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Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr.

Agustin Nazarenos Lectures

Lectures: November 8, 9, 14, 15, 16, 21, 22, 23, 28, 29 December 5, 6, 7 November 8 Well, let us get a view of The Corporation Code of the Philippines, otherwise known as, Batas Pambansa Bilang 628. The old Corporation Law, known as Act 1459, took effect in April 1, 1906, one of the oldest laws in the country. It was effective for more than 70 years because BP 628, the Corporation Code of the Philippines, became effective on May 1, 1980. This was one of the first legal exports from the United States in the Philippines the Corporation Law. Another, which is a legal export, is the Negotiable Instruments law. You have taken that up. That is the law with the only distinction as not having been amended by any Presidential Decree. You cannot improve the language of that law. You study it, you could memorize it. The old Corporation law underwent so many amendments. In fact, there are provisions such as Article 65-A inserted because of the evolution of corporate practice. Finally, in May 1, 1980, with the Batasang Pambansa, the old Corporation law was repealed by the Corporation Code of the Philippines. It was also around that time when Presidential Decree 902A was enacted, expanding the powers of the Securities and Exchange Commission, the oversight body of the juridicial personalities known as corporations. You know, do not make the mistake of thinking that all juridical personalities emanate from the Corporation Code. There are others. An example would be unions. They are registered with the Department of Labor and they become persons. They have juridical personalities. The HLURB also registers juridical persons associations of those who want to acquire land for residential purposes and they still do not have land. They are normally called as homeseekers. However, if you are an ownership association, let us say Forbes Park Homeowners Association, you have to register it with the Securities and Exchange Commission. When you register with the HLURB, then, you are a juridical person. And you can enter into a contract with the government or for purposes of borrowing money as seed money to obtain land for residential purposes. So, there are many. But, the most prominent is the Securities and Exchange Commission. And during the time of President Marcos, the SEC was directly under the Office of the President. The SECs power was expanded. Certain adjudicatory powers were given to the SEC, which was subsequently taken away by RA 8799, the Securities Regulation Code, which was enacted not too long ago. It was enacted in 2000. Now, the adjudicatory powers of the SEC have been taken away. The SEC is now back to the supervision of the Department of Finance. It is now reporting to the Congress once a year. SECTION 1. Title of the Code. This Code shall be known as "The Corporation Code of the Philippines." (n) If you read Section 1 of BP 628, Section 1 is the Title of the Code. Please take note that the article the is included in the name. It is part of the name of the name of the law The Corporation Code of the Philippines. The name is very important. 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. (2) Now, Section 2 gives you the definition. So, you should memorize the definition of a CORPORATION. It 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. To understand corporation, you have to compare it with other business organizations. The standard business organizations, aside from the corporations, there are about 6. In business parlance, they are called business vehicles. They are as follows: 1. sole proprietorship 2. partnership 3. joint accounts 4. business trusts 5. joint venture 6. cooperative Let us go one by one.

1. SOLE PROPRIETORSHIP What is a sole proprietorship? It is a person who personally conducts business under his name or under a business name. So, the business is an organization composed of the proprietor himself and his employees but the business does not have a personality separate and distinct from the proprietor. A sole proprietorship does not possess a juridical personality and has no legal personality to file and defend an action in court. Single proprietorship ka, ngalan sa imong tindahan Bohol Trading. Unsa ngalan nimo? Juan dela Cruz. Karon wala ka na mubayad. Padad-an ka ug subpoena didto sa Bohol Trading. Mali. Single proprietorship man ka. You have to serve it in his residence. That is what happened in Anita Maguila vs. CA 387 SCRA 162 (2002). Just because a single proprietor has a different business name does not mean that his business is separate and distinct from the person of the sole proprietor. The business name gives you a license only to issue receipts under the business name. You have to register the business name with the Civil Business Registrar. But it is not a separate and distinct person. If you believe it as such, then, you will suffer the consequence of ignorance. So, the significance between the proprietor and the business and the name is as follows: 1. A proprietors true name is registered with the Civil Registrar upon birth. Pagtiyabaw niya kay nilusot na siya sa bilahan sa iyang inahan, mao na na. Ienter na iyang pangalan, ihatag sa Civil Registrar. 2. Now, he is in possession of his rights. He can now act with full legal effect. Then, he can, if he so desires, register his business name, other than his true name, with the Bureau of Trade Regulation and Industry. That is required by Section 1 Act 3383 (Business Names Law). Again, that is one of the oldest laws exported from the United States. Muingon ka act, kinsa man ang nag-act? It is the US sovereign, the US State that is acting. When it is a Republic Act, it is the Philippines already acting as a Republic. When you say PD, that is under the sovereign dominated by President Marcos. Why is it called act? It is called act because the state is a juridical person and the only way it can act is by legislation. If it needs money, it passes such legislation. If it wants to spend money, it passes an appropriation bill into law. Without the law, there is no act. Now, the country is divided in such a way that there is the law and, then, the president executes it, acts it for and behalf of the state because it is a juridical person. Hain man ang Republic? You and me are part of the Republic but we are not the Republic. If all of us, if God forbids, are struck by lightning and died, the Republic will still continue. Right now, we are part of it but we are not essential to it. Even if the State wants to declare a holiday, it has to pass a law. It has to go through legislation. It cannot do anything without passing a law. So, from the corporation point of view, that is the way by which a juridical person, like the state can act and that is the only way. A corporation is required to register a business name other than his true name. Juan dela Cruz true name; Bohol Trading business name. That would be called the firm name or the style. What is this style? This is not ang imong sinuotan. In business law, that is the name by which you are to be known to the public. Business name or style. That is technical. If a single proprietor, does not register his business name, what are the consequences? 1. A single proprietor cannot use or sign the business name to engage in any business or in any written or printed receipts of any evidence of agreement or any other document. Mupalit ka ug garab sa Bohol Trading. Kabalo ka unsang garab? (garab = sickle hehe Kanang sa sagbot. It is a sign of death. Jack the Ripper carries a garab.) Palit ka didto and ingon ka gai ko ug resibo. One of the employees there, nay papel didto, sulat and hatag nimo. Dili man to resibo. Ingon ka kanang official receipt. Ibalik ni nako sa akong amo, ihatag ni nakong resibo, dili siya mutuo na sakto ang presyo kay gibuhatan ra nako. That is the importance of an official receipt. For you issue that receipt, you have to print a receipt. And there are sequential numbers. Now, you go to the printing press, the printing press will not print official receipts for you unless you show your registration with the Business Trade Bureau. Hatag ka pud ug BIR registration, isulat na nila ug iphon. Padad-an pud nila ang BI Rug kopya ana. You take this for granted. You do not take this up in law school. If you have not registered as a sole proprietor, your business name you cannot put up. And you know that signage? That is subject to tax. The sign, the dimension of the signage, is subject to tax. Kinsa man ang mukolekta? The barangay. You take a look at your Local Tax Code. It is the barangay which can collect the tax on signage. They also tax on gaffers. You know what a gaffer is? Mananagat (?) .. kanang mag (?) sa higot sa tarip sa manok. (laluma oi .. hehe ) They are gaffers because kanang tarip is a gaff. The barangay can also collect tax from the gaffers.

Jazzie Sarona (3-SR)

Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr. Agustin Nazarenos Lectures

By the way, gaffers are usually known as chicken surgeons. Now, the natural person is registered at birth with the Civil Registrar. Its business name or style is registered with the Business Bureau. But the corporation does not have yet its juridical personality because a corporation, with its corporate name, files its articles with the Securities and Exchange Commission. That is all the registration they need. Even if they put out a sign and order receipts out of that name, provided that if they use that name. But if it uses a different name, that is when they registered it as a trade name with the Bureau of Patents. For instance, he registers his corporate name as Clinica Hilario, Inc. But his business name is different. What is his business name? Davao Doctors Hospital. He has to register that, not only with the City, but also with the Bureau of Patents. It is now a trade name. Tan-awa ra nang Davao Doctors Hospital, naa ba daw na incorporated. Ang corporate name ana kay Clinica Hilario. Who is Hilario? He is a spinster doctor who is already dead. As to the original incorporators, usa na lang ang nahabilin. The last I heard he was in the ICU. There are natural persons that cannot be incorporators. These are called inhibitions or prohibitions. 1. Senators and Congressmen 2. President and Vice-President 3. Members of the Cabinet and their Deputies and Assistants 4. Members of the Constitutional Commission such as the Civil Service, COMELEC 5. Justices of the Supreme Court And then, for purposes of practice of profession, foreigners are disqualified. Also, justices, judges and prosecutors they cannot be single proprietors. In MACARIOLA vs. ASUNCION 144 SCRA 77 (1982), the Supreme Court said that the prohibition for judges and prosecutors for engaging in commerce within their jurisdiction is no longer effective because that was under the old Code of Commerce and it was overturned when there was a change of sovereign. You may understand that it was alright for judges, justices and prosecutors to engage in commerce but it is not. Why? Subsequently, the Supreme Court, in JOSIE BERIN vs. JUDGE FELIXBERTO BARTE 385 SCRA 527 (2002), said that judges are disqualified from engaging into commerce within their jurisdiction despite the abrogation of Article 14 of the Code of Commerce. Rule 5.02 of the Code of Judicial Conduct supplies the void created by the abrogation. Under such rule, the judge is enjoined and refrained from financial and business dealings that tend to reflect adversely on the courts impartiality, interfere with the proper performance of judicial activities, or increase involvement with lawyers or persons likely to come before the court. Judges cannot sit by the sidewalk and sell lanzones, durian and all these fruits because that is engaging in commerce. But judges selling their books? That is engaging in commerce. They should not. Now, in single proprietorship, you plan the business, you execute the business and then you review your execution and you judge whether it is a successful business or not. If durian ra na o lanzones, sayon ra na. It is a simple business. But if it is involved with dealing with others, dealing with London or France, building a tunnel, with 10 years to do it, human isa ra ka tawo mubahat anang tunnel, siya ra mu-execute .. nah! How long did it take to build the Suez Canal? Suez Canal was built at the turn of the century. Panama Canal was built after that. These 2 projects made multi-millionaires out of Mr. Nobel. He invented dynamite, which were actually used to build these canalS. Dili nang canal na naa ra dira The engineer of the Suez Canal died before it was finished. His assistant has to take over. There are certain projects that they a long time, longer than the life of one individual. If you are the one who executes the project and you are the one who infuse capital into the project, chances are, there will be mistakes because you cannot judge yourself wrong. Look at the definition of a partnership because in a partnership, there is a managing partner and there are other partners who do not do the managing. 2. PARTNERSHIP A partnership is defined under Article 1767 of the Civil Code. It is a contract by which two persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. Can you register a partnership such that the partnership will have a separate and distinct personality? Yes, you register it with SEC and the partnership is called a limited partnership (pwede man din hindi limited partnership di ba?). And the public is made aware that they are dealing with a separate person because the partnership is precisely named as a limited partnership.

Registration with the SEC is necessary where the capital of the partnership is P3,000 or more, under Article 1772. When registered with the SEC, the partnership may need not register anew under the Business Trades Law. But if the partnership uses a different trade name, then, that name must be registered. Like Sycip, Gorres and Velayo. Where is Sycip now? He is still alive. He is very old but he has retired. Now and then, he comes out in the newspapers. But Gorres and Velayo, they are now memories. But their names still appear because it has become a trade name. When you look at the financial statements of the San Miguel, reviewed by Sycip, Gorres and Velayo by, and you have there the name of the partners. That is the trade name that is registered separately. So, the general partner is liable without limit. But the limited partners are only liable up to the extent of their contribution. For practical purposes, partnerships are common in the practice of profession. For business enterprises, it is no longer considered to be practical because it is based on confidence and trust. If one of the partners dies, it is supposed to be dissolved. Kinsay bangko magpahulam nimo ana? In fact, if they will lend you, they will require all the partners individually in their capacity to sign as co-makers. Ngano pa man magpartnership na higtan ra man gihapon? The bank does not want to be caught up in a bind thats why it requires all the partners to sign in their individual capacity as comaker. It is as if you have no partnership, which assumes the liability. It is as if you are a single proprietorship because you are assuming the obligations of the partnership. November 9 Just so you can look forward, our first exam covers up to Section 22. 1. 2. 3. 4. 5. 6. As we said, there are 6 vehicles that precede a corporation: sole proprietorship partnership joint account business trust joint venture cooperative

Then, you have the corporation. The corporation is last because the corporation is deemed to be the most sophisticated vehicle of human enterprise. And, for over the years now, the corporation has certain variations but its basic intent, its basic structure has not been changed whereas sole propertiorship, partnership, they have deemed to be inadequate in certain cultures. Now, we took up sole proprietorship and partnership yesterday. Remember that even without registration, a partnership exists. You know that when you took up partnership. And the basis of partnership is _____ fidei?, the utmost trust. So, that the moment one of the partners dies, the partnership is deemed dissolved because the trust is no longer present among them. They have to constitute another partnership. Part of the reason why there is a corporation is to answer precisely that contingency. What happens if someone dies who is a constituent of the organization? Is there any reorganization? There are certain enterprises that cannot let go and they simply become a continuing concern. In a corporation, the moment a stockholder dies, his shares of stocks are inherited by his heirs and the corporation continues. 3. JOINT ACCOUNT What is a joint account? Cuentas en participacion. A joint account is an entity described in the Code of Commerce and it is still valid to a certain extent. Article 239 of the Code of Commerce described cuentas en participacion as a contract whereby merchants may have an interest in the transactions of other merchants, contributing thereto the amount of capital they may agree upon, and participating in the favorable or unfavorable results thereof in the proportion that they may determine. Take note that it is for a particular activity. It is for a particular transaction. And it ends the moment the results of the transaction are achieved. The most common here, in cuentas en participacion, kining mag-ispray sa mga mangga. If you are like Cojuangco who has 300 hectares somewhere near Digos, no one can spray that all alone. So, they form a corpo. But it is not a corporation. It is cuentas en participacion because it is only for that single transaction. Pagkahuman pagspray, iharvest then ibaligya nila, then, they deduct all expenses from the proceeds and they divide their earnings according to their participation. It is not just a partnership. Amot-amot sa tambal, sa pagkahago, sa pagbantay. Magturno-turno mo ug pagpantay. At the end of the transaction, the partnership is over. It is based on a single transaction. How are joint accounts differentiated from partnerships? 1. As to juridical personality: A joint account has no juridical personality while a partnership has a personality separate and distinct from the partners.

Jazzie Sarona (3-SR)

Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr. Agustin Nazarenos Lectures

2. As to the business name: No commercial name common to all participants can be adopted in a joint account. A partnership can adopt a partnership name. 3. As to management: The general partners are all managers in a partnership where only the ostensible partners manages under such business in his own name under his individual capacity for the purpose of cuentas en participacion. 4. As to parties in a case: Only the ostensible partners or the person carrying the business can be sued by and is liable to persons transacting with the former. In a partnership, all general partners may be liable even up to the extent of their personal properties, and therefore, be sued by the other parties. That is the difference between a partnership and cuentas en participacion or a joint account. 4. BUSINESS TRUST This is the fourth vehicle. It is a legal relation whereby one person, called the trustor, conveys property to another, called the trustee, for the benefit of the person called the beneficiary. The person in whom confidence is reposed as regard the property is called the trustee. That is Article 1440 of the Civil Code. Let us put flesh into these elements: the trustor, the trustee and the beneficiary. The trustor is San Miguel Corporation. It creates this business trust for the benefit of their employees who will retire. That is where they will get their retirement benefit, from this particular fund. Who will oversee this fund? Under the Bureau of Internal Revenue, it must be an independent third party. So, you look for a licensed trustee. Thats why you can see China Bank and Trust Company. They can be a trustee and hold the money in trust for the beneficiaries. San Miguel Corporation makes contributions to the trust fund. The NIRC provides that such employers set aside a certain amount of money for retiring employees. Do not laugh at this but in the papers, the San Miguel Retirement Fund just bought several chunks of shares of stocks of San Miguel. One of the several chunks of shares of stocks of San Miguel is the shares of stocks that were in question and held by the Coco Bank the Coco Fund. It was bought by the retirement fund. Cojuangco could not buy it. The trust retirement fund votes according to what the management tells you to vote. It is still open to question whether or not the future beneficiaries of that retirement fund can question the fact that it is buying shares of its own employer because it may be compounding the risk of a retirement fund. Unsa man mahitabo sa imong amo, wagtang imong retirement! But know that a particular business trust is not a person and yet it acts like a person. It pays taxes. It is either exempt from tax or pays tax. It files report, reportorial requirements, with the government. It has obligations and it has benefits. But it is not a person. Who will you sue if you have a problem with the business trust? You sue the trustor, the one who oversees the fund. Normally, it is a qualified trustor, it is an institutional person like China Bank and Trust Company. It can be a trustor in a business trust. (I am confused. Trustor - SMC, Trustee China Bank di ba? Pero sabi kay sue the trustor, the one who oversees the fund ) 5. JOINT VENTURE The fifth vehicle. A joint venture, as defined by KILOSBAYAN VS. GUINGONA 323 SCRA 110 (1994), as 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. So, a joint venture is actually a form of partnership and shall be governed by the laws on partnership. That is what the Supreme Court said in AUR BACH VS. SANITARY WARES MANUFACTURING CORP 180 SCRA 130 (1989). Corporations can enter into joint venture agreements. Again, under AUR BACH vs. SANITARY WARES MANUFACTURING CORP. Joint ventures may be sought in a formation of a joint venture corporation. In such case, it must comply with the applicable nationalization laws of the Philippines. That was pronounced by the Supreme Court in JG SUMMIT vs. CA 345 SCRA 143 (2000). I will give you in example. By December, the old NAPOCOR minus the generating companies that generate electricity, kanang dagko na mga poste and high tension wires, that is Transmission Corporation of the Philippines, spun-off from the old NAPOCOR. So, it basically owns the assets of the whole sale distribution of electricity throughout the Philippines. That is what TRANSCO owns and that is what TRANSCO is going to bid this coming December. In the bidding, they are forming joint ventures. In the bidding, they come together, these different corporations. There is a local counterpart and there is a foreign counterpart because the money

involved is rather considerable. The minimum bid will be US $ 2.5 billion. That is over P 100 billion. Once the bid becomes successful. Lets say the winning bid is a particular joint venture. They constitute themselves as a corporation. But for that transaction, for the bidding, they form into a joint venture. Now, that they can go for a long-term business activity like transmitting electricity wholesale, then, they form a corporation. The electricity now, all over the world, is being distributed. They do not want the same interest controlling and generating electricity. They pass on electricity to distributors like MERALCO and Davao Light and the ownership of MERALCO and Davao Light are divided so that there would be no control of such very essential commodity such as electricity. Technically, if you are in Davao and you hear that there is electricity somewhere in Albay that is cheaper than electricity in Maria Christina, then, you buy that electricity. Let it thru the TRANSCO and you just pay TRANSCO for bringing it to Davao. And so, electricity producers will be competing against each other. There will be false sense of security because we produce electricity in here in Mindanao, then, the whole of Mindanao should buy our electricity. It should not be that way. We should strive for efficiency. For the bidding process, you have a joint venture. The moment you win the bid, they constitute themselves into a corporation for the long term transactions that will follow. But, just for the bidding and just for themselves, they form a joint venture. They contact banks. They contact their source of credit. Then, they have their own staff and hire people to prepare the studies, the make the estimates and to how much they will bid. You are dealing with millions. You have to marshal your bid and then, you submit your bid. The requirements are very tough (?). Only three have met. You watch the bidding of TRANSCO because it has taken 25 years. Dugay na na na istorya pero wala pa jud na bid. Wa jud na na-privatize. Because there are certain people who can get money for as long as it is not privatize. That is a joint venture. 6. COOPERATIVE A cooperative is defined by Section 3, Republic Act 6938 (The Cooperative Code of the Philippines. 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. Foreigners are now allowed to join cooperatives under Article 26 of the Republic Act 6938. Remember, in a cooperative, it is one person-one vote. It is not according to your shares. That is the difference as to a corporation. In a corporation, your vote depends on the number of shares that you hold. But in a cooperative, it is the person. What are the distinctions between a partnership and a corporation? There are several distinctions. 1. As to the composition upon formation A partnership may be formed by two or more persons. A corporation may be formed by not less than 5 or more than 15. This is composition at its inception, pagsugod. Muingon gani na not more than 15, it means that the articles can only contain 15 incorporators. If naay daghan na mucontribute, apil mo, pero dili namo apil sa Articles of Incorporation. The beginning incorporators are only 15. 2. As to basis of creation A partnership is formed by mere agreement of the parties whereas a corporation is created by operation of law and its existence begins from the date of issuance of its certificate of incorporation. That is the basis of creation. Partnership is by mere agreement. Corporation requires the consent of the State. The consent of the State is manifested by the issuance of the certificate of incorporation. 3. As to term or existence Partnerships may be organized for an indefinite period of time, according to the Civil Code, while a corporation may be organized only for 50 years, renewable for periods not exceeding 50 years for each renewal. Actually, the term of the partnership is bounded by the lifespan of each partner. The moment a partner dies, then, the partnership is dissolved. 4. As to the liability of the constituents: General partners are liable as to their properties for the payment of the debts of the partnership while the stockholders are liable only to the extent of their unpaid subscription for the payment of corporate debts. 5. As to the effect of death:

Jazzie Sarona (3-SR)

Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr. Agustin Nazarenos Lectures

Death, insolvency, insanity or civil interdiction of a general partner dissolves a partnership while the death, insolvency, insanity, or civil interdiction of a stockholder does not affect the corporations existence. 6. As to the power to dissolve: A partner may dissolve the partnership by his act of withdrawal while a corporation cannot be dissolved without the approval of the Board of Directors and, then, 2/3 vote of the stockholders and finally, the consent of the State. There has to be a liquidation proceeding and the State oversees that proceeding. 7. As to transferability of interest: A partner cannot transfer his interest in a partnership without the consent of the other partner while in a corporation, the stockholder may transfer the shareholdings without the consent of the other stockholders. Consequently, a person cannot become a partner without the consent of the other partners whereas a person can become a stockholder of a corporation with or without the consent of the other stockholders. 8. As to scope of powers: A partnership may decide by agreement among the partners while a corporation may exercise only such powers as may be granted by law, its Articles of Incorporation or as may be implied therefrom or as may be incidental thereto. So, with corporations, we are talking about express, implied or incidental powers. With partnership, we are talking about powers by consensus or by consensual agreement. If there is no objection and everybody agrees, then, the partnership can exercise such powers. 9. As to its agents: Unless otherwise agreed upon, each partner may act for and bind the partnership while in a corporation, only the officers or the persons authorized by the Board of Directors may act for and in behalf of the corporation and bind the corporation. The officers of the corporation, thats why they are called as attorneys-in-fact, they can bind the corporation if they have the authority of the law, of the Articles and by-laws and it may be implied from their power. What are the advantages of a corporation over other business organizations? If you go over the list, they are the most obvious:

You cannot do it by partnership that can be dissolved the moment a partner dies or a sole proprietorship who is viable only as long as he is alive. You need a corporation. In the end, that is the difference of a corporation. What are the attributes of a corporation? The definition says that 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 (Section 2, The Corporation Code of the Philippines). 1.

That it is an artificial being That it has legal personality or judicial capacity That it is created by operation of law That it is in possession of the right of succession That it has powers expressly authorized by law or incident to its existence

2.
3. 4.

5.

Those are the 5 aspects of a corporation that have legal implications. 1. IT IS AN ARTIFICIAL BEING What are the consequences of this attribute that a corporation is an artificial being? If it is an artificial being, it means that it exists by fiction of law only or by concession of the state. As such, the corporation is subject to many limitations. Among them are: a. The Ability to Act A corporation can only act through natural persons. In its very existence, a natural person is not deemed a corporation. It is an artificial being. It cannot act for and bind himself. It needs natural persons. The collective actions of the incorporators can bring the action into existence. And such persons must observed the formalities required by law through it directors and officers. In evidence, you are told about testimonial evidence and object evidence. Hain man ang atsa na gigamit? Dara. That is evidence. But during the trial, your atsa will not take the stand and say I hit the man on the head. All other evidence are based on testimonial evidence. That is why there will be object evidence but if there is no one to present them in testimonial evidence, then, the object evidence is useless. That is the same with a corporation. The personality of a corporation is as real as yours and mine because it has consequences in law. San Miguel? Wala man koy nakit-an na San Miguel. Kawaton na lang nako ang beer. But there is a real person who owns that San Miguel Beer and if you act as if he does not exist because you have not seen him and you have not touched him, then, you will suffer the consequences of your act. If you act as if there is no corporation because you have not seen and you do not believe because you have not seen, nor heard, nor touch a corporation. San Miguel? Sign man nang San Miguel Corporation? Ang botelya sa San Miguel? Hain man nang San Miguel? That is why a corporation is an artificial being. If it is artificial, who is not artificial? You and I. We are not artificial. We exist and occupy space. We are real. A corporation? It is real in its effects because it has rights and prerogatives. That is the crux because a corporation is artificial, it relies on natural persons in order to act. A corporation can only enter into a contract if its attorney-in-fact signs for it. Know all men by these presents, this contract of sale entered into by and between San Miguel Corporation, Inc., a duly organized corporation with business address at Pasig City, etc., represented hereunder by its President, Mr. Cojuangco xxx So, it is Mr. Cojuangco who signs for San Miguel. But Mr. Cojuangco and San Miguel are two different entities. What does this teach us? The importance of formality. Form is importance because substance, in reality, will not bear. There is no importance in formality because there is no real substance to speak of. A substance is based on agreement. b. Criminal Liability Since it has no physical existence, a corporation cannot be imprisoned. It is incapable of intent. Hence, it cannot commit felony punishable under the Revised Penal Code. It may be fined but such fine is a consequence of the officers being prosecuted for violation of a law. That was the pronouncement of the Supreme Court in TIME, INC. vs REYES 39 SCRA 303 (1971). Look at this special law, the Trust Receipts Law. You are familiar with this if you are an agent of Avon because you sign trust receipts. You are the agent and the trustor is Avon. And you are given products for women to use. You sell these products. Now, to make sure that you would give to Avon the proceeds, you are made to sign blank checks or pre-dated checks. All you have to do is you are supposed to deposit those proceeds to cover your checks. Kapila man ka liable ana? Kaduha! Issuing bouncing checks and violation of the Trust Receipts Law. Let us say it is the trustor who violates the trust. It sells make-up with lead in it na makadaot dili lang sa aping pati pud sa baga nimo! What will

1.

A corporation may sue and be sued, enter into contracts, acquire properties under its name and its own right; 2. The stockholders of the corporation are not liable for the debts and the obligations of the corporation; 3. The corporation continues to exist despite changes in ownership of the stockholders; 4. Shares are transferable even without the consent of the stockholders;

5.

Management is clearly defined in a corporation and centralized. In the end, the advantage of a corporation is the same advantage of modern governance as distinguished from the governance of kings. When the main structure of governance was royalty (kings), in him or her was reposed the entirety of power and governance. The king or the crown made the law. Then, the crown executed the law. And finally, the crown judges whether the law was broken or not. That is the executive, legislative and judiciary. That is all in the king. Now, they are separate. There is a legislature, executive and judicial power. Maayo kung mangga-mangga lang na. What happens if you are undertaking the building of the Sues Canal or the underground railway spanning from England to France? There, you have the policy maker is essentially different from the executor. That is when ownership is different from operational control. The man in the street or a man who is fresh out from the jungle cannot understand it. Why will I lose control if I am the owner? And yet, distancing yourself from the ownership is the only way that you can arrive at a good judgment. And that is present in a corporation. The Board of Directors are elected by the owners, which are the stockholders. And yet, the stockholders have nothing to do with the day to day operations. It is the Board of Directors who will appoint the officers who will run the corporation. Some of these officers may be part of the Board. But to the extent that the Board of Directors are independent as to the execution, then, there can be a fair judgment as to whether or not there has been a successful kind of business. Then, the owners can realize returns.

Jazzie Sarona (3-SR)

Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr. Agustin Nazarenos Lectures

happen? Will Avon go to jail? But Avon is an artificial person. It is a juridical person. It is a corporation. Who will go to jail? The Trust Receipts Law says it will be the officers or employees or other persons responsible for the offense are liable to suffer the imprisonment. The Trust Receipts Law expressly provides that if the violation or the offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in the said law shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. You cannot imprison an artificial person. That is why you penalize the natural persons that run the artificial person. c. Moral Damages The old rule, as laid down in MAMBULAO LUMBER vs. PNB, states that by way of exception a corporation can claim damages for besmirched reputation. That old rule has been overturned. That is no longer the rule. The new rule is ABS-CBN BROADCASTING CORP vs. CA 301 SCRA 572 (1999). A corporation cannot claim moral damages at all. Moral damages are awarded to enable the injured party to obtain means, diversion, or amusements that will serve to obviate the moral suffering he has undergone. The award of moral damages cannot be granted in favor of a corporation being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. The statement in PEOPLE vs. MANERO and MAMBULAO LUMBER CO. vs. PNB is obiter dictum. That is what the Supreme Court said in ABS-CBN BROADCASTING CORP vs. CA. The old rule is that a corporation since it has a name and you besmirch such name, it can ask moral damages. d. Constitutional Protection of Artificial Persons Just like natural persons, the property of a corporation cannot be taken without just compensation. That is constitutionally protected. Second, a corporation is protected against unlawful discrimination and they can only be proceeded against by due process of law. BACHE AND CO. vs. RUIZ 37 SCRA 825. A corporation is entitled to equal protection. SMITH BELL vs. NATIVIDAD 40 PHIL 136. That is an early ruling. Fourth, a corporation is protected against unreasonable searches and seizure. STONEHILL vs DIOKNO 20 SCRA 383 (1967). Be that as it may, officers of a corporation cannot validly object to the use in evidence against them of documents, papers and things seized from the office and premises of the corporation since the right to object to their admission in evidence belongs exclusively to the corporation to which the seized effects belong and may not be invoked by the corporate officers in proceedings against them, in their individual capacity. So, the corporation must pass a resolution to object the use of such evidence obtained from the corporations premises in violation of the law. Natural person has a right against self-incrimination. You cannot be made to sit on the stand and offer evidence against yourself. A corporation has no right against self-incrimination. An officer of a corporation cannot refuse to produce corporate records on the ground that it may incriminate him or the corporation. Self-incrimination is by testimonial evidence and can only be invoked by a natural person. It cannot be invoked by a corporation. That is the ruling of the court in BATAAN SHIPYARD AND ENGINEERING, INC. vs. PCGG 150 SCRA 181 (1997). e. Liability for Tort A corporation is civilly liable in the same manner as natural persons for torts. Generally speaking, the rules governing the liability of the principal for a tort committed are the same whether or not the principal is a natural person or a corporation. A corporation may be held liable for tort for the commission of negligence of its agents. That is the ruling of the court in PNB vs. CA 83 SCRA 237 (1978). If a corporation is a person, does it have a nationality? Disassociate yourself from thinking that nationality has something to do with the color of your skin. Nationality is a legal right. Does the corporation have a nationality? The general rule established in the Corporation Code, namely, that it is considered a national of the country where it was incorporated. (INCORPORATION TEST) Under what laws were they incorporated? If under Philippine laws, then, you are a Philippine corporation. That is the general rule. However, there are exceptions to the general rule. What are these exceptions? There are at least 3: 1. WAR TIME TEST You took this up in Insurance. FILIPINAS COMPAEROS DE SEGUROS vs. CHRISTIAN 89 PHIL 54 (1954). If the controlling stockholders are enemies, then, the veil of corporate fiction will be pierced and the nationality of the corporation

will be based on the citizen of the majority of the stockholders in times of war. What is the reason for this? The reason given is if this rule is not applied, then, it is possible for the enemy to send a representative inside the country and form corporations that will make so many insurance claims for destruction during the war, depleting the resources of the country. So, during war time, establishments may not be considered as insurable interests. (hindi ko masyado gets ang concept na to .. read the case na lang siguro ) 2. DOMICILE TEST This is the second exception to the Incorporation Test. In this test, the nationality of the corporation is determined by the state where it is domiciled. The domicile of the corporation is where its principal office or place of business is situated. Section 14 of the Corporation Code (3) requires that the place of where the principal office of the corporation is to be located, which must be within the Philippines. You may be incorporated in the British Virgin Islands but your principal office may be in Hong Kong and your shares of stocks may be traded in the Hong Kong Stock Exchange and your depository receipts may be traded in New York or it may be traded also in Zurich. Now, where is it incorporated? It is incorporated in the British Virgin Islands. Where is its principal office? It is in another jurisdiction, which is in Hong Kong. Where are its shares traded? Shares are traded, its depository receipts are traded in New York. The domicile test is where your principal office or place of business is situated. That is the DOMICILE TEST. It is an exception to the general rule of the INCORPORATION TEST, under what country or what laws were you incorporated. 3. CONTROL TEST This is the third corporation. This is for purposes of investment. The Foreign Investment Act of 1991 (RA 7042, As Amended), defines a Philippine national as (1) as a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; (2) a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code in which 100% of the capital stock is entitled to vote belongs to the Filipinos. So, even if you are organized abroad and registered abroad but you are registered to do business here in the Philippines under our Corporation Code and your capital stocks are 100% owned by Filipinos, then, you are a Philippine Corporation. (3) Grandfather Rule You look it up in the Secretary of Justice website. It is the Secretary of Justice opinion # 18 Series of 1989. It received a passing approval by the Supreme Court in PALTING vs. SAN JOSE PETROLEUM, INC 18 SCRA 924 (1966) What does the grandfather rule say? This is to determine control of corporation. Shares belonging to corporations or partnerships, at least 60% of the capital of which is owned by Filipinos, then, it 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 constituting such percentage shall be counted as of Philippine nationality. 40% Foreign 60% Filipino

40% Foreign

60% Filipino

40%

60% Filipino

Imagine that this is the entire capital stock of a corporation. This is 40% and this is 60%. Now, suppose these shares of stock of 40% are owned directly by Filipino citizens. The 60% capital is owned by another corporation. And this corporation is 40% foreign and then 60% Filipino. Why do we say that it is 60%? Because it is owned by another corporation that is 40% foreign and 60% Filipino. The grandfather rule says, if the majority of a corporations ownership is Filipino, then it shares of stocks in another corporation shall be counted as 100% Filipino. So, this 60% Filipino will be considered as Filipino. Why do we say that the older is Filipino? Because 60% of its ownership is owned by another corporation which is 60-40 Filipino. The grandfather rule has an indefinite reach. This is called the grandfather rule. The legal community in Manila is awaiting a rule because there is a stockholder who challenged PLDT. Those who are controlling PLDT are technically Filipino. 30 % is owned by First Pacific Corporation, which is a British Virgin Island Corporation. It

Jazzie Sarona (3-SR)

Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr. Agustin Nazarenos Lectures

shares of stocks are traded in Hong Kong. Its main office is in Hong Kong and it has depository receipts traded in the New York Stock Exchange. But the one who is running it is a Filipino. The one who appears is a Filipino, Mr. Pangilinan. How about the 20%? Who owns it? Nippon Telegraph and Telephone Company in Tokyo, which is supposed to be the biggest telephone company in the world. And then, the retirement fund of PLDT owns another 4%. So, that is 54%. The controlling portion of stocks is actually foreign. And yet, if you count the entirety of the capital stock, 90% or a good 80% of the shares of stocks are preferred shares. Why? Because Marcos wrote a decree that if you want a line to be installed, you must buy preferred shares from PLDT. That is how PLDT financed the expansion of their line. It is preferred, therefore, non-voting. The issue now is, according to the one who challenged, this Filipino ownership must be determined on the voting shares and not the entirety of the shares, voting and non-voting. A corporation is a Philippine corporation if the majority of the entirety of the shares, common and preferred, is controlled by Filipinos. The argument of the present management of PLDT is that the entirety of the shares, common and preferred, is owned by the Filipinos because the preferred shares are owned by the subscribers. So, therefore, PLDT is a Filipino corporation. If the Supreme Court will change its rule, then, it would be voting shares and they will overturn PALTING vs. SAN JOSE PETROLEUM. Although in that case, it was just an obiter dictum. It was not really necessary to the case. That is our stance now. This is called the grandfather rule. Shares of stocks owned by a corporation, the nationality of the shares of stocks is determined by the nationality of the controlling shares. If the stockholders, both preferred and common because the law does not distinguish, is at least 60% owned by Filipinos, then, the entire ownership is considered Filipino shares of stock. What happens if the ownership is baliktad? 40% Filipino and 60% foreign? What will become of the 60% of the shares? It will be 40% x 60%. Only 24% of the 60% shall be deemed to be Filipinos. This is still a Filipino corporation that can engage in the exploitation of natural resources. This is because 40% + 24%, that is 64%. Holding Corporation Intervening Corporation Operating Corporation This is what you call tiering. A tier is a step. Corporations are normally tiered. You have the holding corporation. And then you have an intervening corporation and then, the operating corporation. Very seldom does a holding corporation directly own shares of an operating corporation. You will not have BenPres Securities owning Meralco. You have an intervening corporation. Why? In case you sell these (Meralco), all you have to do is sell these (Meralco Securities) and you would have sold these (Meralco). Get it? Otherwise, you have to break this mother corporation and it is a legal process which is more cumbersome. You will need a corporation that will intervene that will exclusively own the holdings of the operating corporations. So, the moment you want to sell Meralco (operating corporation), you sell Meralco Securities Corporation. We now know the grandfather rule. Here is the case of JG SUMMIT HOLDINGS vs. CA 450 SCRA 169 (2005). The corporation at issue here is PHILSECO. It is a Philippine shipyard in Subic. The original owners of PHILSECO were KAWASAKI and NRDC (National Development Corporation, which used to be a subsidiary of Philippine National Bank; in other words, it is part government). After the regime of Marcos, shares were surrendered and it was finally under the PCGG. The original Articles of Incorporation provide that shareholder may only sell their shares to third parties after granting the right of first refusal to existing stockholders. NRDC, which already made some money, wanted to liquidate. So, it put its block of shares for auction for the highest bidder to purchase. Now, Kawasaki says no need because we wanted to exercise our right of first refusal. Now, Gokongwei, who was one of the bidders, objected and said that you cannot exercise your right of first refusal because by doing so, the entire PHILSECO will become foreign owned. You can now own real property.

That is what Gokongwei raised when PCGG awarded the shares to Kawasaki. The Supreme Court said that the agreement of the shareholders, KAWASAKI and NRDC, to mutually grant this right to each other as one of the terms of the joint-venture agreement (JVE) by itself does not constitute a violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy Laws, absent proof of any fraudulent intent on the part of KAWASAKI. So, you are a foreigner and you are granted by the law to bid and in so bidding, it turns into a corporation into a foreign corporation, then, you can assign it to somebody. You can enter into an agreement with that somebody. That somebody is a Filipino citizen. Is that using a dummy? According to the Supreme Court, No. So, Gokongwei lost and was not able to purchase the PHILSECO Shipyard. YOU READ THAT CASE BECAUSE THAT IS VERY INTERESTING! Common sense will tell us but that is not how the law interprets it, according to this case. What are the fully and partially nationalized corporations? The following are corporations were no foreign stockholders are allowed: 1) Mass Media (Article XVI, Section 11 of the Constitution) 2) Retail Trade Enterprises with paid-up capital of less than P 2.5 M (Section 5, RA 8762) 3) Private Security Agencies (RA 5487) 4) Small Scale Mining - eg Diwalwal (RA 7076, Section 3) 5) Utilization of Natural Resources (Article XII, Section 2 of the Const) 6) Cockpits (Section 5, PD 449) 7) Manufacturing, Repair, Stockpiling and Distribution of Nuclear Weapons (Article II, Section 8) That is a big joke 8) Manufacture of Firecrackers and Other Pyrotechnic Devices (Section 5, RA 7183) Those must be entirely Filipino. The smallest foreign equity allowed in an enterprise is by Republic Act 3846. Private Radio Communications Network allows 20% foreign equity. The following are allowed with 25% foreign equity: 1) Private Recruitment Agencies, whether for local or overseas Employment Under the Labor Code, it is provided that it should be 75% Filipino. If you allow foreign entities to come in and recruit, then, you are in violation. But the Migrant Workers Act provides that 5 years from the enactment of the law, there would be no more restraint because there is supposed to be free access to manpower. If you are licensing the exporting of manpower, that is a form of trade. And trade should no longer be limited. When that this is applied, all those prisoners who are serving illegal recruitments, they would file habeas corpus proceedings to free them because a criminal law repealed can be retrospectively applied in favor of the accused. That is the wording of the law. It is just that no president has implemented it. But it is the law The Migrant Workers Act (RA 8042). That within 5 years from the effectivity of the law, the whole system of licensing, placement and recruitment shall be abolished. 2) Construction and repair of locally funded works (Section 1, Commonwealth Act 541) 3) And construction and repair of defense-related structures (Section 1, Commonwealth Act 541) But there is no violation if it is the foreign sovereignty who builds the facility like what the US Air Force did in Zamboanga. November 14 Last week, we talked about various corporations as to percentage of equity. The last category we talked about were corporations allowed up to 25% foreign equity. That is private recruitment and entities, whether for local or overseas, under Article 27 of the Labor Doce (PD 442) and construction and repair of government-funded roads under Section 1, Commonwealth Act 541 and corporations engaged in construction and repair of defense-related structures under Section 1, Commonwealth Act 541. Now, corporations with up to 40% of foreign equity. In other words, 60% Filipino, 40% foreign equity. These corporations may engage in :

1.
2. 3.

The exploration, development and utilization of utilization of natural resources (Article XII, Section 2 of the Constitution); realty corporations and other corporations who own private lands (Article XII, Section 7 of the 1987 Constitution); Corporations engaged in operation and management of public utilities (Article XII, Section 11 of the 1987 Constitution);

Jazzie Sarona (3-SR)

Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr. Agustin Nazarenos Lectures

4.
5. 6.

Corporations engaged in the culture, production, milling, processing, training, except retail, of rice, corn and it s byproducts. (Section 5, PD 194 ;Section 15, RA 8762); Corporations engaged in the adjustment business (Section 323, PD 612); and Corporations engaged in sauna and steam bath houses, massages and similar activities (RA 7042).

How about corporations where 60% foreign equity is allowed? What kind of corporations are these where 60% foreign equity is allowed? 1. Financing companies (Section 6, RA 5980, as amended by RA 8556) They will be allowed up to 60% foreign equity if in excess of the 40%, they get the approval of the President of the Republic; 2. Investment houses (Section 5, PD 129, as amended by RA 8366); There is a peculiar ruling that the SC says that this kind of corporation does not have a nationality. What is that corporation? It is a corporation sole. There is a specific section in the Corporation Code where the elder, the bishop, the high priest is constituted by his office as the corporation and by himself or herself, he or she is the corporation. That corporation has no nationality. What is the authority there? It is the landmark case of Roman Catholic Apostolic Administration vs. Register of Deeds of Davao City 102 PHIL 596 (1957). This ruling has been reiterated in Republic vs. Villanueva 114 SCRA 875 (1982). Its good for you to go over the case. Just to remind you that the Register of Deeds at that time was the mother of Judge Quitain. She was one of the earliest lawyer-graduate of the University of the Philippines. She was a good Catholic and the Apostolic Administrator of Davao City was Monsignor Thibault. The RVM Sisters were given land by the Sorianos in Catalunan Grande. The Bishop wanted that land for a cemetery. The sisters and the bishop agree to barter or exchange land. They drew out a Deed of Exchange. When the Apostolic Administrator went to the Register of Deeds to register the transaction and be issued a title, Register of Deeds Quitain refused because the bishop was a foreigner. Father Thibault was French and you are a corporation sole. So, the property will be under the name of Thibault. So, she refused. The lawyers tried to convince her but Register of Deeds Quitain still refused. So, they raised the matter on consulta to the Land Registration Commission. The Land Registration Commission said that the Register of Deeds is correct. No foreigner can own land. Finally, they brought it as a question of law before the SC. The lawyers asked if the corporation sole the owner or is he not just the administrator? So, that the real owner is the congregation. And the administrator, the corporation sole, is just a focal point for purposes of handling the land so that it will not be taken over by any other Catholics or non-Catholics. But that it be the means of passing on, indefinitely by succession, the land. They were arguing that the nationality of the bishop or the elder or the chief priest is irrelevant. What is important is the nationality of most, if not all, of the Catholics or the congregation. That was upheld by the Supreme Court. It is the congregation. The corporation sole has no nationality. And then, you will see there the long discussion of why is there such a thing a corporation sole, a corporation made up of only one person. It is a contradiction of terms. That one person can be constituted as a corporation. Why is it? Actually, the corporation sole is resorted to in order to accommodate the Catholic Church. Because even before the Republic came into being, there were already bishops then. And the system adopted by the Catholic Church is highly radical. It is not a democracy. The bishop is the ruler. Thats why Napoleon, in his Napoleonic code, created that entity known as a corporation sole. From then on, it gained acceptance in Europe. It was then carried on in common law in England and the US. This is one of the landmark cases in land title. This is also a landmark case with respect to corporations. Why is it that one person can be called a corporation under corporation sole? Its like a square circle! You incorporate but usa ra kabuok. That is the history. Now, we go to the second attribute of a corporation, namely, that a corporation has a separate personality on its own. 2. IT HAS A SEPARATE PERSONALITY

The second attribute is known as the DOCTRINE OF LEGAL ENTITY. It means that a corporation is a juridical person with a personality separate and distinct from that of its shareholders. It also means that the stockholders of the corporation are different from the corporation itself. What are the consequences of this concept that a corporation is a separate legal personality from that of the stockholders? a. As to property The stockholders are not the owners of corporate properties and assets. That is asserted by BERMAN ENVIRONMENTAL DEVT. CORP. vs. CA 167 SCRA 514. The interest of the stockholders over the properties of the corporation is merely inchoate. Hence, the stockholders have no personality to intervene a collection case covering the loans of the corporation. SO vs. CA 195 SCRA 740 (1991) What do you mean by inchoate? The interest of the stockholders in the properties of the corporation is inchoate. Let us say you set-up a corporation because you know the vagaries of life and the uncertainty of owning things. You set-up a corporation for purposes of preserving your wealth. Property is contributed by you. Subsequently, you make your children and your wife as stockholders in the formation of the corporation. But, it is you who put everything there. Maybe the corporation was just capitalized at P 1M, paid-up capital. But you keep getting properties. You buy a piece of property and instead of putting it in your name, you put it in the name of the corporation. So, the value of the corporation grows. Let us say you have a big piece of property and suddenly, it is invaded by squatters. Can you not file yourself an eviction suit in your name because you, yourself, stand to be prejudiced because you are the number one contributor? What is the definition of real party in interest? He who stands to be benefited. Why cant you not be the real party and put your name there? That is the argument of the So Family in the SO vs. CA. This is because the real party in interest is the corporation. The corporation is the person who owns it. How about me? I am the real owner. Your interest in the property of the corporation is inchoate. It hangs upon a condition that (a) at the time of the dissolution of the corporation, when the corporations affairs will be liquidated, the corporation is able to liquidate its property, sell them, get cash, pay all its debtors, satisfy all its just and legal obligations and there would still be some money left to give to you in proportion to your holdings of shares of stocks. Should it happen that the liability far exceed your assets, you will get nothing. The corporation must see to it that you get nothing because its first obligation is to pay its more senior creditors. The stockholder is a junior creditor compared to business transaction creditors of the corporation. That is why your interest is inchoate. It is worth emphasizing because in common parlance, when you see John Gokongwei walk down the street he is the owner of Robinsons, he is the owner of Robina, he is the owner of FHM magazine (), he is the owner of Esquire magazine, he is the owner of Cebu Pacific. But that is ordinary language shorthand and it is full of legal loopholes because according to the Supreme Court, his interest is inchoate. Sa panahon na pagtapos na, all the conditions must be met. The corporation must pay its debts and whatever is left, mao na ang bahinbahinon sa stockholders. The assumption is there is something left. What if nothing is left? You hope that there is something left. One year ago, P55 to $1. Now, P42 to $1. Kung sigeg pangutang ana kay kusog ang piso, maabot sa pila katuig, mubalik na sad P 55, kahubo ka sa imong karsones! That is the meaning of inchoate. There are conditions that have to be met and because you are uncertain to the conditions, you do not have a direct interest in the corporation, even if you are 99% stockholder. There is a separate distinct personality between the corporation and you. b. As to liability The stockholders are not personally liable for the debts of the corporation and vice-versa. The stockholders are not liable for corporate acts unless otherwise provided for by law. Does it happen sometimes when borrowing, before lending to the corporation, require the corporation to make its biggest stockholder be a cosignatory of the loan? It happens. This biggest becomes liable thereof, not as a stockholder, but in a personal capacity as a borrower because he signs as a borrower. Suppose he is also the officer of the corporation, who by a Board Resolution is asked by the corporation to represent it? He signs for the corporation and he signs for his personal capacity. He signs twice! He signs for and behalf of the corporation, and secondly, he signs for and in his own behalf. In this case, if the corporation does not pay the debt or cannot pay the debt, you can execute against his personal capacity because he is obligated to the bank to the extent of his personal capacity because he also signed.

Jazzie Sarona (3-SR)

Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr. Agustin Nazarenos Lectures

Had he not done that (?), his personal property cannot answer the debt for a corporation. The corporations property will answer for him. There is only one exception. What is that exception? If he has unpaid subscription to the corporation. The creditors of the corporation can execute up to the extent of his subscription, unpaid subscription, and they can execute from his personal property up to the extent of his unpaid subscription. c. As to forum shopping certification We are still in the consequence of separate legal personality. You know very well that any party who files a case in court must submit a certification of non-forum shopping. The party, in a verified statement, states that there is no other case pending between the same parties in any other court except here, where I am filing this case. Here is a case between a corporation and the union. And the president is impleaded in his official capacity as the president and also, there are allegations that the president is acting in bad faith. In the original filing of the case, the president was not noted (?). He does not have to file a certification of non-forum shopping. It is the complainant. The Labor Arbiter hands down his decision and makes the corporation liable and also the president personally liable for whimsical and malicious acts in dismissing the employees. Now, they appeal. When you appeal, you have to execute a certificate of non-forum shopping. The president signs in the appeal because he was authorized by the board to make the appeal. But he forgot to sign in his personal capacity. He has already been adjudged in the decision. He must appeal to since a judgment against him was made. But he has not. What does the SC say? That is a fatal error. As to you personally, the case has been final and executory since you did not appeal. You think you appealed, but lacking the essential requirement of certification of non-forum shopping, your appeal has not been perfected. That is the case of PET PLANS INC vs. CA 443 SCRA 510 (2001). That is what the Supreme Court said. Even if you signed there, in the certification of non-forum shopping, you were not signing for your personal capacity but for the corporation. The appeal of the corporation is perfected but your appeal personally is not perfected. That is a landmark case. Read that so you can use that in Remedial Law. Subsidiary

Parent Corporation

Subsidiary

If the owning corporation (parent corporation) owns less than 50% of the outstanding capital stock of the subsidiary corporation, it is not called a subsidiary. It is called an affiliate. If the parent corporation owns more than 50%, then, it is called a subsidiary. If the parent corporation owns 95% of the outstanding capital stock of the subsidiary, then, it is called wholly-owned corporation. Why is it wholly-owned when it is 95%? The law recognizes that in order to organize a corporation, you must at least have 5 stockholders. So, no one can really own 100% of the shares, technically speaking. Thats why 95% wholly-owned. 50% or less affiliate. And the implication in accounting is, once you are a subsidiary, your financial statements will be consolidated with the holding or parent corporation. And that begins only when you have more 50% of the outstanding capital stock of the corporation. Now, we are talking about stock corporations. We are not talking about non-stock here when we are talking about parent and subsidiary corporations. What is an example of a holding corporation? An example of a holding corporation is JG Summit. JG Summit is John Gokongwei Summit. And the subsidiaries are Cebu Pacific, Robinsons, Universal Robina and all the different subsidiary corporations JG SUMMIT

Cebu Pacific

Robinsons

Universal Robina

d. As to rights Rights pertaining to the corporation cannot be invoked by the stockholders or officers, even if the latter owns substantial majority of the shares in that corporation. That is the holding in STONEHILL vs. DIOKNO. e. As to tax exemptions Tax exemptions in favor of a corporation cannot be used by the stockholders. MANILA GAS vs. COLLECTOR 62 PHIL 895 (1936).
Now, we come to the exception to the rule that a corporation has a separate and distinct personality from that of its stockholders. What is the exception to that rule? The exception is the so-called DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY. Piercing the veil. It is an unhappy(?) choice of idiom. Because there is the beginning of the formulation of that doctrine, it has stuck. Who would ever pierce the veil? Nobody pierces the veil Sometimes decisions have difficult formulations. But because they are hard-pressed for time, the English is atrocious. The English is overlooked. The only value of this is that because of its awkwardness, you can remember it. This is taken from the 1905 case of US vs. MILWAUKEE REFRIGERATOR TRANSIT CO 142 Federal Reports 247 (1905). This is what the SC said: When the notion of the legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons. The corporate veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping, against criminal liability, etc. That is what the SC said in the case of FIRST PHILIPPINE INTL BANK vs. CA 252 SCRA 259 (1996). (16:40) The general rule is a corporation will be looked upon as a legal entity separate and distinct from its stockholders. The exception is when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will disregard the corporate entity. Now, when is piercing the veil applied to make a parent corporation liable for obligations of the subsidiary corporation?

They are called subsidiary because JG Summit owns more than 50% of the outstanding capital stock. So, we go now to what we are considering the doctrine of piercing the veil. When can we disregard the subsidiary and go straight to the parent and say that the real party in interest, the real one liable, is JG Summit, not Cebu Pacific? When can we do that? These rules apply when the issue is between the parent and the subsidiary. You have to read the case of PNB vs. RITRATTO GROUP, INC. 362 SCRA 216 (2002), as the same is amplified later on in MR HOLDINGS LIMITED vs. BAJAR 380 SCRA 617 (2002) The SC says: You apply piercing the veil of a corporate entity between a parent corporation and its subsidiary when any or a combination or all of the following factors are present: (a) The parent corporation owns all or most of the capital stock of the subsidiary. (b) The parent and subsidiary corporations have common directors or officers. (c) The parent corporation finances the subsidiary. (d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation. (e) The subsidiary has grossly inadequate capital. (f) The parent corporation pays the salaries and other expenses or losses of the subsidiary. (g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. (h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own. (i) The parent corporation uses the property of the subsidiary as its own. (j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary, but take their orders from the parent corporation.

(k)
observed.

The formal legal requirements of the subsidiary are not

*Only 10 were mentioned in class but there were 11 instances mentioned in the cases. The one that was skipped was letter (f). All or a combination of these will justify piercing the veil of the corporate entity of the subsidiary and going straight to the parent corporation.

Jazzie Sarona (3-SR)

Bus Org 2 Corporation Code (Nov 8, 9, 14, 2007) : Fr. Agustin Nazarenos Lectures

However, the SC says that ownership of substantial portion of the outstanding capital in a corporation, by itself, is not enough to justify the application of piercing the veil. Just because the mother corporation owns 95% of the capital of the subsidiary, that is not enough reason, by itself, to invoke validly the doctrine of piercing the veil of corporate entity. That pronouncement of the SC is in FRANCISCO vs. MEJIA 326 SCRA 738 (2001) Now, suppose we are in another situation. We are not in a parentsubsidiary situation. We are in a corporation and person situation. P owns 99% of the capital. The issue here is if the corporation an alter-ego of this natural person so that we will disregard the separate personality of this corporation and go straight to him. When can we pierce the veil of corporate entity? There are several factors to be considered, according to PNB vs. ANDRADA ELECTRIC AND ENGG COMPANY 381 SCRA 244 (2004). (1) Control not mere stock control, but complete domination not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right; and (3) The said control and breach of duty must have proximately caused the injury or unjust loss complained of. There must be not just control, but domination. And second, domination must have resulted to a violation of the law, fraud or perpetuation of a statutory violation. And third, it is the proximate cause of the loss complained of. Thus, in no case, a corporation can be considered as a mere alterego or adjunct or instrumentality of the other because the stockholders are the same and the manager or the person who controls the corporation is the same and the daughter of the majority stockholder. They have the same customers, they hold office in the same building, opened by a majority stockholder and the business operations of the two corporations are merged. Hence, the adjunct corporations obligations are the obligations of the other corporation. That is the pronouncement of the court ESTELITA BURGOS LIPAT vs. PACIFIC BANKING CORP. ET AL. 402 SCRA 339 (2003). So, piercing the veil of corporate entity when you disregard the separate and distinct personality of the corporation. Remember, that is the exception. If you claim that, you have the burden of proof because the general rule is that the corporate has a personality separate and distinct from the parent corporation or from its majority stockholder.

Commandments of Success (Greatest Success in the World Og Mandino) 1. Thou must labor each day as if thy life hung in the balance 2. Thou must learn that with patience ye can control thy destiny 3. Thou must chart thy course with care or ye will drift forever 4. Thou must prepare for darkness while traveling in the sunlight 5. Thou must smile in the face of adversity until it surrenders 6. Thou must realize that plans are only dreams without action 7. Thou must sweep the cobwebs from thy mind before they imprison thee 8. Thou must lighten thy load if ye would reach thy destination 9. Thou must never forget that it is always later than you think 10. Thou must never strive to be anything but thyself

Jazzie Sarona (3-SR)