Corporation Law Notes by Aquino

INTRODUCTION

1.

Defining the area within which the parties are free to allocate risks, control, and profit as they wish;

2.

Prescribing the allocations of these elements in the absence of express agreement.

Basic types of business organizations:

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1.

Sole proprietorship

2.

Partnerships

3.

Joint accounts or Cuentas en Participacion

4.

Business trusts

5.

Joint venture

6.

Cooperative

7.

Syndicate

8.

Corporations

A sole proprietorship has no legal personality separate from its proprietor.

Business name – refers to any name that is different from the true name of an individual which is used or signed in connection with hi/her business on any written or printed receipts including receipts for business taxes, duties and fees and withdrawal or delivery receipts

GENERAL RULE: The Corporation Code is the primary law that should be applied in the regulation of corporations. EXCEPTION: The Corporation Code applies only suppletorily to banks and other financial institutions, and insurance corporations. Section 2. Corporation defined. – A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (Attributes of a corporation) Concession Theory – A corporation is an artificial being invisible, intangible, and existing only in contemplation of law. Franchise – a special privilege conferred by governmental authority, and which does not belong to citizens of the country generally as a matter of common right Types of franchise: 1.

Corporate or general franchise – the franchise to exist as a corporation

2.

Special or secondary franchise – certain rights and privileges conferred upon existing corporations, such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires

Distinctions between partnership and corporation: 1.

Partnership is created by mere agreement while the existence of the corporation commences only from the issuance of a Certificate of Registration of the SEC or in proper cases, passage of special law;

2.

Even two persons may form a partnership while a corporation needs at least five incorporators;

3.

A corporation is more restricted in its powers because of its limited personality while a partnership is subject only to what may be agreed upon by the partners;

4.

There is mutual agency in partnership and each general partner can represent and bind the partnership while stockholders are not agents of the corporation in the absence of express authority;

5.

Corporate shares are freely transferable without the consent of other stockholders (unless there is a stipulation) while interest in the partnership cannot be transferred without the consent of other partners;

6.

The liability of stockholders and members of for corporate obligations is limited to their investment while partners may be liable beyond their investment;

7.

There is no right of succession in partnership as death of a general partner dissolves the partnership.

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The corporate or general franchise is vested in the individuals who comprise the corporation and not in the corporation itself, and cannot be conveyed in the absence of legislative authority to do so.

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The special or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose its property. (J.R.S. Business Corp. v. Imperial Insurance)

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The right to be and to act as a corporation is not a natural or civil right of any person; such right as well as the right to enjoy the immunities and privileges resulting from incorporation constitute a franchise and a corporation, therefore cannot be created except by or under a special authority from the State. (Recreation and Amusement Association of the Phil. v. City of Manila)

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Under the contract theory, incorporation is deemed to involve contracts among the members, between the members and the corporation, and between the members or the corporation and the State.

THE CORPORATION CODE (B.P. Blg. 68) Section 1. Title of the Code. – This Code shall be known as "The Corporation Code of the Philippines." Purpose of Corporate Law:

Perpetual succession – that continuous existence which enables a corporation to manage its affairs, and hold property without the necessity of perpetual conveyances, for purposes of transmitting it 

A corporation continues to exist even if there is a change in those who compose it. Death of a shareholder or

transfer of his shares will not affect the continued existence of the corporation. 

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A corporation has a personality separate and distinct from its members. It has a personality separate and distinct from the persons composing it as well as from that any other entity to which it may be related. (Secosa v. Heirs of Francisco, 433 SCRA 273)

Under the doctrine of piercing the veil of corporate fiction, the corporation’s separate juridical personality may be disregarded when there is an abuse of the corporate form. The corporation will be treated by the courts as a mere aggrupation of persons and the liability will directly attach to them. Instances when corporate personality may be disregarded: 1.

The properties of the corporation are not the properties of its shareholders, members or officers. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from those who compose it. (Stockholders of Guanson & Sons, Inc. v. Register of Deeds) In the same manner, properties of the shareholders, members or officers of the corporation are not properties of the corporation.

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The interest of the shareholder in the corporation is indirect, contingent and inchoate. (PNB v. Aznar) The interest of the shareholder on a particular property becomes actual, direct and existing only upon liquidation of the assets of the corporation and the same property is assigned to the share holder concerned.

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The ownership of corporate properties is in the corporation itself and not in the holders of its share of stocks. (Mobila Products v. Umezawa)

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The obligations of the corporation are not the obligations of its shareholders and members and officers and viceversa.

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2. 3.

When the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime; Where the corporation is a mere alter ego or business conduit of a person; Where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

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Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality. (Wensha Spa Center v. Yung)

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The similarity of business of two corporations does not warrant the disregard of the corporate veil. The mere fact that the businesses of the two entities are interrelated is not a justification for disregarding the separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights. (China Bank v. Dyne-Sem Electronics)

The corporation cannot likewise be made to answer for the personal obligations of the stockholders, members, directors or officers.

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Limited Liability Rule – A stockholder is personally liable for the financial obligations of a corporation to the extent of his unpaid subscription. While stock holders are generally not liable, the stockholders may be liable if they have not or have not fully paid the subscription price.

The overlapping of incorporators and stockholders of two or more corporations will not necessarily justify the piercing of the veil of corporate fiction. Much more has to be proven. (China Bank v. Dyne-Sem Electronics)

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The mere fact that two corporations have the same president is not sufficient to pierce the veil of corporate fiction of the two corporations. (Complex Electronics Employees Association v. NLRC, 310 SCRA 403)

Reasons for the Limited Liability Rule: 1.

2. 3.

Investment in shares is encouraged because the task of evaluating equity investment is greatly simplified considering that the low-probability even of insolvency and the financial condition of other investors can already be ignored; Investment in risky ventures is encouraged; Banks and other financial intermediaries who are considered experts are encouraged to closely monitor corporate debtors more closely.

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The acts of the stockholders do not bind the corporation unless they are properly authorized.

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It is well settled that an individual cannot enter into a contract with himself but a corporation has the same freedom of contracting with its stockholders that it has of contracting with any other person. (Fletcher)

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A non-stock corporation may file an action in the name of its members only if it can prove that the members indeed authorized the corporation to institute the action for and in behalf of such members. The mere fact that the non-stock corporation was organized for the purpose of advancing the interests and welfare of its members does not necessarily mean that the corporation has the authority to represent its members in legal proceedings, including an arbitration proceeding. (Ormoc Sugar Planters Assoc., v. CA)

Variants within the doctrine of piercing the veil of corporate fiction: 1.

2.

3.

The instrumentality doctrine – calls for the application of the test consisting of the three requisites, to wit: a. Control, not mere majority or complete stock 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; b. 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 plaintiff’s legal right; and c. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The alter ego doctrine – it must be shown that there is unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and that if the acts are treated as those of the corporation alone, an inequitable result will follow. The identity doctrine – If the plaintiff can show that there was such a unity of interest and ownership that the independence of the corporations had in effect ceased or had never begun, and adherence to the

fiction of separate identity would serve only to defeat justice and equity by permitting the economic entity to escape liability arising out of an operation of one corporation for the benefit of the whole enterprise. 

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Only the courts (or administrative tribunals like the NLRC) can pierce the veil of corporate fiction. Hence, a sheriff who has a ministerial duty to enforce a final and executor decision cannot “pierce the veil of corporate fiction” by enforcing the decision against stockholders who are not parties to the action. (Cruz v. Dalisay) When the veil of corporate fiction is pierced in proper cases, the corporate character is not necessarily abrogated. It continues for legitimate objectives. (Reynoso IV v. CA)

Group of Companies – refers to corporations that are financially related to one another as parent corporations, subsidiaries and affiliates 

A group of companies has no personality separate and distinct from each of the components corporations.

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Consistent with the Primary Rules of Attribution, notice to the Board of Directors should also be deemed notice to the corporation.

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Knowledge of facts acquired or possessed by an officer or agent of the corporation in the course of his employment, and in relation to matters within the scope of his authority, is notice to the corporation, whether he communicates such knowledge or not since a corporation cannot see, or know, anything except through its officers. (Francisco v. GSIS)

Two test for determining whether a corporation is foreign or domestic: 1.

2.

Aggregate test (Control test) – requires looking into the nationality, domicile, or residence of the individuals who control the corporation; what about the Grandfather Rule? The Grandfather Rule applies if the share of Filipinos in a shareholder corporation is less than 60%. Entity test (place of incorporation test) – looks to the nation where the corporation was incorporated.

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One exceptional situation where the Supreme Court ruled that a corporation has no nationality is the case of Corporation Sole.

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For practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the Articles of Incorporation.

Doctrine of Corporate Responsibility – Under this doctrine, a corporation is directly and primarily liable, not merely vicarious, to the injury incurred to a party with whom the corporation has a special relationship. 

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As a rule, a corporation is not entitled to moral damages because, not being a natural persons, it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to this rule is when the corporation has a reputation that is debased, resulting in its humiliation in the business realms. (MERALCO v. T.E.A.M. Corp) A corporation is a person, in proper cases, within the due process and equal protection clause of the Constitution.

Just like a natural person, it cannot be deprived of its life and property without due process of law. 

While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privileges.

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No criminal action can lie against a corporation under the present rules.

Theory of Special or Limited Capacities – The powers of the corporation are given by law and it cannot exercise powers that are not so given. In fine, the powers of the corporation are only those that are expressly provided for, implied powers, and incidental powers. Section 3. Classes of corporations. – Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. Section 4. Corporations created by special laws or charters. – Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. Corporations going public – a corporation which decides to list its shares in the stock exchange Corporations going private – a corporation which would restrict the shareholders to a certain group 

The issuance of share certificates is not, by itself, proof that the corporation is a stock corporation. The so-called share certificates may nothing more than proof of membership in a non-stock corporation.

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A public corporation is limited to corporation for the government of the State or municipal corporations under Section 3 of the old Corporation Law.

GOCC – any agency organized as a stock or non-stock corporation vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly or where applicable as in the case of stock corporations to the extent of at least 51% of its capital stock Section 5. Corporators and incorporators, stockholders and members. – Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a)