OUTLINE ON PHILIPPINE Atty. CESAR L.

VILLANUEVA CORPORATE LAW1 The Corporation Code The Corporation Code (Batas Pambansa Blg. 68) took effect on 1 May 1980. . Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code) Sec. 2 Corporation defined A corporation is an artificial being created by operation of law,having the rights of succession and the powers attributes and properties, expresslyauthorized by law or incident to its existence. Art. 1775 Association and societies, whose articles are kept secret among the members, andwherein any pone of the members may contract in his own name with third persons, shallhave no juridical personality, and shall be governed by the provisions relating to co-ownershipcorporation is an artificial being created by operation of law. It has a personality separateand distinct from the persons composing it, as well as from any other legal entity to which it may be related. PNB v. Andrada Electric & Engring Co., 381 SCRA 244 (2002). - an artificial being - a person created by law or by state; legal fiction - created by law its existence is dependent upon the onsent or grant of the state EXCEPT corporation by estoppel and de facto corporation Tri-Level Existence of the Corporation
A)

JURIDICAL ENTITY LEVEL, which views the State-corporation relationship - the state cannot destroy a corporation without observing due process of law (b) INTRA-CORPORATE LEVEL, which considers that the corporate setting is at once a contractual relationship on four (4) levels: Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by the Law on Agency Between the corporation and its shareholders or members Between and among the shareholders in a common venture views the relationship between the corporation and third-parties or outsiders, essentially governed by Contract Law and Labor Law. - most imporatant level, highest form of law in this level is contract law. (c) corporation becomes in its operation a business economic unit Theories on the Formation of Corporation: - The proposition that a corp. has an existence separate and distinct from itsmembership has its limitations. (Separate existence is for a particular purpose.)There can be no corp. existence w/o persons to compose it & there can be no association w/o associates. (a) Theory of Concession (aTayag v. Benguet Consolidated, 26 SCRA 242 [1968]). - corporation creature of the state - limited no other privilege may be exercised beyond grant To organize a corporation that could claim a juridical personality of its own andtransact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. cf. Ang Pue& Co. v. Sec. of Commerce and Industry, 5 SCRA 645 (1962) It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act, and the procedure and conditions

provided under the law for the acquisition of such juridical personality must be complied with. Although the statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be construed thegrant of a juridical personality to such an association . . . nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding that such association acquired a separate juridical personality, even when it adopts sets of constitution and by-laws. International Express Travel & Tour Services, Inc. v. Court ofAppeals, 343 SCRA 674 (2000). Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it haverules and practices other than those established by law. (Torres v. Court of Appeals, 278SCRA 793 (1997). Theory of Enterprise Entity - the corporate entity takes its being primarily from the reality of underlying enterprise, formed or in formation; that the states approval of the corporate form sets up a prima facie case that the assets, liabilities and operations of the corporation are those of the enterprise -the enterprise entity theory therefore hinges itself on the fact that tyhere can be no corporate existence without persons to compose it A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. PSE v. Court of Appeals, 281 SCRA 232 (1997). 5. Four Corporate Attributes Based on Section 2: A) A CORPORATION IS AN ARTIFICIAL BEING (Ability to Contract and Transact) - a person created by law or by state; a legal fiction
B)

CREATED BY OPERATION OF LAW (Creature of the Law) - its existence is dependent upon the consent or grant of the state EXCEPT corporation by estoppel and de facto corporation
C)

WITH RIGHT OF SUCCESSION (Strong Juridical Personality) - the corporation exist despite the death of its members as a corporation has a personality separate and distinct from that of its individual stockholders. The separate personality remains even if there has been a change in the members and stockholders of the corporation. D) HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE (Creature of Limited Powers ) Advantages and Disadvantages of Corporate Form: (i) STRONG LEGAL PERSONALITY A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders. Remo, Jr. v. IAC, 172 SCRA 405 (1989). (ii) CENTRALIZED MANAGEMENT As can be gleaned from Sec. 23 of Corporation Code It is the board of directors or trustees which exercises almost all the corporate powers in a corporation. Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). The exercise of the corporate powers of the corporation rest in the Board of Directors save in those instances where the Corporation Code requires stockholders approval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appeals,

(iii) LIMITED LIABILITY TO INVESTORS AND OFFICERS One of the advantages of the corporation is the limitation of an investors liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631 (1998). It is hornbook law that corporate personality is a shield against personal liability of its officersa corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA671 (2001) Obligations incurred by the corporation acting through its directors, officers and employees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (iv) FREE TRANSFERABILITY OF UNITS OF OWNERSHIP FOR INVESTORS - as a general rule, the share of stocks can be transferred without the consent of the other stockholders Authority granted to corporations to regulate the transfer of its stock does notempower the corporation to restrict the right of a stockholder to transfer his shares,but merely authorizes the adoption of regulations as to the formalities andprocedure to be followed in effecting transfer. Thomson v. Court of Appeals, 298SCRA 280 (1998). (V) ADVANTAGES OVER UNREGISTERED ASSOCIATIONS 1. enjoys perpetual succession under its corporate name 2. capacity to take and grant property 3. contract obligations 4. sue and be sued in its corporate name 5. capacity to receive common grants and privileges 6. SH no personal liability beyond the value of their shares (b) Disadvantages: Abuse of corporate management - spawned corporate irresponsibility under the theory that those vested with corporate powers have no personal proprietary stake in the corporate business enterprise and Limited Liability of Investors - the liability of an investor is limited their investments and investors cannot be held accountable for more than what they invested. - abused by business in order to avoid having to provide adequate protection and compensation for victims of the business venture they undertake Cost of maintenance - the formation and incorporation of a corp. entails a lot of difficulties and costs, particularly the requirements made by the law so as to qualify for incorporation. Double taxation - the profits of the corporation which are already subjected to corporate income tax when declared and distributed as dividends to the stockholders are again subjected to further income tax

COMPARED WITH OTHER BUSINESS MEDIA a) Sole Proprietorships

Sole Proprietorship Free from many requirements and regulations in its operation Owner has full control of his business Owner stands to lose more than what he puts into the venture

Corporation Heavily regulated; a lot of requirements imposed for registration and incorporation Control of business is done by the BoD Investors have limited liabilty

(b) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code) Art. 1768 The partnership has a juridical capacity separate and distinct from that of each of the partners, even in case of failure to comply with requirements of Art. 1772 first paragraph. Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any pone of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to coownership

Corporation Separate legal personality Investors limited liability Free transfer of shares Centralized management

Partnership Separate legal personality Liable even up to their personal properties Transfer with consent of partner Every partner is agent

- the most important distinction between the corporation and the partnership is their legal capacities. With the right of succession the corporation has a stronger legal personality, enabling it to continue despite the deatyh, incapacity, withdrawal or insolvency of any of its SHs. Q. How does the contractual management of a corp. compare with the management of a partnership? A. Every partner, in the absence of a stipulation in the articles of partnership, binds the partnership as every partner is an agent of the others (delectus personarum). In a corporation, only the BoD and not the stockholders can bind the corporation. Q. What are the 2 types of partnerships? A. Regular and Joint venture Q. Can a corporation be a partner in a regular partnership? A. No. Because a partner must be a natural person. It is against public policy for corporation to be a partner in a regular partnership. Q. What is the main distinction between a corporation and a partnership? A. A corp. is an intermingling of corporation law and contract law. On the other hand, a partnership is purely a contractual relationship and so every time a partner dies, the contract is actually extinguished. Q. What is Corporation Law all about? A. It is all about jurisprudence actually built around the 4 attributes of a corporation

Q. Can a defective attempt to form a corporation result at least in a partnership? A. Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989); 1. parties who have intended to participate or actually participated in the business affairs of the proposed corporation would be considered as partners under a de facto partnership and would be liable as such in an action for settlement of partnership obligations 2. parties who took no part in the intended corp - not become partners with other - not liable for action for settlement (c) Joint Ventures Joint venture is an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994). Q. What is the difference between a joint venture and a partnership? A. A joint venture is by law a partnership because it follows the same definition as having two or more persons binding themselves together under a common fund with the intention of dividing the profits between themselves. Therefore, every joint venture is a partnership. The distinction between the two is that a joint venture is for a limited purpose only while a partnership involves an arrangement or an ongoing concern. Q. Is it possible for a joint venture not to be a partnership? A. Yes. When the joint venture forms a corporation, it then becomes a joint venture corporation. Q. Does the requirement of registration needed in a partnership also required in a joint venture? A. No. Only in a partnership is registration required (Art. 1772, Civil Code) (d) Cooperatives (Art. 3, R.A. No. 6938) A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles. Cooperatives are established to provide a strong social and economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000). Cooperative Separate Juridical Personality Governed by principles of democratic control where the members have equal voting rightson a one-member-one vote principle BoD manage the affairs of the coop. But it is the GA of full membership that exercises all the rights and performs all of the obligations of the coop Under the supervision of the coop. Development Authority Organized for the purpose of providing goods and services to its members and thus to enable them to attain increased income and saving, etc. Corporation Separate Juridical Personality SH vote their percentage share of the stocks subscribed by them BoD is the repository of all powers EXCEPT for acts where the Corp. Code requires concurrence or ratification of SH Under the Supervision of the SEC Stock Corp. for profit; Non-Stock Corp eleemosynary (charitable, philantrophic) purpose

e) Business Trusts (Article 1442, Civil Code) Q. What is the difference between a business trust and a corporation? A. The relationship in a business trust is essentially a trust relationship. The business trust does not have a personality which is apart from the trustor or the trustee/beneficiary. The concept of a separate juridical personality is absent from a business trust. ENTITLEMENT OF CORPORATION TO THE CONSTITUTIONAL GUARANTESS (a) Entitled to Due Process AND Equal Protection Clause The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are persons within the scope of the guaranty insofar as their property is concerned. Smith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920). (b) Unreasonable Searches and Seizure A corporation is protected by the constitutional guarantee against unreasonable searches and seizures, but its officers have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. Stonehill v. Diokno, 20 SCRA 383 (1967). A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. Q: Why is a corporation entitled to the rights of due process and equal protection? CLV: A corporation enjoys constitutional rights. In that manner, it enjoys the same protection the law grants to an individual. A corporation is entitled to due process and equal protection by virtue of the juridical personality given by the State through the primary franchise of the corporation. The constitution did not distinguish whether the term person in Sec. 1 Art. III of the Constitution refers to an individual or a juridical entity, which therefore extends to private corporations within the scope of the guaranty. Q: Why is the corporation entitled to the protection against unreasonable searches and seizures? A: The corporation being entitled to due process and equal protection is the consequence of the States grant of a primary franchise to a corporation. It emanates from the Theory of Concession, whereby the government recognizes not only the separate juridical personality of the corporation but also grants unto it all the rights and protections that a natural individual would possess which includes the right to due process and equal protection. However, a corporation is also entitled to protection against unreasonable searches and seizures. This right however does not emanate from the grant of the State by way of primary franchise but is sourced through the Theory of Enterprise Entity which recognizes that regardless of Section 2 of the Corporation Code, a corporation is still for all intents and purposes an association of individuals under an assumed name and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities for such body. (1) Its properties cannot be taken without just compensation (2) it can only be proceeded against by due process of law (3) it is protected against unlawful discrimination. (c) But Not Entitled to Privilege Against Self incrimination It is elementary that the right against self-incrimination has no application to juridical persons. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privilege. Bataan Shipyard & Engineering v. PCGG, 150 SCRA 181 (1987).

Q: Why is a corporation entitled to equal protection but not the right against selfincrimination? A: Any individual is entitled to equal protection whether they be juridical or natural. The corporation being in the same class should be treated equally. However, the right to self-incrimation is not extended to corporation because: 1. The right is meant to prevent individuals from having to lie under oath in order to protect his interest. It is to protect the individual from having to commit perjury just to keep himself from going to jail. However, if a corporation lies under oath, who would you bring to jail when in fact, a corporation is just a legal fiction. 2. The corporation is subject to the reportorial requirements of the law. The corporation being a mere creature of the State is subject to the whims of its Creator. The corporation powers are limited by law. 3. Practice of Profession Corporations cannot engage in the practice of a profession since they lack the moral and technical competence required by the PRC. A corporation engaged in the selling of eyeglasses and which hires optometrists is not engaged in the practice of optometry. Samahan ng Optometrists v. Acebedo International Corp., 270 SCRA 298 (1997); 4. Liability for Torts A corporation is civilly liable in the same manner as natural persons for torts, because the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. PNB v. Court of Appeals, 83 SCRA 237 (1978). NOTE: CLV tells us that it is clear from the ruling of the Court in this case that not every tortuous act committed by an officer can be ascribed to the corporation as its liability, for it is reasonable to presume that in the granting of authority by the corporation to its agent, such a grant did not include a direction to commit tortuous acts against third parties. Only when the corporation has expressly directed the commission of such tortuous act, would the damages resulting therefrom be ascribable to the corporation. And such a direction by the corporation, is manifested either by its board adopting a resolution to such effect, as in this case, or having taken advantage of such a tortuous act the corporation, through its board, expressly or impliedly ratifies such an act or is estopped from impugning such an act. Our jurisprudence is wanting as to the definite scope of corporate tort. Essentially, tort consists in the violation of a right given or the omission of a duty imposed by law; a breach of a legal duty. The failure of the corporate employer to comply with the law-imposed duty under the Labor Code to grant separation pay to employees in case of cessation of operations constitutes tort and its stockholder who was actively engaged in the management or operation of the business should be held personally liable. Sergio F. Naguiat v. NLRC, 269 SCRA 564 (1997). Q: When is a corporation liable for tort? A: A corporation is liable for tort when: (a) the act is committed by an officer or agent (2) under express direction of authority from the stockholders or members acting as a body or through the Board of Directors. Q: How can authority given to the agent of the corporation be determined? A: Either by: (a) such direction by the corporation is manifested, by its board adopting a resolution to such effect (b) by having takien advantage of such a tortious act, the corporation through its board, has expressly or impliedly ratified such an act or estopped from impugning the same. Q: What is a derivative suit? A: Since, the act of the board is essentially that of the corporation and therefore corporate assets cannot escape enforcement of the award of damage to the tort victim. As a remedy, the stockholders may institute a derivative suit against the responsible board members and officers for the damages suffered by the corporation as a result of the tort suit.

5. Corporate Criminal Liability But since a corporation is a legal fiction that cannot be handcuffed and brought to court, the case of Tan Boon Kong provided that since a corporation acts through its officers and agents, any violation of law by any of the actors of the corporation in the conduct of its business involves a violation of law, the correct rule is that all who participate in it are liable. In making actors liable, the court here said attaching criminal liability to the fiction cannot be done since: (1) a corporation is only an artificial person (2) there is a lack of intent imputable to a being since it lacks its own mind. To apply the doctrine of separate juridical personality would allow criminals to use the corporation as a shield or cloak to hide their criminal activities behind such. However, the liability of officers were delineated in case of Sia where the court held that the responsible officer is personally liable is personally liable for crimes committed by the corporation only in a situation where the corporation was directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally. NOTE: While the law only defines individuals as offenders of criminal acts or as criminal actors, the law is currently undergoing changes such that juridical persons are also defined as offenders of criminal acts, as with the case of the Anti-Money Laundering Act. Art. 102 of the RPC: Art. 103 of the RPC: Q: Why can the corporation be held liable for tortuous acts done by its agent but not for criminal acts done outside its authority? A: Crime is not within the corporate contemplation while negligence is. Negligence could be part of every transaction. It is an integral part of corporate transactions. For as long as people comprise the corporation, it is within the contemplation of every corporate act. 6. Recovery of Moral and Other Damages A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral damages. Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968); APT v. Court of Appeals, 300 SCRA 579 (1998). CORPORATE NATIONALITY: UNDER WHOSE LAWS INCORPORATED (Sec. 123) Section 123: Definition and rights of foreign corporations For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. There are three tests to determine the nationality of the corporation, namely: 1.) Place of incorporation that a corporation is of the nationality of the country under whose laws it has been organized and registered, embodied in Sec. 123 of the Corporation Code. 2.) Control test nationality determined by the nationality of the majority stockholders, wherein control is vested. Situation #1: 51% Filipino 49% Japanese Under the control test, the nationality cannot be determined because for a group of stockholders to exercise control over a corporation it is required by the Corporation Code that they at least control 60% of the corporation. Why 60%? Because under the Corporation Code for a group of persons to incorporate a corporation, at least 5 persons are required by law. A majority of the 5 is 3 and converting it into percent, one gets 60%.

3.) Principal place of business applied to determine whether a State has jurisdiction over the existence and legal character of a corporation, its capacity or powers, internal organizations, capital structure, rights and liabilities of directors. Q: Do all three tests apply in the Philippines? A: Yes. The first test is considered the primary test, the second one is used to determine whether a corporation can engage in nationalized activities in the country, and the third one is used to determine the jurisdiction of the State to enforce for instance taxation laws. Q: What is the importance of determining the nationality of the corporation? A: It is necessary so as to determine whether or not a corporation can enter into various transactions or engage in different industries. And also, the legal fiction supporting a corporation is valid only within Philippine territory. Q: What is the implication of having a primary test and a secondary test? A: Simply put, if a corporation does not pass the first test, which the place of incorporation test, automatically it is deemed to be a foreign corporation. However, having passed the first test, the nationality of the corporation may have been established but this does not mean that the corporation is entitled to enter every single economic sector of the Philippines. The control test determines now whether the corporation fulfills the equity requirements of the Constitution. In doing this, the other tests are made such as: war-time test, investment test and grandfather rule. EXCEPTIONS : TEST OF CONTROLLING OWNERSHIP also applies in: (a) Exploitation of Natural Resources Sec. 2 Art. XII All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna and other natural resources are owned by the State. With the exception of agricultural lands, all other national resources shall under the full control and supervision of the State. The State may directly undertake such activities or it may enter into coproduction, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty percentum of whose capital is owned by such citizens. - it does not contain the place of incorporation test, therefore a foreign corporation even thoughcontrolled by Filipino citizens would not be qualified (b) Public Utilities Sec. 11 Art. XII No franchise, certificate or any other form of authorization for the operation of public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. The primary franchise, that is, the right to exist as such, is vested in the individuals who compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative authority so to do. The special or secondary franchises are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use. J.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964).

The Constitution requires a franchise for the operation of a public utility; however, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. There is a clear distinction between operation of a public utility and the ownership of the facilities and equipment used to serve the public. Tatad v.Garcia, Jr., 243 SCRA 436 (1995). (c) Mass Media Sec. 11(1) Art. XVI The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens. Mass media includes the gathering, transmission of news, information, messages, signals and forms of written, oral and all visual communication and shall embrace the print medium, radio, television, films, movies, advertising in all its phases and their business managerial. It does not include commercial telecommunications because such is a public utility. The Constitutional requirements are much stricter for it requires that socks are 100% Filipino owned and managed. (d) Advertising Business Sec. 11(2) Art. XVI The advertising industry is impressed with public interest and shall be regulated by law for the protection of consumers and promotion of the general welfare. Only Filipino citizens or corporations or associations at least seventy percentum of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry. (e) War-Time In Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc. , the Court held that in times of war, the nationality of a private corporation is determined by the character or citizenship of its controlling stockholders The court considered the juridical entity as an enemy based on the fact that the majority of the stockholders of the respondent corporation were German subjects. It ruled that the control test was applicable only in war-time. It refused the sole application of the place of incorporation test during the wartime to determine the nationality of an enemy corporation. (f) Investment Test as to Philippine Nationals (Sec. 3(a) & (b), R.A. 7042, Foreign Investments Act of 1991) Under Sec. 3a of the FIA of 1991, the term Philippine national as it refers to a corporate entity shall mean a corporation organized under the laws of the Philippines of which at least 60% percent of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines. Q: Given these facts: ABC Company is comprised of 60% Filipino and 20% Foreign investors with respect to voting stocks and 40% Foreign investors with respect to non-voting stocks, under the FIA, is it a Philippine national? A: Yes, since FIA limits its scope to voting stocks. Q: Given these facts: ABC Company with 20 voting stocks is comprised of 80% Filipino (16) and 20% Foreign (4), is it a Philippine national? Can it therefore own land under the Constitution? A: Yes, under FIA, it is a Philippine national but it cannot own land. As to the aspects that FIA runs contrary to the Constitution, which is the supreme law of the land, the former shall not apply. -

(g) Grandfather Rule Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Example: partnership between ABC and X companies. ABC owns 60% with 40% foreign and 60% Filipinoowned shares while X companie own 40% with 100% Filipino-owned shares. Under the SEC DOJ Rule, such partnership is Filipino-owned. Moreover, under this rule once the 60% requirement is reached, there is no more need fortierring. GRANDFATHER RULE a method by which the percentage of Filipino equity in corporations engaged in nationalized or partly nationalized areas of activity provided for under the Constitution and other national laws is accurately computed, in cases where corporate shareholders are part of the ownership structure by considering the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder. Q: When is the GFR applied? A: The GFR is applied in cases where the corporation has corporate stockholders with alien stockholdings, otherwise, if the rule is not applied, the presence of such corporate stockholders could diminish the effective control of Filipinos. SITUATION #1 Silahis International Hotel, the capital stock of which is 69% owned by another corporation Hotel Properties Inc. and 31% owned by Filipinos. Hotel Properties in turn is 53% alien-owned and 47% Filipino-owned. The SEC through the GFR stated that Silahis International Hotel can engage in partly nationalized business because the Filipino equity in said corporation is 63.43% while the foreign equity in said corporation is 36.57%. SILAHIS INTERNATIONAL HOTEL Hotel Properties Inc. 69% 1.) 53% Foreign 47% Filipino Filipino stockholdings 31% 47/100 (Hotel Properties) x 69 = 32.43 + 31 (remaining Filipino stockholdings in Silahis) TOTAL: 63.43% SITUATION #2 Whether or not there may be an investment made by Pinoy Inc. in Mass Media which requires 100% Filipino ownership. Pinoy Inc. is 40% owned by Pedro, a Filipino, while 60% is owned by ABC, Inc. ABC on the other hand, is a corporation registered in the Philippines 60% of which is owned by Maria, a Filipino, while 40% is owned by George, a German. Q: Can Pinoy, Inc. enter into the operation of a television station? A: In this situation, is the GFR is applied straight; Pinoy, Inc. would be disqualified since 24% of Pinoy is owned by George. But under the present investment regime of the Philippines, the FIA provides that corporations which are 60% owned by Filipino citizens shall be considered of Philippine nationality. It is defined under said law that for the purposes of investment such a corporation of 60% Filipino and 40% foreign equity is allowed to invest in a corporation engaged in a nationalized sector.\ Q: When should the GFR be applied? A: It should be applied when two requisites are met: (1) when there is involved a nationalized or partly nationalized sector of Philippine economy and (2) when there is tierring, meaning the corporation is partly-owned by another corporation. Up to what level do you apply the grandfather rule? - does not go beyond the level of what is reasonable (Palting case)

SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION MAIN DOCTRINE: A CORPORATION HAS A PERSONALITY SEPARATE AND DISTINCT FROM ITS STOCKHOLDERS OR MEMBERS 1. Sources: Sec. 2; Sec. 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. A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related. This separate and distinct personality is, however, merely a fiction created by law for conveyance and to promote the ends of justice. LBP v. Court of Appeals, Being Corporate Officer: Being an officer or stockholder of a corporation does not by itself make one's property also of the corporation, and vice-versa, for they are separate entities, and that shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991). Dealings Between Corporation and Stockholders: The fact that the majority stockholder had used his own money to pay part of the loan of the corporation cannot be used as the basis to pierce. It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are secured. LBP v. Court of Appeals, 364 SCRA 375 Obligations and Debts: Corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. Traders Royal Bank v. Court of Appeals, 177 SCRA 789 (1989). A corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 Stockholders have no personality to intervene in a collection case covering the loans of the corporation since the interest of shareholders in corporate property is purely inchoate. Saw v. CA, 195 SCRA 740 PIERCING THE VEIL OF CORPORATE FICTION: 1. Source of Incantation: The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. DBP v. Court of Appeals, 2. Nature of Doctrine The nature of the piercing doctrine is to disregard the separate juridical personality of a corporation and to hold the actors or the stockholders of the corporation liable for a wrong committed or a liability avoided. In our lessons in corporation law, we distinguish the cause of the piercing because it would explain of piercing is properly done. The Supreme Court does not go into an explanation or direct attribution as to cause of the piercing which at times cause confusion, so to clarify matters we classify the piercing case into three namely: (1) fraud (2) alter ego and (3) remedy.

In fraud cases, the SC looks into the circumstances of the case searching for elements of malice or evil motive. An absence of such an evil motive, the courts will not allow piercing In alter ego cases, the allegation does not go into fraud or malicious intent but a disrespect for the corporate fiction. Here, the corporation is being used as a conduit or front for the activities of a person, whether natural or juridical, in order to avoid liability or gain advantage over another without really employing fraud. Here, if piercing is allowed then the corporate existence of the conduit corporation is disregarded and the person or corporation behind the corporation shall be considered as one and the liability of one is the liability of the other. The main intent here is not to make the board of directors of the conduit corporation liable but to make the corporation behind the existence of the conduit liable. Equity subdivision is the catch-all subdivision. If not fraud or alter ego, the court may grant piercing as an equitable remedy, but such is usually resorted to as a reason in consonance with fraud or alter ego cases. As such it is of purely judicial discretion. Remedy of Last Resort: Piercing the corporate veil is remedy of last resort and is not available when other remedies are still available. Umali v. Court of Appeals, 189 SCRA 529 (1990). Q: Why are we studying Umali? A: The allegations made by Umali were based on fraud and yet the main objective of the suit was to annul the foreclosure of the mortgage. The Court found no reason to pierce since the main objective was not in consonance with the remedy of piercing in a fraud case would do, which was to hold the Board of Directors liable. Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniary liable for corporate debts. Purpose of Piercing: Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts (?). Umali v. CA, 189 SCRA 529 (1990); Piercing is not available when personal obligations of an individual are to be enforced against the corporation (Robledo v. NLRC, 238 SCRA 52 (1994). Basis Must Be Clear Evidence: To disregard the separate juridical personality of a corporation, it is elementary that the wrongdoing cannot be presumed and must be clearly and convincingly established. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. Luxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999). The party seeking for the piercing of the corporate veil has the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. PNB v. Andrada Electric & Engineering Co. , 381 SCRA 244 (2002). The piercing doctrine is an equitable remedy available only to persons outside the corporation. It cannot be availed of stockholders within the corporation forming part of the corporation. In comparison, CLV uses the Story of the Wall. This wall is the main doctrine, designed both to protect the stockholders by virtue of the attribute of limited liability and to hide from prying eyes the inner workings of the corporation. Stockholders are inside these walls. Piercing the veil of corporate fiction is like a battering ram that creates a hole through this wall to allow third persons to look into the corporation to see if there is a wrong committed inside those walls. A stockholder being inside the fort are afforded other remedies, they have intra-corporate remedies to avail of. Consequences and Types of Piercing Cases: (Umali v. CA, 189 SCRA 529 [1990]) (a) Application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance, or the particular obligation for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco,

(b) Classification of Piercing Cases: (i) Fraud Piercing: When corporate entity used to commit fraud or do a wrong (ii) Alter-ego Piercing: When corporate entity merely a farce since the corporation is merely the alter ego, business conduit, or instrumentality of a person or another entity (iii) Equity Cases: When piercing the corporate fiction is necessary to achieve justice or equity. Fraud Cases: When the legal fiction of the separate corporate personality is abused, such as when the same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. Francisco v. Mejia, 362 SCRA 738 (2001). The most restricted one since it is required that the allegations of fraud must clearly proven

a) Acts by Controlling Shareholder: CLV: As a general rule, an agent acting within the scope of his authority cannot be held liable for acts done in behalf of the principal. However, when a wrong done by a corporation is through a person in its behalf, piercing makes both of them liable. In fact, an agents who commits a crime or fraud can be held liable despite the agency relation. Where the corporation is used as a means to appropriate a property by fraud which property was later resold to the controlling stockholders, then piercing should be allowed. Heirs of Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000). (b) Avoidance of Taxes: The plea to pierce the veil of corporate fiction on the allegation that the corporations true purpose is to avoid payment by the incorporating spouses of the estate taxes on the properties transferred to the corporations: With regard to their claim that Ellice and Margo were meant to be used as mere tools for the avoidance of estate taxes, suffice it to say that the legal right of a taxpayer to reduce the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. Gala v. Ellice Agro-Industrial Corp., 418 SCRA 431 (2003). (c) Avoidance of Contractual or Civil Liabilities: One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co., (e) Avoiding Legal Restrictions: The corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forumshopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. First Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996). (d) Parent-Subsidiary Relations; Affiliates: Q: Why is there an inordinate showing of the alter ego elements? A: In cases of parent-subsidiary relations, it is necessary that the factual circumstances be considered in order to distinguish between a case of fraud or alter ego. There may be an inordinate showing of alter ego elements but that does not necessarily make it an alter ego case. Therefore, alter ego in fraud cases must be distinguished from pure alter ego. In fraud cases, the alter ego concept pertains to employing the corporation even for a single transaction to do evil while in pure alter ego cases, the courts go into systematic findings of utter disregard and disrespect of the separate juridical personality of the corporation. (e) Guiding Principles in Fraud Cases: Why is there inordinate showing of alter-ego elements? 3 There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation by itself would not authorize piercing; and The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders.

Alter-Ego Cases: (a) Factual Basis: The question of whether a corporation is a mere alter ego is a purely one of fact, and the burden is on the party who alleges it. PNB v. Andrada Electric & Engineering Co., (b) Using Corporation as Conduit or Alter Ego: Where the capital stock is owned by one person and it functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same. Arnold v. Willets and Patterson, When corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded. Tan Boon Bee & Co. v. Jarencio, (c) Mixing-up Operations; Disrespect to the Corporate Entity: Employment of same workers; single place of business, etc., may indicate alter ego situation. La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 Where 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. Sibagat Timber Corp. v. Garcia, (d) Avoidance of taxes: Q: Can tax avoidance not be considered as a crime thus perpetuated in fraud rather than an alter ego case? A: The Court had in this case ruled as to the legitimacy of am corporation to act as to seek means to decrease its tax liability. The difference between Yutivo and Tan Boon Kong is that in the latter, the court found evidence that Tan Boon Kong acted beyond the scope of his authority. In the former, evidence was seen to be insufficient as to establish a willful desire to evade taxes. (f) Parent-subsidiary; Affiliated Companies: PNB vs Ritratto 1. the parent corp owns all or most of the capital stock of subsidiary 2. The parent and subsidiary corporation have common directors and officers 3. the parent corp finances the subsidiary 4. the parent corp subscribes to all the capital stock of the subsidiary and otherwise causes its incorporation 5. the subsidiary has grossly inadequate capital 6. parent corp pays the salaries and other expenses and losses of the subsidiary 7. the subsidiary has substantially no business except with parent corp or no assets except those conveyed to or by the parent corp 8. in the papers of parent corp or in the statement of officers, the subsidiary is described as a department or division of the parent corp or its business or financial responsibility is referred to as the parent corp own 9. the parent corp uses the property of the subsidiary as its own 10. the formal legal requirements of the subsidiary is not obeserved (h) 4 policy bases for piercing in Alter-Ego Cases: 1. even no intention to do evil, the use of corp as an alter ego is direct vilation of Corporation law of the treating the corp as separate Juridical entity 2. by not respecting the separate juridical personality of the corp, others who deal with the corp are not also expected to be bound by the SJP of the corp 3. piercing in alter ego may prevail even when no monetary claims are sought to be enforced against the SHs or officers of the corp 4. when the underlying business enterprise does not really changed and only the medium by which the business enterprise is changed, there would be occasion to pierce the veil of corporation fiction to allow the business creditor to recover from whoever has actual control of the business enterprise

Doctrine applies even in the absence of evil intent, because of the direct violation of a central corporate law principle of separating ownership from management; . 6. Equity Cases: - the dumping ground: no fraud or alter ego 1. non labor cases 2. labor cases CLASSIFICATIONS OF CORPORATIONS 1. In Relation to the State: a) Public Corporation (Sec. 3, Act No. 1459). - one formed or organized for the government or a portion of the state - its purpose is for general good and welfare b) Quasi-public Corporation. Marilao Water Consumers Associates v. IAC, 201 SCRA 437 (1991); - marriage of both a public and a private corp. - it is granted the same powers as a private corp. but they have no incorporators, SHs or members - example: A water districst, although established as a corporation, it was established for the greater good and with no stockholders. They are also placed under the jurisdiction of the LWUA not the SEC c) Private Corporation (Sec. 3, Act 1459). - one formed for some private purpose, benefit or end. Governments majority shares does not make an entity a public corporation. National Coal Co., v. Collector of Internal Revenue, 46 Phil. 583 (1924). A corporation is created by operation of law under the Corporation Code while a government corporation is normally created by special law referred to often as a charter. Bliss Dev. Corp. Employees Union v. Calleja, 237 SCRA 271 (1994). The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the GSIS. Camparedondo v. NLRC, 312 SCRA 47 (1999) Although Boy Scouts of the Philippines does not receive any monetary or financial subsidy from the Government, and its funds and assets are not considered government in nature and not subject to audit by the COA, the fact that it received a special charter from the government, that its governing board are appointed by the Government, and that its purpose are of public character, for they pertain to the educational, civic and social development of the youth which constitute a very substantial and important part of the nation, it is not a public corporation in the same sense that municipal corporation or local governments are public corporation since its does not govern a portion of the state, but it also does not have proprietary functions in the same sense that the functions or activities of government-owned or controlled corporations, is may still be considered as such, or under the 1987 Administrative Code as an instrumentality of the Government, and it employees are subject to the Civil Service Law. Boy Scouts of the Philippines v. NLRC, The present doctrine in determining whether a GOCC is subject to the Civil Service Law is the manner of its creation, such that government corporations created by special charter are subject the Civil Service Law, while those incorporated under the general corporation law are governed by the Labor Code. PNOC-Energy Development Corp. v. NLRC, 201 SCRA 487

2. As to Place of Incorporation: (a) Domestic Corporation - incorporated in the Philippines (b) Foreign Corporation (Sec. 123)

- Sec. 123 Definition and rights of foreign corporations For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government authority.
- incorporated in another country and that country grants the same rights to Filipinos in terms of doing business there; it shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this code & a certificate of authority from the appropriate government agency ( SEC license after obtaining BOI certificate ) 3. As to Legal Status: (a) De Jure Corporation (b) De Facto Corporation (Sec. 20) Section 20. De facto corporations. - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (c) Corporation by Estoppel (Sec. 21) . Q. Why is there piercing in a de facto corporation? A. Piercing is allowed because the intention of the law is to protect the contracts entered into by the corporation. 4. As to Existence of Shares (Secs. 3 and 5): Sec. 3 Classes of Corporation Corporations formed or organized under this Code may be stock or nonstock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. Sec. 5 Corporations and incorporators, stockholders and members Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a non-stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. 3. De Facto Corporation (Sec. 20) Every corporation is deemed de jure until proven otherwise. De Jure Corporation formed in accordance with law; perfectly incorporated; consequences: separate juridical personality and perfect liability. De Facto Corporation formed also in accordance with law but falls short of the requirements

provided by law. Such is awarded a separate juridical personality, it may thus enter into contracts, it may sue and be sued (note: third parties may sue the corporation, incorporators may sue but the corporation cannot sue). Note also that such has imperfect liability only the actors will be held liable. In proceeding against such, compliance with due process must be had. The doctrine of de facto corporation applies as to the first level relationship (as between the State and corporations) and also to the third level of relationship (as between third persons and corporations). If it primarily concerns the first level, why does it draw its vitality from the third level? Because without such, transactions shall have no effect but with such, despite the defects, the contracts are valid and enforceable. But because of its primary relation to the first level, third persons cannot question the legal personality of such de facto corporation. Only the State through a quo warranto proceeding may do such. Not all corporations which lack elements are de facto corporations. Elements for Existence of De Facto Corporation: 1) Valid law under which it is incorporated: The Corporation Code 2) Attempt in good faith to incorporate colorable compliance: The corporation must have filed its Articles of Incorporation and the SEC duly issued a Certificate of Incorporation. The minimum requirement for this requisite is the issuance of a certificate such that even if you honestly believed that you incorporated (and all the other requisites are present), it is still not a de facto corporation. The above is need to prove reliance in good faith. If any of the above element is absent can the principle be invoked by third persons? No, but they may have a remedy under the principle of corporation by estoppel. Can such be used in all instances? No, when both parties knew that no corporation existed, such may not be invoked. Issuance of certificate of incorporation minimum requirement under this number. 3) Assumption of corporate powers: Minimum requirement: election of the Board of Directors. Q: Why must there be an election of the BoD? A: The basic principle is a de facto corporation is a mutual going about of the transaction in good faith. Since the corporation has a juridical personality, the only way by which it can be said that there was good faith in entering a transaction is that there must be a BoD by which a corporation can act. If there is no BoD there is no good faith on the part of the corporation because it knows that it can only act through the BoD not on the part of the parties dealing with the corporation because it knows that there must be BoD for the corporation to bind itself. This is also important because this is by which the corporation manifests itself. (Remember: notion of a ghost A ghost manifest itself through signs, in the same manner, a corporation manifests its existence through the existence of the BoD). Effect as to both parties: (1) cannot deny its existence (2) liable as general partners. Not applicable to intra-corporate disputes, why? (1) it is a third level doctrine (2) public is not expected to know, while the above are expected to know. If the other party knows of the non-existence of the corporation there is no estoppel. 3. Corporation by Estoppel (a) Nature of Doctrine Founded on principles of equity and designed to prevent injustice and unfairness, the doctrine applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where no third person is involved in the conflict, there is no corporation by estoppel. A failed consolidation therefore cannot result in a consolidated corporation by estoppel. Lozano v. De Los Santos, 274 SCRA 452 (1997)

A party cannot challenge the personality of the plaintiff as a duly organized corporation after having acknowledged same when entering into the contract with the plaintiff as such corporation for the transportation of its merchandise. Ohta Dev. Co. v. Steamship Pompey, 49 Phil. 117 (1926).4 (b) Two Levels: (i) With Fraud; and (ii) Without Fraud When the incorporators represent themselves to be officers of the corporation which was never duly registered with the SEC, and engage in the name of the purported corporation in illegal recruitment, they are estopped from claiming that they are not liable as corporate officers under Sec. 25 of Corporation Code which provides that all persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result thereof. People v. Garcia, 271 SCRA 621 (1997); Coverage of Trust Fund Doctrine adopted the two precursors of the trust fund doctrine which is the a.) capital impairment rule and the b.) profit rule. A fixed capital must be preserved for protecting the claims of creditors so that dividend distributions to stockholders should be limited to profits earned or accumulated by the corporation. In a solvent corporation, the trust fund doctrine encompasses only the capital stock. 1.) Coverage of capital stocks covers capital stock; the protection by the doctrine upon corporation not in a state of insolvency but only up to the exten t of the capital stock of the corporation. 2.) Retained earnings although part of the stockholders equity, do not constitute part of the capital stock. It is not covered by the doctrine. The corporation is at liberty to declare and pay out dividends from its assets. 3.) Outstanding capital stock total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is a binding subscription agreement) except treasury shares (Sec. 137 ). 4.) Par value stock capital stock represented by aggregate par value of all shares issued and subscribed. If par value shares are sold at premium, excess is not treated as legal capital/capital stock but can be declared as stock dividends. This stock dividends fall within the ambit of the Trust Fund doctrine. 5.) No par value stock legal capital = total consideration received for the shares of stock. Entire consideration for no par value stock treated as capital and not available for distribution as dividends. Classification of Corporate Powers: Express; Implied; and Incidental

EXPRESS These powers given to a corporation either: a.) By clear or express provision of the law. - Some of the other powers expressly granted under Sec. 36 are considered to be inherent or incidental powers which even if not given by express grant are nevertheless deemed to be within the capacity of the foreign entities (such as the power to adopt by-laws) b.) By the charter or articles of incorporation.

IMPLIED Those powers that exist as a necessary consequence of: a.) the exercise of express powers of the corporation or b.) the pursuit of its purpose as provided for in the article of incorporation - The management of a corporation, in the absence of express restrictions, has discretionary authority to enter into contracts or transactions which may

INCIDENTAL Those powers that: a.) attach to a corporation at the moment of its creation b.) without regard to its express powers or particular primary purposes and c.) is said to be inherent in it as a legal entity or a legal organization. Powers that go into the very nature and extent of a corporations juridical entity

- Express grant of authority from the board of directors needed to validly bind the corporation. Thus the SC held that absent any board resolution authorizing an officer or any person to exercise express powers given to a corporation such as filing a suit on its behalf, such an action is invalid. The power of a corporation to sue and be sued in any court is lodged with the board of directors that exercise its corporate powers.

be deemed reasonably necessary or incidental to its business purpose.

cannot be presumed to be incidental or inherent powers. This juridical entity is Stategrant and cannot be altered or amended without State authority (egs. right of succession, right to merger)

By-laws are not a source of powers. Art. 46 of the Civil Code expressly provides for the powers of a corporation as a juridical personality possesses. Sec. 36 of the Corporation Code expressly enumerates the ten powers which a corporation may exercise. Sec. 45 of the Corporation Code recognizes other powers provided in the Article of Incorporation. Generally exercised by the Board of Directors with exception to certain instances where shareholders assent are needed.

Sub-paragraph 11 of Sec. 36 provide that a corporation has the power and capacity to exercise such powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation

Sec. 2 of the Corp. Code provides the corporation as having the powers, attributes and properties expressly authorized by law or incident to its existence.

Generally, purely members of the Board of Directors exercise this.

Generally, purely members of the Board of Directors exercise this.

Ultra Vires doctrine is connected with ancillary doctrines as of (1) apparent authority and of (2) estoppel. One has to look at the corporation as a person before the law because of the (1) issue of consent and (2) liability who commits itself to obligation. The state only gives a corporation limited powers and not general powers as an individual has because of the consent and liability.\

ULTRA VIRES DOCTRINE (a) Concept and Types (Sec. 45) Sec. 45 Ultra vires acts of corporations No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as necessary or incidental to the exercise of the powers so conferred. Sec. 45 of the Corporation Code is the statutory embodiment of the Ultra Vires Doctrine that provides that the corporation cannot exercise powers beyond what had been granted to it by statute or by its articles of incorporation except such as necessary or incidental to the exercise of powers so conferred. It was meant to control and regulate the actions of corporations. BASIS OF ULTRA VIRES DOCTRINE (Two Corporate Principles) 1. A corporation is a creature of the law and has only such powers and privileges as are granted by the State the ultra vires doctrine is a product of the theory of concession as provided in Sec. 2.

2. The doctrine upholds the fiduciary duty of directors and officers to the stockholders or members such duty dictates that the corporation engage only in transactions to which the stockholders and members bind themselves by way of the provisions of the purposes clause. This is also necessarily include an obligation not to enter into transactions which violate the law. TEST TO DETERMINE ULTRA VIRES Whether the act in question is in direct and immediate furtherance of the corporations business, fairly incident to the express powers and reasonably necessary to their exercise. The strict terms direct and immediate refers to the business of the corporation while the liberal terms fairly incident and reasonably necessary with reference to the powers of the corporation. Wit h regard to the business of the corporation as the reference point, much latitude is given to the corporation to enter into various contracts as long as they have logical relation to the pursuit of such business. On the other hand, when the purpose clause used limiting words that Court will hold such corporation to such limited business. POLICIES SUPERVENING IN ULTRA VIRES ISSUES Acts not per se illegal, liberal interpretation. 1.) PUBLIC CONVENIENCE if corporation contracts are strictly construed, the public would be inconvenienced by having to verify and enter into contractual safeguards when entering into contracts with corporations. As such liberal construction is afforded to such corporate contracts. 2.) CONTRAVENTIONOF CONTRACTUAL EXPECTATIONS setting aside the corporate contract on the ground of ultra vires would contravene the expectations of both parties who entered into the contract expecting to be bound. 3.) PRINCIPLE OF BUSINESS JUDGMENT the court will not sit in judgment to substitute their business judgment for that of the directors; and that as much as possible, directors in the exercise of their business judgment, should be given leeway to adopt corporate policies and to engage in transactions as they deem best for the corporation. 4.) NATURE OF BUSINESS OF OPERATIONS it is impossible to anticipate all possible contingencies at the time the Articles are drawn thus there would be a need to amend or revise the Articles to keep abreast with the various aspects of the business. ULTRA VIRES ACTS DISTINGUISHED FROM ACTS WHICH ARE ILLEGAL PER SE Illegal acts of a corporation are those acts which are contrary to law, morals, or public order or contravenes some rule of public policy or public duty are void. Such acts or contracts cannot be the basis of any court action nor acquire validity by performance, ratification or estoppel. Ultra vires acts are those which are not illegal and void ab initio but are within the scope of the articles of incorporation are merely voidable and may become binding and enforceable when ratified by stockholders. Said ratification cures the infirmity of the corporate act and makes it valid and enforceable. TYPES OF ULTRA VIRES CASES 1.) acts or contracts which are per se illegal as being contrary to law VOID 2.) acts done beyond the powers of the corporation as provided for in the law or its articles of incorporation; and VOID or VOIDABLE? 3.) acts or contracts entered into in behalf of the corporation by persons who have no corporate authority UNENFORCEABLE Ultra vires acts of the second type are void as between the corporation and the State or in the first level of corporate existence while it is merely voidable in the third level because of public policy. The public who deals in good faith with the corporation has the right to expect that the obligation entered into shall be complied with.

First Type Ultra Vires: An ultra vires act is one committed outside the object for which a corporation is crated as defined by the law of its organization and therefore beyond the power conferred upon it by law. The term ultra vires is distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. Atrium Management Corp. v. Court of Appeals, 353 SCRA 23 (2001). Second Type Ultra Vires: When the President enters into speculative contracts, without prior board approval, and without subsequent submission of those contracts to the Board for approval or ratification, nor were the transactions included in the reports of the corporation, such contracts do not bind the corporation. It must be pointed out that the Board of Directors, not the President, exercises corporate powers. Safic Alcan & Cie v. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 (2001). (b) Ratification of Ultra Vires Acts: NOTE: We are studying Harden because of the pronouncement that even where corporate contracts are illegal per se, when only public or government policy is at stake and no private wrong is committed, the courts will leave the parties as they are in accordance with their original contractual expectations. (The only contracts that the courts will touch are contracts which are void for being illegal per se.) (i) Theory of Estoppel or Ratification The principle of estoppel precludes a corporation and its Board of Directors from denying the validity of the transaction entered into by its officer with a third party who in good faith, relied on the authority of the former as manager to act on behalf of the corporation. Lipat v. Pacific Banking Corp., In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body or officer authorized to ratify had full and complete knowledge of all the material facts connected with the transaction to which it relates. Ratification can never be made on the part of the corporation by the same person who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having authority to make such contract. Vicente v. Geraldez, 52 SCRA 210 (1973). The admission by counsel on behalf of the corporation of the latters culpability for personal loans obtained by its corporate officers cannot be given legal effect when the admission was without any enabling act or attendant ratification of corporate act, as would authorize or even ratify such admission. In the absence of such ratification or authority, such admission does not bind the corporation. Aguenza v.Metropolitan Bank and Trust Co., 271 SCRA 1 (1997). Doctrine of Laches or Stale Demands: The principle of laches or stale demands provides that the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been done earlier, or the negligence or omission to assert a right within a reasonable time, warrants a presumption that the party entitled to assert it either has abandoned it or declined to assert it. Rovels Enterprises, Inc. v. Ocampo, 391 SCRA 176 (2002). PRINCIPLE OF ESTOPPEL It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. Here it is fair that the resolution be upheld at least on the ground of estoppel. Ratification (a) the act must be consummated and not executory (b) creditors are not prejudiced or all of them have given their consent (c) rights of the public or the State are not involved (d) all the stockholders must give their consent. (ii) Theory of Apparent Authority Outward appearance, the agents apparent representation yields to the principals true representation and the contract is considered as entered into between the principal and the third person. Due what seems to be and what happens otherwise.

Q: Upon whom is placed the burden of discovering that the agent has no authority? A: In view of the authority of apparent authority, the third person dealing with the corporation is not given the burden of discovering whether the agent has authority or not. It is also therefore reasonable in a case where an officer of a corporation has made a contract in its name, that the corporation should be required, if it denies the authority of the officer, to state such defense in its answer, since it allows the plaintiff to be appraised of the fact that the agents authority is contested; and he is given an opportu nity to adduce evidence showing either that the authority existed or that the contract was ratified and approved. NOTE: The theory of apparent authority is classified into two types by which such may be manifested or proved, which are by position and by circumstance. The burden of proof mentioned above applies to the second classification. NOTE: By-laws can bind third parties only when they have knowledge of such, otherwise, such may not bind third parties. In the same manner, knowledge of a third person of such by-laws may bind the corporation. If a corporation knowingly permits one of its officers to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. Soler v. Court of Appeals, 358 SCRA 57 (2001). Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation liable. Traders Royal Bank v. Court of Appeals, Apparent authority may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act, or, in other words the apparent authority to act in general with which is clothes them; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Inter-Asia Investment Industries v. Court of Appeals, 403 SCRA 452 (2003). 3. Express Powers a) Enumerated Powers (Secs. 36) Sec. 36 Corporate powers and capacity Every corporation incorporated under this Code has the power and capacity: 1.) To sue and be sued in its corporate name; 2.) Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3.) To adopt and use a corporate seal; 4.) To amend its articles of incorporations in accordance with the provisions of this Code; 5.) To adopt by-laws, not contrary to law, morals or public policy, and to amend or repeal the same in accordance with this Code; 6.) In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 7.) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transactions of the lawful business of the corporation may reasonably and necessary require, subject to the limitations prescribed by law and the Constitution; 8.) To enter into merger or consolidation with other corporations as provided in this Code; 9.) To make reasonable donations, including those for the public welfare or hospital or charitable, cultural, scientific, civic or similar purposes: Provided, That no corporation, domestic or foreign shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10.)To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11.)To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.