disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as
a shield to defraud creditors and third persons of their rights.
3. NO, the foreclosure of ICP is invalid.
The above argument was premised on the fact that there was (1) no written notice was furnished by Bormaheco to
ICP anent the failure of Slobec in paying its obligation with the former, plus the fact that no receipt was presented
to show the amount allegedly paid by ICP to Bormaheco; and (b) at the time of the foreclosure of the mortgage,
the liability of ICP under the surety bond had already expired.
In the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (12) months from its
effectivity date, whereas Slobec’s installment payment was to end on July 23, 1972. Therefore, while ICP
guaranteed the payment by Slobec of the balance of P180,000.00, such guaranty was valid only for and within
twelve (12) months from the date of effectivity of the surety bond, or until January 22, 1972. The default of
Slobec during this period cannot be a valid basis for the exercise of the right to foreclose by ICP since its surety
contract had already been terminated.
Furthermore, the failure of Bormaheco to notify ICP in writing about Slobec’s supposed default released ICP
from liability under its surety bond. Consequently, ICP could not validly foreclose that real estate mortgage
executed by petitioners in its favor since it never incurred any liability under the surety bond. It cannot claim
exemption from the required written notice since its case does not fall under any of the exceptions hereinbefore
enumerated.
Lastly, it has been held that where the guarantor holds property of the principal as collateral surety for his
personal indemnity, to which he may resort only after payment by himself, until he has paid something as such
guarantor neither he nor the creditor can resort to such collaterals. There is no doubt that said Agreement of
Counter-Guaranty is issued for the personal indemnity of ICP. Considering that the fact of payment by ICP has
never been established, it follows, pursuant to the doctrine above adverted to, that ICP cannot foreclose on the
subject properties,
4. NO, PM Parts in not a buyer in good faith.
Although the doctrine of piercing the veil of corporate fiction is not applicable in this case, its
inapplicability has no bearing on the good faith or bad faith of private respondent PM Parts.
It must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as President
of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid several
transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the
Executive Vice-President of Bormaheco, was also the legal counsel of ICP and PM Parts. These facts were
admitted without qualification in the stipulation of facts submitted by the parties before the trial court. Hence, the
defense of good faith may not be resorted to by private respondent PM Parts which is charged with knowledge of
the true relations existing between Bormaheco, ICP and herein petitioners.

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26 - Indophil Textile Mill Workers Union-PTGWO v. Calica (1992)
Doctrines:
• Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders
may be disregarded.
• The doctrine applies when the 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.
Facts:
In April 1987, Indophil Textile and the petitioner executed a Collective Bargaining Agreement (CBA) valid from
April 1, 1987 to March 31, 1990. On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed. On
July 1989, Indophil Acrylic Manufacturing Corporation’s employees also unionized and executed a CBA with the said
corporation. In 1990 or a year after the workers of Acrylic have been unionized and a CBA executed, the petitioner union
claimed that the plant facilities built and set up by Acrylic should be considered as an extension or expansion of the
facilities of private respondent Company pursuant to Section 1(c), Article I of the CBA, to wit:
This Agreement shall apply to the Company’s plant facilities and installations and to any extension
and expansion thereat.
In other words, it is the petitioner’s contention that Acrylic is part of the Indophil bargaining unit. However, the
petitioner’s contention was opposed by private respondent which submits that it is a juridical entity separate and distinct
from Acrylic.
Issues:
1. W/N the operations in Indophil Acrylic Corporation are an extension or expansion of private respondent
Company.
Held/Ratio:
1. NO.
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the
corporation is a devise to evade the application of the CBA between petitioner Union and private respondent
Company. However, the Indophil Acrylic Manufacturing Corporation is not an alter ego or an adjunct or business
conduit of private respondent because it has a separate legitimate business purpose. More so, the fact that the
businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are
the same persons manning and providing for auxilliary services to the units of Acrylic, and that the physical
plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are
not sufficient to justify the piercing of the corporate veil of Acrylic.
Hence, the Acrylic not being an extension or expansion of private respondent, Indophil Textile, the rank-
and-file employees of Acrylic should not be recognized as the bargaining representative of private
respondent.

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27 - Siain Enterprises Enterprises, Inc. v. Cupertino Realty Corp. (2009)
Doctrine:
• Where clear evidence presented support the fact that a corporation’s affiliates have received large amounts which
became the consideration for the company execution of a real estate mortgage over its properties, then the
piercing doctrine shall be applied to support the fact that the real estate mortgage was valid and supported by
proper consideration.
Facts:
In 1995, Siain Enterprises Enterprises, Inc. (Siain Enterprises) obtained a loan of P37M from Cupertino Realty
Corporation (Cupertino) covered by a promissory note signed by both Siain Enterprises’s and Cupertino’s respective
presidents, Cua Le Leng and Wilfredo Lua. To secure the loan, Siain Enterprises executed a real estate mortgage over two
parcels of land, other equipment and machineries. The promissory note was subsequently amended to contain a 17%
annual interest on the P37M loan. A few months after, Cua Le Leng executed another promissory note in favor of
Cupertino for P160M and signed it as maker on behalf of Siain Enterprises and as co-maker, liable to Cupertino in her
personal capacity. The real estate mortgage was also amended to reflect the increased amount of the loan from
P37M to P197M
A year after, Siain Enterprises through counsel, wrote Cupertino and demanded from the latter the release
of the P160M loan. Siain Enterprises contends that despite repeated verbal demands, Cupertino failed to release P160M.
On the other hand, Cupertino, also through counsel, denied that it had yet to release the P160M loan and
maintained that Siain Enterprises had long obtained the proceeds of such loan and that Siain Enterprises was only
trying to abscond from a just and valid obligation. Cupertino then instituted extrajudicial foreclosure proceedings
over the properties subject of the amended real estate mortgage. This prompted Siain Enterprises to file a complaint with a
prayer for a restraining order to enjoin from proceeding with the public auction. Siain Enterprises further contends that
because it never received the P160M loan, the amended real estate mortgage is null and void because there was no
consideration therefore.
The lower courts ruled in favor of Cupertino and upheld the validity of the amended real estate mortgage.
The lower court disregarded Siain Enterprises’s bare denial and negative evidence and gave credence to Cupertino’s
evidence that the P160M loan was received by Siain Enterprises and its affiliate companies. In this regard, the court
applied the doctrine of “piercing the veil of corporate fiction” to preclude Siain Enterprises from disavowing the
receipt of the loan and paying its obligation under the amended real estate mortgage. Siain Enterprises contends that
the court erroneously applied the doctrine of “piercing the veil or corporate fiction.”
Issue:
1. W/N the doctrine of “piercing the veil of corporate fiction” was properly applied.
Held/Ratio:
2. Yes.
First and foremost, Siain Enterprises being the plaintiff, had the burden of proof and the duty to present a
preponderance of evidence to establish its claim. Instead, its evidence consisted of only a barefaced denial of
receipt of the P160M loan and a vaguely drawn theory. On the other hand, Cupertino presented overwhelming
evidence that Siain Enterprises Inc., and its affiliate corporations (Yuyek and Siain Transport) had received the
proceeds of the loan which was the consideration of the amended real estate mortgage. Moreover, it was
established in the lower courts that Siain Enterprises and Yuyek had a common set of incorporators,
stockholders and board of directors, the same bookkeeper and accountant, the same office address and the
same majority stockholder which is Cua Le Leng. Cua Le Leng had the unlimited liability to use Siain
Transport’s funds to pay the obligations incurred by Siain Enterprises. Thus, it is clear that Siain Enterprises,
Siain Transport and Yuyek are characterized by oneness of operations vested in Cua Le Leng alone.
Consequently, these corporations were proven to be mere alter-egos of Cua Le Leng. Where clear evidence
presented support the fact that a corporation’s affiliates have received large amounts which became the

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consideration for the company execution of a real estate mortgage over its properties, then the piercing doctrine
shall be applied to support the fact that the real estate mortgage was valid and supported by proper consideration.

28 - Rebecca Boyer-Roxas and Guillermo Roxas v. CA and Heirs of Eugenia Roxas Inc. (1992) (Hidden
Springs Resort + No Piercing)
Doctrine:
• Piercing the veil of corporate fiction is not allowed when it is resorted under a theory of co-ownership to justify
continued use and possession by stockholders of corporate properties.
Facts:
Two separate ejectment cases were filed against Guillermo Roxas and Rebecca Boyer-Roxas, respectively by
the Heirs of Eugenia V. Roxas, Incorporated.
As against Rebecca, the corporation alleged that Rebecca is in possession of two houses found in Hidden Valley
Springs Resort, a resort owned by the corporation. One of the houses was still under construction. The houses were said
to be built at the expense of the corporation and that Rebecca’s continued possession of them was merely tolerated by
the corporation.
As against Guillermo, respondent Corporation alleges that he occupies a house (and lot) within the resort and that
his occupation of said house (and lot) was merely tolerated by the corporation. Moreover, the corporation alleges that
this house was built at the expense of the corporation and was intended to be a recreation hall.
In their answers, Guillermo and Rebecca alleged that they were also heirs of Eugenia Roxas and as such they
have a share in the resort, and that they have the right to stay in the property. According to them, the veil of
corporate fiction must be pierced insofar as it does not allow them to possess the properties owned by the corporation
even though they are “co-owners” of the corporation and its properties along with other stockholders.
The RTC set a hearing and both Boyer-Roxas and Roxas received copies of the order of hearing. Their counsel,
Atty. Manicad also received a copy. The hearing was suspended and another hearing was set. During the hearing only the
counsel for the corporation appeared. Atty. Manicad nor his clients did not. Another hearing was scheduled for the
purpose of presenting evidence, a notice of hearing was sent to and received by all parties, but again, neither Atty.
Manicad Rebecca/Guillermo appeared. In the same hearing, the Corporation formally offered their evidence. In its Order
dated September 29, 1986, the court warned that in the event the petitioners and their counsel failed to appear on the next
scheduled hearing, the court shall consider the cases submitted for decision based on the evidence on record. On the next
scheduled hearing, neither Manicad, nor Rebecca/Guillermo appeared. The court rendered a decision based on the
evidence submitted by the Corporation. The court ordered that Guillermo and Rebecca vacate the premises and
that the unfinished building be demolished. No motion for reconsideration was submitted to the RTC within the
reglementary period.
Atty. Manicad submitted a Motion for Reconsideration 2 months later, praying for the reopening of the case and
acceptance of evidence. He said that he was to file a motion within the reglementary period but there was a mix-up with
the secretary and the messenger. He also said that the motion contained the reasons for his failure to attend the last hearing
schedule — that his car broke down on the way to the Calamba court and that he had no choice but to be absent. The
court denied the motion on.
Issues:
1. W/N Rebecca and Guillermo were denied due process
2. W/N the corporate veil must be pierced
3. W/N Rebecca is a builder in good faith

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Held/Ratio:
1. NO. As a general rule, clients are bound by the acts of their lawyers. Of course the rule admits of certain
exceptions as when persons are deprived of their property without due process imputable to the gross negligence
of their counsel. In the case at bar, Rebecca and Guillermo were not deprived of their property without due
process because they were given the proper notices and they were well aware that their counsel was not appearing
in court. Despite the knowledge of their counsel’s incapacity, they still retained his services.
2. NO. The fact that the corporation was incorporated with the estate left by Eugenia Roxas as capital, and that
Rebecca/Guillermo, as heirs of Roxas, were stockholders of the company, do not justify the piercing of the
corporate veil. 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 stockholder is not entitled to possess any definite property of the corporation.
Moreover, even if the former manager of the Corporation granted permission to Rebecca/Guillermo to possess the
property, the Corporation is not forever bound by this permission. In the absence of any contract between the
Corporation and Rebecca/Guillermo regarding the length of their possession, the Board may at any time revoke
the permission through a board resolution, as what they did in the case at bar.
The veil of corporate fiction may only be pierced when the Corporation is used “as a cloak or cover for fraud or
illegality, or to work injustice, or where necessary to achieve equity or when necessary for the protection of the
creditors.”
3. YES. As regards the unfinished building, Rebecaa is considered a builder in good faith and therefore, the CA’s
decision that it be demolished is modified. The unfinished building must be governed by the Civil Code
provisions on Property and builders in good faith.
FAMILY TREE: Rebecca is the mother of Guillermo. Rebecca’s husband was the former manager of the corporation
(Kaya sila nabibigyan ng permission dati).

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29 - Gochan v. Young (2001)
Doctrines:
• A court or tribunal’s jurisdiction over the subject matter is determined by the allegations in the complaint. The
fact that certain persons are not registered as stockholders in the books of the corporation will not bar them from
filing a derivative suit, if it is evident from the allegations in the complaint that they are bona fide stockholders.
• In view of RA 8799, intra-corporate controversies are now within the jurisdiction of courts of general jurisdiction,
no longer of the Securities and Exchange Commission.
• [from outline] The notion of corporate entity will be pierced and the individuals composing it will be treated as
identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a
wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.
Facts:
Felix Gochan and Sons Realty Corporation (FGSRC) was registered under the SEC on June, 1951 with Felix
Gochan, Sr. as one of the incorporators. Felix had a daughter, Alice, who is the mother of the respondents. [There are two
groups of respondents in this case, the Uys and the Youngs. The Youngs are the heirs of Alice.] Alice inherited from her
father 50 shares of stock of FGSRC. Alice also died, leaving the 50 shares to her husband, John Young Sr.
John Young Sr. wanted to have the stock certificates in the names of his children (the respondents Young), so he
requested FGSRC to cancel the stock certificates under his name and issue new certificates under the names of his
children. FGSRC refused, saying the other stockholders had a right of first refusal under the Articles of Incorporation.
Later on, John Young Sr. died, leaving the FGSRC shares to his children. Four years later, the Uys [bigla nalang
sila sumingit, supposedly stockholders din sila ng FGSRC], together with the Youngs, filed a complaint with the SEC,
alleging that the directors were using the corporation for fraudulent purposes. FGSRC apparently sold some of its real
properties to 2 other corporations, with these corporations having the same directors as FGSRC. FGSRC also supposedly
bought the shares of the Uys fraudulently and sold them to these other corporations. The directors of FGSRC are the
petitioners in this present case. [The Youngs just wanted the shares of stock transferred to them, pero sumama na din sila
sa complaint against the directors kasi ayaw pumayag ng directors.]
The FGSRC directors moved to dismiss the case with the SEC, saying among others that the Youngs were not
parties-in-interest as the certificates of stock still held the name of their father, John Young Sr. And since the estate
proceedings were still ongoing, their interest was inchoate and they cannot be treated as stockholders yet. The SEC, in
dismissing the complaint, held that the Youngs had no capacity to sue, as they were not yet stockholders and could thus
not bring a derivative suit for FGSRC as they could not have suffered damage. It was up to the administrator of the estate,
if he so chooses, to bring the action.
The Court of Appeals upheld the SEC ruling, but only insofar as the heirs of Alice Gochan were concerned. The
CA held that the Youngs had no capacity to sue, as they were not stockholders yet, but the Uys were real parties-in-
interest, and had capacity to sue. It also held that the intestate Estate of John Young Sr. was an indispensable party.
In this petition, the directors of FGSRC also want the case dismissed as regards the Uys, saying they also don’t
have capacity to sue. Since the shares of stock of the Uys were already sold at the time of the complaint, they were
supposedly no longer stockholders and thus could not bring a suit.
Issues:
1. W/N the Uys had capacity to sue
2. W/N the derivative suit could be brought
3. W/N the Youngs had capacity to sue
4. W/N the annotation of the notice of lis pendens on the properties sold by FGSRC to the other corporations was
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Held/Ratio:
1. YES, they had capacity to sue. As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint. In the present case, the Uys contend that the sale of their shares of
stock was void ab initio. Thus, being in the complaint, it is deemed admitted. Therefore, since the sale was void
ab initio, the Uys remain as stockholders of the corporation even if under the corporate records they were no
longer stockholders.
There was also an issue regarding prescription, but the court ruled that since the action was based on a contract
which was void ab initio, prescription cannot be invoked. The action or defense for the declaration of nullity of a
contract does not prescribe.
2. YES, the derivative suit was proper. The directors of FGSRC were contending that it was only the Uys who were
injured, not the corporation, and thus, a derivative suit in behalf of the corporation could not prosper. However,
the complaint alleges all the components of a derivative suit. The personal injury of the Uys cannot disqualify
them from filing a derivative suit in behalf of the corporation; it just gives rise to an additional cause of action for
damages against the directors, which they included. As the complaint already avers that the corporation suffered
damage as a result of the action of the directors, the derivative suit could prosper.
3. YES, the Youngs were proper parties to the case. In citing Rule 3, § 3 [CivPro!] and Rule 87, § 2 of the Rules of
Court, the SC held that while an administrator is permitted to bring suits on behalf of the deceased, the
Rules do not prohibit the heirs from representing the deceased. More so in this case as there was still no
administrator appointed; the Youngs could not be expected to wait for the appointment of an administrator; then
wait further to see if the administrator appointed would care enough to file a suit to protect the rights and interests
of the deceased; and in the meantime do nothing while the rights and the properties of the decedent are violated or
dissipated. Since the Rules do not specifically prohibit them from representing the deceased, and since no
administrator had as yet been appointed at the time of the institution of the complaint in the SEC, there is nothing
wrong in allowing the heirs of John Young Sr. to represent the estate in the case.
4. YES, the annotations were proper. The complainants need not be stockholders of the two other corporations in
order to make them parties to the case. On the complaint, it was stated that the directors were using those 2 other
corporations as alter-egos, and the Uys and Youngs wanted the lands sold to these two corporations reconveyed in
the name of FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical if, as alleged here, the corporate entity is being used as a cloak or
cover for fraud or illegality; as a justification for a wrong; or as an alter-ego, an adjunct, or a business
conduit for the sole benefit of the stockholders.
The case is remanded to the RTC, as the SEC no longer had jurisdiction pursuant to RA 8799.
[I added a few facts to make the story make sense na wala sa decision mismo. Yung case kasi is just regarding a motion to
dismiss, and it’s not the actual case itself. A few of the facts of the “main case” were just hinted at.]

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30 - General Credit Corp. v. Alsons Devt and Investment Corp. (2007)
Doctrines:
• Authorities agreed on at least 3 basic areas where piercing the veil is allowed, with which the law isolates the
corporation from any other legal entity to which it may be related:
a) defeat of public convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation
b) fraud cases or where the corporate entity is used to justify a wrong, protect fraud, or defend a crime
c) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of the other
corporation.
Facts:
General Credit Corp (GCC), then known as Commercial Credit Corp (CCC), established CCC franchise
companies in different urban centers in the country. To further its business, GCC was able to secure license from the
Central Bank (CB) and the SEC to engage also in quasi-banking activities. On the other hand, respondent CCC Equity
Corporation (EQUITY) was organized by GCC for the purpose of taking over the operations and management of
the various franchise companies. At a time material hereto, Alsons Devt & Investment Corp (ALSONS) and the Alcantara
Family each owned, just like GCC, shares in the aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu.
ALSONS and the Alcantara family, for a consideration of P2M, sole their shareholdings in the CCC franchise
companies to EQUITY. EQUITY issued ALSONS et al., a “bearer” promissory note for P2M with a 1-year maturity
date.
4 years later, the Alcantaras assigned their rights and interests over the bearer note to ALSONS. But even before
the execution of the assignment deal, letter of demand for interest payment were already sent to EQUITY. EQUITY
pleaded inability to pay (it had no more assets or property to settle the obligation nor was GCC extending them financial
support).
ALSONS filed a complaint for a sum of money against EQUITY and GCC. GCC was impleaded as a party-
defendant for any judgment against GCC, since EQUITY was organized as a tool and mere conduit of GCC.
(In a cross-claim against GCC), EQUITY claims it acted merely as an intermediary / bridge for loan
transactions and other dealings of GCC to its franchises and the public; that it is solely dependent on GCC for its funding;
hence, GCC is solely and directly liable to ALSONS (because GCC failed to provide EQUITY the necessary funds to
meet its obligations to ALSONS). In the answer to cross-claim, GCC says it is a distinct and separate entity from
EQUITY.
RTC ruled that EQUITY was an instrumentality or adjunct of GCC and considering the implications of the
relationship, held in favor of ALSON. CA affirmed.
Issues:
1. W/N the doctrine of “Piercing the Veil of Corporate Fiction” should be applied in the case at bar
Held/Ratio:
1. YES.
The notion of ‘separate personality’ may be disregarded under the doctrine “piercing the veil of corporate
fiction” as in fact the court will look at the corporation as a mere collection of individuals undertaking business as
a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation
of this doctrine is that when 2 business enterprises are owned, conducted and controlled by the same parties, both

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law and equity will disregard the legal fiction that 2 corporations are distinct entities and treat them as one and the
same, when necessary to protect third parties’ rights.
Authorities agreed on at least 3 basic areas where piercing the veil is allowed, with which the law isolates the
corporation from any other legal entity to which it may be related:
a. defeat of public convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation
b. fraud cases or where the corporate entity is used to justify a wrong, protect fraud, or defend a crime
c. alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit
of a person, or where the corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of the other corporation.
There are at least 20 documented circumstances and transactions which, taken together, strongly support the
conclusion that EQUITY was an adjunct / instrumentality / business conduit of GCC — i.e. commonality of
directors, officers and stockholders, sharing of office between GCC and EQUITY, financing and management
arrangements allowing GCC to handle the funds of EQUITY, virtual control of GCC over finances, business
policies and practices of EQUITY, and the establishment of EQUITY by GCC to circumvent CB rules.
This relation provides a justifying ground to pierce GCC’s existence as to ALSON’s claim. The relationship of
GCC and EQUITY have been that of “parent-subsidiary corporations”, the doctrine is applicable in the case at
bar. It is right to disregard the separate existence of the parent and subsidiary, the latter being so controlled by
the parent that its separate identity is hardly discernible thus becoming a mere instrumentality or alter ego
of the former. Said relationships were shown to have been used to perform certain functions not characterized
with legitimacy.
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31 - Concept Builders Inc., v. NLRC (2007) (EPIRA Law, Universal Charge)
Doctrine:
• Thus, where a sister corporation is used as a shield to evade a corporation’s subsidiary liability for damages, the
corporation may not be heard to say that it has a personality separate and distinct from the other corporation. The
piercing of the corporate veil comes into play.
• When the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud
or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation
Facts:
Concept Builders is a domestic corporation engaged in the construction business. Private respondents are
employed by the company as laborers, carpenters and riggers.
In November of 1981, private respondents were served individual notices of termination by the company. It stated
that their contract had already expired and the project for which they were hired was completed. The NLRC discovered
that the project for which they were hired was not yet even finished. In addition to this, Concept had to hire subcontractors
whose works are the same as private respondents.
Dec 1984, Labor Arbiter rendered judgment ordering Concept to reinstate private respondents and pay them back
wages. Nov 1985, NLRC dismissed the MR filed by Concept. A writ of execution was issued by the Labor Arbiter
ordering sheriff to execute the decision. It was partially satisfied through the garnishment of money from MWSS, a debtor
of Concept, and turned over to NLRC.
On Feb 1989, an Alias Writ of Execution was issued by Labor Arbiter directing sheriff to collect from Concept
the balance of the judgment award and reinstate the private respondents but the sheriff issues a report saying he tried to
serve it but was unable to because Concept no longer occupied the premises. A second alias writ was issued but still to no
avail because it was now occupied by Hydro Phils Inc (HPPI).
On Nov 1989, private respondent filed a Motion for Issuance of a Brek-Open Order alleging that Hydro Phils and
Concept were owned by the same stockholders. HPPI filed an opposition to the motion contending that HPPI is distinct
and separate from Concept Builders and that HPPI is a manufacturing firm while Concept was engaged in construction.
March 1990, Labor Arbiter denied private respondents’ motion for break-open order. They appealed to the NLRC
wherein NLRC issued the break-open order and directed the auction sale of properties levied upon.
Concept Builders moved for reconsideration but was denied by NLRC. Hence, this petition.
Issues:
1. W/N the NLRC commit any grave abuse of discretion when it affirmed the break-open order issued by the Labor
Arbiter
2. W/N the doctrine of piercing the corporate veil is applicable to this case
Held/Ratio:
1. NO. In view of the failure of the sheriff to effect a levy upon the property subject of the execution, private
respondents had no other recourse but to apply for a break-open order. This is in consonance with Section 3, Rule
VII of the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his
representative entry to the place where the property subject of execution is located or kept, the
judgment creditor may apply to the Commission or Labor Arbiter concerned for a break-open
order.

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Also, records show that the requirements of due notice and hearing were complied with. Concept and HPPI were
given the opportunity to submit evidence in support of their claim
2. YES. Petitioner further contends, that the doctrine of piercing the corporate veil should not have been applied, in
this case, in the absence of any showing that it created HPPI in order to evade its liability to private respondents.
But, this wasn’t so.
The corporate veil may be pierced when it is the alter ego of a person of another corporation. There is no hard and
fast rule to this because of a dependence on the facts and circumstances of every case.
But there are some probative factors of identity that will justify the application of the doctrine.
Summary probative factors: (1) stock membership by one or common ownership of both (2) identity of
directors and officers (management) (3) manner of keeping corporate books and records (management) (4)
methods of conducting business (management).
While petitioners claimed it ceased operations in 1986, it filed an Information Sheet with the SEC in 1987 stating
that its office address is their old address. Both information sheets were filed by Virgilio Casino, the same
corporate secretary. They had the same President, Board of Directors and substantially the same subscribers.
Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of
back wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of
Concept Builders and its emergence was skillfully orchestrated to avoid the latter’s financial liability.

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32 - Lipat v. Pacific Banking Corporation (2003) (BEC and BET; alter ego)
Doctrine:
• Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such
domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is but a conduit for its principal.
Facts:
Spouses Lipat (Alfredo and Estelita) owns Belas Export Trading (BET), a single proprietorship engaged in
garment manufacturing in Quezon City. The Lipats also owned the Mystical Fashions in the United States, which sells
goods imported from the Philippines through BET. Estelita designated her daughter, Teresita, to manage BET in the
Philippines while she was managing Mystical Fashions in the United States.
In order to facilitate the convenient operation of BET, Estelita executed a special power of attorney appointing
Teresita as her attorney-in-fact to obtain loans, as well as execute mortgage contracts, from Pacific Bank. Thereafter, by
virtue of such SPA, Teresita was able to obtain a sizeable loan.
Three months after the loan, BET was incorporated into a family corporation named Belas Export Corporation
(BEC), engaged in the same business and utilized the same properties. Its incorporators and directors included the Lipat
spouses who owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and
other close relatives and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the vice-
president and general manager. Pursuant to this, the loan was restructured in the name of BEC, and the new corporation
obtained subsequent loans (evidenced by several promissory notes) and a letter of credit agreement, all secured by the real
estate mortgage on the Lipats’ property.
Eventually, BEC defaulted on payments, which prompted the bank to foreclose on the real mortgage. A certain
Trinidad came out to be the highest bidder. Unfazed, the spouses moved to annul the real estate mortgage and
extrajudicial foreclosure, alleging that the promissory notes and the letter of credit were ultra vires acts of Teresita as they
were executed without the requisite board resolution of the Board of Directors of BEC, and even assuming that such were
binding on BEC, the same were the corporations sole obligation, it having a personality distinct and separate from spouses
Lipat.
The trial court ruled that there was convincing and conclusive evidence proving that BEC was a family
corporation of the Lipats. As such, it was a mere extension of petitioners’ personality and business and a mere alter ego or
business conduit of the Lipats established for their own benefit. The appellate court affirmed this ruling. The spouses, still
unfazed, countered on certiorari, alleging that there was no clear showing of fraud on their part.
Issue:
1. W/N the doctrine of piercing the veil of corporate fiction applies in this case.
Held/Ratio:
1. YES. In finding the Lipats’ mortgaged property liable for the obligations of BEC, both courts below relied upon
the alter ego doctrine or instrumentality rule, rather than fraud in piercing the veil of corporate fiction. When the
corporation is the mere alter ego or business conduit of a person, the separate personality of the corporation may
be disregarded.
Note:
If sir asks why the court came to the conclusion that the two businesses are one and the same and that one was
merely an alter ego of the other, say this!
Evidence suggests and alter ego case in the sense that: (1) the spouses are the owners and majority shareholders of
BET and BEC; (2) both firms were managed by their daughter, Teresita; (3) both firms were engaged in the garment

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business, supplying products to Mystical Fashion, a US firm established by Estelita; (4) both firms held office in the same
building owned by the Lipats; (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the
business operations of the BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable;
(7) the corporate funds were held by Estelita Lipat and the corporation itself had no visible assets; (8) the board of
directors of BEC was composed of the Burgos and Lipat family members; (9) Estelita had full control over the activities
of and decided business matters of the corporation; and that (10) Estelita Lipat had benefited from the loans secured from
Pacific Bank to finance her business abroad and from the export bills secured by BEC for the account of Mystical
Fashion. It could not have been coincidental that BET and BEC are so intertwined with each other in terms of ownership,
business purpose, and management. Apparently, BET and BEC are one and the same and the latter is a conduit of and
merely succeeded the former. The spouses desperately attempt to isolate themselves from and hide behind the corporate
personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of piercing the
veil of corporate entity seeks to prevent and remedy. In he Court’s view, BEC is a mere continuation and successor of
BET, and petitioners cannot evade their obligations in the mortgage contract secured under the name of BEC on the
pretext that it was signed for the benefit and under the name of BET.

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33 - Emilio Cano Enterprise, Inc. v. Court of Industrial Relations, et al (1965) (close/family corp.)
Doctrines:
• While a corporation is a legal entity existing separate and apart from the persons composing it, that concept
cannot be extended to a point beyond its reason and policy; and when invoked in support of an end subversive of
this policy, it should be disregarded by the courts.
Facts:
A complaint for unfair labor practice was filed By Honorata Cruz against Emilio, Ariston and Rodolfo Cano as
president and proprietor, field supervisor and manager, respectively, of Emilio Cano Enterprises, Inc.
After trial, Emilio and Rodolfo were found guilty of the ULP charge, but absolved Ariston for insufficiency
evidence. Emilio and Rodolfo were ordered, jointly and severally, to reinstate Honorata to her former position with
payment of back wages from the time of her dismissal up to her reinstatement, together with all of the rights and
privileges thereunto appertaining.
The case was appealed, but the judge affirmed the trial court decision. An order of execution was issued to
reinstate Honorata and to deposit with the court the amount P7,222.58 within 10 days from receipt of the order, failing
which the court will order either a levy on respondents’ properties or the filing of an action for contempt of court. (The
order of execution was directed against the properties of Emilio Cano Enterprises, Inc.)
Issues:
1. W/N the judgment against Emilio and Rodolfo in their capacity as officials of the corporation can be made
effective against the property of the latter which was not a party to the case.
Held/Ratio:
1. Yes. While it is an undisputed rule that a corporation has a personality separate and distinct from its members or
stockholders because of a fiction of the law, here we should not lose sight of the fact that the Emilio Cano
Enterprises, Inc. is a closed family corporation where the incorporators and directors belong to one single family.
Thus, the following are its incorporators: Emilio Cano, his wife Juliana, his sons Rodolfo and Carlos, and his
daughter-in-law Ana D. Cano. Here is an instance where the corporation and its members can be considered as
one. And to hold such entity liable for the acts of its members is not to ignore the legal fiction but merely to give
meaning to the principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end
subversive of justice. And so it has been held that while a corporation is a legal entity existing separate and apart
from the persons composing it, that concept cannot be extended to a point beyond its reason and policy, and when
invoked in support of an end subversive of this policy it should be disregarded by the courts.!

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34 - Palacio v. Fely Transportation Co. (1962)
Doctrine:
• One cannot evade civil liability by incorporating properties or the business.
Facts:
Isabelo Calingasan owns a jeep which Alfredo Carillo was hired to drive. One day, as Carillo was driving in
Quezon City, he ran over a child, Mario Palacio, in a negligent, reckless, and imprudent manner. Carillo was then
convicted. Subsequently, Calingasan sold the jeep to Fely Transportation Company. Now, Mario’s parents are charging
Fely Transportation Co. subsidiary liable for damages. Apparently, the accident/mishap done to their son caused them
great financial distress and anguish — especially it was the day before Christmas when Mario was ran over. In addition to
this, and as their main contention, they claim that Calingasan sold the jeep to Fely Corporation in order to evade liability.
Issue:
1. W/N Fely Transportation Co. and Calingasan are subsidiary liable.
Held/Ratio:
1. YES. Fely Transportation Co. and Calingasan must be subsidiary liable. The court is convinced that Calingasan’s
main purpose of forming the corporation was to evade his subsidiary liability resulting from the conviction of his
driver, Carillo.
This fact was evident since the incorporators were the immediate family members of Calingasan and that the
defendant failed to prove that it has other property than the said jeep — it then strengthens the conviction that the
formation of the corporation was indeed for the evasion of subsidiary liability.
The court said that the corporation should not be heard to say that it has a separate juridical personality distinct
from its members when to allow to do so would be to sanction the use of the fiction of corporate entity as a shield
to subversive acts.

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35 - Villa Rey Transit, Inc. v. Eusebio Ferrer and PANTRANCO (1968)
PANTRANCO v. Jose M. Villarama
Doctrine:
• The ends and purposes of the Corporation law seeks to separate personal responsibilities from corporate
undertakings. It is the very essence of incorporation that the acts and conducts of the corporation be carried out in
its own corporate name because it has its own personality.
• When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of
individuals.
• Where the Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be
enjoined from competing with the covenantee.
• Numerous authorities hold that a covenant which is incidental to the sale and transfer of a trade or business, and
which purports to bind the seller not to engage in the same business in competition with the purchaser, is lawful
and enforceable. While such covenants are designed to prevent competition on the part of the seller, it is
ordinarily neither their purpose nor effect to stifle competition generally in the locality, nor to prevent it at all in a
way or to an extent injurious to the public.
Facts:
Villarama — original owner of the TPU (first set); entered into a contract with PANTRANCO.
PANTRANCO — bought the TPUs from Villarama
Fernando — original owner of the 5 TPUs (second set), from whom Villarama bought along with 49 buses, tools
and equipment.
Ferrer — winner of a civil case against FERNANDO; sheriff levied on two of the five TPUs (second set) in his
favor
The case is a tri-party appeal from the decision of the CFI of Manila. In 1959, Villarama entered into a Contract
of Sale with PANTRANCO for two certificates of public convenience (first set) which authorizes the owner to operate 32
units of buses along the Pangasinan to Manila route. Among others, the contract contains a stipulation that prohibits
the seller (Villarama) from applying for new TPUs for 10 years identical or competing with the buyer’s.
Three months later on March 1959, a corporation called Villa Rey Transit Inc. was organized with a capital stock
of P500,000.00. The incorporators are Natividad Villarama (respondent Villarama’s wife) and other relatives. On April
1959 after registering with the SEC, Villa Rey bought five TPUs (second set) from Fernando along with 49 buses, tools
and other equipment. After the execution of the contract, Villa Rey then prayed for the Public Service Commission (PSC)
to grant it provisional authority to operate. Before the PSC could take action on the application, two of the five TPUs
were levied in favor of respondent Ferrer in cases against Fernando. Ferrer then sold these two TPUs to
PANTRANCO. Subsequently, the PSC ordered that PANTRANCO would have the authority to operate on the two
TPUs acquired from Ferrer.
Villa Rey now questioned this order and initiated an action in the CFI of Manila to annul these two TPUs.
PANTRANCO on the other hand initiated a third-party complaint alleging that Villarama/Villa Rey Inc. was disqualified
from operating on the two TPUs by virtue of their original contract of Sale.

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Issues:
1. W/N the stipulation on the original contract between PANTRANCO and Villarama binds Villa Rey Inc. as
well.
2. W/N such stipulation is valid
Held/Ratio:
1. YES.
Evidence discloses that for someone claiming he is only a part-time manager, the evidence on record shows
Villarama practically controlled the corporation because he used the corporation funds to pay for his own
obligations, and that he also bought money into the corporation’s coffers. The finances of the Corporation which,
under all concepts in the law, are supposed to be under the control and administration of the treasurer keeping
them as trust fund for the Corporation, were, nonetheless, manipulated and disbursed as if they were the private
funds of Villarama, in such a way and extent that Villarama appeared to be the actual owner-treasurer of the
business without regard to the rights of the stockholders. The evidence further shows that the initial cash
capitalization of the corporation of P105,000.00 was mostly financed by Villarama. Further, the evidence shows
that when the Corporation was in its initial months of operation, Villarama purchased and paid with his personal
checks Ford trucks for the Corporation. Villarama had co-mingled his personal funds and transactions with those
made in the name of the Corporation.
The Court thus concluded:
When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection
of a monopoly or generally the perpetration of knavery or crime, the veil with which the law
covers and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of
evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and
that the restrictive clause in the contract entered into by the latter and Pantranco is also
enforceable and binding against the said Corporation.
2. YES.
The clear intention of the parties was to prevent the seller from conducting any competitive line for 10 years
since, anyway, he has bound himself not to apply for authorization to operate along such lines for the duration of
such period. If the prohibition is to be applied only to the acquisition of new certificates of public convenience
thru an application with the Public Service Commission, this would, in effect, allow the seller just the same to
compete with the buyer as long as his authority to operate is only acquired thru transfer or sale from a previous
operator, thus defeating the intention of the parties.
Although the stipulation is in the nature of an agreement suppressing competition, it is, however, merely ancillary
or incidental to the main agreement which is that of sale. The suppression or restraint is only partial or limited:
first, in scope, it refers only to application for TPU by the seller in competition with the lines sold to the buyer;
second, in duration, it is only for ten (10) years; and third, with respect to situs or territory, the restraint is only
along the lines covered by the certificates sold.

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36 - McConnel v. CA (1961) (Case for thinly-capitalized corporations)
Doctrines:
• If a corporation is a mere instrumentality of the individual stockholder; the latter must individually answer for
the corporate obligations
Facts:
Park Rite Co. (PRC), a Phil. corporation, was originally organized on April 1947, with a capital stock of 1,500
shares/P1.00 a share. PRC leased from Rafael Samanillo a vacant lot which was used for parking motor vehicles for
consideration.
It turned out that in operating its parking business, the corporation occupied and used not only the Samanillo
lot it had leased but also an adjacent lot belonging to Padilla (respondent) without the owner’s knowledge and consent.
Padilla wanted payment for the use and occupation of the lot.
Park Rite (then controlled by Parades and Tolentino) disclaimed liability, blaming the original incorporators
(McConnel, Rodriguez, and Cochrane). Padilla filed a complaint for forcible entry in the MTC (uy civpro).
Judgment was rendered on Nov. 13, 1947 against Park Rite to pay P7,500 plus interest. Restitution not having
been made until 31 January 1948, the entire judgment amounted to P11,732.50. Upon execution, the corporation was
found without any assets other than P550 deposited in Court. After their application to the judgment credit, there
remained a balance of P11,182.50 outstanding and unsatisfied.
The judgment creditors then filed suit in the CFI Manila against the corporation and its past and present
stockholders, to recover from them, jointly and severally, the unsatisfied balance of the judgment, plus legal interest and
costs.
CFI denied recovery. CA reversed finding that the corporation was a mere alter ego or business conduit of the
principal stockholders that controlled it for their own benefit, and adjudged them responsible
Issues:
1. W/N there was justification for disregarding the corporate entity of Park Rite Co., Inc. and holding its controlling
stockholders personally responsible for a judgment against the corp.
Held/Ratio:
1. YES
The evidence clearly shows that these persons completely dominated and controlled the corporation and that the
functions of the corporation were solely for their benefits.
When it was originally organized on or about April 15, 1947, the original incorporators were McConnel,
Cochrane, Rodriguez, Dario and Ordrecio with a capital stock of P1,500 divided into 1,500 shares at P1.00 a
share. McConnel and Cochrane each owned 500 shares, Rodriguez 408 shares, and Dario and Odrecio 1
share each. It is obvious that the shares of the last two named persons were merely qualifying shares. (So
McConnel and Cochrane — 500 shares each, Rodriguez — 498 shares and Dario and Odrecio — 1 share each
TOTAL 1500 shares )
Then or about August 22, 1947 the defendants Paredes and Tolentino purchased 1,496 shares of the said
corporation and the remaining four shares were acquired by Claudio, Paredes, Tarictican, and Marquez at
one share each. It is obvious that the last four shares bought by these four persons were merely qualifying
shares and that to all intents and purposes the spouses Cirilo Paredes and Ursula Tolentino composed the so-
called Park Rite Co., Inc.
The facts show that the corporation is a mere instrumentality of the individual stockholder’s; hence the latter
must individually answer for the corporate obligations. While the mere ownership of all or nearly all of the capital
stock of a corporation is a mere business conduit of the stockholder, that conclusion is amply justified where it is

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shown, as in the case before us, that the operations of the corporation were so merged with those of the
stockholders as to be practically indistinguishable from them.
That the corporation was a mere extension of their personality is shown by the fact that the office of Cirilo
Paredes and that of Park Rite Co., Inc. were located in the same building, in the same floor and in the same
room — at 507 Wilson Building. This is further shown by the fact that the funds of the corporation were kept
by Cirilo Paredes in his own name.
To hold the latter liable for the corporation’s obligations is not to ignore the corporation’s separate entity, but
merely to apply the established principle that such entity cannot be invoked or used for purposes that could
not have been intended by the law that created that separate personality.

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37 - Gabionza v. CA (2008)
Doctrine:
• There is no legal obligation on the part of the petitioners to undertake an investigation of ASBHI before agreeing
to provide loans. It is unfair to expect a person to procure every public record concerning an applicant for credit to
satisfy himself of the latter’s financial standing.
Facts:
Betty Go Gabionza and Isabelita Tan invested money with ASB Holdings, Inc. (ASBHI). According to ASBHI’s
articles of incorporation, its primary purpose is to invest in any real and personal properties of every kind or otherwise
acquire the stocks and bonds of any other corporation, and other securities or evidence of indebtedness of any other
corporation and to hold or own, use, sell, deal in, dispose of, and turn to account any such stocks. (Parang money market
placement)
After each deposit, ASBHI would issue two (2) postdated checks to its lenders/investors, one representing the
principal amount and the other covering the interest thereon. The checks were drawn against DBS Bank and would mature
in 30 to 45 days. On the maturity of the checks, the individual lenders can renew the loans, either collecting only the
interest earnings or rolling over the same with the principal amounts.
At first, petitioners were issued receipts reflecting the name “ASB Realty Development” which they were told
was the same entity as ASB or was connected therewith, but beginning in March 1998, the receipts were issued in the
name of ASBHI. Petitioners claimed that the employees told them that the ASBHI was exactly the same institution that
they had previously dealt with
In the first quarter of 2000, DBS Bank started to refuse to pay for the checks purportedly by virtue of “stop
payment” orders from ASBHI. In May of 2000, ASBHI filed a petition for rehabilitation and receivership with the
Securities and Exchange Commission (SEC), and it was able to obtain an order enjoining it from paying its outstanding
liabilities. This series of events led to the filing of the complaints by petitioners charging Luke Roxas (president of
ASBHI) and Evelyn Nolasco (Senior VP and Treasurer) with estafa under Article 315(2)(a) and (2)(d) of theRPC, estafa
under PD 1689, violation of the Revised Securities Act and violation of the General Banking Act.
A special task force, the Task Force on Financial Fraud (Task Force), was created by the DOJ to investigate. The
Task Force concluded that the subject transactions were loans which gave rise only to civil liability; that petitioners were
satisfied with the arrangement from 1996 to 2000; that petitioners never directly dealt with Nolasco and Roxas; and that a
check was not a security as contemplated by the Revised Securities Act.
Petitioners assailed the Task Force findings and filed!a joint petition for review with the Secretary of Justice. Then
DOJ Secretary Hernando Perez issued a resolution which partially reversed the Task Force and instead, directed the filing
of five (5) Informations for estafa under Article 315(2)(a) of the RPC. Respondents filed a petition for certiorari with the
CA. The CA reversed the DOJ resolution and ordered the dismissal of the criminal cases, hence this petition filed by
Gabionza and Tan.
Issue:
1. W/N the findings embodied in the DOJ Resolution align with the foregoing elements of estafa3 by means of deceit

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3. ART. 315. Swindling (estafa). — Any person who shall defraud another by any of the means mentioned herein below shall be punished by:
...
2. By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneous with the commission of the fraud:
a. By using a fictitious name, or falsely pretending to possess power, influence, qualifications, property, credit, agency, business or imaginary
transactions, or by means of other similar deceits;
The elements of estafa by means of deceit are as follows: (1) that there must be a false pretense, fraudulent act or fraudulent means; (2) that such
false pretense, fraudulent act or fraudulent means must be made or executed prior to or simultaneously with the commission of the fraud; (3)
that the offended party must have relied on the false pretense, fraudulent act or fraudulent means, that is, he was induced to part with his money
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Held/Ratio:
1. YES. The DOJ Resolution explicitly identified the false pretense, fraudulent act or fraudulent means perpetrated
upon the petitioners. It narrated that petitioners were made to believe that ASBHI had the financial capacity
to repay the loans it enticed petitioners to extend, despite the fact that “it had an authorized capital stock of
only P500,000.00 and paid up capital of only P125,000.00.
The material misrepresentations have been made by the agents or employees of ASBHI to petitioners, to the effect
that the corporation was structurally sound and financially able to undertake the series of loan transactions that it
induced petitioners to enter into. (They claimed that ASBHI had controlling interests with ASB Realty Corp., ASB
Development Corp. and ASB Land, Inc,;! that ASB could legitimately solicit funds from the public for
investment/borrowing purposes; that ASB, by itself, or through the corporations aforestated, owned real and
personal properties which would support and justify its borrowing program; that ASB was connected with and
firmly backed by DBS Bank in which Roxas held a substantial stake; and ASB would, upon maturity of the checks
it issued to its lenders, pay the same and that it had the necessary resources to do so.)
Even if ASBHI’s lack of financial and structural integrity is verifiable from the articles of incorporation or other
publicly available SEC records, it does not follow that the crime of estafa through deceit would be beyond
commission when precisely there are bending representations that the company would be able to meet its
obligations. Moreover, respondents’ argument assumes that there is legal obligation on the part of petitioners to
undertake an investigation of ASBHI before agreeing to provide the loans. There is no such obligation. It is unfair
to expect a person to procure every available public record concerning an applicant for credit to satisfy himself of
the latter’s financial standing. At least, that is not the way an average person takes care of his concerns.
To the benefit of private respondents, the Court of Appeals ruled, citing Sesbreno v. Court of Appeals, that the
subject transactions “are akin to money market placements which partake the nature of a loan, the non-payment of
which does not give rise to criminal liability for estafa.” That rationale is wholly irrelevant to the complaint at bar,
which centers not on the inability of ASBHI to repay petitioners but on the fraud and misrepresentation
committed by ASBHI to induce petitioners to part with their money.
To be clear, it is possible to hold the borrower in a money market placement liable for estafa if the creditor was
induced to extend a loan upon the false or fraudulent misrepresentations of the borrower. Such estafa is one by
means of deceit.
The DOJ Resolution clearly supports a prima facie finding that the crime of estafa under Article 315 (2)(a) has
been committed against petitioners.
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or property because of the false pretense, fraudulent act or fraudulent means; and (4) that as a result thereof, the offended party suffered
damage.
Other facts: Gabionza lost P12,160,583.32 whereas Tan lost 16,411,238.57

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38 - Yutivo Sons Hardware Company v. CTA and CIR (1961) (assessment; mere alter ego)
Doctrines:
• Corporate Juridical Personality cannot be employed for the purpose of avoidance or minimization of taxes.
• It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporation petitions to which it may be connected. However, “when
the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,” the
law will regard the corporation as an association of persons, or in the case of two corporations, merge them into
one.
• When the corporation is the “mere alter ego or business conduit of a person, it may be disregarded.”
Facts:
Yutivo Sons Hardware Co. is a company engaged in the importation and sale of hardware supplies and
equipment. The former bought a number of cars from General Motors Overseas Corporation. As importer, GM paid sales
tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being
collected only once on original sales, Yutivo paid no further sales tax on its sales to the public.
On 1946, Southern Motors was organized to engage in the business of selling cars, trucks, and spare parts. Its
original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each, 25% of which
(2,500) was subscribed to the 5 sons of 3 of the founders of Yutivo. [Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng
Poh, and Washington Sycip] (The first three are brothers, being sons of Yu Tiong Yee. The latter two! are respectively
sons of Yu Tiong Sin and Albino Sycip.)
**Short corp shiz: only at least 25% of the authorized capital stock needs to be subscribed at the time of incorporation, out
of which only at least 25% of the subscribed stocks need to be paid upon subscription. Minimum number of people to
form a corporation: FIVE**
After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars
and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the
Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and
trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of
selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as
importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is
collected only once on original sales, SM paid no sales tax on its sales to the public.
After some time, the CIR made an assessment on Yutivo and demanded from the latter P1,804,769.85 as
deficiency sales tax, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale
made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the
subsidiary of the latter.
The said assessment was disputed by Yutivo, and after a reinvestigation was made, the respondent Collector
countermanded his demand for sales tax deficiency on the ground that there was “no sufficient evidence that could be
gathered to sustain the assessment of this Office based on the theory that Southern Motors is a mere instrumentality or
subsidiary of Yutivo.”
Another investigation ensued, this time the respondent determined that the aforementioned tax assessment was
lawfully due the government, the last demand being P2,215,809.27. The increase in amount was due to the additional
assessment made for the year of 1950.
Yutivo contested the second assessment before the CTA, alleging that there is no valid ground to disregard
corporate personality and to hold that SM is an adjunct of petitioner. The CTA finding sustained the Collector’s theory
that there was no legitimate or bona fide purpose in the organization of SM — the apparent objective being to evade the
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payment of taxes — and that it was owned (or a majority of the stocks thereof) and controlled by Yutivo, and is a mere
alter ego of the latter.
Yutivo brought the case to the SC through a petition for review.
Issues:
1. W/N Southern Motors was organized for the purpose of evading the payment of taxes.
2. W/N Southern Motors is a mere adjunct of Yutivo.
Held/Ratio:
1. NO. SM was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up to
June 30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo,
which, in turn resold them to SM. During that period, it is not disputed that GM as importer, was the one solely
liable for sales taxes. Neither Yutivo nor SM was subject to the sales taxes on their sales of cars and trucks. The
sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued its
practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax
evasion device runs counter to the fact that there was no tax to evade.
The intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and
convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation.
This is because fraud is never lightly to be presumed.
2. YES. According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 (25% of
P250,000 **see short corp shiz above**) was paid by the aforenamed subscribers, but actually the said sum was
advanced by Yutivo. The additional subscriptions to the capital stock of SM and subsequent transfers thereof were
paid by Yutivo itself. The payments were made, however, without any transfer of funds from Yutivo to SM.
Yutivo simply charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in payment
of the shares. Whether a charge was to be made against the accounts of the subscribers or said subscribers were to
subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing that the
former initiated the subscription.
Another aspect relative to Yutivo’s control over SM operations relates to its cash transactions. All cash assets of
SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all
receipts of cash by SM including its branches were transmitted or transferred immediately and directly to Yutivo
in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are referred
to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in relation there, the
payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs
generally, a corresponding charge is made against the account of SM in Yutivo’s books. The payments for and
charges against SM are made by Yutivo as a matter of course and without need of any further request, the latter
would advance all such cash requirements for the benefit of SM. Any and all payments and cash vouchers are
made on Yutivo stationery and made under authority of Yutivo’s corporate officers, without any copy thereof
being furnished to SM. All detailed records such as cash disbursements, such as expenses, purchases, etc. for the
account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information
received from Yutivo.
Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit
to the latter not only in the form of starting capital but also in the form of credits extended for the cars and
vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the
capital had been exhausted. Thus, the increases in the capital stock were made in advances or “Guarantee”
payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. At
all times, Yutivo, through officers and directors common to it and SM, exercised full control over the cash funds,
policies, expenditures and obligations of the latter.

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Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court CTA correctly disregarded the
technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.
In the end, SC merely modified the ruling of the CTA and reduced the charges held therein, due to the fact that
the CTA erroneously included in the computation amounts which were already paid by Yutivo.

39 - Francisco v. Mejia (2001) (intentional delinquency in payment of real taxes)


Doctrines:
• US v. Milwaukee Refrigerator and Umali v. CA were cited.
• “With specific regard to corporate officers, the general rule is that the officer cannot be held personally liable with
the corporation, whether civilly or otherwise, for the consequences of his acts, if he acted for and in behalf of the
corporation, within the scope of his authority and in good faith. In such cases, the officer’s acts are properly
attributed to the corporation. However, if it is proven that the officer has used the corporate fiction to defraud a
third party, or that he has acted negligently, maliciously or in bad faith, then the corporate veil shall be lifted and
he shall be held personally liable for the particular corporate obligation involved.”
Facts:
Andrea Gutierrez was the owner of a parcel of land in Caloocan. This property was subdivided into five lots, four
of which are the subject of this controversy. The four lots were sold to Cardale Financing and Realty Corporation for a
consideration of P800,000. Cardale made an initial payment of P171,000, the balance payable within a period of 5 years
with an interest of 9% per annum. To secure the balance of the purchase price, Cardale mortgaged 3 of the 4 parcels of
land sold to it by Gutierrez to Gutierrez herself (hence, the deed executed was “sale with mortgage”).
Cardale failed to pay. Gutierrez filed a suit for rescission. Cardale was represented by its VP and Treasurer, herein
petitioner Adalia Francisco. During the pendency of the suit, Gutierrez died and was substituted by herein respondent Rita
Mejia as the administrator of Gutierrez’s estate. The case dragged on for 14 years.
Meanwhile, real property taxes for the mortgaged properties were not paid. As a result, the government levied
upon them. They became subject of an auction sale. The highest bidder was Merryland Development Corporation, whose
President was also Adalia Francisco. Eventually, titles were consolidated to Merryland.
Mejia filed a complaint for damages against Francisco, Merryland, and the Register Deeds of Caloocan City. The
trial court ruled in favor of Francisco. It was said that no sufficient proof of fraud on the part of Francisco was adduced.
The Court of Appeals reversed the decision of the trial court.
Issues:
1. W/N it is proper to pierce the corporate veil and hold Francisco liable
Held/Ratio:
1. YES, it was evident that Francisco was in bad faith, not informing Gutierrez’s estate of the tax delinquencies.
Apparently, Francisco made use of her involvement in Cardale and Merryland to secure an advantage for the
latter. Cardale as the mortgagor had the duty of paying the taxes for the properties. Evidence showed that
Francisco as Cardale’s Treasurer, intended to conceal the delinquency in the payment of taxes so that the
properties may be levied upon and be the subject of an auction where Merryland could bid, which was exactly
what happened.

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40 - NAMARCO v. Associated Finance (1967) (sugar deal)
Facts:
National Marketing Corporation (NAMARCO) entered into an agreement with Associated Finance, a domestic
corporation represented by its president, Francisco Sycip, for the exchange of raw and refined sugar. Respondent would
deliver to the Petitioner 22,516 bags (each weighing 100 pounds) of “Victorias” and/or “National” refined sugar in
exchange for 7,732.71 bags of “Busilak” and 17,285.08 piculs of “Pasumil” raw sugar belonging to NAMARCO, both
agreeing to pay liquidated damages equivalent to 20% of the contractual value of the sugar should either party fail to
comply. Associated failed to deliver to NAMARCO the “Victoria” and “National” sugar agreed upon and instead offered
to pay its price. NAMARCO refused and filed a suit for damages. The trial court held Associated liable but not Sycip.
Issue:
1. W/N Sycip may be held liable, jointly and severally with his co-defendant, Associated Finance.
Held/Ratio:
1. There are facts w/c are sufficient to hold Sycip liable solidarily w/ Associated. He asserted that he entered into the
contract personally, he had full knowledge of the fact that Associated was in no position to comply. At the same
time, he was majority stockholder of Associated; w/ 60,000 of its 105,000 total shares in his name, and another
20,000 in the name of his wife. He had full control over Associated. The foregoing facts, fully established by
evidence, can lead to no other conclusion than that Sycip was guilty of fraud through false representations. Thus,
he cannot seek refuge behind the separate personality of the corporation — w/c was his mere alter ego.

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41 - G. C. Arnold v. Willits and Patterson Ltd. (1923) (Exhibit A v. Exhibit B)
Doctrines:
• Where the stock of a corporation is owned by one person whereby the corporation functions only for the
benefit of such individual owner, the corporation and the individual should be deemed to be the same.
Facts:
Willits & Patterson was a partnership organized in San Francisco, California. In 1916, they engaged the services
of Arnold to be their agent in the Philippines. Under their contract, marked Exhibit A, Arnold will get half of the net
profits of any transaction entered into in the name of the partnership, half of the net profits of the coconut oil mill, a
minimum $200/month salary, and a 1% brokerage fee on all purchases and sales of merchandise. Arnold was to be Willits
& Patterson’s agent for five years, and he was tasked to operate a certain oil mill. Sometime later, Patterson retired, and
Willits then created a new corporation under the same name. Under this corporation, Willits owned practically all the
shares except those nominal shares needed to qualify directors. Willits also created another corporation in the
Philippines with the same name. Again, he owned practically all the shares. Legally, the San Francisco corporation
owned all the assets and liabilities of the Manila corporation. Sometime in 1919, Willits and Arnold entered into
another contract, marked Exhibit B, which clarified Arnold’s mode of compensation.
Under Exhibit B, Arnold would get a 1% commission on all sales made by the corporation in Manila, half of the
profits on all business transactions, and no participation on earnings of any stock, and if the business operated on a loss,
he would receive $400/month. No complaint or argument was raised against these terms, and the accountant of Willits &
Patterson in Manila used Exhibit B in computing what was due to Arnold. By 1921, it showed that defendant corporation
owed Arnold P106,277.50 under Exhibit B. However, before this, the corporation underwent financial trouble and all its
assets were forwarded to a “creditors’ committee.” The committee refuses to honor Exhibit B because according to it,
the corporation never allowed or acceded to such a contract or understanding, and that Willits signed it without
authority.
Issues:
1. W/N Exhibit B is binding upon the corporation and the creditors’ committee despite the lack of approval from the
Board
Held/Ratio:
1. YES. The approval of the Board is not needed since it is evident that Willis owns and controls the corporation.
When the stock of a corporation owned by one individual and the corporation functions for his benefit, the
corporation and individual should be deemed the same. Willit’s actions were done not just to benefit him as a
shareholder but to control the whole corporation and to affect the transaction of its business, in the same
manner as if it had been clothed with all the formalities of a corporate act.
Also, Exhibit B came into effect in 1919 and since then, was used by the corporation in determining Arnold’s
salary and dues. There was no objection ever raised against it except two years later, in 1921, by the creditors’
committee. It’s a well-settled doctrine that acts of officers, though unauthorized, may be ratified by the
corporation where the latter acquiesces to the act. Here, the creditors’ committee cannot object to Exhibit B
because the corporation has in effect ratified its validity by applying it for two years.
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42 - La Campana Coffee Factory v. Kaisahan ng Manggagawa (1953) (jurisdiction of Court of Industrial
Relations, GauGau and Coffee Corporation)
Doctrines:
• The issue in this case is about the jurisdiction of the Court of Industrial Relations to hear the case filed against the
corporation. This shows a distinction between Alter Ego Cases and Fraud Cases, which in the latter involves a
pecuniary claim.
• The law treats two corporations as one, in a case filed against them, when they have only one management, set of
shareholders, office, and payroll.
Facts:
Tan Tong and his family own two corporations, namely: La Campana Gaugau Packing(The Gaugau Corporation)
and La Campana Coffee Factory, Inc.(The Coffee Corporation). Both are located in the same office in Espana.
In 1951, the laborers of the two corporations of Tan Tong formed a labor union named as Kaisahan ng
Manggagawa sa La Compana(The Kaisahan). The 66 members of which are under one payroll of the two corporations.
The Kaisahan then sought to be registered in the Department of Labor to have its separate entity in July 1951.
Tan Tong and the Kaisahan went into a Coporate Bargaining Agreement in which the laborers demanded higher
wages. The two entities failed to reach an agreement and by the issuance of a permit by the Department of Labor to the
Kaisahan to have legal standing, the dispute was then given to the Court of Industrial Relations.
In September 1951, during the pendency of the case, the Secretary of Labor revoked the Kaisahan’s permit to
be a separate entity due to a finding that the labor union was engaged in subversive actions.
Tan Tong now pushes for the dismissal of the case in the Court of Industrial Relations for lack of jurisdiction.
The claim that the number of workers in the La Campana Coffee Factory is only 14 and the Court of Industrial
Relations requires that to have jurisdiction over a dispute, an organization must have at least 31 members.
Tan Tong claims that the two corporations are distinct from each other and its La Campana Coffee Factory has
less than 31 laborers and the Court of Industrial Relations does not have jurisdiction over the same. He also claims that
the union has lost its legal standing to sue because the Secretary of Labor has revoked the permit.
Issues:
1. W/N the Court of Industrial Relations has jurisdiction over the dispute
2. W/N the Kaisahan have legal standing to sue
Held/Ratio:
1. Yes
It has been proven by an investigation done, that the corporations owned by Tan Tong are merely one and the
same. This is for the fact that they are based in only one office, its goods (gaugau and coffee) are stored in one
place and in one warehouse, delivery trucks indicate deliveries of both gaugau and coffee. It is also stated that the
employees receive their salaries from only one payroll and from one Natividad Garcia, Tan Tong’s secretary. In
this case, the court treats the two companies as one. Therefore, the count of employees should be taken as a
whole, which is 66, very well above the minimum number required for the Court of Industrial Relations to
acquire jurisdiction.
2. Yes
The law vests the Court of Industrial Relations jurisdiction of disputes of organizations with at least 31 members.
It is also stated that once the Court of Industrial Relations acquires jurisdiction, it is retained throughout
until the dispute is resolved. The revocation of the permit of the Kaisahan by the Secretary of Justice did not
remove the jurisdiction of the court over the case.

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43 - Shoemart v. NLRC (1993) (sister company of SM)
Doctrines:
• Employment of same workers, single place of business, etc., may indicate alter ego situation (from syllabus)
Facts:
Moris Industries was engaged in manufacture of leather goods. In 1985, 56 out of 74 workers decided to form the
Moris Industries Union. When the Union contacted Moris in order to fix a collective bargaining agreement, Moris
suddenly shut down and ceased operations two days later. Because of this, the Union filed a case with the NLRC against
Moris for unfair labor practice, recovery of wage differentials and other monetary benefits. Shoemart, and its president,
Henry Sy, was also impleaded because according to the Union, Shoemart and Moris had only one juridical personality.
SM countered that it had a separate juridical personality from Morris and that it had no employer-employee relationship
with members of the Union.
The Union presented one Cresencio Edic as a witness. Edic testified that he was first hired by the persons who
owned SM to make samples to be displayed on the store windows. When he was promoted as over-all supervisor, the
factory was transferred, the production division was separately incorporated and underwent many name changes.
However, the owners remained the same. Due to martial law, the case was repeatedly delayed, until it finally landed
with Labor Arbiter Linsangan, who was the 4th arbiter to handle the case. Linsangan decided that Moris and SM were
equally liable to the Union based on the ff. grounds:
a. Edic’s testimony
b. all five incorporators of Moris were major stockholders of SM (except for Elizabeth Sy)
c. SM is the exclusive buyer of all of Moris’s products
d. SM and Moris are housed in one building
e. Moris uses the payrolls of SM (SM says that they didn’t know this was happening, but the Court found
this allegation incredible)
SM appeals this decision.
Issues:
1. W/N the NLRC correctly applied the piercing doctrine by holding SM liable together with Moris
Held/Ratio:
1. YES. The facts show that Moris was the mere alter ego of SM. There are several factors that show that Moris is a
mere conduit of SM, and that it is SM who really owns and controls Moris. Thus, in order to protect the rights of
the workers, the NLRC properly applied the piercing of the corporate veil doctrine. And since Moris doesn’t exist
anymore to rehire the workers, who also can’t work for SM because of a difference in expertise of labor, then the
SC deemed it proper to hold SM solidarily liable with Moris for separation pay.!

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44 - Padilla v. Court of Appeals (2001) (same person, different corporation, must implead)
Doctrine:
• No person shall be affected by any proceedings to which he is a stranger, and strangers to a case are not bound by
the judgment rendered by the court.
• The veil of corporate fiction may only be disregarded in cases where the corporate vehicle is being used to defeat
public convenience, justify wrong, protect fraud, or defend crime. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be
presumed.
Facts:
Susana Realty Inc. (SRI) sold to Light Rail Transit Authority (LRTA) several parcels of land along Taft Avenue.
On the deed of absolute sale, SRI had a right of first refusal in case LRTA decided to develop the land. LRTA contracted
with Phoenix-Omega Development and Management Corporation (Phoenix-Omega) to develop the land, but this was
opposed by SRI due to the right of first refusal clause.
SRI later agreed to lease to Phoenix-Omega part of its property for commercial development. The condition set by
SRI was that any developments to be made were subject to its prior approval. Phoenix-Omega then assigned its rights
over the development of the land to PKA Development and Management Corporation (PKA). Padilla, herein petitioner, is
the President and General Manager of PKA as well as the Chairman of the Board of Directors of Phoenix-Omega.
So now, PKA was in charge of developing the properties. However, it continuously failed to do so, and its
building permit was even revoked for violation of the National Building Code (BP 344) due to defects in the construction.
SRI withheld its approval of PKA’s development plans until the defects were cured, but they never were. PKA then filed
for rescission of the contract, alleging that SRI maliciously withheld approval of the plans, which in turn led to PKA being
unable to comply with its obligations. However, the judgment went in favor of SRI. The contract was rescinded, and PKA
was ordered to indemnify SRI for damages.
The properties were returned to SRI, but PKA failed to pay the monetary awards. Thus, SRI filed a motion for
the issuance of an alias writ against Padilla and Phoenix-Omega, saying that they were one and the same entity with
PKA. The RTC granted this motion, and said that if PKA’s properties were insufficient, SRI can go against the
properties of Padilla and Phoenix-Omega for the enforcement of the previous judgment. The RTC ruled, and the CA
later agreed, that there was evidence to show the PKA and Phoenix-Omega were one and the same, or that PKA is
a mere conduit of Phoenix-Omega. It pointed out that Padilla was both the President and General Manager of PKA
and at the same time the Chairman of the Board and controlling stockholder of Phoenix-Omega. PKA and Phoenix-
Omega also shared officers, laborers, and offices.
Naturally, Padilla and Phoenix-Omega opposed this ruling, saying they were denied due process and were not
given their day in court. The CA, however, ruled that since Padilla was already involved in the proceedings as PKA’s
President and General Manager, and since he was the Chairman of the Board and controlling stockholder of
Phoenix-Omega, then they were already allowed to take part in the proceedings. Thus, there was no violation of due
process.
Padilla and Phoenix-Omega now go to the SC.
Issue:
1. W/N the RTC acquired jurisdiction over Padilla and Phoenix-Omega
2. W/N Padilla’s participation in the proceedings as PKA’s President and General Manager could be construed as
the opportunity to be heard in court of Padilla and Phoenix-Omega

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Held/Ratio:
1. NO, the RTC did not acquire jurisdiction, therefore the alias writ of execution was void.
A court acquires jurisdiction over a person through either a valid service of summons or the person’s voluntary
appearance in court. A court must necessarily have jurisdiction over a party for the latter to be bound by a court
decision. Generally accepted is the principle that no man shall be affected by any proceeding to which he is a
stranger, and strangers to a case are not bound by judgment rendered by the court. In the present case, the RTC
never acquired jurisdiction over the petitioners through any of the aforementioned modes. Neither of the
petitioners were even impleaded as parties to the case.
Since the RTC had no jurisdiction over Padilla and Phoenix-Omega, they could not be bound by the decision.
Execution can only be issued against a party and not against one who was not accorded his day in court. To levy
upon their properties to satisfy a judgment in a case in which they were not even parties is not only inappropriate;
it most certainly is deprivation of property without due process of law.
2. NO, Padilla and Phoenix-Omega were not given their day in court. It is clear that Padilla participated in the
proceedings as General Manager of PKA and not in any other capacity. The fact that he was the Chairman of
the Board of Phoenix-Omega cannot equate to participation by Phoenix-Omega in the same proceedings.
Phoenix-Omega was never a party to the case and so could not have participated therein.
Neither was the trial court’s use of the doctrine of piercing the veil of corporate fiction proper. The general rule is
that a corporation is clothed with a personality separate and distinct from the persons composing it. It may not be
held liable for the obligations of the persons composing it, and neither can its stockholders be held liable for its
obligations. This veil of corporate fiction may only be disregarded in cases where the corporate vehicle is being
used to defeat public convenience, justify wrong, protect fraud, or defend crime. PKA and Phoenix-Omega are
admittedly sister companies, and may be sharing personnel and resources, but there was no allegation, much less
positive proof, that their separate corporate personalities were being used to defeat public convenience,
justify wrong, protect fraud, or defend crime.
For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. In this case, there was no reason to justify piercing the corporate
veil.

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CORPORATE CONTRACT LAW


45 - Bayla v. Silang Traffic Co., Inc (1942) — contract of sale not subscription
Doctrine:
• Whether a particular contract is a subscription or a sale of stock is a matter of construction and depends upon its
terms and the intention of the parties
• Section 61. Pre-incorporation subscription. - A subscription for shares of stock of a corporation still to be formed
shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other
subscribers consent to the revocation, or unless the incorporation of said corporation fails to
materialize within said period or within a longer period as may be stipulated in the contract of subscription:
Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of
incorporation to the Securities and Exchange Commission.
Facts:
Sofronio Bayla and other petitioners instituted this action in the CFI of Cavite against Silang Traffic Corporation
in order to recover a sum of money they paid to the corporation on account of shares of stock they each agreed to take and
pay for under the condition that if the subscriber fails to pay any of the installments when due, or if they are levied upon
by the creditors of the said subscriber, the shares were to revert to the seller and the payments already made will also be
forfeited to the seller, and that the latter may take possession without court proceedings.
The following people agreed to purchase the following number of shares and up to April 30, 1937 had paid the
following amounts:
Sofronio Bayla 8 shares P360
Venancio Toledo 8 shares P375
Josefa Naval 15 shares P675
Paz Toledo 15shares P675

The Board of Directors of the Corporation issued a resolution on August 1, 1937 rescinding the agreement, hence,
Bayla and the other petitioners instituted this action. The corporation alleged that the resolution is not application to Bayla
and the others because their subscribed shares of stock had already automatically reverted to the coporation and the
installments made by them were already forfeited and that the Aug. 1, 1937 resolution was cancelled by a subsequent
resolution.
Issues:
1. W/N the contract is a contract of subscription
2. W/N the failure of Bayla and the others to pay any installment can automatically give rise to forfeiture of the
amounts and the reversion of the shares to the corporation
3. W/N the Aug. 1, 1937 resolution was valid
Held/Ratio:
1. NO. The contract is one of sale not subscription.
The said agreement is entitled “Agreement for Installment Sale of Shares in the Silang Traffic Co”, and while the
purchaser is designated as the “subscriber” and the corporation “seller”, the agreement was entered into in 1935
long after the incorporation and organization of the corporation which took place in 1927. The purchase was to be
payable in quarterly installments for five years. The lower court failed to see the distinction between a
subscription and a purchase. “A subscription, properly speaking, is the mutual agreement of the subscribers to

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take and pay for the stock of a corporation, while a purchase is an independent agreement between the individual
and the corporation to buy shares of stock from it at stipulated price.”
2. NO.
The contract actually provided for an interest of 6% p.a. on deferred payments which would not have been present
if the intention of the parties was the automatic forfeiture and cancellation of the contract. Also, the contract did
not expressly provide that demand shall not be necessary in order that default may arise.
3. Yes.
Since the contract is one of purchase, there is no legal impediment to its rescission by agreement of the parties. In
the first resolution, the rescission was made for the good of the corporation and in order to terminate the then
pending civil case involving the validity of the sale of the shares in question among others. Bayla and the others
agreed to the rescission as shown by their demand for the refund of the amounts they had paid as provided in said
resolution. But the subsequent revocation of the rescission in the first resolution is invalid as it was not agreed to
by the parties.

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46 - Cagayan Fishing Dev. Co., Inc. v. Teodoro Sandiko (1937) (Manuel Tabora and his 4 parcels of land)
Doctrines:
• A promoter could not have acted as agent for a corporation that had no legal existence.
• A corporation, until organized, has no being, franchise or faculties.
Facts:
Manuel Tabora (Tabora) owns 4 parcels of land which are covered by three mortgages (2 - PNB; 1 - Severina
Buzon). On May 31, 1930, Tabora sold the 4 parcels of land to Cagayan Fisheries Dev. Co., Inc. (Cagayan) which was in
the process of incorporation then. Note: later on in the decision it was stated that Cagayan was actually composed of
Tabora, his wife, and others and that Tabora owned most of the capital stock subscribed. The consideration was P1 and
there was a stipulation that the certificate of title to the lands would not be transferred to Cagayan until the latter has fully
paid Tabora’s indebtedness to PNB. Five months later, Cagayan was incorporated, but the mortgage loan was not paid.
A year later, the parcels of land were sold in the name of the corporation to Sandiko with the condition that the
latter would shoulder the mortgage debts. Sandiko issued a promissory note in favor of Cagayan, secured by the 4 parcels
of land. When Sandiko failed to comply with his obligation, Cagayan filed an action praying that judgment be rendered
against Sandiko for P25,300 (the book called it a “recovery suit”). The CFI ruled in favor of Sandiko.
Issues:
1. W/N Sandiko is liable to Cagayan.
Held/Ratio:
1. NO. The transfer to Cagayan was null (word used in the case) because at the time it was effected, Cagayan was
non-existent. If Cagayan could not and did not acquire the 4 parcels of land, it follows that it had no right to sell
them to Sandiko.
The sale was made 5 months before Cagayan was incorporated. It was not even a de facto corporation at that time.
Not being in legal existence then, Cagayan did not have juridical capacity to enter into the contract. A
corporation, until organized, has no being, franchise or faculties. Nor do those engaged in bringing it into
being have any power to bind it by contract, unless so authorized by the charter.
It is to be noted that the contract here was entered into not between Manuel Tabora and a non-existent corporation
but between Manuel Tabora as owner of the 4 parcels of lands on the one hand and the same Manuel Tabora, his
wife and others, as mere promoters of a corporation on the other hand. These promoters could not have acted as
agent for a projected corporation since that which had no legal existence could have no agent. A
corporation, until organized, has no life and therefore no faculties.
However, this does not mean that acts of promoters can never be ratified by the corporation when it is
subsequently organized. There are exceptions. However, given the facts and circumstances of this case, the court
refused to apply the doctrine of ratification.
*Additional facts which according to the book pointed to a lack of a bona fide ratification of the deed of sale in favor of
Cagayan: The court also noted that out of the P48,700 amount of capital stock subscribed, P45,000 was subscribed by
Tabora and P500 by his wife. Both Tabora and his wife were directors and the latter was treasurer as well. The lands
remain inscribed in Tabora’s name. Sandiko always regarded Tabora as the owner of the lands. He dealt with the latter
directly. The President of Cagayan only intervened to sign the contract in behalf of Cagayan. Even PNB always treated
Tabora as the owner of the lands.
(The case was discussed in Dean CLV’s book. p. 148 -149)

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47 - Rizal Light and Ice Co. v. Public Service Commission (1968) (electricity franchise, corporate organized
enterprise)
Doctrine:
• Contracts made by the promoters of a corporation on its behalf may be adopted, accepted, or ratified by the
corporation when organized.
Facts:
Involved in this case are two electric companies in the old times, RIZAL LIGHT AND ICE and MORONG
ELECTRIC COMPANY.
RIZAL LIGHT AND ICE has been distributing electricity in the Morong, Rizal Area since 1949 when it was
awarded a Certificate of Public Convenience by the now defunct Public Service Commission and a franchise to operate by
the Municipality of Morong. Through the years however, the Commission gradually observed that RIZAL LIGHT could
no longer render efficient, adequate, and satisfactory electric service, and in July 1962, the electric plant of RIZAL
LIGHT burned down. Morong was left in the dark.
And so, another enterprising company, MORONG ELECTRIC Company came into the picture.
May 6, 1962 MORONG ELECTRIC was granted a franchise to operate an electric service by the Municipality
of Morong
September 10, 1962 Morong Electric filed before the Public Service Commission an application for a Certificate of
Public Convenience
October 17, 1962 Only here did the Securities and Exchange Commission issue Morong Electric’s Certificate of
Incorporation
March 13, 1963 The Public Service Commission granted a Certificate of Public Convenience in favor of Morong
Electric.
Rizal Light contended that Morong Electric did not have a corporate personality at the time it was granted a
franchise by the Municipality and when it applied for the Cert. of Public Convenience from the Public Service
Commission. Its incorporation came belatedly and so, it cannot be considered even at least, a de facto corporation. Rizal
Light also noted that franchises are contracts, and in contracts, at least two competent parties are required, and parties are
competent when they are not yet “in being.”
Issue:
1. W/N Morong Electric could validly be granted a franchise and apply for a Certificate of Public Convenience
even when it did not yet have a separate corporate legal personality at those times
Held/Ratio:
1. Yes. Morong Electric might not yet have a corporate personality at those times but ultimately, it was granted
its certificate of incorporation by the SEC and it accepted its franchise according to the terms and conditions.
In effect, the doctrine of ratification was applied in favor of Morong Electric.
The Court cited three American authors, McQuiuin, Fletcher (of Fletcher’s Law Encyclopedia), and
Thomson, who unanimously believed that “the fact that a company is not completely incorporated at the time
the grant is made to it does not affect the validity of the grant. But such grant cannot take effect until the
corporation is organized.”
American courts generally hold that contracts made by the promoters of a corporation on its behalf may be
adopted, accepted, or ratified by the corporation when organized.
Thus, to ratify an otherwise defective contract, more than the existence of a juridical personality through
incorporation, the existence of an organized corporate enterprise or a complete corporate organization is
required.
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The decision here is NOT incompatible with the Cagayan Electric case because there, the Court held that “a
corporation should have a full and complete organization and existence as an entity before it can enter into
any kind of contract or transact any business. Cagayan Electric did not hold that under absolutely no
circumstance can the acts of a promoter of a corporation be ratified or accepted if and when the corporation is
subsequently organized.”

48 - Fermin Caram, Jr. and Rose O. Caram v. CA and Alberto Arellano (1987)
Facts:
The Carams are challenging the validity of the dispositive portion of the CA’s decision which states:
1. Defendants are hereby ordered to jointly and severally pay the plaintiff (Arellano) the amount
of P50,000 for the preparation of the project study and his technical services that led to the
organization of the defendant corporation, plus P10,000 attorney’s fees;
The Carams are claiming that said order has no basis because no such contract with Arellano existed. They were
contending that they were mere subsequent investors in the corporation that was later created and, as such, they should
not be held solidarily liable with Filipinas Orient Airways and with Barretto and Garcia, their co-defendants in the lower
court, who were the ones who requested the said services from Arellano.
(Short story: The Carams were amongst the principal stockholders of the Filipinas Orient Airways. But the actual brains
responsible for the conceptualizing and all that shiz of the said airlines were Barretto and Garcia.)
Issues:
1. W/N the Carams are also and personally liable for such expenses and, if so, to what extent.
Held/Ratio:
1. NO. After a perusal of the decision of the CA, the SC found that the Carams were not really involved in the
initial steps that finally led to the incorporation of the Filipinas Orient Airways. It was Barretto and Garcia who
handled the preparation of the project study. The said study being then subsequently presented to the Carams to
induce the latter in investing to the proposed airlines. The Carams were merely among the financiers who
were persuaded by the strength of the project study to invest in the proposed airline.
Furthermore, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have
a separate juridical personality, to be able to justify making the Carams, as principal stockholders thereof,
responsible for its obligations.
To summarize, the Carams did not contract the services mentioned. It was only the results of such services that
Barretto and Garcia presented to them and which persuaded them to invest in the proposed airline. The most that
can be said is that they benefitted from such services. Therefore, the SC held that the Carams were not liable at
all, jointly or solidarily.

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49 - Arnold Hall v. Piccio (1950) (de facto corporation, immunity)
Doctrines:
• Personality of a corporation begins to exist only from the moment a certificate of incorporation is issued.
• Immunity from collateral attack is granted to corporations claming in good faith to be a corporation.
• Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between
stockholders.
Facts:
Arnold and Bradley Hall (petitioners) and Fred and Emma Brown, Chapman, and Abella (respondents) signed and
acknowledged the articles of incorporation of the Far Eastern Lumber and Commercial Co., Inc. Attached to the article
was an affidavit of the treasure stating that 23,428 shares of stock had been subscribed and fully paid with certain
properties transferred to the corporation.
The said articles of incorporation were later filed in the office of the SEC for the issuance of the corresponding
certificate of incorporation. Pending action by the SEC, the respondents filed before the CFI of Leyte a case against the
Halls. They alleged that the Far Eastern Lumber and Commercial Co. was an unregistered partnership and that they
wished to dissolve it because of bitter dissension among members, mismanagement, and fraud. Piccio, the judge of the
CFI of Leyte, ordered the dissolution of the company and at the request of the respondents, appointed them to be the
receiver of the properties. The Halls filed a counter-bond for the discharge of the receiver. Judge Piccio refused to accept
the offer and to discharge the receiver. Hence, the Halls filed a case, claiming that the court had no jurisdiction to decree
the dissolution of the company, because it being a de facto corporation, dissolution may only be ordered in a quo warranto
proceeding and that the respondents, having signed the articles of incorporation, are estopped from denying that it is a
corporation.
Issues:
1. W/N the court had jurisdiction to decree the dissolution
Held/Ratio:
1. YES.
Personality of a corporation begins to exist only from the moment such certificate is issued. Immunity from
collateral attack is granted to corporations “claiming in good faith to be a corporation” under the
Corporation Law. The parties very well know that the SEC has not issued the certificate of corporation. Thus,
they couldn’t claim in good faith to be a corporation. In this case, there is no de facto corporation immune from
collateral attack.
Besides, this corporation is not a party to this case. The case is a litigation between stockholders, for the purpose
of obtaining dissolution. Even the existence of a de jure corporation may be terminated in a private suit for
its dissolution between stockholders, without the intervention of the state.
Regarding estoppel, no one was led to believe anything to his prejudice and damage. Hence, the principle of
estoppel does not apply.
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50 - Salvatierra v. Garlitos (1958) (corporation by estoppel; Phil. Fibers)
Doctrine:
• Corporation by Estoppel: Where a person acts on behalf of a corporation which he knew was not existing at the
time of the transaction with a third person, such person is estopped from claiming that he has no personal liability
for any debts which the non-existent corporation may incur.
• In other words: Actually, wala naman talagang corporation. Pero since may third person na na-prejudice dahil
naniwala siyang existing yung corporation, edi may corporation. Kaya nga corporation by estoppel eh. Parang
partnership by estoppel lang.
Facts:
In 1954, Manuela Salvatierra entered into a contract of lease with Philippine Fibers Producers Corp.
(represented by its President Refuerzo) over a parcel of land in Leyte owned by the former. Among the provisions of the
contract were the lessor’s entitlement to 30% of the net income accruing from the harvest of without being responsible for
the cost of production thereof; and the lessee’s obligation to declare at the earliest possible time the income derived
therefrom and to deliver the corresponding share due the lessor. Barely a year after the lease, Salvatierra filed for
damages, accounting and rescission; she averred that the corporation violated the aforementioned provisions in the
contract.
Subsequently, the trial court declared the corporation in default (after sufficient notice and still no answers),
received Salvatierra’s evidence and rendered judgment against Phil. Fibers. The corporation did not appeal, so the court
moved to subject parcels of land owned by Refuerzo to attachment. This was because the corporation had no property in
its name. Refuerzo filed a motion claiming that the decision rendered was null and void with respect to him, there being
no allegation in the complaint pointing to his personal liability. His defense was that for while it was stated in the
complaint that he was a signatory to the lease contract, he did so in his capacity as president of the corporation. On
the other hand, Salvatierra maintains that her failure to specify Refuerzo’s personal liability was due to the fact that all the
time she was under the impression that Phil. Fibers, represented by Refuerzo, was a duly registered corporation as
appearing in the contract, but a subsequent inquiry from the SEC yielded otherwise. Judge Garlitos sided with Refuerzo
and ordered the attachment lifted. Salvatierra now moves to render Judge Garlitos’ decision as null and void.
Issue:
1. W/N Refuerzo, in his personal capacity, can be held liable for corporate debts.
Held/Ratio:
1. YES. A registered corporation has a juridical personality separate and distinct from its component members or
stockholders and officers and conversely, a stockholder or member cannot be held personally liable for any
financial obligation of the corporation in excess of his unpaid subscription. But this rule is understood to refer
merely to registered corporations and cannot be made applicable to the liability of members of an
unincorporated association. Since an organization, which before the law is non-existent, has no personality and
would be incompetent to act as a corporation, it cannot confer authority to another to act in its behalf; thus, those
who act or purport to act as its representatives or agents do so without authority and at their own risk.
A person who acts as an agent without authority or without a principal is himself regarded as the principal;
a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such
obligations and comes personally liable for contracts entered into or for other acts performed as such. Considering
that Refuerzo, as president of the unregistered corporation Phil. Fibers, was the agent of a non-existent principal,
his liability cannot be limited or restricted to that imposed upon corporate shareholders. In acting on behalf of a
corporation which he knew to be unregistered, he assumed the risk of reaping the consequential arising out of
such transaction.

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51 - Albert v. University Publishing (1965)
Doctrine:
• In a suit against a corporation with no valid existence, the person who had and exercised the rights to control the
proceedings, to make defense, to adduce and to cross-examine witnesses, and to appeal from a decision, is the real
defendant, and the enforcement of a judgment against the corporation upon him is substantial observance of due
process of law.
Facts:
15 years previously, Mariano Albert sued University Publishing Co., Inc. (UP Co.) which alleged that it was a
corporation duly organized and existing under the laws of the Philippines. UP Co. through Jose Aruego, its President,
entered into a contract with Albert for the exclusive right to publish his revised Commentaries on the Revised Penal Code
and for his share in previous sales of the book’s first edition. The former would pay in 8 quarterly installments of P3,750
starting July 15, 1948 and the contract stated that failure to pay one installment would render the rest due. UP Co. had
failed to pay the second installment.
During the previous proceedings, UP Co. admitted to Albert’s allegation of it’s corporate existence as well as
admitted the execution and terms of the contract dated July 19, 1948. However, it alleged that it was Albert who breached
their contract by failing to deliver his manuscript. The CFI of Manila ruled against UP Co.
Thereafter, Albert petitioned for a writ of execution against Aruego, as the real defendant, because it was recently
discovered that there is no such entity as University Publishing Co., Inc. The SEC records show that UP Co. was never
registered either as a corporation or partnership. UP Co. countered through counsel (Aruego’s own law firm), that Aruego
is not a party to the case.
Issue:
1. W/N the judgment may be executed against Jose M. Aruego, supposed President of University Publishing Co.,
Inc., as the real defendant.
Held/Ratio:
1. YES. On account of the non-registration UP Co. cannot be considered a corporation, not even a corporation de
facto. It has therefore no personality separate from Jose M. Aruego; it cannot be sued independently. Although
corporation-by-estoppel doctrine has not been invoked, even assuming that it was, it does not apply in this case.
Aruego represented a non-existent entity by signing the contract as President of UP Co. stating that this was a
corporation duly organized and existing under the laws of the Philippines, and obviously misled Albert into
believing the same. Jose M. Aruego was, in reality, the one who answered and litigated, through his own law firm
as counsel. He was in fact the actual defendant.
It is patently clear that Jose M. Aruego, acting as representative of a non-existent principal, was the real party to
the contract sued upon, reaping the benefits resulting from it. Responsibility under the judgment falls on him since
partial payments of the consideration were made by him, he violated its terms, which precipitated the previous
suit in question.
The case is remanded to the lower court to hold supplementary proceedings for the purpose of carrying the
judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego.

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52 - International Express Travel and Tours Services, Inc. v CA, Henri Kahn, Phil. Football Federation
(2000) (corporation by estoppel; FOOTBALL)
Doctrine:
• One who deals with an unincorporated association which is not duly incorporated is not estopped to deny its
corporate existence when his purpose is not to avoid liability, but precisely to enforce the contract against the
action for the purported corporation.
Facts:
In 1989, International Express Travel and Tours (International Express) entered into an agreement with the Philippine
Football Federation (Federation) through the Federation’s president, Henri Kahn, where they would be the Federation’s
travel agent. International Express secured the airline tickets for the trips of the athletes and officials to the 1989 South
East Asian Games in Kuala Lumpur as well as various trips to China and Brisbane where the total costs of the tickets
amounted to P449,654.83. The Federation made partial payments around P200,000. Henri Kahn also issued a personal
check in the amount of P50,000. After this, there remained a P200,000 balance but no further payments were made despite
repeated demands. As such, International Express sued Henri Kahn in his personal capacity and as President of the
Federation alleging that Kahn personally guaranteed the obligation. Kahn on the other hand denied that he personally
guaranteed the payment and that International Express has no cause of action against him.
The Trial Court ruled in favor of International Express and declared Kahn personally liable because neither International
Express nor Kahn adduced any evidence to prove the corporate existence of the Federation. The Trial Court held that a
voluntary unincorporated association like the Federation has no power to enter into a contract and that its officers or
agents shall be liable themselves. The Court of Appeals reversed the decision by recognizing the juridical existence of the
Federation. International Express now maintains that the CA erred in holding such.
Issue:
1. W/N The Federation is an existing juridical entity that should be liable for payment.
Held/Ratio:
1. NO. The Court held that the CA was wrong. The Federation has no separate juridical identity because in order to
exist as a juridical entity, the State must first give its consent through a special law or a general enabling act. The
CA cited two laws, RA 3135 (about the Phil. Amateur Athletic Federation) and PD 604 (about the Dept. of Youth
and Sports Development), to assert the existence of the Federation. However, these laws merely recognized the
existence of national sports associations and provided the manner by which they may acquire juridical
personality. They are general laws that do not provide for the existence of the Federation. (National sports
associations (NSAs) are individual governing bodies for different sports; so for example, the Phil Football
Federation is the one setting up the Azkals vs Galaxy game on Dec 3).
In other words, it is not enough that the Federation has its own by-laws and constitution; it must show proof that it
is an NSA recognized and accredited by the Phil Amateur Athletic Federation or Dept of Youth and Sports
Development because only accredited NSAs are entitled to have a separate corporate personality.
Kahn failed to prove this and as president, he is presumed to have known about the “existence” or “nonexistence”
of the Federation. As such he should be held liable for the unpaid obligations of the unincorporated Philippine
Football Federation.
Although it transacted with Kahn, International Express is not estopped to claim from Kahn because one who
deals with an association which is not duly incorporated is not estopped to deny its corporate existence when his
purpose is not to avoid liability, but precisely to enforce the contract against the purported corporation.
In other words, the corporation by estoppel doctrine applies to a third party who tries to escape liability on a
contract from which he has benefited on the irrelevant ground of defective incorporation. International Express is
not escaping liability but actually, enforcing the Federation’s liability.

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Lim Tong Lim v. Philippine Fishing Gears Industries Inc. (see Digest #4)

53 - Asset Privatization Trust (APT) v. The Honorable Court of Appeals (1998)


Doctrine:
• Stockholders have no standing to recover for themselves moral damages, otherwise, it would amount to the
appropriation by, and the distribution to, such stockholders of part of the corporation’s assets before its
dissolution.
Facts:
[Note: APT is the successor of DBP and PNB, super tagal pa kasi niya lumabas so baka mainip kayo. Haha. ]
Marinduque Mining Industrial Corporation (MMIC) was granted the exclusive right to develop, explore
and exploit the Surigao Mineral Reservation. The Government obtained the help of the DBP and other government
financing institutions to guarantee foreign loans by the MMIC. To secure the guarantees extended by DBP and PNB,
MMIC executed in favor of them a Mortgage Trust Agreement over all of MMIC’s assets, providing for a right to
extrajudicial foreclosure in case MMIC fails to pay their obligation.
MMIC’s obligation blew up to a total of P22 Billion. In an attempt to save the company, its Board of Directors
adopted a Financial Rehabilitation Plan aimed at reducing MMIC’s debts by converting them to equity. Neither PNB
nor DBP adopted the plan. Meanwhile, MMIC’s obligations to PNB/DBP became due but no payment was obtained.
PNB/DBP decided to extra-judicially foreclose on the assets of MMIC. The PNB turned out to be the lone bidder. The
assets were subsequently transferred by PNB to the Asset Privatization Trust.
Jesus Cabarrus, the President of MMIC, and other stockholders filed a derivative suit in the RTC of Makati
against APT contending that the foreclosure was illegal because a rehabilitation plan to rehabilitate MMIC was being
prepared so that they may be able to pay their obligations. The suit was dismissed by the RTC because the parties
decided to enter into a “Compromise Agreement” whereby they agreed to enter instead into arbitration.
The arbitration committee decided that the foreclosure was illegal. They upheld the validity of the
rehabilitation plan. According to the committee, since no valid foreclosure was made, MMIC is still obliged to pay APT
their obligation, however MMIC’s liability shall be reduced because under the plan, DBP shall have 87% equity over the
total capital of MMIC (Kumbaga, sabi ng plan, para umonti utang natin kay DBP, bigyan natin siya ng 87% equity. Sabi
ngayon ng committee, dahil may 87% equity ka na, liable ka na rin sa sarili mo kahit papano, so mag-o-offset.)
The arbitration committee also directed the APT to pay moral damages to MMIC and to Cabarrus and the
other stockholders. The RTC affirmed the Committee’s decision. APT appealed to the CA but the latter dismissed the
appeal.
Issues:
1. W/N the FRP is valid and consequently
2. W/N the extra-judicial foreclosure was Illegal
3. W/N the award of Moral Damages to MMIC was valid
4. W/N the award of Moral Damages to the stockholders was valid
Held/Ratio:
1. NO, the FRP is not valid. The Financial Rehabilitation Plan cannot be said to be valid because it was not
adopted by DBP or PNB. As mentioned, the FRP planned to convert MMIC’s obligations into equity. The
conversion directly affects DBP or PNB, thus their ratification of the plan is essential. The FRP is a contract and
its validity depends on whether or not both the contracting parties agreed to its terms. In this case, no
agreement was expressed by DBP or PNB who both felt that the plan’s objectives would never materialize.
Moreover, the fact that most of MMIC’s Board of Directors are the same with DBP/PNB does not make the

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latter estopped from assailing the FRP since the individual board of directors are separate from the
personality of the company. They, singly, are different from DBP/PNB.
2. NO. The foreclosure was legal. The existence of the Financial Rehabilitation Plan did not divest DBP or PNB
their right to extra-judicially foreclose under the mortgage agreement. MMIC knew that the plan has to be
approved by PNB/DBP. The fact that these institutions opted to foreclose meant that they reject the plan.
3. NO. As a general rule, corporations are not entitled to moral damages. An exception would be if the wrongful act
was so grave that it besmirched the corporation’s good reputation. MMIC in this case had no more reputation to
protect since it was already suffering from serious financial crisis. Its credit standing cannot be said to be “of good
reputation.” Moreover, MMIC was not a party to the suit. Only Cabarrus and the stockholders filed a
derivative suit in their capacity as individual stockholders. In a derivative suit, it is a settled doctrine that
the Corporation is an indispensable party. The cause of action remains that of the corporation’s. Because
MMIC is not a party to the suit, it cannot be awarded damages.
4. NO. The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if wrong was committed in the
foreclosure, it was done against the corporation. Cabarrus cannot directly claim those damages for himself —
that would result in the appropriation by, and the distribution to, him part of the corporation’s assets
before the dissolution of the corporation and the liquidation of its debts and liabilities.
[Sinasabi kasi ni Cabarrus na karamihan sa nakuhang assets ay sa ibang company na majority stockholder din
siya, so dapat bigyan siya ng moral damages dahil na-stress daw siya.]
Note: Sobrang mahirap at mahaba talaga yung kaso guys, I did my best  Kung di niyo gets, I can always explain,
sabihan niyo lang ako — love, Pat
Note Ulit: Si Atty. Jose Sison (host ng Ipaglaban Mo) ay isa sa arbiters, fun fact lang ulit, baka manghuli siya ulit.

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54 - National Telecommunications Commission v. Court of Appeals (1999)
Doctrine:
• Trust fund doctrine — considers subscribed capital as a trust fund for the payment of the debts of the
corporation to which the creditors may look for satisfaction. No part of the subscribed capital may be returned or
released to the stockholder until the liquidation of the corporation. With this, dividends must never impair the
subscribed capital, the corporation cannot buy its own shares using the subscribed capital as the consideration.
• Vocabulary:
o Capital — value of the property or assets of a corporation
o Capital subscribed — total amount of the capital that persons have agreed to take and pay for (can be
more than the par value of the shares, so pwedeng may patong)
 amount the corporation receives (including the premium) in consideration of the original issuance
of the shares
o Subscribed capital stock — amount of capital stock subscribed whether fully paid or not
o Outstanding capital stock — total shares of stock that is already issued to subscribers or stockholders (no
longer held by the corporation)
o Par value — amount of money contributed by the shareholder to the capital stock (money value for share
of stock as written in the articles of incorporation)
 inclusive of stock dividends and premium
o Market value — the price a willing seller would sell and a willing buyer would buy and is affected by law
of supply and demand
 excluding stock dividends and premium
o Stock dividends — amount that the corporation transfers from its surplus profit (so pag may sobra)
account to its capital account (this is also considered trust fund of the corporation)
Facts:
[The case has many technical terms, please refer to the VOCABULARY when the terms get confusing.]
The case resulted from the assessment notices served by the National Telecommunications Commission (NTC) to
the PLDT. This is for payment of certain fees imposed upon PLDT for the expenses in supervision, regulation and
authorization done by the NTC on public services (in pursuant to Sec 40 of Public Service Act.) There are several fees
(regulation fees, permit fees) imposed, but for the purpose of this case we only focus on the regulation fees.
For the assessment of the regulation fees, NTC based it on the outstanding capital stock, thus arriving at the
amount of around P7.4 million for the fees. With this, PLDT filed a protest in the said commission claiming that the
regulation fee should be based on the par value instead. NTC denied the protest which prompted PLDT to appeal in the
CA.
The CA ordered NTC to ecomputed and base the regulation fees on the par value of the capital stock
subscribed or paid excluding stock dividends, premium or capital in excess of par. NTC then now argued that the fee
should be based on the market value of PLDT’s capital stock including stock dividends and premium.
Issue:
1. W/N the computation of supervision and regulation fees under section 40 (e) of the public service act should be
based on the par value of the subscribed capital stock.

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Held/Ratio:
1. NO
The Court held that the regulation fee should be based on the capital stock subscribed or paid (nothing less
nothing more.) According to the trust fund doctrine, (which considers capital subscribed as trust for the payment
of debts of corporation) the dividends must never impair the subscribed capital. With this, SC disallowed the
computation of fees based on the par value of capital stock subscribed (excluding premiums and stock
dividends) and it also rejected the idea of basing it on the market value.
(The decision was based on the case of PLDT v PSC. Here, the SC rejected the assessment which based the regulation
fees imposed in Sec 40 (e) on the “value of the property and equipment.” According to the Court, the proper basis for
the computation of regulation fees is the “capital stock subscribed or paid and not alternatively the property and
equipment.”)

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55 - Ong Yong v. Tiu (2003) (presubscription agreement)
Doctrines:
 The rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the
capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation
Code, since rescission of a subscription agreement is not one of the instances when distribution of capital assets
and property of the corporation is allowed
Facts:
The Tiu family members are the owners of First Landlink Asia Development Corporation (FLADC). One of the
corporation’s projects is the construction of Masagana Citimall in Pasay City. However, due to financial difficulties (they
were indebted to PNB for P190 million), the Tius feared that the construction would not be finished. So to prevent the
foreclosure of the mortgage on the two lots where the mall was being built, they invited the Ongs to invest in FLADC.
The two parties entered into a Presubscription Agreement:
 The total shares of capital stock would be 2,000,000. The division of the shareholdings would be on a 50-50
basis (1,000,000 shares for each party)
 the Ongs were to subscribe to 1,000,000 shares at a par value of P100.00 each
 the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already existing
subscription of 450,200 shares
 Tius were entitled to nominate the VP and the Treasurer + 5 directors
 Ongs were entitled to nominate the President, Secretary + 6 directors; they also have the right to manage and
operate the mall
To fill the deficiency of 549,800 shares of stock, the Tius commited to contribute to FLADC a building
(equivalent to 200,000 shares) and two lots (equivalent to 300,000 and 49,800 shares of stock). The Ongs
contributed P100 Million (equivalent to 1 Million shares of stock). They also paid P70 Million to FLADC and another
P20 Million to the Tius (a total of P190 Million) to pay off the loan from PNB.
Two years after, the Tius filed a case in SEC for the rescission of the Agreement due to the following reasons: a)
the Ongs refused to issue to them the shares of stock corresponding to their property contributions; b) they were prevented
from assuming the positions of VP and Treasurer. In their defense, the Ongs contended that they could not issue the new
shares to the Tius because the latter did not pay the capital gains tax and the documentary stamp tax of the lots. And
because of this, the SEC would not approve the valuation of the property contribution of the Tius. (It turned out that one
of the lots was in FLADC’s name all along, so issuance of new shares of stock was not needed because the lot was
already a part of the corporation’s assets).
The SEC decided in favor of the Tius. The case eventually reached the CA, and it ordered the liquidation of
FLADC to enforce the rescission of the contract (restitution of their initial contributions, then whatever remaining assets
would go to the Tius, including the mall which is already valued at P 1 Billion). The CA also concluded that both the
Ongs and the Tius were in pari delicto so technically they are not entitled to the remedy of rescission. But the rescission
was granted only to prevent “squabbles and numerous litigations” between the parties. The SC upheld the decision of the
CA. The Ongs then filed a Motion for Reconsideration, asserting that the decision would amount to unjust enrichment on
the part of the Tius.
Issues:
1. W/N the Tius could legally rescind the presubscription agreement (whether they have the personality to sue)
2. W/N rescission is the proper remedy
3. W/N the liquidation of FLADC violated the Trust Fund Doctrine

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Held/Ratio:
1. NO. The Agreement was in fact a subscription contract because it involves unissued shares of the corporation. A
subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter
of the transaction is property owned by the corporation — its shares of stock. Thus, the contract was actually
between FLADC and the Ongs, and not between the Tius and the Ongs (separate juridical personality). Therefore,
the Tius had no personality to file a case for rescission.
2. NO. The Tius allege that the Ongs prevented them from assuming the positions of Treasurer and VP. However,
rescission is not the remedy for personal grievances. 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.
The breach committed by the Ongs was not substantial to warrant the rescission of the contract. It would be unfair
on the part of the Ongs who actually helped the Tius. Hence, the Tius cannot demand the rescission of the
agreement for they have other remedies under the law, and besides they do not have the capacity to bring the suit.
3. YES. Even assuming that the Tius had the legal standing to sue, the case would still not prosper because the
rescission would be in violation of the Trust Fund Doctrine.
This doctrine enunciates that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying principle in
the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the
distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to
reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the corporation.
In this case, the rescission would certainly be a violation of the doctrine and also of the Corporation Code because
the rescission would result in the unauthorized distribution of the assets of the corporation. Rescission based on a
breach in the terms of a subscription agreement is not one of the instances when distribution of a corporation’s
assets and property is allowed. It would not only be unlawful but it would also be prejudicial to the corporate
creditors who enjoy absolute priority of payment over any individual stockholder.
[ADDITIONAL: if ever itanong ni Sir, this was mentioned kasi in the book]
The Tius also argued that the rescission would not result into liquidation because their case is actually a petition to
decrease the capital stock. As provided in Sec. 122 of the Corporation Code, distribution of any of its assets or property
is permitted only after lawful dissolution and payment of all debts and liabilities. An exception is by decrease of capital
stock. So the Tius claim that they do not violate the liquidation procedures under the law. They were asking the court to
compel FLADC to file a petition with SEC to approve the decrease in capital stock.  The SC ruled that it has no right
to intrude into the internal affairs of the corporation so it cannot compel FLADC to file the petition. It was not
actually a decrease of capital stock because it failed to comply with certain requirements (no board decision, etc.).

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BY-LAWS
56 - Gokongwei v. SEC (1979)
[Note: If you don’t have time just read issue number 2 for it is the most relevant one. The rest are just in case Sir is in a
questioning mood.]
Doctrines:
• Every corporation has the inherent power to adopt by-laws ‘for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to
the management of its affairs. And in the Philippine Law, under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws “the qualifications, duties and compensation of directors, officers and employees ...
.”
Facts:
Petitioner: John Gokongwei, was a stock holder of San Miguel Corp. (Gokongwei)
Private Respondents: The majority of the members of the Board of Directors of San Miguel, last named Soriano, Zobel,
Roxas etc. (The Board)
Respondent: Securities and Exchange Commission (SEC)
This case arose from two other cases, SEC Case No. 1375 and SEC Case No. 1423.
This SEC case involves two main issues. The facts relevant to the first issue (this is the most important issue) are
as follows;
In 1976, the Board amended the bylaws of San Miguel Corp. (SMC), the amendment prohibits a Stock holder
being nominated or elected as a Board of Directors if he is engaged, or if he is an officer, manager or controlling person
of, or the owner of any business which competes with or is antagonistic to that of the Corporation; and to determine
whether the business he is in competition a 3/4 of the Board is required, furthermore in determining whether or not a
person is a controlling person, beneficial owner, or the nominee of another, the Board may take into account such factors
as business and family relationship.
It is to be noted that, Gokongwei is the president and a substantial stockholder of Robina Corp. (Robina) and
Consolidated Foods Corp. (CFC), a competitor of SMC, in various areas, such as Instant Coffee, Ice Cream, Poultry and
Hog Feeds and many more.
Gokongwei petitioned that the amendments to the bylaws be declared null and void. One of his reason was that,
the amendment was done without authority since the “Board” based their authority on a resolution adopted on 1961.
According to Gokongwei in order to amend the bylaws 2/3 vote of the capitalization at the time of the amendment is
necessary. And since the total par value of the SMC was greater during 1976 (when bylaws where amended), the
amendment was done without authority. (not really important issue). He also alleged that the amendment was
unreasonable and arbitrary.
The Second issue arose when, Gokongwei filed a motion to inspect the documents of San Miguel International
Inc.(SMI) a subsidiary of, and wholly controlled by, SMC. Gokongwei motion was denied by SEC. SEC Case No. 1423
(Not important)
When SMC invested in SMI, according to Gokongwei, this was against the primary purpose clause of SMC,
which is a violation of the Corporation Law.
Issues:
1. W/N amended by-laws are valid is purely a legal question which public interest requires to be resolved
2. W/N the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board
of Directors of SMC are valid and reasonable
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3. W/N SEC gravely abused its discretion in denying petitioner’s request for an examination of the records of San
Miguel International Inc., a fully owned subsidiary of San Miguel Corporation
4. W/N respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to
ratify the investment of corporate funds in a foreign corporation
Held/Ratio:
1. YES, It is settled that the doctrine of primary jurisdiction has no application where only a question of law is
involved. In the case at bar, there are facts which cannot be denied, : that the amended by-laws were adopted by
the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders
ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held
specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders of record;
that the foreign investment in the Hongkong Brewery and Distillery, a beer manufacturing company in Hongkong,
was made by the San Miguel Corporation in 1948; and that in the stockholders’ annual meeting held in 1972 and
1977, all foreign investments and operations of San Miguel Corporation were ratified by the stockholders. (I think
this also answers the first contention of Gokongwei)
[Note: among the parties involved only OSG contends that primary jurisdiction is with the SEC.]
2. YES, for several reasons:
First, the authority of a Corp. to prescribe qualifications of directors is expressly conferred by law, every
corporation has the inherent power to adopt by-laws ‘for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. And under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws “the qualifications, duties and compensation of directors, officers and
employees ... “. They also cited a case which allowed a Corp. to add a qualification for a Board of Director.
Second, The stockholder has no vested right to be elected as director, Any person who buys stock in a corporation
does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the limits of the law. And under section 18
of the Corporation Law, any corporation may amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the amendment
changes, diminishes or restricts the rights of the existing shareholders then the dissenting minority has only one
right, viz.: “to object thereto in writing and demand payment for his share.
Third, since the Director stands in a fiduciary relation to the Corporation and its Shareholders.
Fourth, it has been held in our jurisdiction, that an amendment to the by-laws which renders a stockholder to be
ineligible to be a director of a corp, if he is a director of another corp. in competition with the other one, is valid.
For the doctrine of “corporate opportunity” is precisely a recognition by the courts that the fiduciary standards
could not be upheld where the fiduciary was acting for two entities with competing interests.
Finally, There are legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of
trade, specifically the Constitution, Revised Penal Code Corporation Law, it is obvious that the election of
Gokongwei to the Board of SMC could bring illegal results. Access to SMC pricing policy by CFC-Robina would
in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.
3. Yes, considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and,
therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the
statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to
books and records of such wholly subsidiary which are in respondent corporation’s possession and control.
4. Yes, Since, the purchase of beer manufacturing facilities by SMC was an investment in the same business stated
as its main purpose in its Articles of Incorporation, which is to manufacture and market beer. Since the original

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investment was a purchase of a beer brewery in Hong-Kong, but the investment was restructured thru SMI in
Bermuda, tax free.
In sum, the amendment was held valid, but without prejudice to the question of the actual disqualification of petitioner
John Gokongwei.
The Separate Opinion:
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate opinion, they
voted against the validity of the questioned amended bylaws and that this question should properly be resolved
first by the SEC as the agency of primary jurisdiction.
I shall present one separate opinion only of Teehankee et. al. concurring.
He argued that, the questioned amended by-laws as being specifically tailored to discriminate against petitioner and
depriving him in violation of substantive due process of his vested substantial rights as stockholder of respondent
corporation.
Also said amended by-laws violated the Corporation Law which grant and recognize the right of a minority stockholder
like petitioner to be elected director by the process of cumulative voting ordained by the Law and the right of a minority
director once elected not to be removed from office of director except for cause by vote of the stockholders holding 2/3 of
the subscribed capital stock. If a minority stockholder could be disqualified by such a by-laws amendment under the guise
of providing for “qualifications,” these mandates of the Corporation Law would have no meaning or purpose.
Also as said above he believes that the SEC has primary jurisdiction.
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57 - Rosita Peña v. The Honorable Court of Appeals, Sps. Yap (1991) (void resolution, no quorum)
Doctrine:
• The by-laws of a corporation are its own private laws which substantially have the same effect as the laws of the
corporation. In this sense they become part of the fundamental law of the corporation with which the corporation
and its directors and officers must comply.
Facts:
[Petitioner Peña is represented in this case by CLV. Alam na sino panalo  ]
Pampanga Bus Co. (PAMBUSCO) owned several mortgaged lots. The lots were foreclosed and were sold to
Rosita Peña, as highest bidder, in a public bidding. Now, PAMBUSCO, through three of its five directors resolved to
authorize one of their directors, Briones, to execute a deed of assignment of their right of redemption in favor of
Marcelino Enriquez. It must be noted that the three who voted were the only ones who attended the meeting.
Enriquez then redeemed the properties. A day after he executed a deed of sale covering the same properties in favor of the
spouses Yap (private respondents).
[Pambusco assigned to -> Enriquez, sold to - > Spouses Yap]
Peña contends that there could be no valid sale to the spouses Yap because the deed of assignment in favor of
Enriquez was void. She prays that a final deed of sale be executed in her favor because the redemption period had
already lapsed without a valid redemption being effected. According to her, the deed of assignment was executed ultra
vires and against the by-laws of the corporation which provided:
Sec. 4. ... No failure or irregularity of notice of meeting shall invalidate any regular meeting or
proceeding thereat; Provided a quorum of the Board is present, nor of any special meeting;
Provided at least four Directors are present.
In the case at bar, only three out of five directors were present. The RTC ruled in favor of Peña, the CA,
however reversed. According to the CA, the section would only apply if there were failure or irregularity of notice, which
according to them, Peña failed to prove. They also ruled that the by-laws provided no categorical declaration that
failure to abide by the “four directors” requirements would result to a void resolution. Moreover, the CA ruled that
the RTC had no jurisdiction to hear the case.
Issues:
1. W/N the RTC had jurisdiction to hear the case
2. W/N the act of the board was against the corporation’s by-laws, and consequently, void.
Held:
1. YES. The SEC only has jurisdiction over intra-corporate disputes. In the case at bar, neither respondents Yap, nor
petitioner Peña were stockholders of PAMBUSCO. The issue regarding the validity of the resolution resulting to
the sale of the property was properly cognizable by the RTC.
2. YES. The By-laws are the corporation’s own private laws. They become the fundamental laws of the corporation
which the corporation and its officers should follow. Sec. 4 of PAMBUSCO’s by-laws provided that at least
four directors should be present to constitute a quorum. According to the Corporation Code any action
resolved by the board with less than the number provided in the by-laws of the corporation to constitute a quorum
would not bind the corporation. When a quorum is not reached, all the present directors could do is to
adjourn.
Moreover, the purported directors who attended the meeting and voted in favor of the assignment were bogus
directors as they were not listed in the SEC as directors, nor were they stockholders of the company.
[Side issue: Because there was no consideration for the deed of assignment, the Court deemed it as merely a donation and
because it lacked the proper formalities for a valid donation, the donation is void.]

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58 - San Miguel Corporation v. Mandaue Packing Union (2005) (by-laws; Union)
Doctrine:
• By-laws has traditionally been defined as regulations, ordinances, rules or laws adopted by an association or
corporation or the like for its internal governance, including rules for routine matters such as calling meetings and
the like. Without such provisions governing the internal governance of the organization, such as rules on meetings
and quorum requirements, there would be no apparent basis on how the corporation could operate.
Facts:
On 15 June 1998, Mandaue Union, claiming to be a local chapter of FFW, filed a petition for certification election
with the DOLE, claiming that it represents the rank-and-file employees of San Miguel Corporation. More than a month
later in July 1998, the Union submitted to the Bureau of Labor Relations the same documents earlier attached to its
petition for certification, along with an accompanying letter stating that such documents were submitted in compliance
with the requirements for the creation of a local/chapter pursuant to the Labor Code; and it was hoped that the
submissions would facilitate the listing of respondent under the roster of legitimate labor organizations. A month after on
3 August 1998, the DOLE issued Certificate of Creation of Local/Chapter certifying that the Union has acquired legal
personality as a labor organization, it having submitted all the required documents. In its Comment, San Miguel reiterated
that the Union was not a legitimate labor organization at the time of the filing of the petition because it lacked certain
documents.
In September 1998, the DOLE Arbiter dismissed the Union’s petition saying that as of the date of filing (15 June
1998), the Union did not have the legal personality to file the said petition for certification election. The Undersecretary
reversed this, concluding that the Union acquired legal personality as early as June 1998, the date it submitted the required
documents.
Eh ano ba’ng kulang ng Union? Hindi sila nag-submit ng By-Laws.
Issue:
1. W/N as of the date of filing the petition for certification election, the Union had the requisite legal personality.
a. Kasi ganito: If it acquired legal personality on 15 June 1998 (the date of filing), then the petition for
certification election is meritorious. If it acquired legal personality anytime after 15 June 1998 (the date of
issuance of the certificate), then its petition must fail for lack of legal personality.
2. BY-LAWS RELATED ISSUE: W/N the failure of the Union to include the labor organization’s by-laws is
enough to dismiss its petition.
Held/Ratio:
1. YES. The issuance of the certificate of registration by the Bureau or Regional Office is not the operative act that
vests legal personality upon a local/chapter under pertinent rules. Such legal personality is acquired from the
filing of the complete documentary requirements. Although the manner by which the Union was deemed to have
acquired legal personality by the DOLE and the Court of Appeals was not in strict conformity with the provisions
of Department Order 9, these derivations are not enough to overrule the constitutional right to self-organization.
2. NO. In this case, the Union never submitted separate by-laws, when the Department Order 9 provides that the
submission of both a constitution and a set of by-laws is required. A literal reading of the provision might indicate
that the failure to submit a specific set of by-laws is fatal to the recognition of the local/chapter. A more critical
analysis of this requirement though must be made, especially as it should apply to this petition which seeks to
impair self-organization.
By-laws has traditionally been defined as regulations, ordinances, rules or laws adopted by an association or
corporation or the like for its internal governance, including rules for routine matters such as calling meetings and
the like. Without such provisions governing the internal governance of the organization, such as rules on meetings
and quorum requirements, there would be no apparent basis on how the union could operate. Without a set of by-

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laws that provides how the local/chapter arrives at its decisions or otherwise wields its attributes of legal
personality, then every action of the local/chapter may be put into legal controversy.
However, if those key by-law provisions on matters such as quorum requirements, meetings, or on the internal
governance of the local/chapter are themselves already provided for in the constitution, then it would be feasible
to overlook the requirement for by-laws. Indeed in such an event, to insist on the submission of a separate
document denominated as “By-Laws” would be an undue technicality, as well as a redundancy.

59 - China Banking Corp. v. CA (1997) (binding effects of by-laws)


Doctrines:
• General Rule: Third persons are not bound by the by-laws of a corporation since they are not privy thereto.
o Exception: When third persons have actual knowledge or constructive knowledge of the same. However,
this knowledge of the by-laws must be present at the time of the perfection of the contract, and not only
during the proceedings.
Facts:
Galicano Calapatia, Jr. is a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI). He
pledged his Stock Certificate to petitioner China Banking Corp. (CBC). To assure that such agreement will be honored by
VGCCI, CBC wrote a letter requesting that the pledge agreement be recorded in the corporate books, to which VGCCI
replied in the affirmative.
Carpatia loaned P20,000 from CBC which was secured by the agreement. He failed to pay his obligations, so
CBC filed a petition for extrajudicial foreclosure before a notary public, requesting the latter to conduct a public auction
sale of the pledged stock. CBC informed VGCCI of this petition and requested that the pledged stock be transferred to
CBC’s name and the same be recorded in the corporate books. However, VGCCI also informed CBC that it will not be
able to do so because Calapatia has unsettled accounts with the club. CBC was the highest bidder in the auction and was
issued the corresponding certificate of sale.
The debts of Calapatia with VGCCI have become due therefore it sent the demand the letters, but, as always in all
the cases, Calapatia was not able to pay. So VGCCI published a notice of auction sale of a number of its stock certificates,
including Calapatia’s own (under Sec. 3 Art. VIII of its by-laws, after a member shall have been posted as delinquent, the
Board may order his/her/its share sold to satisfy the claims of the Club). VGCCI informed Calapatia that he was no longer
a member because his shares of stock were already sold.
Three years after, CBC informed VGCCI that it was the new owner by virtue of the auction sale, however,
VGCCI replied that for reason of delinquency, the same share of stock was sold at the public auction.
So of course, CBC protested and filed a case with the RTC of Makati for the nullification of the auction sale and
the issuance of a new stock certificate in its name. RTC dismissed the case for lack of jurisdiction (intra-corporate dispute
daw kasi), so CBC filed a complaint with SEC. It first held that VGCCI has the right not to transfer the share to CBC until
the liquidation of the delinquency, but it reversed the decision stating that CBC has a prior right over the pledged share.
SEC dismissed VGCCI’s MR so it turned to CA to seek redress. CA dismissed the case for lack of jurisdiction.
Hence, this appeal.
(Oke. So ung public auction ni CBC was in 1985, same year sinabi nya kay VGCCI ung nangyaring sale. Ung
public auction naman ni VGCCI was in 1986, despite its knowledge of the previous auction sale. And it is also important
to note that Carpatia has been delinquent in paying his monthly dues since 1975.)
Issues:
1. NOT SO MUCH RELATED: W/N SEC has jurisdiction.
2. W/N the by-laws of VGCCI can affect CBC.
Held/Ratio:
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1. YES. The Commission has jurisdiction over any of the following relationships: 1) between the corporation and
the public; 2) between the corporation and its stockholders; 3) between the corporation and the state in so far as its
franchise, permit or license to operate is concerned; and 4) among the stockholders themselves. VGCCI is
contending that CBC is not among those enumerated since it is a third person as to the corporation. So the test that
should be applied first is whether CBC is a stockholder by virtue of the auction sale.
The transfer ownership to CBC through the public auction and the issuance of the corresponding Certificate of
Sale entitles CBC to have the said share registered in its name as a member of VGCCI. This was not assailed by
either VGCCI or Calapatia.
2. NO. VGCCI only began sending notices of delinquency to Calapatia after it was informed by CBC of its
foreclosure proceedings. Also, even though VGCCI acknowledged the pledge agreement between Calapatia and
CBC, it completely disregarded CBC’s rights as a pledge by not informing it of the public auction it initiated.
However, VGCCI countered this by saying that CBC has actual knowledge of the by-laws of the corporation
(when VGCCI informed CBC that it cannot transfer and record the shares in the corporate book). It cited
Fleishcer v. Botica which stated that as a general rule, third persons are not bound by the by-laws of a corporation
since they are not privy thereto; however the exception to this is when third persons have actual or constructive
knowledge of the same. VGCCI is contending that CBC has actual knowledge and therefore must be bound by the
by-laws.
The Court ruled that in order to be bound, the third party must have acquired knowledge of the by-laws at the time
the agreement was entered into between him and the shareholder. In the case at bar, CBC was only informed of
the by-laws after it informed VGCCI of the public auction. Also, VGCCI could have easily informed petitioner of
its by-laws when it sent notice formally recognizing CBC as pledge of one of its shares registered in Calapatia’s
name.

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CORPORATE POWERS AND AUTHORITY


60 - De La Rama v Ma-Ao Sugar Central (1969)
Facts:
De La Rama and 3 other minority stockholders of Ma-Ao Sugar Central filed a derivative suit against the Ma-Ao
Sugar Central Co., Inc., and Amado Araneta and 3 other directors of the corporation. Among the allegations in the
complaint include gross mismanagement, fraudulent use and diversion of corporate funds, disregard of corporate
requirements and etc.
De La Rama claims that the directors made an illegal investment in Phil. Fibers Processing Co., Inc. He contends
that since the investment was made NOT in pursuance of the corporate purpose and without the requisite authority of 2/3
of the stockholders, then the investment was thus illegal (in violation of Sec. 17-1/2 of the Corporation Law).
On the other hand, Araneta claims that the investment was not illegal. He admits having invested in Phil Fibers
but that this was subsequently ratified by the board of directors in a resolution, more than that, he also contends that since
the company was engaged in the manufacture of sugar bags, it was thus perfectly legitimate for Ma-Ao Sugar either to
manufacture sugar bags or invest in another corporation engaged in said manufacture.
Issue:
1. W/N the affirmative vote of the stockholders representing 2/3 of the voting power is necessary
Held/Ratio:
1. No. the court held that the affirmative vote of the stockholders representing 2/3 of the voting power is not
necessary. The corporation code allows a corporation to invest its funds in another corporation for any other
purpose other than the main purpose. Provided that the board has been authorized by affirmative vote of the
stockholders representing 2/3 of the voting power. But if the investment is made in a corporation whose business
is important to the investing corporation and would aid it in its purpose, then to require authority of the
stockholders would be to unduly curtail the power of the board of directors.
According to the book of Professor Guevarra of the University of the Philippines, College of Law, a well-known
authority in commercial law:
j. Power to acquire or dispose of shares or securities. — A private corporation, in order to
accomplish its purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of the corporate purpose, does not need the
approval of the stockholders; but when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary.
40. Power to invest corporate funds. — A private corporation has the power to invest its corporate
funds in any other corporation or business, or for any purpose other than the main purpose for
which it was organized, provided that ‘its board of directors has been so authorized in a resolution
by the affirmative vote of stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such a proposal at a stockholders’ meeting
called for that purpose,’ and provided further, that no agricultural or mining corporation shall in
anywise be interested in any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in it articles of incorporation, the
approval of the stockholders is NOT necessary.

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61 - Nielson & Co. v. Lepanto Consolidated Mining (1966) (dividends, mining management and operation, World
War II)
Doctrines:
• Under Section 16 of the Corporation Law, stock dividends cannot be issued to a person who is not a stockholder
in payment of services rendered.
Facts:
In 1937, Lepanto entered into a Management Contract with Nielson. In this agreement, Nielson was to manage
and operate the Mankayan Mining Claim of Lepanto in consideration for
1. P2,500 a month and
2. 10% of dividends declared and paid.
In 1941, Lepanto declared dividends amounting to P175,000, 10% of which Nielson was entitled to (so,
P17,500). Lepanto never paid Nielson. During the liberation in 1945 (i.e., after World War II), Lepanto unilaterally
terminated the management contract with Nielson.
In 1958, Nielson instituted an action for its 10% share in the dividends declared by Lepanto in 1941. The suit
reached the SC and it decided against Lepanto in 1941. The suit between Nielson and Lepanto was suspended in 1942
when the US Army bombarded the Mankayan mining claims, thus preventing Nielson from complying with its obligation
(i.e. operating and managing the claim). The tribunal further said that the contract remained suspended even after the war
was over in 1945 until 1948 when the mines were fully operational; and that the management contract still had five years
to go from 1948.
Thus, the SC stated that Nielson was entitled to 10% of the dividend declarations in 1949 and 1950 worth P3M.
Lepanto sought reconsideration of SC’s decision in 1966. (1) What is the nature of the management contract? Is it one of
agency and hence terminable at the principal’s will or is it a contract of lease of services which may be terminated only
upon agreed causes? (2) Is Nielson entitled to 10% of the stock dividend even though Lepanto is not a stockholder?
(Here’s the gist — they had a management contract that will pay Nielson 10% of dividends. However, due to the war, the
contract was suspended as per a stipulation in their contract that if there’s force majure, they will suspend the contract.
Lepanto now contends that he’s not entitled to pay the dividends because the contract is done. He refuses to consider the
war-time and rebuilding-of-the-mine-time as suspended periods.)
Issues:
1. W/N the nature of the Management Contract is one of a contract of lease of services which may be terminated
only upon agreed causes
2. CORP: W/N Nielson entitled to 10% of the stock dividend even though Lepanto is not a stockholder
Held/Ratio:
1. YES. Nielson was hired to manage and operate the mine of Lepanto. It was not allowed to make decisions without
Lepanto’s approval.
2. NO. Under Section 16 of the Corporation Law, stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered. The understanding between Lepanto and Nielson was simply to
make the cash value of the stock dividends declared as the basis for determining the amount of compensation
that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. It
does not mean that the compensation of Nielson would be taken from the amount actually declared as cash
dividend to be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as
stock dividends, but from the other assets or funds of the corporation which are not burdened by the dividends
thus declared.

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Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2)
property; and (3) undistributed profits. Shares of stock are given the special name “stock dividends” only if they
are issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or property then
those shares do not fall under the category of “stock dividends”. A corporation may legally issue shares of
stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness.
A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property,
because services is equivalent to property.
It is the shares of stock that are originally issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold
or unsubscribed, either coming from the original capitalization or from the increased capitalization. Those shares
of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for
services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be
issued to one who is not a stockholder of a corporation.
A “stock dividend” is any dividend payable in shares of stock of the corporation declaring or authorizing
such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of
cash, and is properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a
dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par.
When a corporation issues stock dividends, it shows that the corporation’s accumulated profits have been
capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or
kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets
and no longer available for actual distribution.
Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders
are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the
surplus, which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder;
the proportional interest of each stockholder remains the same .If a stockholder is deprived of his stock dividends
- and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder then
the proportion of the stockholder’s interest changes radically. Stock dividends are civil fruits of the original
investment, and to the owners of the shares belong the civil fruits.
The term “dividend” is that part or portion of the profits of the enterprise which the corporation, by its governing
agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside,
and declared by the directors of the corporation as dividends and duly ordered by the director, or by the
stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their
respective interests.
Under Section 16 of the Corporation Law stock dividends cannot be issued to a person who is not a
stockholder in payment of services rendered. And so, in the case at bar Nielson cannot be paid in shares of
stock which form part of the stock dividends of Lepanto for services it rendered under the management
contract.

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62 - Tuason & Co. v. Bolanos (1954)
Doctrines:
• Although a corporation has no power to enter into a partnership, it may nonetheless enter into a joint venture w/
another where the nature of that venture is in line w/ the business authorized by its charter.
Facts:
This is an action for the recovery of possession of real property against Bolanos. Bolanos alleges ownership of
the land by prescription. The case was ruled in favor of Tuason (prescription does not run against registered property).
On appeal, Bolanos alleges, among others, that the complaint by Tuason should have been dismissed for not having
been brought by the real party in interest. This is because the action is brought in behalf of JM Tuason & Co. Inc. by
Gregorio Araneta Inc., its managing partner.
Issues:
1. W/N case should have been dismissed on the ground that the case was not brought by the proper party in interest
Held/Ratio:
1. No. What Section 2, Rule 2 of the Rules of Court provide is that the action be brought in the name of, but not
necessarily by the real party in interest. While the complaint states that the plaintiff is “represented herein by its
Managing Partner Gregorio Araneta, Inc.”, another corporation, there is nothing against one corporation being
represented by another person, natural or juridical, in a suit in court.
The contention that Gregorio Araneta, Inc. cannot act as managing partner for plaintiff on the theory that it is
illegal for two corporations to enter into a partnership is without merit. The true rule is that “though a
corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with
another where the nature of that venture is in line with the business authorized by its charter.”
There is nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio Araneta,
Inc. as “its managing partner” is not in line with the corporate business of either of them.

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63 - Atrium Management Corp. v. Court of Appeals (2001)
Doctrines:
• An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of
its organization and therefore beyond the power conferred upon it by law. The term “ultra vires” is distinguished
from an illegal act, for the former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.
• Personal liability of a corporate director, trustee, or officer along (although not necessarily) with the corporation
may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in
the directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its
stockholders, or other persons;
2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.
Facts:
Once upon a time, there were three companies, Hi-Cement Corporation, E.T. Henry and Co., and Atrium
Management Corporation. Hi-Cement issued 4 postdated crossed checks worth P2 million in favor of E.T. Henry as
payee. These were issued through Hi-Cement’s corporate signatories Lourdes M. de Leon (Lourdes) as Hi-Cement’s
treasurer and Antonio de las Alas as Chairman (but he died so nawala na sya sa eksena).
E.T. Henry was in need of cash right away, so it entered into a discounting agreement with Atrium. Before
entering into the agreement, E.T. Henry and Atrium first confirmed with Lourdes if this was possible and if Hi-Cement
would consent. She said that it was OK, and that the checks were issued to E.T. Henry as payment of petroleum
products. So the checks were then indorsed to Atrium.
When Atrium tried to collect on the checks, the drawee bank (unnamed) dishonored all four checks for the reason
“payment stopped.” Naturally, Atrium went to the courts to collect.
The trial court ruled that Lourdes, E.T. Henry, and Hi-Cement were solidarily liable for the payment of P2 million
to Atrium. However, on appeal, the CA absolved Hi-Cement, saying Lourdes was not authorized to issue the checks
(constituting ultra vires acts), and the checks were not issued for valuable consideration.
Issues:
1. W/N the issuance of the checks constituted an ultra vires act
2. W/N Lourdes (and de las Alas) were personally liable for the checks issued as corporate officers and authorized
signatories of the checks
3. W/N Atrium is a holder in due course
Held/Ratio:
1. NO, the acts were not ultra vires. The issuance of the checks was for the procurement of a loan to finance the
activities of the corporation, and was well within the ambit of a valid corporate act, and hence, not an ultra vires
act. An ultra vires act is one committed outside the object for which a corporation is created as defined by the law
of its organization and therefore beyond the power conferred upon it by law. The term “ultra vires” is
distinguished from an illegal act, for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.

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2. YES, Lourdes (and de las Alas, but he died so the case against him was dismissed) is personally liable on the
checks she issued, even if she was authorized to issue the checks, because she was negligent. Lourdes signed the
confirmation letter requested by E.T. Henry and Atrium for the rediscounting of the checks, even if she was aware
that the checks were strictly endorsed for deposit only to E.T. Henry’s account and not to be further negotiated
(being a crossed check).
Moreover, in the said confirmation letter, Lourdes said the checks were for payment of petroleum products, when
in fact they were for a financing agreement with E.T. Henry. Due to her negligence, Atrium suffered damage, and
therefore, she must be held personally liable (see 2nd doctrine).
3. NO, Atrium is not a holder in due course, as it was aware that the checks were crossed. However, this doesn’t
mean that it could no longer collect on the checks.

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64 - Pirovano v. De la Rama Steamship (1954)
Doctrine:
• Ultra vires acts - acts of corporation performed merely outside the scope of power granted to it by its article of
incorporation.
• Ultra vires acts are those acts which are not illegal and void ab initio. They are merely voidable and may become
binding and enforceable when ratified by the stockholders.
Facts:
The case involves numerous corporate resolutions and the quest of a family in seeking that “valued recognition”
from the corporation for the efforts of a father named Pirovano (bff of then President Roxas).
It all started when the heirs of Pirovano filed before CFI of Rizal an action seeking to enforce some board
resolutions which gives the children the proceeds of the insurance policies taken on the life of the deceased Enrico
Pirovano. Pirovano, former president of steamship corporation, was said to have contributed greatly to progress of the
company by raising its paid up capital from P240k to P15.5 M. Few years before he died in the hands of the Japanese, the
company insured the life of Pirovano in various insurance companies for P1M.
With this in mind, the first in the series of corporate resolutions was issued wherein a sum of P400k convertible to
4k shares of stock at par shall be set aside for his heirs. Then another resolution was passed which changes the form of
donation of shares of stocks to a sum of money. The wife then executed a memorandum of agreement regarding this. Then
another resolution followed wherein the corporation said that the interest shall be paid only upon paying of the debts of
the company (at that time the corp had a debt with Nat’l Dev’t company. After a few years the stockholders of the
steamship corp formally ratified the donation stated in the resolutions. With this, the president of the corp, Sergio Osmena
filed an inquiry before SEC alleging that said donation was void because the corporation acted beyond its scope of powers
(corp can’t dispose of his assets by gift).
Issues:
1. W/N the grant of proceeds of insurance policies taken on the life of Pirovano embodied in resolutions is a
renumerative donation.
2. W/N donation has already perfected before its rescission or nullification by stockholders
3. W/N the donation is an ultra vires act (corp related issue) thus unenforceable and invalid
Held/Ratio:
1. YES. Court held that the said donation is renumerative in nature. It was clearly expressed that the thought of
giving donation to his heirs was due to the big contribution of Pirovano in the progress and success of the
corporation. This was donation made to a person in consideration of his merits or for services rendered to the
donor.
2. YES, the court held that the donation has reached the stage of perfection (upon the grant of resolutions and
ratifications by stockholders and accepted by donee). It is therefore valid and binding upon the parties and cannot
be rescinded unless there is a legal ground. In this case, the court sees no reason for rescission.
3. YES. The court held that even if the donation given was outside the scope of the powers of the corporation, (ultra
vires act) such donation may still be held valid and enforceable upon the formal ratification of the stockholders. In
this case, it was clearly and expressly shown that stockholders have formally ratified said donation, thus it may be
effected and binding upon the parties.

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65 - Fred Harden et.al. v. Benguet Consolidated Mining Co. (1933) (illegal per se + No private Wrong)
Doctrine:
• CLV Book: Even where corporate contracts are illegal per se, when only public or government policy is at stake
and no private wrong is committed, the courts will leave the parties as they are, in accordance with their original
contractual expectations.
Facts:
Benguet Consolidated, a sociedad anonima, and Balatoc Mining Co., a corporation, were engaged in the business
of mining gold. During its early years, Balatoc was underdeveloped. Because of this, Benguet and Balatoc entered into a
contract wherein Benguet will erect power plants and develop a milling plant for Balatoc. In return, Balatoc gave Benguet
shares with a par value of P600K. The contract was a result of a general stockholders’ meeting held by Balatoc.
The project soon after turned out well, with Benguet profiting from their shares. Harden, a stockholder of
Balatoc, as well as other stockholders, viewed the arrangement with complacency. (Nega lang talaga sila, kasi kumikita
yung Benguet dahil nagging successful ung stocks nila.) They filed a case against Benguet and Balatoc praying that
the contract be declared unlawful, and subsequently annulled, and that the shares of stock issued to Benguet be
obliterated. They based their complaint on a provision in the then Corporation Law (adopted from the Act of Congress of
1916) which states that it shall be “unlawful for any member of a corporation engaged in agriculture or mining (…)
to be in any wise interested in any other corporation engaged in agriculture or in mining.”
Issues:
1. W/N the contract be annulled for illegality.
2. W/N Benguet, as a sociedad anonima, falls under the Corporation Law.
Held/Ratio:
1. NO. The provision was enacted based on public policy which dictates the need to regulate mining rights.
Moreover, the penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an
action of quo warranto. But these proceedings can be maintained only by the Attorney-General in
representation of the Government. Moreover, Benguet Company has committed no civil wrong against the
plaintiffs.
The SC cited a decision which states that a corporation which is limited by its charter and the law has all the
power than any other individual has until the State acts against it. It has an absolute title against the entire
world except the State, after a proper proceeding is begun in a court of law.
2. NOT DECIDED. The SC ruled that because Harden et. Al. had no legal standing, this issue need not be passed
upon.

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DIRECTORS, TRUSTEES, AND OFFICERS


66 - Manila Metal Container Corporation v. PNB (2006) (SAMD)
Doctrines:
• Contracts or acts not made either by the Board of Directors or by a corporate agent duly authorized by the Board
are not binding on the corporation.
Facts:
Manila Metal Container mortgaged its 8, 015-square meter property in Mandaluyong to PNB as security for a
loan. Several amendments were made to the loan agreement, increasing the amount and extending the payment period.
Manila Metal failed to pay in time. PNB extrajudicially foreclosed the property. It was also the winning bidder at P
911,532.21. The sale was annotated on the title on February 17, 1983, giving Manila Metal until February 17, 1984 to
redeem the property.
Manila Metal sent its first letter to PNB asking for an extension of the redemption period. PNB sent its first reply
stating that the request was pending at its Pasay City branch. Eventually, the redemption period expired and a new title
was issued to PNB.
Meanwhile, the Special Assets Management Department (SAMD) of PNB rendered a statement of account to
Manila Metal covering its total obligation in the amount of P 1,574,560.47. Manila Metal remitted P 725,000 as “deposit
to repurchase.” SAMD also recommended to PNB that Manila Metal be allowed to repurchase the Mandaluyong property
at 47 cents less the amount in the statement of account. PNB wrote Manila Metal informing the latter that SAMD’s
recommendation was rejected and that the repurchase price was set at P 2,660,000, the minimum market value of the
property according to PNB. PNB likewise gave Manila Metal until December 15, 1984 to accept the offer or else the P
725,000 remittance will be returned and the property will be offered to other buyers. A series of offers and counter-offers
ensued.
Manila Metal’s assertion was that it had already accepted SAMD’s offer which was why it made the earlier
remittance (earnest money, allegedly). Again, offers and counter-offers were made until Manila Metal filed a complaint
for Annulment of Mortgage, and Specific Performance with damages.
Issues:
1. W/N there was a perfected contract of sale to repurchase the foreclosed property
2. W/N SAMD’s purported offer was binding on the corporation
Held/Ratio:
1. NO. At no point was there a meeting of the minds as to the consideration.
2. NO. SAMD was not duly authorized by the Board of the Directors to enter into a repurchase agreement. In fact, it
was made quite clear to Manila Metal that the P 725,000 remittance was only accepted on the condition that the
repurchase price was still subject to the approval of the Board.
Section 23 of the Corporation Code provides:
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
of directors or trustees to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold office for one (1) year until
their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of
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which he is a director shall thereby cease to be a director. Trustees of non-stock corporations
must be members thereof. a majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.

67 - Filipinas Port Services v. Go (2007) (additional positions, derivative suit)


Doctrines:
• Raison d’etre behind the conferment of corporate powers: The concentration in the board of the powers of
control of corporate business and of appointment of corporate officers and managers is necessary for efficiency
in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate organization is for the stockholders to
choose the directors who shall control and supervise the conduct of corporate business.
Facts:
Petitioner Filport is represented by its previous Board Director Eliodoro Cruz and stockholder Mindanao
Terminal and Brokerage Services, Inc. (Minderbro). Only these two appealed from the CA decision being assailed in this
case. In 1993, Filport’s Board of Directors (herein respondents) enacted a resolution creating six new positions
(AVPs for Corporate Planning, Operations, Finance, and Administration, as well as Special Assistants to the
President and to the Chairman), and 6 people were elected into said offices, all with a monthly salary of P13,050
each. They also increased the salaries of the Chairman and other officers. Cruz wrote a letter to the Board questioning
these decisions, saying that the Board was not authorized to do so by the company’s by-laws. The Board did not act upon
the matter so Cruz and the other stockholders filed a derivative suit of damages due to mismanagement with the SEC.
After a few years, the Securities Regulations Code was enacted, which changed the rules on venue, so the case was
eventually moved to the Davao RTC.
The RTC ruled in favor of Cruz, et al., even if it decided that the Board had the authority to create positions not
found in the by-laws and the salary increases were reasonable, and declared that the AVP for Corporate Planning and the
Special Assts. should restore whatever salary they received because Filport wasn’t a big corporation that needed multiple
executive positions, and that these positions were just created for accommodation. The CA overturned the RTC decision.
Cruz contends that the board does not have the authority to create an executive committee because it is not
provided for in Filport’s by-laws as required by Sec. 35 of the Corp Code.
Issues:
1. W/N the Board had the power to create the assailed positions (most impt.)
2. W/N the positions were created merely for accommodation
3. W/N the Board is guilty of mismanagement
4. W/N Cruz has standing to bring the case
Held/Ratio:
1. YES, the governing body of a corporation is its board of directors. As per Sec. 23 of the Corp Code, the corporate
powers of all corporations formed under the code shall be exercised by the board, and all property owned and
business conducted by the corporation shall also be held and controlled by the board. The board is the sole
authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within
the scope of its charter. However, the authority of the board is restricted to the management of the corp’s regular
business affairs, unless more extensive power is expressly conferred.
In this case, while the by-laws do not expressly provide for the board’s authority to create an executive
committee, the Court cannot deem that the positions created automatically formed an executive committee. The
“executive committee” referred to in Sec. 35 means a committee that has equal powers with the board and must be
distinguished from other committees that can be created and controlled by the board. In this case, the positions
created are ordinary positions were created in accordance with the regular business of Filport; thus, it is entirely

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within the board’s power to create them and provide remuneration therefor. Plus, Cruz himself moved to create
the positions of AVPS for Finance, Operations, and Administration during his incumbency as Filport president.
2. NO. There is no evidence to substantiate Cruz’s allegations. He who alleges a fact has the burden of proving his
existence. Mere allegations are not enough. In this case, Cruz only presented his testimony to prove that the
positions were created for mere allegation, but this cannot serve as the proof needed. It only served as an
allegation.
3. NO. Mismanagement connotes the presence of bad faith and malice, not just negligence, error, or bad business
judgment. Bad faith connotes a dishonest purpose or some moral obliquity or conscious doing of a wrong that
partakes of the nature of fraud.
4. YES. The SC ruled that this suit is indeed a derivative suit, wherein a corporate stockholder may bring an action
to protect or vindicate corporate rights whenever the board refuses to sue, or when the board is the one to be sued.
In order to be considered a derivative suit, the ff. requisites must concur: 1) the party bringing the suit must have
been a shareholder as of the time of the act or transaction complained of; 2) he has tried intra-corporate remedies
but they have failed or the board refused to hear his plea; and 3) the cause of action devolves around the
corporation—the wrongdoing or harm was done to the corporation itself and not merely to a particular
stockholder. This petition clearly satisfies all three requisites: 1) Cruz was a stockholder at the time of the
positions were enacted and the raises were given; 2) he wrote to the board to do the necessary action about his
complaint but the board never acted on it; and 3) in the end, Filport, not Cruz, stands to benefit from the case.

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68 - Angeles v. Santos (1937)
Doctirines:
• Where corporate directors are guilty of a breach of trust — not of mere error of judgment or abuse of discretion
— and intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon
the corporation and indirectly upon the stockholders
• The board of directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a
position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good
faith, care and diligence in the administration of the affairs of the corporation and should protect not only the
interest of the majority but also those of the minority of the stock
Facts:
The plaintiff and the defendant are all stockholders and member of the board of directors of the “Parañaque Rice
Mill, Inc. On September 6, 1932, a complaint was instituted by Angeles, de Lara, Bernabe, as stockholders, for and in
behalf of the corporation, Parañaque Rice Mill, Inc., against Santos, Mayuga, Pascual, and Rodriguez. The complaint
avers subtantially the following:
1. that the plaintiffs are stockholders and constitute the minority and the defendants are also stockholers
and constitute the majority of the board of directors of the Parañaque Rice Mill, Inc.;
2. that at an extraordinary meeting held on February 21, 1932, the stockholders appointed an investigation
committee of which the plaintiff Jose de Lara was chairman and the stockholders Dionisio Tomas and
Aguedo Bernabe were members, to investigate and determine the properties, operations, and losses of the
corporation as shown in the auditor’s report corresponding to the year 1931, but the defendants, particularly
Teodorico B. Santos, who was the president of the corporation, denied access to the properties, books
and record of the corporation which were in their possession;
3. that the defendant Teodorico B. Santos, in violation of the by-laws of the corporation, had taken possession
of the books, vouchers, and corporate records as well as of the funds and income of the Parañaque Rice
Mill, Inc., all of which, according to the by-laws, should be under the exclusive control and possession of
the secretary-treasurer, the plaintiff Aguedo Bernabe;
4. that notwithstanding written requests made in conformity with the by-laws of the corporation of three
members of the board of directors who are holders of more than one-third of the subscribed capital stock of
the corporation, the defendant Teodorico B. Santos as president of the corporation refused to call a meeting
of the board of directors and of the stockholders;
5. that Teodorico B. Santos as president of the corporation, in connivance with his co-defendants, was
disposing of the properties and records of the corporation without authority from the board of
directors or the stockholders of the corporation and without making any report of his acts to the said
board of directors or to any other officer of the corporation, and that, to prevent any interferrence with or
examination of his acts, he arbitrarily suspended plaintiff Jose de Lara from the office of general manager to
which office the latter had been lawfully elected by the stockholders.
On the date of the filling of the complaint, September 6, 1932, the court issue an ex parte order of receivership
appointing Melchor de Lara as receiver of the corporation upon the filling of a bond of P1,000 by the plaintiffs-appellees.
The bond of the receiver was fixed at P4,000.
The defendant-appellants objected to the petition for the appointment of a receiver on the ground, among others,
that the court had no jurisdiction over the Parañaque Rice Mill, Inc., because it had not been include as party defendant in
this case and that, therefore the court could not properly appoint a receiver of the corporation pendente lite. The motions
for reconsideration and new trial and the special appearance were, by separate orders bearing date of December 19, 1934,
denied by the trial court. The case was finally elevated to the Supreme Court by bill of exceptions.

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Issues:
1. W/N the trial court was without jurisdiction to appoint a receiver and should have dismissed the case
2. W/N the lower court erred in ordering the destitution of the defendants from their office as members of the board
of directors of the corporation, until the new election of the stockholders, which shall be held once the decision
has become final.
Held/Ratio:
1. NO. That the action was properly instituted by the plaintiff as stockholders for and in behalf of the corporation
Parañaque Rice Mill, Inc. and the lower court committed no reveiwable error in appointing a receiver of the
corporation pendente lite.
The board of directors, or the majority thereof, in drawing to themselves the power of the corporation, occupies a
position of trusteeship in relation to the minority of the stock in the sense that the board should exercise good
faith, care and diligence in the administration of the affairs of the corporation and should protect not only the
interest of the majority but also those of the minority of the stock. Where a majority of the board of directors
wastes or dissipates the funds of the corporation or fraudulently disposes of its properties, or performs ultra vires
acts, the court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy is
unavailing, will entertain a suit filed by the minority members of the board of directors, for and in behalf of
the corporation, to prevent waste and dissipation and the commission of illegal acts and otherwise redress
the injuries of the minority stockholders against the wrongdoing of the majority.
2. YES. Our Corporation Law (Act No. 1459, as amended), does not confer expressly upon the court the
power to remove a director of a corporation. There are abundant authorities, however, which hold that if the
court has acquire jurisdiction to appoint a receiver because of the mismanagement of directors, these may
thereafter be removed and others appointed in their place by the court in the exercise of its equity jurisdiction. In
this case, however, the properties and assets of the corporation being amply protected by the appointment of a
receiver. Hence, the removal of the directors is, under the circumstances, unnecessary and unwarranted.

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69 - Tan et al. v. Sycip (2006) (quorum; non-stock corporation; deceased members)
Doctrines:
• For stock corporations, the “quorum” referred to in Section 52 of the Corporation Code is based on the number of
outstanding voting stocks.
• For nonstock corporations, only those who are actual, living members with voting rights shall be counted in
determining the existence of a quorum during members’ meetings. Dead members shall not be counted.
Facts:
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen
(15) regular members, who also constitute the board of trustees. During the annual members’ meeting held on April 6,
1998, there were only eleven (11) living member-trustees, as four (4) had already died. Out of the eleven, seven (7)
attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr.
over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the meeting, Petitioners
Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC), Tan et al. maintained that the
deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members
automatically lost all their rights (including the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She
held that the basis for determining the quorum in a meeting of members should be their number as specified in the articles
of incorporation, not simply the number of living members.
Issues:
1. W/N in nonstock corporations, dead members should still be counted in determination of quorum for purpose of
conducting the Annual Members’ Meeting.
Held/Ratio:
1. NO. In nonstock corporations, the voting rights attach to membership. Under Section 52 of the Corporation
Code, the majority of the members representing the actual number of voting rights, not the number or
numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum.
Membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the
articles of incorporation or the bylaws of the corporation provide otherwise. The determination of whether or not
“dead members” are entitled to exercise their voting rights (through their executor or administrator), depends on
the articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of
the member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a
member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster
in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the
requisite vote in corporate matters or the requisite quorum for the annual members’ meeting. With 11 remaining
members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members’
meeting, conducted with six members present, was valid (as to other resolutions).
[Note: The case also details the rule for stock corporations. It is a short and concise case by CJ Panganiban]!
But, while a majority of the remaining corporate members were present, however, the “election” of the four
trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members,
not of the board of trustees. We are not unmindful of the fact that the members of GCHS themselves also
constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that
vacancies in the board must be filled up by the remaining trustees. In other words, these remaining member-
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trustees must sit as a board in order to validly elect the new ones. Thus, petition was partly granted.The
assailed Resolutions of the Court of Appeals are hereby reversed and set aside. The remaining members of the
board of trustees of GCHS may convene and fill up the vacancies in the board by sitting as a board.

70 - Board of Liquidators v. Heirs of Kalaw (1967)


Doctrine:
• It is possible for an express provision of the by-laws to be violated and the Board may, in certain corporate
actions, bind the corporation in spite of the fact that it is contrary to the by-law provision.
• There are 2 ways by which corporate actions may come about through its Board of Directors:
o The board may empower or authorize the act or contract; or
o Ratification from the board
As long as there is approval by the board, express or implied, it is valid to bind the corporation.
Facts:
National Coconut Corporation (NACOCO) was a chartered as a non-profit governmental organization, in charge
of all transactions involving coconut and its by-products. Maximo Kalaw sat as its General Manager and board chairman.
Because of 4 typhoons that hit the country in, NACOCO was unable to fulfill its obligations under the numerous contracts
it entered into with several buyers. The aggrieved buyers threatened to bring damage suits but most of these were settled,
except for one who actually pushed through with the suit (Louis Dreyfus ltd.). Subsequently, NACOCO was abolished by
EO 372, giving the Board of Liquidators the function of settling and closing its affairs.
All the settlements sum up to P1,343,274.52. It is this sum that NACOCO, through the Board of Liquidators, now
seeks to recover from General Manager Kalaw and the other two directors, charging the latter with negligence and bad
faith/breach of trust for having approved entered into the aforementioned unprofitable contracts. It is alleged that while
the by-laws required prior approval of the board, Kalaw entered into the contracts alone as general manager and without
the board’s prior approval. Sometime after, Kalaw died and the suit was brought against his estate.
Issues:
1. W/N Kalaw and the rest of the board were guilty negligence and bad faith and/or breach of trust for having
entered into the unprofitable contracts
2. [civpro related] w/n the action survives his death; and if so, is his heirs liable
Held:
1. NO. Under the circumstances, Kalaw’s acts were valid corporate acts. Although the by-laws required that a
general manager first procure approval of the board members before entering into contracts that would bind the
corporation, the contrary practice by Kalaw was ratified by the Board. Evidence shows that it was the practice of
the corporation to allow its general manager to negotiate contracts, in its copra trading for and in NACOCO’s
behalf, without prior board approval. The Court ruled that “if the by-laws were to be literally followed, the
board should give its stamp of prior approval on all corporate contracts. But [in this case] the board itself, by its
acts and through acquiescence, practically laid aside the by-law requirement of prior approval” [please see
above doctrine ]
2. [civpro related] The action, being one for a tort, does survive his death.

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71 - Montelibano v. Bacolod-Murcia Milling (1962) (milling concession grants / business judgment)


Facts:
The Bacolod-Murica Milling entered into Milling Contracts with Montelibano and Gonzaga & Co. (planters).
Originally executed in 1919, said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop, and
provided that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. This was
then amended to give the planters an increased participation of 60%.
The Board of Bacolod-Murica later adopted a Resolution granting further concessions to the planters depending
on the granting by the other Sugar Centrals of Negros the similar concessions to the said planters. This was in fact
further consideration for the planters (and was incorporated into the milling contracts) who now claim that their
concessions should appropriately be increased pursuant to the Resolution. Bacolod-Murica seeks to renege on the
undertaking — alleging it is void.
Issue:
1. W/N the additional consideration before adoption of the Resolution is void
Held/Ratio:
1. YES. Bacolod-Murcia Milling Co., Inc. cannot deny its obligation to increase the participation of their planters as
embodied in the resolution duly adopted by its Board of Directors when the corporation extended its milling
contract with the planters. The court said that the act in question is in direct and immediate furtherance of the
corporation’s business, fairly incident to the express powers and reasonable necessary to their exercise. The court
also reiterated the rule that questions of policy or of management are left solely to the honest decision of officers
and directors of a corporation, and the court is without authority to substitute its judgment with that of the Board
of Directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are
nor reviewable by the courts.
Bacolod-Murica should be bound by the terms of the agreement. It is w/in the powers of the Board to
amend the contracts to make them more acceptable to the planters. The Resolution has been passed in good
faith, and the fact that it may cause losses to the corporation does not suffice to warrant the courts to
review them. This is a matter left to the judgment of the Board, a question of policy, and as long as they are
not illegal and are executed in good faith, they will not be disturbed by the courts. Bacolod must honor its
undertakings.

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72 - Philippine Stock Exchange v. CA (1997) (Listing of shares: Business Judgment)
Doctrines:
• The PSE is engaged in a business imbued with high public interest and is under the control and supervision of the
SEC, moreso due to the fact that the PSE was granted a public franchise by the government, where it is mandated
to protect the interest of the investing public. However, though under such control and supervision by the SEC,
the PSE cannot be questioned on matters of internal management, policies, and administration in the
absence of bad faith.
Facts:
Puerto Azul Land Inc. (PALI), a domestic real estate corporation, made an application to the SEC for the purpose
of having its stocks listed in order for it to be sold in the public. A year after a permit to sell was granted, heirs of the
former President Marcos claimed that Pres. Marcos was the legal owner of certain properties forming part of the Puerto
Azul Beach Hotel Complex which PALI claims to be among its assets.
The PSE, taking into consideration these claims, rejected the application for listing. In response, PALI sought the
decision of the SEC which then reversed the decision of the PSE and ordered the latter to list the PALI stocks.
Issue:
1. W/N did the SEC act arbitrarily in reversing the decision of the PSE and ordering the listing of PALI stocks?
Held/Ratio:
1. YES. The PSE is engaged in a business imbued with high public interest and is under the control and supervision
of the SEC, moreso due to the fact that the PSE was granted a public franchise by the government, where it is
mandated to protect the interest of the investing public.
However, though under such control and supervision by the SEC, the PSE cannot be questioned on matters of
internal management, policies, and administration in the absence of bad faith.
In fact, in the decision rendered by the board of the PSE, was found of good standing by the court. PSE was
correct in denying the listing of the PALI stocks since there were various allegations against the listing:
a. Portions of the properties are alleged to be owned by former Pres. Marcos
b. Portion of the properties are alleged to pertain to public domain
c. The manner of transfer of properties were questionable
d. A sequestration order was issued by the PCGG against some portions of properties
Taking all these into consideration, the PSE deemed that PALI stocks are not for the best interest of the investing
public and will deteriorate the high standards and goodwill upheld by the PSE.

Ong Yong v. Tiu (see Digest #55)


Lipat v. Pacific Banking Corp (see Digest #32)

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73 - Woodchild Holding Inc. v. Roxas Electric Constructions Company Inc (2004)
Doctrines:
• The apparent power of an agent is to be determined by the acts of the principal.
Facts:
Roxas Electric and Construction Company Inc (RECCI) owned 2 parcels of land, Lot 491-A-3-B1(B1) and Lot
491-A-3-B2 (B2). RECCI’s Board of Directors issued a resolution authorizing the corporation through its
President, Roberto Roxas, to sell B2 and to sign and execute the necessary documents4. Roxas sold B2 to Woodchild
Holdings Inc (WHI) through its President, Jonathan Dy, for P 5M who wanted to build a warehouse in the land. In the
Deed of Absolute Sale, Roxas also granted WHI a right of way over B1and an option to purchase certain portions
thereof in case the need arose as earlier requested by WHI. After Roxas died, WHI demanded that RECCI sell a
portion of B1 but it refused claiming it never authorized Roxas to do so. WHI filed a case for specific performance
and damages. The trial court ruled that RECCI was estopped from disowning the apparent authority of Roxas under the
Resolution of its Board finding WHI in good faith. The CA reversed claiming that Roxas was merely authorized to sell B2
and therefore the provisions in the deed of sale not binding to RECCI.
Issue:
1. W/N RECCI is bound by the provisions in the deed of absolute sale granting beneficial use and a right of way and
option to buy over a portion of B1
Held/Ratio:
1. NO. Contracts entered into by corporate officers beyond the scope of their authority are unenforceable
against the corporation unless ratified by the corporation, whether expressly or impliedly.
WHI’s contention that by allowing Roxas to execute the deed of absolute sale and failing to disapprove the same,
RECCI gave him apparent authority to grant a right of way and option to buy over B1.
For the principle of apparent authority to apply, the WHI was burdened to prove the following: (a) the acts
RECCI justifying belief in the agency by the WHI; (b) knowledge by RECCI which is sought to be held; and, (c)
reliance thereon by WHI consistent with ordinary care and prudence.
The apparent power of an agent is to be determined by the acts of the principal and not by the acts of the agent.
There is no evidence of specific acts made by the RECCI showing or indicating that it had full knowledge of
any representations made by Roxas to WHI that it had authorized Roxas to grant WHI an option to buy B1, or
to create a burden or lien thereon. There is no implied ratification when RECCI received the P5M purchase
price for B2. RECCI sold B2 to WHI and the latter took possession of the property, building a warehouse.
RECCI had a right to retain the P5M. For an act of the principal to be considered as an implied ratification of an
unauthorized act of an agent, such act must be inconsistent with any other hypothesis than that he approved and
intended to adopt what had been done in his name.
Ratification is based on waiver — the intentional relinquishment of a known right. Ratification cannot be
inferred from acts that a principal has a right to do independently of the unauthorized act of the agent.
Moreover, if a writing is required to grant an authority to do a particular act, ratification of that act must
also be in writing. Since RECCI had not ratified the unauthorized acts of Roxas, the same are unenforceable.

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4. Board Resolution: RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any interested buyer, its 7,213-sq.-meter
property at the Sumulong Highway, Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price and on terms and
conditions which he deems most reasonable and advantageous to the corporation; FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS,
President of the corporation, be, as he is hereby authorized to execute, sign and deliver the pertinent sales documents and receive the proceeds of
sale for and on behalf of the company

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74 - Francisco v. GSIS (1963) (telegram, lawyer-father, apparent authority)
Doctrines:
• If a private corporation intentionally or negligently clothes its officers or agents with apparent power to perform
acts for it, the corporation will be estopped to deny that such apparent authority is real, as to innocent third
persons dealing in good faith with such officers or agents.
Facts:
Trinidad J. Francisco, in consideration of a loan, mortgaged in favor of the defendant, Government Service
Insurance System a parcel of land with 21 bungalows, known as Vic-Mari Compound, located at Baesa, Quezon City,
payable within ten 10 years in monthly installments and with interest of 7% per annum compounded monthly. Sometime
in Jan 1959, The System extrajudicially foreclosed the mortgage on the ground that up to that date the plaintiff-mortgagor
was in arrears on her monthly installments in the amount of P52,000.00. The System itself was the buyer of the property
in the foreclosure sale.
On February 1959, the plaintiff’s father, Atty. Vicente J. Francisco, sent a letter to the general manager of the
defendant corporation, Mr. Rodolfo P. Andal. Atty. Francisco in effect wanted to pay back the arrears on the monthly
installments but then instead of giving the whole P52,000, he would just first give P30,000 and as for the balance, he
proposes for the GSIS to take over the administration of the mortgaged property and to collect the monthly installments
until the same is fully covered.
On the same date, Atty. Francisco’s request was approved by the GSIS board which was sent in the form of a
telegram with the signature of Andal. Pursuant to the agreement Atty. Francisco remitted to the System, through Andal,
a check for P30,000.00, with an accompanying letter, which reads:
I am sending you ... [P30,000] in accordance with my letter of February 20th and your reply
thereto of the same date, which reads: GSIS BOARD APPROVED YOUR REQUEST RE
REDEMPTION OF FORECLOSED PROPERTY OF YOUR DAUGHTER…
The defendant received the said amount however it did not, take over the administration of the compound. Thus,
the Franciscos continued to administer the same, but remitting the proceeds to the GSIS. Subsequently, letters were sent
asking the plaintiff for a proposal for the payment of her indebtedness, since the one-year period for redemption had
expired. In reply, Atty. Francisco protested against this, saying that they have already accepted his offer and that he has
already commenced his part on the terms of his contract. Later on, the GSIS consolidated ownership of the compound —
alleging that the telegram did not express the contents of the Board Resolution (incorrect wording). The GSIS maintain
that the true intent was for the Franciscos to also bear the expenses of foreclosure.
Issues:
1. W/N the compromise made is binding upon defendant corporation.
Held/Ratio:
1. YES
The compromise made through the telegrams is binding. There was apparent authority — that of the GM,
Andal. Even assuming it is true that Andal didn’t sign it and that it was sent by the Secretary in his name, how are
the Franciscos to know? Persons transacting with corporations need not disbelieve every act of its officers,
especially those regular on their face. They are entitled to rely upon external manifestations of corporate
consent. And if a corporation knowingly permits its officers to do acts w/ apparent authority, it is estopped
from denying such authority. Also, assuming there was a mistake in the telegram, GSIS notified the Franciscos
too late — and only after having received several remittances. There was also notice to the GSIS, because
Vicente attached the disputed telegram in replying to that w/c was sent by GSIS. Notice to an officer with
regard to matters within his authority is tantamount to notice to the corporation. There was thus implied
ratification.

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75 - Prime White Cement Corp v. Honorable IAC and Alejandro Te (1993) [Self-dealing director]
Doctrines:
• Te was not only an ordinary stockholder of PWCC, but was a member of the Board of Directors and Auditor of
the corporation. He is what is often referred to as a “self-dealing” director.
Facts:
Prime White Cement Corp (PWCC) filed a petition for review on certiorari seeking to reverse the trial court and
IAC’s decision, awarding private respondent Te actual damages (P3,302,400.00), moral damages (P100,000.00) and
attorney’s fees and costs (P10,000.00).
PWCC thru its President (Mr. Falcon) and Chairman of the Board (Mr. Trazo) entered into a dealership agreement
with Alejandro Te, which obligated the latter to become the exclusive dealer and/or distributor of PWCC’s cement
products in the entire Mindanao area for 5 years. Important to note with this agreement is that the price of cement per
bag (P9.70) is fixed for the entire 5-year period.
Relying on the said agreement, Te began contracting with distributors in the area, marketing the product to ensure
that he is able to sell his allocation (20,000 bags per month). However, PWCC through its corporate secretary informed Te
that the board of directors decided to impose limitations on their agreement, including limiting the period of the dealership
(3 months), decreasing allocation (8,000 bags) and increasing the price per bag (P13.30). Te demanded the enforcement of
the original dealership agreement but PWCC refused to comply. The latter even entered into an exclusive dealership
agreement with Napoleon Co for the marketing of the cement in Mindanao, hence this suit.
Issues:
1. W/N the “dealership agreement” referred by the President and Chairman of the Board is a valid and enforceable
contract.
Held/Ratio:
1. NO, the SC does not agree with the conclusion of the IAC.
The general rules5 provided by the Corporate Law (in force at the time of the case) as well as the present
Corporation Code cannot apply with the case on hand, since the said rules pertain to dealings with 3rd persons
(i.e., person outside the corporation)
The case on hand is different because Te was not only an ordinary stockholder of PWCC, but was a member
of the Board of Directors and Auditor of the corporation. He is what is often referred to as a “self-dealing”
director.
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. This
trust relationship is “not a matter of statutory or technical law. It springs from the fact that the directors have the
control and guidance of corporate affairs and property and hence the property interest of the stockholders”.
Not all contracts between a director and his corporation is void or voidable. If the contract is fair and
reasonable under the circumstances, it may be ratified by the stockholders, provided a full disclosure of his
adverse interest is made.
Sec 32 of the Corporation Code provides the general rule as well as the exception on dealings of directors,
trustees or officers with the corporation. Although the old Corp Law does not contain a similar provision, the
said provision incorporates well-settled principles in corporate law.

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5. All corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law;
The Board may expressly delegate powers to its President or any of its officers;
In the absence of express delegation, the President may still bind the corporation, by the ratification of his acts or if contract was entered into the
ordinary course of business.

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Granting arguendo that the “dealership agreement” involved here would be valid and enforceable if entered into
with a person other than a director or officer of the corporation, the fact that the other party to the contract was a
Director and Auditor of the petitioner corporation changes the whole situation. First of all, the SC believes that
the contract was neither fair nor reasonable. Based on the original agreement that provided a flat rate of P9.70
per bag for 5-years, respondent Te must have knowledge that within that period, there would be a considerable
rise in the price of white cement. This unfairness in the contract is also a basis, which renders a contract entered
into by the President, without authority from the Board of Directors, void or voidable, although it may have been
in the ordinary course of business.
As director, respondent Te’s bounden duty was to act in such manner as not to unduly prejudice PWCC.
However, it is quite clear that he was guilty of disloyalty to the corporation, that he was attempting in effect,
to enrich himself at the expense of the corporation. Furthermore, there is no showing that the stockholders
ratified the “dealership agreement” or that they were fully aware of its provisions. The contract was therefore not
valid and this Court cannot allow him to reap the fruits of his disloyalty.

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76 - Yao Ka Sin Trading V. CA (1992)
Doctrines:
• A corporate officer or agent may represent and bind the corporation in transactions with third parties to the extent
that authority to do so has been conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred.
• The burden of proof is first with the corporation to prove that the agent is not with authority then it shifts to the
other party to prove that the agent was clothed with apparent authority.
Facts:
The root of the controversy is the undated letter-offer (“Exhibit A”) of Constancio B. Maglana, President and
Chairman of the Board of Prime White Cement Corp (PWCC) to Yao Ka Sin Trading (YKS) with the terms (pertinent
terms only):
Prime White Cement, Price: P24.30 per 94lbs bag FOB Cebu City, Qty: 45,000 bags
withdrawable at 15,000 monthly, Payment: Downpayment of P243,000 payable upon signing
of this contract, balance upon presentation of shipping docs.
This was accepted by YKS. June 30, 1973 or 23 days after the signing of Exhibit A, the BOD of PWCC
disapproved the same and the rejection was evidenced by the Minutes.
The 10,000 bags of white cement sold to YKS Trading is sold not because of the alleged
letter-contract adhered to them, but must be understood as a new separate contract, and has in
no way to do with the letter-offer.
July 5, 1973, PWCC wrote a letter to YKS informing it of the disapproval of Exhibit A and with respect to the
10,000 bags of cement, it issued the corresponding Delivery Order and Official Receipt for the payment of P243,000.
YKS accepted without protest both the Delivery Order and Official Receipts. YKS denied having received the letter.
An exchange of letters between PWCC and YKS followed until on March 4, 1974, YKS filed with the CFI of
Leyte an action for specific performance w/ Damages against PWCC based on Exhibit A.
During the Pre-trial, the parties admitted that the By-Laws of PWCC provided that the Chairman of the Board,
who is also the President has the power to execute and sign, for and in behalf of the corporation, all contracts or
agreements which the corporation enter into, subject to the qualification that all the president’s actuations, prior to and
after he had signed and executed said contracts, shall be given to the board of directors of the defendant corporation. All
contracts of the corporation should also meet the approval of the NIDC and/or the PNB board.
Per standard of practice of the corporation, contracts should first pass through the marketing and intelligence unit
before they are finalized. NIDC controller goes over the contracts, the legal counsel is to review the contracts before they
are submitted to the Board.
The trial court rendered its decision in favor of YKS because it interpreted the provision of the By-Laws to mean
that the President may enter into such contract/agreement at anytime and the same is not subject to ratification by the
Board. The By-Laws also provided that the President can operate and conduct the business of the corporation according to
his own judgment and discretion as long as it is not expressly limited by the orders, directives or resolutions of the board
of directors.
The CA reversed the decision of the TC.
Issue:
1. W/N Exhibit a is binding upon the corporation?

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Held/Ratio:
1. No. Exhibit A is not binding upon PWCC, Mr. Magalana, its President and Chairman was not empowered to
execute it.
A corporate officer or agent may represent and bind the corporation in transactions with 3rd parties to the extent
that authority to do so has been conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred.
Provisions of PWCC’s By-laws:
• The power of the BOD to “...enter into agreement / contract of any kind with any person in the name and
for and in behalf of the corp through its President, subject only to the declared objects and purpose of the
corp and the existing provisions of the law.
• The power of the Chairman of the BOD to “execute and sign, for and in behalf of the corp, all contracts or
agreements which the corp may enter into.
The provisions of PWCC’s By-Laws do not in any way confer upon the President the authority to enter into
contracts for the corp independently of the Board of Directors. That power is exclusively lodged in the BOD.
Nevertheless, to expedite and facilitate the execution of the contract, only the President-not all the members of the
Board-shall sign it for the corporation. Both powers presuppose a prior act of the cororation exercised through the
BOD.
There is no evidence to show that Mr. Maglana had in the past entered into contracts similar to that of Exhibit A
either with petitioner or other parties. Petitioner’s alternative proposition that PWCC had clothed Mr. Maglana w/
the apparent power to act for it and had caused persons dealing with it to believe that he was conferred with such
power is w/out merit. It is incumbent upon the petitioner to prove that indeed PWCC had clothed Mr. Maglana w/
the apparent authority to execute Exhibit A or any similar contract but petitioner miserably failed to do that. On
the other hand, PWCC’s evidence overwhelmingly shows that no contract can be signed by the president w/out
first being approved by the BOD, such approval may only be given after the contract passes through, at least, the
comptroller(NIDC representative) and the legal counsel.

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77 - Westmont Bank v. Inland Construction and Dev. Corp. (2009)
Doctrine:
• Doctrine of Apparent Authority — General Rule states that in the absence of authority from the board of directors,
no person, not even its officers can validly bind a corporation. BUT, if a corporation consciously lets one of its
officers or any other agents act within the scope of apparent authority it will be estopped from denying
such officer’s authority.
Facts:
The case started when Inland Construction and Development Corp (Inland) executed real estate mortgages over
its 3 properties and 3 promissory notes for the loans it obtained from Westmont Bank (previously Associated Citizens
Bank.) Inland defaulted in payment.
A Deed of Assignment, Conveyance and Release was executed by Aranda (President of Inland)wherein he
assigns all his rights and interest in Hanil-Gonzalez Corp in favour of Abrantes. In the deed, the obligations of Inland
(including that with Westmont Bank) shall be transferred to Abrantes. It must be noted that Westmont Bank’s Account
officer, Calo, signed for its conformity to the deed.
Inland then filed a complaint for injunction in the RTC against Westmont Bank when the latter foreclose the
properties mortgaged by Inland.
In their Answer, the bank claimed that it had no knowledge of such assignment of obligation and did not conform
to it. RTC held that the Bank ratified the act of Calo when it failed to repudiate the said assignment within a reasonable
time. The CA affirmed the decision of RTC stating that the bank indeed ratified the deed of assignment.
Issue:
1. W/N Westmont Bank is bound by the deed of Assignment
Held/Ratio:
1. YES. The Court held that Westmont Bank is bound by the deed of Assignment. In this case, records show that
Calo (signee in the deed of assignment) was the one assigned to transact on behalf of the Bank with respect to the
loan transactions with Inland. Because of this, it is presumed that he had the authority to sign for the bank in the
Deed of Assignment. The Court stated that if a corporation consciously lets one of its officers, or any other agent,
to act within the scope of an apparent authority it will be estopped from denying such officer’s authority. The
burden of proof is set upon the Corporation. In this case the Bank failed to discharge its primary burden of
proving that Calo was not authorized to bind it. The inter-office memo stating that Calo has “no signing authority”
was disregarded by the Court for it was considered as self-serving and did not form part of Banks’ body of
evidence.
OTHER NOTES: (just in case he asks)
• With regard to SC’s Decision in Yao Ka Sin Trading v. CA (where Court held that Yao Ka Sin had to prove that
the cement company had clothed its president with apparent power to execute the contract by evidence)
o The SC stated that for the Yao Ka Sin Case, the cement company had shown by clear and convincing
evidence that its president was not authorized to undertake such particular transaction. Thus the burden of
proof is shifted to Yao Ka Sin. In the present case, Westmont Bank failed to prove that Calo has no such
authority, thus the burden of proof remains with the Bank.
• Dissenting Opinion of Brion:
o Inland had the burden to prove that there was valid consent by the bank (prove that Calo had the authority
to sign and bind the bank.) According to Brion, Calo merely signed the deed to give conformity (as the
Deed is primarily between assignor Inland and Abrantes) and he did not likewise indicate or attach proof
of his authority to sign for the bank.

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o Apparent authority may be established by proof of the course of business, the usage and practices of the
bank, and by the knowledge of the Board of Directors. Mere title of Calo as officer in charge of accounts
of Inland with the bank is not enough. In this case, the majority decision did not refer to any past acts of
the bank which creates an impression that Calo was clothed with apparent authority.

78 - Nyco Sales Corporation v. BA Finance Corp (2001)


Facts:
Nyco Sales Corp is in the business of selling construction materials. Its President and General Manager Rufino
Yao was approached by Santiago and Renato Fernandez (Fernandez brothers) of Sanshell Corporation for credit
accommodation. They requested Nyco via Yao to grant Sanshell discounting privileges which Nyco had with BA Finance
Corp, to which Yao agreed. In 1978, a post-dated BPI check from the Fernandez bros was given to Yao (check was
payable to Nyco). Then Nyco thru Yao endorsed the check in favor of BA Finance. In turn, BA Finance issued a check to
Nyco and thereafter endorsed it in favor of Sanshell, and this check was used by Sanshell. A Deed of Assignment was also
executed by Nyco in favor of BA Finance with the conformity of Sanshell. At the back of the document was a Continuing
Suretyship Agreement where the Fernandez bros unconditionally guaranteed to BA Finance the full, faithful and prompt
payment and discharge of any and all indebtedness of Nyco. However the BPI check was dishonored. When BA Finance
reported this to the Fernandez bros, they issued a Security Bank check in favor of BA Finance, but again this was
dishonored. Nyco and the Fernandez bros failed to settle their obligation with BA Finance. A case was instituted by BA
Finance but the other parties were not able to file their answers. Thus Nyco and the Fernandez bros were ordered to jointly
and severally pay P65, 536.67 (plus 14% interest) to BA Finance. Nyco asked for the oreder of default be lifted so as to be
able to implead Sanshell, however this was denied. On appeal, the ruling of the lower court was upheld with modifications
on the date in which the interest is to run. Nyco filed a MR but was denied.
Issues:
1. W/N Nyco (assignor) is liable to BA Finance (assignee)
2. W/N Nyco is discharged from liability since a subsequent SBTC check was issued/ Whether novation took place
when BA Finance accepted the SBTC check
3. W/N Nyco can be liable for the President’s (unauthorized) acts
Held/Ratio:
1. YES. According to Art 1628 of the Civil code, the assignor-vendor warrants both the existence and legality of the
credit itself and the person of the debtor including his solvency. If there be any breach of the aforementioned
warranties, the assignor-vendor is liable.
2. NO. So long as the credit remains outstanding Nyco is liable to BA Finance, however this doesn’t mean BA
Finance can collect from both BPI and the replacement SBTC check (1 obligation lang). Neither can it be said
that there was novation since there was no express agreement that the acceptance of the SBTC check will
discharge Nyco from liability nor was there incompatibility of obligations since both checks were issued to
extinguish the outstanding obligation. In novation there are 2 distinct obligations which is not the case here.
3. YES. Nyco cannot disowns its President’s acts by stating that Yao was not authorized to do such acts by
stating that there was no Board resolution giving him such authority, the By-Laws clearly provide for the power
of the President which includes executing contracts and agreements, borrowing money, signing, indorsing
and delivering checks all in behalf of the corporation. Furthermore, there was already a previous transaction
of discounting of checks involving the same personalities wherein any enabling resolution from Nyco was
dispensed with and yet BA Finance was able to collect from Nyco and Sanshell was able to discharge its own
undertakings. Such effectively places Nyco under estoppel in pais. Nyco remained silent in the course of the
transaction and spoke out only later to escape liability. This cannot be countenanced. Nyco is estopped from
denying Rufino Yao’s authority as far as the latter’s transactions with BA Finance are concerned.

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79 - Associated Bank v. Sps. Pronstroller (2008)
Doctrine:
• If a corporation knowingly permits its officer, or any other agent, to perform acts within the scope of an apparent
authority, holding him out to the public as possessing power to do those acts, the corporation will, as against any
person who has dealt in good faith with the corporation through such agent, be estopped from denying such
authority.
Facts:
! The Spouses Vaca executed a Real Estate Mortgage in favor of Associated Bank over their parcel of residential
land in Green Meadows Subdivision, QC. For failure of the spouses Vaca to pay their obligation, the subject property was
sold at public auction with Associated Bank as the highest bidder. However, the Vacas commenced an action for the
nullification of the real estate mortgage and the foreclosure sale. The case reached the SC and while the parties were
waiting for the resolution, Associated Bank advertised the subject property for sale. Rafael and Monaliza Pronstroller
offered to purchase the property. Said offer was made through Atty. Jose Soluta, the bank’s VP, and a member of its
BOD.
On March 18, 1993 .Atty. Soluta, acting on behalf of the bank and the Pronstrollers executed a Letter-Agreement
which states that the 10% deposit and the remaining balance will be deposited under escrow agreement. Said escrow
deposit shall be applied as payment upon delivery of the aforesaid property to the buyers free from occupants. The deposit
shall be made within ninety (90) days. A month after the payment deadline had lapsed, the Pronstrollers and Atty. Soluta,
acting for the bank, executed another Letter-Agreement (July 14, 1993) allowing the former to pay the balance of the
purchase price upon receipt of a final order from the SC (Vaca case) and/or the delivery of the property to them free from
occupants.
Towards the end of the year (1993), the bank reorganized its management. Atty. Dayday became the bank’s
Asst.VP, while Atty. Soluta was relieved of his responsibilities. Atty. Dayday reviewed bank’s records and discovered
that the Pronstrollers failed to deposit the balance of the purchase price of the subject property. Atty. Dayday informed the
spouses of the rescission and forfeiture of their deposit. The spouses gave him the second Letter-Agreement to show that
they were granted an extension (They will only pay purchase price upon the receipt of final order from SC). However,
Atty. Dayday claimed that the letter was a mistake and that Atty. Soluta was not authorized to give such extension.
On July 14, 1994, in the Vaca case, the SC upheld the bank’s right to possess the subject property. The
Pronstrollers commenced the suit by filing a Complaint for Specific Performance before the RTC of Antipolo. The
spouses prayed that the bank be ordered to sell the subject property to them in accordance with their letter-agreement of
July 14, 1993. While the case was pending, the bank sold the subject property to the spouses Vaca, who eventually
registered the sale and a new TCT was issued in their names. As new owners, the Vacas started demolishing the house on
the subject property which, however, was not completed by virtue of the writ of preliminary injunction issued by the
court. The RTC ruled in favor of the Pronstrollers and ordered Associated Bank to accept their payment of the balance and
to deliver the title and possession to subject property.
On appeal, the CA affirmed the RTC decision and upheld Atty. Soluta’s authority to represent the petitioner. It
further ruled that petitioner had no right to unilaterally rescind the contract. Associated Bank assails the CA decision,
hence this petition.
Issues:
1. W/N Associated Bank is bound by the Letter-Agreement signed by Atty. Soluta under the doctrine of apparent
authority.
Held/Ratio:
1. YES. The general rule is that, in the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation. The power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board of directors. However, just as a natural

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person may authorize another to do certain acts for and on his behalf, the board may validly delegate some of its
functions and powers to officers, committees and agents.
The doctrine of “apparent authority,” with special reference to banks, had long been recognized in this
jurisdiction. Apparent authority is derived not merely from practice. Its existence 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 it clothes him; 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.
Undoubtedly, the Associated Bank had previously allowed Atty. Soluta to enter into the first agreement without a
board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same
via the second letter-agreement. It is not the quantity of similar acts which establishes apparent authority, but the
vesting of a corporate officer with the power to bind the corporation.
Naturally, the third person has little or no information as to what occurs in corporate meetings; and he must
necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions
can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance
with law. What transpires in the corporate board room is entirely an internal matter. Hence, Associated Bank may
not impute negligence on the part of the Pronstrollers in failing to find out the scope of Atty. Soluta’s authority.
Indeed, the public has the right to rely on the trustworthiness of bank officers and their acts.
Gokongwei v. SEC (see Digest #56)

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80 - Lee v. CA (1992)
Doctrine:
• Beneficial ownership under voting trust arrangement no longer qualifies.
Facts:
International Corporate Bank (ICB) filed a complaint for a sum of money against Sacoba Manufacturing Corp.,
Pablo Gonzales Jr., and Tomas Gonzales who who in turn, filed a third party complaint against Alfa Integrated Textile
Mills (Alfa), Ramon Lee (Alfa’s president) and Antonio Lacdao (Alfa’s VP). Lee and Lacdao filed a motion to dismiss
the third party complaint but this was denied, so they filed their answer.
They then sent a letter to the court informing the court that the summons for Alfa was erroneously served upon
them considering that the management of Alfa had been transferred to DBP. The RTC issued an order requiring the
issuance of an alias summons upon Alfa.
In their manifestation, DBP claimed that it was not authorized to receive summons on behalf of Alfa since DBP
had not taken over the company which has a separate and distinct corporate personality and existence. The RTC then
issued an order advising Sacoba Manufacturing, et al. to take the appropriate steps to serve the summons to Alfa. Sacoba
Manufacturing, et al., filed a manifestation and motion for the declaration of proper service of summons which the trial
court granted.
Lee and Lacdao filed a motion for reconsideration submitting that rule 14 sec. 13 of the Revised Rules of Court is
not applicable since they were no longer officers of Alfa, Sacoba should have availed of another mode of service under
rule 14 sec. 16 of the said rules (through publication to effect proper service to Alfa).
Lee and Lacdao filed a motion for reconsideration reiterating their stand by virtue of the voting trust
agreement,they ceased to be officers and directors of Alfa, hence they could no longer receive summons in behalf of Alfa.
Attached in their MR is the voting trust agreement between all the stockholders of Alfa and the DBP, whereby
management and control of Alfa became vested upon DBP. TC reversed its decision saying that service to officers of Alfa
cannot be considered summons.
Issues:
1. W/N the execution of the voting trust agreement by Lee and Lacdao whereby all their shares to the corporation
have been transferred to the trustee deprives the stockholder of their positions as directors of the corporation?
2. W/N the 5 year period of the voting trust agreement in question had lapsed in 1986 so that the legal title to the
stocks covered by the said voting trust agreement ipso facto reverted to Lee and Lacdao as beneficial owners
pursuant to the 6th paragraph of sec. 59 of the new corporation code?
Held/Ratio:
1. Yes. Lee and Lacdao, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of DBP, as trustee. Consequently, Lee and Lacdao ceased to own at least one
outstanding share in their names on the books of Alfa as required under Sec. 23 of the new Corporation code.
They also ceased to have anything to do with the management of the enterprise, they ceased to be directors.
Hence, the transfer of their shares to the DBP created vacancies in their respective positions as directors of Alfa.
The transfer of shares from the stockholders of Alfa to DBP is the essence of the subject voting trust agreement.
Considering that the voting trust agreement between Alfa and DBP transferred legal ownership of the stocks
covered by the agreement to DBP as trustee, DBP became the stockholder of record with respect to the said shares
of stock.
In the absence of a showing that DBP had caused to be transferred in their names one share of stock for the
purpose of qualifying as directors of Alfa, Lee and Lacdao could no longer deemed to retain their status as
officers of Alfa. Hence, the service of summons to Alfa through Lee and Lacbao was invalid. To rule otherwise
would contravene the general principle that the corporation can only be bound by such acts which are within the
scope of the officer’s or agent’s authority.
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2. No. The 6th paragraph of sec. 59 of the new corporation code reads that “unless expressly renewed, all rights
granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby deemed cancelled
and new certificates of stock shall be reissued in the name of the transferors.”
However it is manifestly clear from the voting trust agreement of Alfa and DBP that the duration of the agreement
is contingent upon the fulfillment of certain obligations of Alfa with the DBP. Had the 5-year period of the voting
trust agreement expired, DBP would not have transferred its rights and interests to the national government
through the Asset Privatization Trust later that year.

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81 - Valle Verde Country Club, Inc. v. Africa (2009) (vacancy, VVCC Stockholders or remaining members, term,
holdover capacity)
Doctrines:
• The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed
by a board of directors whose members have stood for election, and who have actually been elected by the
stockholders, on an annual basis. Only in that way can the directors’ continued accountability to the shareholders,
and the legitimacy of their decisions that bind the corporation’s stockholders, be assured. The shareholder vote is
critical to the theory that legitimizes the exercise of power by the directors or officers over properties that they do
not own.
• The theory of delegated power of the board of directors similarly explains why, under Section 29 of the
Corporation Code, in cases where the vacancy in the corporation’s board of directors is caused not only by the
expiration of a member’s termm the successor “so elected to fill in a vacancy shall be elected only for the
unexpired term of his predecessor’s office. The law has authorized the remaining members of the board to fill in a
vacancy only in specified instances, so as not to retard or impair the corporation’s operations; yet, in recognition
of the stockholders’ right to elect the members of the board, it limited the period during which the successor shall
serve only to the “unexpired term of his predecessor in office.”
Facts:
On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club, Inc.
(VVCC), the following were elected as members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan
(Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato
Dee, Augusto Sunico, and Ray Gamboa. — 9-member board (those who will resign later are in BOLD)
In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders’
meeting could not be obtained. Consequently, the above-named directors continued to serve in the VVCC Board in a
hold-over capacity.
DATE RESIGNED REPLACEMENT
Sept. 1, 1998 Dinglasan Eric Roxas Quorum
Nov. 10, 1998 Makalintal Jose Ramirez Remaining members

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of
the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC), respectively.
AFRICA’S CONTENTIONS
• the election of Roxas was contrary to Section 296, in relation to Section 237, of the Corporation Code.
• a year after Makalintal’s election as member of the VVCC Board in 1996, Makalintal’s term — as well as those
of the other members of the VVCC Board — should be considered to have already expired. Thus, according to
Africa, the resulting vacancy should have been filled by the STOCKHOLDERS in a regular or special meeting
called for that purpose, and not by the remaining members of the VVCC Board, as was done in this case.

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6. Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other than by removal
by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. xxx.
[Emphasis supplied.]
7. Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees
to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office
for one (1) year until their successors are elected and qualified.

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• for the members to exercise the authority to fill in vacancies in the board of directors, Section 29 requires, among
others, that there should be an unexpired term during which the successor-member shall serve. Since
Makalintal’s term had already expired with the lapse of the one-year term provided in Section 23, there is no
more “unexpired term” during which Ramirez could serve.
VVCC’s DEFENSE
• Under Section 29 of the Corporation Code, a vacancy occurring in the board of directors caused by the expiration
of a member’s term shall be filled by the corporation’s stockholders. Correlating Section 29 with Section 23 of the
same law, VVCC alleges that a member’s term shall be for one year and until his successor is elected and
qualified; otherwise stated, a member’s term expires only when his successor to the Board is elected and
qualified. Thus, “until such time as [a successor is] elected or qualified in an annual election where a quorum is
present,” VVCC contends that “the term of [a member] of the board of directors has yet not expired.”
• As the vacancy in this case was caused by Makalintal’s resignation, not by the expiration of his term, VVCC
insists that the board rightfully appointed Ramirez to fill in the vacancy.
Issues:
1. To answer the issue below, we must tackle: what constitutes a director’s term of office.
2. W/N the remaining directors of a corporation’s Board, still constituting a quorum, can elect another
director to fill in a vacancy caused by the resignation of a hold-over director
Held/Ratio:
1. TERM
a. the time during which the officer may claim to hold the office as of right, and fixes the interval after
which the several incumbents shall succeed one another.
b. The term of office is not affected by the holdover.
c. fixed by statute and it does not change simply because the office may have become vacant, nor because
the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been
elected and has failed to qualify.
d. distinguished from tenure in that an officer’s “tenure” represents the term during which the
incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the incumbent.
After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintal’s term of office
is deemed to have already expired. That he continued to serve in the VVCC Board in a holdover capacity
cannot be considered as extending his term. To be precise, Makalintal’s term of office began in 1996 and
expired in 1997, but, by virtue of the holdover doctrine in Section 23 of the Corporation Code, he continued to
hold office until his resignation on November 10, 1998. This holdover period, however, is not to be considered
as part of his term, which, as declared, had already expired. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the expiration of Makalintal’s term had been created long
before his resignation.
2. NO. It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the
director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no more
unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s stockholders who shall
possess the authority to fill in a vacancy caused by the expiration of a member’s term.
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez to replace
Makalintal, there was no more unexpired term to speak of, as Makalintal’s one-year term had already expired.
Pursuant to law, the authority to fill in the vacancy caused by Makalintal’s leaving lies with the VVCC’s
stockholders, not the remaining members of its board of directors.

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Palting v. San Jose Petroleum (see Digest #18)

Prime White Cement v. IAC (see Digest #75)

82 - Steinberg v. Velasco (1929)


Doctrines:
• Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the
board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
Facts:
Steinberg(Plaintiff) was the receiver of Sibugey Trading Company, while Velasco et. al(defendants) where the
members of the board of director of Sibugey Co.
On June 30, 1922, the BOD of Sibugey authorized the purchase of, and purchased, 330 shares of the capital stock
of the corporation at the price of P3,300, and that at the time the purchase, the corporation was indebted in the sum of
P13,807.50, and that, it had accounts receivable in the sum of P19,126.02.
And on June 24, 1922, the officers and directors of the corporation approved a resolution for the payment of
P3,000 as dividends to its stockholders.
On September 11, 1923, when the petition was filed for its dissolution upon the ground that it was insolvent, its
accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47.
Stienberg now alleges, this was all, wrongfully done and in bad faith, and to the injury and fraud of its creditors.
He now prays that Velasco et. al. pay the sums of money wrongfully given to them with interest and cost.
It is to be noted when Stienberg was appointed a receiver, he tried to collect the remaining accounts receivable,
but failed to because most of the debtors have no property, and he has no money to pay for docket fees.
Issue:
1. W/N the board of directors did not act in good faith and grossly ignorant, and therefore should pay for the losses?
Held/Ratio:
1. Yes. It is very apparent that the BOD assumed that, because it appeared from the books of the corporation that it
had accounts receivable of P19,126.02, therefore it had a surplus over its liabilities. But there is no stipulation as
to the actual cash value of those accounts, and On February 28, P12,512.47 of those accounts had almost no
value, and, in the purchase of its own stock to the amount of P3,300 and in declaring the dividends to the amount
of P3,000, the real assets of the corporation were diminished P6,300.
It also appears that the dividends were made in instalments so as not to affect the financial condition of the
corporation. In other words, that the corporation did not then have an actual bona fide surplus from which the
dividends could be paid.
It is peculiar that the board in purchasing the stock from the corporation and in declaring the dividends on the
stock was all done at the same meeting of the board of directors, and Ganzon and Mendaros both, former
directors, resigned before the board approved the purchase and declared the dividends. In other words, that the
directors were permitted to resign so that they could sell their stock to the corporation. As stated, the authorized
capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was
subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000 of paid
up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation, it is
apparent the directors did not act in good faith or that they were grossly ignorant of their duties.
Upon each of those points,(the court cited two laws of, Ruling Case Law which in essence means), General Duty
to Exercise Reasonable Care. — The directors of a corporation are bound to care for its property and manage its
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affairs in good faith, and for a violation of these duties resulting they will be liable for damages cause, and that if
they act beyond their power, and the corporation losses, or dispose of its property without authority, they will be
required to make good the loss out of their private estates.
Want of Knowledge, Skill, or Competency. If directors commit an error of judgment through mere
recklessness or want of ordinary prudence or skill, they may be held liable for the consequences. A director
is bound not only to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to
exercise ordinary skill and judgment, he cannot set up that he did not possess them.
Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the
board of directors will not use the assets of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
Therefore, the BOD are liable.

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83 - Bates v. Dresser (1920) (bank, Coleman)
Doctrines:
• Duty of diligence
Facts:
Dresser was the president and executive officer, a large stockholder, of the National City Bank of Cambridge.
Earl was the cashier and Coleman was the bank’s bookkeeper. An auditor reported that the daily balance book was very
much behind, that it was impossible to prove the deposits and that a competent bookkeeper should be employed. Coleman
kept the deposit ledger and this was the work that fell into his hands. Coleman then acted as paying and receiving teller, in
addition to his other duty. Coleman took $2,000 from the vault, but restored them the next day. Later, he began a series of
thefts. (He would draw checks for the amount he wanted, exchange them with a Boston broker, get cash for the broker’s
check and when his own check came to the bank through the clearing house, would abstract it from the envelope, enter the
others on his book and conceal the difference by a charge to some other account or a false addition in the column of drafts
or deposits in the depositors’ ledger.) So far as Coleman was concerned, he took care that his balances should agree with
those in the cashier’s book. The directors noticed that the amount of monthly deposits declined but concluded that it was
due to competition with rival banks. The bank’s semi-annual examinations by national bank examiners found nothing that
would raise suspicion. The directors also relied on the cashier since he was an honest man. However, if only Earl had
opened the envelopes that came from the clearinghouse, he would’ve discovered the fraud. By 1910, Coleman had stolen
$310,143.02.
Issues:
1. W/N the directors neglected their duty by accepting the cashier’s statement of liabilities and failing to inspect the
depositors’ ledger
2. W/N Dresser should be liable
Held/Ratio:
1. NO. The Court held that the directors should not be held answerable for taking the cashier’s statement of
liabilities to be as correct as the statement of assets always was. The director’s confidence seemed warranted by
the semi-annual examinations and they were encouraged in their belief that all was well by the president, whose
responsibility and knowledge were greater than theirs. They were not bound by virtue of the office gratuitously
assumed by them to call in the pass books and compare them with the ledger, and until the event showed the
possibility they hardly could have seen that their failure to look at the ledger opened a way to fraud.
2. YES. Dresser was the master of the situation. He was daily at the bank, he had the deposit ledger in his hands, he
had hints and warning. Cutting, a bank teller, and Fillmore gave Dresser hints that there was a thief in the bank.
He knew that Coleman had bought a new car, considering that Coleman only made $12 a week. In accepting the
presidency, Dresser must be taken to have contemplated responsibility for losses to the bank, if chargeable to his
fault. Those that happened was chargeable to his fault, after he had warnings that should have led to steps that
would have made the fraud impossible.

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84 - Alden Smith v. Jerome W. Van Gorkom (1985) US Case (Trans Union Case)
Doctrine:
• Under the business judgment rule there is no protection for directors who have made an unintelligent or unadvised
judgment.
Facts:
This is a class suit of Trans Union stockholders against Van Gorkom. Trans Union was suffering a tax credit
problem prompting it Van Gorkom to sell his shares but eventually negotiated to involve all the stocks of Trans Union. A
corporation called Marmon was attempting a leverage buy-out of Trans Union. Van Gorkom proposed a price of $55 a
share. Van Gorkom and his CFO didn’t bother to do any research to see how much the company was actually worth. He
didn’t even inform Trans Union’s legal department about the transaction.
$55 a share was only about 60% of what the company was later appraised at. In Van Gorkom’s defense, at the
time of the merger, the stock was only selling for $37.25 a share, so $55 seemed like a lot. Van Gorkom called an
emergency meeting of the board of directors, proposed the merger, and the directors gave preliminary approval. Van
Gorkom failed to disclose a number of things at the board meeting where the vote was taken, including the fact that there
was no basis for the $55 price, and that there had been objections by TransUnion management regarding the merger. Van
Gorkom didn’t even provide the directors with copies of the merger agreement. The facts get a little complicated, but
basically, there was some wheeling and dealing and the directors eventually wound up recommending that the
shareholders approve the merger, even though the directors never really bothered to learn if the terms of the merger were a
good deal for the company or not. Some shareholders instituted a derivative lawsuit against the directors for breach of
fiduciary duty. The Trial Court decided in favor for Van Gorkom. The shareholders appealed. The Trial Court found that
Van Gorkom’s actions fell within the business judgment rule. The business judgment rule says that the courts should not
second guess business decisions made by directors. The Appellate Court reversed. The Appellate Court found that the
directors were grossly negligent because they approved the merger without substantial inquiry or any expert advice.
Therefore they breached their duty to care.
Issue:
1. W/N the actions of Van Gorkom and the board is protected by the Business Judgement Rule Doctrine.
Held/Ratio:
1. NO. The Court found that the directors breached their fiduciary duty by their failure to inform themselves of all
information reasonably available to them and relevant to their decision to recommend the merger, and The Court
found that there was a failure to disclose all material information such as a reasonable stockholder would consider
important in deciding whether to approve the merger. The Court found that Van Gorkom breached his duty to care
by offering $55 a share because, “the record is devoid of any competent evidence that $55 represented the per
share intrinsic value of the Company.” The Court found that the business judgment rule was not a defense because
the directors and Van Gorkom didn’t use any “business judgment” when they came to their decision. “The rule
itself ‘is a presumption that in making a business decision, the directors of a corporation acted on an informed
basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’ ...Thus,
the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an
informed one.” “Under the business judgment rule there is no protection for directors who have made an
unintelligent or unadvised judgment.”Basically, the actual decision is not so important, what the courts will look
to is whether there was an adequate decision-making process. In this case, the Court basically said that in order to
hide behind the business judgment rule, you have to show that you made an informed decision based on some
principle of business. If you pull numbers out of thin air or cast votes without doing due diligence, then the courts
can overturn your decisions. The idea behind the business judgment rule is that people who work in the business
have more experience and are better judges of what a corporation should do than a court would be. But when
businessmen show that they didn’t use any of that experience to make a decision, then there is no reason for the
courts to defer to them.

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85 - Sanchez v. Republic (2009)
Facts:
In July 1980, the University of Life Foundation, Inc., (ULFI) a non-stock, non-profit corporation, was given the
management and operation of the University of Life Complex constructed by the Human Settlements Development
Corporation (HSDC). ULFI was to get all the incomes from the Complex (rents) but had to give HSDC an annual fee of
14% of HSDC’s investment in it.
After the fall of the Marcos Regime, the new government reorganized the HSDC into the Strategic Investments
Dev’t Corp. (SIDCOR), during which it was discovered that ULFI never paid the 14% it was supposed to pay HSDC
(totaling P316 million), and so the SIDCOR rescinded the HSDC-ULFI agreement, but ULFI was allowed by SIDCOR to
continue managing and operating the COMPLEX, under an Interim Management Agreement.
In 1989, DECS was given the ownership of ULFI’s properties, and in 1990, under RA 6847, was also given full
control and management of the Complex, effective 2 years from enactment. In 1991 SIDCOR transferred all its rights in
the Complex to the government which in turn transferred it to DECS.
In January 1991, DECS granted ULFI the authority to manage and operate the Complex until the end of 1991,
during which period ULFI was expressly mandated to remit all incomes from the Complex, net of allowable expenses. At
the end of 1991, ULFI was given notice to vacate premises, which it declined, and so DECS filed an action for unlawful
detainer in MeTC (Pasig) which was dismissed, and the RTC affirmed such dismissal upon appeal. The CA, on petition
for review filed by DECS in 1995, reversed the decisions of the MeTC and RTC, and ordered ULFI to vacate and pay
rentals as the MeTC might fix. The SC dismissed ULFI’s appeal. The MeTC fixed the rents, which totaled to P
22,559,215.14 (Feb 1992-Jan1996). ULFI was successfully ejected but did not pay the rents.
(ITO NA YUNG TALAGANG FOR THIS CASE)
In 1998 DECS filed a complaint for collection of the rents and damages against Henri Kahn, President and
Managing Director, and Manuel Sanchez, Exec. VP and Finance Director, of the ULFI, based on their personal liability
under Sec. 31 of the Corporation Code. The underlying theory of the case was that both operated ULFI as if it were their
own property, handled the collections and spent the money as if it were theirs. Sanchez, in his defense, alleged that as
mere officer he cannot be made personally liable, saying that the complaint is an attempt to pierce the corporate veil.
The RTC ordered Kahn and Sanchez to pay jointly and severally the unremitted rents with legal interest until fully
paid, as well as exemplary damages and atty’s fees.
Both appealed to the CA and only Sanchez was given due course because Kahn’s was filed out of time. The CA
affirmed RTC decision. Hence, this petition for review on certiorari.
Issues:
1. W/N Sanchez can be held liable in damages under Sec 31 of Corp. Code for gross neglect or bad faith in directing
the corporation’s affairs
2. W/N action is barred by res judicata and constitutes forum shopping
Held/Ratio:
1. Yes. Sec. 31 Corporation Code provides: Liability of Directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other persons. (DOCTRINE OF
CORPORATE OPPORTUNITY)
The CA found that even after ULFI’s authority expired, it still continued to collect and keep the rents, knowing
these belonged to DECS. Both acted in bad faith and with gross negligence when they did not turn over even one
centavo nor render an accounting of their collections. Sanchez, as the officer charged with approving and

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implementing corp disbursements, had the duty to present documents showing how the incomes were spent,
which he failed to do.
DECS does not have to invoke the piercing of the corporate veil, which was exactly why they filed the complaint
based on Sec 31 of the Code, which lays down Kahn’s and Sanchez’s liability for damages arising from their
gross negligence or bad faith in directing corporate affairs. Gross negligence is the absence of care, acting or
omitting to act where there is duty to act, willfully and intentionally, with a conscious indifference to
consequences. Bad Faith implies breach of faith, imports a dishonest purpose, partakes the nature of fraud.
Moreover, in a piercing case, the test is complete control or domination, which is not the case here. Sec 32 makes
a corporate director, who may not be a stockholder or member, accountable for his management of the corporate
affairs.
2. NO. The ejectment suit and the complaint for collection and damages have different causes of action. The essence
of forum shopping is the filing of multiple suits involving the same parties for the same cause of action to obtain
favorable judgment.

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86 - Mead vs. McCullough (1911) (wrecking contract)
Doctrine:
• Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there are
exceptions to this rule. There must necessarily be a limit upon the power of the majority. xxx Notwithstanding
these limitations upon the power of the majority of the stockholders, their (the majority’s) resolutions, when
passed in good faith and for a just cause, deserve careful consideration and are generally binding upon the
minority.
Facts:
The complaint contains three causes of action, which are substantially as follows: The first, for salary; the second,
for profits; and the third, for the value of the personal effects alleged to have been left Mead and sold by the
defendants.
Charles Mead (petitioner), Edwin McCullough (respondent), Hartigan, Green and, Hilbert organized the Phil.
Engineering & Construction Co. (PECC). The incorporators were also the only stockholders and directors of the
corporation. They each gave $2000 mexican currency cash, except for Mead who contributed property. They held a
meeting and elected Mead as the general manager. Mead held the position for nine months, until he resigned to accept a
position as engineer of the Canton & Shanghai Railway Co.
Several contracts entered by Mead as general manager failed, specifically a wrecking contract with the navy.
Because of these failures, the board voted to sell all the rights and interests of PECC to the wrecking contract in
favor of McCullough. McCullough then incorporated a new company, Manila Salvage Association, and transferred all
his rights and interests to the contract to MSA.
Now Mead goes after McCullough for his salary, part of the profits of the contract and, the value of the properties
he contributed to the company. He claims that the transfer and sale of the rights and interests were done in bad faith, when
they also sold Mead’s personal effects along with the contract transfer, violating both the articles of agreement (old name
for articles of incorporation) and national laws.
Issue:
1. Whether the sale or transfer to McCullough of the assets of said corporation was done within the laws and powers
of the corporation.
Held/Ratio:
1. YES. The articles of agreement made the incorporators not only as the sole stockholders but also the board of
directors. This means that their decisions are made in the name of both the directors and stockholders of PECC. It
would be unreasonable to question the decision based on the complaints of a minority stockholder (Mead)
when the entire corporation assented to such transfer. Especially since the contract was not profitable and
McCullough was transferring the rights to himself despite incurring losses.
Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there are
exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without such a limit the
will of the majority would be absolute and irresistible and might easily degenerate into an arbitrary tyranny. The
reason for these limitations is that in every contract of partnership (and a corporation can be something
fundamental and unalterable which is beyond the power of the majority of the stockholders, and which constitutes
the rule controlling their actions. this rule which must be observed is to be found in the essential compacts of such
partnership, which gave served as a basis upon which the members have united, and without which it is not
probable that they would have entered not the corporation. Notwithstanding these limitations upon the power
of the majority of the stockholders, their (the majority’s) resolutions, when passed in good faith and for a
just cause, deserve careful consideration and are generally binding upon the minority.
A private corporation, which owes no special duty to the public and which has not been given the right of eminent
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all of its property. A transaction done in good faith w/c achieves substantial justice cannot be disturbed based on
mere suspicions.
NOTE: Hilbert, Green, and Hartigan were not only all creditors at the time the sale or transfer of the assets of the
insolvent corporation was made, but they were also directors and stockholders. In addition to being a creditor,
McCullough sustained the corporation the double relation of a stockholder and president. The plaintiff was
only a stockholder, since he severed his relations with the company when he left for China.
Gokongwei v. SEC (see Digest #56)
Associated Bank v. Sps. Pronstroller (see Digest #79)

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87 - People’s Aircargo and Warehousing Co. Inc vs. CA and Stefano Sano (2011) (bonded warehouse at
International Airport)
Doctrines:
• Contracts entered into by a corporate president without express prior board approval bind the corporation, when
such officer’s apparent authority is established and when these contracts are ratified by the corporation.
Facts:
People’s Aircargo is a domestic corporation, which was organized in the middle of 1986 to operate a customs
bonded warehouse at the old Manila International airport in Pasay City.
To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the corporation
president, solicited a proposal from private respondent for the preparation of a feasibility study. Private respondent
submitted a letter-proposal dated October 17, 1986 (“First Contract”) to Punsalan
Punsalan preferred Sano’s services because of the latter’s membership in the Task force, which was supervising
the transition of the Bureau of Customs from the Marcos Government to the Aquino administration. On Oct. 17, 1986,
People’s Aircargo, through Punsalan, sent to Private respondent a letter confirming their agreement. Accordingly, Sano
prepared a feasibility study for petitioner which eventually paid him the balance of the contract price.
On December 14, 1986, upon Punsalan’s request, Sano sent petitioner another letter-proposal (“Second
Contract”). The Second Contract is for Consultany Services consisting of an Operations Manual and Seminar/Workshop
for the employees of People’s Aircargo. Petitioner received the operations manual and submitted such to the Bureau of
Customs in connection with the petitioner’s application to become one of the three public customs bonded warehouses at
the international airport. Sano also conducted in the warehouse of petitioner, a three-day training seminar for the latter’s
employees. Sano was not paid for his 2nd contract. Hence, he filed a collection case against the corporation. Meanwhile,
Punsalan sold his shares in People’s Aircardo and resigned as its President.
People’s Aircargo denied that Sano conducted Constultancy services. It alleged that the contract entered into
between Sano and Punsalan was without authority. RTC ruled that the Second Contract was unenforceable or simulated.
However, since private respondent had actually prepared the operations manual and conducted a training seminar for
petitioner and its employees, the RTC awarded P60,000 to the former, on the ground that no one should be unjustly
enriched at the expense of another (Article 2142, Civil Code). CA ruled for the contract’s validity and enforceability.
Hence, this petition.
Issues:
1. W/N Punsalan, as president, has apparent authority to enter into the second contract that could bind the
corporation
2. W/N the said contract was valid and not merely simulated
Held/Ratio:
1. YES. The general rule is that, in the absence, of authority from the board of directors, no person, not event its
officers, can validly bind a corporation. A corporation is a juridical person, separate and distinct from its
stockholders and members, having powers, attributes and properties expressly authorized by law or incident to its
existence. Being a juridical entity, a corporation may act through its Board of Directors, which exercises almost
all corporate powers, lays down all corporate business policies and is responsible for the efficiency of
management as is under Sec. 23 of the Corp Code.
SEC. 23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees x x x.”

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However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to officers, committees or agents.
In the case at bar, since the corporation had previously allowed Punsalan to enter into the first contract with Sano
without a board resolution expressly authorizing him, thus, it had clothed its president with apparent authority to
execute the Second Contract.
If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts, and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s
authority. Hence, private respondent should not be faulted for believing that Punsalan’s conformity to the contract
in dispute was also binding on petitioner.
Furthermore, private respondent prepared an operations manual and conducted a seminar for the employees of
petitioner in accordance with their contract. Petitioner accepted the operations manual, submitted it to the Bureau
of Customs and allowed the seminar for its employees. As a result of this, petitioner was given by the Bureau of
Customs a license to operate a bonded warehouse. Even if the Second Contract was outside the usual powers of
the president, petitioner’s ratification of said contract and acceptance of benefits have made it binding,
nonetheless.
2. YES. It is a valid contract and not merely simulated. In the case at bar, petitioner received from private respondent
a letter-offer containing the terms of the former, including a stipulation of the consideration for the latter’s
services. Punsalan’s conformity, as well as the receipt and use of the operations manual, shows petitioner’s
consent to or, at the very least, ratification of the contract. petitioner even submitted the manual to the Bureau of
Customs and allowed private respondent to conduct the seminar for its employees. Private respondent heard no
objection from the petitioner, until he claimed payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal factors in the determination of the will of the contracting
parties. The circumstances mentioned, do not establish any intention to simulate the contract in dispute. On the
contrary, the legal presumption is always on the validity of contracts. A corporation, by accepting benefits of a
transaction entered into without authority, has ratified the agreement and is, therefore, bound by it.
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88 - Gurrea v. Lezama (1958)
Facts:
Gurrea sought to have Resolution No. 65 of the Board of Directors of the La Paz Ice Plant and Cold
Storage Co., Inc., removing him from his position of manager of said corporation declared null and void and to
recover damages incident thereto. The action is predicated on the ground that said resolution was adopted in
contravention of the provisions of the by-laws of the corporation, of the Corporation Law and of the understanding,
intention and agreement reached among its stockholders.
Jose Manuel Lezama answered the complaint setting up as defense that Gurrea had been removed by virtue of a
valid resolution.
Gurrea moved for the issuance of a writ of preliminary injunction to restrain Lezama from managing the
corporation pending the determination of this case, but after hearing where parties presented testimonial and documentary
evidence, the court denied the motion. Thereafter, by agreement of the parties and without any trial on the merits, the case
was submitted for judgment on the sole legal question of whether plaintiff could be legally removed as manager of
the corporation merely by resolution of the board of directors or whether the affirmative vote of 2/3 of the paid
shares of stocks was necessary for that purpose. The trial court held that the removal of Gurrea was legal and dismissed
the complaint without pronouncement as to costs. Gurrea appealed to the Court of Appeals but finding that the question at
issue is one of law, the latter certified the case to the SC for decision.
Issue:
1. W/N Gurrea was properly removed from his position as manager of La Paz Ice Plant by a mere resolution.
Held/Ratio:
1. YES. Section 33 of the Corporation Law provides: “Immediately after the election, the directors of a corporation
must organize by the election of a president, who must be one of their number, a secretary or clerk who shall be a
resident of the Philippines . . . and such other officers as may be provided for in the by-laws.”
The by-laws of the instant corporation in turn provide that in the board of directors there shall be a
president, a vice-president, a secretary and a treasurer. These are the only ones mentioned therein as
officers of the corporation. The manager is not included although the latter is mentioned as the person in
whom the administration of the corporation is vested, and with the exception of the president, the by-laws provide
that the officers of the corporation may be removed or suspended by the affirmative vote of 2/3 of the
corporation.
From the above the following conclusion is clear: that we can only regard as officers of a corporation those
who are given that character either by the Corporation Law or by its by-laws. The rest can be considered
merely as employees or subordinate officials. And considering that Guerra has been appointed manager by
the board of directors and as such does not have the character of an officer, the conclusion is inescapable that he
can be suspended or removed by said board of directors under such terms as it may see fit and not as
provided for in the by-laws, without the 2/3 vote of the stockholders, as required when an officer is to be
removed. Evidently, the power to appoint carries with it the power to remove, and it would be incongruous to
hold that having been appointed by the board of directors he could only be removed by the stockholders.
One distinction between officers and agents of a corporation lies in the manner of their creation. An officer is
created by the charter of the corporation, and the officer is elected by the directors or the stockholders. An
agency is usually created by the officers, or one or more of them, and the agent is appointed by the same
authority. It is clear that the two terms officers and agents are by no means interchangeable.
In this case, Guerra’s position was only created by the officers. The by laws did not provide for the creation of
his position. Therefore, he may not be considered as an “officer” and the manner of removal provided for in
the by laws shall not be made applicable to him. He may thus be removed by a mere resolution by the officers
of the corporation.

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89 - Pardo de Tavera v. Philippine Tuberculosis Society (1982)
Doctrines:
• An appointment held at the pleasure of the appointing power is in essence temporary in nature. It is co-
extensive with the desire of the Board of Directors. Hence, when the Board opts to replace the incumbent,
technically there is no removal but only an expiration of term and in an expiration of term, there is no need of
prior notice, due hearing or sufficient grounds before the incumbent can be separated from office.
Facts:
Dr. Buktaw, then executive secretary of the Board of Directors of the Philippine Tuberculosis Society (Society)
retired. Dr. Mita Pardo de Tavera was appointed as his replacement. President Canizares sent an appointment letter.8 The
letter of appointment, however, didn’t include a fixed term. Subsequently, de Tavera was removed from her post
without telling her the cause. One of the defendants, Alberto Romulo was appointed to her position with a vote of
7(affirm)-2(abstain)-1(objection). De Tavera alleged that co-defendants Pardo, Garcia, Nubla, and Anil were unqualified
to be elevated to their positions as members of the board, hence their meeting which installed Romulo as Executive
Secretary should be declared null and void.
The defendants filed their answer specifically denying that plaintiff was illegally removed from her position as
Executive Secretary and averring that under the Society’s by-laws, said position is held at the pleasure of the Board of
Directors and when the pleasure is exercised, it only means that the incumbent has to vacate the same because her
term has expired; that defendants Pardo, Nubla, Adil and Garcia were, at the time of their election, members of the
defendant Society and qualified to be elected as members of the Board. Defendant Anil also filed a Motion to Dismiss,
contending that de Tavera had no cause of action or even if she does have one, it had already prescribed. Inasmuch as
plaintiff seeks reinstatement, Anil argued that the complaint is an action for quo warranto and hence, the same should be
commenced within one year from May 29, 1974 when the plaintiff was ousted from her position. De Tavera filed an
opposition stating that the complaint is a suit for damages under Sec. 6, Art 11 of the Constitution in relation to Article 12
and 32(6) of the Civil Code, and equal protection of the law. The lower court decided that the complaint is in the nature of
a quo warranto, hence it should have been filed within one year after her ouster.
Issues:
1. W/N de Tavera was illegally dismissed
Held/Ratio:
1. No. The lower court did not err in deciding in favor of the defendants.
[Not so important] While it is true that the complaint questions petitioner’s removal from the position of
Executive Secretary and seeks her reinstatement thereto, the nature of the suit is not necessarily one of quo
warranto. The nature of the instant suit is one involving a violation of the rights of the plaintiff under the
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
8. Dr. Mita Pardo de Tavera
Philippine Tuberculosis Society, Inc.
Manila
Madam:
I am pleased to inform you that at the meeting of the Board of Directors held on April 25, 1973, you were appointed Executive Secretary,
Philippine Tuberculosis Society, Inc. with such compensation ,petition and allowances as are provided for in the Budget of the Society, effective
immediately, vice Dr. Jose Y. Buktaw, retired.
Congratulations.
Very truly yours,
For the Board of Directors:
(Sgd) Miguel Canizares,
M.D. MIGUEL CARIZARES, M.D.
President!
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By-Laws, the Civil Code and the Constitution, which allegedly renders the individuals responsible, therefore,
accountable for damages. Further, it must be noted that the action is not only against Alberto Romulo, the person
appointed in her stead, but also against the Society and the past and present members of the Board. Therefore, it
could not be held as a quo warranto case. Corollarily, the one-year period fixed in Sec. 16, Rule 66 of the Revised
Rules of Court within which a petition for quo warranto should be filed, counted from the date of ouster, does not
apply to the case at bar. The action must be brought within 4 years, in accordance with Valencia vs. Cebu
Portland Cement Co.
[Important part] Nonetheless, although the action is not barred by the statute of limitations, the case will not
prosper. Contrary to her claim, petitioner was not illegally removed or from her position as Executive Secretary in
violation of the By-laws, the New Civil Code and the pertinent provisions of the Constitution.
Although the minutes of the organizational meeting show that the Chairman mentioned the need of appointing a
“permanent” Executive Secretary, such statement alone cannot characterize the appointment of petitioner without
a contract of employment definitely fixing her term because of the specific provision of Section 7.02 of the Code
of By-Laws that: “The Executive Secretary shall hold office at the pleasure of the Board of Directors, unless their
term of employment shall have been fixed in their contract of employment.” Besides the word “permanent” could
have been used to distinguish the appointment from acting capacity”.
The absence of a fixed term in the letter addressed to petitioner informing her of her appointment as
Executive Secretary is very significant. This could have no other implication than that petitioner held an
appointment at the pleasure of the appointing power.
An appointment held at the pleasure of the appointing power is in essence temporary in nature. It is co-
extensive with the desire of the Board of Directors. Hence, when the Board opts to replace the incumbent,
technically there is no removal but only an expiration of term and in an expiration of term, there is no need of
prior notice, due hearing or sufficient grounds before the incumbent can be separated from office.

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90 - Matling Industrial and Commercial Corporation, et al. v. Coros (2010) (illegal dismissal; office v.
employee; RTC v. NLRC)
Doctrine:
• If the dismissed officer is deemed a corporate officer, then the RTC (before, SEC) has jurisdiction. However, if he
is a regular employee, then jurisdiction lies with the NLRC.
• A position must be expressly mentioned in the By-laws in order to be considered as a corporate office. The
creation of an office under a by-law enabling provision is not enough to make a position a corporate office.
• An “office” is created by the charter of the corporation, and the officer is elected by the directors or stockholders.
An “employee” occupies no office and generally is employed by the managing officer who also determines the
compensation to be paid.
• An intra-corporate controversy is one, which arises between a stockholder and a corporation. In determining
which body has jurisdiction over a case, one has to consider the status or relationship of the parties and the nature
of the question that is the subject matter of their controversy.
Facts:
Ricardo R. Coros is the Vice President for Finance and Administration of Matling Industrial and Commercial
Corporation. However, Matling dismissed him. As a result, Coros filed a complaint for illegal suspension and illegal
dismissal against Matling and some of its corporate officers before the NLRC.
Matling, et al. moved to dismiss the petition. They claimed that SEC, and not NLRC, had jurisdiction over the
case, the matter being an intra-corporate in nature. This is because Coros was also a member of the corporation’s Board of
Directors prior to his termination. Coros alleged that his status as a member of the Board was “doubtful” — he was never
formally elected; he did not own a single share of stock; he had been made to sign in blank an undated indorsement of the
certificate of stock he had been given but Matling had taken back and retained the certificate of stock in its custody; and
that even assuming that he had been a Director of Matling, he had been removed as the Vice President for Finance and
Administration, not as a Director.
The Labor Arbiter granted Matling’s motion to dismiss. Coros appealed before the NLRC. The NLRC set aside
the dismissal and held that the matter was not intra-corporate in nature. Matling appealed to the CA and eventually, to the
SC.
Issues:
1. W/N Coros, as Vice President for Finance and Administration, was a corporate office of Matling Industrial and
Commercial Corporation.
a. W/N the NLRC or the RTC has jurisdiction over his complaint for illegal dismissal.
2. W/N Coros’ status as Director and Stockholder automatically convert his dismissal into an intro-corporate
dispute.
Held/Ratio:
1. NO. Section 25 of the Corporate Code provides, “the directors of a corporation must formally organize by the
election of a president…a treasurer…a secretary…and such other officers as may be provided for in the by-
laws”. A position must be expressly mentioned in the By-laws in order to be considered as a corporate office. The
creation of an office under a by-law enabling provision is not enough to make a position a corporate office. A
different interpretation can easily allow the Board to circumvent the constitutional guarantee of security of tenure
by including an enabling clause on the creation of any corporate office in the by-laws. The Board may create
appointive positions other than those expressly mentioned in the by-laws. However, persons occupying such
positions are not considered as corporate officers within the meaning of Section 25.
In this case, Matling’s By-laws did not list Coros’ position as Vice President for Finance and Administration as a
corporate officer. It only listed four corporate offices — President, Executive Vice President, Secretary and
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Treasurer. The position of “Vice President for Finance and Administration” was not explicitly written in the by-
laws.
Further, there is a distinction between an officer and employee. An “office” is created by the charter of the
corporation, and the officer is elected by the directors or stockholders. An “employee” occupies no office and
generally is employed by the managing officer who also determines the compensation to be paid.
Coros’ was appointed Vice President by Matling’s general manager and not by the Board of Directors. It was also
the general manager who determined the amount of compensation he received. Therefore, Coros is merely an
employee and not a corporate officer.
If the dismissed officer is deemed a corporate officer, then the RTC (before, SEC) has jurisdiction. However, if he
is a regular employee, then jurisdiction lies with the NLRC. Since Coros’ was a regular employee, the NLRC has
jurisdiction over his complaint for illegal dismissal.
2. NO. An intra-corporate controversy is one, which arises between a stockholder and a corporation. In determining
which body has jurisdiction over a case, one has to consider the status or relationship of the parties and the nature
of the question that is the subject matter of their controversy.
Coros’ was not appointed as Vice President because of his being a stockholder or Director of Matling. His ascent
to the position of Vice President had been gradual but steady. His promotion to the position was due to the length
of service he had rendered as an employee of the corporation. There is no relation between his acquisition of his
status as stockholder or Director and his position as Vice President of Finance and Administration. Further, his
position as stockholder or Director remained unaffected by his dismissal as Vice President.

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91 - De Rossi vs. NLRC (1999) (removal of officers: SEC jurisdiction)
Doctrines:
• The SEC has the jurisdiction over removal of corporate officers as well as intra-corporate affairs regarding
election and appointment of corporate officers.
• Jurisdiction of a tribunal, agency, or office, is conferred by law, and its lack of jurisdiction may be questioned at
any time even on appeal.
Facts:
Armando de Rossi is an Italian Citizen and was the Executive Vice-President and General Manager of Matling
Industrial and Commercial Corp. (MICC). He started to work in 1985 and was terminated in 1988 for failing to secure his
employment permit and grossly mismanaged the business affairs of the company—he allegedly diverted corporate
funds to his personal use. Aggrieved, he then filed a case against MICC in the NLRC for illegal dismissal.
Issue:
1. W/N the NLRC has jurisdiction over illegal dismissal cases and intra-corporate affairs regarding elections and
appointments.
Held/Ratio:
1. NO. It is the SEC who has jurisdiction in the abovementioned cases. The Articles of Incorporation of MICC
expressly states that de Rossi’s position as Executive Vice-President was considered to be an “officer” position.
The court held that de Rossi’s act of diverting corporate funds to his personal use amounted to an act of fraud —
something that is detrimental to the interest of not only the corporation, but also its members. This type of
controversy is encompassed by the SEC’s jurisdiction. The court deemed SEC to possess the competence and
adjudicative expertise on this case.

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92 - Vasquez v. Borja (1944)
Doctrine:
• A corporation is an artificial being invested by law with a personality of its own, separate and distinct from that of
its stockholders and from that of its officers who manage and run its affairs. The mere fact that its personality is
owing to a legal fiction and that it necessarily has to act thru its agents, does not make the latter personally liable
on a contract duly entered into, or for an act lawfully performed, by them for an in its behalf. The legal fiction by
which the personality of a corporation is created is a practical reality and necessity. Without it no corporate
entities may exists and no corporate business may be transacted. Such legal fiction may be disregarded only when
an attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose.
Facts:
In January 1932, De Borja obligated himself to sell 4000 cavans of rice at P2.10 per cavan to Natividad-Vasquez
Sabani Development Co.(NVSD). . NVSD Co. only delivered 2,488 cavans and failed and refused in spite demand to
deliver the rest hence De Borja incurred damages (apparently, NVSD Co was insolvent). De Borja sued Vasquez for
payment of damages. Vasquez denied having entered into the contract in his own personal capacity and alleged that the
agreement was made by De Borja with NVSD.
Issue:
1. W/N Vasquez entered into the contract in his personal capacity
Held/Ratio:
1. Yes. Vasquez is not party to the contract as it was NVSD Co which De Borja contracted with. (See doctrine).
The fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence in the fulfillment of the
contract did not make Vazquez principally or even subsidiarily liable for such negligence. Since it was the
corporation’s contract, its non fulfillment, whether due to negligence or fault or to any other cause, made the
corporation and not its agent liable.
On the other hand if independently of the contract Vazquez by his fault or negligence cause damaged to the
plaintiff, he would be liable to the latter under article 1902 of the Civil Code. But then the plaintiff’s cause of
action should be based on culpa aquiliana and not on the contract alleged in his complaint herein; and Vazquez’
liability would be principal and not merely subsidiary,
JUSTICE PARAS Dissenting:
Vasquez as president of NVSD Co is liable for damages. Vasquez, as acting president and manager of Natividad-
Vazquez Sabani Development Co., Inc., and with full knowledge of the then insolvent status of his company,
agreed to sell to De Borja 4,000 cavans of palay. Further, NVSD Co was soon thereafter dissolved.

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93 - Palay, Inc. v. Clave (1983)
Doctrine:
• The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice; or
for purposes that could not have been intended by the law that created it; or to defeat public convenience, justify
wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse legitimate issues; or to circumvent the
law or perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.
Facts:
Palay, Inc., through its President, Albert Onstott executed a Contract to Sell a parcel of land to Dumpit. The sale
price was P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00 and monthly installments of
P246.42 until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of 1 month, without
need of notice and with forfeiture of all installments paid.
Dumpit paid the downpayment and several installments. The last payment was made on December 5, 1967 for
installments up to September 1967.
Almost 6 years later, Dumpit wrote Palay, Inc. offering to update all his overdue accounts with interest, and
seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. Palay, Inc. informed him that his
Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.
Dumpit filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an altenative
prayer for refund. NHA, found the rescission void in the absence of either judicial or notarial demand and ordered Palay,
Inc. and Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Dumpit the
amount of P13,722.50 with 12% interest
Issue:
1. W/N notice or demand is not mandatory under the circumstances and may be dispensed with by stipulation in a
contract to sell.
2. W/N petitioners may be held liable for the refund of the installment payments made by Dumpit.
3. W/N the doctrine of piercing the veil of corporate fiction has application.
Held/Ratio:
1. YES. An extrajudicial rescission has legal effect where the other party does not oppose it. Where it is objected to,
a judicial determination of the issue is still necessary. In other words, resolution of reciprocal contracts may be
made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall be
subject to judicial determination.
The contention that Dumpit had waived his right to be notified under paragraph 6 of the contract is neither
meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private
respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such
waiver follows only where liberty of choice has been fully accorded. Moreover, it is a matter of public policy to
protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice
is one such onerous and oppressive condition to buyers of real estate on installment payments.
2. YES. Rights to the lot should be restored to Dumpit or the same should be replaced by another acceptable lot.
However, considering that the property had already been sold to a third person and there is no evidence on record
that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the
legal rate of 12% computed from the date of the institution of the action. It would be most inequitable if
petitioners were to be allowed to retain private respondent’s payments and at the same time appropriate the
proceeds of the second sale to another.

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3. NO. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those
of the legal entities to which it may be connected and vice versa. There were no badges of fraud on petitioners’
part. They had literally relied, albeit mistakenly, on paragraph 6 of its contract with Dumpit when it rescinded the
contract to sell extrajudicially and had sold it to a third person.
Onstott was made liable because he was then the President of the corporation. No sufficient proof exists on record
that said petitioner used the corporation to defraud private respondent. He cannot be made personally liable just
because he “appears to be the controlling stockholder”. Mere ownership by a single stockholder or by another
corporation is not of itself sufficient ground for disregarding the separate corporate personality.

94 - Aratea and Canonigo v. Suico (2007) (mining, bad faith of officers, Section 31)
Doctrine:
• While the piercing the veil doctrine may not apply, officers of a corporation may still be held personally and
solidarily liable with the corporation in exceptional circumstances as when they act in bad faith in directing
corporate affairs.
Facts:
This involves a loan agreement between debtor Samar Mining Development Corporation (SAMDECO) and
creditor Esmeraldo Suico.
Debtor SAMDECO Creditor Mr. Suico
Will pay the loans and cash advances by giving Will extend loan and cash advances to SAMDECO
creditor Suico the exclusive right to market 50% of
the total coal that SAMDECO will extract from its
mining site.
Represented by Aratea and Canonigo who are the Will have the right of first priority to operate the
controlling stockholders of SAMDECO and its mining facilities of SAMDECO if it becomes
duly authorized officers incapable of coping with the work demands

However, Suico was never paid because:


1. Suico was never able to market or sell the 50% share of the coal. All her prospective buyers whom she
directed to Aratea and Canonigo and who offered competitive prices for the coal were refused by the two for
no reason other than the prices tendered were “too low.”
Meanwhile, Aratea and Canonigo were able to successfully market and sell their other 50% of the coal. Still,
they did not pay Suico.
2. Later, the ownership of SAMDECO was transferred to Southeast Pacific Marketing Inc. (SPMI). In other
words, Suico was not given the right of first priority over SAMDECO.
Suico sued SAMDECO, the new owner SPMI, and officers Aratea and Canonigo for the payment of the loan and
asked that they be held solidarily liable to him.
Issue:
1. Should Aratea and Canonigo be held solidarily liable to the corporation for the obligation to Suico?
Held/Ratio:
1. Yes. Aratea and Canonigo, as corporate officers who represented SAMDECO in their loan agreement, must be
held solidarily liable with the corporation to Suico.

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While the fiction of separate juridical personality of SAMDECO may not be pierced because the loan agreement
was really for the mining operation of the corporation, Aratea and Canonigo should still be held personally and
solidarily liable to Suico because they acted in bad faith in dealing with him.
It was they who prevented Suico from marketing his 50% of the coals mined and they did not allow him to
exercise his right of first priority.
The Court held that these are the exceptional circumstances when corporate officers may be held liable even if the
piercing the veil of corporate fiction will not apply:
a. Section 31 of the Corporation Code:
When directors and trustees or, in appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons;
b. Section 65 of the Corporation Code:
When a director or officer has consented to the issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the corporate secretary his written objection
thereto;
c. Jurisprudence: De Asis vs. CA 136 SCRA 599
When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation; or
d. Article 144 Corporation Code and in Section 13, PD 115 (Trust Receipts Law)
When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.

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95 - Singian v. Sandiganbayan (2005)
Doctrine:
• Officers of a corporation other than members of the board of directors can be made criminally liable for their
criminal acts if it can be proven that they participated therein.
Facts:
Atty. Salvador was a consultant for the Presidential Commission on Good Goverment who was detailed with the
Presidential Ad Hoc Committee on Behest Loan (behest loan: loans without appropriate securities and was approved
based on favors and influence). The Committee investigated the loans granted to Integrated Shoe, Inc. (ISI) by the PNB. It
appeared that ISI applied for a 5 yr confirmed irrevocable letter of credit amounting to US$2.5M (P16M) to finance its
purchase of machinery and equipment. This was recommended to the PNB board of director by its Senior VP Bautista.
PNB approved the loan subject to several conditions which included the mortgage of ISI’s property along with other
collaterals. It was provided further that the letter of credits be subjected to several conditions: a) the letter of credits be
subject to the joint and several signatures of ISI’s corporate officers including Petitioner Singian, b) that ISI would
increase its paid up capital and authorized capital, c) ISI shall submit other collaterals in case the appraised value of the
new machineries and equipment be insufficient. In addition, ISI was given the loan accommodations in the total amount
of P29.6M. In reviewing the loan, the Committee found that the loan bore characteristics of behest loans specifically for
not having been secured by sufficient collaterals and was obtained with undue haste. Atty. Salvador filed with the
Ombudsman a complaint against the corporate officers and board of directors of PNB and ISI including Singian who was
not a member of the board of director of ISI but was a corporate officer of ISI being its Executive VP. Initial
recommendations by investigators of the OMB was for the dismissal of the charges, however, the then Ombudsman
Disierto disapproved this recommendations and found probable cause and initiated the filing of charges against the
respondents with the Sandiganbayan. Respondents and petitioner Singian filed a motion for re-determination of existence
of probable cause which was denied by the Sandiganbayan. Hence, this petition for certiorari.
Issue:
1. W/N the Ombudsman and the Sandiganbayan acted with grave abuse of discretion when they denied the motion
of the petitioner Singian for re-determination of the existence of probable cause.
Held/Ratio:
1. NO. In the absence of grave abuse of discretion, the SC would not interfere with the discretion of the Ombudsman
and the Sandiganbayan. In the case at bar, Singian was made liable for participation in the loan transaction based
on his signature affixed in the undertaking. Singian argues that he cannot be made liable for ISI’s failure to put up
additional capitalization and collateral because it was the responsibility of the board to comply and as only an
Executive Vice President he has no legal power to compel them to do so. The SC held that while the power to
increase capitalization and to offer collateral to secure indebtness is with thr board of directors, this does not mean
that officers of the corporation other than the board of directors cannot be made criminally liable for their criminal
acts if it can be proven that they participated therein. There is evidence that Singian participated in the loan
transaction when he signed the undertaking. They cited with approval the findings of the Sandiganbayan which
found that even if Singian is not a stockholder or a board of director of ISI but when he acted as a Executive VP
he executed jointly with the officers and board of directors the undertaking in connection with the loan application
to which the loan is unpaid to date.

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