Schedule: M – 6:30-7:30

Thurs – 4:30-6:30 OR 5PM - 6:30PM

2 AND A HALF HOUR EVERY WEEK
40% Q – SHORT QUIZZES, MAX OF 10 PTS. (1 question or True or False,
Matching or Multiple Choice) – Coverage --- readings and discussion outlines ,
can be old discussions or future discussions
20% MT
20% FINALS

PRIVATE CORPORATIONS PRELIMINARIES DISCUSSION

The basis of the enactment of the Corporation Code (BP68) and the Revised
Corporation Code-

Section 16, Article XXII, 1973 Constitution

“Congress shall not, except by General law provide for the formation,
organization or regulation of private corporations, government owned or
controlled corporations may be created by or established by special charters in
the interest of the public good and subject to the test of liability.”

Defined-

Section 2

The law defines a corporation as an artificial being created by operation of law

having the right of succession and the powers, attributes and properties
expressly authorized by law or incidental to its existence.

From the definition, the attributes of a corporation are: (a) it is created by

operation of law (b) it is an artificial being (c) it only has the power, attributes
and property expressly allowed by law or incident to its existence (d) it has the
right of succession.

The concession theory- (Created by Law)

When a corporation is said to be created by operation of law, it means that it

cannot come into existence without the consent or any grant of authority from
the sovereign government.

The grant of authority by the sovereign government is a concession. Thus the

concept known as the “Concession Theory” or “Government Paternity Theory” or
the “Franchise Theory”.

GOCCs come into existence because of special laws. –

Primary and secondary franchises-

Primary – held by individuals – those with capacity to enter a contract
Secondary – power of corp to be and to act as a corporation – enjoyed by the
corp itself

Corp by estoppel

Distinguishing between Primary or Corporate or General Franchise which refers

to the privilege enjoyed by individuals to form a corporation, and the Secondary
or Special Franchise which refers to the privilege enjoyed by the corporation to
be and to act as a corporation.

Right of succession-

Old law – can only be exercised for atleast 50 yrs at a time

RCC – Sec 11, corp created under new law will have perpetual existence, but they
can still have definite corporate term if they want to.

The right of succession refers to its continued existence unaffected by anything

that happens to its stockholders or members limited only by the term stated in
its Articles of Incorporation.

It does not contemplate corporate immortality but rather a continuity of

existence irrespective of that of its components.

Under Section 11 of the Revised Corporation Code, a corporation has perpetual

existence unless its articles provide otherwise.

Corporations in existence prior to the revision shall also have perpetual

existence unless by a majority vote of the outstanding capital stock, notifies the
SEC that it will retain its specific terms. The right of appraisal is available to any
change in the corporate term. (Only happens if originally, they had perpetual
existence and now they want to have a definite term. – for new law)

The term of a corporation can be extended or shortened by amendment of the

articles. A renewal can take place within 5 years prior to the expiration of its
original term or renewal thereof unless there are justifiable reasons for an
earlier renewal.

Revival of corporate existence

A corporation whose term has expired may apply for a revival of its corporate
existence together with all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and liabilities existing prior to
its revival. Upon approval by the Commission, the corporation shall be deemed
revived and a certificate of revival of corporate existence shall be issued, giving it
perpetual existence, unless its application for revival provides otherwise.
How soon after can you revive? -- Once revived, right of succession is also
revived.

No application for revival of certificate of incorporation of banks, banking and

quasi-banking institutions, preneed, insurance and trust companies, non-stock
savings and loan associations (NSSLAs), pawnshops, corporations engaged in
money service business, and other financial intermediaries shall be approved by
the Commission unless accompanied by a favorable recommendation of the
appropriate government agency.

The corporation as an artificial being-

The corporation is said to be an artificial being that is invisible and intangible, it

is said to exist only in contemplation of law. The law treats as though it were a
person by process of fiction. It is likewise said to be a juristic person resulting
from an association of human beings being granted legal personality by the state.

Consequently, the corporation as a juridical person has a personality separate and

distinct from the persons composing it. This separate personality is recognized
under Article 44 (2) Civil Code, which begins the minute it is said to be duly
constituted according to law.

Article 46 of the Civil Code provides that as such it may acquire and possess
property of all kinds as well as incur obligations and bring civil or criminal
actions in conformity with laws and regulations of their organizations.

Illustrating the consequence of having a separate and distinct personality-

In J.G. Summit Holdings v. CA, the court said: “an agreement of co-shareholders to
mutually grant a right of first refusal to each other, by itself, does not constitute a
violation of the provisions of the Constitution limiting land ownership to
Filipinos or Filipino corporations. If the foreign shareholdings exceeds 40%, it is
not their ownership that is adversely affected, but rather the capacity if the
corporation to own land. The fact of land ownership by the corporation cannot
deprive the stockholders of the right of first refusal. No law disqualifies a person
from purchasing shares in a landholding corporation even if the latter will
exceed the allowed foreign entity. This right belongs to the stockholders, while
the right to the land belongs to the corporation. They are separate and distinct.”

Extent of corporate powers-

A corporation is said to have only those powers or properties expressly

authorized by law or incident to its existence. Incidental powers require that we
look to what is provided for by law or its charter first, then determine a causal
connection between the act or power being exercised with what is express.

This attribute is recognition of what is known as the “Theory of Special or

Limited Capacities”. The opposite of this theory is the “Theory of General
Capacities” which maintains that a corporation can exercise any and all powers
that may be exercised by persons.
As distinguished from those exercised by natural persons or partnerships,
corporations can only exercise those expressly authorized by law, can be implied
or are necessary to carry out its purpose/s, such as acts in the usual course of
business or incidental to its existence because they attach to a corporation upon
its creation and said to be inherent, such as the right of succession or to sue.
Natural persons or partnerships, on the other hand can exercise or perform any
act provided it is not contrary to law. The reason being that corporations owe
their existence to the state, while natural persons or partnerships do not.

Express and Implied powers can further be distinguished as follows: (a) Express
powers deal with main business, object or purposes of the corporation, while
Implied powers deal with the means and methods of attaining the object or
purpose. (b) Express powers are determined by the language of the law and its
charter while Implied powers may change according to time, place and
circumstances. (c) Test of Express powers is whether they are found in the
words of the law or charter while the Test of Implied powers is whether they are
purely incidental to its express powers and is reasonably necessary to their
being carried out.

Piercing the veil of corporate fiction- exception to the separate and distinct
personality of the corporation

The obligations of a corporation are not obligations of its stockholders or

members and vice-versa.

The principle though is subject to an exception, if the Doctrine of Piercing the

Veil of Corporate Fiction applies. This doctrine is also known as the Doctrine of
Disregarding the Fiction of Corporate Entity or Corporate Alter Ego Doctrine. It is
an exception because the application of the doctrine seeks to hold the
stockholder or members of the corporation personally liable for corporate
obligations.

For the doctrine to apply, any of following circumstances must obtain: (a)
corporate fiction is being used to defeat public convenience –(convenience that
we have and enjoy when we deal with corporations). The convenience is the
creation of a separate and distinct person from the stockholder or members to
facilitate the transaction of business. These are referred to as the Alter-Ego cases.
An example is when a stockholder or member who has an unsavory reputation
utilizes corporate fiction to hide his true identity for illegal purposes, or (b) it
justifies a wrong, protects fraud or defends crime. These are the referred to as
the Fraud cases. – you only consider piercing when the corporation cannot answer
for the obligation-

The obligation must be incurred by the corporation – not the stockholder or

member (if this happens, recognize separate and distinct personality) --
In the Concept Builders and Lanuza cases, the court said that: to sustain the
application of the doctrine to alter-ego cases, resort has been had to the
Instrumentality Rule, the requisites of which are: (a) There is complete
domination or control of policy and business practice (b) The control is used to
commit the fraud (c) The control used is the proximate cause of injury or loss.

To allow piercing, the courts must be sure that the corporation fiction was
misused to such extent that injustice, fraud, or a crime was committed upon
another, disregarding his rights. It is the protection of the interest of innocent
third persons, which the law aims to protect. Thus, one cannot be allowed to
invoke the separate identity doctrine to save itself from transactions, which it
knew to be defective or contrary to law, rules or regulations.

It bears repeating here the Supreme Court declaration that whether the
existence of the corporation should be pierced depends on questions of facts,
appropriately pleaded. Mere allegation that a corporation is the alter ego of the
individual stockholders is insufficient. The presumption is that the stockholders
or officers and the corporation are distinct entities. The burden of proving
otherwise is on the party seeking to have the court pierce the veil of corporate
entity.

Corporate residence and nationality-

The residence of a corporation is ordinarily the place of incorporation. For venue

purposes, a domestic corporation is a resident of a particular province, city or
municipality.

Ordinarily a corporation cannot be said to be possessed of nationality or

citizenship as its very essence is the duty to allegiance to the state and the
exercise of political rights, which only natural persons can perform. However, the
nationality of the corporation will have to be determined for purposes of
engaging in business.

The tests to determine nationality are: (a) the aggregate or control test which
requires looking into the nationality, domicile or residence of the individuals
who compose the corporation, and (b) the entity or place of incorporation test
which looks at the nation where the corporation was enacted. The applicable
standard in the code is the latter test. However, for purposes of investments, the
applicable standard is the former as based on the Foreign Investments Act of
1991 which provides that a Filipino national includes a corporation organized
under Philippine laws of which 60% of the outstanding capital stock entitled to
vote is owned by Filipinos or a corporation organized abroad is doing business in
the Philippines under the Corporation Code of which 100% of the capital stock
entitled to vote is owned 100% by Filipinos.

In Gamboa v. Teves, capital as used in Section 11, Article XII of the 1987
Constitution was defined as referring only to shares entitled to vote in the
election of directors and not to 60% of the entire outstanding capital stock. This
is the Voting Control Test or Beneficial Ownership Test.
Subsequently, the SEC promulgated SEC MC No. 8, Series of 2013 requiring
covered corporations to comply with the requirement that the 60% shall apply
to the (1) total number of outstanding shares entitled to vote for the election of
directors and (2) total number of outstanding shares of stock. The validity of this
circular was upheld in Roy v. SEC.

The application of the control test and abandonment of the “grandfather rule” for
investment purposes is supported by the provision of the Foreign Investments
Act that provides: “where a corporation and its non-Filipino stockholders own
stocks in a SEC registered enterprise, at least 60% of the stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens
of the Philippines and at least 60% of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in order that the
corporation shall be considered a Philippine national”

In the case of Narra Nickel Mining & Development Corporation v. Redmont

Consolidated Mines, the Court said it could be utilized to resolve a doubt as to
who has beneficial interest and control even when the corporation complies with
the 60-40 requirement.

The grandfather rule looks at the percentage of foreign holdings in a corporation,

which is a stockholder in a Filipino corporation to determine whether or not the
percentage requirement of Filipino ownership has been met.

To illustrate: Assume that Corporation “A”, a corporation organized in the

Philippines, wants to pursue an activity which is limited under a statute to
corporations where the equity participation of foreigners is limited to 40% of the
outstanding capital stock. Its outstanding capital is equivalent to P10, 000,000.00
divided into 1,000,000 shares. Around 450,000 shares in “A” is owned by
Corporation “B” while the rest belong to Mr. X a Filipino. Sixty percent (60%) of
the outstanding capital stock in Corporation “B” belongs to Japanese nationals
while forty percent (40%) belongs to Filipinos. If the Grandfather Rule will be
strictly applied, the 450,000 shares owned by Corporation “B” cannot be said to
be entirely Filipino owned or Japanese owned. The percentage which can be said
to be Japanese owned can be determined using the formula “Number of Shares
multiplied by 60/100” or in this case 450,000.00 x 60/100=270,000.00. Thus,
270,000 shares are deemed Japanese owned and the balance of 180,000 is
owned by Filipinos. If the 180,000 will be added to the shares of Mr. X (550,000),
then the total number of shares owned by Filipinos in Corporation “A” is 730,000
or 73%. On the other hand, the 270,000 belong to foreigners or 27% of the
outstanding capital stock in Corporation “B”. Therefore, under the “Grandfather
Rule”, Corporation “A” can pursue the proposed activity because the limit of
equity participation of foreigners, which is 40%, has not been exceeded.

Tort and criminal liability-

In PNB v. CA, tort liability can be imposed on a corporation because generally

speaking, the rules governing liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master
is a natural person or a corporation. Hence, when an officer or agent of a
corporation under express direction or authority of the corporation commits a
tortuous act, it would be liable.

As a rule, no criminal action can lie against a corporation. A corporation cannot

commit felonies as provided for in the Revised Penal Code because artificial
beings are incapable of intent, nor can it actually perform an overt act.

In West Coast Life v. Hurd, to make a corporation criminally liable, the Supreme
Court clarified that it is necessary that the statute, by express words or by
necessary intendment, include corporations within the persons who could offend
against criminal laws and the legislature must at the same time establish a
procedure applicable to corporations. Illustrating in Sia v. People, the court
acquitted the president of a corporation who signed a trust receipt as the law
prevailing prior to the enactment of the Trust Receipts Law did not provide for
the existence of corporate criminal liability.

Entitlement to moral damages-

In Mambulao Lumber vs. PNB, the recovery of moral damages for a besmirched
reputation was allowed. This ruling was eventually modified in Acme Shoe vs.
Court of Appeals where the court said: mental suffering can only be experienced
by one having a nervous system and it flows from real ills, sorrows and grief of
life, all of which cannot be suffered by respondent banks as an artificial person.

The pronouncement on the matter is Filipinas Broadcasting Network, Inc. vs. Ago
Medical and Educational Center where it was held that Article 2219 (7) of the
Civil Code allows the recovery of moral damages in cases of libel, slander or any
other form of defamation without qualification as to whether the plaintiff is a
natural or juridical person.

In Crystal v. BPI (572 SCRA 697) it was held: “While the court may allow the
grant of moral damages to corporations, it is not automatically granted; there
must be proof of the existence of the factual basis of the damage and its causal
relation to the defendant’s acts.”