Corporation Code Case Doctrine

Batas Pambansa Blg. 68 - Corporation Code of the Philippines

Sec. 2 - Corporation Defined Separate juridical personality Piercing the veil of corporate fiction Nature of the doctrine When applicable When not applicable Grandfather rule Rights and Liabilities of a corporation Corporation may delegate powers and functions to officers, committees or agents.

Separate juridical personality As a general rule, a corporation will be deemed a separate legal entity until sufficient reason to the contrary appears. But the rule is not absolute. A corporation's separate and distinct legal personality may be disregarded and the veil of corporate fiction pierced when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Siain Enterprises vs. Cupertino Realty Corp., et al., G.R. No. 170782, June 22, 2009

It is elementary that a corporation has a personality distinct and separate from its individual stockholders or members. Being an officer or stockholder of a corporation does not make one's property the property also of the corporation, for they are separate entities (Adelio Cruz vs. Quiterio Dalisay, A.M. No. R-181-P, July 31, 1987) Traders Royal Bank vs. Court of Appeals, G.R. No. 78412, September 26, 1989

While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person. Concepcion Magsaysay-Labrador vs. Court of Appeals, G.R. No. 58168, December 19, 1989 Copyright 2015

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Good Earth Emporium, Inc. vs. Court of Appeals, G.R. No. 82797, February 27, 1991

It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Alberto S. Sunio vs. National Labor Relations Commission, G.R. No. L-57767, January 31, 1984

In La Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La Campana, 93 Phil. 160, where a somewhat similar situation existed as in this case, We ruled: "The attempt to make the two factories appear as two separate businesses, when in reality they are but one, is but a devise to defeat the ends of the law and should not be permitted to prevail. Although the coffee factory is a corporation and, by legal fiction, an entity existing separate and apart from persons composing it, T and his family, it is settled that this fiction of law, which had been introduced as a matter of convenience and to subserve the ends of justice cannot be invoked to further an end subversive of that purpose." Reynolds Philippine Corp. vs. Court of Appeals, G.R. No. 36187, January 17, 1989

Piercing the veil of corporate fiction The doctrine of piercing the veil of corporate entity applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime or where a corporation is the mere alter ego or business conduit of a person (Indophil Textile Mill Workers Union-PTGWO vs. Teodorico P. Calica, G.R. No. 96490, February 3, 1992). To disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It cannot be presumed (Del Rosario vs. NLRC, G.R. No. 85416, July 24, 1990) James Yu vs. National Labor Relations Commission, G.R. Nos. 111810-11, June 16, 1995

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So when the notion of separate juridical personality is used to defeat public convenience, justify Copyright 2015

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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. Concept Builders, Inc. vs. National Labor Relations Commission, G.R. No. 108734, May 29, 1996

The question of whether one corporation is merely an alter ego of another is purely one of fact generally beyond the jurisdiction of this Court. . . . Also, the fact that Mar Fishing's officers remained as such in Miramar does not by itself warrant a conclusion that the two companies are one and the same. As this Court held in Sesbreño v. Court of Appeals, the mere showing that the corporations had a common director sitting in all the boards without more does not authorize disregarding their separate juridical personalities. Neither can the veil of corporate fiction between the two companies be pierced by the rest of petitioners' submissions, namely, the alleged take-over by Miramar of Mar Fishing's operations and the evident similarity of their businesses. At this point, it bears emphasizing that since piercing the veil of corporate fiction is frowned upon, those who seek to pierce the veil must clearly establish that the separate and distinct personalities of the corporations are set up to justify a wrong, protect a fraud, or perpetrate a deception. Vivian T. Ramirez, et al. vs. Mar Fishing Co., Inc., et al., G.R. No. 168208, June 13, 2012 citing Kukan International Corp. vs. Reyes, G.R. No. 182729, September 29, 2010

Nature of the doctrine Piercing the veil of corporate entity is an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud of defend crime or where a corporation is a mere alter ego or business conduit of a person. Piercing the veil of corporate entity requires stockholders from liabilities that ordinarily, they could be subject to or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do this, the court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third persons dealing with the corporate entity which the law aims to protect by this doctrine. 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 stockholders and from other corporations may be disregarded, in the absence of such grounds, the Copyright 2015

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general rule must be upheld. Traders Royal Bank vs. Court of Appeals, G.R. No. 93397, March 3, 1997

When applicable The rule is that the veil of corporate fiction may be pierced when made as a shield to perpetrate fraud and/or confuse legitimate issues (Jacinto vs. CA, G.R. No. 80043, June 6, 1991). The theory of corporate entity was not meant to promote unfair objectives or otherwise, to shield them (Villanueva vs. Adre, G.R. No. 80863, April 27, 1989). Likewise, where it appears that two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities, and treat them as identical (Phil. Veterans Investment Development Corp. vs. CA, G.R. No. 85266, January 30, 1990) Sibagat Timber Corp. vs. Adolfo B. Garcia, G.R. No. 98185, December 11, 1992 A.C. Ransom Labor Union-CCLU vs. National Labor Relations Commission, G.R. No. L-69494, May 29, 1987

When not applicable Buenaflor C. Umali vs. Court of Appeals, G.R. No. 89561, September 13, 1990 Indophil Textile Mill Workers Union-PTGWO vs. Teodorico P. Calica, G.R. No. 96490, February 3, 1992

It is apparent, therefore, that the doctrine has no application to this case where the purpose is not to hold the individual stockholders liable for the obligations of the corporation but, on the contrary, to hold the corporation liable for the obligations of a stockholder or stockholders. Piercing the veil of corporate entity means looking through the corporate form to the individual stockholders composing it. Quintin Robledo vs. National Labor Relations Commission, G.R. No. 110358, November 9, 1994 Adelio C. Cruz vs. Quiterio L. Dalisay, A.M. No. R-181-P, July 31, 1987

[The general manager] cannot be held personally liable for the obligation of the corporation. . . . This Court upholds the doctrine of separate juridical personality of corporate entities. . . . A corporation is a juridical entity with a legal personality separate and distinct from those acting for and on its behalf and, in general, of the Copyright 2015

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people comprising it. Hence, the obligations incurred by the corporation, acting through its officers such as in this case, are its sole liabilities. Mercy Vda. de Roxas vs. Our Lady's Foundation, Inc., G.R. No. 182378, March 6, 2013 citing Santos vs. NLRC, 325 Phil. 145 (1996)

[A]ny piercing of the corporate veil has to be done with caution. . . : A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. . . .

Therefore, we refuse to allow the execution of a corporate judgment debt against the general manager of the corporation, since in no legal sense is he the owner of the corporate property. Mercy Vda. de Roxas vs. Our Lady's Foundation, Inc., G.R. No. 182378, March 6, 2013 citing Sarona v. NLRC, G.R. No. 185280, January 18, 2012

Grandfather rule Pedro R. Palting vs. San Jose Petroleum Incorporated, G.R. No. L-14441, December 17, 1966

Rights and Liabilities of a corporation A corporation is liable 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. Philippine National Bank vs. Court of Appeals, G.R. No. L-27155, May 18, 1978 Smith, Bell & Co. vs. Joaquin Natividad, G.R. No. 15574, September 17, 1919

A corporation — being an artificial person which has no feelings, emotions or senses, and which cannot experience physical suffering or metal anguish — is not entitled to moral damages. Solid Homes, Inc. vs. Court of Appeals, G.R. No. 117501, July 8, 1997

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A corporation can act only through its officers and agents, and where the business itself involves a violation of the law, the correct rule is that all who participate in it are liable (Grall and Ostrander's Case, 103 Va., 855, and authorities there cited) People of the Phils. vs. Tan Boon Kong, G.R. No. 32652, March 15, 1930

A corporation is vested by law with a personality separate and distinct from the people comprising it. Ownership by a single or small group of stockholders of nearly all of the capital stock of the corporation is not by itself a sufficient ground to disregard the separate corporate personality. Thus, obligations incurred by corporate officers, acting as corporate agents, are direct accountabilities of the corporation they represent. Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., G.R. Nos. 168756 & 171476, December 7, 2009

Water districts are distinct from corporations organized under the Corporation Code. The juridical entities known as water districts created by PD 198, although considered as quasi-public corporations and authorized to exercise the powers, rights and privileges given to private corporations under existing laws, are entirely distinct from corporations organized under the Corporation Code. The Corporation Code has nothing whatever to do with their formation and organization, all the terms and conditions for their organization and operation being particularly spelled out in PD 198. Marilao Water Consumers Association, Inc. vs. IAC, G.R. No. 72807, September 9, 1991

Not every stockholder or officer can bind the corporation. Not every stockholder or officer can bind the corporation considering the existence of a corporate entity separate from those who compose it. The rationale for this is that service must be made on a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. Ramon C. Lee vs. Court of Appeals, G.R. No. 93695, February 4, 1992

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Chief of Finance falls under the term 'agent' authorized to receive processes. An Administrative Chief is responsible for the management of the corporation which places him on the level of a manager contemplated by the Rules. As Chief of Finance, he is conferred with vital and sensitive functions and responsibilities. Under corporate and management organizational structure, a finance officer even holds a higher position than that of a cashier. Otherwise stated, he is not one of the lesser officers of the corporation who would not have been able to appreciate the importance of the papers delivered to him. On the contrary, he falls squarely under the term Agent who is authorized by law to receive the processes of the Court for the corporation. Far Corporation vs. Ricardo J. Francisco, G.R. No. L-57218, December 12, 1986

Service of summons upon Assistant General Manager for Corporations serves the purpose of the law. Service of summons upon a corporation's Assistant General Manager for Corporations who was a former President and General Manager thereof serves the purpose of the law. Should he refuse to receive the summons, tender unto him is sufficient to confer jurisdiction over the corporation. Villa Rey Transit, Inc. vs. Far East Motor Corp., G.R. No. L-31339, January 31, 1978

Test to determine the applicability of the doctrine of piercing the veil of corporate fiction The Supreme Court laid down the test in determining the applicability of the doctrine of piercing the veil of corporate fiction, to wit: 1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own. 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and, unjust act in contravention of plaintiffs legal rights; and, 3. Copyright 2015

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unjust loss complained of. Concept Builders, Inc. v. NLRC, G.R. No. 108734, May 29, 1996 "G" Holdings, Inc. vs. NAMAWU, et al., G.R. No. 160236, October 16, 2009

Sec. 3 - Classes of Corporations Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital stock divided into shares; and (2) that it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation. As for non-stock corporations, they must have members and must not distribute any part of their income to said members. Republic of the Phil. vs. City of Parañaque, G.R. No. 191109, July 18, 2012

Sec. 4 - Corporations Created by Special Laws or Charters

Provisions of Corporation Code apply in supplementary manner to all corporations including electric cooperatives. Section 4 of the Corporation Code renders the provisions of that Code applicable in a supplementary manner to all corporations, including those with special or individual charters so long as those provisions are not inconsistent with such charters. Benguet Electric Cooperative, Inc. vs. NLRC, G.R. No. 89070, May 18, 1992

Sec. 6 - Classification of Shares

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Shares of stock in corporations may be divided into voting shares and non-voting shares, which are generally issued as "preferred" or "redeemable" shares. Voting rights are exercised during regular or special meetings of stockholders; regular meetings to be held annually on a fixed date, while special meetings may be held at any time necessary or as provided in the by-laws, upon due notice. The Corporation Code provides for a whole range of matters which can be voted upon by stockholders, including a limited set on which even non-voting stockholders are entitled to vote on. On any of these matters which may be voted upon by stockholders, the proxy device is generally available. GSIS vs. Court of Appeals, et al., G.R. Nos. 183905 & 184275, April 16, 2009

Advantages accorded to preferred shares upon conversion The advantages accorded to the preferred shares are undeniable, namely: the significant premium in the price being offered; the preference enjoyed in the dividends as well as in the liquidation of assets; and the voting rights still retained by preferred shares in major corporate actions. All things considered, conversion to preferred shares would best serve the interests and rights of the government or the eventual owner of the CIIF SMC shares. COCOFED, et al. vs. Republic of the Phil., G.R. Nos. 177857-58, September 17, 2009

Preferred shares A preferred share of stock is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends. Republic Planters Bank vs. Enrique A. Agana, Sr., G.R. No. 51765, March 3, 1997

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Sec. 8 - Redeemable Shares

Redeemable shares Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. Republic Planters Bank vs. Enrique A. Agana, Sr., G.R. No. 51765, March 3, 1997

Sec. 9 - Treasury Shares A treasury share or stock, which may be common or preferred, may be used for a variety of corporate purposes, such as for a stock bonus plan for management and employees or for acquiring another company. It may be held indefinitely, resold or retired. While held in the company's treasury, the stock earns no dividends and has no vote in company affairs. Thus, the CIIF common shares that would become treasury shares are not entitled to voting rights. COCOFED, et al. vs. Republic of the Phil., G.R. Nos. 177857-58, September 17, 2009

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Definition of treasury shares San Miguel Corporation, et al. vs. Sandiganbayan, G.R. Nos. 104637-38, September 14, 2000

Sec. 13 - Amount of Capital Stock to be Subscribed and Paid for Purposes of Incorporation

Paid-up capital MSCI-NACUSIP vs. NWPC, G.R. No. 125198, March 3, 1997

Sec. 14 - Contents of Articles of Incorporations The charter of a corporation is a contract between three parties: (a) It is a contract between the state and the corporation to which the charter is granted; (b) it is a contract between the stockholders and the state and (c) it is also a contract between the corporation and its stockholders. (Cook on Corporations, vol. 2, sec. 494 and cases cited.) Government of the Phil. vs. Manila Railroad Company, G.R. No. 30646, January 30, 1929

Sec. 17 - Grounds When Articles of Incorporation or Amendment May Be Rejected or Disapproved The amendment of the articles of incorporation requires merely that (a) the amendment is not contrary to any provision or requirement under the Corporation Code, and that (b) it is for a legitimate purpose. Copyright 2015

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IEMELIF, et al. vs. Nathanael Lazaro, et al., G.R. No. 184088, July 6, 2010

Sec. 18 - Corporate Name

Corporate name Industrial Refractories Corporation of the Philippines vs. Court of Appeals, G.R. No. 122174, October 3, 2002

Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name. Ang Mga Kaanib Sa Iglesia Ng Dios Kay Kristo Hesus vs. Iglesia Ng Dios Kay Cristo Jesus, G.R. No. 137592, December 12, 2001

A change in the corporate name does not make a new corporation. The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed. A change in the corporate name does not make a new corporation, and whether effected by special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. The corporation continues, as before, responsible in its new name for all debts or other liabilities which it had previously contracted or incurred. Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992

Sec. 18 applies only when corporate names are identical. Section 18 of the Corporation Code is applicable only when the corporate names in question are identical. Philips Export B.V. vs. Court of Appeals, G.R. No. 96161, February 21, 1992

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Right of corporation to use its corporate and trade name is a property right. A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field. Philips Export B.V. vs. Court of Appeals, G.R. No. 96161, February 21, 1992 Western Equipment and Supply Co. vs. Fidel A. Reyes, G.R. No. 27897, December 2, 1927

Name of corporation is esential to its existence. The name of a corporation is essential to its existence. It cannot change its name except in the manner provided by the statute. By that name alone is it authorized to transact business. The law gives a corporation no express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart for it and protected by the law. If any corporation could assume at pleasure as an unregistered trade name the name of another corporation, this practice would result in confusion and open the door to frauds and evasions and difficulties of administration and supervision. Red Line Transportation Co. vs. Rural Transit Co., Ltd., G.R. No. 41570, September 6, 1934

Importance of corporate name. A name is peculiarly important as necessary to the very existence of a corporation. Its name is one of its attributes, an element of its existence, and essential to its identity. The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person; and the right to use its corporate name is as much a part of the corporate franchise as any other privilege granted. Philips Export B.V. vs. Court of Appeals, G.R. No. 96161, February 21, 1992

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Requisites for application of Sec. 18 of the Corporation Code. To come within the scope of the statutory prohibition, two requisites must be proven, namely: (1) that the complainant corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is either: (a) identical or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. Philips Export B.V. Court of Appeals, G.R. No. 96161, February 21, 1992

A corporation has exclusive right to the use of its name. A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames. Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name. Philips Export B.V. vs. Court of Appeals, G.R. No. 96161, February 21, 1992

Sec. 19 - Commencement of Corporate Existence

Substantial compliance with conditions subsequent will suffice to perfect corporate personality. Organization and commencement of transaction of corporate business are but conditions subsequent and not prerequisites for acquisition of corporate personality. The adoption and filing of by-laws is also a condition subsequent. Under Section 19 of the Corporation Code, a corporation commences its corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues certificate of incorporation under its official seal. This Copyright 2015

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may be done even before the filing of the by-laws, which under Section 46 of the Corporation Code, must be adopted "within one month after receipt of official notice of the issuance of its certificate of incorporation." Chung Ka Bio vs. Intermediate Appellate Court, G.R. No. L-71837, July 26, 1988

Sec. 20 - De facto Corporations

De facto corporation C. Arnold Hall vs. Edmundo S. Piccio, G.R. No. L-2598, June 29, 1950 Municipality of Malabang vs. Pangandapun Benito, G.R. No. L-28113, March 28, 1969 Emeterio A. Rodriguez vs. Court of Appeals, G.R. No. L-28734, March 28, 1969

Sec. 21 - Corporation by Estoppel

Corporation by estoppel Mariano A. Albert vs. University Publishing Co., Inc., G.R. No. L-19118, January 30, 1965

When a third person has entered into a contract with an association which represented itself to be a corporation, the association will be estopped from denying its corporate capacity in a suit against it by such third person. It cannot allege lack of capacity to be sued to evade responsibility on a contract it had entered into and by virtue of which it received advantages and benefits. Christian Children's Fund vs. National Labor Relations Commission, G.R. No. 84502, June 30, 1989

Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Copyright 2015

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Where there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered there is no corporation by estoppel. Reynaldo M. Lozano vs. Eliezer R. De Los Santos, G.R. No. 125221, June 19, 1997 Lim Tong Lim vs. Phil. Fishing Gear Industries, G.R. No. 136448, November 3, 1999 Merrill Lynch Futures, Inc. vs. Court of Appeals, G.R. No. 97816, July 24, 1992 People of the Phil. vs. Patricio Botero, G.R. No. 117010, April 18, 1997

Sec. 23 - The Board of Directors or Trustees Exercise of corporate powers Business judgment rule Doctrine of Apparent authority Doctrine of apparent authority not applicable Board of trustees to be elected from among the members A corporation can act only through its board of directors. Corporation may delegate powers and functions to officers, committees or agents. Authority of officers or agents is derived from the board of directors unless conferred by corporate charter. Derivative Suit

"Term" of office, defined; distinguished from "tenure The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have defined "term" as 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. The term of office is not affected by the holdover. The term is 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.

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Term is 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. Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, September 4, 2009

The holdover period constitutes part of a director's tenure, and not part of his term of office. The term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period — that time from the lapse of one year from a member's election to the Board and until his successor's election and qualification — is not part of the director's original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term. Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, September 4, 2009

As a general rule, officers and directors of a corporation hold over after the expiration of their terms until such time as their successors are elected or appointed. The holdover doctrine has, to be sure, a purpose which is at once legal as it is practical. It accords validity to what would otherwise be deemed as dubious corporate acts and gives continuity to a corporate enterprise in its relation to outsiders. Hans Christian M. Señeres vs. COMELEC, et al., G.R. No. 178678, April 16, 2009

The board of directors may validly delegate some of its functions and powers to officers, committees or agents. The power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are lodged in the board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law. 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 Copyright 2015

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powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. Cebu Mactan Members Center, Inc. vs. Masahiro Tsukahara, G.R. No. 159624, July 17, 2009 People's Aircargo and Warehousing Co., Inc. vs. Court of Appeals, G.R. No. 117847, October 7, 1998, 357 Phil. 850

Corporation may delegate powers and functions to officers, committees or agents. A corporation, like a natural person who may authorize another to do certain acts for and in his behalf, through its board of directors, may legally delegate some of its functions and powers to its officers, committees or agents appointed by it. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation. Luzviminda Visayan vs. NLRC, G.R. No. 69999, April 30, 1991

Under Section 23 of the Corporation Code of the Philippines, authority over corporate funds is exercised by the Board of Directors who, in the absence of an appropriate delegation of authority, are the only ones who can act for and in behalf of the corporation. People's Broadcasting (Bombo Radyo Phils., Inc.) vs. Secretary of the DOLE, et al., G.R. No. 179652, May 8, 2009

The corporate powers of a corporation, including the power to sue and be sued in its corporate name, are exercised by the board of directors. The physical acts of the corporation, like the signing of documents such as verification and certification of non-forum shopping, can only be performed by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. Marylou B. Tolentino vs. Shenton Realty Corp., G.R. No. 162103, June 19, 2009

Exercise of corporate powers It must be borne in mind that Sec. 23, in relation to Sec. 25 of the Corporation Code, clearly enunciates that all corporate powers are exercised, all business conducted, and all properties controlled by the board of directors. A corporation has a Copyright 2015

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separate and distinct personality from its directors and officers and can only exercise its corporate powers through the board of directors. Thus, it is clear that an individual corporate officer cannot solely exercise any corporate power pertaining to the corporation without authority from the board of directors. This has been our constant holding in cases instituted by a corporation. Cagayan Valley Drug Corp. vs. Commissioner of Internal Revenue, G.R. No. 151413, February 13, 2008

Indubitably, a corporation may act only through its board of directors or, when authorized either by its bylaws or by its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of law. Thus, this Court has held that "'a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the 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.' " 05plpecda

San Juan Structural and Steel Fabricators vs. Court of Appeals, G.R. No. 129459, September 29, 1998

Since a corporation, such as the private respondent, can act only through its officers and agents, "all acts within the powers of said corporation may be performed by agents of its selection; and, except so far as limitations or restrictions may be imposed by special charter, by-law, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents when once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons." Moreover, ". . . a corporate officer or agent may represent and bind the corporation in transactions with third persons 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, Copyright 2015

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and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred." Yao Ka Sin Trading vs. Court of Appeals, G.R. No. 53820, June 15, 1992 Sps. Constante & Azucena Firme vs. Bukal Enterprises and Dev't. Corp., G.R. No. 146608, October 23, 2003 Inter-Asia Investments Industries, Inc. vs. Court of Appeals, G.R. No. 125778, June 10, 2003 Rebecca Boyer-Roxas vs. Court of Appeals, G.R. No. 100866, July 14, 1992

Business judgment rule This is in accord with the "business judgment rule" whereby the SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith. The said rule precludes the reversal of the decision of the PSE to deny PALI's listing application, absent a showing of bad faith on the part of the PSE Philippine Stock Exchange, Inc. vs. Court of Appeals, G.R. No. 125469, October 27, 1997

Doctrine of apparent authority The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of "apparent authority," with special reference to banks, was laid out in Prudential Bank vs. Court of Appeals, G.R. No. 108957, June 14, 1993, where it was held that: "Conformably, we have declared in countless decisions that the principal is liable for obligations contracted by the agent. The agent's apparent representation yields to the principal's true representation and the contract is considered as entered into between the principal and the third person (citing National Food Authority vs. Intermediate Appellate Court, G.R. No. 75640, April 5, 1990)."A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course of dealing of the officers in their representative capacity but not for acts outside the scope of their authority (9 C.J.S., P. 417). A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom (10 Am Jur 2d, p. 114). Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the Copyright 2015

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course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit (McIntosh v. Dakota Trust Co., 52 ND 752, 204 NW 818, 40 ALR 1021). "Application of these principles is especially necessary because banks have a fiduciary relationship with the public and their stability depends on the confidence of the people in their honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the selection and supervision of its employees, resulting in prejudice to their depositors." First Philippine International Bank vs. Court of Appeals, G.R. No. 115849, January 24, 1996

Doctrine of apparent authority not applicable New Durawood Co. vs. Court of Appeals, G.R. No. 111732, February 20, 1996

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, whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties. 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. People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals, G.R. No. 117847, October 7, 1998 Inter-Asia Investments Industries, Inc. vs. Court of Appeals, G.R. No. 125778, June 10, 2003

Board of trustees to be elected from among the members Grace Christian High School vs. Court of Appeals, G.R. No. 108905, October 23, 1997

A corporation can act only through its board of directors. The law is settled that contracts between a corporation and third persons must be made by or under the authority of its board of directors and not by its stockholders. Copyright 2015

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Hence, the action of the stockholders in such matters is only advisory and not in any wise binding on the corporation. Luzviminda Visayan vs. NLRC, G.R. No. 69999, April 30, 1991 Alberto Barreto vs. La Previsora Filipina, G.R. No. 34719, December 8, 1932

Authority of officers or agents is derived from the board of directors unless conferred by corporate charter. Whatever authority the officers or agents of a corporation may have is derived from the board of directors or other governing body, unless conferred by the charter of the corporation. A corporate officer's power as an agent of the corporation must therefore be sought from the statute, the charter, the by-laws, or in a delegation of authority to such officer, from the acts of the board of directors, formally expressed or implied from a habit or custom of doing business. Ignacio Vicente vs Ambrosio M. Geraldez, G.R. No. L-32473, July 31, 1973

The board of directors of a corporation is a creation of the stockholders. The board of directors, or the majority thereof, controls and directs the affairs of the corporation; but in drawing to itself the power of the corporation, it occupies a position of trusteeship in relation to the minority of the stock. The board shall exercise good faith, care, and diligence in the administration of the affairs of the corporation, and protect not only the interest of the majority but also that of the minority of the stock. Where the 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. The action in such a case is said to be brought derivatively in behalf of the corporation to protect the rights of the minority stockholders thereof. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Derivative Suit It is well settled in this jurisdiction that where corporate directors are guilty of a Copyright 2015

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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. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

A derivative suit must be differentiated from individual and representative or class suits, thus: Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder or member is denied the right of inspection, his suit would be individual because the wrong is done to him personally and not to the other stockholders or the corporation. Where the wrong is done to a group of stockholders, as where preferred stockholders' rights are violated, a class or representative suit will be proper for the protection of all stockholders belonging to the same group. But where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to the individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause of action since the corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that should be paid to each individual stockholder. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees themselves, a stockholder or member may find that he has no redress because the former are vested by law with the right to decide whether or not the corporation should sue, and they will never be willing to sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be an effective remedy of the minority against Copyright 2015

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the abuses of management. Thus, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation as the party in interest. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

The power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are lodged in the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. In the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. 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 its officers, committees or agents. The authority of these individuals to bind the corporation is generally derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business. Violeta Tudtud Banate, et al. vs. Phil. Countryside Rural Bank (Liloan, Cebu), Inc., et al., G.R. No. 163825, July 13, 2010

The authority of a corporate officer or agent in dealing with third persons may be actual or apparent. Actual authority is either express or implied. The extent of an agent's express authority is to be measured by the power delegated to him by the corporation, while the extent of his implied authority is measured by his prior acts which have been ratified or approved, or their benefits accepted by his principal. The doctrine of "apparent authority," on the other hand, with special reference to banks, had long been recognized in this jurisdiction. The existence of apparent authority may be ascertained through: 1)

the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which 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.

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Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances when the power was exercised without any objection from its board or shareholders. Violeta Tudtud Banate, et al. vs. Phil. Countryside Rural Bank (Liloan, Cebu), Inc., et al., G.R. No. 163825, July 13, 2010

Sec. 24 - Election of Directors or Trustees

Distinction between "proxy solicitation" and "proxy validation" . . . the distinction between "proxy solicitation" and "proxy validation" cannot be dismissed offhand. The right of a stockholder to vote by proxy is generally established by the Corporation Code, but it is the SRC which specifically regulates the form and use of proxies, more particularly the procedure of proxy solicitation, primarily through Section 20. GSIS vs. Court of Appeals, et al., G.R. Nos. 183905 & 184275, April 16, 2009

Participation of stockholders in the election of directors or trustees. Under Section 5 (c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to election-related controversies is specifically confined to "controversies in the election or appointment of directors, trustees, officers or managers of corporations, partnerships, or associations". Evidently, the jurisdiction of the regular courts over so-called election contests or controversies under Section 5 (c) does not extend to every potential subject that may be voted on by shareholders, but only to the election of directors or trustees, in which stockholders are authorized to participate under Section 24 of the Corporation Code. GSIS vs. Court of Appeals, et al., G.R. Nos. 183905 & 184275, April 16, 2009

To be eligible as director, legal title to stocks, not beneficial ownership thereto, is material. With the omission of the phrase "in his own right" the election of trustees and other Copyright 2015

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persons who in fact are not the beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized. Hence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation. 05plpecda

Ramon C. Lee Court of Appeals, G.R. No. 93695, February 4, 1992

Sec. 25 - Corporate Officers, Quorum Corporate Officers Officer distinguished from employee Coverage of a corporate officer

Corporate Officers Dily Dany Nacpil vs. International Broadcasting Corp., G.R. No. 144767, March 21, 2002

Before a dismissal or removal could properly fall within the jurisdiction of the SEC, it has to be first established that the person removed or dismissed was a corporate officer. "Corporate officers" in the context of Presidential Decree No. 902-A are those officers of the corporation who are given that character by the Corporation Code or by the corporation's by-laws. There are three specific officers whom a corporation must have under Section 25 of the Corporation Code. These are the president, secretary and the treasurer. The number of officers is not limited to these three. A corporation may have such other officers as may be provided for by its by-laws like, but not limited to, the vice-president, cashier, auditor or general manager. The number of corporate officers is thus limited by law and by the corporation's by-laws. Virgilio R. Garcia vs. Eastern Telecommunications Phil., Inc., et al., G.R. Nos. 173115 & 173163-64, April 16, 2009

Officer distinguished from employee Purificacion G. Tabang vs. NLRC, G.R. No. 121143, January 21, 1997 Copyright 2015

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Coverage of a corporate officer Bienvenido Ongkingco vs. NLRC, G.R. No. 119877, March 31, 1997

A greater number than the majority may be fixed by the articles or by-laws to constitute a quorum. The articles of incorporation or by-laws of the corporation may fix a greater number than the majority of the number of board members to constitute the quorum necessary for the valid transaction of business. Any number less than the number provided in the articles or by-laws therein cannot constitute a quorum and any act therein would not bind the corporation; all that the attending directors could do is to adjourn. 05plpecda

Rosita Peña vs. Court of Appeals, G.R. No. 91478, February 7, 1991

Sec. 29 - Vacancies in the Office of Director or Trustee 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 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. This 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 by the expiration of a member's term, the successor "so elected to fill in a vacancy shall be elected only for the unexpired term of the his predecessor in 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". Copyright 2015

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Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, September 4, 2009

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. Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, September 4, 2009

Sec. 31 - Liability of Directors, Trustees or Officers

Doctrine of corporate opportunity Section 31 lays down the "doctrine of corporate opportunity" and holds personally liable corporate directors found guilty of gross negligence or bad faith in directing the affairs of the corporation, which results in damage or injury to the corporation, its stockholders or members, and other persons. Manuel Luis S. Sanchez vs. Republic of the Phil., G.R. No. 172885, October 9, 2009

The director's wrongdoing must be a patently unlawful act, i.e. an act declared unlawful by law. For a wrongdoing to make a director personally liable for debts of the corporation, the wrongdoing approved or assented to by the director must be a patently unlawful act. Mere failure to comply with the notice requirement of labor laws on company closure or dismissal of employees does not amount to a patently unlawful act. Patently unlawful acts are those declared unlawful by law which imposes penalties for commission of such unlawful acts. There must be a law declaring the act unlawful and penalizing the act. Antonio C. Carag vs. NLRC, et al., G.R. No. 147590, April 2, 2007

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Directors and officers are not liable for errors in judgment. If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable. For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud. Filipinas Port Services, Inc., et al. vs. Victoriano S. Go, et al., G.R. No. 161886, March 16, 200

When corporate officers become personally liable The personal liability of corporate officers validly attaches only when (a) they assent to a patently unlawful act of the corporation; or (b) they are guilty of bad faith or gross negligence in directing its affairs; or (c) they incur conflict of interest, resulting in damages to the corporation, its stockholders or other persons. H.L. Carlos Construction, Inc. vs. Marina Properties Corp., et al., G.R. No. 147614, January 29, 2004

Article 212 (e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation because Section 31 of the Corporation Code is still the governing law on personal liability of officers for the debts of the corporation. Armando David vs. National Federation of Labor Unions, et al., G.R. Nos. 148263 & 148271-72, April 21, 2009 PEA-PTGWO, et al. vs. NLRC, et al., G.R. Nos. 170689 & 170705, March 17, 2009

Solidary liability of directors, officers, and employees The general rule is that obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities. However, solidary liability may be incurred, but only under the following exceptional circumstances: (1) When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote Copyright 2015

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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; (2) 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; (3) When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or (4) When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. Andrea Uy, et al. vs. Arlene Villanueva, et al., G.R. No. 157851, June 29, 2007 Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., G.R. Nos. 168756 & 171476, December 7, 2009

Liability of directors Edsa Shangri-La Hotel and Resort, Inc., et al. vs. BF Corporation, G.R. Nos. 145842 & 145873, June 27, 2008 Cebu Country Club, Inc., et al. vs. Ricardo F. Elizagaque, G.R. No. 160273, January 18, 2008 National Food Authority vs. Court of Appeals, G.R. No. 96453, August 4, 1999 Elena F. Uichico vs. NLRC, G.R. No. 121434, June 2, 1997 REAHS Corp. vs. NLRC, G.R. No. 117473, April 15, 1997 Aurora Land Projects Corp. vs. NLRC, G.R. No. 114733, January 2, 1997 Benjamin A. Santos vs. National Labor Relations Commission, G.R. No. 101699, March 13, 1996 MAM Realty Development Corporation vs. National Labor Relations Commission, G.R. No. 114787, June 2, 1995 Tramat Mercantile, Inc. vs. Court of Appeals, G.R. No. 111008, November 7, 1994 Businessday Information Systems and Services, Inc. vs. NLRC, G.R. No. 103575, April 5, 1993

Section 31 makes a director personally liable for corporate debts if he willfully and knowingly votes for or assents to patently unlawful acts of the corporation. Section 31 also makes a director personally liable if he is guilty of gross negligence or bad faith in directing the affairs of the corporation. The bad faith or wrongdoing of the director Copyright 2015

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must be established clearly and convincingly. Bad faith is never presumed. Seaoil Petroleum Corp. vs. Autocorp Group, et al., G.R. No. 164326, October 17, 2008

A corporation is vested by law with a personality separate and distinct from the people comprising it. Ownership by a single or small group of stockholders of nearly all of the capital stock of the corporation is not by itself a sufficient ground to disregard the separate corporate personality. Thus, obligations incurred by corporate officers, acting as corporate agents, are direct accountabilities of the corporation they represent. Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., G.R. Nos. 168756 & 171476, December 7, 2009

The general rule is that obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities. However, solidary liability may be incurred, but only under the following exceptional circumstances: 1.

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;

2.

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;

3.

When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or

4.

When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. Shrimp Specialists, Inc. vs. Fuji-Triumph Agri-Industrial Corp., G.R. Nos. 168756 & 171476, December 7, 2009

To hold a director or officer personally liable for corporate obligations, two requisites must concur: (1) complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. Irene Martel Francisco vs. Numeriano Mallen, Jr., G.R. No. 173169, September 22, Copyright 2015

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2010

Sec. 32 - Dealings of Directors, Trustees or Officers with the Corporation Ana Maria A. Koruga vs. Teodoro O. Arcenas, G.R. Nos. 168332 and 169053, June 19, 2009

Self-dealing director Prime White Cement Corporation vs. Intermediate Appellate Court, G.R. No. 68555, March 19, 1993

Sec. 33 - Contracts Between Corporations with Interlocking Directors The mere interlocking of directors and officers does not warrant piercing the separate corporate personalities of the two corporations. Not only must there be a showing that there was majority or complete control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked, so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own. "G" Holdings, Inc. vs. NAMAWU, et al., G.R. No. 160236, October 16, 2009

Sec. 34 - Disloyalty of a Director Ana Maria A. Koruga vs. Teodoro O. Arcenas, G.R. Nos. 168332 and 169053, June 19, 2009

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to further their interests. 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. This doctrine rests fundamentally of the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. John Gokongwei, Jr. vs. Securities and Exchange Commission, G.R. No. L-45911, April 11, 1979

Corporation Code cured the lapse under Corporation Law involving directors' disloyalty to corporation. True, at that time, the Corporation Law did not prohibit a director or any other person occupying a fiduciary position in the corporate hierarchy from engaging in a venture which competed with that of the corporation. But as a lawyer, private respondent should have known that while some acts may appear to be permitted through sheer lack of statutory prohibition, these acts are nevertheless circumscribed upon ethical and moral considerations. And had he turned to American jurisprudence which then, as now, wielded a persuasive influence on our law on corporations, he would have known that it was unfair for him or for Porter, acting as fiduciary, to take advantage of an opportunity when the interest of the corporation justly calls for protection. Parenthetically, this lapse in the old Corporation Law is now cured by sections 31 and 34 of the Corporation Code. Erlinda L. Ponce vs. Valentino L. Legaspi and Court of Appeals, G.R. No. 79184, May 6, 1992

In case of conflict of interests, a director cannot sacrifice the corporation to his own advantage. A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." Prime White Cement Corp. vs. Intermediate Appellate Court, G.R. No. 68555, March Copyright 2015

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19, 1993

Sec. 35 - Executive Committee Under 35 of the Corporation Code of the Philippines, authority over corporate funds is exercised by the Board of Directors who, in the absence of an appropriate delegation of authority, are the only ones who can act for and in behalf of the corporation. People's Broadcasting (Bombo Radyo Phils., Inc.) vs. Secretary of the DOLE, et al., G.R. No. 179652, May 8, 2009

Sec. 36 - Corporate Powers and Capacity

Sec. 36 (1) - Derivative suits A derivative action is a suit by a shareholder to enforce a corporate cause of action. Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit on behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party. Hi-Yield Realty, Inc. vs. Court of Appeals, et al., G.R. No. 168863, June 23, 2009

Requisites of a derivative suit The following are the requisites before a derivative suit can be filed by a stockholder: a) the party bringing suit should be a shareholder as of the time of the Copyright 2015

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act or transaction complained of, the number of his shares not being material; b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. Filipinas Port Services, Inc., et al. vs. Victoriano S. Go, et al., G.R. No. 161886, March 16, 2007

Derivative suit distinguished from individual and representative or class suits. A derivative suit must be differentiated from individual and representative or class suits, thus: suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or other persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder or member is denied the right of inspection, his suit would be individual because the wrong is done to him personally and not to the other stockholders or the corporation. Where the wrong is done to a group of stockholders, as where preferred stockholders' rights are violated, a class or representative suit will be proper for the protection of all stockholders belonging to the same group. But where the acts complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to the individual stockholder or member. Although in most every case of wrong to the corporation, each stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an individual cause of action since the corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of suits as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages that should be paid to each individual stockholder. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Basis of stockholder's right to institute a derivative suit. A stockholder's right to institute a derivative suit is not based on any express Copyright 2015

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provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. In effect, the suit is an action for specific performance of an obligation, owed by the corporation to the stockholders, to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to adopt suitable measures for its protection. The basis of a stockholder's suit is always one of equity. However, it cannot prosper without first complying with the legal requisites for its institution. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Requirements for filing a derivative suit. Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (IRPICC) lays down the following requirements which a stockholder must comply with in filing a derivative suit: "A stockholder or member may bring an action in the name of a corporation or association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; (2) he exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is not a nuisance or harassment suit. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Sec. 36 (7) - A corporation may sell or convey its real properties. The property of a corporation, however, is not the property of the stockholders or members, and as such, may not be sold without express authority from the board of directors. Physical acts, like the offering of the properties of the corporation for sale, or the acceptance of a counter-offer of prospective buyers of such properties and the execution of the deed of sale covering such property, can be performed by the corporation only by officers or agents duly authorized for the purpose by corporate by-laws or by specific acts of the board of directors. Absent such valid delegation/authorization, the rule is that the declarations of an individual director Copyright 2015

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relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties of such director, are not binding on the corporation. Eduardo V. Lintonjua Jr., et al. vs. Eternit Corp., et al., G.R. No. 144805, June 8, 2006

Under these provisions, the power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. A corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or its by-laws. Riosa v. Tabaco La Suerte Corp., G.R. No. 203786, October 23, 2013, citing Spouses Firme v. Bukal Enterprises and Development Corp., 460 Phil. 321 (2003)

Sec. 37 - Power to Extend or Shorten Corporate Term

Extension of Corporate term Alhambra Cigar & Cigarette Manufacturing Co., Inc. vs. Securities & Exchange Commission, G.R. No. L-23606, July 29, 1968

Sec. 38 - Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness

Requirements of Sec. 38 not complied with MSCI-NACUSIP vs. NWPC, G.R. No. 125198, March 3, 1997

To validly increase its authorized capital stock, corporation must issue at least 25% of such stock.

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The corporation must issue at least twenty-five percent (25%) of the newly or contemporaneously authorized capital stock in the course of complying with the requirements of the Corporation Code for increasing its authorized capital stock. Nestle Philippines, Inc. vs. CA and SEC, G.R. No. 86738, November 13, 1991

Sec. 39 - Power to Deny Pre-emptive Right

Pre-emptive right Datu Tagoranao Benito vs. Securities and Exchange Commission, G.R. No. L-56655, July 25, 1983

Sec. 40 - Sale or Other Disposition of Assets

Sale of assets Islamic Directorate of the Phils. vs. Court of Appeals, G.R. No. 117897, May 14, 1997 Chung Ka Bio vs. Intermediate Appellate Court, G.R. No. L-71837, July 26, 1988

While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor's liabilities, unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to transfer all its business, properties and assets without the consent of its creditors and without requiring the assignee to assume the assignor's obligations will defraud the creditors. The assignment will place the assignor's assets beyond the reach of its creditors. Copyright 2015

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Strategic Alliance Development Corp. vs. Radstock Securities Limited, et al., G.R. Nos. 178158 & 180428, December 4, 2009

Sec. 41 - Power to Acquire Own Shares The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. Boman Environmental Development Corporation vs. Court of Appeals, G.R. No. 77860, November 22, 1988

Sec. 42 - Power to Invest Corporate Funds in Another Corporation or Business or for Any Other Purpose Ramon De La Rama vs. Ma-Ao Sugar Central Co., Inc., G.R. Nos. L-17504 and L-17506, February 28, 1969

Sec. 43 - Power to Declare Dividends

Trust fund doctrine It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realized assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., Copyright 2015

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802.) A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary (14 C. J., 198, 620). Philippine Trust Co. vs. Marciano Rivera, G.R. No. 19761, January 29, 1923

Sec. 45 - Ultra Vires Acts of Corporations Ultra vires defined Ultra vires

Ultra vires defined In legal parlance, "ultra vires" act refers to one which is not within the corporate powers conferred by the Corporation Code or articles of incorporation or not necessary or incidental in the exercise of the powers so conferred. Lopez Realty, Inc. vs. Florentina Fontecha, G.R. No. 76801, August 11, 1995

A distinction should be made between corporate acts or contracts which are illegal and those which are merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or public order, or contravene some rules of public policy or public duty, and are, like similar transactions between individuals, void. They cannot serve as basis of a court action, nor acquire validity by performance, ratification, or estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders. 05plpecda

Maria Carla Pirovano vs. The De La Rama Steamship Co., G.R. No. L-5377, December 29, 1954

Ultra vires Copyright 2015

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Apex Investment and Financing Corp. vs. Intermediate Appellate Court, G.R. No. L-69723. October 18, 1988

Sec. 46 - Adoption of By-Laws Failure to file by-laws/ Nature of by-laws Nature of by-laws Effect of non-filing of by-laws

Failure to file by-laws/ Nature of by-laws Loyola Grand Villas Homeowners Assn. vs. Court of Appeals, G.R. No. 117188, August 7, 1997

Nature of by-laws China Banking Corp. vs. Court of Appeals, G.R. No. 117604, March 26, 1997

Effect of non-filing of by-laws Chung Ka Bio vs. Intermediate Appellate Court, G.R. No. L-71837, July 26, 1988

Non-filing of by-laws will not automatically dissolve the corporation. With the adoption of PD 902-A, it is now clear that the failure to file by-laws within the required period is only a ground for suspension or revocation of the certificate of registration of corporations. Non-filing of the by-laws will not result in automatic dissolution of the corporation. Chung Ka Bio vs. Intermediate Appellate Court, G.R. No. L-71837, July 26, 1988

Sec. 47 - Contents of By-Laws

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Contents of by-laws Grace Christian High School vs. Court of Appeals, G.R. No. 108905, October 23, 1997 Rosita Peña vs. Court of Appeals, G.R. No. 91478, February 7, 1991

47(5) John Gokongwei, Jr. vs. Securities and Exchange Commission, G.R. No. L-45911, April 11, 1979

Sec. 57 - Voting Right for Treasury Shares

Voting right for treasury shares San Miguel Corporation vs. Sandiganbayan, G.R. Nos. 104637-38, September 14, 2000

Sec. 59 - Voting Trusts

Effect of voting trust agreement on status of stockholder who is party to its execution. Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust agreement on the status of a stockholder who is a party to its execution — from legal title holder or owner of the shares subject of the voting trust agreement, he becomes the equitable or beneficial owner. Ramon C. Lee vs. Court of Appeals, G.R. No. 93695, February 4, 1992

A voting trust transfers only voting or other rights pertaining to the shares subject of the agreement, or control over the stock. National Investment and Dev't. Corp. vs. Benjamin Aquino, G.R. No. L-34192, June 30, Copyright 2015

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1988

Voting trust agreements, if entered into not to circumvent the law, may confer other rights in addition to voting rights. A voting trust agreement may confer upon a trustee not only the stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust agreement is not entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud." Thus, the traditional concept of a voting trust agreement primarily intended to single out a stockholder's right to vote from his other rights as such and made irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholders shares is effected subject to the specific provision of the voting trust agreement. The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on the other hand. Ramon C. Lee vs. Court of Appeals, G.R. No. 93695, February 4, 1992

Sec. 60 - Subscription Contract Commissioner of Internal Revenue vs. First Express Pawnshop Co., Inc., G.R. Nos. 172045-46, June 16, 2009

Pre-subscription agreement Ong Yong vs. David S. Tiu, G.R. No. 144476, February 1, 2002 David S. Tiu vs. Ong Yong, G.R. No. 144629, February 1, 2002

Subscription contract National Exchange Company, Ltd. vs. Jose S. Ramos, G.R. No. 27850, December 24, 1927

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Sec. 62 - Consideration for Stocks Under the trust fund doctrine, a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its debt. To make out a prima facie case in a suit against stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that the stockholders have not in good faith paid the par value of the stocks of the corporation. Donnina C. Halley vs. Printwell, Inc., G.R. No. 157549, May 30, 2011

Sec. 63 - Certificate of Stock and Transfer of Shares Transfer of shares of stock Certificate of stock Unpaid claim

A corporation cannot create restrictions in stock transfers. The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because: ". . . restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass upon the legality of the transactions by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. . . ." Copyright 2015

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The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his ownership of the stocks. Thus: "whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock in the books of the corporation." The corporation's obligation to register is ministerial. Rural Bank of Salinas, Inc. vs. Court of Appeals, G.R. No. 96674, June 26, 1992 Eric L. Lee vs. Henry J. Trocino, et al., G.R. No. 164648, June 19, 2009

The heirs do not automatically become stockholders upon the death of a shareholder. Upon the death of a shareholder, the heirs do not automatically become stockholders of the corporation and acquire the rights and privileges of the deceased as shareholder of the corporation. The stocks must be distributed first to the heirs in estate proceedings, and the transfer of the stocks must be recorded in the books of the corporation. Section 63 of the Corporation Code provides that no transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. During such interim period, the heirs stand as the equitable owners of the stocks, the executor or administrator duly appointed by the court being vested with the legal title to the stock. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor. Consequently, during such time, it is the administrator or executor who is entitled to exercise the rights of the deceased as stockholder. Joselito Musni Puno vs. Puno Enterprises, Inc., G.R. No. 177066, September 11, 2009

Transfer of shares of stock Armand O. Raquel-Santos, et al. vs. Court of Appeals, et al., G.R. Nos. 174986, 175071 & 181415, July 7, 2009

For a valid transfer of stocks, the requirements are as follows: (a) there must be delivery of the stock certificate; (b) the certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) to be valid against third parties, the transfer must be recorded in the books of the corporation. Vicente C. Ponce vs. Alsons Cement Corporation, G.R. No. 139802, December 10, Copyright 2015

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2002

We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed by law. The requirements are: (a) There must be delivery of the stock certificate: (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) To be valid against third parties, the transfer must be recorded in the books of the corporation. The Rural Bank of Lipa City vs. Honorable Court of Appeals, G.R. No. 124535, September 28, 2001

Simply stated, the transfer of title by means of succession, though effective and valid between the parties involved (i.e., between the decedent's estate and her heirs), does not bind the corporation and third parties. The transfer must be registered in the books of the corporation to make the transferee-heir a stockholder entitled to recognition as such both by the corporation and by third parties. Oscar C. Reyes vs. RTC of Makati, et al., G.R. No. 165744, August 11, 2008

Transfer of shares must be registered in corporate books to affect third persons. The corporation did not keep books and records. Perforce, no transfer was ever recorded, much less effected as to prejudice third parties. The transfer must be registered in the books of the corporation to affect third persons. Concepcion Magsaysay-Labrador vs. CA and Adelaida Rodriguez-Magsaysay, G.R. No. 58168, December 19, 1989

The crossing out of the acknowledgement portion of the deed of assignment attached to the compromise agreement is of no moment precisely because, as advanced by the parties, the notarization of the deed or even its execution is not a requirement for the valid transfer of shares of stocks. Paraiso International Properties, Inc. vs. Court of Appeals, et al., G.R. No. 153420, April 16, 2008

Certificate of stock must be duly indorsed for effective transfer. The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. The Copyright 2015

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petitioner's asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper conduct of business even among friends. To reiterate, indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Enrique Razon vs. IAC and Vicente B. Chuidian, G.R. No. 74306, March 16, 1992

Even if original stockholders had transferred their shares to another group, franchise granted to corporation subsists. A distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and the franchise itself which is owned by the corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction. Since stockholders own the shares of stock, they may dispose of the same as they see fit. They may not, however, transfer or assign the property of a corporation, like its franchise. In other words, even if the original stockholders had transferred their shares to another group of shareholders, the franchise granted to the corporation subsists as long as the corporation, as an entity, continues to exist. The franchise is not thereby invalidated by the transfer of the shares. PLDT vs. NTC, Cellcom, Inc. and ETCI, G.R. No. 88404, October 18, 1990

Certificate of stock defined. A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby, but is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. Alfonso S. Tan vs. SEC, G.R. No. 95696, March 3, 1992

Certificate of stock Nora A. Bitong vs. Court of Appeals, G.R. No. 123553, July 13, 1998 ([CA-G.R. No. 33291]) Copyright 2015

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Unpaid claim China Banking Corp. vs. Court of Appeals, G.R. No. 117604, March 26, 1997 Rural Bank of Salinas, Inc. vs. Court of Appeals, G.R. No. 96674, June 26, 1992

Sec. 67 - Payment of Balance of Subscription The trust fund doctrine is not limited to reaching the stockholder's unpaid subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim. Donnina C. Halley vs. Printwell, Inc., G.R. No. 157549, May 30, 2011

Sec. 74 - Books to be Kept, Stock Transfer Agent Stockholder requesting inspection of corporate records must act in good faith. Defense of improper use or motive Sec. 74 par. 4 – Stock and transfer book Sec. 74(2) Right of inspection under the Corporation Code does not apply in a supplementary capacity to PNB charter Express limitations on stockholders' right of inspection

Stockholder requesting inspection of corporate records must act in good faith. It is now expressly required as a condition for the exercise of the right of inspection Copyright 2015

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granted to a stockholder that the one requesting it must not have been guilty of using improperly any information secured through a prior examination, and that the person asking for such examinations must be "acting in good faith and for a legitimate purpose in making his demand." Ramon A. Gonzales vs. PNB, G.R. No. L-33320, May 30, 1983

Defense of improper use or motive [i]n a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the same. Accordingly, where the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation. However, where no such improper motive or purpose is alleged, and even though so alleged, it is not proved by the corporation, then there is no valid reason to deny the requested inspection. Sy Tiong Shiou, et al. vs. Sy Chim, et al., G.R. Nos. 174168 & 179438, March 30, 2009

Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are able to prove the same. Accordingly, where the corporation denies inspection on the ground of improper motive or purpose, the burden of proof is taken from the shareholder and placed on the corporation. This being the case, it would be improper for the prosecutor, during preliminary investigation, to refuse or fail to address the defense of improper use or motive, given its express statutory recognition. In the past we have declared that if justifying circumstances are claimed as a defense, they should have at least been raised during preliminary investigation; which settles the view that the consideration and determination of justifying circumstances as a defense is a relevant subject of preliminary investigation. Ma. Belen Flordeliza C. Ang-Abaya, et al. vs. Eduardo G. Ang, G.R. No. 178511, December 4, 2008

Sec. 74 par. 4 – Stock and transfer book The stockholder's right of inspection of the corporation's books and records is based upon his ownership of shares in the corporation and the necessity for Copyright 2015

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self-protection. After all, a shareholder has the right to be intelligently informed about corporate affairs. Such right rests upon the stockholder's underlying ownership of the corporation's assets and property. Similarly, only stockholders of record are entitled to receive dividends declared by the corporation, a right inherent in the ownership of the shares. Joselito Musni Puno vs. Puno Enterprises, Inc., G.R. No. 177066, September 11, 2009 Manuel A. Torres, Jr. vs. Court of Appeals, G.R. No. 120138, September 5, 1997

Sec. 74(2) The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical to the interest of the corporation. John Gokongwei, Jr. vs. Securities and Exchange Commission, G.R. No. L-45911, April 11, 1979

Right of inspection under the Corporation Code does not apply in a supplementary capacity to PNB charter. The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code. It is not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank. Ramon A. Gonzales vs. PNB, G.R. No. L-33320, May 30, 1983

Express limitations on stockholders' right of inspection.

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A stockholder may exercise his statutory right of inspection, the only express limitation being that (1) the right of inspection should be exercised at reasonable hours on business days; (2) the person demanding to examine and copy excerpts from the corporation's records and minutes has not improperly used any information secured through any previous examination of the records of such corporation; and (3) the demand is made in good faith or for a legitimate purpose. Rep. of the Phil. (PCGG) vs. Sandiganbayan, et al., G.R. No. 88809, July 10, 1991 Victor Africa vs. PCGG, G.R. No. 83831, January 9, 1992 Ma. Belen Flordeliza C. Ang-Abaya, et al. vs. Eduardo G. Ang, G.R. No. 178511, December 4, 2008

Sec. 75 - Right to Financial Statements The stockholder's right of inspection of the corporation's books and records is based upon his ownership of shares in the corporation and the necessity for self-protection. After all, a shareholder has the right to be intelligently informed about corporate affairs. Such right rests upon the stockholder's underlying ownership of the corporation's assets and property. Similarly, only stockholders of record are entitled to receive dividends declared by the corporation, a right inherent in the ownership of the shares. Joselito Musni Puno vs. Puno Enterprises, Inc., G.R. No. 177066, September 11, 2009

Sec. 76 - Plan of Merger or Consolidation

Definition of merger Cesar Reyes vs. Max Blouse, G.R. No. L-4420, May 19, 1952

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Sec. 79 - Securities and Exchange Commission's and Approval and Effectivity of Merger or Consolidation Associated Bank vs. Court of Appeals, G.R. No. 123793, June 29, 1998

Sec. 80 - Effects of Merger or Consolidation

The Corporation Code does not mandate the absorption of the employees of the non-surviving corporation by the surviving corporation in the case of a merger. The rule is that unless expressly assumed, labor contracts such as employment contracts and collective bargaining agreements are not enforceable against a transferee of an enterprise, labor contracts being in personam, thus binding only between the parties. A labor contract merely creates an action in personam and does not create any real right which should be respected by third parties. This conclusion draws its force from the right of an employer to select his employees and to decide when to engage them as protected under our Constitution, and the same can only be restricted by law through the exercise of the police power. BPI vs. BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank, G.R. No. 164301, August 10, 2010, citing Sundowner Development Corp. vs. Drilon, G.R. No. 82341, December 6, 1989 BPI vs. Carlito Lee, G.R. No. 190144, August 1, 2012

Sec. 80(4) Associated Bank vs. Court of Appeals, G.R. No. 123793, June 29, 1998

Sec. 81 - Instances of Appraisal Right The raison d'etre for the grant of appraisal rights to minority stockholders has been Copyright 2015

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explained thus: . . . [Appraisal right] means that a stockholder who dissented and voted against the proposed corporate action, may choose to get out of the corporation by demanding payment of the fair market value of his shares. When a person invests in the stocks of a corporation, he subjects his investment to all the risks of the business and cannot just pull out such investment should the business not come out as he expected. He will have to wait until the corporation is finally dissolved before he can get back his investment, and even then, only if sufficient assets are left after paying all corporate creditors. His only way out before dissolution is to sell his shares should he find a willing buyer. If there is no buyer, then he has no recourse but to stay with the corporation. However, in certain specified instances, the Code grants the stockholder the right to get out of the corporation even before its dissolution because there has been a major change in his contract of investment with which he does not agree and which the law presumes he did not foresee when he bought his shares. Since the will of two-thirds of the stocks will have to prevail over his objections, the law considers it only fair to allow him to get back his investment and withdraw from the corporation. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Derivative Suit [T]he corporation is the real party in interest in a derivative suit, and the suing stockholder is only a nominal party: An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. It is a condition sine qua non that the corporation be impleaded as a party because not only is the corporation an indispensable party, but it is also the present rule that it must be served with process. The judgment must be made binding upon the corporation in order that the Copyright 2015

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corporation may get the benefit of the suit and may not bring subsequent suit against the same defendants for the same cause of action. In other words, the corporation must be joined as party because it is its cause of action that is being litigated and because judgment must be a res adjudicata against it. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation's behalf is only a nominal party. The corporation should be included as a party in the suit. An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Petitioners' only possible cause of action as minority stockholders against the actions of the Board of Directors is the common law right to file a derivative suit. The legal standing of minority stockholders to bring derivative suits is not a statutory right, there being no provision in the Corporation Code or related statutes authorizing the same, but is instead a product of jurisprudence based on equity. However, a derivative suit cannot prosper without first complying with the legal requisites for its institution. Ching v. Subic Bay Golf and Country Club, Inc., G.R. No. 174353, September 10, 2014

Although the shareholdings of petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is enough that a member or a minority of stockholders file a derivative suit for and in behalf of a corporation. Ching v. Subic Bay Golf and Country Club, Inc., G.R. No. 174353, September 10, 2014

It is a condition sine qua non that the corporation be impleaded as a party because — . . . . Not only is the corporation an indispensable party, but it is also the present rule that it must be served with process. The reason given is that the judgment must be made binding upon the corporation and in order that the corporation may get the benefit of the suit and may not bring a subsequent suit against the same defendants for the same cause of action. In other words the corporations must be joined as party Copyright 2015

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because it is its cause of action that is being litigated and because judgment must be a res ajudicata against it. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

The reasons given for not allowing direct individual suit are: (1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of these are in the corporation itself for the benefit of the stockholders." In other words, to allow shareholders to sue separately would conflict with the separate corporate entity principle; (2). . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case of Evangelista v. Santos, that "the stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done in view of Section 16 of the Corporation Law . . .;" (3) the filing of such suits would conflict with the duty of the management to sue for the protection of all concerned; (4) it would produce wasteful multiplicity of suits; and (5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the damages recoverable by the corporation for the same act. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Sec. 82 - How Right is Exercised The raison d'etre for the grant of appraisal rights to minority stockholders has been explained thus: [Appraisal right] means that a stockholder who dissented and voted against the proposed corporate action, may choose to get out of the corporation by demanding payment of the fair market value of his shares. When a person invests in the stocks of a corporation, he subjects his investment to all the risks of the business and cannot just pull out such investment should the business not come out as he expected. He will have to wait until the corporation is finally dissolved before he can get back his investment, and even then, only if sufficient assets are left after paying all corporate creditors. His only way out before dissolution is to sell his shares should he find a willing buyer. If there is no buyer, then he has no recourse but to stay with the Copyright 2015

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corporation. However, in certain specified instances, the Code grants the stockholder the right to get out of the corporation even before its dissolution because there has been a major change in his contract of investment with which he does not agree and which the law presumes he did not foresee when he bought his shares. Since the will of two-thirds of the stocks will have to prevail over his objections, the law considers it only fair to allow him to get back his investment and withdraw from the corporation. Santiago Cua, Jr., et al. vs. Miguel Ocampo Tan, et al., G.R. Nos. 181455-56 & 182008, December 4, 2009

Sec. 87 - Definition MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code defines a non-stock corporation as "one where no part of its income is distributable as dividends to its members, trustees or officers". A non-stock corporation must have members. Even if we assume that the Government is considered as the sole member of MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. This prevents MIAA from qualifying as a non-stock corporation. Manila International Airport Authority vs. City of Pasay, et al., G.R. No. 163072, April 2, 2009

Sec. 88 - Purposes Section 88 of the Corporation Code provides that non-stock corporations are "organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like chambers". MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate an international and domestic airport for public use. Copyright 2015

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Manila International Airport Authority vs. City of Pasay, et al., G.R. No. 163072, April 2, 2009

Sec. 89 - Right to Vote

Stockholders participate in corporate management through right to vote. It is through the right to vote that the stockholder participates in the management of the corporation. The right to vote, unlike the rights to receive dividends and liquidating distributions, is not a passive thing because management or administration is, under the Corporation Code, vested in the board of directors, with certain reserved powers residing in the stockholders directly. Eduardo M. Cojuangco, Jr. vs. Antonio J. Roxas, G.R. No. 91925, April 16, 1991

Sec. 91 - Termination of Membership Under Section 91 of the Corporation Code, membership in a non-stock corporation "shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws". The By-law provisions are elaborate in explaining the manner and the causes for the termination of membership in Calatagan, through the execution on the lien of the share. The Court is satisfied that the By-Laws, as written, affords due protection to the member by assuring that the member should be notified by the Secretary of the looming execution sale that would terminate membership in the club. In addition, the By-Laws guarantees that after the execution sale, the proceeds of the sale would be returned to the former member after deducting the outstanding obligations. If followed to the letter, the termination of membership under this procedure outlined in the By-Laws would accord with substantial justice Calatagan Golf Club, Inc. vs. Sixto Clemente, Jr., G.R. No. 165443, April 16, 2009 Alfredo Long and Felix Almeria vs. Lydia Basa, G.R. Nos. 134963-64, September 27, 2001 Copyright 2015

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Sec. 96 - Definition and Applicability of Title

Definition San Juan Structural and Steel Fabricators vs. Court of Appeals, G.R. No. 129459, September 29, 1998

Sec. 100 - Agreements by Stockholders

Sec. 100(5) liability for corporate torts Sergio Naguiat vs. NLRC, G.R. No. 116123, March 13, 1997

Sec. 101 - When Board Meeting is Unnecessary or Improperly Held Manuel R. Dulay Enterprises, Inc. vs. Court of Appeals, G.R. No. 91889, August 27, 1993

Sec. 108 - Board of Trustees Section 108 of the Corporation Code determines the membership and number of trustees in an educational corporation. . . . The second paragraph of the provision, although setting the term of the members of the Board of Trustees at five years, contains a proviso expressly subjecting the duration to what is otherwise provided in the articles of incorporation or by-laws of the educational corporation. That contrary Copyright 2015

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provision controls on the term of office. Petronilo J. Barayuga vs. Adventist University of the Phil., G.R. No. 168008, August 17, 2011

Sec. 109 - Classes of Religious Corporations Alfredo Long and Felix Almeria vs. Lydia Basa, G.R. Nos. 134963-64, September 27, 2001

Corporation sole is disqualified to hold lands of public domain except by lease under the 1973 Constitution. The Iglesia ni Cristo is a corporation sole governed by section 109 et sequitur of the Corporation Code. It did not apply for registration as a trustee. Under Section 11 of Article XIV of the 1973 Constitution, it is disqualified as a corporation to hold lands of the public domain except by lease. Republic of the Philippines vs. Iglesia Ni Cristo, G.R. No. L-61145, February 20, 1984

Sec. 113 - Acquisition and Alienation of Property Republic of the Phil. vs. Candido P. Villanueva, G.R. No. L-55289, June 29, 1982 Republic of the Phil. vs. Arsenio M. Gonong, G.R. No. L-56025, November 25, 1982 Republic of the Phil. vs. Court of Appeals, G.R. No. L-59447, December 27, 1982 Republic of the Phil. vs. Iglesia Ni Cristo, G.R. No. L-61145, February 20, 1984 Director of Lands vs. Court of Appeals, G.R. No. L-56613, March 14, 1988 Republic of the Phil. vs. Intermediate Appellate Court, G.R. No. 75042, November 29, 1988

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Sec. 118 - Voluntary Dissolution where no Creditors are Affected

Voluntary dissolution where no creditors are affected Neugene Marketing Inc., vs. Court of Appeals , G.R. No. 112941, February 18, 1999 Teodoro B. Vesagas, vs. Court of Appeals, G.R. No. 142924, December 5, 2001

Sec. 122 - Corporate Liquidation Corporate liquidation Trust fund doctrine Rationale for extending the period of existence of a dissolved corporation Law deemed to allow service of process upon a dissolved corporation. When liabilities of a dissolved corporation deemed assumed by another. There can be no distribution of assets among the stockholders without first paying corporate creditors. Dissolved corporation remains a body corporate for three years.

Corporate liquidation Chung Ka Bio vs. Intermediate Appellate Court, G.R. No. L-71837, July 26, 1988

Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts. Sps. Anthony and Rosita Yu, et al. vs. Sps. Joseph and Nancy Yukayguan, et al., G.R. No. 177549, June 18, 2009

What is provided in Section 122 of the Corporation Code is that the conveyance to the trustees must be made within the three-year period. But it may be found impossible to complete the work of liquidation within the three-year period or to Copyright 2015

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reduce disputed claims to judgment. The trustees to whom the corporate assets have been conveyed pursuant to the authority of Section 122 may sue and be sued as such in all matters connected with the liquidation. Premiere Development Bank vs. Alfredo C. Flores, et al., G.R. No. 175339, December 16, 2008

Last par . of sec. 122 Boman Environmental Development Corporation vs. Court of Appeals, G.R. No. 77860, November 22, 1988 James Reburiano, et al vs. Court of Appeals, G.R. No. 102965, January 21, 1999

A corporation that has a pending action and which cannot be terminated within the three-year period after its dissolution is authorized under Section 78 to convey all its property to trustees to enable it to prosecute and defend suits by or against the corporation beyond the three-year period. Although private respondent did not appoint any trustee, yet the counsel who prosecuted and defended the interest of the corporation in the instant case and who in fact appeared in behalf of the corporation may be considered a trustee of the corporation at least with respect to the matter in litigation only. Carlos Gelano, et al. vs. Court of Appeals, G.R. No. L-39050, February 24, 1981

Trust fund doctrine It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realized assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary (14 C. J., 198, 620). Philippine Trust Co. vs. Marciano Rivera, G.R. No. 19761, January 29, 1923

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The rationale for extending the period of existence of a dissolved corporation is explained in Castle's Administrator v. Acrogen Coal, Co. (145 Ky 591, 140 SW 1034 [1911]) as follows: "This continuance of its legal existence for the purpose of enabling it to close up its business is necessary to enable the corporation to collect the demands due it as well as to allow its creditors to assert the demands against it. If this were not so, then a corporation that became involved in liabilities might escape the payment of its just obligations by merely surrendering its charter, and thus defeat its creditors or greatly hinder and delay them in the collection of their demands. This course of conduct on the part of corporations the law in justice to persons dealing with them does not permit. The person who has a valid claim against a corporation, whether it arises in contract or tort should not be deprived of the right to prosecute an action for the enforcement of his demands by the action of the stockholders of the corporation in agreeing to its dissolution of a corporation does not extinguish obligations or liabilities due by or to it." Crisostomo Rebollido vs. CA and PEPSICO, Inc., G.R. No. 81123, February 28, 1989

Law deemed to allow service of process upon a dissolved corporation. A "defendant corporation is subject to suit and service of process even though dissolved." Nowhere in the Corporation Code is there any special provision on how process shall be served upon a dissolved defendant corporation. The absence of any such provision, however, should not leave petitioners without any remedy, unable to pursue recovery for wrongs committed by the corporation before its dissolution. Since our law recognizes the liability of a dissolved corporation to an aggrieved creditor, it is but logical for the law to allow service of process upon a dissolved corporation. Otherwise, substantive rights would be lost by the mere lack of explicit technical rules. The Rules of Court on service of summons upon a private domestic corporation is also applicable to a corporation which is no longer a going concern. Crisostomo Rebollido vs. CA and PEPSICO, INC., G.R. No. 81123, February 28, 1989

When liabilities of a dissolved corporation deemed assumed by another. By virtue of the assumption of the debts, liabilities and obligations of Pepsi Cola, "any judgment rendered against Pepsi Cola after its dissolution is a 'liability' of PEPSICO, Inc., within the contemplation of the undertaking." Crisostomo Rebollido vs. CA and PEPSICO, INC., G.R. No. 81123, February 28, 1989 Copyright 2015

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There can be no distribution of assets among the stockholders without first paying corporate creditors. The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice of creditors is null and void. "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 . . ." Boman Environmental Development Corp. vs. CA and Nilcar Y. Fajilan, G.R. No. 77860, November 22, 1988 C.H. Steinberg vs. Gregorio Velasco, G.R. No. 30460, March 12, 1929

Dissolved corporation remains a body corporate for three years. Although the cancellation of a corporation's certificate of registration puts an end to its juridical personality, Sec. 122 of the Corporation Code, however provides that a corporation whose corporate existence is terminated in any manner continues to be a body corporate for three years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs. Paramount Insurance Corp. vs. A.C. Ordoñez Corp., et al., G.R. No. 175109, August 6, 2008

Sec. 123 - Definition and Rights of Foreign Corporations

Definition of doing business - Sec. 3(d) RA 7042 Doing business/ transacting business Copyright 2015

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No general rule or governing principle can be laid down as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its own peculiar environmental circumstances. The true tests, however, seem to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. As a general proposition upon which many authorities agree in principle, subject to such modifications as may be necessary in view of the particular issue or of the terms of the statute involved, it is recognized that a foreign corporation is "doing", "transacting", "engaging in", or carrying on "business in the State when, and ordinarily only when, it has entered the State by its agent and is there engaged in carrying on and transacting through them some substantial part of its ordinary or customary business, usually continuous in the sense that it may be distinguished from merely casual, sporadic, or occasional transactions and isolated acts. The term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to or in progressive prosecution of the purpose and subject of its organization. Columbia Pictures, Inc. vs. Court of Appeals, G.R. No. 110318, August 28, 1996

The phrase "give Philippine nationals reciprocal rights" distinguished from "allow Filipino citizens and corporations to do business in its own country or state". Section 123 does not say that it is required that the laws under which foreign corporations are formed "give Philippine nationals reciprocal rights." What it does say is that the laws of the country or state under which a foreign corporation is "formed, organized or existing . . . allow Filipino citizens and corporations to do business in its own country or state," which is not quite the same thing. State Investment House, Inc. vs. Citibank, N.A., G.R. Nos. 79926-27, October 17, 1991

Sec. 128 - Resident Agent; Service of Process

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Proper service of summons to corporations doing business in the Philippines. Even if petitioners can be considered as doing business in the Philippines, the Corporation Code did not repeal the rules requiring proper service of summons to such corporations as provided in Rule 14 of the Rules of Court and Section 128 of the Corporation Code. The Dial Corp. vs. Soriano, G.R. No. 82330, May 31, 1988 H.B. Zachry Company International vs. Court of Appeals, G.R. No. 106989, May 10, 1994 Vinnel-Belvoir Corporation vs. The Court of Appeals and H.B. Zachry Company International, G.R. No. 107124, May 10, 1994

Sec. 133 - Doing Business Without License Subic Bay Metropolitan Authority vs. Universal International Group of Taiwan, G.R. No. 131680, September 14, 2000 The Home Insurance Company vs. Eastern Shipping Lines, G.R. No. L-34382, July 20, 1983

Foreign Corporation Doing Business in the Philippines Construed To be doing or "transacting business in the Philippines" for purposes of Section 133 of the Corporation Code, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in its own name and for its own account. Actual transaction of business within the Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign corporation and thus require the foreign corporation to secure a Philippine business license. If a foreign corporation does not transact such kind of business in the Philippines, even if it exports its products to the Philippines, the Philippines has no jurisdiction to require such foreign corporation to secure a Philippine business license. B. Van Zuiden Bros., Ltd. vs. GTVL Mfg. Industries, Inc., G.R. No. 147905, May 28, 2007 Copyright 2015

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Doctrine of Estoppel The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. And the "doctrine of estoppel to deny corporate existence applies to foreign as well as to domestic corporations;" "one who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity." The principle "will be applied to prevent a person contracting with a foreign corporations from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract (Sherwood v. Alvis, 83 Ala 115, 3 So 307, limited and distinguished in Dudley v. Collier, 87 Ala 431, 6 So 304; Spinney v. Miller 114 Iowa 210, 86 NW 317), where such person has acted as agent for the corporation and has violated his fiduciary obligations as such, and where the statute does not provide that the contract shall be void, but merely fixes a special penalty for violation of the statute. . . ." Merrill Lynch Futures, Inc. vs. Court of Appeals, G.R. No. 97816, July 24, 1992 Converse Rubber Corporation vs. Universal Rubber Products, Inc., G.R. No. L-27906, January 8, 1987

Isolated Transaction Rule. The fact that a foreign corporation is not doing business in the Philippines must be disclosed if it desires to sue in Philippine courts under the "isolated transaction rule." Without this disclosure, the court may choose to deny it the right to sue. Commissioner of Customs vs. K.M.K. Gani, G.R. No. 73722, February 26, 1990

This Court has held in a long line of cases that a foreign corporation not engaged in business in the Philippines may exercise the right to file an action in Philippine courts for an isolated transaction. When the allegations in the complaint have a bearing on the plaintiffs capacity to sue and merely state that the plaintiff is a foreign corporation existing under the laws of the United States, such averment conjures two alternative possibilities: either the corporation is engaged in business in the Philippines, or it is not so engaged. In the first, the corporation must have been duly licensed in order to maintain the suit; in the second, and the transaction sued upon is singular and isolated, no such license is required. In either case, compliance with the requirement of license, or the fact that the suing corporation is exempt therefrom, as the case may be, cannot Copyright 2015

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be inferred from the mere fact that the party suing is a foreign corporation. The qualifying circumstance being an essential part of the plaintiff’s capacity to sue must be affirmatively pleaded. Hence, the ultimate fact that a foreign corporation is not doing business in the Philippines must first be disclosed for it to be allowed to sue in Philippine courts under the isolated transaction rule New York Marine Managers, Inc. vs. Court of Appeals, G.R. No. 111837, October 24, 1995 Lingner & Fisher GMBH vs. Intermediate Appellate Court, G.R. No. L-63557, October 28, 1983 Wang Laboratories, Inc. vs. Rafael T. Mendoza, G.R. No. L-72147, December 1, 1987

Doing business without a license is now penalized. The prohibition against doing business without first securing a license is now given penal sanction which is also applicable to other violations of the Corporation Code under the general provisions of Section 144 of the Code. It is, therefore, not necessary to declare the contract null and void even as against the erring foreign corporation. The penal sanction for the violation and the denial of access to our courts and administrative bodies are sufficient from the viewpoint of legislative policy. The Home Insurance Co. vs. Eastern Shipping Lines and/or Angel Jose Transportation, Inc., G.R. No. L-34382, July 20, 1983

Foreign corporation may sue for trademark infringement although not doing business in the Philippines. A foreign corporation may sue in this jurisdiction for infringement of trademark and unfair competition although it is not doing business in the Philippines because the Philippines was a party to the Convention of the Union of Paris for the Protection of Industrial Property. Converse Rubber Corp. vs. Universal Rubber Products, Inc., L-27906, January 8, 1987

Right of foreign corporation to file action in Philippine courts. A foreign corporation not licensed to do business in the Philippines may not be denied the right to file an action in our courts for an isolated transaction in this country. Copyright 2015

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Commissioner of Customs v. K.M.K Gani, G.R. No. 73760, February 26, 1990

A foreign corporation not licensed to do business in the Philippines is not absolutely incapacitated from filing a suit in local courts. Only when that foreign corporation is "transacting" or "doing business" in the country will a license be necessary before it can institute suits. Aboitiz Shipping Corp. vs. Insurance Co. of North America, G.R. No. 168402, August 6, 2008

Indeed, it is in the best interest of justice that in the enforcement of a foreign arbitral award, we deny availment by the losing party of the rule that bars foreign corporations not licensed to do business in the Philippines from maintaining a suit in our courts. When a party enters into a contract containing a foreign arbitration clause and, as in this case, in fact submits itself to arbitration, it becomes bound by the contract, by the arbitration and by the result of arbitration, conceding thereby the capacity of the other party to enter into the contract, participate in the arbitration and cause the implementation of the result. Tuna Processing, Inc. vs. Philippine Kingford, Inc., G.R. No. 185582, February 29, 2012

Sec. 144 - Violations of the Code In the recent case of Ang-Abaya, et al. v. Ang, et al., the Court had the occasion to enumerate the requisites before the penal provision under Section 144 of the Corporation Code may be applied in a case of violation of a stockholder or member's right to inspect the corporate books/records as provided for under Section 74 of the Corporation Code. The elements of the offense, as laid down in the case, are: First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the corporation's records or minutes; Second. Any officer or agent of the concerned corporation shall refuse to allow the said director, trustee, stockholder or member of the corporation to examine and copy said excerpts; Third. If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed Copyright 2015

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upon the directors or trustees who voted for such refusal; and, Fourth. Where the officer or agent of the corporation sets up the defense that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown or proved. Sy Tiong Shiou, et al. vs. Sy Chim, et al., G.R. Nos. 174168 & 179438, March 30, 2009 Ang-Abaya, et al. v. Ang, et al., G.R. Nos. 180055 & 183005, July 31, 2009

Sec. 145 - Amendment or Repeal Furthermore, Section 145 of the Corporation Code clearly provides that "no right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation." Even if no trustee is appointed or designated during the three-year period of the liquidation of the corporation, the Court has held that the board of directors may be permitted to complete the corporate liquidation by continuing as "trustees" by legal implication. Premiere Development Bank vs. Alfredo C. Flores, et al., G.R. No. 175339, December 16, 2008

Moreover, the rights of a corporation, which is dissolved pending litigation, are accorded protection by law pursuant to Sec. 145 of the Corporation Code, to wit: Section 145. Amendment or repeal. No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof. (Emphasis ours) Dissolution or even the expiration of the three-year liquidation period should not be Copyright 2015

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a bar to a corporation's enforcement of its rights as a corporation. Paramount Insurance Corp. vs. A.C. Ordoñez Corp., et al., G.R. No. 175109, August 6, 2008 Rene Knecht and Knecht Inc. vs. United Cigarette Corporation, G.R. No. 139370, July 4, 2002

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