CORPORATION LAW BOOK I

CHAPTER I: INTRODUCTION • Criticism: lesser opportunity for young-

bloods
THE COMPANY: A SHORT HISTORY OF THE
Tipping Point for the Viability of
REVOLUTIONARY IDEA [Micklethwait and
Wooldridge] Corporations
What are the arguments against corporations? • Capital: Railroads
• The fact that they can circumvent the laws • It made things less costly
to their advantage; they are only motivated o Ronald Coase, “The Nature of the
Firm”: argued that the main reason
by profit
• The Agency Problem: Potential conflict of why a company exists is because it
interest between the shareholders and the minimizes the transaction costs of
coordinating a particular economic
managers/agents who run it
o Adam Smith’s concern: Hired activity. But the gains from reducing
managers would not bring the same transaction costs that companies
deliver have to be balanced against
“anxious vigilance” to their firms’
interests as owner-managers “hierarchy costs” – the costs of central
o Ex: The Enron Scandal managers ignoring dispersed
• British East India Company and Dutch East information
India Company • The “visible hand of managerial direction”
o They had the support of the replaced “the invisible hand of market
government mechanisms”
o They had to ask for a franchise or a
Significant Changes
royal grant
o Monopoly 1. Corporate social responsibilities
2. Government Participation; creation of
corporations became easier
Reason for liberalization of
business/companies: more red tape discourage 3. The governing boards and the internal
businesses structure
• US: “Race to the Bottom”
• But there is higher regulation in terms of Greatest Advantage of Corporation: It
operation of business (i.e. health and labor increased productivity, and it made life easier
regulations)
Advantages of a Corporation vis-à-vis
other business organizations:
Two Theories of Corporation Law:
1. Stakeholder Model – Germany and 1. Capital can be pooled from different
Japan; company is responsible to a sources, and not just one person
2. Limited Liability – liability is limited to the
wider range of interests, wider variety
of social responsibilities (shareholders, extent of his investment (exceptions:
managers, employees, suppliers, piercing the corporate veil; unpaid
subscriptions)
consumers, government agencies)
2. Shareholder Model - Anglo-Saxon 3. Right of Succession – corporation will
model of England and America; continue to exist notwithstanding the fact
company is SOLELY responsible to its that a shareholder leaves, dies, or
shareholders, to those who hold stock becomes incapacitated
in the company.

Drawbacks of Stakeholder Approach vis-à-vis

Shareholder Approach: The Two-Tier Approach
in Stakeholder Model – General Court; Court of
Directors – creates more redtape and makes it
hard to arrive at decisions and policies that will
serve the interests of all stakeholders

STAKEHOLDER MODEL: Lifetime employment

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 CORPORATION LAW BOOK I

ROLE OF CORPORATION IN MODERN stockholders or by transfer of shares to

BUSINESS a third person
(1) Corporate form of business organization (4) It has the powers, attributes, and
permits combination of funds from various properties expressly authorized by law or
sources to raise the bid capital needed for incident to its existence
large business and industrial enterprises • Unlike a natural person who can do
(2) Limitation of liability to the amount of anything as long as he violates no law
investment nor rights of others
(3) Wider employment of manpower and a
fuller development of technical and LAWS GOVERNING PHILIPPINE
managerial skill CORPORATIONS
Current Law: Corporation Code (B.P. Blg. 68)
DIFFERENT ATTRIBUTES OF A which became effective on May 1, 1980
CORPORATION
SECTION 2. A corporation is an artificial being Spanish Regime: Code of Commerce, based
created by operation of law, having the right of on the Spanish Code of 1885
succession and the powers, attributes, and • Corporations were referred to as
properties expressly authorized by law or incident “sociedades anonimas”
to its existence.
American Occupation: Corporation Law (Act
Four Attributes of a Corporation
1459)
(1) It is an artificial being, with a personality
• The law was aimed to replace the sociedad
separate and distinct from its members or
anonima, but it gave the latter the choice
stockholders
to continue as such.
• Stockholders are not personally liable
• If so, they would still be governed by the
for corporate obligations and cannot be
Code of Commerce in matters relating to
held liable to third persons who have
its organization and method of transacting
claims against the corporation beyond
business as well as to the rights of the
their agreed contributions to the
members among themselves
corporate capital
o But it would be governed by the
• Neither may the corporation be liable
Corporation law with respect to its
for the personal obligations of its
relations to the public and public
stockholders
officials
(2) It is created by operation of law
• Those who failed to express their choice
• Under Art. XII, Sec 16, 1987
are deemed by the Supreme Court to have
Constitution, “the Congress shall not,
elected to continue business as sociedad
except by general law, provide for the
anonima
formation, organization, or regulation of
private corporations. Government-
Special Laws Governing Special Kinds of
owned or controlled corporations may
Corporations
be created or established by special
• Insurance Code
charters in the interest of the common
• General Banking Act
good and subject to the test of
• Investment Company Act
economic viability.”
• “By operation of law” – only by
CHOICE OF BUSINESS ORGANIZATION
complying with the requirements of the
Forms of Business Organization
Corporation Code will a corporation
(1) Individual Proprietorship
come into being and acquire a juridical
(2) Partnership
personality; this right is referred to as
(3) Joint Venture
the primary franchise
(4) Business Trust
• For GOCCs, it is created by special law,
often referred to as its charter
Factors to be considered in choosing:
(3) It has a right of succession
(1) Legal Requirements
• Its continued existence is not affected
(2) Effects
by any change in members or
(3) Consequences

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 CORPORATION LAW BOOK I

(1)Individual Proprietorship 2/3 vote of the stocks,

• One-man business except in the case of
• Advantages: expiration of term
o Makes decisions alone, and thus act
without delay or other formalities Dissolution can legally
o Free from many regulations and take place only upon
requirements some state act
o Earnings are subject to income tax only Partners can Only those expressly
once perform any act as granted to it and those
• Disadvantages: long as it does not which are necessary to
o Unlimited personal Liability violate any law or the exercise of such
o Capital is limited by his resources right of others powers
o Expansion would present difficulties
o Business will probably have to stop and (3)Close Corporation
be liquidated upon his death or SECTION 96, Corporation Code. A close
incapacity corporation, within the meaning of this Code, is
one whose articles of incorporation provide that:
(2)Partnership (1) All the corporation's issued stock of all classes,
• Under Article 1767 of the Civil Code, “by exclusive of treasury shares, shall be held of
record by not more than a specified number of
the contract of partnership, two or more
persons, not exceeding twenty (20); (2) all the
persons bind themselves to contribute issued stock of all classes shall be subject to one
money, or industry to a common fund, or more specified restrictions on transfer
with the intention of dividing the profits permitted by this Title; and (3) The corporation
among themselves. shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Partnership Corporation Notwithstanding the foregoing, a corporation shall
Partners are Stockholders cannot be be deemed NOT a close corporation when at least
2/3 of its voting stock or voting rights is
personally liable made personally liable
owned/controlled by another corporation which is
(But in most
not a close corporation within the meaning of this
corporations, credit Code.
cannot be obtained
without the personal Any corporation may be incorporated as a close
guaranty of the corporation except mining or oil companies, stock
principal stockholders) exchanges, banks, insurance companies, public
2 persons 5 persons utilities, educational institutions, corporations
declared to be vested with public interest.
Mere agreement Mere agreement is not
gives rise to a sufficient to form a • A close corporation is one whose articles of
partnership, WON it corporation; incorporation provide that:
is registered with formalities of the law (1) All the corporation's issued stock of all
the SEC must be complied with classes, exclusive of treasury shares,
All the partners Management is shall be held of record by not more
actively participate centralized in the BOD than a specified number of
persons, not exceeding twenty
in the management;
every partner is an (20);
agent of the (2) all the issued stock of all classes
shall be subject to one or more
partnership
specified restrictions on transfer
Personal Has the right of
permitted by this Title; and
Relationship based succession and its
(3) The corporation shall not list in
on trust and existence is not
any stock exchange or make any
confidence; often affected by death,
public offering of any of its stock
referred to as insolvency, or
of any class.
delectus personae incapacity, which gives
• Notwithstanding the said requirements, a
it more stability
corporation shall be deemed NOT a close
Death or insolvency
corporation when at least 2/3 of its voting
will result in Cannot be voluntarily
stock or voting rights is owned/controlled
dissolution dissolved except by
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 CORPORATION LAW BOOK I
by another corporation which is NOT a
close corporation
• Any corporation may be incorporated as a
close corporation EXCEPT:
o Mining or oil companies
o Stock exchanges
o Banks
o Insurance Companies
o Public Utilities
o Educational institutions
o Corporations declared to be vested
with public interest
• Most characteristic feature: identity of
stock ownership and active management
• Code allows the Articles of Incorporation of
a close corporation to do away with a
board of directors, vesting management in
the stockholders themselves
o HOWEVER, stockholders who are
active in management are personally
liable for corporate torts, unless it has
obtained reasonably adequate
insurance
• *Downside: Limited capital; and foregoes
benefit of limited liability
(4)Limited Partnership
• Makes possible the sharing of profits by an
investor, whose liability is limited to his
investment
• Certain formalities have to be complied
with
• Like a stockholder, a limited partner
cannot take part in the management of
the business
• HOWEVER, unlike the corporation, a
limited partnership must have at least one
general partner, who will personally
answer for the debts of the partnership
(5)Joint Venture
• It has no precise legal definition, but has
been generally understood to mean an
organization formed for some temporary
purpose
• Same elements as partnership – doing business in the Philippines on the date of the
community of interest, sharing of profits or
losses, mutual right of control
• The main distinction – Partnership
contemplates a general business; JV is
formed for the execution of a single
transaction – is not entirely accurate in the
Philippines because we have a particular
partnership
• SC cases held that the main distinction is
that a corporation cannot enter into a
partnership but it can enter into a JVA.
• In business, a JV is referred to as the
combination of resources between two
groups
o But from a legal standpoint, this is a
corporation
(6)Business Trust
• The vesting of title to the assets of
business enterprise in trustees, who act as
representatives thereof, for the benefit of
others, called the beneficiaries or the
cestui que trust
• It is of common law origin, and there is no
law in our jurisdiction which recognizes a
business trust as an association or
organization
• Advantages: centralized management in
the hands of trustees; easy transferability
of beneficiaries’ interest
• If trustees are given complete control of
the business without any right to the
beneficiaries to interfere, the beneficiaries
are exempt from personal liability. If it
gives them indirect control, then they are
subject to personal liability.
GOVERNMENT REGULATION OF
CORPORATIONS
(1) Legislature – has the power to amend or
repeal the Corporation Code
(2) SEC – formed in 1936 with the enactment
of CA No. 83 (securities Act), but was later
reorganized by PD 902-A)
*Jurisdiction over intra-corporate cases is now
with the RTC upon the enactment of RA 8799
(Securities Regulation Code), effective August
8, 2000.
EFFECT OF CORPORATION CODE ON
EXISTING CORPORATIONS
SECTION 148. Applicability to existing
corporations. - All corporations lawfully existing and
effectivity of this Code and heretofore authorized,
licensed or registered by the Securities and
Exchange Commission, shall be deemed to have
been authorized, licensed or registered under the
provisions of this Code, subject to the terms and
conditions of its license, and shall be governed by
the provisions hereof: Provided, That if any such
corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise
herein provided, be given a period of not more than
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 CORPORATION LAW BOOK I
two (2) years from the effectivity of this Code within
which to comply with the same. (n)
SECTION 76, Corporation Law. This Act or any
part thereof may be amended or repealed at any
time by the legislative authority, and any or all
corporations created by virtue of this Act may be
dissolved by legislative enactment. No right or
remedy in favor of or accrued against any
corporation, its stockholders or officers, shall be
removed or impaired either by the subsequent
dissolution of said corporation or by any
subsequent amendment or repeal of this Act or of
any part of portion thereof.
Under the two provisions, although a
corporation organized under the Corporation
Law is now governed by the Corporation Code,
any rights accrued or liabilities incurred
prior to the effectivity of the latter in
favor of or against such corporation, its
stockholders or members must be
respected. HOWEVER, any additional
requirements must be complied with within 2
YEARS from its effectivity.
UNION GLASS & CONTAINER CORP v. SEC
November 28, 1983, Escolin, J.
FACTS: Pioneer Glass obtained various loans
from DBP for the construction of a glass plant
in Cavite (and from other sources which DBP
guaranteed). As security, Pioneer mortgaged
and/or assigned its assets to DBP. However, it
was unable to pay the accumulated interests,
hence, these unpaid interests were converted
into equity shares in the name of DBP. And
when Pioneer could no longer meet its financial
obligations, it entered into a dacion en pago
agreement with DBP, whereby all its assets
mortgaged were ceded to DBP. DBP then
leased and subsequently sold to Union Glass
the glass plant. In 1981, Hofilena, a
stockholder of Pioneer, filed a derivative suit
before the SEC against DBP, Union Glass and
Pioneer alleging that the dacion is illegal.
UNION GLASS moved to dismiss on the ground
that SEC has no jurisdiction. Hearing officer
Reyes granted the MTD but reversed upon MR.
UNION GLASS filed a 2nd MR (to have it
reviewed by SEC En Banc) but was denied on
the ground that the proper remedy is appeal.
UNION GLASS then filed this petition for
certiorari and prohibition.
RULING: SEC has no jurisdiction over the
[case] because the controversy involves the
rights of Union Glass who has no intra-
corporate relation with either Hofileña or DBP.
Orders of the SEC are set aside and Union
Glass is ordered to be dropped in the SEC
case.
DOCTRINE: In order that SEC can take
cognizance of a case, the controversy must
pertain to any of the following relationships:
(a) Between the corporation, partnership or
association and the public;
(b) Between the corporation, partnership or
association and its stockholders, partners,
members, or officers;
(c) Between the corporation, partnership or
association and the state in so far as its
franchise, permit or license to operate is
concerned; and
(d) Among the stockholders, partners or
associates themselves.
ABEJO v. DELA CRUZ
May 21, 1987, Teehankee, C.J.
FACTS: Suit between the principal
stockholders – Abejo and Teletronics on the
one hand, and Braga, on the other. 1st suit:
mandamus and injunction filed by Abejos; 2nd
suit: rescission of sale of shares of stock,
transfer/assignment/endorsement of Virginia
Braga’s stock certificates filed by Braga. The
current petitions are (1) petition filed by Abejo
alleging that J. dela Cruz committed GAD in
refusing to dismiss the complaint filed by
Braga (2) petition filed by Braga contending
that the SEC has no jurisdiction.
RULING: SEC has jurisdiction, because this is
an intra-corporate case. The dispute has arisen
between and among the principal stockholders
of the corporation Pocket Bell due to the
refusal of the corporate secretary, backed up
by his parents majority shareholders, to
perform his "ministerial duty" to record the
transfers
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 CORPORATION LAW BOOK I
CHAPTER II: CLASSIFICATION OF
PRIVATE CORPORATIONS
STOCK AND NON-STOCK CORPORATIONS
SECTION 3. Classes of corporations. -
Corporations formed or organized under this
Code may be stock or non-stock corporations.
Corporations which have capital stock divided
into shares and are authorized to distribute to
the holders of such shares dividends or
allotments of the surplus profits on the basis of
the shares held are stock corporations. All
other corporations are non-stock corporations.
Section 87. Definition. - For the purposes of
this Code, a non-stock corporation is one
where no part of its income is distributable as
dividends to its members, trustees, or officers,
subject to the provisions of this Code on
dissolution: Provided, That any profit which a
non-stock corporation may obtain as an
incident to its operations shall, whenever
necessary or proper, be used for the
furtherance of the purpose or purposes for
which the corporation was organized, subject
to the provisions of this Title.
The provisions governing stock corporation,
when pertinent, shall be applicable to non-
stock corporations, except as may be covered
by specific provisions of this Title.
Section 88. Purposes. - Non-stock
corporations may be formed or organized for
charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social,
civic service, or similar purposes, like trade,
industry, agricultural and like chambers, or any
combination thereof, subject to the special
provisions of this Title governing particular
classes of non-stock corporations.
(a) Stock Corporation
• Elements:
(1) It must have capital stock divided
into shares
(2) It must be authorized to distribute to
its shareholders dividends out of its
surplus profits.
• Main Purpose: To make profits for its
shareholders.
• Persons who compose the corporation are
referred to as stockholders
(b)Non-Stock Corporation
• Exists for purposes other than profit, like
civic, religious and charitable
organizations
• However, it does not mean that they
cannot make profits. But unlike stock
corporations, the profits are not
distributed among its members but are
used for the furtherance of its purposes
• The articles of incorporation or by-laws
may provide for the distribution of its
assets among its members upon its
dissolution
o EXCEPT as to those which have been
received by it subject to restrictions
as to use and return, and subject to
the provisions of the Code
• Persons who compose the corporation are
referred to as members
BURWELL v. HOBBY LOBBY
June 30, 2014, Alito, J.
FACTS: Case assails the validity of the
contraceptive mandate of HHS Regulations,
enacted pursuant to the Obamacare Act, as
applied to religious-dissenting closely held
corporations. The Hahn and Green families,
owners of Conestoga and Hobby Lobby Stores
respectively, sought exemption from the
contraceptive mandate because it was contrary
to their religious belief and is therefore an
undue burden on their religious exercise under
the RFRA.
RULING: The regulations are void under the
RFRA as applied to Hobby Lobby Stores and
Conestoga, which are corporations closely-held
by fervently religious families. The term
“person” under the RFRA includes for-profit
closely held corporations, and that the HHS
regulations unduly burdened the religious
exercise of these corporations. The
government failed to show that the application
of the burden to the corporation is “in
furtherance of a compelling government
interest” and is “the least restrictive means of
furthering that compelling interest.”
As applied to closely held for-profit
corporations, the Health and Human Services
(HHS) regulations imposing the contraceptive
mandate violate the Religious Freedom
Restoration Act (RFRA). HHS's contraceptive
mandate substantially burdens the exercise of
religion under the RFRA. The Court assumes
that guaranteeing cost-free access to the four
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 CORPORATION LAW BOOK I
challenged contraceptive methods is a
compelling governmental interest, but the
Government has failed to show that the
mandate is the least restrictive means of
furthering that interest.
CIR v. CLUB FILIPINO
May 31, 1962, Paredes, J.
FACTS: Club Filipino is a civic organization
organized under PH laws. Neither in the
articles or by-laws is there a provision relative
to dividends and their distribution, although it
is covenanted that upon its dissolution, the
Club’s remaining assets, after paying debts,
shall be donated to a charitable Philippine
Institution in Cebu. The Club owns and
operates a club house, bowling alley, golf
course, and a bar-restaurant. The profits were
used to defray its overhead expenses and to
improve its golf-course. In 1951, the Club
declared stock dividends, but no actual cash
dividends were distributed. A BIR agent
discovered that the Club has never paid
percentage tax on the gross receipts of its bar
and restaurants
RULING: The Club is not liable for percentage
taxes.
(1) The Club is not engaged in the business of
an operator of bar and restaurant
(2) Nowhere in its articles of incorporation or
by-laws could be found an authority for the
distribution of its dividends or surplus
profits.
Campos: The case was decided years before
the Corporation Code was approved. Unlike the
Corporation Law, Section 43 of the Code
expressly empowers the board of directors of a
stock corporation to declare dividends out of
unrestricted retained earnings. Hence, it is not
necessary that the authority to distribute
dividends by expressly stated in the articles or
by-laws.
CORPORATION SOLE
Section 110. Corporation Sole. – For the purpose
of administering and managing, as trustee, the
affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole
may be formed by the chief archbishop, bishop,
priest, minister, rabbi or other presiding elder of
such religious denomination, sect or church.
• An incorporated office held by only one
person
• Under the Corporation Code, only a
religious corporation can be a
corporation sole.
*One Person Corporation – A corporation
incorporated by only one person
• vs. corporation sole: purpose;
PARENT AND SUBSIDIARY
CORPORATIONS, HOLDING COMPANIES,
AFFILIATE CORPORATIONS
• A subsidiary corporation is one in which
control, usually in the form of ownership of
majority of its shares, is in another
corporation, called the parent corporation
• Holding company is one whose sole
function is to hold the shares of other
corporations which it controls. It has no
other business aside from holding the
shares of its subsidiaries
• Investment corporation is one who holds
shares in other corporations not for the
purpose of controlling them but merely to
invest therein
• Affiliates are those corporations which
are subject to common control and
operated as part of a system; sometimes
called “sister” companies
DULAY v. CA
August 27, 1993, Nocon, J.
FACTS: Manuel Dulay was authorized through
Board Reso 18 to sell the property to the Sps.
Veloso. Dulay and Veloso executed a deed of
absolute sale with a right to repurchase. Maria
Veloso used the property as collateral for a
loan she secured from Torres. Veloso then
executed a Deed of Absolute Assignment of the
Right to Redeem in favor of Manuel Dulay but
neither redeemed the property. Torres
consolidated the property under his name.
Dulay Inc. contests the Sheriff’s sale by
contending that the sale between M. Dulay and
the Velosos was void since the Board Reso was
not prepared by the Corp. Sec and was not
approved by the Board of Directors.
RULING: Sale is valid. The resolution is a
corporate act because a corporate action taken
at a board meeting without proper call or
notice in a closed corporation is deemed
ratified2 by the absent director unless the
latter promptly files his written objection with
the secretary of the corporation after having
knowledge of the meeting which, in his case,
petitioner Virgilio Dulay failed to do. It is
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 CORPORATION LAW BOOK I

“difficult to believe” such resolution was passed so defective as to come short of creating a
without Virgilio’s knowledge. He is very much corporation within the statute, they become in
privy to the transactions involved. To begin legal effect partners inter se, and their rights
with, he is a incorporator and one of the board as members of the company to the property
of directors designated at the time of the acquired by the company will be recognized.
organization of Manuel R. Dulay Enterprise, However, such a relation does not necessarily
Inc. In ordinary parlance, the said entity is exist, for ordinarily persons cannot be made to
loosely referred to as a "family corporation". assume the relation of partners, as between
The nomenclature, if imprecise, however, fairly themselves, when their purpose is that no
reflects the cohesiveness of a group and the partnership shall exist, and it should be
parochial instincts of the individual members of implied only when necessary to do justice
such an aggrupation of which Manuel R. Dulay between the parties. One who takes no
Enterprises, Inc. is typical: four-fifths of its part except to subscribe for stock in a
incorporators being close relatives namely, proposed corporation which is never
three (3) children and their father whose name legally formed does not become a partner
identifies their corporation. with other subscribers who engage in
business under the name of the pretended
PIONEER INSURANCE v. CA corporation, so as to be liable as such in an
July 28, 1989, Gutierrez, Jr., J. action for settlement of the alleged partnership
FACTS: Jacob Lim owned and operated and contribution.
Southern Airlines as the sole proprietor. In
order to expand, he induced several people to
give him money for the expansion of his
airlines, w/c will be considered as their share in
the corporation he will set up. The new
airplanes bought for the expansion were
secured by Pioneer Insurance. Lim defaulted
on the payments, so Pioneer paid the supplier
and sued Bormaheco, Maglana, and the
Cervanteses on the theory that, as a result of
the failure of Lim et al to incorporate, a de
facto partnership among them was created,
and as a consequence, all must share in the
gains or losses of the venture in proportion of
their contribution.

RULING: Bormaheco, Maglana, and the

Cervanteses are not liable. No de facto
partnership was created. The record shows
that Lim was acting on his own and not in
behalf of his other would-be incorporators in
transacting the sale of the airplanes and spare
parts. RESPs allege that Lim promised to
incorporate his airline IAW their agreement
and proceeded to acquire the planes on his
own account. Since then, Lim has refused,
failed and still refuses to set up the corporation
or return the money.

DOCTRINE: It is ordinarily held that persons

who attempt, but fail, to form a corporation
and who carry on business under the corporate
name occupy the position of partners inter se.
Thus, where persons associate themselves
together under articles to purchase property to
carry on a business, and their organization is

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 CORPORATION LAW BOOK I

CHAPTER III: FORMATION AND o Schools (Art. XIV, Sec. 4(2),

ORGANIZATION OF CORPORATION Constitution)
o Other areas of investment as
congress may provide (Art. XII,
WHO MAY FORM A CORPORATION
SECTION 10. Number and Qualifications of Sec. 10, Constitution)
Incorporators. – Any number of natural persons not • However, where more than 40% of the
less than five (5) but not more than fifteen (15), all outstanding capital is to be owned or
of legal age and a majority of whom are residents of controlled by aliens, a written
the Philippines, may form a private corporation for authorization must be obtained from
any lawful purpose or purposes. Each of the the BOI before it can register with the
incorporators of a stock corporation must own or be SEC
a subscriber to at least one (1) share of the capital o Ratio: TO enable the BOI to
stock of a corporation.
determine whether such corporation
would contribute to the sound and
Incorporators – those stockholders or
balanced development of national
members mentioned in the articles of
economy
incorporation as originally forming and
• Moreover, SEC requires a timely notice
composing the corporation who are signatories
and stock exchanges, stating the exact
Corporators -
number of shares which may be sold
without impairing such limitation
(1)Must be a Natural Person
(4)Restrictions on stock ownership of
• Only natural persons can be
closely knit groups
incorporators
• Under present law, no bank may be
• HOWEVER, the law does not preclude
licensed to operate if the stockholdings
corporations and partnerships from
of any one person, or persons related to
becoming stockholders or members as
each other within the 3rd degree of
long as they are not incorporators
consanguinity or affinity exceed 20% of
• By special law, cooperatives and
the bank’s voting stock
corporations primarily organized to hold
• Under Article 140, maximum limits may
equities in rural banks may be
be set by Congress for stockholdings:
incorporators
1. In corporations declared by it to
(2)At least 5 incorporators
be vested with a public interest
• They must sign the articles of
2. In corporations belonging to
incorporation
individuals or groups of individuals
• This requirement, which was not
related to each other by
present under the old law, does not
consanguinity or affinity or by
necessarily prevent the existence of a
close business interests
“one-man corporation”
3. Whenever it is necessary to
o It is possible for him to incorporate
a. Achieve national objectives,
by giving nominal ownership of only
b. Prevent illegal monopolies or
1 share of stock to each of the 4
combinations in restraint or
(3)Residence requirement; citizenship
trade, or
requirement only in certain areas
c. Implement national economic
• The Code requires that a majority of the
policies declared in laws, rules
incorporators be RESIDENTS of the PH
and regulations designed to
• GR: No citizenship requirement for
promote the general welfare
private corporations
and foster economic
• EXCEPTIONS:
development
o Public utilities (Art. XII, Sec. 11,
• Article 97 allows close corporations to
Constitution)
provide in their articles of incorporation
o Retail trade banks (RA 1180, RA
for qualifications for owning or holding
337, RA 720, RA 4093)
stocks therein.
o Investment houses (PD 129)
o Savings and loan associations (RA SECTION 140. Stock Ownership in certain
3779) corporations. – Pursuant to the duties specified by
Article XIV of the Constitution, the NEDA shall, from

9
 CORPORATION LAW BOOK I
time to time, make a determination of whether the
corporate vehicle has been used by any corporation
or by business or industry to frustrate the provisions
thereof or of applicable laws, and shall submit to the
Batasang Pambansa, whenever deemed necessary,
a report of its findings, including recommendations
for their prevention or correction.
Maximum limits may be set by the Batasang
Pambansa for stockholdings in corporations declared
by it to be vested with a public interest pursuant to
the provisions of this section, belonging to
individuals or groups of individuals related to each
other by consanguinity or affinity or by close
business interests, or whenever it is necessary to
achieve national objectives, prevent illegal
monopolies or combinations in restraint or trade, or
to implement national economic policies declared in
laws, rules and regulations designed to promote the
general welfare and foster economic development.
In recommending to the Batasang Pambansa
corporations, businesses or industries to be declared
vested with a public interest and in formulating
proposals for limitations on stock ownership, the
National Economic and Development Authority shall
consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the
geographic location, the extent of Filipino
ownership, the labor intensity of the activity, the
export potential, as well as other factors which are
germane to the realization and promotion of
business and industry.
SECTION 97. Articles of incorporation. - The
articles of incorporation of a close corporation may
provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same
and restrictions on their transfers as may be
stated therein, subject to the provisions of the
following section;
2. For a classification of directors into one or
more classes, each of whom may be voted for
and elected solely by a particular class of
stock; and
3. For a greater quorum or voting requirements
in meetings of stockholders or directors than
those provided in this Code.
The articles of incorporation of a close corporation
may provide that the business of the corporation
shall be managed by the stockholders of the
corporation rather than by a board of directors. So
long as this provision continues in effect:
1. No meeting of stockholders need be called to
elect directors;
2. Unless the context clearly requires otherwise,
the stockholders of the corporation shall be
deemed to be directors for the purpose of
applying the provisions of this Code; and
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
The articles of incorporation may likewise provide
that all officers or employees or that specified
officers or employees shall be elected or appointed
by the stockholders, instead of by the board of
directors.
STEPS IN FORMATION OF CORPORATION
(1) Promotional Stage
(2) Drafting Articles of Incorporation
(3) Filing of Articles; Payment of Fees
(4) Examination of articles; approval or
rejection by SEC
(5) Issuance of certificate of incorporation
(1)Promotional Stage
SECTION 2, Revised Securities Act.
(r) “Promoter” includes (1) any person who,
acting alone or in conjunction with one or more
other persons, directly or indirectly, takes initiative
in founding and organizing the business or
enterprise of an issuer; or (2) any person who, in
connection with the founding or organizing of the
business of an issuer, directly or indirectly, receives
in consideration of services or property or both
services or property 10% or more of any class or
securities of the issuer or 10% or more of the
proceeds from the sale of any class of such
securities. However, a person who receives such
securities or proceeds either solely as underwriting
commissions or solely as consideration of property
shall not be deemed a promoter within the meaning
of this paragraph if such person does not otherwise
take part in founding and organizing the enterprise.
• Code requires that before incorporation
o At least 25% of the authorized capital
stock of the proposed corporation should
be subscribed and
o At least 25% of this subscription should
be paid in
• In many cases, promoters are also
incorporators
• In order to protect the public from
unscrupulous promoters, the Securities Act,
before allowing registration, requires
disclosure of all pertinent information
regarding
(1) The purposes, character and nature of
the business,
(2) The financial position of the proposed
corporation,
(3) the financial responsibility of its
directors and officers, and
(4) The nature and other circumstances of
the shares to be issued
• These matters must appear in a
registration statement which must be
10
 CORPORATION LAW BOOK I
published in 2 newspapers once a week for
2 consecutive weeks
• If all requirements are complete, the SEC
shall issue an order making the registration
effective and grant the corporation a permit
to offer securities named in the certificate
of sale
o Issuance does not mean that the
registration statement is true and
accurate or that it was given approval of
the security involved
o Issuance is merely permissive and does
not constitute a recommendation or
endorsement of the securities permitted
to be offered
• Exempted from registration: pre-
incorporation subscriptions upto the
minimum amount required before a subscribers showing that at least twenty-five (25%)
corporation may be registered, provided no
commission is paid in connection with their
disposition
(2)Drafting Articles of Incorporation
SECTION 14. Contents of the articles of
incorporation. - All corporations organized under
this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the
official languages duly signed and acknowledged by
all of the incorporators, containing substantially the
following matters, except as otherwise prescribed by
this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the
corporation is being incorporated. Where a
corporation has more than one stated
purpose, the articles of incorporation shall
state which is the primary purpose and which
is/are the secondary purpose or purposes:
Provided, That a non-stock corporation may
not include a purpose which would change or
contradict its nature as such;
3. The place where the principal office of the
corporation is to be located, which must be
within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the
incorporators;
6. The number of directors or trustees, which
shall not be less than five (5) nor more than
fifteen (15);
7. The names, nationalities and residences of
persons who shall act as directors or trustees
until the first regular directors or trustees are
duly elected and qualified in accordance with
this Code;
8. If it be a stock corporation, the amount of its
authorized capital stock in lawful money of
the Philippines, the number of shares into
which it is divided, and in case the share are
par value shares, the par value of each, the
names, nationalities and residences of the
original subscribers, and the amount
subscribed and paid by each on his
subscription, and if some or all of the shares
are without par value, such fact must be
stated;
9. If it be a non-stock corporation, the amount
of its capital, the names, nationalities and
residences of the contributors and the amount
contributed by each; and
10. Such other matters as are not inconsistent
with law and which the incorporators may
deem necessary and convenient.
The Securities and Exchange Commission shall not
accept the articles of incorporation of any stock
corporation unless accompanied by a sworn
statement of the Treasurer elected by the
percent of the authorized capital stock of the
corporation has been subscribed, and at least
twenty-five (25%) of the total subscription has been
fully paid to him in actual cash and/or in property
the fair valuation of which is equal to at least
twenty-five (25%) percent of the said subscription,
such paid-up capital being not less than five
thousand (P5,000.00) pesos.
• Constitute the charter of the corporation
(a) Corporate Name
SECTION 18. Corporate Name. – No corporate
name may be allowed by the SEC if the proposed
name is identical or deceptively or confusingly
similar to that of any existing corporation or to any
other name already protected by law or is patently
deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved,
the Commission shall issue an amended certificate
of incorporation under the amended name.
• Must not be (1) identical or
deceptively or confusingly similar to
(a) any existing corporation or (b)
other name already protected by
law or (2) patently deceptive,
confusing or contrary to existing
laws.
PHILIPS EXPORT BV v. CA
February 21, 1992, Melencio-Herrera, J.
FACTS: PETs filed a letter-complaint with the
SEC for the cancellation of the word “Philips”
from RESP’s (Standard Philips Corporation)
corporate name in view of the prior registration
with the Bureau of Patents in of the
trademarks above in the name of PEBV, and
Philips Electrical’s and Philips Industrial’s
11
 CORPORATION LAW BOOK I
previous registration in the SEC. RESP
contends that its use of its corporate name is
not at all similar to PET’s trademark name
when considered in its entirety, and that its
products (chain rollers, belts, bearings and
cutting saw) are grossly different from PET’s
electrical products. SEC ruled in favor of RESP,
because PET’s corporate name contains at
least 2 different words different from that of
RESP.
RULING: RESP ordered to drop “Philips” from
its corporate name.
1. While the corporate names aren’t identical,
a reading of which leads one to conclude
that “Philips” is indeed the dominant
word in that all the companies affiliated or
associated with the principal corporation are
known in the Philippines and abroad as the
Philips Group of Companies. No actual proof
of confusion is needed, only that it is
probable or likely to occur.
2. Also, the articles of incorporation of RESP
include the sale of electronics. That said,
nothing could prevent it from dealing in the
same line of business of electrical devices,
products or supplies which fall under its
primary purpose. The choice of using
“Philips” as part of its corporate name tends
to show that RESP intends to ride on the
popularity and established goodwill of PET’s
business.
3. Philips is a trademark registered in 1922.
Petitioners, therefore, have the exclusive
right to use which must be free from any
infringement by similarity.
4. RESP’s name actually contains only a single
word – STANDARD – different from that of
Petitioners.
DOCTRINE: Sec. 18 of the Corporation Code
provides the requisites that must be proven
by complainant:
1. That the complainant corporation
acquired a prior right over the use of
such corporate name; and
2. The proposed name is either:
a. Identical;
b. Deceptively or confusingly similar to
that of any existing corporation or
to any other name already
protected by law; or
c. Patently deceptive, confusing or
contrary to existing law.
For the second requisite, the test is whether
the similarity is such as to mislead a
person using ordinary care and
discrimination.
It is a fraud on the corporation which has
acquired a right to that name and perhaps
carried on its business thereunder, that
another should attempt to use the same
name, or the same name with a slight
variation in such a way as to induce persons
to deal with it in the belief that they are
dealing with the corporation which has given a
reputation to the name.
LYCEUM OF THE PHILIPPINES v. CA
July 28, 1989, Gutierrez, Jr., J.
FACTS: Lyceum of the Philippines, Inc. filed an
action in SEC against other educational
institutions to have them stop using the word
“Lyceum” claiming its rights over the name.
Petitioner argues that the word "Lyceum" has
acquired a secondary meaning in relation to
petitioner with the result that that word,
although originally a generic, has become
appropriable by petitioner to the exclusion of
other institutions RESPs.
RULING: While the appellant may have
proved that it had been using the word
'Lyceum' for a long period of time, this fact
alone did not amount to mean that the said
word had acquired secondary meaning in its
favor because the appellant failed to prove that
it had been using the same word all by itself to
the exclusion of others. More so, there was no
evidence presented to prove that confusion will
surely arise if the same word were to be used
by other educational institutions.
DOCTRINE: Under the doctrine of secondary
meaning, a word or phrase originally incapable
of exclusive appropriation with reference to an
article in the market, because geographical or
otherwise descriptive might nevertheless have
been used so long and so exclusively by
one producer with reference to this article that,
in that trade and to that group of the
purchasing public, the word or phrase has
come to mean that the article was his produce.
P.C. JAVIER & SONS v. CA
June 29, 2005, Chico-Nazario, J.
FACTS: P.C. Javier tries to stop the extra-
judicial foreclosure of their property, claiming
that they didn’t pay their loan payments
12
 CORPORATION LAW BOOK I
because they were not notified of the change
in corporate name of First Summa into PAIC
Savings.
RULING: There is no requirement under a law
or a regulation ordering a bank that changes
its corporation name to formally notify all its
debtors. And in this case, evidence abound
that they had notice or knowledge of the
change despite not receiving a formal notice.
A change in corporate name does not make a
new corporation, whether effected by a special
act or under a general law. It has no effect on
the identity of the corporation, or on its
property, rights or liabilities. The corporation,
upon such change in its name, is in no sense a
new corporation, nor the successor of the
original corporation. It is the saeme
corporation with a different name, and its
character is in no respect changed.
PHILIPPINE FIRST INSURANCE CO. V.
HARTIGAN
July 28, 1989, Gutierrez, Jr., J.
FACTS: Yek Tong Lin Fire and Marine
Insurance Co. Ltd. changed its name to
‘Philippine First Insurance Corp” by amending
its AOI. However, allegedly still under its old
name, it signed a PN as co-maker with
Hartigan under the Yek Tong name. Hartigan
agreed to execute an indemnity agreement in
favor of Yek Tong/Phil First. When Phil. First
wanted to collect on the indemnity agreement
after Hartigan failed to pay its obligation on the
PN, Hartigan argued that the indemnity
agreement was signed in favor of Yek Tong,
not in favor of Phil. First. Thus, Phil. First has
no personality to file the suit.
RULING: Phil. First may bring the suit. Sec.
18 lays down procedure for amending AOI. It
does not have provisions against change of
name, but it has provisos restricting the power
to amend when it comes to the term of
existence and the increase or decrease of
capital stock.
DOCTRINE: A corporation may change its
name merely by amending its charter in the
matter prescribed by law. What is contrary to
public policy is the use by one corporation of
the name of another corporation as its trade
name.
Mere change in name does not generally affect
the identity of the corporation nor in any way
affect the rights, privileges or obligations
previously acquired or incurred by it.
ZUELLIG v. NLRC
July 22, 2013, Bersamin, J.
FACTS: San Miguel filed a complaint for ULP,
illegal dismissal, non-payment of salaries and
moral damages against Zuellig (formerly
known as Zeta Brokerage Corporation). Zuellig
countered that San Miguel was dismissed for
an authorized cause – closure of business.
RULING: The amendments of the articles of
incorporation of Zeta to change the corporate
name to Zuellig Freight and Cargo Systems,
Inc. did not produce the dissolution of the
former as a corporation. Under the Corporation
Code, change of corporate name is not one of
the modes of dissolving a corporation. Hence,
the renamed corporation remains liable for the
illegal dismissal of its employee separated
under that guise.
Zuellig, despite its new name, was the mere
continuation of Zeta’s corporate being, and still
held the obligation to honor all of Zeta’s
obligations, one of which was to respect San
Miguel’s security of tenure. The dismissal of
San Miguel from employment on the pretext
that petitioner, being a different corporation,
had no obligation to accept him as its
employee, was illegal and ineffectual.
* Why is corporate name important?
• Identity
• Goodwill
*Why is it important to get the name right at
the start?
• It will determine the identity of your
corporation; and this will be the one
that will stick to the public
• It will be hard to change a name
*Why would corporations change their names?
• Change in business
• Merger
• Avoid liabilities or defraud creditors
(b)Purpose
SECTION 88. Purposes. - Non-stock corporations
may be formed or organized for charitable, religious,
educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes,
like trade, industry, agricultural and like chambers,
or any combination thereof, subject to the special
13
 CORPORATION LAW BOOK I
provisions of this Title governing particular classes
of non-stock corporations.
• Under the Corporation Code, a
corporation may have as may
purposes it wants as long as it
states the primary and the
secondary purpose
• Significance of purpose clause:
confers as well as limits the powers
which a corporation may exercise
• BALLANTINE: Three reasons for
requiring a purpose clause:
(1) So that a prospective
stockholder who is
contemplating an investment
shall know within what lines of
business his money will be
risked
(2) So that management may know
within what lines of business it
is authorized to act
(3) So that anyone who deals with
the corporation may ascertain,
if he wishes, whether a (e) Incorporators and
contract/transaction into which
he contemplates entering is one
within the general authority of
the management.
• Under the Corporation Code, a
corporation may have as many
purposes as it may wish to include
as long as the primary and the
secondary purpose is specified –
they need not be related to each
other
• HOWEVER, corporations for which
special provisions are made in the
Corporation Code or which are
governed by special laws, can have
only the purpose peculiar to them
and no other
• In all cases, the purpose/s must be
lawful
(c) Principal Office of Corporation
• Only requirement is that it must be
within the Philippines
• The statement of principal office
establishes residence of the
corporation
o Important for determining
venue in an action; and places
from which to get licenses, and
where to file taxes
• Articles must specify the
city/municipality and the province;
[no specific provision in the law but
in the form, it states the
city/municipality and the province]
(d)Term of Existence
SECTION 11. Corporate Term. – A corporation shall
exist for a period not exceeding fifty (50) years from
the date of incorporation unless sooner dissolved or
unless said period is extended. The corporate term
as originally stated in the articles of incorporation
may be extended for periods not exceeding fifty
(50) years in any single instance by an amendment
of the articles of incorporation, in accordance with
this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may
be determined by the Securities and Exchange
Commission.
• Should not exceed 50 years but
may be extended forever by
amendment as long as each
extension does not exceed 50 years
Directors/Trustees; Number and
Qualifications
• Directors – for stock; Trustees – for
non-stock
• No citizenship requirements (except
for public utilities)
• *Directors need not be
incorporators
• Non-stock corporations may have
more than 15 trustees (except for
educational corporations, which
must be in multiples of 5)
• For merger of banks, the law allows
as many directors as there are
merging banks even though in
excess of 15.
• The AOI must also name the
treasurer to receive on behalf of
the corporation, all subscriptions or
contributions paid by them
(f) Capital Stock; Subscription;
Payment
SECTION 13. Amount of capital stock to be
subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%)
of the authorized capital stock as stated in the
articles of incorporation must be subscribed at the
time of incorporation, and at least twenty-five
(25%) per cent of the total subscription must be
paid upon subscription, the balance to be payable
on a date or dates fixed in the contract of
subscription without need of call, or in the absence
14
 CORPORATION LAW BOOK I
of a fixed date or dates, upon call for payment by
the board of directors: Provided, however, That in
no case shall the paid-up capital be less than five
Thousand (P5,000.00) pesos.
• The AOI must state the amount of
authorized capital stock and
number of shares into which it is
divided.
o Share may be par value shares
or no par value shares
• Capital Stock – amount fixed in
the AOI “to be subscribed and paid
in or secured to be paid in or
secured to be paid in by the
shareholders of a corporation, at
the organization of the corporation
or afterwards and upon which it is
to conduct its operations
• Subscription – mutual agreement
of the subscribers to take and pay
for the stock of a corporation
• Par Value Share – one in which
the certificate of stock of which
appears an amount in pesos as the
nominal value of the shares; sets
the minimum price for the issuance
of the shares
• Issued Value – consideration for
which no par value shares may be
issued; may be fixed in any of three
ways: (1) By AOI, (2) BoD when so
authorized by said articles of by the
by-laws, or (3) by the stockholders
representing at least a majority of
the outstanding capital stock
*When must the subscribers pay their
subscriptions? It will be stated in the
subscription contract; if they are really
delinquent, the corporation may make a
resolution setting a deadline for payment.
*Does the Corporation Code provide for a
minimum capitalization? NO. But since the
minimum paid up capital is 5,000, effectively
the minimum capitalization is P80,000.
• 5,000 is 25% of 20,000 (minimum
subscription requirement)
• 20,000 is 25% of 80,000 à minimum
authorized capital stock
(g)Other Matters
• Classes of shares which the shares
of stock have been divided as well
as the preferences of and
restrictions on any such loss.
(h)Close Corporations
SECTION 96. A close corporation, within the
meaning of this Code, is one whose articles of
incorporation provide that: (1) All the corporation's
issued stock of all classes, exclusive of treasury
shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty
(20); (2) all the issued stock of all classes shall be
subject to one or more specified restrictions on
transfer permitted by this Title; and (3) The
corporation shall not list in any stock exchange or
make any public offering of any of its stock of any
class. Notwithstanding the foregoing, a corporation
shall be deemed NOT a close corporation when at
least 2/3 of its voting stock or voting rights is
owned/controlled by another corporation which is
not a close corporation within the meaning of this
Code.
Any corporation may be incorporated as a close
corporation except mining or oil companies, stock
exchanges, banks, insurance companies, public
utilities, educational institutions, corporations
declared to be vested with public interest.
• Corp will be governed by chapter on
closed corps only if its articles
provide for certain specific matters
• Code allows close corps to be
“incorporated partnerships” by
adding special provisions in its AOI
(3)Filing of Articles; Payment of Fees
• For those covered by special laws, the
AOI will not be accepted for filing unless
accompanied by recommendation of
appropriate government agency
• Failure to file will prevent due
incorporation, will not give rise to
juridical personality. It will not even be
a de facto corporation.
(4)Examination of articles; approval or
rejection by SEC
SECTION 17. Grounds when articles of
incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation
or disapprove any amendment thereto if the same is
not in compliance with the requirements of this
Code: Provided, That the Commission shall give the
incorporators a reasonable time within which to
correct or modify the objectionable portions of the
articles or amendment. The following are grounds
for such rejection or disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed herein;
2. That the purpose or purposes of the
corporation are patently unconstitutional,
15
 CORPORATION LAW BOOK I
illegal, immoral, or contrary to government
rules and regulations;
3. That the Treasurer's Affidavit concerning the
amount of capital stock subscribed and/or
paid is false;
4. That the percentage of ownership of the
capital stock to be owned by citizens of the
Philippines has not been complied with as
required by existing laws or the Constitution.
No articles of incorporation or amendment to
articles of incorporation of banks, banking and
quasi-banking institutions, building and loan
associations, trust companies and other financial
intermediaries, insurance companies, public utilities,
educational institutions, and other corporations
governed by special laws shall be accepted or
approved by the Commission unless accompanied
by a favorable recommendation of the appropriate
government agency to the effect that such articles
or amendment is in accordance with law.
Grounds for rejection or disapproval of
AOI
(1) AOI or amendments not substantially in
accordance with form
(2) Purpose/s are patently unconstitutional,
illegal, immoral, contrary to government
rules and regulations
(3) Treasurer’s affidavit concerning amount
of capital stock subscribed or paid is false
(4) Required percentage of ownership of
capital stock to be owned by citizens of
the Philippines has not been complied
with as required by existing laws or
Constitution
(5) Broader Ground: It is inconsistent with
declared national economic policies
• If non-compliant, SEC must give the
incorporators a reasonable time within
which to correct or modify the
objectionable portions.
• Any decision for disapproving or
rejecting the AOI may be appealed to
the CA by petition for review.
(5)Issuance of certificate of
incorporation
• If SEC is satisfied that all legal
requirements have been complied with,
it will issue a certificate of incorporation
• It is only upon such issuance that the
corporation acquires a juridical
personality distinct and separate from
its members
SECTION 19. Commencement of corporate
existence. - A private corporation formed or
organized under this Code commences to have
corporate existence and juridical personality and is
deemed incorporated from the date the Securities
and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their
successors shall constitute a body politic and
corporate under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance with
law.
DEFECTIVE ATTEMPTS TO INCORPORATE;
DE FACTO CORPORATIONS
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.
Elements of a De Facto Corporation
(1) There is an apparently valid statute
under which the corporation with its
purposes may be formed
(2) That there has been colorable
compliance with the legal requirements in
good faith
(3) That there has been user of corporate
powers, i.e. the transaction of business in
some way as if it were a corporation
De Jure Corporation v. De Facto
Corporation
The existence of a de jure corporation cannot
be successfully attacked even in a quo
warranto proceeding by the State
(1)Use of Corporate Powers
• Just a slight evidence of conducting
business as a corporation will be
deemed sufficient to constitute user of
corporate powers
• There is user of corporate powers when
the people are already dealing with
third persons
• Acts that may constitute user of
corporate powers: taking subscriptions,
issuance of share of stocks, buying a lot
and constructing and leasing a building
• Mere election of directors and officers
does not constitute user of corporate
powers
16
 CORPORATION LAW BOOK I
(2)Laws subsequently declared Void
• Prevailing View: There can be no de
facto corporation under a Statute
subsequently declared unconstitutional
• But there has been an increasing
tendency to recognize its existence
where the corporation in good faith did
all that is required under said statute to
form a valid corporation
• In any event, even if no de jure
corporation is recognized, limited
liability of the stockholders could still be
possible under the doctrine of estoppel
MUNICIPALITY OF MALABANG v. BENITO
July 28, 1989, Gutierrez, Jr., J.
FACTS: The Municipality of Balabagan was
created through EO 36 of President Garcia out
of the barrios of Malabang. In the case of
Pelaez, the Court declared Sec. 68 of the
Administrative Code unconstitutional. The
Municipality and its Mayor brought this action
for prohibition to nullify EO 386 and to restrain
RESP officials from performing their functions.
RESPs argue that the rule in Pelaez can have
no application to this case because, unlike the
municipalities in Pelaez, the municipality of
Balabagan is atleast a de facto corporation,
hence its existence cannot be collaterally
attacked.
RULING: Balabagan is not a de facto
corporation. The mere fact that Balabagan was
organized at a time when the statute had not
been invalidated cannot conceivably make it a
de facto corporation because, independently of
the Administrative Code provision in question,
there is no other valid statute to give color of
authority to its creation.
DOCTRINE: A de facto office or municipal
corporation can only exist under color of an
unconstitutional statute where there is some
other valid law under which the organization
may be effected.
The color of authority requisite to the
organization of a de facto municipal
corporation may be:
(1) A valid law enacted by the legislature.
(2) An unconstitutional law, valid on its
face, which has either
(a) Been upheld for a time by the courts
or
(b) Not yet been declared void;
(3) Provided that a warrant for its creation
can be found in some other valid law or
in the recognition of its potential
existence by the general laws or
constitution of the state
There can be no color of authority in an
unconstitutional statute alone, the
invalidity of which is apparent on its face.
(3)“Substantial” or “Colorable”
compliance
• Much difficulty has been encountered in
determining when compliance is
substantial, when it is only colorable,
and when it is less than colorable
• While the corporation is still in the
process of formation, it is quite clear
that there can be no “substantial” or
“colorable” compliance and therefore,
there cannot be at such stage a de
factor corporation.
HARILL v. DAVIS
July 28, 1989, Gutierrez, Jr., J.
FACTS: Davis et al., after agreeing to form a
corporation, ordered goods from Harill even
before they filed their articles of incorporation.
After filing the AOI with the clerk of CA (one of
the 2 public offices required by law), they
ordered additional goods. Harill filed a case to
recover the price from Davis et al as partners.
Lower Court ruled in favor of Davis et al.
RULING: They are liable individually as
partners. No de facto corporation was formed.
Under the general law of Arkansas, the filing of
articles of incorporation with the clerk of CA
was a sine qua non of any color of a legal
corporation. Without that, there was not, and
there could not be an apparent corporation.
To give to a body of men assuming to act as a
corporation, where there has been no attempt
to comply with the provisions of any law
authorizing them to become such, the status
as a de facto corporation, might open the door
to frauds upon the public.
DOCTRINE: The general rule is that parties
who associate themselves together actively
engage in business for profit under any name
are liable as partners for the debts they incur
under that name. It is an exception to this rule
that such associates may escape individual
liability for such debts by a compliance with
incorporation laws or by a real attempt to
17
 CORPORATION LAW BOOK I

comply with them which gives the color of a more than the latter had made similar
legal corporation, and by the user of the representations to them.
franchise of such a corporation in the honest
belief that it is duly incorporated. CORPORATION BY ESTOPPEL
SECTION 21. Corporation by Estoppel. - All persons
When the fact appears that parties associated who assume to act as a corporation knowing it to be
and knowingly incurred liabilities under a given without authority to do so shall be liable as general
name, the legal presumption is that they are partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided,
governed by the general rule, and the burden
however, That when any such ostensible corporation
is upon them to prove that they fall under
is sued on any transaction entered by it as a
some exception. corporation or on any tort committed by it as such,
it shall not be allowed to use as a defense its lack of
HALL et al v. PICCIO et al corporate personality.
June 29, 1950, Bengson., J.
FACTS: Petitioners and respondents signed On who assumes an obligation to an ostensible
and acknowledged the articles of incorporation corporation as such, cannot resist performance
thereof on the ground that there was in fact no
of Far Eastern Lumber and Commercial Co.,
corporation.
Inc. The AOI were filed with the Sec. However,
before the issuance of the certificate of
The doctrine of corporation by estoppel is
incorporation, RESPs filed an action before CFI
based on equity considerations.
Leyte alleging that FEL was an unregistered
partnership, and they wished to have it
Effect of Doctrine of Corporation by
dissolved because of bitter dissension among
Estoppel
the members. Judge Piccio ordered the
As to the persons who acted as a
dissolution of the company and appointed a
corporation: (1) All persons who assume to
receiver. PETs filed a special action alleging
act as a corporation knowing it to be without
that the Court has no jurisdiction to decree
authority to do so shall be liable as general
dissolution of a company, because it being a de
partners for all debts, liabilities and damages
facto corporation, dissolution may only be
incurred (2) Cannot raise lack of corporate
ordered in a quo warranto proceeding, and
personality as a defense.
inasmuch as RESPs Brown had signed the AOI,
they are estopped from claiming that it is not a
*Meaning they cannot invoke limited liability;
corporation but only a partnership.
and they are liable in their individual capacity
RULING:
As to a third party: Cannot resist
(1) Not having obtained the certificate of
performance of obligation to alleged
incorporation, Far East and its
corporation on ground that there was no
incorporators/stockholders may not claim
corporation in a suit brought by the alleged
in “good faith” to be a corporation. Unless
corporation. 3P is deemed to have admitted
there have been evident attempt to
existence of corporation by virtue of dealing
comply with the law, the claim to be a
with it as a corporation.
corporation under this act could not be
made in good faith. Moreover, this is not a
However, if a 3P contracts with a fraudulent
suit where the corporation is a party. This
corporation which misrepresented itself as
is litigation between the stockholders of
such, and 3P had no knowledge of defect, 3P
the alleged corporation, for the purpose of
may sue the associates as if they were general
obtaining its dissolution. Even the
partners and the associates who formed the
existence of a de jure corporation may be
fraudulent corporation cannot claim the 3P is
terminated in a private suit for its
estopped. They cannot profit by their own
dissolution between stockholders, without
misrepresentation. (Estoppel on 3P will apply if
the intervention of the State.
it’s the alleged corporation that brings the
(2) Estoppel does not apply because nobody
suit).
was led to believe anything to his
prejudice and damage. The complaining
NOTE: Reliance and non-reliance by the
associates have not represented to the
injured party is irrelevant.
others that they were incorporated any

18
 CORPORATION LAW BOOK I
Corporation by Estoppel v. De Facto
Corporation
If requisites of a de facto corporation are
present, a defectively formed corporation will
have status of a de jure corporation in all cases
brought by or against it, except by the state in
a direct proceeding.
However, if any requisite is absent, the alleged
corporation or the 3P may be estopped
depending on the circumstances.
Individual liability of the “stockholders” when
neither de facto nor estoppel doctrines apply in
their favor will be as general partners.
But who will be liable? All associates or only
those active in the business? (Code says “all
persons who assume to act as a corporation.”)
ASIA BANKING CORP v. STANDARD
PRODUCTS CO.
September 11, 1924, Cranson, J.
FACTS: Standard Products, Co. Inc. owed Asia
Banking Corporation the amount of
P37,757.22. As a security for this
indebtedness, it executed a Promissory Note in
favor of Asia Banking. This action was filed to
recover P24,736.47, the balance of the debt.
TC ruled in favor of Asia Banking. Standard
Products avers that during trial, Asia Banking
failed to prove affirmatively the corporate
existence of the parties and it insists that
under these circumstances the TC erred in
finding that the parties were corporations with
juridical personality.
RULING: Standard Products, having
recognized the corporate existence of the
Asia Banking by making a promissory note
in its favor and making partial payments on
the same is therefore estopped to deny its
corporate existence. It is, of course, also
estopped from denying its own corporate
existence. Thus, it was unnecessary for Asia
Banking to present other evidence of the
corporate existence of either of the parties.
DOCTRINE: The general rule is that in the
absence of fraud a person who has contracted
or otherwise dealt with an association in such a
way as to recognize and in effect admit its
legal existence as a corporate body is thereby
estopped to deny its corporate existence in any
action leading out of or involving such contract
or dealing, unless its existence is attacked for
cause which have arisen since making the
contract or other dealing relied on as an
estoppel and this applies to foreign as well as
to domestic corporations.
CRANSON v. INTERNATIONAL BUSINESS
MACHINES CORP.
1964, Horney, J.
FACTS: IBM filed an action against Cranson for
the balance due on the electric writers bought
by Real Estate Service Bureau on the theory
that the Real Estate service Bureau was
neither a de jure nor a de facto corporation.
The Bureau was formed under Maryland laws,
but due to an oversight, the certificate of
incorporation, which had been signed or
acknowledged prior to May 1, 1961, was not
filed until November 24, 1961. The purchase of
electric writers was done between May 17 and
November 8.
RULING: Cranson cannot be held personally
liable due to the doctrine of estoppel on the
part of IBM. IBM, having dealt with the Bureau
as if it were a corporation and relied on its
credit rather than that of Cranson, is estopped
to assert that the Bureau was not incorporated
at the time the typewriters were purchased.
DOCTRINE: The doctrine of estoppel to deny
the corporate existence is generally employed
where the person seeking to hold the officer
personally liable has contracted or otherwise
dealt with the association in such a manner as
to recognize and in effect admit its existence
as a corporate body.
Where one has recognized the corporate
existence of an association, he is estopped to
assert the contrary with respect to claims
arising out of such dealings.
SALVATIERRA v. GARLITOS
May 23, 1958, Felix, J.
FACTS: Rufuerzo, acting as president of
Philippine Fibers Producers, entered into a
lease contract with Salvatierra over the latter’s
parcel of land. Philippine Fibers was an
unincorporated association. When Rufuerzo
failed to perform his obligation, Salvatierra
sued both the company and Rufuerzo.
Rufuerzo set up the defense of separate
juridical personality of the company, in order
to limit his liability.
19
 CORPORATION LAW BOOK I
RULING: Rufuerzo is liable. The circumstances
surrounding the execution of the contract lead
to the inescapable conclusion that Salvatierra
was really made to believe that such
corporation was duly in accordance with law.
onsidering that Rufuerzo, as president of the
unregistered corporation Philippine Fibers, was
the moving spirit behind the consummation of
the lease agreement by acting as its
representative, his liability cannot be limited or
restricted as if he was a corporate shareholder.
He acted with knowledge that the corporation
was unregistered, therefore he assumed the
risk of reaping the consequential damages or
resultant rights, if any, arising out of such
transaction.
DOCTRINE: General rule – person who
contracted or dealt with association is estopped
from denying its corporate existence
Exception – where fraud takes place, and the
plaintiff was unaware that the corporation had
no juridical personality.
CHIANG KAI SHEK v. CA
April 18, 1989, Cruz, J.
FACTS: Oh has been a teacher in Chiang Kai
Shek since 1932. In 1968, she was terminated.
She then filed a complaint against Chiang Kai
Shek and later on impleaded the officers. CFI
dismissed the complaint. CA reversed and held
that the school is suable and liable.
RULING: Chiang Kai Shek is liable. Under Act
2706 and CA 180, it was required to be
incorporated within 90 days after the date of
its recognition by the Government. Having
been recognized by the gov’t, CSK had
obligation to incorporation under the
Corporation law, within 90 days from such
recognition – having not done so at the time
the complaint was filed notwithstanding its
existence even earlier than 1932, CSK cannot
now invoke its own non-compliance with law as
immunity from suit [apply Sect. 21 Corp.
Code]
Having contracted with Oh for 32 years and
representing itself as possessed of juridical
personality, CSK is estopped from denying
such personality to defeat Oh’s claim against it
(used Article 1431 of the Civil Code).
LOZANO v. DELOS SANTOS
June 19, 1997, Puno, J.
FACTS: Lozano and Anda agreed to
consolidate their respective Jeepney Operators’
and Drivers’ Assoc. However, the new
association was not yet approved, neither was
the articles of consolidation submitted.
Elections were held and Lozano won as the
president of the new association. Anda
protested the results and refused to abide by
the agreement. Lozano then filed a case for
damages with the MCTC. Anda filed a MTD on
the ground of lack of jurisdiction.
RULING: It is the MCTC which has jurisdiction
over the case because this is not an intra-
corporate case. Lozano and Anda have no
intra-corporate relationship with each other
because their plan to consolidate was still a
proposal and had not yet been approved by the
SEC, and neither has the officers and members
submitted the AoI.
The doctrine of corporation by estoppel is not
applicable. The doctrine applies when persons
assume to form a corporation and exercise
corporate functions and enter into business
relations with 3rd persons. Where there is no
third person involved and conflict arises only
among those assuming the form of a
corporation, who therefore know that it has not
been registered, there is no corporation by
estoppel. Moreover, the doctrine cannot
override jurisdictional requirements.
Jurisdiction is fixed by law and is not subject to
the agreement of the parties.
LIM TONG LIM v. PHIL. FISHING GEAR
INDUSTRIES, INC.
November 3, 1999, Panganiban, J.
FACTS: (Background: Lim requested Yao, who
was engaged in commercial fishing, to join
him, along with Chua, Yao’s partner. The three
then acquired 2 fishing from CMF Fishing
Corporation – later on, acquired 2 more boats
– financed by Jesus Lim.) The boats were in
the name of Lim. Pursuant to their business
agreement, Yao and Chua bought nets and
floats from PH Fishing Gear, in behalf of
“Ocean Quest Fishing Corporation.”
Subsequently, Chua and Yao filed a case
agAoInst Lim for declaration of nullity of
commercial documents, reformation of
contracts, declaration of ownership of fishing
boats, injunction and damages. This was
settled through a compromise agreement
20
 CORPORATION LAW BOOK I
where they agreed to pay the loan with PH
Fishing Gear with the proceeds of sale of the
boats, and to divide equally among them the
excess or loss. Thereafter, PH Fishing Gear
filed against Chua, Yao, and Lim for the unpaid
nets and floats.
RULING: (1) There was a partnership formed
among them. It is clear that CHUA, YAO and
LIM had decided to engage in a fishing
business, which they started by buying boats
worth P3.35 million, financed by a loan secured
from Jesus Lim who was petitioner's brother.
In their Compromise Agreement, they
subsequently revealed their intention to pay
the loan with the proceeds of the sale of the
boats, and to divide equally among them the
excess or loss. The argument that he was a
lessor and not a partner is illogical. It is
unreasonable – in fact, absurd – for petitioner
to sell his property to pay a debt he did not
incur, if the relationship among them was
merely that of a lessor-lessee.
(2) It is true that petitioner did not directly act
on behalf of the corporation. However, having
reaped the benefits of the contract entered into
by persons with whom he previously had an
existing relationship, he is deemed to be part
of said association and is covered by the scope
of the doctrine of corporation by estoppel.
DOCTRINE: The doctrine of corporation by
estoppel may apply to the alleged corporation
and to a third party. In the first instance, an
unincorporated association, which represented
itself to be corporation, will be estopped from
denying its corporate capacity in a suit against
it by a third person who relied in good faith on
such representation. It cannot allege lack of
personality to be sued to evade its
responsibility for a contract it entered into and
by virtue of which it received advantages and
benefits.
On the other hand, a third party who, knowing
an association to be unincorporated,
nonetheless treated it as a corporation and
received benefits from it, may be barred from
denying its corporate existence in a suit
brought against the alleged corporation. In
such case, all those who benefited from the
transaction made by the ostensible
corporation, despite knowledge of its legal
defects, may be held liable for contracts they
impliedly assented to or took advantage of.
INT’L EXPRESS TRAVEL & TOURS v. CA
October 19, 2000, Kapunan, J.
FACTS: Int’l Express provided its services as
travel agency to the Philippine Football
Federation, through its President, Henri Kahn.
It secured the airline tickets of the athletes and
officials of the Federation to the South East
Asian Games. The Federation failed to fully pay
the amount of the airline tickets, hence, IETT
filed a case against Khan, in his personal
capacity and capacity as President, and in the
alternative, the Federation. Khan alleged that
IETT has no cause of action against him
because he did not guarantee the payment but
merely acted as agent of the Federation. RTC
ruled in favor of IETT and held Khan personally
liable, absolving the Federation. Only Khan
appealed. CA reversed and absolved Khan,
recognizing the juridical existence of the
Federation. And since IETT did not appeal the
RTC decision, the alternative prayer of IETT is
denied.
RULING: The PH Football Federation is not
a national sports association within the
purview of the law. Hence, Khan should
be held liable for the unpaid obligations of
the unincorporated Football Federation.
As correctly observed by the CA, both RA 3135
and PD 604 recognized the existence of
national sports associations. However, the
corporate status of the sports associations
does not automatically take place by mere
passage of laws. 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. Nowhere can it be found in R.A.
3135 or P.D. 604 any provision creating the
Philippine Football Federation. These laws
merely recognized the existence of national
sports associations and provided the manner
by which these entities may acquire juridical
personality.
The laws require that before an entity may be
considered as a national sports association,
such entity must be recognized by the
accrediting organization, the Philippine
Amateur Athletic Federation under R.A. 3135,
and the Department of Youth and Sports
Development under P.D. 604. This fact of
recognition, however, Henri Kahn failed to
substantiate.
21
 CORPORATION LAW BOOK I
Hence, Khan is liable for the unpaid
obligations. It is a settled principle in
corporation law that any person acting or
purporting to act on behalf of a corporation
which has no valid existence assumes such
privileges and obligations and becomes
personally liable for contracts entered into or
for other acts performed by such agent. As
president of the Federation, Khan is
presumed to have known about the corporate
existence or non-existence of the Federation.
The doctrine of corporation by estoppel is
mistakenly applied. The application of the
doctrine applies to a third party only when he
tries to escape liability on a contract from
which he has benefited on the irrelevant
ground of defective incorporation. In the case
at bar, the petitioner is not trying to escape
liability from the contract but rather is the one
claiming from the contract.
INTERNAL ORGANIZATION OF
CORPORATION
(1) Approval of by-laws
(2) Election of directors
(3) Election of officers
(1)By-Laws
SECTION 35. Corporate Powers and Capacity. –
Every corporation incorporated under this Code has
the power and capacity:
(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.
SECTION 46. Adoption of By-laws. – Every
corporation formed under this Code, must, within 1
month after receipt of official notice of the issuance
of its certificates of incorporation by the SEC, adopt
a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-
laws by the corporation, the affirmative vote of the
stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of
the members, in the case of non-stock corporation,
shall be necessary. The by-laws shall be signed by
the stockholders or members voting for them and
shall be kept in the principal office of the
Corporation, subject to the inspection of the
stockholders or members during office hours; and a
copy thereof, duly certified to by the majority of the
directors or trustees and countersigned by the
secretary of the corporation, shall be filed with the
SEC which shall be attached to the original articles
of incorporation.
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed prior
to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and
submitted to the Securities and Exchange
Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only upon the
issuance by the Securities and Exchange
Commission of a certification that the by-laws are
not inconsistent with this Code.
The Securities and Exchange Commission shall not
accept for filing the by-laws or any amendment
thereto of any bank, banking institution, building
and loan association, trust company, insurance
company, public utility, educational institution or
other special corporations governed by special laws,
unless accompanied by a certificate of the
appropriate government agency to the effect that
such by-laws or amendments are in accordance with
law.
SECTION 47. Contents of by-laws. – Subject to the
provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a
private corporation may provide in its by-laws for:
1. The time, place and manner of calling and
conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and
conducting regular or special meetings of the
stockholders or members;
3. The required quorum in meetings of
stockholders or members and the manner of
voting therein;
4. The form for proxies of stockholders and
members and the manner of voting them;
5. The qualifications, duties and compensation of
directors or trustees, officers and employees;
6. The time for holding the annual election of
directors of trustees and the mode or manner
of giving notice thereof;
7. The manner of election or appointment and
the term of office of all officers other than
directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner
of issuing stock certificates; and
10. Such other matters as may be necessary for
the proper or convenient transaction of its
corporate business and affairs.
• By-laws are the product of the
agreement of the stockholders or
members and establish the rules for the
internal government of the corporation.
• The by-laws are subordinate to the AoI
as well as to the Corporation Code and
related statutes, and should therefore not
be inconsistent with any of these.
22
 CORPORATION LAW BOOK I
Otherwise, they would have no binding
effect. [LGVHA (South) v. CA, 1997]
• The by-laws are kept in principal office of
corporation subject to inspection of the
stockholders or members voting for them
during office hours.
• Note on Sec 47: by-laws may provide for
time, place, and manner of calling and
conducting directors’ meetings, but it can
provide only for the time and manner of
calling and conducting stockholders’
meetings
o Stockholders’ meetings must be held
at the principal office
WHEN TO FILE
• For the convenience of incorporators, the
Code allows the adoption and filing of by-
laws even prior to incorporation.
o HOWEVER, they must be approved
by all the incorporators, and not
merely by majority vote, and must
be submitted to the SEC with the AOI
• Effect of failure to file by-laws:
ground for suspension or revocation of its
certificate of registration
• If it is filed after incorporation, it must be
field within 1 month from incorporation
• Under Sec. 46, by-laws shall, in ALL
cases, be effective only upon the
issuance by the SEC of a certification
that they are not inconsistent with the
Code
• Once approved by the SEC, the by-laws
will bind the corporation and all
stockholders or members.
• BUT in Board of Liquidators v. Heirs of
Maximo Kalaw, the Court held that
contracts entered into without strict
compliance with the by-laws may, due to
long acquiescence and usage, be binding
on the corporation, which may be
deemed to have waived such compliance.
LGV HOMEOWNERS (SOUTH)
ASSOCIATION v. CA
August 7, 1997, Romero, J.
FACTS: LGVHAI registered itself with the HIGC
as the sole homeowners association in LGV.
However, it failed to file its by-laws within 1
month from its incorporation. Later on, 2 more
associations within the subdivision was formed.
And when LGVHAI President inquired about its
status, HIGC informed him that LVGHAI has
been automatically dissolved. LGVHAI then
filed a complaint questioning the revocation of
its certification of registration. HIGC ruled in its
favor and revoked the certificates of
registration of the North and South association.
The South Association appealed alleging that
the failure to file by-laws within the prescribed
period results in the automatic dissolution of
the corporation, as seen by the use of the word
“must” in the law.
RULING: Failure to file the by-laws within 1
month from incorporation does not result in
the automatic dissolution of the corporation.
Re: interpretation of “must” in Sec 46,
Corporation Code: Taken as a whole and
under the principle that the best interpreter of
a statute is the statute itself, Sec. 46 reveals
the legislative intent to attach a directory, and
not mandatory, meaning for the word “must”.
As to the consequence of non-filing:
Although the Corporation Code requires the
filing of by-laws, it did not expressly provide
for the consequences of non-filing within the
period. However, this was rectified by PD 902-
A, Sec 6, which states that the SEC shall
possess the ff. powers: (1) To suspend,
revoke, after proper notice and hearing, the
franchise or certificate of registration of
corporations, partnerships or associations upon
any of the grounds provided by law, incl:
failure to file by-laws within the required
period. Even under this provision, there is no
automatic corporate dissolution. Proper
notice and hearing are cardinal components of
due process in any democratic institutions.
FLEISCHER v. BOTICA NOLASCO CO.
March 14, 1925, Johnson, J.
FACTS: Fleischer acquired shares of stock of
Botica Nolasco from Manuel Gonzales. The
Corporation, however, refused to register them
in his name. So Fleischer filed a case against
the BoD of Botica Nolasco praying that they be
ordered to register in its books the 5 shares of
stock in his favor and to pay damages. RESP
filed a demurrer alleging that the facts do not
constitute a sufficient cause of action, and that
pursuant to Article 12 of its by-laws, it had
preferential right to buy from Fleischer the
shares at par value. CFI ruled in favor of
Fleischer and held that Art. 12 of the by-laws is
void because it was in conflict with Sec. 35 of
the Corporation Law.
RULING: Art. 12 of the by-laws is null and
23
 CORPORATION LAW BOOK I
void for being against Sec. 35 of the
Corporation Code. The only restraint imposed
by Sec 35 of Act No. 1459 is that the transfer
must be entered and noted upon the books of
the corporation. It contains no restriction as to
whom they may be transferred or sold.
Moreover, the by-law in question cannot have
any effect on Fleischer who had no knowledge
of such by-law when the shares were assigned
to him. Since by-laws operate merely as
internal rules among the stockholders, they
cannot affect or prejudice third persons who
deal with the corporation, unless they have
knowledge of the same.
DOCTRINE: The power of a corporation to
enact by-laws restraining the sale and transfer
of shares should not only be in harmony with
the law or charter of the corporation, but such
power should be expressly granted in said law
or charter.
Campos note: the Corporation Code allows
reasonable transfer restrictions in close
corporations.
GOVERNMENT OF THE PHILIPPINE
ISLANDS v. EL HOGAR FILIPINO
July 13, 1927, Street, J.
FACTS: The Government of the Philippine
Islands filed a quo warranto action against El
Hogar be excluded from all corporate rights
and privileges and effecting a final dissolution
of said corporation on the basis of seventeen
different cases of action.
RULING: Article 10 of the by-laws is null and
void. Articles 71, 92, and 70 are not.
Article 10 (giving the BOD the power to
cancel shares), is in direct conflict with Sec.
187 of the Corporation Law which provides that
the BOD shall not have the power to force the
surrender and withdrawal of unmatured stock
except in case of liquidation or forfeiture of
stock for delinquency.
Article 71 (giving directors the power to elect
from among the shareholders members to fill
the vacancy in BOD until the election at a
general meeting) is valid. There can be no fault
imputed to the corporation on account of the
failure of the shareholders to attend the annual
meetings.
Article 92 (5% of net profit is distributed to
the directors in proportion to their attendances
at the board meetings) is valid. The power to
fix compensation is left to the corporation, to
be determined in its by-laws.
Article 70 (requiring persons elected as BOD
to be holders of shares of the padi up value of
P5,000 which shall be held as security) is valid.
Corporation Law expressly gives the power to
the corporation to provide in its by-laws for the
qualifications of its directors and the
requirement of security from them for the
proper discharge of the duties of their office in
the manner prescribed in Article 70 is highly
prudent and in conformity with good practice.
DOCTRINE:
1. There is no provision of law making it a
misdemeanor to incorporate an invalid
provision in the by-laws of a corporation;
and if there were such, the hazards
incident to corporate effort would be
largely increased.
2. If a mistake has been made, or the rule
adopted in the by-laws has been found to
work harmful results, the remedy is in the
hands of the stockholders who have the
power at any lawful meeting to change the
rule.
(2)Election of directors and officers;
commencement of business
SECTION 22. Effects on non-use of corporate
charter and continuous inoperation of a corporation.
– If a corporation does not formally organize and
commence the transaction of its business or the
construction of its works within two (2) years from
the date of its incorporation, its corporate powers
cease and the corporation shall be deemed
dissolved. However, if a corporation has commenced
the transaction of its business but subsequently
becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for
the suspension or revocation of its corporate
franchise or certificate of incorporation.
This provision shall not apply if the failure to
organize, commence the transaction of its
businesses or the construction of its works, or to
continuously operate is due to causes beyond the
control of the corporation as may be determined by
the Securities and Exchange Commission.
SECTION 25. Corporate officers, quorum. –
Immediately after their election, the directors of a
corporation must formally organize by the election
of a president, who shall be a director, a treasurer
who may or may not be director, a secretary who
shall be a resident and citizen of the Philippines, and
such other officers as may be provided for in the by-
laws.
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 CORPORATION LAW BOOK I

• “Formally organize” includes not only

the adoption of by-laws but also the
establishment of the body which will
administer the affairs of the corporation
and exercise its power
Board of Directors
• The AOI name the initial members of
the board who are to act until the first
set of regular directors are duly elected
and qualified [Sec. 14(7)]
• Once the directors are elected, they
must complete the organization by
electing their officers.
• After the by-laws have been approved
and the directors have been elected,
the corporation is ready to commence
business, which it should do within 2
years from the date of incorporation,
otherwise, its corporate powers will
cease and the corporation is deemed
dissolved.
• *Usually, the BOD are the incorporators
Officers
• Elected by the directors
• President must be a director
• Treasurer – may or may not be a
director
• Secretary – must be a resident and
citizen of the Philippines

(3)Annual Financial Statements

• This requirement is aimed to assist the
SEC in the exercise of its supervisory
powers over all corporations (SEC rule
issued Nov. 20, 1980)
• This requirement applies to both stock
and non-stock corporations

25
 CORPORATION LAW BOOK I
CHAPTER IV: CORPORATE ENTITY
THEORY OF CORPORATE ENTITY; ITS
EFFECTS
• The issuance of the CoI marks the beginning
of the corporation’s existence as a legal
entity.
• As such, it acquires the right to sue and be
sued, to hold property in its own name,
enter into contracts with third persons, and
to perform all other legal acts
• Recall: a corporation has a personality
distinct and separate from its sotckholders
or members
• Since corporate property is owned by the
corporation as a juridical person, the
stockholders have no claim on it as owners,
but have merely an expectancy or
inchoate right should any of it remain
upon dissolution after all corporate creditors
have been paid
o Hence, it cannot bring an action for
replevin to recover property of
corporation
• Although a stockholder’s interest in the
corporation may be attached by his personal
creditor, the latter cannot use corporate
property to satisfy his claim.
• Nevertheless, a stockholder has been held
to have an insurable interest in the
corporate property
• Conversely, a corporation has no interest in
the individual property of its stockholders,
UNLESS transferred to the corporation.
o Thus, it cannot bring an action on
behalf of its stockholders or members
for the purpose of recovering property
which belongs to them in their
personal capacities
Immunity
• A corporation is entitled to immunity against
unreasonable searches and seizures
• However, the legality of contested warrants
and seizures cannot be assailed by its
individual stockholders
STOCKHOLDERS OF GUANZON and SONS
v. REGISTER OF DEEDS
October 30, 1962, Bautista-Angelo, J.
FACTS: Five stockholders of the F. Guanzon
and Sons, Inc. executed a certificate of
liquidation of the assets of the corporation
reciting that by virtue of a resolution of the
stockholders on Sept. 17, 1960, dissolving the
corporation, they have distributed among
themselves in proportion to their
shareholdings, as liquidating dividends, the
assets. RoD and Commissioner of Land
Registration denied to register the certificate
on the ground of non-payment of Reg. fees
and DST and non-certification of the number of
parcels in the acknowledgement. Petitioners
appealed alleging that the certificate of
liquidation is not a conveyance.
RULING: The act of liquidation made by the
stockholders of the F. Guanzon and Sons, Inc.
of the latter's assets is not and cannot be
considered a partition of community property,
but rather a transfer or conveyance of the title
of its assets to the individual stockholders.
Since the purpose of the liquidation, as well as
the distribution of the assets of the
corporation, is to transfer their title from the
corporation to the stockholders, that transfer
cannot be effected without the corresponding
deed of conveyance.
DOCTRINE: While shares of stock constitute
personal property, they do not represent
property of the corporation. The
corporation has property of its own which
consists chiefly of real estate. A share of stock
only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds
to that extent when distributed according to
law and equity, but its holder is not the owner
of any part of the capital of the corporation.
Nor is he entitled to the possession of any
definite portion of its property or assets. The
stockholder is not a co-owner or tenant in
common of the corporate property.
CARAM v. CA
June 30, 1987, Cruz, J.
FACTS: The service of Arellano was obtained
by Baretto and Garcia for the preparation and
pre-organization of Filipinas Orient Airways.
After the preparations were complete the
Carams joined as investors. After not being
paid, Arellano filed a case against Filipinas
Orient, Barretto, Garcia, and the Carams. CA
ruled in favor of Arellano and held all
defendants solidarily liable. The Carams
appealed alleging that they should not be held
solidarily liable.
RULING: the Carams are not liable at all. As a
bona fide corporation, Filipinas Orient Airways
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 CORPORATION LAW BOOK I
should alone be liable. (1) Petitioners were not
really involved in the initial steps that finally
led to the incorporation of Filipinas Orient. In
the CA decision, Barretto was described as the
“moving spirit”. If at all, the most that can be
said is that they benefited from such services,
but that surely is no justification to hold them
personally liable. (2) There was no showing hat
the Filipinas Orient Airways was a fictitious
corporation and did not have a separate
juridical personality, to justify making the
petitioners, as principal stockholders,
responsible for the obligations.
PALAY v. CLAVE
September 21, 1983, Melencio-Herrera, J.
FACTS: Palay Inc, through its President,
Onstott, entered into a CTS with RESP, which
had an automatic rescission clause. Upon
default of payment, PET had considered the
CTS rescinded without giving any notice to
RESP. 6 years later, RESP wanted to pay but
the lot had been resold. Upon complaint, NHA
and OP held for the RESP and ordered PET and
its President jointly and severally liable.
RULING: Rescission is invalid, but the
president cannot be held solidarily liable with
the corporation. While the veil of corporate
fiction may be pierced, no badges of fraud
exist on Onstott’s part. Onstott cannot be
made liable merely because he was then the
President and he appeared to be the
controlling stockholder. No sufficient proof on
record that said he used the corporation to
defraud Dumpit.
DOCTRINE: A corporation is invested by law
with a personality separate and distinct from
the persons composing it as well as from that
of any other legal entity to which it may be
related. General rule: the corporation may
not be made to answer for the acts or liabilities
of its stockholders or those of the legal entities
to which it may be connected with, and vice
versa.
Mere ownership by a single stockholder or by
another corporation of all or nearly all the
capital stock is not of itself sufficient ground
for disregarding the separate corporate
personality.
J.G. SUMMIT HOLDINGS v. CA
January 31, 2005, Puno, J.
FACTS: JG won in a public bidding to purchase
the shares of PHILSECO for privatization.
Kawasaki, the government’s partner in the JV
(PHILSECO) exercised its right to top the
highest bid for the Govt’s 86% ownership. JG
alleged that there is a violation because
Kawasaki would be acquiring more than 40%
equity. In addition, PHILSECO would be in
violation of the Constitution because it owned
land up to the time of the bidding when the
equity structure would change.
RULING: Kawasaki/PHI can exercise its right
to top. And in exercising its RFR, it can exceed
40% in PHILSECO. If the foreign shareholdings
of a landholding corporation exceeds 40%, it is
not the foreign stockholder’s ownership of
shares w/c is adversely affected but the
capacity of the corporation (PHILSECO) to own
land – that is, the corporation becomes
disqualified to own land.
This is based on the fact that the corporation
and its stockholders are separate juridical
entities. The right of first refusal pertains
to the shareholders whereas the capacity
to own land pertains to the corporation.
Thus, the fact that PHILSECO owns land cannot
deprive stockholders of their RFR.
TRANAT MERCANTILE v. CA
November 7, 1994, Vitug, J.
FACTS: dela Cuesta, doing business under
“Farmer’s Machineries” sold a Tractor to Tranat
Mercantile. Ong, as president of Tranat, issued
a check as payment. Ong then sold the tractor
to MWSS. MWSS refused to pay, and as a
result, Ong also caused the “stop payment” on
the check it made to dela Cuesta. Dela Cuesta
then sued Ong. RTC ruled that Tranat and Ong
are jointly and severally liable.
RULING: Ong cannot be held solidarily liable
because he acted as an officer of the
corporation, not in his personal capacity.
DOCTRINE: Personal liability of a corporate
director, trustee or officer along with the
corporation may so validly attach, as a rule,
only when:
(1) He:
(a) Assents to a patently unlawful act of
the corporation; or
(b) For bad faith or gross negligence in
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 CORPORATION LAW BOOK I
directing its affairs; or
(c) For conflict of interest, resulting in
damages to the corporation, its
stockholders or other persons;
(2) He consents to the issuance of watered
stocks or, having knowledge thereof, does
not file with the corporate secretary his
written objection thereto;
(3) He agrees to hold himself personally and
solidarily liable with the corporation; or
(4) He is made, by a specific provision of law,
to personally answer for his corporate
action.
DISREGARDING CORPORATE ENTITY
• The privilege of being treated as an entity
distinct and separate from the stockholders
is confined to legitimate uses and is
subject to equitable limitations to prevent
is being exercised for fraudulent, unfair or
illegal purposes
o Aside from this general guideline,
there is no hard and fast rule
• Some instances where piercing the
corporate veil is applied: evasion of taxes or
other requirements of law, issues of ER-EE
relationship, escape of liability to 3rd persons
• vs. De Facto Corporation: Under the
doctrine of piercing the corporate veil, it
may be presumed that the corporation is de
jure or even de facto. However, it is NOT its
due incorporation that is being questioned
but its use of the privileges which attach to
the corporate entity.
When the Corporate Veil is pierced:
(1) When it is done to commit a wrong
(2) When the law provides
(3) In close corporations
(4) Alter-ego Theory
(5) Instrumentality Rule
“Instrumentality Rule”
Where one corporation is so organized and
controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality
or adjunct of the other, the fiction of the
corporate entity of the ‘instrumentality’ may be
disregarded. The control necessary to invoke
the rule is not majority or even complete stock
control but such domination of finances,
policies and practices that the controlled
corporation has, so to speak, no separate
mind, will or existence of its own, and is but a
conduit for its principal. It must be kept in
mind that the control must be shown to have
been exercised at the time the acts complained
of took place. Moreover, the control and breach
of duty must proximately cause the injury or
unjust loss for which the complaint is made.
[Concept Builders v. NLRC]
Some probative factors of identity that will
justify the application of the doctrine of
piercing the corporate veil:
(1) Stock ownership by one or common
ownership of both corporations
(2) Identity of directors and officers
(3) The manner of keeping corporate books
and records
(4) Methods of conducting the business
The test in determining the applicability of the
doctrine of piercing the veil of corporate fiction
is as follows: [PNB v. Hydro Resources]
1. CONTROL TEST: Control, not mere
majority or complete stock control, but
complete domination, not only of
finances but of policy and business
practice in respect to the transaction
attacked so that the corporate entity as to
this transaction had at the time no
separate mind, will or existence of its own;
2. FRAUD TEST: Such control must have
been used by the defendant to commit
fraud or wrong, to perpetuate the
violation of a statutory or other positive
legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal rights; and
3. HARM TEST: The aforesaid control and
breach of duty must proximately cause
the injury or unjust loss complained of.
Effect of Piercing the Corporate Veil:
• The law will regard the corporation, ONLY IN
THAT PARTICULAR CASE, as:
(1) A mere association of persons, or
(2) In case of two corporations, merge
them into one
• The stockholders will be personally liable for
the acts and contracts of the corporation
whose existence, at least for the purpose
of the particular situation involved, is
ignored
• When a court disregards the corporate
entity, it is not denying its corporate
existence, but merely refuses to allow the
corporation to use the corporate privileges
for the particular purpose involved in the
case.
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 CORPORATION LAW BOOK I
Application to Close Corporations
• Although stockholders active in
management would be personally liable for
corporate torts, they would still enjoy
limited liability insofar as other corporate
obligations are concerned.
• It will be forfeited however, if the
stockholders confuse their affairs and assets
with those of the corporation so that their
separate personalities are not kept clear and
distinct, or when they are guilty of bad faith,
fraud or abuse in the exercise of their
control
MARVEL BLDG. CORPORATION v. DAVID
February 24, 1954, Labrador, J.
FACTS: The CIR seized property owned by
Marvel Building Corporation for the collection
of war profits tax assessed against Maria B.
Castro. The stockholders contested the seizure
and filed a case to enjoin the CIR from selling
the properties alleging that it is the company
that owns the property and not Maria B.
Castro. CFI ruled in favor of the corporation.
RULING: Judgment reversed. Maria Castro
owns all the stocks of the corporation and the
others are just mere dummies.
(1) The most important evidence presented by
the CIR is the supposed endorsement in
blank of the shares of stock issued in the
name of the other incorporators, and the
possession thereof by Maria B. Castro.
(2) Other stockholders did not have incomes
during the time of the organization of the
corporation in 1947or immediately thereto,
as to enable them to pay in full for their
supposed subscriptions.
(3) The supposed subscribers, who should
have come to court to assert that they
actually paid for their subscriptions, and
are not mere dummies, did not do so. This
failure on their part to take the witness
stand to deny or refute the charge that
they were mere dummies is to us of
utmost significance.
PALACIO v. FELY TRANSPORTATION
August 31, 1962, Regala, J.
FACTS: Calingasan was held subsidiarily liable
for his driver’s liability ex delicto for reckless
negligence. After RTC rendered the decision,
Calingasan formed Fely Transportation
Company, and sold the jeep to it. Palacio then
filed a case against Fely Transportation for the
civil liability in the prior criminal case on the
theory that the sale of the jeepney was merely
an attempt of Calingasan to evade liability.
RULING: The corporation and Calingasan are
solidarily liable. They may be treated as one
the same person. Calingasan’s main purpose in
forming the corporation was to evade his
liability. This is borne by the fact that his
family members are the incorporators.
Moreover, the jeep Calingasan sold to it is the
corporation’s only property. Even though
Calingasan is not a party to the action, the
Court can substitute him for the corporation
as the real party in interest.
NAMARCO v. ASSOCIATED FINANCE
COMPANY
April 27, 1967, Dizon, J.
FACTS: Associated, through its President
Sycip, entered into an exchange agreement
with NAMARCO. While NAMARCO was able to
deliver the required raw sugar to Associated,
Associated failed to deliver the refined sugar so
NAMARCO filed a case against it. The CFI held
that only Associated, the corporation, was
liable and dismissed the case in relation to
Sycip.
RULING: Sycip is solidarily liable with the
corporation. Sycip was guilty of fraud
because through false representations he
succeeded in inducing NAMARCO to enter into
the exchange agreement, with full
knowledge, on his part, of the fact that
Associated was in no position to comply
with the obligation it had assumed.
Consequently, he cannot now seek
refuge behind the general principle that a
corporation has a personality distinct and
separate from that of its stockholders and that
the latter are not personally liable for the
corporate obligations.
DOCTRINE: When the corporation is the mere
alter ego of a person, the corporate fiction may
be disregarded. This is true when the
corporation is controlled, and its affairs are so
conducted as to make it merely an
instrumentality, agency or conduit of another.
TAN BOON BEE & CO v. JARENCIO
January 30, 1988, Paras, J.
FACTS: Tan Boon is a creditor of Graphic
Publishing. The sheriff levied on 1 unit of
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 CORPORATION LAW BOOK I
printing machine found in the premises of
Graphic Publishing. However, PADCO
intervened, arguing that it actually owned the
machine levied upon. Sheirff proceeded with
the auction sale, hence, PADCO filed a motion
to nullify sale on execution. Judge ruled in
favor of PADCO.
RULING: Judge should have pierced the
corporate veil. PADCO was never engaged in
the printing business; the Board of directors
and officers of PADCO and Graphic Publishing
were the same; PADCO holds 50% shares of
Graphic Publishing; Printing machine was in
the premises of Graphic Publishing long before
PADCO even acquired its alleged title.
DOCTRINE: The separate and distinct
personality is merely a fiction for convenience
and to promote justice, and it may be
disregarded in cases where it is used as a cloak
for fraud or illegality, or to work an injustice,
or where it is necessary to achieve equity, or
when necessary for the protection of creditors.
Additionally, when the corporation is merely
an adjunct, business conduit or alter ego of
another corporation, the fiction of separate and
distinct corporate entities should be
disregarded.
MAGSAYSAY-LABRADOR v. CA
December 19, 1989, Fernan, C.J.
FACTS: Petitioners, sisters of the late Senator
Magsaysay, filed a motion to intervene in the
case filed by the widow of Sen. Magsaysay
against the corporation, SUBIC, alleging that
they are stockholders of said corporation,
hence, they have a legal interest in the
outcome of the case.
RULING: Petitioners cannot intervene. The
interest which entitles a person to intervene
must be of such direct and immediate
character that the intervenor will either gain or
lose by the direct legal operation and effect of
the judgment. In this case, the PETS interest is
indirect, contingent, remote, conjectural,
consequential and collateral. At the very least,
their interest is purely inchoate.
Petitioners cannot claim the right to intervene
on the strength of the transfer of shares
allegedly executed by the late Senator. The
corporation did not keep books and records.
Perforce, no transfer was ever recorded, much
less effected as to prejudice third parties.
Assuming that there was a valid transfer, they
are barred from intervening inasmuch as their
rights can be ventilated and amply protected in
another proceeding.
DOCTRINE: While a share of stock represents
a proportionate or aliquot interest in the
property of the corporation, it does not vest
the owner thereof with any legal right or title
to any of the property, his interest in the
corporate property being equitable or beneficial
in nature. Stockholders are in no legal sense
the owners of corporate property, which is
owned by the corporation as a distinct legal
person.
INDOPHIL TEXTILE MILL WORKERS
UNION v. CALICA
February 3, 1992, Medialdea, J.
FACTS: Indophil was the SEBA of Indophil
Textile. They eventually entered into a CBA.
Afterwards, Indophil Acrylic was formed.
Indophil Workers Union claimed that the plant
facilities built and set up by Indophil Acrylic
should be considered as an
extension/expansion of the facilities of Indophil
Textile pursuant to their CBA. The Union
asserts that the AOI of the 2 corporations
establish that the 2 entities are engaged in the
same kind of business (manufacture and sale
of yarns and other materials of kindred
character or nature), they practically have the
same incorporators, directors and officers, and
70% of the total subscription of Indophil
Acrylic is subscribed by Indophil Textile.
RULING: Petition DENIED. IA should not be
recognized as part of, and/or within the scope
of the Union, as the SEBA of IT. The fact that
the business of IT and IA are related, that
some of the EEs of IT are the same persons
manning and providing for auxiliary services to
the units of IA, and that the physical plants,
offices, and facilities are situated in the same
compound is not sufficient to justify the
piercing of the corporate veil. In Umali v. CA,
the SC already emphasized that the legal
corporate entity is disregarded only if it is
sought to hold the officers and stockholders
directly liable for a corporate debt or
obligation.
DOCTRINE: Under the doctrine of piercing the
corporate veil, when valid grounds exist, the
legal fiction that a corporation is an entity with
a juridical personality separate and distinct
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 CORPORATION LAW BOOK I
from its members or stockholders may be
disregarded. In such cases, the corporation will
be considered as a mere association of
persons. The members/stockholders will be
considered as the corporation, that is liability
will attach directly to the officers and
stockholders. The doctrine applies when the
corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or
defend crime, or when it is made as a shield to
confuse the legitimate issues, or where a
corporation is the mere alter ego or business
conduit of a person, or where the corporation
is so organized and controlled and its affairs
are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of
another corporation. [Umali v. CA]
JACINTO v. CA
June 6, 1991, Davide, Jr., J.
FACTS: RTC rendered judgment against PET
Jacinto ordering him and the company Inland
Industries Inc. solidarily liable to Metrobank.
Jacinto alleges that he cannot be held
solidarily liable with Inland Industries because
he just signed the instruments in his official
capacity as president (and GM) of the
corporation, and the latter has a personality
distinct and separate from its officers and
stockholders. RTC and CA ruled that the
corporation was a mere alter ego of Jacinto,
and that Jacinto was practically the corporation
itself. Jacinto alleges that RTC and CA erred in
piercing the corporate veil because there was
no allegation in the complaint questioning the
separate identity and existence of Inland
Industries.
RULING: While on the face of the complaint
there is no specific allegation that the
corporation is a mere alter ego of Jacinto,
subsequent developments, from the stipulation
of facts upto the presentation of evidence and
examination of witnesses, unequivocally show
that Metrobank sought to prove that Jacinto
and the corporation are one. Citing Sec. 5,
Rule 10, ROC, when evidence is presented by
one party, with the express or implied consent
of the adverse party, as to the issues not
alleged in the pleadings, judgment may be
rendered validly as regards those issues, which
shall be considered as if they have been raised
in the pleadings. There is implied consent to
the evidence when the adverse party fails to
object thereto.
CONCEPT BUILDERS v. NLRC
May 29, 1996, Hermosisma, Jr., J.
FACTS: Marabe et al were employees of
Concept Builders. They were dismissed on the
ground that their contracts of employment
expired and the project in which they were
hired had been completed. They then filed a
case for illegal dismissal. LA and NLRC ruled in
their favor. LA then issued a writ of execution
which was partially satisfied through
garnishment of sums from PET’s debtor,
MWSS. The subsequent 2 alias writs were not
enforced. The sheriff then recommended the
issuance of a “break-open order”. Thereafter, a
certain Dennis Cuyegkeng filed a third-party
claim alleging that the properties sought to be
levied were owned by Hydro Phils. RESPs filed
a motion for issuance of a break-open Order
alleging that Hydro Phils. And Concept Builders
are owned by the same
incorporators/stockholders, and that PET
temporarily suspended its business operations
to evade its obligations, attaching duly certified
copies of the General Information Sheets of
both corporations. LA denied the motion. But
NLRC reversed and ordered the sheriff to
proceed with the action sale.
RULING: NLRC did not commit GAD. Both
corporations have the same address and/or
premises, president, board of directors,
corporate officers, and substantially the same
subscribers. Clearly, Concept Builders ceased
its business operations in order to evade
payment to RESPs of back wages and to bar
their reinstatement to their former positions.
Hydro Phils. is obviously a business conduit of
Concept Builders and its emergence was
skillfully orchestrated to avoid the liability that
already attached to Concept Builders.
DOCTRINE: Some probative factors of identity
that will justify the application of the doctrine
of piercing the corporate veil:
(5) Stock ownership by one or common
ownership of both corporations
(6) Identity of directors and officers
(7) The manner of keeping corporate books
and records
(8) Methods of conducting the business
“Instrumentality Rule” – Where one
corporation is so organized and controlled
and its affairs are conducted so that it is,
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 CORPORATION LAW BOOK I
in fact, a mere instrumentality or adjunct
of the other, the fiction of the corporate
entity of the ‘instrumentality’ may be
disregarded. The control necessary to invoke
the rule is not majority or even complete stock
control but such domination of finances,
policies and practices that the controlled
corporation has, so to speak, no separate
mind, will or existence of its own, and is but a
conduit for its principal. It must be kept in
mind that the control must be shown to have
been exercised at the time the acts complained
of took place. Moreover, the control and breach
of duty must proximately cause the injury or
unjust loss for which the complaint is made.
The test in determining the applicability of the
doctrine of piercing the veil of corporate fiction
is as follows:
4. Control, not mere majority or complete
stock control, but complete domination,
not only of finances but of policy and
business practice in respect to the
transaction attacked so that the corporate
entity as to this transaction had at the
time no separate mind, will or existence of
its own;
5. Such control must have been used by the
defendant to commit fraud or wrong,
to perpetuate the violation of a statutory
or other positive legal duty, or dishonest
and unjust act in contravention of
plaintiff’s legal rights; and
6. The aforesaid control and breach of duty
must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements
prevents ‘piercing the corporate veil. ‘ in
applying the ‘instrumentality’ or ‘alter ego’
doctrine, the courts are concerned with reality
and not form, with how the corporation
operated and the individual defendant’s
relationship to that operation.
CLAPAROLS v. CIR
July 31, 1975, Makasiar, J.
FACTS: Allied Workers Assoc and 10
respondent workers filed a ULP case against
Claparols Steel Corp on account of their
dismissal from Claparols Steel and Nail Plant.
Lower Court ruled in favor of RESP and ordered
Claparols to reinstate the workers with
backwages. RESP then filed a motion for
execution. PETs opposed alleging that under
the circumstances, they could not reinstate the
workers, and that assuming that they are, it
should only be limited to three months.
Moreover, it ruled that since Claparols Steel
Corporation ceased to operate on Dec. 7,
1962, re-remployment cannot go beyond that
date. RESPs contend that the two corporations
are one and the same, with the latter Claparols
Steel succeeding the Claparols Steel and Nail
Corp.
RULING: Claparols Steel Corporation was a
continuation and successor of Claparols Steel
and Nail Corporation. They were owned and
controlled by Claparols and there was no break
in the succession and continuity of the same
business. The ‘avoiding-the-liability scheme’ is
very patent considering that 90% of subscribed
shares of stock of Claparols Steel Corp. was
owned by Claparols himself, and all the assets
of the dissolved corporation were turned over
to the new corporation.
VILLA REY TRANSIT v. FERRER
October 29, 1968, Angeles, J.
FACTS: Villarama sold its 2 CPCs to
PANTRANCO with a restriction clause that
Villarama shall not apply for a service identical
and competing with PANTRANCO for 10 years.
3 months after, the corporation Villa Rey
Transit, Inc. was formed, with Villarama’s wife
as incorporator and treasurer. It then bought 5
CPCs from Fernando, but before the sale could
be approved by the PSC, 2/5 CPCs was levied
pursuant to a writ of execution in favor of
Ferrer (judgment creditor of Fernando). Ferrer
bought the 2 CPCs in the auction sale and later
on sold it to PANTRANCO. Villa Rey then filed a
case for the annulment of the auction sale to
Ferrer and the subsequent sale to
PANTRANCO. PANTRANCO filed a 3rd party
complaint against Villarama, alleging that
Villarama and the corporation are one and the
same. CFI ruled in favor of Villa Rey and ruled
that it is distinct and separate from Villarama,
and that the restriction clause is null and void.
RULING: Villa Rey is an alter ego of Villarama,
hence, it is bound by the restriction clause in
the sale.
DOCTRINE: The doctrine that a corporation is
a legal entity distinct and separate from its
members and stockholders is recognized and
respected in cases which are within reason and
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 CORPORATION LAW BOOK I
the law. When the fiction is urged as a means
of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing
obligation, the circumvention of statutes, the
achievement of perfection of a monopoly or
generally the perpetration of knavery or crime,
the veil with which the law covers and isolates
the corporation from the members or
stockholders will be lifted to allow for its
consideration merely as an aggregation of
individuals.
SECOSA v. HEIRS OF ERWIN SUAREZ
FRANCISCO
June 29, 2004, Ynares-Santiago, J.
FACTS: The truck owned by Dassad
Warehousing and Port Services, driven by
Secosa, bumped the motorcycle driven by
Erwin Francisco, and the rear wheel of the
truck ran over Francisco, resulting in his death.
His parents then filed a case against Secosa,
Dassad Warehousing, and its President, Sy.
RTC ruled in favor of the Francisco’s.
RULING: Dassad Warehousing failed to
conclusively prove that it exercised the
requisite diligence of a good father of a family
in the selection and supervision of its
employees. It failed to support the testimony
of its lone witness with documentary evidence.
However, its President, SY, cannot be held
solidarily liable. The fact that he was the
president is not sufficient by itself to hold him
liable. The records are bereft of any evidence
tending to show the presence of any grounds
that will justify the piercing of the veil of
corporate fiction such as to hold its president
solidarily liable. The cargo truck was registered
in the name of Dassad, not in the name of Sy.
Secosa is an employee of PET Dassad, not of
Sy.
DOCTRINE: The so-called veil of corporation
fiction treats as separate and distinct the
affairs of a corporation and its officers and
stockholders. As a general rule, a corporation
will be looked upon as a legal entity, unless
and until sufficient reason to the contrary
appears. When the notion of 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. Also, the corporate entity may be
disregarded in the interest of justice in such
cases as fraud that may work inequities among
members of the corporation internally,
involving no rights of the public or third
persons. In both instances, there must have
been fraud and proof of it. For the separate
juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly
and convincingly established. It cannot be
presumed.
YU v. NLRC
June 16, 1995, Melo, J.
FACTS: RESPs (4 workers) filed a case for ULP
after they, along with 22 others, were
retrenched from Tanduay Distillers, Inc. On
June 1, 1988, a new buyer of TDI's assets,
Twin Ace Holdings, Inc. (after First Pacific gave
up its efforts to acquire the assets) took over
the business. Twin Ace assumed the business
name Tanduay Distillers. On August 8,
1988, the former EEs filed a motion to implead
PETs James Yu and Wilson Young, doing
business under the name and style of Tanduay
Distillers, as party respondents in said cases.
LA ruled in favor of RESPs, holding TDI liable.
NLRC affirmed. They then filed a motion for
execution. PETs opposed alleging that the
execution is without basis insofar as it prays
for the issuance for a writ against Tanduay
Distillers, an entity separate and distinct from
TDI, Yu and Young. NLRC, through Labor
Arbiter Cueto, issued a writ of execution
against Tanduay Distillers, Inc., Wilson Young
and James Yu.
RULING: Yu and Young cannot be held liable.
(1) The order of execution is null and void
because it effectively amended the
decision ordering TDI to reinstate RESPs.
The LA decision declaring the
retrenchment illegal does not in any
matter obligate TD, Yu, and Young to
reinstate RESPs.
(2) Neither may it be said that Yu, Young and
TD are one and the same as TDI. The
genuine nature of the sale to Twin Ace is
evidenced by the fact that Twin Ace was
only a subsequent interested buyer.
At the time when termination notices
were sent to its employees, TDI was
negotiating with the First Pacific Metro
Corporation for the sale of its assets. TDI
as a corporation or its shares of stock were
not purchased by Twin Ace The buyer
limited itself to purchasing most of the
assets, equipment, and machinery of TDI.
Thus, Twin Ace or Tanduay Distillers did
not take over the corporate personality of
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 CORPORATION LAW BOOK I
TDI although they manufacture the same
product at the same plant with the same
equipment and machinery. Significantly,
TDI has taken the side of its former EEs
and argues against TD.
(3) Moreover, RESPs already received
separation pay from TDI.
CEASE v. CA
October 18, 1979, Guerrero, J.
FACTS: Cease incorporated Tiaong Milling with
5 others but eventually his children became
the only nominal stockholders with him
remaining as majority stockholder. When he
died, 2 of his kids wanted to partition the
properties of Tiaong Milling among them.
However, the 3 others wanted to
reincorporate, and formed FL Cease Plantation.
They then had the properties of Tiaong Milling
held in trust with it. The 2 kids sued for
partition, alleging that Tiaong Milling and
Cease were one and the same, and the
properties of Tiaong Milling therefore formed
part of Cease’s estate.
RULING: Cease and Tiaong Milling were
actually one and the same entity. Therefore,
the properties of Tiaong formed part of the
estate of Cease. The business of the
corporation in this case is largely, if not wholly,
the personal venture of Cease. The
participation of the children as nominal
shareholders was due only to Cease’s gratuity
to the benefit of the children and ultimately his
family. The accounts of the corporation and
therefore its operation, as well as that of the
family, appears to be indistinguishable and
apparently joined together.
DELPHER TRADES CORP v. CA
January 6, 1988, Gutierrez, Jr., J.
FACTS: Delphin and Pelagio Pacheco owned a
lot in Valenzuela, which they leased to
Construction Components Int’l, Inc. with a
right of first refusal. CCI eventually assigned
its rights to Hydro Pipes. Later on, a deed of
exchange was executed between the Pacheco’s
and Delpher Trades. On the ground that it was
not given a first option to buy, Hydro Pipes
filed a complaint for reconveyance. CFI and
IAC ruled in favor of Hydro Pipes.
RULING: The Deed of Exchange was not a
sale. There was no transfer of actual ownership
interests to a third party. The Pacheco family
merely changed their ownership from one form
to another. The ownership remained in the
same hands. What they really did was to invest
their properties and change the nature of their
ownership from unincorporated to incorporated
form by organizing Delpher Trades Corp to
take control of their properties and at the same
time save on inheritance taxes.
GARRETT v. SOUTHERN RAILWAY
COMPANY
173 F. Supl. 915. 1959. Taylor, J.
FACTS: Garrett was employed as a wheel
moulder by Lenoir Car Works, a Tennessee
corporation. He claims injuries from silicosis
contracted from silica dust permeating the
foundry. Southern Railway Company
acquired the entire capital stock of Lenoir in
1904, the year of the latter's organization.
Plaintiff claims to be an employee of Southern
entitled to recover under the Federal
Employers' Liability Act.
RULING: Lenoir is not a mere instrumentality
of Southern Railway, hence, Garrett cannot
claim from the latter. The facts in the case
show that the 2 corporations are two distinct
operations, and no evidence shows that
Southern dictated the management of Lenoir.
There was no evidence that Lenoir was run
solely for the benefit of Southern. It operated
no rolling stock and had nothing to do with the
transportation business. Lenoir was not
operated so tightly by Southern that it was an
agency or instrumentality of the latter. Policy
decision and pricings remained in the hands of
Marius, the manager of Lenoir. Accounting and
claims were done in Washington only to
eliminate duplication. There is no evidence of
intimacy and inseparability of control which
would lead the court to conclude that the 2
corporations are one and the same.
PARENT-SUBSIDIARY RELATIONSHIP
• The mere fact that a corporation owns all or
substantially all of the stocks of another
corporation, taken alone, is not sufficient to
justify their being treated as one entity
o If used to perform legitimate
functions, a subsidiary’s separate
existence may be respected
• Use alter-ego or instrumentality test to
determine if the piercing of the corporate
veil is proper
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 CORPORATION LAW BOOK I
JARDINE DAVISES, INC v. JRB REALTY
INC.
July 15, 2005, Callejo, Sr., J.
FACTS: Fedder aircon units did not deliver the
desired cooling temperature. AIRCON (the
company) said it would replace the units, but
did not specify date of delivery. RESP learned
of MAXIM, the new exclusive licensee of the
Fedder aircons, so RESP asked MAXIM to honor
AIRCON’s obligation to it. But such request was
refused, so RESP filed an action for specific
performance with damages against MAXIM,
Feders, Aircon, and its parent company PET
Jardine Davies. RTC and CA pierced the
corporate veil and held PET solidarily liable
with the other DEFs (except for AIRCON,
whose corporate life ended four years prior to
the filing of the case).
RULING: While it is true that Aircon is a
subsidiary of the petitioner, it does not
necessarily follow that Aircon’s corporate legal
existence can just be disregarded. The records
bear out that Aircon is a subsidiary of the
petitioner only because the latter acquired
Aircons majority of capital stock. It, however,
does not exercise complete control over
Aircon; nowhere can it be gathered that the
petitioner manages the business affairs of
Aircon. Indeed, no management agreement
exists between the petitioner and Aircon, and
the latter is an entirely different entity from
the petitioner. There is no evidence that
Aircon was formed or utilized with the intention
of defrauding its creditors or evading its
contracts and obligations. There was nothing
fraudulent in the acts of Aircon in this case.
DOCTRINE: In Velarde v. Lopez, Inc, the
Court categorically held that a subsidiary has
an independent and separate juridical
personality, distinct from that of its parent
company; hence, any claim or suit against the
latter does not bind the former, and vice versa.
In applying the doctrine, the following
requisites must be established:
(1) Control, not merely majority or complete
stock control;
(2) Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest acts
in contravention of plaintiffs legal rights;
(3) The aforesaid control and breach of duty
must proximately cause the injury or
unjust loss complained of.
The existence of interlocking directors,
corporate officers and shareholders is not
enough justification to pierce the veil of
corporate fiction, in the absence of fraud or
other public policy considerations. But even
when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of
corporate fiction applies only when such fiction
is used to defeat public convenience, justify
wrong, protect fraud or defend crime.
KOPPEL (PHIL) INC v. YATCO
June 29, 2004, Ynares-Santiago, J.
FACTS: Koppel Phils is a domestic corporation,
where 995 out of its 1000 shares are owned by
Koppel Industrial Car and Equipment Company
(KICEC) – a corporation organized under US
laws and not licensed to do business in the
Philippines. The remaining 5 shares were
owned by each of the officers of KPI. KICE is
in the business of selling railway materials,
machineries and supplies. Buyers in the
Philippines, when interested, asked for price
quotations from KPI, and KPI then cabled for
the quotation desired from KICEC. However,
KPI quoted to the purchaser a selling price
above the figures quoted by KICEC. On the
basis of these quotations, orders were placed
by the local buyers. Between KICEC and KPI,
the arrangement nonetheless was that KICE
controls how much share of the profits goes to
KPI. For these transactions, the BIR treated
KPI as a subsidiary of KICE and collected from
KPI the merchants’ sales tax, which was a
revenue law in force at the time the sales took
place. KPI paid the taxes under protest,
demanded for refund, contending that it could
not be liable for merchants’ sales tax because
it was only acting as broker between KICE and
the local buyers. The lower court dismissed
the complaint, ruling that KPI is a mere
dummy or branch of KICEC.
RULING: KPI is liable for merchant sales tax.
Insofar as sales are involved, KPI is a mere
branch, subsidiary, or agency of KICEC.The
fact that KPI is a mere branch is conclusively
borne out by the fact, among others, that the
amount of the so-called "share in the profits"
of KPI was ultimately left to the sole, unbridled
control of KICEC. If KPI was intended to
function as a bona fide separate corporation,
we cannot conceive how this arrangement
could have been adopted. No group of business
could be expected to organize a mercantile
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 CORPORATION LAW BOOK I
corporation – the ultimate end of which could
only be profit – if the amount of that profit
were to be subjected to such a unilateral
control of another corporation, unless indeed
the former has been previously designed as a
mere subsidiary, branch or agency. Evidently,
KICEC made use of its ownership of the
overwhelming majority – 99.5% - to control
KPI’s operations to such an extent that it had
the final say even as to how much should be
allotted to said local entity in the so-called
sharing in the profits.
Moreover, KPI charged KICEC no more than
actual cost – without profit – for merchandise
allegedly of its own to complete deficiencies of
shipments made by KICEC. And KPI was
charged by KICEC with the cost even of its
cable quotations. Far from disclosing a real
separation between the two, evidence reveals
such a commingling and interlacing of their
activities as to render even incomprehensible
certain accounting operations between them.
LIDDELL & CO, INC v. CIR
June 30, 1961, Bengzon, C.J.
FACTS: Liddell and Co is a domestic
corporation engaged in the business of
importing and retaining passenger cars and
trucks. 2 years after, Liddell Motors was
organized, with Frank Liddell’s wife as one of
the incorporators. Liddell & Co stopped
retailing cars, and instead sold them to Liddell
Motors which in turn sold them to the public.
CIR assessed Liddell & Co with deficiency sales
tax on the basis that Liddell Motors was an
alter ego of Liddell & Co.
RULING: Liddell & Co is liable for sales tax.
Bulk of the business of Liddell & Co was
channeled through Liddell Motors. The latter
pursued no activities except to secure cares,
trucks, and spare parts from the former and
sell them to the public. Sales made by the
former to the latter took place on the same
day the latter sold to the public. Liddell & Co
would issue checks in favor of Frank, which
were deposited in his account. Frank would
then issue checks to Liddell Motors on the
same day and for the same amount.
As to Liddell & Co, Frank owned 98% of its
capital stock at the time of its organization.
And agreements b/n Frank and his EEs
contained stipulations that guaranteed Frank’s
complete control over the corporation. As to
Liddell Motors, Frank supplied the original
capital funds. And it was not proven that his
wife, Irene, had money of her own.
LA CAMPANA COFFEE FACTORY v.
KAISAHAN
May 25, 1953, Reyes, J.
FACTS: Since 1932, Tan Tong has been
engaged in the business of buying and selling
“gaugau” (starch) under the trade name La
Campana Gaugau Packing (GP). In 1950,
Tan Tong with members of his family as sole
incorporators and stockholders organized a
family corporation, La Campana Coffee Factory
(CF). They both have the same office. A year
before incorporation, CF, Tan Tong entered
into a collective bargaining agreement (CBA)
with Philippine Legion of Organized Workers
(PLOW). His EE’s, however, eventually seceded
and formed Kaisahan ng mga Manggagawa sa
La Campana. The union, composed of 66
members from both GP and CF, then
demanded for higher wages and more
privileges addressed to La Campana Starch
and Coffee Company. Demand was not
granted, and mediation failed, so the case was
certified to the CIR. Meanwhile, Kaisahan’s
permit was suspended. GP and CF filed a MTD
alleging that the action is directed against 2
entities, and that the union has no legal
capacity to sue. CIR denied, ruling that GP is
merely a business name while CF is a family
corporation.
RULING: GP, CF and Tantongco are one and
the same. They had one office, one
management, and a single payroll for both
business (until the case was filed). The
business are owned exclusively by Tan Tong
and his family. The attempt to make the two
factories appear as two separate businesses,
when in reality they are but one, is but a
device to defeat the ends of the law and should
not be permitted to prevail.
DOCTRINE: A subsidiary or auxiliary
corporation which is created by a parent
corporation merely as an agency for the latter
may sometimes be regarded as identical with
the parent corporation, especially if the
stockholders or officers of the two corporations
are substantially the same or their system of
operation unified.
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WPM INTL TRADING v. LABAYEN
September 17, 2014, Brion, J.
FACTS: Labayen entered into a management
contract with WPM Int’l Trading for the
operation, management, and rehabilitation of
Quickbite. Labayen then engaged the services
of CLN Eng’r Services for the rehabilitation.
After it was done, CLN sued Labayen and
Manlapaz for the balance of the cost of
renovation. RTC found Labayan liable. Labayen
then filed a case for damages against Manlapaz
and WPM for reimbursement of the amount she
paid to CLN. Manlapaz countered that Labayen
exceeded her authority as agent in contracting
with CLN, hence, Labayen should solely be
liable for the renovation agreement, and that
WPM has a separate and distinct personality,
hence, she could not be held liable. RTC ruled
in favor of Labayen, ruling that WPM is a mere
instrumentality or business conduit of
Manlapaz. CA affirmed.
RULING: Manlapaz cannot be held liable.
Aside from the fact that Manlapaz was the
principal stockholder, Records don’t show that
WPM was organized and controlled, and its
affairs conducted in a manner that made it
merely an instrumentality, agency, conduit or
adjunct of Manlapaz. As held in Martinez v. CA,
mere ownership by a single stockholder is not
by itself a sufficient ground to disregard the
separate corporate personality.
(1) Likewise, records do not support the
finding that Manlapaz had control or
domination over WPM or its finances.
Concurrently holding the positions of president,
chairman and treasurer are insufficient to
prove that he had exercised absolute control
over WPM. (2) Her control does not necessarily
warrant piercing the veil since tehre was not a
single proof that WPM was formed to defraud
CLN or Labayen, or that Manlapaz was guilty of
bad faith or fraud. On the contrary, CLN and
Labayen knew and acted on the knowledge
that they were dealing with WPM for the
renovation of the latter’s restaurant, and not
with Manlapaz. (3) CA also failed to
demonstrated how the separate and distinct
personality of WPPM was used by Manlapaz to
defeat Labayen’s right for reimbursement.
Neither was there any showing that WPM
attempted to avoid liability or had no property
against which to proceed. Hence, no harm
could be said to have been proximately caused
by Manlapaz.
DOCTRINE: The control necessary to invoke
the instrumentality or alter ego rule is not
majority or even complete stock control but
such domination of finances, policies and
practices that the controlled corporation has,
so to speak, no separate mind, will or
existence of its own, and is but a conduit for its
principal. The control must be shown to have
been exercised at the time the acts complained
of took place. Moreover, the control and breach
of duty must proximately cause the injury or
unjust loss for which the complaint is made.
TANTONGCO v. KAISAHAN NG MGA
MANGGAGAWA SA LA CAMPANA
September 22, 1959, Montemayor, J.
FACTS: Offshoot of La Campana case. So after
the CIR decision in favor of RESPs attained
finality, Additional incidental cases (5 in total)
were filed by Kaisahan before the CIR including
a petition for the reinstatement of some
employees. Ramon Tantongco died some time
in 1956. The administrator of the estate of
Ramon, herein petitioner Ricardo Tantongco,
was ordered included as respondent in the
cases pending before the CIR. The CIR
rendered a decision on the incidental cases and
ordered the reinstatement of the dismissed
EEs. When the employees reported to work,
the management refused them admittance.
Kaisahan then filed a petition to cite the
management in contempt before the CIR. PET
alleges that upon the death of Ramon, the
claims should have been dismissed and should
have been filed with the probate court (since
the claims were money claims). Moreover, he
alleged that since the SC held that La
Campana and Ramon are one and the same,
the death of Ramon meant the death of La
Campana. Since La Campana ceased to exist,
resulting in the loss of jurisdiction of the CIR to
enforce its order against said entities.
.
RULING: The death of Ramon Tantongco did
not end the existence of La Campana. The
Supreme Court applied the Doctrine of Piercing
the Veil of Corporate Existence in GR no. L-
5677 to avoid the use of technicality to defeat
the jurisdiction of the CIR. In the present case,
however, despite the obvious fact that La
Campana was run by the same people, they
still are two different companies with separate
personalities from Ramon Tantongco. La
Campana was owned not only by Ramon but
others as well including Ricardo Tantongco.
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 CORPORATION LAW BOOK I
Lastly, petitioner is under estoppel and cannot
claim that La Campana and Ramon are one
and the same since he has represented La
Campana as separate entities in numerous
dealings.
As to the contention that the claims should be
filed with the probate court, this was already
ruled in a previous case. Furthermore,
Tantongco was not a party in the main case
and the other incidental cases. Naturally, the
claims there were not the claims contemplated
by law to be submitted before the
administrator. Moreover, the money claims
were merely incidental to their demands for
reinstatement.
CRUZ v. DALISAY
July 31, 1987, Fernan, J.
FACTS: RESP Sheriff Dalisay attached and/or
levied the money belonging to complainant
Cruz when he was not himself the judgment
debtor in the final judgment of an NLRC Case
sought to be enforced but rather the company
known as "Qualitrans Limousine Service, Inc.,"
a duly registered corporation. Dalisay
explained that when he garnished
complainant's cash deposit at the Philtrust
bank, he was merely performing a ministerial
duty. While it is true that said writ was
addressed to Qualitrans Limousine Service,
Inc., yet it is also a fact that complainant had
executed an affidavit before the Pasay City
assistant fiscal stating that he is the
owner/president of said corporation and,
because of that declaration, the counsel for the
plaintiff in the labor case advised him to serve
notice of garnishment on the Philtrust bank.
RULING: Dalisay was negligent, hence a fine
equivalent to 3 months salary is imposed. The
tenor of the NLRC judgment and the
implementing writ is clear enough. It directed
Qualitrans Limousine Service, Inc. to reinstate
the discharged employees and pay them full
backwages. Respondent, however, chose to
"pierce the veil of corporate entity" usurping a
power belonging to the court and assumed
improvidently that since the complainant is the
owner/president of Qualitrans Limousine
Service, Inc., they are one and the same. It is
a well settled doctrine both in law and in equity
that as a legal entity, a corporation has a
personality distinct and separate from its
individual stockholders or members. The mere
fact that one is president of a corporation does
not render the property he owns or possesses
the property of the corporation, since the
president, as individual, and the corporation
are separate entities.
That Cruz was named as one of the RESPs is of
no moment as execution must conform to that
directed in the dispositive portion.
NASECO GUARDS ASSOC-PEMA v. NASECO
August 25, 2010, Villarama, J.
FACTS: On the issue of liability, NAGA-PEMA
contends that PNB should be held liable to
shoulder the CBA benefits awarded to them by
virtue of it being a company having full
financial, managerial and functional control
over NASECO as it subsidiary, and by reason of
the unique “no loss, no profit” scheme
implemented b/n NASECO and PNB.
RULING: The Court finds no reason to pierce
the corporate veil of NASECO and go beyond
its legal personality. Control, by itself, does
not mean that the controlled corporation
is a mere instrumentality or a business
conduit of the mother company. Even control
over the financial and operational concerns of a
subsidiary company does not by itself call for
disregarding its corporate fiction. There must
be a perpetuation of fraud behind the
control or at least a fraudulent or illegal
purpose behind the control in order to
justify piercing the veil of corporate
fiction. Such fraudulent intent is lacking in this
case.
There is no showing that such no loss, no
profit scheme between NASECO and PNB
was implemented to defeat public
convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat
the labor laws, nor does the scheme show that
NASECO is a mere business conduit or alter
ego of PNB. Absent proof of these
circumstances, NASECO’s corporate personality
cannot be pierced.
NATIONALITY OF CORPORATIONS
• A corporation can have NO citizenship.
• However, it may either be domestic or
foreign
o A domestic corporation is one
organized under PH laws and is
therefore governed by such laws
o A foreign corporation is one organized
under laws other than those of the
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 CORPORATION LAW BOOK I
Philippines, and is governed by the law
of its creation, and can operate only in
the territory.
o HOWEVER, a foreign corporation may,
however, be licensed to do business in
the Philippines, in which case it will
governed by PH laws, except those
which refer to the creation, formation,
organization or dissolution thereof or
those which fix the relations, liabilities
and responsibilities of the stockholders
or officers to each other or to the
corporation
• Under our national laws, the privilege of
engaging in a nationalized business depends
not only on whether a corporation is
domestic.
PACIFIC REHOUSE CORP v. CA
March 24, 2014, Reyes, J.
FACTS: Pacific Rehouse filed a case against E-
Securities for unauthorized sale of shares. RTC
ruled in favor of Pacific Rehouse. However, the
writ of execution returned unsatisfied, so
Pacific Rehouse moved for an alias writ of
execution to hold EIB liable for the obligation
of E-Securities because the latter is a wholly-
owned, controlled and dominated subsidiary of
the former. E-Securities opposed the said
motion, arguing that it has a separate
corporate personality distinct from EIB. RTC
ruled that E-Securities is a mere alter ego of
EIB.
RULING: EIB cannot be held liable. The
circumstances used by the RTC (stock
ownership, same officers, directors, staff, etc.)
to pierce the corporate veil cannot be
considered, because they were not properly
pleaded and proved. They were merely raised
for the first time in the motion for the issuance
of an alias writ of execution. Additionally,
control by itself does not mean that the
controlled corporation is a mere
instrumentality. There must be a perpetration
of fraud behind the control.
Moreover, piercing the veil of corporate fiction
is applied only to determine established
liability. It is not available to confer on the
court a jurisdiction it has not acquired in the
first place over a party not impleaded. A
corporation not impleaded in a suit cannot be
subject to the court’s process of piercing the
veil. This is because the doctrine comes to play
only during trial, after the court has already
acquired jurisdiction over the corporation.
KUKAN INTERNATIONAL CORP v. REYES
September 29, 2010, Velasco, Jr., J.
FACTS: Morales filed a case against Kukan,
Inc. for its unpaid balance. Starting Nov 2000,
KI no longer appeared and participated, and a
judgment was rendered against them which
became final and executory. The sheriff then
levied upon various personal properties found
at what was supposed to be KI’s office in
Salcedo Village, Makati. However, Kukan
International Corporation (KIC) alleged that
the properties levied were theirs and that it
was a different corporation from KIC. Morales
then filed a motion praying that the principle of
piercing the corporate veil be applied. This was
granted and KIC was declared as one and the
same as KI.
RULING: KIC cannot be held liable. A
corporation not impleaded in a suit cannot be
subject to the court’s process of piercing the
veil of corporate fiction. Implication:
1. The court must first acquire jurisdiction
over the corporation or corporations
involved before its or their separate
personalities are disregarded;
2. The doctrine of piercing the veil of
corporate entity can only be raised ina
full- blown trial over a cause of action
duly commenced involving parties duly
brought under the authority of the court
by way of service of summons or what
passes as such service.
Here, there was no full-blown trial. KIC was
not impleaded. It was dragged to the case
after it reacted to the improper execution of its
properties, not thru the usual process of
service of summons, but by mere motion of a
party with whom it has no privity of contract
and after the decision in the main case had
already become final and executor. Morales’
Motion to Pierce the Corporate Veil stated a
new cause of action (liability of Ki to be borne
by KIC) however this must be properly
ventilated in another complaint.
In any event, the doctrine cannot be applied
because there was no confluence of factors.
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 CORPORATION LAW BOOK I
PNB v. HYDRO RESOURCES CONTRACTORS
CORP
March 13, 2013, Leonardo-De Castro, J.
FACTS: In a complaint for sum of money filed
by HRCC against NMIC, DBP and PNB, and
APT, the RTC pierced the corporate veil of
NMIC and ruled that it was an alter ego of the
two banks to evade the payment of a just
debt. CA affirmed. PNB and DBP argue that
majority ownership is not a sufficient ground
for disregarding the separate corporate
personality of NMIC. Nothing in the records
show that the ownership and control of the
shares of NMIC were used to commit fraud,
illegality or injustice. Assuming they may be
held solidarily liable with NMIC, such liability of
the two banks was transferred to and assumed
by the National Government through the APT.
RULING: DBP and PNB cannot be held liable.
Piercing the corporate veil improper. None of
the three-pronged test (Control, Fraud, Harm)
has been satisfactorily met in this case.
Nothing in the records shows that the
corporate finances, policies and practices of
NMIC were dominated by DBP and PNB.
Hercon’s letter proposal was addressed to and
accepted by NMIC. Subsequent billing reports,
progress reports, statements of accounts and
communications did not refer to DBP or PNB.
The finding that the respective boards of
directors of the 3 entities were interlocking has
no basis.
MACASAET v. CO
June 5, 2013, Bersamin, J.
FACTS: Resp Co sued PETs for damages,
impleading Abante Tonite, for an alleged
libelous article that the PETs published in one
of its issues. PETs claim that charges against
Abante Tonie should be dropped by virtue of its
being neither a natural nor a juridical person.
RTC and CA ruled that it was a juridical person.
RULING: Abante Tonite is a corporation by
estoppel as the result of its having represented
itself to the reading public as a corporation
despite its not being incorporated. The non-
incorporation or Abante Tonite with the
Securities and Exchange Commission was of no
consequence, for, otherwise, whoever of the
public who would suffer any damage from the
publication of articles in the pages of its
tabloids would be left without recourse.
ABOITIZ EQUITY v. CHIONGBIAN
October 31, 1919, Johnson, J>
FACTS: A, C and W entered into an agreement
where A and C would transfer their shipping
assets to W in exchange of W’s shares of stock.
The corporation became WG&A. The
agreement provided that all disputes shall be
submitted to arbitration. An annex was also
attached to the agreement confirming W’s
purchase of C’s inventories. Eventually, C and
W decided to leave WLI and sell their interest
to Aboitiz family. An SPA was entered into
between PET AEV, C and W. Even before this
transfer, C has been claiming from WLI the
balance for the payment of its inventories. It
subsequently demanded from PET AEV and
filed an application for arbitration.
RULING: There is no agreement binding AEV
to arbitrate with CAGLI on the latter’s claim
arising from Annex SL-V. That Annex SL-V is
only between WLI and CAGLI — it necessarily
follows that none but WLI/ WG&A/ ATSC and
CAGLI are bound by the terms of Annex SL-V.
While the principle of privity or relativity of
contracts acknowledges that contractual
obligations are transmissible to a party’s
assigns and heirs, AEV is not WLI’s successor-
in-interest. A corporation has a personality
separate and distinct from that of its individual
stockholders. Thus, a stockholder does not
automatically assume the liabilities of the
corporation of which he is a stockholder.
LIVESEY v. BINSWANGER
March 19, 2014, Brion, J.
FACTS: Livesey filed a complaint for illegal
dismissal with money claims against CBB Phils.
LA ruled in favor Livesey. When the claim
remain unsatisfied, Livesey filed a motion for
an alias writ of execution against Binswanger
Phils, alleging that they are one and the same
and that Binswanger Phils was created merely
to avoid CBB’s liabilities. LA ruled in favor of
RESPs. NLRC reversed. CA reversed.
RULING: CBB and Binswanger Phils are one
and the same. CBB’s closure and Binswanger’s
incorporation. CBB ceased to exist only in
name; it re–emerged in the person of
Binswanger for an urgent purpose — to avoid
payment by CBB of the last two installments.
Moreover, evidence show: (1) it holds office in
the same building and in the same floor, (2)
same key officers (3) e–mail correspondence,
supplied the information that Binswanger is
40
 CORPORATION LAW BOOK I
“now known” as either CBB (Chesterton
Blumenauer Binswanger or as Chesterton
Petty, Ltd., in the Philippines; (4) the use of
Binswanger of CBB’s paraphernalia (receiving
stamp) in connection with a labor case where
Binswanger was summoned by the authorities,
although Elliot claimed that he bought the item
with his own money; and (5) Binswanger’s
takeover of CBB’s project with the PNB.
Moreover, Elliot was well aware of the fact that
there was a compromise agreement, and that
there was a remaining balance left unpaid.
HEIRS OF FE TAN UY v. INT’L EXCHANGE
BANK
February 13, 2013, Mendoza, J.
FACTS: Hammer obtained loans from iBank,
secured by a third-party REM executed by
Goldkey, and a Surety Agreement executed by
Chua and Uy. Hammer defaulted, so the
properties covered by the REM was foreclosed.
iBank then filed a complaint for the balance
against Hammer, Chua, Uy, and Goldkey. RTC
held all of them solidarily liable – Uy as an
officer; Goldkey being an alter ego of Hammer.
RULING: Uy is not liable, but Goldkey is liable.
As to Uy, the mere fact that she is an officer is
not sufficient to hold her liable. And it was not
alleged, much less proven, that Uy committed
an act as an officer that would permit the
piercing of the corporate veil. iBank did not
demand that she be held liable for the
obligations because she was a corporate officer
who committed bad faith or gross negligence;
what the complaint merely stated is that she
acted as surety. And since the only basis for
holding her liable was a forged document,
there was no justification for the RTC to have
ruled that she was liable merely because she
was an officer. As to Goldkey, the factors of
identity stated in Concept Builders that will
justify the piercing of corporate veil are
present in this case. (1) Both are family
corporations of Chua and Uy; (2) Hammer and
Goldkey share the same office; (3) Chua is the
president and COO of both corporations; (4)
The assets of Goldkey and Hammer are co-
mingled; (5) When Chua absconded, both the
corporations ceased to exist, even if the other
officers and stockholders are still around.
MEDICAL PLAZA v. CULLEN
June 29, 2004, Ynares-Santiago, J.
FACTS: RESP Cullen was prohibited from
voting and running for BOD elections in their
condominium association allegedly due to non-
payment of dues and assessments. When
MMPC failed to give explanation, RESP Cullen
filed a Complaint for Damages in RTC. PETs
filed a MTD alleging that it is the HLURB that
has jurisdiction over the case. RTC granted the
MTD, but CA reversed, ruling that this is an
ordinary action for damages.
RULING: It is an intra-corporate dispute,
which is within the jurisdiction of the RTC
sitting as a special commercial court, and not
the HLURB.
• In determining whether a dispute constitutes
an intra-corporate controversy, the Court uses
2 tests:
• (1) Relationship Test: existence of any of the
intra-corporate relations below
a. between the corporation, partnership or
association and the public;
b. between the corporation, partnership or
association and the State insofar as its
franchise, permit or license to operate
is concerned;
c. between the corporation, partnership or
association and its stockholders,
partners, members or officers; and
d. among the stockholders, partners or
associates themselves.
(2) Nature of the Controversy Test: the
controversy must not only be rooted in the
existence of an intra-corporate relationship,
but must as well pertain to the enforcement of
the parties’ correlative rights and obligations
under the Corporation Code and the internal
and intra-corporate regulatory rules of the
corporation.
In this case: PET MMPC is a condominium
domestic corporation charged with the
management of Medical Plaza Makati. RESP
Cullen, on the other hand, is the registered
owner of Unit No. 1201 and is thus a member
of the condo corporation. Clearly, there’s an
intra-corporate relationship between the
corporation and a member. Though
denominated as an action for damages, an
examination of the allegations made by RESP
in his complaint shows that the case principally
dwells on the propriety of the assessment and
the validity of restraining RESP from
participating in the elections. In a number of
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 CORPORATION LAW BOOK I
cases settled by the Court, the dispute as to
the validity of the assessments is purely an
intra-corporate matter and is thus within the
exclusive jurisdiction of the RTC sitting as a
special commercial court.
GAMBOA v. TEVES
June 28, 2011, Carpio, J.
FACTS: PTIC held 13.847% of PLDT’s
outstanding common shares. In 1969, GTEC
sold 26% of the outstanding common shares of
PLDT to PTIC. In 1977, Prime Holdings (PHI)
was incorporated, and subsequently acquired
46.125% of the OCS of PTIC. In 1999, First
Pacific, a Bermuda-registered, HK based
investment firm, acquired the remaining 54%
of the OCS of PTIC. In 2006, the PH
Government sold its 111,415 shares in PTIC.
First Pacific eventually bought the shares. PET
filed a petition for prohibition, injunction,
declaratory relief, and declaration of nullity of
sale of the 111,415 shares arguing that since
PTIC is a stockholder of PLDT, the sale of the
PTIC shares is actually an indirect sale of 12M
shares of about 6.3% of the outstanding
common shares of PLDT.
RULING: The term “capital” in Sec. 11, Article
XIII of the Constitution refers only to shares of
stock entitled to vote in the election of
directors, and thus in the present case only to
common shares, and not to the total
outstanding capital stock comprising both
common and non-voting preferred shares.
It must be stressed, and respondents do not
dispute, that foreigners hold a majority
(66.27%) of the common shares of PLDT.
GAMBOA v. TEVES
October 9, 2012, Carpio, J.
RULING: There is no change of any long-
standing rule; thus, no redefinition of the term
“capital”. Philippine National under the Foreign
Investments Act: A corporation organized
under the laws of the Philippines of which at
least 60% of the capital stock outstanding and
entitled to vote is owned and held by citizens
of the Philippines. (Taken from EO 226 –
Omnibus Investments Act of 1987; PD 1789 –
OIA of 1981; RA 5186 – Investment Incentives
Act of 1967)
Mere legal title is insufficient to meet the 60%
Filipino owned capital required in the
Constitution. Full beneficial ownership of 60%
of the outstanding capital stock, coupled with
60% of the voting rights, is required. [Voting
Control Test and Beneficial Ownership Test]
Since the constitutional requirement applies to
voting control and to the beneficial ownership
of the corporation, it is therefore imperative
that such requirement apply uniformly and
across the board to all classes of shares,
regardless of nomenclature and category,
comprising the capital of a corporation. THE
60-40 ownership requirement must apply
separately to each class of shares, whether
common, preferred non-voting, preferred
voting or any other class of shares.
ROY v. HERBOSA
November 22, 2016, Caguioa, J.
FACTS: Pursuant to the Gamboa decision, SEC
issued SEC-MC No. 8 entitled “Guidelines in
Compliance with the Filipino-Foreign Ownership
Requirements.
Section 2. All covered corporations shall, at all
times, observe the constitutional or statutory
ownership requirement. For purposes of
determining compliance therewith, the required
percentage of Filipino ownership shall be
applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in
the election of directors; AND (b) the total
number of outstanding shares of stock, whether
or not entitled to vote in the election of
directors.
Roy, as a lawyer and taxpayer, filed the
Petition, assailing the validity of SEC-MC No. 8
for not conforming to the letter and spirit of
the Gamboa Decision and Resolution, alleging
that the 60-40 Filipino ownership requirement
separately to each class of shares, whether
common, preferred nonvoting, preferred
voting, or any class of shares.
RULING: SEC did not commit GAD in issuing
the Resolution.
Petitioners' insistence that the 60% Filipino
equity requirement must be applied to each
class of shares is simply beyond the literal text
and contemplation of Section 11, Article XII of
the 1987 Constitution. In the exhaustive
review made by the Court in the Gamboa
Resolution of the deliberations of the
Constitutional Commission, the opinions of the
framers of the 1987 Constitution, the opinions
of the SEC and the DOJ as well as the
provisions of the FIA, its implementing rules
and its predecessor statutes, the intention to
42
 CORPORATION LAW BOOK I
apply the voting control test and the beneficial
ownership test was not mentioned in reference
to "each class of shares." Even
the Gamboa Decision was silent on this point.
The right to vote in the 8 instances
enumerated in Section 6 of the stockholders
with preferred shares is more in furtherance of
the stockholder's right of ownership rather
than as a mode of control.
The pronouncement of the Court in the
Gamboa Resolution - the constitutional
requirement to apply uniformly and across the
board to all classes of shares, regardless of
nomenclature and category, comprising the
capital of a corporation - is clearly an obiter
dictum that cannot override the Court's
unequivocal definition of the term "capital" in
both the Gamboa Decision and Resolution.
Beneficial ownership [Rule 3, Securities
Regulation Code (RA 8799)]
Any person who, directly or indirectly, through
any contract, arrangement, understanding,
relationship or otherwise, has or shares voting
power, which includes the power to vote, or to
direct the voting of such security; and/or
investment returns or power, which includes
the power to dispose of, or to direct the
disposition of such security; provided,
however, that a person shall be deemed to
have an indirect beneficial ownership interest
in any security which is:
(a) Held by members of his immediate family
sharing the same household
(b) Held by a partnership in which he is a
general partner
(c) Held by a corporation of which he is a
controlling shareholder; or
(d) Subject to any contract, arrangement, or
understanding which gives him voting
power or investment power with respect to
such securities
NARRA NICKEL MINING v. REDMONT
CONSOLIDATED MINES CORP
April 21, 2014, Velasco, Jr., J.
FACTS: Narra Nickel et. al. were applying for
MPSAs to mine and explore in Palawan.
Redmont filed petition to cancel their
applications, alleging that Narra et. al. were
actually foreign corporations because they
were controlled by MBMI, a Canadian
corporation, and who are therefore disqualified
by law.
• McArthur – Madridejos Mining Corp -
Olympic
• Tesoro – Sara Marie Mining (SMMI) –
Olympic Mines and DC
• Narra – Patricia Louise MDC (PLMDC) –
Palawan Alpha South Resource DC
RULING: Narra, Tesoro, and McArthur are
disqualified from acquiring MPSAs.
Case is not mooted by the sale of MBMI’s
shares to DMCI, which is a Filipino corporation.
The sale of MBMI shares does not have any
breading and this should be disregarded,
because this is being disposed of in a different
case.
The control test is still the prevailing mode of
determining WON a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art.
XII, 1987 Constitution, entitled to undertake
the exploration, development and utilization of
the natural resources of the Philippines. When
in the mind of the Court, there is doubt, based
on the attendant facts and circumstances of
the case, in the 60-40 Filipino equity ownership
in the corporation, then it may apply the
“grandfather rule.”
Leonen, Dissenting: All the 3 corporations are
ostensibly Filipino corporations. But Redmont
engaged in blatant forum shopping – filed four
cases (DENR, SEC, RTC, OP)
NARRA NICKEL MINING v. REDMONT
CONSOLIDATED MINES CORP
January 28, 2015, Velasco, Jr., J.
A resort to the Grandfather Rule is necessary if
doubt exists as to the locus of the “beneficial
ownership” and “control”. In this case, a
further investigation as to the nationality of the
personalities with the beneficial ownership and
control of the corporate shareholders in both
the investing and investee corporations is
necessary.
Indicators of a dummy status:
(1) That the foreign investors provide
practically all the funds for the joint
investment undertaken by these Filipino
businessmen and their foreign partner;
(2) That the foreign investors undertake to
provide practically all the technological
support for the joint venture;
(3) That the foreign investors, while being
minority stockholders, manage the
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 CORPORATION LAW BOOK I

company and prepare all economic

viability studies

When foreigners contribute more capital to an

enterprise, doubt exists as to the actual control
and ownership of the subject corporation even
if the 60% Filipino equity threshold is met.

Grandfather rule applies on 2 levels of

corporate relations for publicly-held
corporations or where the shares are traded in
the stock exchanges, and to 3 levels for closely
held corporations or the shares of which are
not traded in the stock exchanges

44
 CORPORATION LAW BOOK I

CHAPTER V: PROMOTERS’ Buzon. 5 months after, Cagayan Fishing filed

CONTRACTS PRIOR TO its AOI. BOD then adopted a Resolution
authorizing its president Ventura to sell the
INCORPORATION lots to RESP Sandiko. Sandiko failed to pay, so
Cagayan Fishing filed a case against Sandiko.
CORPORATE RIGHTS UNDER PROMOTERS’
CONTRACTS
RULING: Sale to Sandiko is invalid because in
• Upon adoption or ratification of pre-
the first place, the sale from Tabora to
incorporation contracts, the corporation
Cagayan Fishing was invalid. Cagayan Fishing,
becomes liable thereon. It is only logical
not being in legal existence then, did not
that it should also acquire the rights
possess the juridical personality to enter into
• Therefore, if the other party fails to perform
the contract. Until organized as authorized,
his part, the corporation may sue for
there is not a corporation, nor does it possess
specific performance or damages
franchises or faculties for it or others to
• The fact of bringing an action on the
exercise, until it requires a complete existence.
contract has been held to constitute
sufficient adoption or ratification, to give the
Doctrine of ratification cannot be applied
corporation cause of action
because it will result to injustice or fraud. In
this case, Tabora formed Cagayan Fishing to
MCARTHUR v. TIMES PRINTING
avoid his liability. Hence, the sale was in fact,
February 1, 1892, Mitchell, J. between Tabora as owner and himself, his
FACTS: McArthur was employed as an wife, and others as promoters of Cagayan
advertising solicitor in 1889 by Times Printing, Fishing.
which was still being organized. However, in
April 1890, he was discharged. McArthur filed
BUILDERS DUNTILE CO v. DUNN MFG CO.
this case for damages based on breach of
1929, Hobson
contract.
FACTS: Dunn Manufacturing, through its
agent, Gaston, sold machinery for making
RULING: Times Printing is liable. While a
duntile to Samuel, who was organizing a
corporation is not bound by engagements
company to manufacture duntiles. During the
made on its behalf by its promoters before its
negotiation, Samuel preferred to organize the
organization, it may, after its organization,
corporation before making the contract, but
make such engagements its own contracts. It
Gaston and the other promoters convinced
is not required that such adoption or
Samuel to sign the contract first before
acceptance be express; it may be inferred from
organizing, reasoning that the delivery of the
the acts or acquiescence on the part of the
machine will take a long time. The AOI of
corporation or its authorized agents.
Builders’ Duntile Company were soon field.
Aaron, the person sent to install the
The argument that the agreement is void
machineries didn’t properly install them, so a
under the Statute of Frauds proceeds from an
second man, Terell, had to be sent to fix it.
erroneous assumption that what the
Thereafter, Builders’ filed this case against
corporation did was ratification. In this case,
Dunn Mfg to recover on the written contract.
what the corporation did was adoption.
Ratification implies an existing person. There
RULING: Builders can sue. The contract,
cannot be a ratification in this case, because
though made in the name of Samuels was, as
the ratifier, the corporation, was not yet in
all the parties knew, made in his name for the
existence at the time the agreement was
benefit of the corporation to be organized. The
entered into.
weight of authority holds that a corporation
may sue upon the contract made by its
CAGAYAN FISHING DEVELOPMENT v. promoters for it, when it has adopted the
SANDIKO
contract. In this case, it was clearly understood
December 23, 1937, Laurel, J., Bengson, J. between Samuels and the other promoters and
FACTS: Tabora sold his lots to Cagayan Gaston that the contract was made on behalf
Fishing, which was then under the process of of the proposed corporation to be formed by
incorporation, in consideration of P1 subject to Samuels, and when the corporation was
the mortgages in favor of PNB and a certain formed, the incorporators took over the whole

45
 CORPORATION LAW BOOK I
thing, and ratified all that have been done on
its behalf. Though there was no formal
assignment of the contract to the corporation,
its acts were an adoption of the contract no
less than a formal resolution to this effect
would have been.
The form of the contract was due simply to the
fact that Gaston insisted that it would take
time to ship the machinery and get it there,
and that it would be better to make the order
first.
RIZAL LIGHT & ICE, INC v. PSC
September 28, 1968, Zaldivar, J.
FACTS: On May 6, 1962, Morong Electric was
granted a franchise to operate an electric light,
heat and power service. But it was only issued
its certification of incorporation on October 17,
1962. Rizal Light assailed the issuance of the
franchise, alleging that the franchise is null and
void because it was granted to Morong when it
was not yet in existence. Morong counters that
it was a de facto corporation at the time the
franchise was granted, and, as such, it was not
incapacitated to enter into any contract or to
apply for and accept a franchise.
RULING: The fact that the Morong Electric had
no corporate existence on the day the
franchise was granted in its name does not
render the franchise invalid, because later,
Morong Electric obtained its certificate of
incorporation and then accepted the franchise
in accordance with the terms and conditions
thereof.
The fact that a company is not completely
incorporated at the time the grant is made to it
does not affect the validity of the grant. But
such grant cannot take effect until the
corporation is organized. [McQuillin] While a
franchise cannot take effect until the grantee
corporation is organized, the franchise may,
nevertheless, be applied for before the
company is fully organized. [Fletcher]
PERSONAL LIABILITY OF PROMOTER ON
PRE-INCORPORATION CONTRACTS
Three Possible Situations that may be intended
by the promoter and the other party to a pre-
incorporation contract:
(1) Promoter may take a continuing offer on
behalf of the corporation, which if
accepted after incorporation, will become
a contract. In this case, the promoter
does not assume any personal liability,
WON the offer is accepted by the
corporation.
(2) The promoter may make a contract at
the time binding himself, with the
understanding that if the corporation,
once formed, accepts or adopts the
contract, he will be relieved of all
responsibilities; or
(3) The promoter may bind himself
personally and assume the responsibility
of looking to the proposed corporation,
when formed, for reimbursement
• Unless either of the 1st two situations was
agreed upon, expressly or impliedly, the
third situation will be presumed to exist.
• In other words, in the absence of any
express or implied agreement to the
contrary, a promoter is personally liable for
contracts made by him on behalf of the
proposed corporation.
• And the fact that the corporation when
formed has adopted or ratified the contract
does not release him from responsibility,
unless a novation was intended.
QUAKER HILL v. PARR
1961, Doyle, J.
FACTS: Quaker Hill sold a large quantity of
nursery stock to Denver Memorial Nursery,
Inc, which executed a PN in payment of said
purchase. Another order was made in the
name of Denver. Subsequently, a substituted
order was sent in the name of “Mountain View
Nurseries”. Denver Memorial was never
formed. After Mountain View was formed, it
issued a new note in favor of Quaker Hill.
Quaker Hill then used the designation
“Mountain View Nurseries” in all its
communications. Quaker Hill filed this action
against Parr and Presba to hold them
personally liable in view of the defunct financial
condition of the corporation, based upon the
fact that it was not formed at the time the
contract was made and on the further ground
that the defendants as promoters were
individually liable.
RULING: Parr cannot be held liable. Quaker,
acting through its agent, was well aware of the
fact that the corporation was not formed and
nevertheless urged that the contract be made
in the name of the proposed corporation. The
reason for the contract being entered into
under the name DNMI (but failed to form)
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 CORPORATION LAW BOOK I

was explained as Quaker Hill’s insistence four courses:

(through its agent) that the deal be
consummated at once because the growing
season was rapidly passing.
General Rule: Promoters are personally liable
on their contracts, though made on behalf of a
corporation to be formed
Exception: If the contract is made on behalf of
the corporation and the other party agrees to
look to the corporation and not to the
promoters for payment, the promoters incur no
personal liability.
(1) Provide an independent board of officers
not under his control, and make full
disclosure to the corporation through
them;
(2) Make full disclosure of all material facts to
each original subscriber of shares;
(3) Procure a ratification of the contract after
disclosing its circumstances by vote of
the stockholders of the completely
established corporation; and
(4) Be the real subscriber of all the shares of
the capital stock contemplated.

COMPENSATION OF PROMOTERS
• Prevailing View: Corporation is not liable to
pay such compensation because this would
be an imposition on innocent investors.
• The promoter is deemed as having given his
service on the chance of his being able to
get a reward from the corporation after it is
formed
• HOWEVER, the corporation may become
liable to pay such compensation:
o If after it is formed, it expressly
promises to do so;
o Where the promoters’ services are
performed partly before and after
incorporation, and the corporation takes
the benefits thereof – liable for services
rendered before and after incorporation
• SEC 7 of Securities Act authorizes a
promotion fee if it is provided for in the
registration statement of the securities
involved. The amount will depend on
o Effort exerted
o Difficulties encountered
o Expenses incurred in promoting and
organizing

OLD DOMINION COPPER MINING AND

SMELTING CO v. BIGELOW
FACTS: Bigelow and Lewihson bought mining
properties worth $1M, which they sold to the
Old Dominion Co (of which they were
promoters and directors) in exchange for
shares of stocks worth $3.25M. Old Dominion
eventually filed this case seeking to recover
the secret profits made by the promoters.

RULING: A promoter stands in a fiduciary

relation to the corporation, and he is charged
with all the duties of good faith. However, a
promoter may sell his own property to the
company he is promoting, and the contract
may be absolutely binding if he pursues one of

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 CORPORATION LAW BOOK I
CHAPTER VI: CORPORATE POWERS
GENERAL POWERS OF CORPORATIONS
SECTION 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 incorporation 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 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 transaction of the
lawful business of the corporation may
reasonably and necessarily 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 for hospital, 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.
Remember: A corporation can exercise those
powers that are expressly conferred by law and
those essential and necessary to carry out its
purpose/s.
The Corporation Code removed restrictions of
the Corporation Law on the power of
agricultural and mining corps to acquire real
props and shares in corps engaged in same
business as theirs.
General Restrictions on power of a
corporation to purchase and hold
property:
a. Property must be reasonably and
necessarily required by the transaction of
its lawful business
b. Power must be subject to the limitations
prescribed by law and the Constitution
General powers are to be exercised by the BoD
unless otherwise provided by the Code.
Amending AI and BL are exercised by
stockholders of members.
SPECIFIC POWERS
(1) Extend or shorten corporate term
(2) Increase or decrease capital stock
(3) Incur, create or increase bonded
indebtedness
(4) Deny preemptive right
(5) Sell or otherwise dispose of substantially
all its assets
(6) Acquire its own shares
(7) Invest in another corporation or business
(8) Declare dividends
(9) Enter into management contracts
Power to invest does not imply power to enter
partnership contract. This will contradict the
rule that a corporation must act through a BD
(because partners can bind the whole
partnership).
However, a corporation may enter into a joint
venture.
IMPLIED POWERS
Sec 36, par 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.
A corporation is presumed to act within its
powers. When a contract is not on its face
necessarily beyond its authority, it will, in the
absence of truth to the contrary, presumed to
be valid.
ULTRA VIRES DOCTRINE
Corporations are no longer “mere creatures of
the state” but are more probably so a product
of the agreement between the parties.
Ultra Vires acts of the corporation are merely
voidable, hence they can be ratified, except
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 CORPORATION LAW BOOK I
when it is contrary to law, morals, public
policy, or public order or when third persons
are injured.
Legal Consequences of ultra vires acts:
(1) On corporation itself
• Dissolved under a quo warrant
proceeding by SolGen.
• SEC may suspend or revoke the
certificate of registration of any
corporation on any of the grounds
provided by existing law, which
include commission of ultra vires
acts.
(2) On immediate parties to the ultra vires
contract
• If executed, parties will be left as
they are
• If executory on both sides, neither
can ask for specific performance.
• One party performs, the other has
not but has benefitted, latter will be
estopped.
(3) On the rights of the stockholders
• Stockholder may bring individual or
derivative suit to enjoin a
threatened ultra vires act or
contract.
• If act already performed, a contravention to law, customs, public order, or
derivative suit against directors may
be filed, but liability will depend on
whether they acted in good faith
with reasonable diligence in entering
into the contracts
When a suit is based on tort, the corporation
cannot set up the defense of ultra vires against
the injured party who had no knowledge that
the corporation was engaging in an act not
included expressly or impliedly in its purpose
clause.
REPUBLIC v. ACOJE MINING
February 28, 1963, Bautista, J.
FACTS: Acoje Mining requested from the
Director of Posts, the opening of a post,
telegraph and money order officers at its
mining camp at Sta. Cruz, Zambales to service
its EEs and their families. Director agreed on
the condition that the company shall assume
full responsibility for any pecuniary loss and it
would provide the EEs in said office. A
resolution was then passed by Acoje Mining
agreeing to the said condition. Eventually, the
postmaster absconded with money, so the
Republic filed a case to recover the amount
stolen. Acoje Mining denied liability contending
that the resolution is ultra vires, and in any
event, its liability under the resolution is only
that of a guarantor.
RULING: The resolution is not ultra vires.
First, it is to be noted that the opening of the
post office was undertaken at the request of
Acoje Mining for the benefit of its employees.
At the very least, Acoje is estopped from
claiming that the resolution is ultra vires.
Moreover, the resolution covers a subject
which concerns the benefit, convenience, and
welfare of its employees and their families.
While as a rule, an ultra vires is one committed
outside the object for which the corporation is
created as defined by the law of its
organization and therefore beyond the powers
conferred upon it by law, there are however
certain corporate acts that may be performed
outside of the scope of the powers expressly
conferred if they are necessary to promote the
interest or welfare of the corporation. It is
undisputed in this case that the establishment
of the post office is a reasonable and proper
adjunct to the conduct of its business.
Assuming that the resolution is ultra vires, it is
not void for it was approved not in
public policy. It is merely voidable which can
be enforced or validated, in this case, through
estoppel.
CARLOS v. MINDORO SUGAR CO.
October 26, 1932, Imperial, J.
FACTS: Mindoro Sugar issued a resolution
authorizing its President to sell its bonds worth
3M. Pursuant to this, Philippine Trust Co
purchased bonds worth 3M from Mindoro Sugar
Co in exchange for the guarantee of said bonds
and its debts to PNB. PTC then resold them to
the public with a guaranty by them. 13 bonds
were sold to Diaz, and 4 were then sold to
Carlos. PTC initially paid the value of the bonds
but thereafter stopped. Carlos then filed this
case to recover from MSC and PTC the value of
the 4 bonds.
RULING: PTC is liable. Although the deed of
trust does not clearly state that MSC
transferred the bonds to PTC, the resolution of
the BOD nevertheless authorized its president
to buy and guarantee the bonds. As soon as
the bonds were issued, MSC transferred all its
49
 CORPORATION LAW BOOK I
real property to PTC, the consideration being,
the guarantee of the bonds, and the guarantee
of MSC’s debt to PNB. Even if the guarantee
REPUBLIC v. EL HOGAR
October 26, 1932, Imperial, J.
FACTS: El Hogar administered and managed
the properties mortgaged by its delinquent
stockholders, as well as those properties
owned by its shareholders, but not mortgaged.
RULING: The management of the properties
mortgaged is lawful. Under the mortgage
agreement, the association may treat the
whole indebtedness as due, at the option of
the BOD. And the management of the
properties is certainly more favorable to the
debtor than the immediate enforcement of the
entire obligation. However, the management of
the parcels of land not under mortgage is
unlawful. Said administration is more befitting
to the business of a real estate agent or trust
company than to the business of a building and
loan association.
NAPOCOR v. VERA
February 27, 1989, Cortes, J.
FACTS: NPC had a contract for stevedoring
services with Sea Lion, but the contract had
expired. NPC took over the stevedoring
services. Sea Lion then filed a complaint for
prohibition and mandamus, alleging that NPC
did not have the power to conduct stevedoring
services.
RULING: Judge Vera acted without jurisdiction
when he issued the writ of preliminary
injunction against NPC, because NPC is a public
utility, hence, protected by Sec 1, PD 1818.
Moreover, RTC’s finding that NPC is not
empowered by its Charter to undertake
stevedoring services in its pier is erroneous.
NPC was empowered not only to construct,
operate and maintain power plants, reservoirs,
transmission lines, and other works, but also to
exercise such powers and do such things as
may be reasonably necessary to carry out the
business and purposes for which it was
organized, or which xxx may be declared by
the Board to be necessary, useful, incidental or
auxiliary to accomplish said purpose. In the
CAB, it is an undisputed fact that the pier
owned by NPC receives the various shipments
of coal which is used exclusively to fuel its
Batangas Coal-Fired Thermal Power Plant for
the generation of electric power. The
stevedoring services which involve the
unloading of the coal shipments onto the NPC
pier for its eventual conveyance to the power
plant are incidental and indispensable to the
operation of the plant. Lastly, the writ cannot
be issued because Sea Lion Intl Port’s contract
with NPC already expired.
MADRIGAL & CO v. ZAMORA
June 30, 1987, Sarmiento, J.
FACTS: Madrigal & Co was engaged in the
management of its sister company, Rizal
Cement Co. When Madrigal Central Office EU
sought for the renewal of its CBA, Madrigal,
thru a resolution, reduced its capital stock.
This was done through a distribution of
marketable securities owned by Madrigal to its
stockholders in exchange for their share in an
equivalent amount in the corporation. Union
then filed a complaint for ULP. Madrigal raised
operational losses in its position paper.
Pending the NLRC decision, Madrigal informed
the SOL that Rizal Cement had ceased
operations temporarily, and that its income is
derived from Rizal Cement, as a result, it had
to reduce its capital stock. It requested that it
be allowed to effect reorganization by way of
retrenchment. LA ruled in favor of Union and
ordered the reinstatement of the employees.
RULING: The reduction of capital stock was
just a mask for the purge of union members.
The dividends it received from Rizal Cement
are corporate earnings arising from corporate
earnings, hence, it is incorrect to say that such
profits, in the form of dividends, are beyond
the reach of Madrigal’s creditors.
PIROVANO v. DELA RAMA
December 29, 1954, Bautista-Angelo, J.
FACTS: The Board of Directors of De La Rama
Steamship Co., Inc. adopted a Resolution
donating to the Pirovanos, heirs of the
Company’s deceased President, 400,000 pesos
of the life insurance proceeds on the life of
Pirovano, convertible into 4,000 shares of
stock. When the corporation found that the
value of the shares increased, they issued a
second resolution changing the for of donation
to a renunciation in favor of the children of the
company’s right, title and interest as
beneficiary in the proceeds of the insurance
policies. The stockholders of the Company
subsequently ratified the donation in a
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 CORPORATION LAW BOOK I
separate Resolution. However, the
stockholders later revoked the donation on the
basis of a SEC Opinion holding that the said
donation was not within the powers of the
Corporation to make.
RULING: The donation was valid. The
company’s articles of incorporation provide
that one of the reasons for which the
corporation was formed is “to invest and deal
with the moneys of the company not
immediately required, in such manner as from
time to time may be determined” and “to aid in
any other manner any person, association, or
corporation of which any obligation or in which
any interest is held by this corporation or in
the affairs or prosperity of which this
corporation or in the affairs or prosperity of
which this corporation has a lawful interest.”
The corporation was given broad and almost
unlimited powers to carry out the purposes for
which it was organized. The word deal is broad
enough to include any manner of disposition,
and refers to moneys not immediately required
by the corporation, and such disposition may
be made in such manner as from time to time
may be determined by the corporations.
Assuming that the donation is ultra vires, it still
cannot be invalidated because the stockholders
have ratified it.
*This could have been decided easily under the
current Corporation Code because under Sec.
36(9), a corporation may make reasonable
donations.
HARDEN v. BENGUET CONSOLIDATED
MINING
March 18, 1933, Street, J.
FACTS: Balatoc Mining approached Benguet
Consolidated to secure capital necessary to
develop. They entered into a contract whereby
Benguet will construct a milling plant and a
power plant in exchange for 600K shares of
Balatoc. Harden, stockholder of Balatoc sought
to annul the contract on the ground that it is
unlawful for the Benguet Company to hold any
interest in a mining corporation.
RULING: Harden has no casue of action
against Benguet Mining. Where one mining
corporation acquires a prohibited interest in
another such corporation, the shareholders of
the latter cannot maintain an action to annul
the contract by which such interest was
acquired.The remedy must be sought in a
criminal proceeding or quo warranto action,
under Section 190 (A), instituted by the
Government.
Corporations have a right against
unreasonable searches and seizures
STONEHILL v. DIOKNO
October 26, 1932, Imperial, J.
FACTS: 42 search and seizure warrants were
issued against Stonehill et al, and the
corporations in which they are officers.
Stonehill et al filed this case to question the
legality of the search warrants.
RULING: Stonehill et al have no cause of
action to assail the legality of the contested
warrants and of the seizures made in
pursuance thereof, for the simple reason that
said corporations have their respective
personalities, separate and distinct from the
personality of herein petitioners, regardless of
the amount of shares of stock or of the interest
of each of them in said corporations, and
whatever the offices they hold therein may be.
The legality of a seizure can be contested only
by the party whose rights have been impaired
thereby, and that the objection to an unlawful
search and seizure is purely personal and
cannot be availed of by third parties.
Consequently, petitioners may not validly
object to the use in evidence against them of
the documents, papers and things seized from
the offices and premises of the corporations
adverted to above, since the right to object to
the admission of said papers in evidence
belongs exclusively to the corporations, to
whom the seized effects belong, and may not
be invoked by the corporate officers in
proceedings against them in their individual
capacity.
BACHE & CO v. RUIZ
February 27, 1971, Villamor, J.
FACTS: CIR Vera wrote a letter to Judge Ruiz
requesting for the issuance of a search warrant
against Bache & Co (Phils) and its President,
Seggerman, for violation of Sec. 46(a) of the
NIRC. 3 days later, BIR agents served the
search warrant at Bache & Co’s office. Their
lawyers protested on the ground that no formal
complaint or transcript of testimony was
attached to the warrant. The agents
nevertheless proceeded with their search, w/c
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 CORPORATION LAW BOOK I
yielded 6 boxes of documents. A few days
later, B&Co filed a petition praying that the
search warrant be quashed, dissolved, or
recalled, and that it be declared null and void,
and that Vera pay them damages. RTC
dismissed the petition.
RULING: The search warrants are null and
void. (1) the judge did not conduct a personal
examination of the complainant de Leon and
his witness Logronio. (2) the search warrant
was issued for more than one specific offense.
(3) The search warrant does not particularly
describe the things to be seized.
As a corporation, B&Co is entitled to protection
against unreasonable searches and seizures. In
Stonehill, et al. vs. Diokno, this Court impliedly
recognized the right of a corporation to object
against unreasonable searches and seizures. In
the Stonehill case only the officers of the
various corporations in whose offices
documents, papers and effects were searched
and seized were the petitioners. In the case at
bar, the corporation to whom the seized
documents belong, and whose rights have
thereby been impaired, is itself a petitioner.
Corporation is generally not entitled to
moral damages. The exceptions are those
mentioned under Article 2219, CC.
MAMBULAO LUMBER v. PNB
January 30, 1968, Angeles, J.
FACTS: Mambulao failed to pay its loan to
PNB, so PNB requested the sheriff to take
possession of the mortgaged real properties,
along with the chattel mortgages. The sale of
real properties pushed through. Thereafter,
Mambulao requested that the sale of the
chattel mortgage be discontinued because the
debt has been fully settled. PNB advised
Mambulao that it still had a balance, and since
Mambulao did not pay, the foreclosure sale of
chattel mortgages proceeded with PNB as the
highest bidder, who later sold it to Bundok.
Mambulao filed a claim for damages,
contesting the amount of indebtedness and
validity of the foreclosure sale.
RULING: The foreclosure sale of the chattels
is illegal because the debt was already fully
settled upon the foreclosure of the real
properties and the issuance of a bank draft.
However, Mambulao Lumber is not entitled to
moral damages. An artificial person like herein
appellant corporation cannot experience
physical sufferings, mental anguish, fright,
serious anxiety, wounded feelings, moral shock
or social humiliation which are the basis of
moral damages. A corporation may have a
good reputation which, if besmirched, may also
be a ground for the award of moral damages,
But this is not applicable in this case because:
(1) It is admitted that Mambulao already
ceased its business operations (2) Whatever
adverse effect the foreclosure sale of the
chattels could have upon its reputation or
business standing would undoubtedly be the
same whether the sale was conducted in
Camarines Norte or Manila.
LBC EXPRESS v. CA
September 21, 1994, Puno, J.
FACTS: Carloto filed an action for damages
against LBC for wantonly and recklessly
disregarding its obligation (re: cashpack of
1,000). The complaint was amended adding
Rural Bank as one of the plaintiffs and prayed
for reimbursement of 32,000. RTC ruled in
favor of RESPs, and held LBC liable for 10K as
moral damages, 5K ED, 3K AF, 1K litigation
expenses, and also for the 32K
reimbursement. CA deleted the award of AF.
RULING: Lower Court erred in awarding moral
damages to Rural Bank of Labason. Moral
damages are granted in recompense for
physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation,
wounded feelings, moral shock, social
humiliation, and similar injury. A corporation,
being an artificial person and having existence
only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot
experience physical suffering and mental
anguish. Moral damages are granted in
recompense for physical suffering, mental
anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock,
social humiliation, and similar injury. A
corporation, being an artificial person and
having existence only in legal contemplation,
has no feelings, no emotions, no senses;
therefore, it cannot experience physical
suffering and mental anguish.
Neither is Carloto entitled to moral damages.
He is not without fault, as he knew that his
obligation with the CB would mature on Nov.
21 and his bank has set aside cash for these
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 CORPORATION LAW BOOK I

bills payable. He was all set to go, nevertheless

he did not immediately proceed allegedly
claiming his 1K pocket money. They also failed
to show that LBC’s late delivery was motivated
by personal malice or bad faith.

ABS-CBN BROADCASTING v. CA
January 21, 1999, Davide, Jr, C.J.
FACTS: ABS-CBN filed an action for specific
performance to enforce an agreement allegedly
entered into by its general manager, Lopez,
and RESP Del Rosario, a representative of
VIVA. RTC ruled in favor of RBS and VIVA. CA
affirmed and also awarded moral damages,
holding that RBS’s reputation was debased by
the filing of the complaint for specific
performance and by the non-showing of the
film “Maging Sino Ka Man.”

RULING: Republic Broadcasting Corp is not

entitled to moral damages. Moral damages are
in the category of an award designed to
compensate the claimant for actual injury
suffered and not to impose a penalty on the
wrongdoer. In this case, there was no actual
injury, hence, it cannot be entitled to moral
damages. Moreover, the award of moral
damages cannot be granted in favor of a
corporation because, being an artificial person
and having existence only in legal
contemplation, it has no feelings, no emotions,
no senses. It cannot, therefore, experience
physical suffering and mental anguish, which
can be experienced only by one having a
nervous system.

FILIPINAS BROADCASTING NETWORK v.

AMEC
January 17, 2005, Carpio, J.
FACTS: AMEC filed a complaint for damages
against FBNI, Rima, and Alegre for its libelous
broadcasts against AMEC. Both lower courts
ruled that AMEC is entitled to moral damages.

RULING: While as a general rule, juridical

persons are not entitled to moral damages,
said award is justified in this case because (1)
under Article 2219(7), moral damages are
recoverable in cases of libel, WON the plaintiff
is a natural or juridical person, (2) the
broadcast is libelous per se. Neither in such a
case is plaintiff required to introduce evidence
of actual damages as condition precedent for
recovery of damages.

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 CORPORATION LAW BOOK I
CHAPTER VII: CONTROL AND
MANAGEMENT OF CORPORATION
ALLOCATION OF POWER AND CONTROL
(1) Board of Directors or Trustees –
responsible for corporate policies and
the general management of the
business and affairs of the corporation
(2) Officers – in theory, execute the policies
laid down by the board, but in practice
often have wide latitude in determining
the course of business operations
(3) Stockholders/members – residual power
over fundamental corporate changes,
like amendments to the AOI
WHO EXERCSIES CORPORATE POWERS
1. Board of Directors
SECTION 23. The board of directors or trustees. –
Unless otherwise provided in this Code, the
corporate powers of all corporations formed under
this Code shall be exercised, all business conducted,
and all property of such corporations controlled and
held by the BOD or BOT to be elected from among
the holders of stock, or where there is no stock,
from among the members of the corporation, who
shall hold office for one (1) year and until their
successors are elected and qualified.
• Although the stockholders/members elect the
members of the board, once they have so
elected them, they have no right to interfere
with the board’s exercise of its power and
functions, EXCEPT in the instances where the
law expressly gives them the final say, i.e.
removal of director, amendment of the AOI,
and other major changes.
• Under Sec. 23, the board has the sole power
and responsibility to decide WON the
corporation should sue, purchase and sell
property, enter into any contract, or perform
any act.
(a) Board must act as a body in a • Meetings may either be special or regular.
meeting
SECTION 25. Corporate officers, quorum. – xxx
Unless the AOI or by the by-laws provide for a
greater majority, a majority of the number of
directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the
transaction of corporate business, and every
decision of at least a majority of the directors or
trustees present at a meeting at which there is a
quorum shall be valid as a corporate act, except for
the election of officers which shall require the vote
of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy
at board meetings.
• The directors or trustees must act not
individually, but as a body in a lawful
meeting. The law presumes that they will act
only after discussion and deliberation of the
matters before them.
• This does not meet however that the
corporation cannot in any case be bound in
favor of 3rd persons except when it acts
formally by a board resolution
• A corporation is just as bound by a contract
of an unauthorized where the majority of the
directors know of it, and take advantage of
the benefits thereof.
• As a general rule, a third person who acts in
good faith cannot be prejudiced by the fact
that the directors did not act IAW the
requirements of the law, if such person was
led to believe or had the right to presume
that the act involved was duly authorized by
the board.
(b) Requirements of meeting
SECTION 53. Regular and special meetings of
directors or trustees. - Regular meetings of the
board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or
trustees may be held at any time upon the call of
the president or as provided in the by-laws.
Meetings of directors or trustees of corporations
may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the
date, time and place of the meeting must be sent to
every director or trustee at least one (1) day prior
to the scheduled meeting, unless otherwise provided
by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly. (n)
• A board meeting must be properly called in
accordance with law, otherwise, it will not be
valid, and any action may be questioned by
an objecting director/stockholder, without
prejudice to any right which may have been
acquired by an innocent third person.
i. Notice
• Notice of any meeting, regular or
special, is MANDATORY
• In the absence of any provision in
the by-laws, notice must be given at
least 1 day prior to the meeting
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 CORPORATION LAW BOOK I
• An individual director or trustee
however may expressly or impliedly
waive such requirement as to him
• Contents: purpose and other matters
which are to be taken up therein
ii. Place of Meeting
• If the by-laws are silent, board may
meet anywhere it pleases, even
outside the Philippines
• The by-laws may however set
limitations on this freedom of the
board to choose a place of meeting
iii. Quorum and Vote
• Qourum: majority of the number of
directors or trustees as fixed in the
AOI, unless the AOI or by-laws
provide for a greater majority
• Vote: Majority of the members of the
BOD who are present, provided there
is quorum
iv. Agenda
• Only those stated in the notice can
be taken up in the meeting
• Extraordinary matters not mentioned
in the notice cannot be validly acted
upon.
• Even should the agency list as its last
item “other matters”, only such
matters which are routine and
ordinary can be validly acted upon.
• HOWEVER, if all directors are present
and agree to take up alien matters,
then no one can later question the
validity of any action taken
v. Presiding Officer
• Unless the by-laws otherwise
provide, the president of the
corporation shall preside at all
meetings of the directors/trustees as
well as of stockholders/members
• It is possible for the by-laws to
provide for a Chairman of the Board
(c) Close Corporations
• The Code allows close corporations to
do away with the board entirely,
treating the stockholders as directors
SEC. 97. Articles of incorporation. - The articles of
incorporation of a close corporation may provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same
and restrictions on their transfers as may be
stated therein, subject to the provisions of the
following section;
2. For a classification of directors into one or
more classes, each of whom may be voted for
and elected solely by a particular class of
stock; and
3. For a greater quorum or voting requirements
in meetings of stockholders or directors than
those provided in this Code.
The articles of incorporation of a close corporation
may provide that the business of the corporation
shall be managed by the stockholders of the
corporation rather than by a board of directors. So
long as this provision continues in effect:
1. No meeting of stockholders need be called to
elect directors;
2. Unless the context clearly requires otherwise,
the stockholders of the corporation shall be
deemed to be directors for the purpose of
applying the provisions of this Code; and
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
4. The articles of incorporation may likewise
provide that all officers or employees or that
specified officers or employees shall be
elected or appointed by the stockholders,
instead of by the board of directors.
SEC. 101. When board meeting is unnecessary or
improperly held. - Unless the by-laws provide
otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written
consent thereto is signed by all the directors;
or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action with the express or implied
acquiescence of all the stockholders; or
4. All the directors have express or implied
knowledge of the action in question and none
of them makes prompt objection thereto in
writing.
5. If a director's meeting is held without proper
call or notice, an action taken therein within
the corporate powers is deemed ratified by a
director who failed to attend, unless he
promptly files his written objection with the
secretary of the corporation after having
knowledge thereof.
RAMIREZ v. ORIENTALIST CO.
September 24, 1918, Street, J.
FACTS: Fernandez, as treasurer of The
Orientalist Company (a Philippine corporation
maintaining a movie theatre) entered into a
contract with Ramirez, who was in the business
of marketing films and distributing films,
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 CORPORATION LAW BOOK I
involving the “Éclair” and “Milano” films.
Oriental failed to pay. Ramirez filed suit
against the company and Fernandez. The
company alleged that Fernandez, in signing,
had no authority to bind the company.
RULING: The action is based on documents
purporting to be signed by Orientalist, and so it
was incumbent upon the corporation to
specifically deny the due execution of said
contracts under oath, as prescribed in section
103 of the Code of Civil procedure, if it wanted
to question Fernandez’ authority to sign in
behalf of the company. The reason for this
rule is that in dealing with corporations the
public at large is bound to rely to a large
extent upon outward appearances. If a man is
found acting for a corporation with the external
indicia of authority, any person, not having
notice of want of authority, may usually rely
upon those appearances; and if it be found
that the directors had permitted the agent to
exercise that authority and thereby held him
out as a person competent to bind the
corporation, or had acquiesced in a contract
and retained the benefit supposed to have
been conferred by it, the corporation will be
bound, notwithstanding the actual authority
may never have been granted. The public is
not supposed nor required to know the
transactions which happen around the table
where the corporate board of directors or the
stockholders are from time to time convoked.
The authority of a subordinate agent of a
corporation often depends upon the course of
dealings which the company or its director
have sanction. In this case, the guaranty of
Fernandez was given with the knowledge and
consent of the president and irectors, and his
consent was given with as much observance of
formality as was customary in the transaction
of the business of the company.
LOPEZ v. ERICTA
June 29, 1972, Makalintal, J.
FACTS: Lopez submitted the ad interim
appointment of RESP Blanco for
reconsideration of the BOR. Lopez extended
Blanco’s appointment subject to the approval
of the BOR and to pertinent Univ regs. In
another meeting, the BOR took a rollcall vote
on the appointment of Blanco as dean. 5 voted
in favor, 3 against, 4 abstained. Having ruled
that Blanco did not obtain the necessary
number of votes, BOR agreed to expunge the
result, and since BOR did not take aaction
either adversely or favorably, Blanco’s ad
interim appointment of Blanco was terminated.
Blanco sued Lopez, the BOR, and the OIC
Dean, alleging that an abstention means
acquiescence in the action of those who voted
affirmatively.
RULING: The absention in this case does not
mean acquiescence in the action of those who
voted affirmatively due to the fact that Blanco
was clearly not the choice of het majority of
the members of the BOR.
Blanco’s ad interim appointment is not
authorized under the Charter and the Revised
Code of UP. Under both laws, the Dean of a
college is elected by the BOR on nomination by
the President of the University. In other words,
the President’s function is only to nominate,
not to extend an appointment, even if only ad
interim, and the power of the BOR is not
merely to confirm, but to elect or appoint.
EXPERT TRAVEL TOURS v. CA
May 26, 2005, Callejo, Sr., J.
FACTS: Aguinaldo, the resident agent of
Korean Airlines (“KAL”), executed a verification
and certification against forum shopping
(“Certification”) in connection with a collection
suit filed by KAL. Expertravel & Tours, Inc.
(“ETI”) filed a motion to dismiss on the ground
that Aguinaldo was not authorized to execute
the Certification.
RULING: Aguinaldo was not properly
authorized by the BOD of KAL. While he is a
resident agent of KAL, this does not mean that
he is authorized to execute the Certification. A
resident agent may be aware of actions filed
against his principal, but he may not be aware
of actions initiated by its principal, whether in
the Philippines or in the country where such
corporation was organized. A reading
of the text of the Certification shows that there
is no allegation that Aguinaldo was authorized
to execute the Certification. No Board
Resolution authorizing Aguinaldo was
appended to or incorporated in the
Certification.
CITIBANK NA v. CHUA
March 17, 1993, Campos, Jr., J.
FACTS: In a complaint initiated by RESPs, they
sought to declare PETs in default during the
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 CORPORATION LAW BOOK I
pre-trial conference on the ground that the
counsel who appeared was not authorized to
do so due to a lack of a resolution from the
BOD of PET conferring such power.
RULING: The by-laws of the company had
effectively allowed the corporation’s Executing
Officer to appoint an Attorney-in-Fact to
represent it in its cases, and in the AIF’s
general power of attorney, it was allowed to
delegate such powers to an employee of
Citibank. Hence, a resolution is not necessary.
[By-Laws à Executing Officer à Ferguson à
JPGA]
GR: All corporate powers are to be exercised
by the BOD
XPN: where the Code provides otherwise
1. Sec. 25: The directors or trustees and
officers to be elected shall perform the
duties enjoined on them by law and by
the by-laws of the corporation
2. Sec. 47 enumerates what may be
contained in the by-laws including the
qualifications, duties and compensation
of directors or trustees, officers and
employees
PRIME WHITE CEMENT, INC. v. IAC
March 19, 1993, Campos, Jr., J.
FACTS: Te, a board director of Prime White
Cement, Inc., entered into a dealership
agreement with PWC, through its President,
Falcon and Chair, Trazo. Relying on this
dealership agreement, he entered into
distributor agreements with several hardware
stores to dispose of his 20K bags allocation
from PWC. Te made several demands to PWC
to comply with the dealership agreement, PWC
refused, so Te had to cancel his agreement
with his 3rd parties. Notwithstanding the
existence of the dealership agreement, PWC
entered into an exclusive dealership with
Napoleon Co. Te filed a case for breach of
contract.
RULING: The dealership agreement is not
valid. Te is a self-dealing director, as such, he
holds a position of trust and as such, he owes
a duty of loyalty to his corporation. In case his
interest conflict with those of the corporation,
he cannot sacrifice the latter to his own
advantage and benefit. HOWEVER, a director’s
contract is not in all instances void or voidable.
If it is fair and reasonable, it may be ratified,
provided full disclosure of adverse interest is
made (Sec. 32). In this case, the contract is
neither fair nor reasonable as shown by the
fact that his dealership contract provided for a
fixed price of the cement and did not allow for
its increase. This fact unduly prejudiced the
corporation. He was guilty of disloyalty as he
was attempting to enrich himself at PWC’s
expense. There is also no showing that the
stockholders ratified the dealership agreement.
BOYER-ROXAS v. CA
July 14, 1992, Gutierrez, Jr., J.
FACTS: Heirs of Eugenia V. Roxas, Inc. filed a
case for recovery of possession against
Rebecca Boyer-Roxas and Guillermo Roxas.
PETs alleged that (1) they are the heirs of
Eugenia V. Roxas, and therefore co-owners of
the Hidden Valley Springs Resort, and
therefore have a right to stay within its
premises, and (2) the authority given by
Eufrocino for conversion of the recreation hall
can no longer be questioned by the
stockholders of the corporation or its BOD
because they delegated such authority to
Eufrocino (husband of Eugenia, who controlled
and managed the corporation).
RULING: The corporation may eject Rebecca
and Guillermo at anytime it wishes. Again,
corporations transact business only through its
officers or agents. Whatever authority these
officers of agents may have is derived from the
BOD or other governing body, unless
conferred by the charter of the corporation. An
officer’s power as an agent must be sought
from the statute, charter, by-laws, or in a
delegation of authority to such officer, from the
acts of the BOD, formally expressed or
implied from a habit or custom of doing
business.
In this case, the stay was merely by tolerance
of the corporation in deference to the wishes of
Eufrocino. And while the BOD did not object to
the actions of Eufrecino, his actions could not
have bound the corporation forever. But
Rebecca and Guillermo have not cited any
provision of the by- laws, or any resolution or
act of the BOD which authorized Eufrocino to
allow them to stay within the premises forever.
In the absence of a contract between the
corporation and Rebecca and Guillermo, the
corporation may choose to eject them at any
time it wishes for its benefit and interest.
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EPG CONSTRUCTION v. CA
June 22, 1992, Cruz, J.
FACTS: UP filed a case against EPG
Construction and its President for the
reimbursement of the cost of the repair of the
defective corporations.
RULING: EPG is liable, but its president is not.
The President merely acted on the
corporation’s behalf within the scope of his
authority and without any malice and bad
faith.
BENECO v. NLRC & COSALAN
May 18, 1992, Feliciano, J.
FACTS: BENECO’s Board suspended and
withheld the salaries, and later on ousted their
GM, Cosalan, when the latter tried to clean up
irregularities within the cooperative. Hence, he
filed a claim for damages against BENECO and
the BOD. NLRC absolved the BOD from liability.
RULING: The BOD are solidarily liable for
having acted with malice and bad faith. The
NLRC clearly overlooked or disregarded the
circumstances under which respondent Board
members had in fact acted in the instant case.
The Board’s actions were in response to
Cosalan’s efforts to take the COA audits
seriously. They did not offer any lawful cause
for Cosalan’s suspension and dismissal. They
acted with indecent haste. Thus, the record
showed strong indications that respondent
Board members had illegally suspended and
dismissed Cosalan precisely because he was
trying to remedy the financial irregularities and
violations of NEA regulations.
WOODCHILD HOLDINGS v. ROXAS
ELECTRIC
August 12, 2004, Callejo, Sr., J.
FACTS: Roberto Roxas, the President of Roxas
Electric (RECCI), was authorized in a
Resolution issued by the BoD to sell Lot B2 to
Wodochild Holdings. However, Roxas and WHI
also agreed that WHI will have a right of way
over, or may opt to buy a portion of, the
adjacent Lot B1 in case it needs access into
Sumulong Highway for its 45 foot container
van. After Roxas died, RECCI did not give WHI
a right of way over Lot B1 nor enforce the
agreed option to sell allegedly because Roxas’
authority did not allow him to enter these
transactions. WHI argued otherwise and filed
an action for specific performance against
RECCI.
RULING: The agreement is uenforceable
against RECCI as Roxas did not have authority
to sell Lot B1. Generally, the acts of corporate
officers within the scope of their authority are
binding on the corporation. The exception,
under Article 1910, being that acts done by
such officers beyond the scope of their
authority cannot bind the corporation UNLESS
the corporation has ratified such acts expressly
or tacitly, or is estopped from denying them.
Re implied ratification: For an act of the principal
to be considered as an implied ratification of an
unauthorized act of an agent, such act must be
inconsistent with any other hypothesis than that he
approved and intended to adopt what had been
done in his name.
Re apparent authority: Absent estoppel or
ratification, apparent authority cannot remedy the
lack of the written power required under the statute
of frauds. In this case, no evidence of specific acts
made by RECCI showing or indicating that it had full
knowledge of any representation made by Roxas to
WHI or that it had authorized him to sell Lot B1 or
to create a burden/lien.
Re assumed agency: Persons dealing with an
assumed agency, whether the assumed agency be a
general or special one, are bound at their peril, if
they would hold the principal liable, to ascertain not
only the fact of agency but also the nature and
extent of authority.
2. Corporate Officers and Agents
SECTION 25. Corporate officers, quorum. –
Immediately after their election, the directors of a
corporation must formally organize by the election
of a president, who shall be a director, a treasure
who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and
such other officers as may be provided for in the by-
laws. Any 2 or more positions may be held
concurrently by the same person, except that no
one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected
shall perform the duties enjoined on them by law
and the by-laws of the corporation. xxx
* the power of officers are derivative/ delegated
(a) President
• Presides over all meetings of the BOD
or BOT and stockholders/members
• HOWEVER, by-laws may provide for a
Chairman of the Board
• In many instances, he is impliedly
vested with broad powers, usually
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through long acquiescence to the
exercise of such powers.
• Whether the particular act/contract is
within the powers of the president will
depend on the facts, but the burden of
proving that it is not would usually be
borne by the corporation.
• Acts of president may be ratified by
the board
• One most common power – “sign and
execute the contracts of the
corporation
o This does not include the power to
enter into contracts with third
persons
(b)Corporate Secretary
• Must be both a PH resident and citizen
• Keeps the corporate records and has
custody thereof
• Duties are ministerial and he cannot
bind the corporation by contract,
UNLESS he is also named manager, or
is otherwise authorized
(c) Treasurer
• May or may not be a director
• Must be appointed at the time of the
drafting of the AOI since the law
requires his affidavit to attest to the
fact of compliance with the required
pre-incorporation subscription
• Main function is to receive an keep the
funds of the corporation, and to
disburse them in accordance with the
authority given him by the board or by
the properly authorized officers
• Powers are limited and cannot bind the
corporation unless authorized to do so
(d)Vice President
• He has no inherent power to bind the
corporation
• As a general rule, he takes over when
the president is absent or when the
latter’s office becomes vacant
• Usually also named as General
Manager
(e) General Manager
• Takes care of the day-to-day affairs of
the corporation
• Powers are limited to implementing
the policies laid down by the board,
and although he is given wide
discretion in making policies effective,
he can only perform such acts and
enter into such contracts as are usual
in the ordinary course of business of
the corporation, UNLESS the board
has given him broader authority
• He would thus have implied power to
appoint subordinate employees
• He cannot act contrary to an express
resolution of the Board, even on a
matter which would usually be within
his power to decide
• However, a third person has a right to
presume that a GM has the authority
to perform acts or enter into ordinary
contracts which are within the usual
course of the corporate business.
o If in fact he had no authority, a
third person who had no
knowledge thereof cannot be
prejudiced thereby
• Even if the act is not in the usual
course of business but BOD had
acquiesced to these acts and did not
prohibit them, they are deemed within
his implied authority
• Even if acts in excess of his authority,
such acts may be subsequently ratified
by the BOD expressly/impliedly
(f) Other Agents
• The corporation may employ persons
as it may need to carry on corporate
business
• It may also appoint agents for specific
purposes
YU CHUCK v. KONG LI PO
October 26, 1932, Imperial, J.
FACTS: C.C. Chen, GM, of Kong Li Po engaged
the services of Yu Chuck for the printing of the
company’s newspaper. However, prior to the
end of the contract of employment, the new
general manager of Kong Li Po terminated the
services of Yu Chuck. Yu Chuck sued. Kong Li
Po argued that the general manager did not
have the authority to bind the corporation. SC
ruled that the general manager has the implied
authority, but he can only enter into contracts
of employment which are reasonable.
RULING: While C.C. Chen, as GM, had implied
authority to bind the corporation by a
reasonable and usual contract of employment,
the contract cannot be considered reasonable,
hence, cannot bind the corporation. Not only is
the term of employment usually long, but the
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conditions are otherwise so onerous. The
contract even states that Kong Li Po shall be
liable even if it should become bankrupt.
General rule is power to bind a corporation lies
with its BOD, but this may either be expressly
or impliedly delegated to other officers or
agents. However, where the authority of
employing servants is expressly vested in the
board, an officer who has general control and
management of the corporation’s business or a
specific part thereof, may bind the corporation
by employing agents as are usual and
necessary in the conduct of such business.
Moreover, it must be reasonable.
LAPU-LAPU FOUNDATION & ELIAS TAN v.
CA
January 29, 2009, Callejo, J.
FACTS: Tan, then president of Lapulapu
Foundation, obtained 4 loans from Allied Bank
however he failed to pay. Bank filed a
complaint seeking payment by the PETS,
jointly and solidarily. Bank denied
indebtedness alleging that Tan exceed his
authority while Tan admitted that he
contracted the loans in his personal capacity.
RULING: PETS are jointly and solidarily liable.
A businessman of Tan’s stature could not have
been careless to sign blank loan documents.
PN clearly showed on their faces the obligation
of the Foundation as contracted by Tan “in his
official and personal capacity”. If a corporation
knowingly permits one of its officers, or any
other agent, to act within the scope of an
apparent authority, it holds him out to the
public as possessing the power to do those
acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it
through such agent, be estopped from denying
the agent’s authority.
BOARD OF LIQUDATORS v. HEIRS OF
KALAW
August 14, 1967, Sanchez, J.
FACTS: NACOCO’s by-laws authorizes the
general manager to enter into contracts,
provided that approval is first sought from the
board of directors. Kalaw, as NACOCO GM,
entered into 9 copra trading contracts without
the requisite board approval. Typhoons then
hit the country and NACOCO was not able to
perform its contractual duties (to deliver
copra). NACOCO had to settle with its creditor
in the amount of P1.34M+. NACOCO, through
the Board of Liquidators (BoL) now seeks that
amount from Kalaw and members of the board
who subsequently approved the contracts,
charging Kalaw with negligence, bad faith,
and/or breach of trust.
RULING: Kalaw’s acts are valid. A rule that
has gained acceptance through the years is
that a corporate officer "entrusted with the
general management and control of its
business, has implied authority to make any
contract or do any other act which is necessary
or appropriate to the conduct of the ordinary
business of the corporation.” As such officer,
"he may, without any special authority from
the Board of Directors perform all acts of an
ordinary nature, which by usage or necessity
are incident to his office, and may bind the
corporation by contracts in matters arising in
the usual course of business.” Existence of
such authority is established, by proof of the
course of business, the usage and practices of
the company and by the knowledge which the
board of directors has, or must be presumed to
have, of acts and doings of its subordinates in
and about the affairs of the corporation.
Applied to the case: the practice of the
corporation has been to allow its GM to
negotiate and execute contracts in its copra
trading activities for and in NACOCO's behalf
without prior board approval. If the by-laws
were to be literally followed, the board should
give its stamp of prior approval on all
corporate contracts. But that board itself, by
its acts and through acquiescence, practically
laid aside this requirement.
ADVANCE PAPER CORP v. ARMA TRADERS
CORP.
December 11, 2013, Brion, J.
FACTS: Arma Traders purchased notebooks
and other paper products and also obtained
loans from Advance Paper to settle its
obligations to other suppliers. For this purpose,
they issued 82 psotdated checks signed by Tan
(former President) and Uy (treasurer) to
Advance Paper. Advance Paper presented the
checks, but “account closed” for insufficiency of
funds. It sued Arma Traders. Arma’s defense:
loans were ultra vires because there was no
board resolution authorizing Tan and Uy to
obtain the loans in the company’s behalf and
the loans were personal loans of Tan and Uy.
Advance Paper’s argument: apparent
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 CORPORATION LAW BOOK I
authority.
RULING: Arma Traders is liable under doctrine
of apparent authority. In the absence of a
charter or bylaw provision to the contrary, the
president is presumed to have the authority to
act within the domain of the general objectives
of its business ans within the scope of his or
her usual duties.
1. AI of Arma provides that the corp may
borrow or raise money to meet the
financial requirements of its business by
the issuance of bonds, PNs and other
evidence of indebtedness.
2. Tan and Uy are actually Arma Traders’
incorporators.
3. Arma’s Corporate Secretary testified that
the sole management of Arma was left to
Tan and Uy and that he and the other
officers never dealt with the business and
management of Arma for 14 years. Since
1984, the stockholders and directors never
had its meeting.
COSARE v. BROADCOM ASIA, INC.
February 5, 2014, Reyes, J.
FACTS: Cosare was an incorporator of
Broadcom (broadcast equipment dealer), was
the AVP of sales. He sent a memo to Arevalo,
another incorporator, that the VP for Sales
Abiog was committing certain anomalies. The
accusations weren’t acted on, instead Cosare
was called for a meeting where he was asked
to resign in exchange for financial assistance of
300k. He refused. He was then charged with
serious misconduct and willful breach of trust
for encouraging clients to buy rival companies’
equipment. He was given 48 hours to explain
and suspended from access to any of the
company’s records and assets. He was also
barred from entering the company premises.
He wanted to furnish a memo with the
company to address the accusations but the
company refused to receive it. Cosare then
filed a complaint for constructive dismissal and
illegal suspension case. Boradcom alleged that
LA had no jurisdiction because it was an intra-
corporate dispute so RTC has jurisdiction. It
argued that under its BL, the Board amy
appoint such officers are it may deem
necessary. The AVP position of Cosare is one of
those offices.
RULING: The LA has jurisdiction because the
case did not involve an intra-corporate dispute.
The mere fact that Cosare was a stockholder
and AVP of Broadcom does not make the case
an intra-corporate dispute. Cosare was not a
corporate officer. Corporate officers are those
who are given that character by the
Corporation Code or the corporation’s BL.
They are also elected by the directors or
stockholders. (1. Creation is by corpration’s
charter or BL, 2. Election of officer is by
directors or stockholders). In this case,
Broadcom’s BL lists the specific offices created
by the BL: President, VP, Treas, and Sec. It
was not proved that the AVP for sales was
created by virtue of a board reso and Cosare
was specifically elected or appointed. An
enabling clause in the BL empowering the BD
to create additional officers, even with a
subsequent board reso to that effect, cannot
make such position a corporate office. BD
cannot create other corporate offices without
first amending the BL to include that new
office.
Finally, mere fact of being a stockholder cannot
make this an ICD. The “controversy test” must
be followed: status or relationship of the
parties, nature of the question subject of
controversy must relate to rights and
obligations under Corporation Code.
ZAMBOANGA TRANSPORATION CO v.
BACHRACH MOTOR CO.
August 14, 1967, Sanchez, J.
FACTS: ZAMTRANCO purchased trucks and
accessory parts from Bachrach, which was
secured by two chattel mortgages. Later on,
Mons. Clos (stockholder who loans money to
Zamtranco to pay its debt to Bachrach) and
Bachrach, with the intervention of Zamtranco,
entered into an agreement where they agreed
to cancel the two mortgages in exchange for
the execution of a new one. The BOD did not
act on this immediately (later on rejected) but
Erquiaga was able to discuss the mortgage
with 2 other directors who expressed their
satisfaction with the arrangement. Eventually,
Erquiaga found out that Bachrach registered
the new mortgage without first registering the
cancellation of the two previous mortgages,
Hence, it filed a case against Bachrach praying
for the annulment of the new mortgage,
alleging that they had an oral agreement that
the mortgage will not be valid until it was
approved by the BOD and the PUC.
RULING: The mortgage is valid. The broad
powers granted to Erquiaga, the approval of
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his acts by 2 other directors, and the partial
fulfillment of the terms of the mortgage are
equivalent to a tacit approval by the BOD of
said mortgage.
When the president of a corporation, who is
one of the principal stockholders and at the
same time its GM, auditor, and attorney, is
empowered to enter into chattel mortgage
contracts, subject to BOD approval, and enters
into such contracts with the tacit approval of 2
other members, whom together with the
president, form a majority, and said
corporation takes advantage of the benefits
afforded by the contract, such acts are
equivalent to an implied ratification of said
contract by the BOD.
3. Board of Committees
SECTION 35. Executive committee. - The by-laws
of a corporation may create an executive
committee, composed of not less than three
members of the board, to be appointed by the
board. Said committee may act, by majority vote of
all its members, on such specific matters within the
competence of the board, as may be delegated to it
in the by-laws or on a majority vote of the board,
except with respect to:
(1) approval of any action for which shareholders'
approval is also required;
(2) the filing of vacancies in the board;
(3) the amendment or repeal of by-laws or the
adoption of new by-laws;
(4) the amendment or repeal of any resolution of
the board which by its express terms is not so
amendable or repealable; and
(5) the distribution of cash dividends to the
shareholders.
• For convenience, the BOD may create
committees for the performance of certain
functions
• As long as the BOD clearly specifies and
limits the functions delegated, and the
delegation does not in effect constitute an
abdication by the BOD of the powers and
responsibilities vested in it by law, such
delegation will be valid.
• Code also allows a delegation to an
executive committee of any act within the
competence of the board, with some
exceptions, provided such delegation is on
specific matters
• Under Sec. 35, an executive committee
must be composed of not less than 3
members of the BOD
• Sec. 35 implies that the BOD or the by-
laws may specifically authorize the
Executive Committee to study and review
a board resolution not expressly
unamendable or unrepealabe, and amend
or repeal the same if it deems wise to do
so
• *Decisions of executive committees are
merely recommendatory à FALSE
4. Stockholders or Members
• In vesting all corporate powers in the BOD,
Sec. 23 starts with “unless otherwise
provided by the Code” – this includes
instances where Code expressly requires
stockholders’ or members’ consent to
certain matters before any action can be
taken
• *Power of stockholders are residual
• Stockholders’ or members’ meetings may
be general or special
o Regular: annually on a date fixed by
the BL, or in April if not fixed
o Special: necessary in those instances
where Code requires stockholders’ or
members’ action or approval
§ Amendment of BL
§ Increase of capital stock
§ Removal of directors
• NOTE: No meeting is required for
amendment of AOI; written consent of
stockholders representing 2/3 of
outstanding capital stock along with
majority of BOD is sufficient. (except:
extend or shorten corporate term, increase
or decrease in capital stock)
(a) Requirements of stockholders’ or
members’ meeting and of voting
(1)Notice – written notice must be sent at
least 2 weeks prior to the meeting in case
of a regular meeting, and at least 1 week
prior in case of a special meeting, UNLESS
a different period is required by the BL
• Notice must specify time and place of
meeting and the purpose
• Only matters reasonably related to the
purpose would be taken up
• Effect of want of notice – render any
resolution made voidable at the
instance of an absent stockholder who
was not notified of the meeting
o If he attends despite want of
notice, he will be deemed to have
impliedly waived the requirements
SECTION 50. Regular and special meetings of
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stockholders or members. - Regular meetings of
stockholders or members shall be held annually on a
date fixed in the by-laws, or if not so fixed, on any
date in April of every year as determined by the
board of directors or trustees: Provided, That
written notice of regular meetings shall be sent to
all stockholders or members of record at least two
(2) weeks prior to the meeting, unless a different
period is required by the by-laws.
Special meetings of stockholders or members shall
be held at any time deemed necessary or as
provided in the by-laws: Provided, however, That at
least one (1) week written notice shall be sent to all
stockholders or members, unless otherwise provided
in the by-laws.
Notice of any meeting may be waived, expressly or
impliedly, by any stockholder or member.
Whenever, for any cause, there is no person
authorized to call a meeting, the Securities and
Exchange Commission, upon petition of a otherwise provided for in this Code or in the by-
stockholder or member on a showing of good cause
therefor, may issue an order to the petitioning
stockholder or member directing him to call a
meeting of the corporation by giving proper notice
required by this Code or by the by-laws. The
petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders
or members present have chosen one of their
number as presiding officer.
(2)Place – city or municipality where the
principal officer is located, if practicable in
the principal officer of the corporation.
Metro-Manila shall be considered a city or
municipality. By-laws cannot fix a place
other than this.
a. Time of Meeting – what is stated in
the BL; if silent – any day of April
every year
SECTION 51. Place and time of meetings of
stockholders of members. - Stockholder's or
member's meetings, whether regular or special,
shall be held in the city or municipality where the
principal office of the corporation is located, and if
practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of
this section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time
and place thereof stated therein.
All proceedings had and any business transacted at
any meeting of the stockholders or members, if
within the powers or authority of the corporation,
shall be valid even if the meeting be improperly
held or called, provided all the stockholders or
members of the corporation are present or duly
represented at the meeting.
SECTION 93. Place of meetings. - The by-laws
may provide that the members of a non-stock
corporation may hold their regular or special
meetings at any place even outside the place where
the principal office of the corporation is located:
Provided, That proper notice is sent to all members
indicating the date, time and place of the meeting:
and Provided, further, That the place of meeting
shall be within the Philippines.
(3)Quorum – stockholders representing
majority of the OCS or in case of a non-
stock corporation, a majority of the
members, UNLESS BL provide for a greater
or lesser number for quorum
• Unlike directors, stockholders or
members need not be present
personally, but may be represented by
proxies, who may vote in their behalf
Section 52. Quorum in meetings. - Unless
laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital
stock or a majority of the members in the case of
non-stock corporations.
(4)Vote – as a general rule, majority vote of
the shares or members present or
represented, provided there is a quorum;
exception – in the case of amendment of
AOI, 2/3 vote of the OCS is needed
a. Non-voting stocks or members –
right to vote inheres in stock
ownership; however, Code allows a
wavier in case of preferred or
redeemable shares
Where all stockholders/members are
present, even if a meeting is improperly
called, matters acted on will be valid.
GRACE CHRISTIAN HIGH SCHOOL v. CA
and GRACE VILLAGE ASSOC. INC.
October 23, 1997, Mendoza, J.
FACTS: In 1975, Committee of the Grace
Village BOD proposed an amendment to its BL
which allowed GCHS to sit as permanent
Director of the Assoc. It was never submitted
for approval but from 1975 to 1990, GCHS was
given a permanent seat. In 1990, a committee
of the GVAI sent a letter to the school principal
that all the driectors should be elected, thus, it
would “reexamine” the right of GCHS to sit in
the BOD. Notices were then sent to the
members of the association that the provision
on election of the directors under the original
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unamended BL will be observed. GCHS
requested for a change in notice of election
claiming that it acquired a vested right to sit as
director because of 15 years practice. GCHS
also claimed that there is no law prohibiting
unelected members of the BD of corps, citing
sec. 92 of Corporation Code, which does not
contain a prohibition (providing that the board
of trustees as soon as organized should come
up with a scheme such that 1/3 will be elected
every year) and that this is practiced by Pius
XII Catholic Center and Cardinal Santos
Memorial Hospital.
RULING: GCHS did not attain vested right to
sit as member of BD because it is contrary to
law. Legally, there can be no unelected
member of the BD. It is actually Sec. 28 and
29 of the Corporation Law (Sec. 23 of
Corporation Code) which govern. The meaning
of these provisions is that the BOD of
corporations must be elected from among the
stockholders or members. The unelected
members cited by GCHS sit in the BD as ex
oficio members, i.e. by virtue of holding a
particular office. In fact, there is no reason
why GCHS should he given a seat because the
proposed amendment was never enacted
formally. It is more accurate to say that the
members merely tolerated and not
implemented the provision and that it could
never attain validity because it is contrary to
law – the board of directors must always be
elected from among the stockholders or
members. Practice, no matter how long
continued, cannot give rise to any vested right
if it is contrary to law.
BOD and ELECTION COMMITTEE OF SMB
WORKERS SAVINGS AND LOAN ASSOC v.
TAN
1959, Padilla, J.
FACTS: Castillo et. Al. of Board of SMB was
able to convince the Court to declare the 1st
election of the BD of SMB Works void and to
compel holding of another election. The
election committee scheduled the election for
March 28 and sent notices out on March 26
and allowed securing his ballot and proxy
from the office of the assoc. Castillo argued
that the notice did not comply with the BL (at
least 5 days, by posting in a prepaid postage
envelope, delivering to known post office
address or personal delivery, or posting in
different offices of SMB not less than 5 days
prior).
RULING: Election may not be held because
of deficient notice. Court may create a
committee to conduct and supervise an
election of directors on showing of good
reasons. There are good reasons in this case.
(b) Where no meeting called
SECTION 50. Regular and special meetings of the
stockholders or members. – xxx Whenever, for any
cause, there is no person authorized to call a
meeting, the Securities and Exchange Commission,
upon petition of a stockholder or member on a
showing of good cause therefor, may issue an order
to the petitioning stockholder or member directing
him to call a meeting of the corporation by giving
proper notice required by this Code or by the by-
laws. The petitioning stockholder or member shall
preside thereat until at least a majority of the
stockholders or members present have chosen one
of their number as presiding officer.
SECTION 6, PD 902-A. In order to effectively
exercise such jurisdiction, the Commissioner shall
possess the following powers:
(c) To compel the officers of any corporation or
association registered by it to call meetings of
stockholders or members thereof under its
supervision
• SEC, upon petition of a stockholder/member
on a showing of good cause, may issue an
order to the petitioning stockholder/member
to call a meeting by giving proper notice
• Said stockholder/member shall preside until
at least a majority of the
stockholders/members present have chosen
one of their number as presiding officer
PONCE et al v. ENCARNACION et al
November 28, 1953, Padilla, J.
FACTS: Gapol filed a petition praying for an
order directing him to call a meeting of the
stockholders for the purpose of electing a new
BOD, and to preside at such meeting, alleging
that Ponce misspent, misapplied,
misappropriated and converted corporate funds
for his own use and benefit. 2 days later,
without notice to the PETs and to the other
members of the board of directors, the RESP
court issued the order as prayed for. Ponce et
al learned of this when Bank of America
refused to recognize the new BOD elected and
returned the checks to Ponce, and filed a
petition for certiorari alleging that at a
meeting, the stockholders agreed to a
voluntary dissolution of the corporation and
appointed Gapol as receiver. However, Gapol
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changed his mind and instead filed a complaint
to compel Ponce and Domingo to render an
accounting of the funds and assets of the
corporation.
RULING: Under Sec. 26 of the Corporation
Law, Court, upon showing of good case, has
the power to authorize a stockholder to call a
meeting and preside until the majority
stockholders present and permitted to vote
shall have chosen one among them to preside.
This showing of good cause exists when the
court is apprised of the fact that the by-laws of
the corporation require the calling of a
general meeting of the stockholders to elect
the board of directors but the call for such
meeting has not been done. In this case,
there is good cause because the chairman of
the board of directors called upon to call for
such meeting as required by the by-laws had
failed, neglected, or refused to perform his
duty.
The requirement that, on the showing of good
cause therefor, the court may grant to a
stockholder the authority to call such meeting
and to preside thereat, does not mean that
the petition must be set for hearing with
notice served upon the board of directors.
Ponce et al had no right to continue as
directors of the corporation unless re-elected
by the stockholders in a meeting called for that
purpose every even year. They had no right to
a hold-over brought about by the failure to
perform the duty incumbent upon one of them.
5. Instances when stockholders’ or
members’ action is necessary
• Election of directors or trustees and all
major changes in the corporation which
affect the contract of the stockholders
(a) Election of directors or trustees
SECTION 24. Election of directors or trustees. - At
all elections of directors or trustees, there must be
present, either in person or by representative
authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members
entitled to vote. The election must be by ballot if
requested by any voting stockholder or member. In
stock corporations, every stockholder entitled to
vote shall have the right to vote in person or by
proxy the number of shares of stock standing, at the
time fixed in the by- laws, in his own name on the
stock books of the corporation, or where the by-
laws are silent, at the time of the election; and said
stockholder may vote such number of shares for as
many persons as there are directors to be elected or
he may cumulate said shares and give one
candidate as many votes as the number of directors
to be elected multiplied by the number of his shares
shall equal, or he may distribute them on the same
principle among as many candidates as he shall see
fit: Provided, That the total number of votes cast by
him shall not exceed the number of shares owned
by him as shown in the books of the corporation
multiplied by the whole number of directors to be
elected: Provided, however, That no delinquent
stock shall be voted. Unless otherwise provided in
the articles of incorporation or in the by-laws,
members of corporations which have no capital
stock may cast as many votes as there are trustees
to be elected but may not cast more than one vote
for one candidate. Candidates receiving the highest
number of votes shall be declared elected. Any
meeting of the stockholders or members called for
an election may adjourn from day to day or from
time to time but not sine die or indefinitely if, for
any reason, no election is held, or if there are not
present or represented by proxy, at the meeting,
the owners of a majority of the outstanding capital
stock, or if there be no capital stock, a majority of
the member entitled to vote.
SECTION 92. Election and term of trustees. -
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees
of non- stock corporations, which may be more than
fifteen (15) in number as may be fixed in their
articles of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of
office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall
have a term of three (3) years. Trustees thereafter
elected to fill vacancies occurring before the
expiration of a particular term shall hold office only
for the unexpired period.
No person shall be elected as trustee unless he is a
member of the corporation.
Unless otherwise provided in the articles of
incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the
members.
SECTION 93. Place of meetings. - The by-laws may
provide that the members of a non-stock
corporation may hold their regular or special
meetings at any place even outside the place where
the principal office of the corporation is located:
Provided, That proper notice is sent to all members
indicating the date, time and place of the meeting:
and Provided, further, That the place of meeting
shall be within the Philippines.
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QUORUM REQUIRED
• Majority of the outstanding capital stock, or
if there is no capital stock, majority of the
members entitled to vote
• The phrase “entitled to vote” means that
even the quorum must count only the
outstanding voting stock
MANNER OF VOTING; CUMULATIVE
VOTING
• A viva voce or hand-raising vote would be
sufficient UNLESS a vote by ballot is
requested by any voting stockholder or
member
• Cumulative voting is mandatory in stock
corporations
o Number of votes of each stockholder –
number of shares owned x number of
directors to be elected
o Shares may be distributed in any way
he pleases – cumulating them all in
favor of one candidate or distributing
them equally or in any proportion
among as many of the candidates as he
may wish to elect
o Basis for voting: number of shares
registered in the name of the voter at
the time of election; UNLESS BL
provides otherwise
• In non-stock corporations, there is no right
to cumulative voting, unless AOI or BL
expressly grant such right
• In close corporations, the Code gives special
privilege
o Sec. 97 of the Code allows classification
of directors into one or more classes,
each of whom may be voted for an
elected solely by a particular class of
stock
o Meaning, each class of stock may be
guaranteed a representative in the BOD
QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS
SECTION 23. The board of directors or trustees. -
Every director must own at least one (1) share of
the capital stock of the corporation of which he is a
director, which share shall stand in his name on the
books of the corporation. Any director who ceases to
be the owner of at least one (1) share of the capital
stock of the corporation of which he is a director
shall thereby cease to be a director. Trustees of
non-stock corporations must be members thereof. A
majority of the directors or trustees of all
corporations organized under this Code must be
residents of the Philippines.
SECTION 27. Disqualification of directors, trustees
or officers. - No person convicted by final judgment
of an offense punishable by imprisonment for a
period exceeding six (6) years, or a violation of this
Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as
a director, trustee or officer of any corporation.
Qualifications
• Must own at least 1 share, which should be
registered in his name in the books of the
corporation
• Should a director during his term of officer
dispose of all his shares, he ipso facto
ceases to be a director
• The Code deletes the qualification in the old
Corporation Law that the director must own
the share “in his own right”, thereby
legalizing the election of trustees and other
persons who in fact are not the beneficial
owners of the shares registered in their
name
• A majority of the directors/trustees must be
residents of the Philippines
• There is no requirement as to the citizenship
for a director/trustee except in activities,
business or industry totally closed to aliens
(like retail trade business)
• Although the BL may not do away with the
qualifications laid down by law, they may
provide for additional requirements. They
may also impose disqualifications.
Disqualifications
• Conviction by final judgment of offenses
punishable by imprisonment for a period
exceeding 6 years
• Violation of the Code committed within 5
years prior to the date of election or
appointment
GOKONGWEI v. SEC
April 11, 1979, Antonio, J.
FACTS: Gokongwei is a stockholder of SMC,
and also the president and controlling
shareholder of URC and CFC (competitors) of
SMC, who also acquired shares in SMC.
Eventually, SMC amended its by-laws
disqualifying stockholders owning shares in
corporations in direct competition with the
corporation from becoming directors.
Gokongwei filed a petition for declaration of
nullity of amended by-laws.
RULING: By-laws are valid. The authority of
corporations to prescribe qualifications of
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directors is expressly conferred by law. And
there is no vested right of a stockholder to be
elected director.
DETECTIVE AND PROTECTION AGENCY
INC. v. CLORIBEL ET AL
November 29, 1968, Zaldivar, J.
FACTS: Fausto Alberto was the managing
director of Detective and Protection Bureau
Inc. The corporation sued him for an
accounting, alleging that he took control of
the assets and books of the corporation.
Meanwhile, the stockholders had a meeting.
In that meeting they removed Alberto and
elected a new managing director, Jose de la
Rosa, but Alberto remained in his duties.
RULING: Alberto cannot be removed because
his successor-elect did not own any shares of
stock. Under Sec. 30 of the Corp. Law (now
Sec. 23 of the Corp. Code) a director must
own at least 1 share of stock. Since the by
laws of the corporation provide that a
manager shall be elected by the BOD from
among its members, de la Rosa may not
serve as managing director and Alberto
cannot be compelled to vacate.
TERM OF DIRECTOR OR TRUSTEE
SECTION 92. Election and term of trustees. -
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees
of non- stock corporations, which may be more than
fifteen (15) in number as may be fixed in their
articles of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of
office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall
have a term of three (3) years. Trustees thereafter
elected to fill vacancies occurring before the
expiration of a particular term shall hold office only
for the unexpired period. xxx
Section 108. Board of trustees. - Trustees of
educational institutions organized as non-stock
corporations shall not be less than five (5) nor more
than fifteen (15): Provided, however, That the
number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of
incorporation on the by-laws, the board of trustees
of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized,
so classify themselves that the term of office of one-
fifth (1/5) of their number shall expire every year.
Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term,
shall hold office only for the unexpired period.
Trustees elected thereafter to fill vacancies caused
by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a
quorum for the transaction of business. The powers
and authority of trustees shall be defined in the by-
laws.
For institutions organized as stock corporations, the
number and term of directors shall be governed by
the provisions on stock corporations.
• Under Sec. 23, the term is limited to 1 year
o The BL cannot provide for a longer or
shorter term than 1 year nor can there
be staggering of terms
• A corporation must therefore hold election
annually, but until such election is held and
new set of directors is duly elected and
qualified, the incumbent directors/trustees
hold over as such even after their term is
over
• In non-stock corporations, the term of the
trustee is three years (except in non-stock
educational corporations – 5 years) unless
the AI provides otherwise
• If the education corporation is organized as
stock corporation, Sec. 23 applies
VACANCIES IN THE BOARD
SECTION 29. Vacancies in the office of director or
trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the
stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of
the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies
must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected
only or the unexpired term of his predecessor in
office.
Any directorship or trusteeship to be filled by reason
of an increase in the number of directors or trustees
shall be filled only by an election at a regular or at a
special meeting of stockholders or members duly
called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so
stated in the notice of the meeting.
• May occur in the BOD by death, resignation,
removal, expiration of term, or
abandonment of office
• Resignation – may be made orally or in
writing
o In any case, there must be clear and
positive indication of the intention to
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resign and it must be absolute and
unconditional
o Absent such, a director cannot be
deprived his seat in the board. And if a
director is deprived of his seat in the
board, mandamus may issue to order
his reinstatement
• Abandonment – may be implied when the
director has accepted a position outside of
the PH where his work would require his
continuous presence
• In stock corporations, vacancy created by
expiration of term takes place at the same
time for all seats. However, they hold over
until a new board is elected
• In non-stock corporations, where
staggering of terms is allowed, vacancies in
only one or a portion of the board seats
would be possible
• Allowing the remaining directors/trustees to
fill up vacancies avoids the expense and
inconveniences of calling a
stockholders/members meeting
• However, vacancies are to be filled by the
stockholders or members:
1. When the remaining directors or
trustees do not constitute a
quorum
2. If the vacancy is caused by
removal of a director/trustee
3. If the vacancy is caused by
expiration of term
4. In case of increase in the
number of directors/trustees as
a result of an amendment of the
AI authorizing such increase
(b) Removal of Directors
SECTION 28. Removal of directors or trustees. -
Any director or trustee of a corporation may be
removed from office by a vote of the stockholders
holding or representing at least two-thirds (2/3) of
the outstanding capital stock, or if the corporation
be a non-stock corporation, by a vote of at least
two-thirds (2/3) of the members entitled to vote:
Provided, That such removal shall take place either
at a regular meeting of the corporation or at a
special meeting called for the purpose, and in either
case, after previous notice to stockholders or
members of the corporation of the intention to
propose such removal at the meeting. A special
meeting of the stockholders or members of a
corporation for the purpose of removal of directors
or trustees, or any of them, must be called by the
secretary on order of the president or on the written
demand of the stockholders representing or holding
at least a majority of the outstanding capital stock,
or, if it be a non-stock corporation, on the written
demand of a majority of the members entitled to
vote. Should the secretary fail or refuse to call the
special meeting upon such demand or fail or refuse
to give the notice, or if there is no secretary, the call
for the meeting may be addressed directly to the
stockholders or members by any stockholder or
member of the corporation signing the demand.
Notice of the time and place of such meeting, as
well as of the intention to propose such removal,
must be given by publication or by written notice
prescribed in this Code. Removal may be with or
without cause: Provided, That removal without
cause may not be used to deprive minority
stockholders or members of the right of
representation to which they may be entitled under
Section 24 of this Code.
• Only stockholders/members have the power
to remove directors or trustees elected by
them
• Vote required: 2/3 of outstanding capital
stock; or 2/3 of members entitled to vote in
case of non-stock corporations
• The Code, unlike the Corporation Law,
expressly allows removal even without case.
o However, the removal without cause
may not be used to deprive the minority
stockholders or members of the right of
representation to which they may be
entitled under Sec. 24
• The vacancy created by removal may be
filled in by the stockholders in the same
meeting where the removal is effected,
without need of further notice, or at any
other meeting called for that purpose, after
the required notice has been given (i.e. the
1 week notice under Sec. 50 for special
meetings, unless the BL provides otherwise)
ROXAS v. DELA ROSA
November 16, 1925, Street, J.
FACTS: The majority stockholders of the
Binalbagan Estate, Inc. formed a voting trust
composed of 3 members as trustees. The
trustees were authorized to represent and vote
the shares pertaining to their constituents, and
to this end the shareholders undertook to
assign their shares to the trustees in the
books. Eventually, Roxas et al, as members of
the voting trust, caused the Secretary to issue
a notice calling for a special general meeting of
shareholders for the election of the BOD and
amendment of by-laws. Coruña, as member of
the existing BOD, and Ledesma, as shareholder
instituted a civil action against the trustees and
the corporation to enjoin the meeting. RESP
Judge issued the injunction.
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RULING: Injunction was proper. The voting
trust did not constitute 2/3 of the stockholders.
The directors can only be removed from office
by a vote of the stockholders representing at
least 2/3 of the subscribe capital stock entitled
to vote.
ANGELES v. SANTOS
August 30, 1937, Laurel, J.
FACTS: The plaintiffs here are the minority
stockholders of the Paranaque Rice Mill, Inc.
and the defendants are the majority
stockholders. The plaintiffs filed a complaint
averring that Santos, the president of the
corporation, has been disposing of the income
and properties of the corporation for his own
benefit without authority form the board of
directors and to the prejudice of the
stockholders. Pursuant to such complaint, TC
appointed a receiver for the corporation.
Santos assailed the appointment of the
receivership and their removal as board of
directors.
RULING: It is now unnecessary to remove the
directors with the appointment of a receiver.
The Corporation law in section 29 to 34,
provide for the election and removal of the
directors of a corporation. The Corporation Law
does not confer expressly upon the courts the
power to remove a director of a corporation.
There are abundant authorities, however,
which hold that if he court has acquired
jurisdiction to appoint a receiver because of
mismanagement of the directors, these
directors may be removed and other appointed
in their place by the court in the exercise of its
equity jurisdiction.
CAMPBELL v. LEOW’S INC.
September 19, 1957, Seitz, Chancellor.
FACTS: Campbell filed an action against
Leow’s Inc, Vogel (President) requesting a
preliminary injunction restraining the holding
of a stockholders’ meeting, or alternatively,
restraining the meeting from considering
certain matters or voting certain proxies.
RULING: In view of fact that the bylaws of
corporation authorized president to call special
meetings of the stockholders for any purpose
or purposes, president of the corporation was
authorized to call a stockholders' meeting to fill
director vacancies, amend the bylaws to
increase the number of the board of directors,
and to remove certain directors and fill such
vacancies, even though such purposes were
not in furtherance of routine business of
corporation, and notwithstanding fact that such
matters might have involved policy matters not
defined by the board of directors, court would
not issue a preliminary injunction enjoining the
holding of such meeting.
As to the removal of directors: Stockholders
have the inherent power to remove a director
for cause. This power must be implied when
we consider that otherwise, a director who is
guilty of the worst sort of violation of his duty
could nevertheless remain in the BOD.
(c) Fundamental Changes
(1) Amendment of AOI
(2) Increase and decrease of capital stock
(3) Incurring, creating or increasing bonded
indebtedness
(4) Sale, lease, mortgage, or other disposition
of substantially all corporate assets
(5) Investment of funds in another business or
corporation or for a purpose other than the
primary purpose for which the corporation
was organized
(6) Adoption, amendment and repeal of by-
laws
(7) Merger and consolidation
(8) Dissolution of corporation
*Why are the stockholders’ consent need in
fundamental changes? Because it changes the
original contract which the stockholder signed
up for.
In all these cases, even non-voting stocks, or
non-voting members will be entitled to vote.
SEC rules require that a corporation wishing to
make the fundamental change should give the
reason for such change when filing the
corresponding supporting papers.
AMENDMENT OF ARTICLES OF
INCORPORATION
SECTION 16. Amendment of Articles of
Incorporation. - Unless otherwise prescribed by this
Code or by special law, and for legitimate purposes,
any provision or matter stated in the articles of
incorporation may be amended by a majority vote of
the board of directors or trustees and the vote or
written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of
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 CORPORATION LAW BOOK I
dissenting stockholders in accordance with the
provisions of this Code, or the vote or written assent
of at least two-thirds (2/3) of the members if it be a
non-stock corporation.
The original and amended articles together shall
contain all provisions required by law to be set out
in the articles of incorporation. Such articles, as
amended shall be indicated by underscoring the
change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and
a majority of the directors or trustees stating the
fact that said amendment or amendments have
been duly approved by the required vote of the
stockholders or members, shall be submitted to the
Securities and Exchange Commission.
The amendments shall take effect upon their
approval by the Securities and Exchange
Commission or from the date of filing with the said
Commission if not acted upon within six (6) months
from the date of filing for a cause not attributable to
the corporation.
SECTION 103. Amendment of articles of
incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any
provision required by this Title to be contained in
the articles of incorporation or to reduce a quorum
or voting requirement stated in said articles of
incorporation shall not be valid or effective unless
approved by the affirmative vote of at least two-
thirds (2/3) of the outstanding capital stock,
whether with or without voting rights, or of such
greater proportion of shares as may be specifically
provided in the articles of incorporation for
amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.
• There is no requirement of a stockholders’
or members meeting. All that is needed is
written assent
• Exceptions:
o in the extension or shortening of term as
well as increase or decrease of capital
stock (Secs. 37 and 38) – which require a
meeting with the accompanying notice
o In close corporations (Sec. 103)
• A referendum sent to stockholders or
members will be sufficient, if the required
number of stocks/members approve the
amendment in writing
o C.f. Sections 37, 38, 39, 42, 43, 44 –
which all require a meeting
• Vote requirement: 2/3 of OCS or members
SALE OR DISPOSITION OF
SUBSTANTIALLY ALL ASSETS
SECTION 40. Sale or other disposition of assets. -
Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may,
by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon
such terms and conditions and for such
consideration, which may be money, stocks, bonds
or other instruments for the payment of money or
other property or consideration, as its board of
directors or trustees may deem expedient, when
authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or
member's meeting duly called for the purpose.
Written notice of the proposed action and of the
time and place of the meeting shall be addressed to
each stockholder or member at his place of
residence as shown on the books of the corporation
and deposited to the addressee in the post office
with postage prepaid, or served personally:
Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions
provided in this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if
thereby the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the
stockholders or members, the board of directors or
trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets,
subject to the rights of third parties under any
contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the
power of any corporation, without the authorization
by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of
any of its property and assets if the same is
necessary in the usual and regular course of
business of said corporation or if the proceeds of the
sale or other disposition of such property and assets
be appropriated for the conduct of its remaining
business.
In non-stock corporations where there are no
members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient
authorization for the corporation to enter into any
transaction authorized by this section.
• Selling, leasing, mortgaging, or otherwise
disposing of substantially all of the
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 CORPORATION LAW BOOK I
corporate assets is not merely an act of
management but one of ownership
• A corporation may by a majority vote of its
BOD sell, lease, exchange, mortgage,
pledge dispose of all or substantially all of
its property and assets when authorized by
at least 2/3 of the OCS or 2/3 of the
members
• Unlike amendment of AI, a meeting is
required and written notice must be sent to
each stockholder/member at their place of
residence as shown in the books and
deposited in the post office with postage
prepaid or served personally
INVESTMENT IN ANOTHER BUSINESS OR
CORPORATION
SECTION 42. Power to invest corporate funds in
another corporation or business or for any other
purpose. - Subject to the provisions of this Code, a
private corporation may invest its funds in any other
corporation or business or for any purpose other
than the primary purpose for which it was organized
when approved by a majority of the board of
directors or trustees and ratified by the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two thirds
(2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's
meeting duly called for the purpose. Written notice
of the proposed investment and the time and place
of the meeting shall be addressed to each
stockholder or member at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post office with
postage prepaid, or served personally: Provided,
That any dissenting stockholder shall have appraisal
right as provided in this Code: Provided, however,
That where the investment by the corporation is
reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation,
the approval of the stockholders or members shall
not be necessary.
SECTION 36. Corporate powers and capacity. -
Every corporation incorporated under this Code has
the power and capacity:
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
transaction of the lawful business of the
corporation may reasonably and necessarily
require, subject to the limitations prescribed by
law and the Constitution;
• Sec. 42 allows the corporation to invest in
other corporation or business or for any
purpose other than the primary purpose
when approved by the majority of the BOD
and ratified by stockholders representing
2/3 of the OCS, or at least 2/3 of the
members
• Sec. 36 limits this power of a corporation
under Sec. 42 to investment in one which
may be reasonably and necessarily required
by the lawful business of the corporation
• Any other kind of investment would thus be
ultra vires UNLESS the AOI expressly allows
the corporation to invest in another
corporation or business
• Investment in another corporation is usually
in the form of securities like stocks and
bonds
Three Kinds of Investment
(1) Investment in any business which are
included or incidental or necessary to the
primary purpose = approval of
stockholders/members not necessary
(2) Investment in any business which is not a
primary purpose but within the purposes of
the corporation = approval of
stockholders/members necessary
(3) Investment which is entirely not within the
purposes of the corporation = ultra vires
but can be ratified
DELA RAMA v. MA-AO SUGAR CENTRAL
CO.
February 28, 1969, Capistrano, J.
FACTS: Dela Rama et al, minority stockholders
of Ma-ao Sugar Central, filed against against
the corporation, Araneta, and 3 other directors
of the corporation. The first cause of action
involves the investment of Pres. Araneta in
Philippine Fiber Processing Co without a board
resolution authorizing the investment. Ma-ao
Sugar contend that since Phil. Fiber was
engaged in the manufacture of sugar bags, it
was perfectly legitimate for Ma-ao Sugar to
manufacture sugar bags or investment in
another corporation engaged in said
manufacture.
RULING: The investment of corporate funds in
Philippine Fiber Processing Co is valid as it is
within the corporate powers of Ma-ao Sugar.
The investment does not fall under Sec 17 ½
of Corporation Law.
A corporation has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds,
securities, and other evidences of indebtedness
of any domestic corporation. Such an act, if
done in pursuance of the corporate
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 CORPORATION LAW BOOK I
purpose, does not need the approval of
the stockholders. However, when the
purchase of shares of another corporation is
done solely for investment and not to
accomplish the purpose of its incorporation,
the vote of approval of the stockholders is
necessary.
A private corporation has the power to invest
its corporate funds in any other corporation or
business, or for any purpose other than the
main purpose for which it was organized,
provided that its board of directors has been so
authorized in a resolution by the affirmative
vote of stockholders meeting called for that
purpose. When the investment is necessary to
accomplish its purpose or purposes as stated in
the articles of incorporation, the approval of
the stockholders is not necessary. [Guevara,
Philippine Commercial Law)
GOKONGWEI v. SEC
April 11, 1979, Antonio, J.
FACTS: Gokongwei assailed certain acts of
BOD of SMC, particularly the investment of
corporate funds in foreign corporations and
businesses not among those stated in the
purpose of SMC, and without prior authority of
the stockholders, thus violating Sec. 17 ½ of
the Corporation Law. SEC allowed SMC to ratify
the investment of corporation funds in a
foreign corporation.
RULING: The purchase of beer manufacturing
facilities by SMC was an investment in the
same business stated as its main purpose in its
AOI, which is to manufacture and market beer,
hence stockholder/member approval is not
necessary. Assuming arguendo that the BOD
had no authority to make the assailed
investment, there is no question that a
corporation, like an individual, may ratify and
thereby render binding upon it the originally
unauthorized acts of its officers or other
agents.
MERGER AND CONSOLIDATION
SECTION 77. Stockholder's or member's approval.
- Upon approval by majority vote of each of the
board of directors or trustees of the constituent
corporations of the plan of merger or consolidation,
the same shall be submitted for approval by the
stockholders or members of each of such
corporations at separate corporate meetings duly
called for the purpose. Notice of such meetings shall
be given to all stockholders or members of the
respective corporations, at least two (2) weeks prior
to the date of the meeting, either personally or by
registered mail. Said notice shall state the purpose
of the meeting and shall include a copy or a
summary of the plan of merger or consolidation. The
affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the
members in the case of non-stock corporations shall
be necessary for the approval of such plan. Any
dissenting stockholder in stock corporations may
exercise his appraisal right in accordance with the
Code: Provided, That if after the approval by the
stockholders of such plan, the board of directors
decides to abandon the plan, the appraisal right
shall be extinguished.
Any amendment to the plan of merger or
consolidation may be made, provided such
amendment is approved by majority vote of the
respective boards of directors or trustees of all the
constituent corporations and ratified by the
affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members of each
of the constituent corporations. Such plan, together
with any amendment, shall be considered as the
agreement of merger or consolidation.
APPRAISAL RIGHT
SECTION 81. Instances of appraisal right. - Any
stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of
his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any
respects superior to those of outstanding
shares of any class, or of extending or
shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
3. In case of merger or consolidation. (n)
SECTION 82. How right is exercised. - The
appraisal right may be exercised by any stockholder
who shall have voted against the proposed
corporate action, by making a written demand on
the corporation within thirty (30) days after the date
on which the vote was taken for payment of the fair
value of his shares: Provided, That failure to make
the demand within such period shall be deemed a
waiver of the appraisal right. If the proposed
corporate action is implemented or affected, the
corporation shall pay to such stockholder, upon
surrender of the certificate or certificates of stock
representing his shares, the fair value thereof as of
the day prior to the date on which the vote was
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 CORPORATION LAW BOOK I
taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
If within a period of sixty (60) days from the date
the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by
three (3) disinterested persons, one of whom shall
be named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall
be final, and their award shall be paid by the
corporation within thirty (30) days after such award
is made: Provided, That no payment shall be made
to any dissenting stockholder unless the corporation
has unrestricted retained earnings in its books to
cover such payment: and Provided, further, That
upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith
transfer his shares to the corporation. (n)
SECTION 83. Effect of demand and termination of
right. - From the time of demand for payment of the
fair value of a stockholder's shares until either the
abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all
rights accruing to such shares, including voting and
dividend rights, shall be suspended in accordance
with the provisions of this Code, except the right of
such stockholder to receive payment of the fair
value thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares within
30 days after the award, his voting and dividend
rights shall immediately be restored. (n)
SECTION 84. When right to payment ceases. - No
demand for payment under this Title may be
withdrawn unless the corporation consents thereto.
If, however, such demand for payment is withdrawn
with the consent of the corporation, or if the
proposed corporate action is abandoned or
rescinded by the corporation or disapproved by the
Securities and Exchange Commission where such
approval is necessary, or if the Securities and
Exchange Commission determines that such
stockholder is not entitled to the appraisal right,
then the right of said stockholder to be paid the fair
value of his shares shall cease, his status as a
stockholder shall thereupon be restored, and all
dividend distributions which would have accrued on
his shares shall be paid to him. (n)
INCREASE AND DECREASE OF CAPITAL
STOCK; CREATION OR INCREASE OF
BONDED INDEBTEDNESS
SECTION 38. Power to increase or decrease capital stock;
incur, create or increase bonded indebtedness. - No
corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and,
at a stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall favor
the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating,
or increasing of any bonded indebtedness and of the time
and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his
place of residence as shown on the books of the
corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of
the directors of the corporation and countersigned by the
chairman and the secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the
amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of
capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be incurred, created or
increased;
(5) The actual indebtedness of the corporation on the day
of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the
capital stock, or the incurring, creating or increasing
of any bonded indebtedness.
Any increase or decrease in the capital stock or the
incurring, creating or increasing of any bonded
indebtedness shall require prior approval of the Securities
and Exchange Commission.
One of the duplicate certificates shall be kept on file in the
office of the corporation and the other shall be filed with
the Securities and Exchange Commission and attached to
the original articles of incorporation. From and after
approval by the Securities and Exchange Commission and
the issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased and
the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of
increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully
holding office at the time of the filing of the certificate,
showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at
least twenty-five (25%) percent of the amount subscribed
has been paid either in actual cash to the corporation or
that there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of
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 CORPORATION LAW BOOK I

corporate creditors. • Under Sec. 43, no stock dividend may

be issued without the approval of
Non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by a stockholders representing not less than
majority vote of the board of trustees and of at least two- 2/3
thirds (2/3) of the members in a meeting duly called for • Stock dividends deprive the
the purpose. stockholders of the right to participate
Bonds issued by a corporation shall be registered with the in the current profits of the corporation,
Securities and Exchange Commission, which shall have the hence, stockholders’ approval is
authority to determine the sufficiency of the terms thereof. necessary.
(17a)

(2)Management Contracts
• No appraisal right in changes of capital • A management contract is one entered
stock and creation/increase of bonded into between 2 corporations by virtue of
indebtedness which one agrees that its corporate
affairs will be managed by the other
ADOPTION, AMENDMENT OR REPEAL OF • The stockholders or members of BOTH
BY-LAWS corporations must give their approval;
SECTION 48. Amendments to by-laws. - The board as well as majority of the BOD
of directors or trustees, by a majority vote thereof,
and the owners of at least a majority of the
SECTION 44. Power to enter into management
outstanding capital stock, or at least a majority of
contract. - No corporation shall conclude a
the members of a non-stock corporation, at a
management contract with another corporation
regular or special meeting duly called for the
unless such contract shall have been approved by
purpose, may amend or repeal any by-laws or adopt
the board of directors and by stockholders owning at
new by-laws. The owners of two-thirds (2/3) of the
least the majority of the outstanding capital stock,
outstanding capital stock or two-thirds (2/3) of the
or by at least a majority of the members in the case
members in a non-stock corporation may delegate
of a non-stock corporation, of both the managing
to the board of directors or trustees the power to
and the managed corporation, at a meeting duly
amend or repeal any by-laws or adopt new by-laws:
called for the purpose: Provided, That (1) where a
Provided, That any power delegated to the board of
stockholder or stockholders representing the same
directors or trustees to amend or repeal any by-laws
interest of both the managing and the managed
or adopt new by-laws shall be considered as
corporations own or control more than one-third
revoked whenever stockholders owning or
(1/3) of the total outstanding capital stock entitled
representing a majority of the outstanding capital
to vote of the managing corporation; or (2) where a
stock or a majority of the members in non-stock
majority of the members of the board of directors of
corporations, shall so vote at a regular or special
the managing corporation also constitute a majority
meeting.
of the members of the board of directors of the
managed corporation, then the management
Whenever any amendment or new by-laws are
contract must be approved by the stockholders of
adopted, such amendment or new by-laws shall be
the managed corporation owning at least two-thirds
attached to the original by-laws in the office of the
(2/3) of the total outstanding capital stock entitled
corporation, and a copy thereof, duly certified under
to vote, or by at least two-thirds (2/3) of the
oath by the corporate secretary and a majority of
members in the case of a non-stock corporation. No
the directors or trustees, shall be filed with the
management contract shall be entered into for a
Securities and Exchange Commission the same to
period longer than five years for any one term.
be attached to the original articles of incorporation
and original by-laws.
The provisions of the next preceding paragraph shall
apply to any contract whereby a corporation
The amended or new by-laws shall only be effective
undertakes to manage or operate all or substantially
upon the issuance by the Securities and Exchange
all of the business of another corporation, whether
Commission of a certification that the same are not
such contracts are called service contracts,
inconsistent with this Code. (22a and 23a)
operating agreements or otherwise: Provided,
however, That such service contracts or operating
• There is also no right of appraisal in this agreements which relate to the exploration,
case development, exploitation or utilization of natural
resources may be entered into for such periods as
(d) Other Instances Requiring may be provided by the pertinent laws or
Stockholders’ Action regulations. (n)
(1)Declaration of Stock Dividends

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 CORPORATION LAW BOOK I
Requirements:
1. Majority of OCS/M entitled to vote
2. Vote of both corps
3. Meeting
(3)Fixing Consideration for No-Par shares
SECTION 62. Consideration for stocks. – xxx The
issued price of no-par value shares may be fixed in
the articles of incorporation or by the board of
directors pursuant to authority conferred upon it by
the articles of incorporation or the by-laws, or in the
absence thereof, by the stockholders representing at
least a majority of the outstanding capital stock at a
meeting duly called for the purpose.
• Majority of OCS (voting only)
• Meeting
(4)Fixing Compensation of Directors
SECTION 30. Compensation of directors. - In the
absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however, That any
such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income
tax of the corporation during the preceding year.
1. Majority of OCS
2. Meeting
3. Not exceeding 10% of net income of
corporation during preceding year
6. Deadlocks in close-corporations
SECTION 104. Deadlocks. - Notwithstanding any
contrary provision in the articles of incorporation or
by-laws or agreement of stockholders of a close
corporation, if the directors or stockholders are so
divided respecting the management of the
corporation's business and affairs that the votes
required for any corporate action cannot be
obtained, with the consequence that the business
and affairs of the corporation can no longer be
conducted to the advantage of the stockholders
generally, the Securities and Exchange Commission,
upon written petition by any stockholder, shall have
the power to arbitrate the dispute. In the exercise of
such power, the Commission shall have authority to
make such order as it deems appropriate, including
an order:
(1) cancelling or altering any provision contained
in the articles of incorporation, by-laws, or
any stockholder's agreement;
(2) cancelling, altering or enjoining any resolution
or act of the corporation or its board of
directors, stockholders, or officers;
(3) directing or prohibiting any act of the
corporation or its board of directors,
stockholders, officers, or other persons party
to the action;
(4) requiring the purchase at their fair value of
shares of any stockholder, either by the
corporation regardless of the availability of
unrestricted retained earnings in its books, or
by the other stockholders;
(5) appointing a provisional director;
(6) dissolving the corporation; or
(7) granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial person
who is neither a stockholder nor a creditor of the
corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any,
may be determined by the Commission. A
provisional director is not a receiver of the
corporation and does not have the title and powers
of a custodian or receiver. A provisional director
shall have all the rights and powers of a duly elected
director of the corporation, including the right to
notice of and to vote at meetings of directors, until
such time as he shall be removed by order of the
Commission or by all the stockholders. His
compensation shall be determined by agreement
between him and the corporation subject to
approval of the Commission, which may fix his
compensation in the absence of agreement or in the
event of disagreement between the provisional
director and the corporation.
DEVICES AFFECTING CONTROL
• As a general rule, the extent of control
would be proportional to the number of
shares a stockholder owns
1. The proxy device
SECTION 58. Proxies. - Stockholders and members
may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall in writing,
signed by the stockholder or member and filed
before the scheduled meeting with the corporate
secretary. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a
period longer than five (5) years at any one time.
(n)
• May refer to (1) person duly authorized by a
stockholder to vote in his behalf or (2)
document which evidences this authority
Requirements:
1. Proxy must be in writing
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2. It must be filed with the corporate
secretary
3. Proxy may fix period during which it may
be used but shall not exceed 5 years
§ If the proxy is silent, it shall be valid
only for one meeting
• GR: Proxy is revocable even before the
expiration of period
• EXCEPTIONS: Proxy is irrevocable:
1. When it is coupled with an interest
2. Authority is given as security
• By-laws may not prohibit the use of proxies
• A proxy may be general or limited
• Revocation, unlike the creation of proxy,
may be made orally
The “cutoff time” for proxies in meetings
• Cutoff for time to appoint a proxy
• Cutoff for the time for proxies to vote
IN RE GIANT PORTLAND CEMENT CO.
August 18, 1991
FACTS: Some stockholders question the
results of the BOD election alleging the manner
how the proxies casted their votes and whose
proxies they are. During the period when the
BOD declared transfer books closed, certain
shares were sold by “record owners” and the
stock certificates were duly assigned and
delivered to the purchasers prior to the
meeting. These shares were voted on proxies
of “record owners”.
RULING: The votes cast by stockholders of
record or their proxies are valid. GR: those
who voted are by proxies the of “record
owners.” even if they are not the beneficial or
equitable owners.The reason for this
restriction, despite the transfer of legal title to
transferee, is for the benefit of the corporation
and to enable it to ascertain from its records
who its members or stockholders are. So far as
the corporation is concerned, the record owner
is regarded as the real owner of the stock, with
consequent general right to vote by proxy.
Generally, there is no privity of contract
between the mere holder of the certificate and
the corporation. He is not a real member of the
organization until the transfer is recorded. Until
that time, the possible legal right of the holder
is merely inchoate. The record owner, although
now merely nominal owner, is technically a
trustee for the holder of certificate, but legally,
he is still a stockholder in the corporation, and
so far as the corporation is concerned.
STATE OF WASHINGTON REL. EVERETT
TRUST v. PACIFIC WAXED PAPER
1945, Grady, J.
FACTS: Jordan (owning Paine-Mitchell) and
Paine-Mitchell, and Engle all owned interest in
Pacific Waxed Paper. They entered into 2
agreements – (1) Before one sells or transfers
any portion of the stock owned by him, he
would first notify the other party in writing of
his intention, and give him an option to
purchase; (2) when Engle dies, the Paine
Mitchell would become the owner of his stocks
and would be entitled to vote, and if Jordan
dies, Engle would become the owner. To
effectuate this agreement, it should be deemed
that the irrevocable proxy of Engle’s heirs/legal
representatives was with full power of
substitution. When Jordan died, his executor,
Everett, requested that Paine-Mitchell be
dissolved, and the share of Paine-Mitchell in
Pacific Waxed was given to him. When Everett
sought to vote the stock at a stockholders
meeting, the corporation denied the right to do
so because of the proxy held by Engle.
RULING: The proxy to Engle was irrevocable,
hence Everett cannot exercise the right to vote
said shares. It is clear from the proxy
agreement and the facts of this case that the
parties intended that the Paine-Mitchell Co.
stock should be used in conjunction with the
stock owned by Engle so that the policies of
the respondent could be thus controlled. This is
apparent from the fact that it was agreed the
proxy should exist and continue until such time
as Engle should sell or dispose of the stock
owned by him at the time of the death of
Jordan. The control of the affairs of the
corporation was of much importance to Engle.
The general rule is that a proxy given by a
stockholder to vote his corporate stock at a
meeting of stockholders of a corporation is
revocable by him even though the proxy by its
terms is expressly made irrevocable.
The exceptions are:
(1) Where the authority or power is coupled
with an interest;
(2) where the authority is given as part of a
security or is necessary to effectuate
such a security.
A `power coupled with an interest' is a power
or authority to do an act, accompanied by or
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connected with an interest in the subject or
thing itself upon which the power is to be
exercised, the power and interest being united
in the same person.
ALEJANDRINO v. DE LEON
December 29, 1943
FACTS: The parties are stockholders of
Pampanga Sugar Dev’t Co, with Alejandrino
owning 112 shares. A meeting was held to
elect a new board and the 9 RESPs won,
getting 19k votes, while Alejandrino only got
14K. He contested the election because they
refused to register the 6K shares held by
Alejandrino, given to him by 18 stockholders.
The Chairman and the Secretary asserts that
the 18 stockholders previously executed
pledges in favor of Pambul, Inc, granting the
pledgee the right to vote the shares.
Alejandrino then filed a petition for quo
warranto to annul the election of directors
alleging that the irrevocable proxies to Pambul
are null and void. He claims that Pambul, Inc.
is an alter ego of PASUDECO and its principal
stockholder De Leon as shown by the fact that
Pambul, Inc. was organized by the controlling
stockholders of PASUDECO as a financing
corporation, and the stockholders of
PASUDECO automatically become stockholders
of Pambul.
RULING: The proxies are valid. (1) there was
no evidence to prove that irrevocable proxies
are contrary to good morals or public policy.
The right of a stockholder to vote is inherent in
ownership, and if the owner can dispose the
right to manage it. (2) there are no allegations
that the proxies were procured through error,
deceit, fraud, or intimidation. The desire and
design of a majority of stockholders of a
private to control mgmt. and operation is
legitimate per se. (3) Alejandrino alleged that
the terms of loans were way of bribing
stockholders to vote; but to vote at
stockholders meeting is not like a political
fanchise. It is an exercise of ownership
involving no public interest. It can no more be
called bribery than the payment by the
purchaser of the price of goods he bought. (4)
2. Voting Trust
SECTION 59. One or more stockholders of a stock
corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at
any time: Provided, That in the case of a voting
trust specifically required as a condition in a loan
agreement, said voting trust may be for a period
exceeding five (5) years but shall automatically
expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and
shall specify the terms and conditions thereof. A
certified copy of such agreement shall be filed with
the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In
the books of the corporation, it shall be noted that
the transfer in the name of the trustee or trustees is
made pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to
the transferors voting trust certificates, which shall
be transferable in the same manner and with the
same effect as certificates of stock.
The voting trust agreement filed with the
corporation shall be subject to examination by any
stockholder of the corporation in the same manner
as any other corporate book or record: Provided,
That both the transferor and the trustee or trustees
may exercise the right of inspection of all corporate
books and records in accordance with the provisions
of this Code.
Any other stockholder may transfer his shares to the
same trustee or trustees upon the terms and
conditions stated in the voting trust agreement, and
thereupon shall be bound by all the provisions of
said agreement.
No voting trust agreement shall be entered into for
the purpose of circumventing the law against
monopolies and illegal combinations in restraint of
trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire at
the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall
be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy
unless the agreement provides otherwise. (36a)
• Under this arrangement, a stockholder
transfers his shares to a trustee who will
exercise his voting rights
• Beneficial ownership remains with
stockholder but legal ownership is
transferred to a trustee
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 CORPORATION LAW BOOK I
• Unlike a proxy, it is irrevocable as long as
the trustee has not violated the trust by his
misconduct or fraud
Requisites:
(1) It must be writing and notarized
(2) A certified copy must be filed with the
corporation as well as with the SEC
(3) It must not be for a period longer than
5 years, although it may be renewed
each time for not more than 5 years
(4) The certificates of stock must be
cancelled, and new ones issued to the
trustee stating therein that they were
issued in pursuance of the voting trust
agreement
(5) The transfer must be entered into the
corporate books with a similar
statement
(6) The voting trust should not be for an
illegal purpose
• The voting trust certificates are transferable
in the same manner as certificates of stock.
HOWEVER, the stockholder ceases to be
such and his rights are against the trustee
in accordance with their agreement
EVERETT v. ASIA BANKING CORPORATION
November 3, 1926, Ostrand, J.
FACTS: Asia Banking was financing the debts
of Teal and Co. It was also a creditor of the
company. Later on, the Bank suggested to Teal
and Co. that it would be better to place the
company under control of the Bank. Everett et
al (majority stockholders of Teal & Co) thus
signed a Voting Trust Agreement in favor of
the Bank. Eventually, the officers of the Bank
proceeded to oust the BOD of Teal and Co.
Everett et al then sued the Bank without first
requesting the BOD to sue on the corporation’s
behalf. Lower Court dismissed the complaint,
ruling that Teal & Co should have been made a
party plaintiff.
RULING: Complaint is proper. It is true that
the general rule is that stockholders cannot
bring an action on behalf of a corporation
unless it first demands that the BOD do so. But
this is an exception since the defendants had
full control of the Board.
MACKIN v. NICOLLET HOTEL
April 16, 1928, Kennedy, J.
FACTS: A voting trust agreement was
executed between Dixon et al and the banks
providing the loan for Nicollet Hotel covering all
of the company’s common stock for the benefit
of 3 trustees. Owners of the stock filed a case
against the trustees claiming that the voting
trust agreement was void and that the 3 have
mismanaged the company.
RULING: The VTA is valid. VTAs are not illegal
per se. They have been generally held invalid
by the courts because of other invalidating
circumstances. In this case, there is no want of
consideration or fraud alleged. The voting
power in the 3 trustees is coupled w/ an
interest because one of the trustees, Dixon, is
a substantial owner of the common stock of
the corporation. The purpose of the agreement
is legitimate and wholesome. Moreover, it
appears that both the Mackin and Cooper
became purchasers of the trust certificates
after the creation of the VTA and thereby
presumably had full knowledge of the
limitation of their rights which went with such
holdings
DOCTRINE: VTAs are valid and binding if
based upon a sufficient consideration, if they
do not contravene public policy or a positive
prohibitory statute, and if they do not result in
fraud or wrong against the stockholders.
Where the trust is voluntarily created as a
condition precedent to a loan to protect those
who have furnished the money that has put
the life into the corporation, such is a valid
consideration.
NIDC v. AQUINO
June 30, 1988, Padilla, J.
FACTS: Batjak obtained loans from PNB,
executing mortgages as security. Eventually, a
Voting Trust Agreement was executed in favor
of NIDC for a period of 5 years. Later on, PNB
foreclosed the 3 oil mills mortgaged by Batjak.
Eventually, Batjak filed a petition for
receivership, basing its right to the possession
of the oil mills on the VTA, claiming that under
the VTA, NIDC was constituted as trustee, and
that due to the expiration of the VTA, NIDC
should turn over the assets of the 3 oil mills.
RULING: CFI should not have appointed
receivers because there was no imminent
danger of of loss, removal or material injury of
the properties in question. More importantly,
the properties were acquired not under the
capacity of a trustee but as a foreclosing
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 CORPORATION LAW BOOK I
creditor. The voting trust created did not
transfer assets, operations, and management
but merely voting rights. What the trustee is
supposed to return after the termination of the
VTA is the certificates of stock.
3. Pooling and Voting Agreements
• Agreement between two or more
stockholders to vote their shares the same
way
• Usually relates to election of directors
• Upheld as valid as long as they do not limit
the discretion of the BOD in the
management of the corporate affairs, or
work any fraud against the stockholders not
parties to the contract
• Unlike a voting trust, a voting agreement
does not involve a transfer of stocks but is
merely a private agreement b/n 2 or more
stockholders to vote the same way
SECTION 100. Agreements by stockholders. -
1. Agreements by and among stockholders
executed before the formation and organization
of a close corporation, signed by all
stockholders, shall survive the incorporation of
such corporation and shall continue to be valid
and binding between and among such
stockholders, if such be their intent, to the
extent that such agreements are not
inconsistent with the articles of incorporation,
irrespective of where the provisions of such
agreements are contained, except those
required by this Title to be embodied in said
articles of incorporation.
2. An agreement between two or more
stockholders, if in writing and signed by the
parties thereto, may provide that in exercising
any voting rights, the shares held by them shall
be voted as therein provided, or as they may
agree, or as determined in accordance with a
procedure agreed upon by them.
3. No provision in any written agreement signed
by the stockholders, relating to any phase of
the corporate affairs, shall be invalidated as
between the parties on the ground that its
effect is to make them partners among
themselves.
4. A written agreement among some or all of the
stockholders in a close corporation shall not be
invalidated on the ground that it so relates to
the conduct of the business and affairs of the
corporation as to restrict or interfere with the
discretion or powers of the board of directors:
Provided, That such agreement shall impose on
the stockholders who are parties thereto the
liabilities for managerial acts imposed by this
Code on directors.
5. To the extent that the stockholders are actively
engaged in the management or operation of the
business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary
duties to each other and among themselves.
Said stockholders shall be personally liable for
corporate torts unless the corporation has
obtained reasonably adequate liability
insurance.
• Par 1 – stockholders’ agreements in general
• Par 2 – pooling and voting agreement
• Par 3 – follows the modern trend of giving
close corporations the freedom to operate
as a partnership among the sockholders, but
remaining as a corporation insofar as 3rd
parties are concerned
• Par 4 – qualifies the general rule that no
voting agreement may interfere with the
discretion of the board
RINGLING v. RINGLING BROS.
1946, Seitz, J.
FACTS: PET Edith and DEF Aubrey, executed a
Memorandum of Agreement wherein they
agreed that they will be exercising their voting
rights jointly for a period of 10 years. The
Agreement provided that in case of
disagreements, it will be submitted for
arbitration and the decision of arbitrator Loos
will be binding upon them. From 1943-1945,
they voted jointly. The husband of DEF Aubrey
attended as her proxy in the stockholder’s
meeting, where he disagreed with PET Edith
and refused the suggestion of arbitrator Loos.
Aubrey now questions the validity of the MOA,
alleging that it is voting agreement which is
void for non-compliance with statutory
requirements.
RULING: The Agreement is not a voting trust,
but rather a variation of the well-known stock
pooling agreement. The stockholders under the
present Agreement vote their own stock at all
times which is the antithesis of a voting trust.
Voting trustees have continuous voting control
for the period of time stipulated in the
agreement of trust. Trustees in the very first
instance determine policy and implement it by
their votes. Here, the right of the arbitrator
to direct the vote is limited to those particular
cases where a stockholder’s vote is called for
and the parties cannot agree. The parties
have the initial choice to determine policy and
the arbitrator only resolves a conflict.
E.K. BUCK RETAIL STORE v. HARKET
January 15, 1954, Carter, J.
FACTS: Harkert and Buck entered into a
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 CORPORATION LAW BOOK I
stockholders control agreement which gives
them the right to nominate for 2 seats each in
the board of directors. Harkert refused to
honor the agreement, claiming that it violated
the constitution, its enacting statute and public
policy.
RULING: The agreement was valid. Based on
jurisprudence, stockholders control
agreements are valid (1) where it is for the
benefit of the corporation, (2) where it works
no fraud upon creditors or other stockholders,
and (3) where it violates no statute or
recognized public policy.
CLARK v. DODGE
1936, Crouch, J.
FACTS: Defendant companies, Bell & classified and issued as "preferred" or "redeemable"
Company, Inc. and Hollings-Smith Company,
Inc., were co-owned by Clark (25% of shares)
and Dodge (the remaining 75% of shares). The
companies manufactured medicine, the
formulae that were known only by Plaintiff.
Plaintiff entered into an agreement with
Defendant wherein Clark agreed to disclose the
formulae to the son of Dodge in return for a
promise that Defendant would keep Plaintiff as
a director and would be entitled to 25% of all
net income providing that Plaintiff was
competent in his position. Afterwards,
Defendant did not vote Plaintiff in as director,
stopped delivering 25% of the income to
Plaintiff. Plaintiff sought reinstatement and
money owed from the stopping of payments
and money wasted by Defendant. Defendant
countered, citing McQuade v. Stoneham (263
N. Y. 323), that the agreement was invalid
because it required Defendant as a shareholder
to usurp the directors’ judgment.
RULING: The agreement is valid. In the
McQuade case, the court invalidated a similar
agreement because it affected the rights of
others that were not part of the agreement,
and therefore it fell under the public policy
argument. In this case, the only shareholders
were Clark and Dodge, and therefore the
agreement between the two did not have any,
or at least negligible, consequences on the
public.
As the parties are complete owners of the
corporation, there is no reason why the
exercise of the power and discretion of the
directors cannot be controlled by valid
agreement between themselves, provided that
the interest of creditors are not affected
4. Cumulative Voting
• Although this device cannot of itself give
such minority the control of corporate
affairs, it may affect and limit the extent of
the majority’s control
• Strongest argument against cumulative
voting = results in the election of partisans
5. Classification of Shares
SECTION 6. Classification of shares. - The shares of
stock of stock corporations may be divided into
classes or series of shares, or both, any of which
classes or series of shares may have such rights,
privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share
may be deprived of voting rights except those
shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class
or series of shares which have complete voting
rights. Any or all of the shares or series of shares
may have a par value or have no par value as may
be provided for in the articles of incorporation:
Provided, however, That banks, trust companies,
insurance companies, public utilities, and building
and loan associations shall not be permitted to issue
no-par value shares of stock. xxx
Except as otherwise provided in the articles of
incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every
other share. xxx
• The Code allows for classification of shares
• If shares are classified into common and
preferred shares, the management of
corporate affairs will be controlled by
whoever owns the majority of the common
voting shares
• The preference of non-voting stocks over
dividends upon liquidation compensate for
the lack of voting rights.
• To prevent abuses, however, the SEC
usually requires that where no dividends are
declared for 3 consecutive years in spite of
profits, the preferred stocks will be given
the right to vote for directors until dividends
are declared
• In close corporations, the corporation is
allowed to classify its directors into one or
more classes, each of whom may be voted
for and elected solely by a particular class of
stock
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GOTTSCHALK ET AL v. AVALON REALTY
June 22, 1946, Rector, J.
FACTS: The AOI of Avalon provided that
holders of first and second preferred to stock
are authorized to vote whenever default should
exist in payment of dividend after a specified
date. The issue in this case was whether such
provision constitute a denial of a right to vote
prior to the happening of the specified
contingencies.
RULING: The provision in the AOI which says
that such stock may vote upon the happening
of such contingencies clearly implies that it
may not until the contingencies occur. A denial
may exist expressly or by necessary
implication. A denial may exist under an
express provision even though the denial may
not be expressed just like in this case.
6. Restriction on Transfer of Shares
• Peculiar to close corporations
o In fact, Sec. 96 states that a
corporation cannot qualify as a close
corporation unless transfer of its
stocks is subject to one or more of the
restrictions allowed by the law
• Most common restriction: right of first
refusal (one which gives the first option to
the other stockholders and/or the
corporation to acquire the shares of a
stockholder who wishes to sell them)
7. Prescribing Qualifications for directors;
founder’s shares
• Corporation can impose qualifications and
disqualifications as long as they are
reasonable and not meant to unjustly or
unfairly deprive the minority of their rightful
representation in the BOD
Founder’s Shares
SECTION 7. Founders' shares. - Founders' shares
classified as such in the articles of incorporation
may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided
that where the exclusive right to vote and be voted
for in the election of directors is granted, it must be
for a limited period not to exceed five (5) years
subject to the approval of the Securities and
Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval
by the Securities and Exchange Commission. (n)
• Code allows that only holders of “founder’s
shares” may qualify for directorship under
certain limitations:
o It must not exceed 5 years subject to
the approval of the SEC
• This privilege granted to this kind of shares
is intended to compensate in some way the
efforts which the organizers of the
corporation may have spent in initiating the
venture and putting the business on its feet
8. Management Contracts
SECTION 44. Power to enter into management
contract. - No corporation shall conclude a
management contract with another corporation
unless such contract shall have been approved by
the board of directors and by stockholders owning at
least the majority of the outstanding capital stock,
or by at least a majority of the members in the case
of a non-stock corporation, of both the managing
and the managed corporation, at a meeting duly
called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same
interest of both the managing and the managed
corporations own or control more than one-third
(1/3) of the total outstanding capital stock entitled
to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of
the managing corporation also constitute a majority
of the members of the board of directors of the
managed corporation, then the management
contract must be approved by the stockholders of
the managed corporation owning at least two-thirds
(2/3) of the total outstanding capital stock entitled
to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock corporation. No
management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph shall
apply to any contract whereby a corporation
undertakes to manage or operate all or substantially
all of the business of another corporation, whether
such contracts are called service contracts,
operating agreements or otherwise: Provided,
however, That such service contracts or operating
agreements which relate to the exploration,
development, exploitation or utilization of natural
resources may be entered into for such periods as
may be provided by the pertinent laws or
regulations. (n)
• Instead of appointing an individual general
manager, the BOD may decide to enter into
a management contract with another
corporation
• The terms of the management contract
should be carefully drafted so that the BOD
of the managed corporation retains control
of the basic corporate policies and the
power to recall the contract where the
corporation’s interest would greatly suffer
from its continuance
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 CORPORATION LAW BOOK I

• Sec. 44 should not be interpreted as an stockholders meeting providing for unanimous

exception to Sec. 23 of the Code which lays votes in actions taken by stockholders,
down the fundamental principle that all directors, voting for directors, and amending
corporate powers are to be exercised by the by laws adjudged valid and to enjoin other
BOD stockholders from doing anything inconsistent
• A management contract is one for lease of with it.
services and is not one of agency. THUS, it
cannot be terminated at will RULING: The 1st to 3rd by-laws are invalid,
o Basis for agency: representation while the 4th one is valid. It is an essential part
o Basis of lease of services: employment of the State policy that plurality/majority of
votes is enough. Moreover, in all acts done by
SHERMAN & ELLIS, INC. v. INDIANA the corporation, the major number must bind
MUTUAL CASUALTY CO. the lesser, or else differences could never be
1930, Evans, J. determined.
FACTS: Sherman & Ellis and Indian Mutual
entered into an agreement where for 20 years
Sherman will supply the underwriting and
executive management in the person of, Frank
H. Ellis, or such other officer as Sherman may
from time to time designate, and that during
said twenty-year period" the casualty company
shall elect the officer furnished by Sherman for
its underwriting manager who shall have
general supervision and charge of the
underwriting affairs of the corporation.

RULING: The agreement is void for it

contemplated the substitution of Sherman for
the officers of the casualty company. Also, the
length of time during which the agreement was
to operate indicated that not only managerial
powers were delegated, but the entire policy of
the casualty company business was to be fixed
and determined by Sherman.

9. Unusual voting and quorum

requirements
• The corporation may provide for a greater
number for quorum and voting.
• And the provision in the AOI requiring a
higher quorum or voting reqruiement cannot
be amended except by the vote of the
stockholders representing such higher
voting requirement, whether voting or non-
voting
• Under Article 97, close corporations may
provide for a greater quorum or voting
requirements in meetings of stockholders or
directors than those provided in the Code
• While the Corporation Code is silent as to
validity of providing unanimous votes,

BENINTENDI v. KENTON HOTEL

1945, Desmond, J.
FACTS: The minority stockholders brought a
suit to have the by-laws adopted at a
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CHAPTER VIII: DUTIES OF
DIRECTORS AND CONTROLLING
STOCKHOLDERS
• The directors act as a body in the formulation
of all corporate policies and exercise all
powers of management to the exclusion of
stockholders
• In granting them broad powers, the law in
effect makes them fiduciaries of the
corporation
THREE-FOLD DUTY:
(3) To be diligent
a. Even if they acted within their powers,
liability may still arise if they not
observed due diligence
(4) To be loyal
(5) To be obedient
SECTION 31. Liability of directors, trustees or
officers. - Directors or trustees who wilfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by
the corporation, its stockholders or members
and other persons.
When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty,
any interest adverse to the corporation in
respect of any matter which has been reposed
in him in confidence, as to which equity
imposes a disability upon him to deal in his
own behalf, he shall be liable as a trustee for
the corporation and must account for the
profits which otherwise would have accrued to
the corporation. (n)
DUTY OF DILIGENCE; BUSINESS
JUDGMENT RULE
• Those who voluntarily take the position of
directors and invite confidence in that
relation, undertake that they possess at least
ordinary knowledge and skill and that they
will use them in the discharge of their
functions as such
• The directors are therefore expected to
manage the corporation with reasonable
diligence, care and prudence.
• They can be held liable for (1) willful
dishonesty and (2) negligence
• Although they are not expected to interfere
with the day-to-day administrative details of
the business, they should keep themselves
sufficiently informed about the general
condition of the business, and the manner in
which it is being conducted.
• BUSINESS JUDGMENT RULE: Contracts
intra vires entered into by the BOD are
binding upon the corporation and that the
courts will not interfere unless such contracts
are so unconscionable and oppressive as to
amount to a wanton destruction of the rights
of the minority
o They cannot be held liable for mistakes or
errors in the exercise of their business
judgment, provided they have acted in
good faith
• Degree of care and diligence: Usually that
which men prompted by self-interest,
generally exercise in their own affairs
o Look at the particular circumstances of
each case must be considered; the
nature of the business is an important
factor
• And where they have been grossly negligent
or have fraudulently mismanaged the
corporation, they may be removed by the
stockholders
OTIS & Co v. PENNSYLVANIA R. Co.
1946, Kalodner, District Judge
FACTS: Respondent Pennsylvania Railroad
(PRR) and its subsidiary PO&D issued “Series
D” bonds, but only offered it to Kuhn and later
on sold it to Kuhn without competitive bidding.
Otis & Co, a stockholder in PRR brought to suit
to hold the directors of PRR and PO&D liable,
arguing that because they did not do
competitive bidding in the sale of the bonds,
this resulted in losses.
RULING: The bond issuance was properly
negotiated and executed. There is no lack of
good faith, no motivation of personal gain or
profit, no lack of diligence, skill or care in
selling the bonds. Under the business
judgment rule, courts have properly decided
to give directors a wide latitude in the
management of the affairs of a corporation,
provided always that an honest, unbiased
judgment is reasonably exercised by them. In
any event, what constitutes negligence
depends upon the circumstances of the case. It
is also established that mistakes or errors in
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the exercise of honest business judgment
do not subject the officers and directors to
liability for negligence in the discharge of their
appointed duties.
On the matter of good faith, there is no doubt
that the officers and directors of PRR and
PO&D acted honestly and in good faith, and
sought to exercise their judgment for the best
interests of their respective railroads. There is
no contention that fraud was present, being
mere allegations. The fact that competitive
bidding was not held does not, in itself, afford
a basis for liability.
MONTELIBANO v. BACOLOD-MURCIA
May 18, 1962, Reyes, J.B.L, J.
FACTS: The Montelibanos and Gonzaga &
Company are sugar planters adhered to RESP
Bacolod-Murcia Milling Co.’s (BMMC) sugar
central mill under identical milling contracts.
Sometime before the expiration of the
contracts, it was proposed to execute an
amended milling contracts, increasing the
planters’ share to 60% of the manufactured
sugar. Subsequently, the BoD of RESP BMMC
adopted a Resolution granting further
concessions to the planters over and above
those contained in the printed Amended Milling
Contract. PETs signed the contract but a copy
of the resolution was not attached to the
contract until almost a year after. PETs then
filed the present case, contending that the 3
Negros sugar centrals had already granted
increased participation to the planters. BMMC
resisted the claim arguing that the stipulations
contained in the Resolution were made without
consideration and that it was null and void,
being in effect a donation that was ultra vires.
RULING: BoD of the RESP company had
authority to modify the proposed terms of the
Amended Milling Contract for the purpose of
making its terms more acceptable to the other
contracting parties. The Resolution in question
was passed in good faith by the BoD, it is valid
and binding, and whether or not it will cause
losses or decreased the profits of the central,
the court has no authority to review them.
The Reso was adopted by BMMC as a
supplement, or further amendment, of the
proposed milling contract, and that it was
approved 21 days prior to the signing by the
PETs of the Amended Contract itself. The terms
embodied on the Reso were supported by the
same cause or consideration underlying the
main amended milling contract; ie. the
promises and obligations undertaken by the
planters and particularly the extension of its
operative periods for an additional 15 years.
PSE v. CA, SEC, and PUERTO AZUL LAND
October 27, 1997, Torres, Jr.
FACTS: PALI sought to be listed in the stock
market. PSE denied it because of ownership
issues raised by the Marcoses, as supported by
the PCGG (sequestration, etc). PALI went to
SEC. SEC ruled in favor of PALI, and ordered
PSE to grant PALI’s application. CA affirmed
SEC.
RULING: While SEC has authority over PSE, it
acted arbitrarily in arrogating unto itself the
discretion of approving the application for
listing in the PSE of PALI, since this is a matter
addressed to the sound discretion of the PSE.
PSE’s action in refusing to allow the listing of
PALI in the stock exchange is justified by law
and by the circumstances attendant to this
case. PSE heard from the representative of the
heirs of Marcos and his family who claim the
properties of PALI to be part of the Marcos
estate. PCGG confirmed this claim. In fact, an
order of sequestration has been issued over
the properties and a suit for reconveyance to
the State has been filed in the Sandiganbayan.
LITWIN v. ALLEN et al.
1940, McGeehan, J.
FACTS: This is a stockholders derivative suit
against the directors of Guaranty Trust
Company, (Trust), its subsidiary Guaranty
Company of New York, (Guaranty), and J.P.
Morgan & Co., (J.P.). The complaint alleges the
directors breached their duty of care when
they entered into the Missouri Pacific Bond
Transaction. Alleghany Corporation,
(Alleghany), purchased certain properties the
balance of which was $10,500,000 due on
October 16. Alleghany needed money to make
the payment but because of certain borrowing
limitations in its charter, could not borrow the
money. To overcome this limitation, Alleghany
sold $10,000,000 in its Missouri Pacific bonds
to banking firm J.P. Morgan & Co. for cash at
par value, with an option for Alleghany to buy
back the bonds within six months for the price
at which they were sold to J.P. Morgan.
Guaranty Trust Company (Trust Company)
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 CORPORATION LAW BOOK I
made a written commitment to J.P. Morgan to
participate in the purchase, and Guaranty
Company of New York (Guaranty Company), a
subsidiary of Trust Company, agreed to take
over the bonds upon expiration of the six
month repurchase option, if Alleghany failed to
exercise the option. The bonds had already
been steadily declining in value in 1930. On
November 5, 1930, when the board of
directors of Trust Company approved the
transaction, the bonds were selling at 102 7/8.
On November 18, 1930, when the board of
directors of Guaranty Company approved their
commitment, the bonds were valued at 98 5/8.
On April 16, 1931, when the six month
repurchase option expired, the bonds were
selling at 86 high and 81 low. Guaranty
Company took them over from Trust Company
at par and carried them on its books as an
investment. Shareholders owning 36 out of
900,000 shares of stock in Trust Company
(plaintiffs) have brought a derivative suit
against the directors of Trust Company and
Guaranty Company, and members of J.P.
Morgan (defendants), seeking to impose
liability for losses resulting from the
transaction.
RULING: The directors plainly failed to bestow
the care which the situation demanded
because the entire arrangement was so
improvident, risky unusual and unnecessary as
to be contrary to the fundamental conceptions
of prudent banking practice. It is against public
policy for a bank to for a bank to purchase
securities and give the seller the option to buy
them back at the same price thereby incurring
the entire risk of loss with no possibility of gain
other than the interest derived from the
securities in the interim. Any benefit of a rise
in price is assured to the seller and any risk of
heavy loss s inevitably assumed by the bank.
However, they should only be liable for the
portion of the loss which accrued within the six
month option period.
A director is not liable for loss or damage other
than what was proximately caused by his own
acts or omissions in breach of his duty. Once
the option had expired, there was nothing to
prevent the directors of the Company that had
taken over the bonds in accordance with its
agreement from selling them. Any loss that
incurred after the option had expired was a
result of the directors’ independent business
judgment in holding them. The further loss
should not be laid at the door of the improper
but expired repurchase option.
WALKER v. MAN et al.
1931, Collins, J.
FACTS: Walker, trustee of the bankrupt
Frederick Southack & Alwyn Ball, Jr. and seeks
to recover ~$1M from Man et al, as former
directors of the bankrupt corporation for
dereliction of duty and mismanagement in the
conduct of the company’s affairs. Walker
alleged that the directors are guilty of
misfeasance and non-feasance, not only with
doing wrongful acts and committing waste, but
with acquiescing in and confirming the wrong
doing of others, and with doing nothing to
retrieve the waste, particulary in not protesting
the note for non-payment. Man moved for
judgment dismissing the complaint on the
ground that there is no allegation that he was
a director at the time of the loan and that it
does not appear that at the time he was
director Lacey could have been held by a suit
upon a note.
RULING: As directors, these defendants were
not only obligated to do nothing wrongful
themselves, but to attempt to prevent
wrongdoing by their fellow directors, and if
wrong be committed, to seek to rectify it.
Passivity and disavowal of knowledge alone do
not constitute a pass to freedom from
responsibility.
Surely, if Man knew that an improvident and
unauthorized loan had been made, and took no
steps whatever at salvaging the loan, and
acquiesced in and confirmed the original
wrongful act, he would open to the charge of
negligence and should account for his conduct.
STEINBERG v. VELASCO
March 12, 1929
FACTS: The receiver filed a case against the
directors of Sibuguey Trading Company,
alleging that BOD approved and authorized
unlawful purchases amounting to P3,300 and
approved a resolution for the distribution of
P3K as dividends to its stockholders, which
were wrongfully done and in bad faith, to the
injury and fraud of creditors. Directors claim
that they acted in good faith because when the
petition was filed for its dissolution on the
ground that it was insolvent, it accounts
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 CORPORATION LAW BOOK I
payable amounted to P9,241.19, and its
accounts receivable P12,512.47, or an
apparent asset of P3,271.28, over and above
its liabilities. (However, there is no
stipulation or finding of fact as to what was
the actual cash value of its accounts
receivable. In other words, the corporation did
not then have an actual bona fide surplus from
which the dividends could be paid, and that the
payment of them in full at that time would
“affect the financial condition of the
corporation.)
RULING: It is peculiar that the action of the
board in purchasing the stock from the
corporation and in declaring the dividends on
the stock was all done at the same meeting of
the BOD. Moreover, the directors Ganzon and
Mandaros were permitted to resign so that
they could sell their stock to the corporation.
Creditors of a corporation have the right to
assume that so long as there are outstanding
debts and liabilities, the BOD will not use the
assets of the corporation to purchase its own
stock, and that it will not declare dividend to
stockholders when the corporation is insolvent.
General Duty to Exercise Reasonable Care -
The directors of a corporation are bound to
care for its property and manage its affairs in
good faith, and for violation of these duties,
they are liable to account the same as other
trustees.
Want of Knowledge, Skill or Competency -
Directors are not liable for losses resulting to
the corporation from want of knowledge on
their part; or for mistakes of judgment,
provided they were honest, and fairly within
the scope of their powers and discretion. But
the acceptance of the office of a director of a
corporation implies a competent knowledge of
the duties assumed, and directors cannot
excuse imprudence on the ground of their
ignorance or inexperience. And if they commit
an error of judgment through mere
recklessness or want of ordinary prudence or
skill, they may be held liable for the
consequences.
BARNES v. ANDREWS
1924, Learned Hand, J.
FACTS: The receiver filed a suit in equity to
hold Andrews liable as director for misprision
of office. He alleged that Andrews failed to give
adequate attention to the affairs of the
company, which had been conducted
incompetently and without due regard to the
waste in salaries during the period before
production was possible.
RULING: Directors are not expected to
interfere individual in the actual conduct of its
affairs. However, directors have an
individual duty to keep themselves
informed to some detail. It is not enough to
content oneself with general answers that the
business looks promising, and that all looks
prosperous. In this case, all Andrews did was
talk to Maynard while commuting, at their
homes, or as they met. He did not press him
for details. Andrews could have learned that
there were delays in production. He allowed
himself to be carried along as a figure-head, in
complete reliance upon Maynard.
POOL v. POOL et al.
1945, OTT, J.
FACTS: Pool filed this case to recover the
amounts he paid as his pro-rata share in the
surtax liability of the company. Pool alleged
that because of the various acts on the part of
the RESP Directors, the dividends due the said
corporation by the Times Picayune Publishing
Company during the year 1938, amounting to
the sum of $4200, were not received and
distributed during that year, by reason of
which the corporation was assessed with and
required to pay a surtax on its undistributed
profits for that year under the Revenue Act of
1938, 26 U.S.C.A. Int.Rev.Acts, p. 1001 et
seq., which assessment was made against the
stockholders after the liquidation of the
corporation, and plaintiff, as a stockholder,
was forced to pay his pro rata part of said tax.
RULING: Defendants are not liable. The
defendants as directors were only required to
exercise reasonable care and diligence and act
in good faith and with that judgment and
discretion which ordinarily prudent men
exercise under similar circumstances. They
employed a certified public accountant to make
the income tax returns of the Company for
1938 and also had the advice of an attorney in
connection with its legal affairs. The
defendants did not know that these dividends
had to be distributed before March 15, 1939 (if
this could have been done), in order to avoid
the surtax. They had a right to rely on the
advice and suggestion of the public accountant
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and the attorney whom they had employed to
look after these legal and technical matters.
While the plaintiff claims that he knew that
these dividends had to be distributed before
March 15, 1939, in order to avoid the surtax,
yet he admits that he never advised any of the
defendants of this fact, notwithstanding he was
a stockholder and had as much at stake as any
of the defendants. It was to the interest of all
the stockholders to avoid paying this surtax,
and it is hardly conceivable that the defendants
would have refused to distribute these
dividends had they been advised or had known
that a failure to do so would subject them as
well as plaintiff to this loss.
FOSTER v. BOWEN et al.
1942, Qua, J.
FACTS: Cushing was a director and the
treasurer and manager of Fitchburg and
Leominster Street Railway Company. In 1929,
he signed on behalf of the company a lease of
its roller skating rink in its Whalon Park
amusement resort. This was assented to by
the president at that time, Baxter. When
Bowen became President, he informed Cushing
that said arrangement is illegal. Eventually,
Cushing was not reelected director and his
offices as treasurer and manager were
declared vacant.
Foster, a minority stockholder, filed this case
against Bowen for the alleged breaches he
committed as president. He alleged that (1)
Bowen should be liable for causing the
company to lose the benefit of 2 fidelity bonds
wherein National Surety Corporation had
become liable to indemnify the company
against loss or money or other personal
property through improper conduct of Cushing
for his failure to notify the other directors
within the time required after he learned of the
lease. He also contends that (2) Bowen is liable
for the sums received by Cushing from his
lease after Bowen’s discovery of the lease.
Bowen contends that the bonds never covered
the acts of Cushing and therefore, the
company lost nothing by any delay on Bowen’s
part to notify the surety corporation.
RULING: Bowen is not liable. The bonds did
not cover the acts of Cushing. Cushing's leases
of the rink to himself were not made with
fraudulent or dishonest intent, but rather
under a belief that the profit to accrue to him
was legitimate and was authorized by his
conversations with Baker. Cushing paid openly
to the cashier on account of his leases all that
he was expected to pay under his original
arrangement with Baker. He did not attempt to
conceal his transactions with respect to the
rink but carried them out through the company
office and told of them and of his own profit
whenever the question was raised. In view of
this, it is unnecessary to consider whether the
company's rights on the first bond had already
been lost by Baker's knowledge and failure to
notify the insurer before Bowen ever became
an officer of the company. In any event the
company lost nothing on either bond through
Bowen's delay.
As to Bower, there is no finding of bad faith on
Bowen’s part. He did not profit personally
through Cushing’s lease. Directors of a
business corporation in the absence of positive
statutory enactment are not responsible for
errors of judgment provided they act honestly.
There is no absolute prohibition of dealings
between a corporation and its officer, if proper
safeguards are observed to insure that those
acting for the corporation are themselves
disinterested and the utmost good faith is
exercised.
LOWELL HOIT & CO v. DETIG et al.
1943, Huffman, J.
FACTS: Lowell Hoit & Co entered into a lease
agreement with Steward Cooperative Grain
Company thru its manager, Hermann, where
Lowell Hoit leased certain bins in the elevator
for storage of grain. Lowell Hoit filed this case
against the company and its directors alleging
that the elevator company shipped and sold
9,081 bushels of such oats without the
knowledge or consent of appellant, and failed
to account for the proceeds thereof.
RULING: Defendants are not liable. The
evidence failed to show any knowledge on the
part of appellees concerning the transaction in
question. Nothing appears to indicate that
appellees did not exercise care and prudence in
their selection of the agent Herrmann. Neither
does it appear that they sought to divest
themselves of a general supervision of the
conduct of the business. Further, nothing
appears to indicate that they had any
knowledge of, or had acquiesced in a
continuous or repeated course of conduct on
the part of Herrmann such as committed in the
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present instance. Courts will treat directors
with more leniency with respect to a single
isolated act of fraud on the part of a
subordinate officer or agent, than where the
practice appears to have been so habitually
and openly committed as to have been easily
detected upon proper supervision.
DOCTRINE: Ordinarily, where such director
can be held liable for the acts of subordinate
officers, he must participate therein, be guilty
of lack of ordinary and reasonable supervision,
or be guilty of lack of ordinary care in the
selection of such officer. The duties of a
general manager of a corporation are usually
more extensive than those of a mere director.
Liability in such instance on the part of the
director is generally considered to rest upon
the question whether he actively participated
in the wrongdoing, and it seems impossible to
lay down any governing rule further than that
the test is to be whether the director
authorized or participated in the alleged
wrongful act. The mere fact that a person is a
director in a corporation does not necessarily
render him liable for the torts of the
corporation or its agents. In other words,
directors are not to be held liable for the
negligence of the corporation merely because
of their official relation to it. And the general
rule would seem to be that he must participate
in the wrongful act, or have such knowledge
thereof as to give rise to liability.
BATES v. DRESSER
1920, Holmes, J.
FACTS: Dresser was the president of a small
bank in Cambridge. The bank had only a few
employees, and defendant supervised all the
work that was done. One of the employees,
Coleman, was promoted from messenger to
bookkeeper in 1904. From 1904 until 1907,
there were several small shortages in the bank
and indications that an employee was
stealing. There was no indication, however,
that Coleman was dishonest. In 1907,
Coleman began using his access to the books
to cover up the thefts he was making. He did
this by altering the records in such a way that
the only way he could be caught was to
examine the deposit record of all the
deposits. During this time, defendant had
several indications that someone at the bank
was a thief. He never attempted to ascertain
who the thief was or to examine the books,
even though he had the opportunity to do so.
RULING: Failure to take affirmative action
amounts to breach of duty as far as
the president is concerned, but not regarding
the directors. The directors acted reasonably
by relying on the information given to
them. They had no reason to believe that
there were any irregularities in the bank
records. Dresser’s position was
different. He was in the bank daily. He had
access to the books at all times. He knew of
shortages and apparent unexplained declines
in deposits, yet he failed to make any attempt
to discover the reasons behind these peculiar
events. The continued losses were his fault
because the warnings that he had should have
led him to investigate. Had he investigated,
the losses may have been eliminated because
he may have discovered the reason behind
them. Dresser, as president, was much closer
to the operation of the bank than the
directors. He was there every day, and he
supervised the actual operation of the
bank. This the directors didn’t do;
therefore, Dresser’s position exposed him to
the warning signs, while the directors were not
exposed and, therefore, he was personally
liable while the directors were not.
FIDUCIARY DUTIES; CONFLICT OF
INTERESTS
• Director is a fiduciary of the corporation. As
such, in case of conflict of his interest with
those of the corporation, he cannot sacrifice
the latter without incurring liability for his
disloyal act.
1. The Self-dealing Director
SECTION 32. Dealings of directors, trustees, or
officers with the corporation. – A contract of the
corporation with one or more of its directors or
trustees or officers is voidable, at the option of
such corporation, unless all the following conditions
are present:
1. That the presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a
quorum of such meeting;
2. That the vote of such director or trustee was
not necessary for the approval of the contract;
3. That the contract is fair and reasonable under
the circumstances;
4. That in the case of an officer, the contract with
the officer has been previously authorized by
the board of directors.
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Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract
may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two- thirds
(2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees involved
is made at such meeting: Provided, however, That
the contract is fair and reasonable under the
circumstances.
• The contract of a self-dealing director is
VOIDABLE unless ALL the above
requirements are present.
• It may be voided by the corporation
regardless of whether or not it suffered any
damage.
• In the absence of the 1st and 2nd requisite,
the stockholders may ratify it by a vote of
2/3 of the outstanding capital stock or
members
• Modern View in US: test the validity of
self-dealing directors’ contracts solely on
the issue of fairness
o The position of the so-called
“enlightened minority” is that although
the interest director participated in the
approval of the contract between him
and his corporation, the latter cannot
avoid it UNLESS it is unfair
o The burden of proving fairness,
however, lies with the director
o One good reason for using this view
over the traditional view: The
traditional view can be used to the
detriment of the corporation (but this
possibility is diminished by the
ratification of stockholders)
PALTING v. SAN JOSE PETROLEUM
INCORPORATED
December 17, 1966, Barrera, J.
FACTS: The AOI of San Jose Petroleum
contained the provision: that no contract or
transaction between the corporation and any
other association or partnership will be
affected, except in case of fraud, by the fact
that any of the directors or officers of the
corporation is interested in, or is a director or
officer of, such other association or
partnership, and that no such contract or
transaction of thecorporation with any other
person or persons, firm, association or
partnership shall be affected by the fact that
any director or officer of the corporation is a
party to or has an interest in, such contract or
transaction, or has in anyway connection with
such other person or persons, firm, association
or partnership; and finally, that all and any of
the persons who may become director or
officer of the corporation shall be relieved from
all responsibility for which they may otherwise
be liable by reason of any contract entered into
with the corporation, whether it be for his
benefit or for the benefit of any other person,
firm, association or partnership in which he
may be interested.
RULING: These provisions are in direct
opposition to our corporation law and
corporate' practices, in this country. These
provisions alone would outlaw any corporation
locally organized or doing business in this
jurisdiction. The impact of these provisions
upon the traditional judiciary* relationship
between the directors and the stockholders of
a corporation is too obvious. to -escape notice
by those who are called upon to protect the
interest of investors. The directors and officers
of the company can do anything, short of
actual fraud, with the affairs the corporation
even to benefit themselves, directly or other
persons or entities in which they are
interested, and with immunity because of the
advance condonation or relief from
responsibility by reason of such acts. This and
the other provision which authorizes the
election of non-stockholders as directors,
completely disassociate the stockholders from
the government and management of the
business in which they have invested.
MEAD v. E.C. McCULLOUGH et al.
1911, Trent, J.
FACTS: Charles Mead, Edwin McCullough and
three others organized the corporation called
The Philippine Engineering and Construction
Company (PECC). The 4 organizers, except
Mead, contributed to the majority of the capital
stock of PECC, the remaining shares were
offered to the public. Mead contributed some
personal properties. Mead was assigned as a
manager but he resigned as such when he
accepted an engineering job in China. But even
so, he remained as one of the five directors.
At that time, PECC was already incurring
losses. McCullough, the president, proposed
that he shall buy the assets of the corporation.
The three other directors then voted in favor of
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this proposal hence the assets were transferred
to McCullough. Mead learned of this and so he
filed this case for salary, profits, and recovery
of personal properties sold, questioning the
propriety of the course of action undertaken by
the directors. Mead argued that:
(6) Corporation cannot transfer the property
to one of the directors considering that his
consent was not obtained to allow such
transfer.
(7) Under the AOI of PECC, the BOD only have
ordinary powers; hence, the authorization
made by the three directors to allow the
sale of company assets to McCullough
constitutes an act of agency which is
invalid at that because no express
commission was made, i.e., no power of
attorney was made in favor of the
directors.
(8) Under their charter, no resolution affecting
the administration of the affairs of PECC
should be binding upon the corporation
unless the unanimous consent of the entire
board was first obtained.
RULING: Sale made by the quorum of the
BOD is valid and binding upon Mead.
PICCARD v. SPERRY CORPORATION et al.
1946, Rifkind, J.
FACTS: A controversy developed between
Sperry and Cowdin and Standard Company
when Sperry demanded of Cowdin Co. sums of
money which it received from Field Gorre & Co,
which Cowdin negotiated in behalf of Sperry.
This eventually lead to a settlement where
Cowdin & Co paid Sperry in exchange for a
release of claims. Piccard et al, minority
stockholders, filed this case against the
directors of Sperry, alleging that the release
was invalid because Morgan and Sanderson
were ineligible to vote (and be included in the
quorum) on the release because Morgan and
Sanderson’s wife were also stockholders of
Cowdin & Co.
RULING: The charter of Sperry Corporation
not only declares that Morgan might be
counted towards a quorum if interested but
also that mere stock ownership does not make
him an interested director. It could not be
assumed that Delaware forbids stockholders to
contract based on the considerations:
• There is at least some authority which
recognizes an interested director’s eligibility
for quorum purposes even in the absence of
charter provisions expressly sanctioning
such eligibility
• The Delaware courts have failed to condemn
such a provision
• NY courts have apparently sanctioned such
a provision
In this case, plaintiffs failed to establish the
invalidity of the clause in the charter, hence,
the proceedings on June 30 and July 28 must
be deemed valid.
2. Fixing Compensation of directors and
officers
SECTION 30. Compensation of directors. - In the
absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however, That any
such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income
tax of the corporation during the preceding year. (n)
SECTION 87. Defintion. – xxx The provisions
governing stock corporation, when pertinent, shall
be applicable to non-stock corporations, except as
may be covered by specific provisions of this Title.
(n)
• This may take various forms – per diems,
salaries and profit sharing agreements (i.e.
bonuses, stock option plans, pension plans)
• As a general principle, directors are NOT
entitled to compensation for performing
services ordinarily attached to their office
UNLESS the articles of incorporation or the
by-laws expressly so provide or a contract is
expressly made in advance.
• Although Sec 30 governs compensation for
directors and not trustees for non-stock
corporations, it covers also the latter by
virtue of Sec. 87.
• Under Sec. 30, directors may fix their
own per diems provided they are
reasonable
• Directors can receive compensation other
than per diems ONLY if (1) fixed by the by-
laws or (2) the stockholders representing
the majority of the OCS agree, or (3)
contract made in advance expressly
provides so
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• Total amount received must not exceed
10% of the corporation’s income before
taxes
When Rules regarding compensation are
not applicable
• Officers – considered employees
• Director who renders services outside his
usual duties
• To prevent abuses in granting stock option
rights, SEC requires widely held
corporations which have granted stock
option rights to its stockholders to make full
disclosure of the same before they can
publicly sell their securities.
GOVERNMENT v. EL HOGAR
1927
FACTS: By-laws of El Hogar provide for
compensation of directors of 5% of net profit
distributed in proportion to the attendance in
meetings.
RULING: The power to fix compensation is left
to the corporation, determined by its by-laws.
If a mistake has been made, or the rule
adopted in the by-laws has been found to work
harmful results, the remedy is in the hands of
the stockholders who have the power to rule
the rule.
BARRETTO v. LA PREVISORA
December 8, 1932, Ostrand, J.
FACTS: Alberto Barretto, Jose de Amusategui,
and Jose Barretto, who had been directors of
the corporation from its incorporation up to the
month of March, 1929, sought to recover from
La Previsora, a mutual building and loan
association, 1% per plaintiff of the net profits
of said corporation for the year 1929, which
amount to P50,727.53, under and in
accordance with the following amendment to
the by-laws of the defendant corporation,
which was made at a general meeting of the
stockholders on Feb. 23, 1929.
RULING: Article 68-A of the amended by-laws
of the defendant corporation upon which the
action is based, does not create any legal
obligation on its part to pay to the persons
named therein, including the plaintiffs, such a
life gratuity or pension out of its net profits. A
by-law provision of this nature must be
regarded as clearly beyond the lawful powers
of a mutual building and loan association, such
as the defendant corporation.
1. Building and loan associations are peculiar
and special corporations. They are founded
upon principles of strict mutuality and
equality of benefits and obligations, and the
trend of the more recent decisions is that
any contract made or by-law provision
adopted by such an association in
contravention of the statute is ultra vires
and void. It stands in a trust relation to the
contributors in respect to the funds
contributed, and there is an implied contract
with its members that it shall not divert its
funds or powers to purposes other than
those for which it was created.
2. Essential requisites of contract are not
present. There was no consent. There was
no consideration as it was for past services.
CENTRAL COOPERATIVE EXCHANGE v.
TIBE et al
June 30, 1970, Reyes, J.B.L, J.
FACTS: BOD issued resolutions authorizing per
diems and increase of said per diems to
directors, and also appropriating 10K as
discretionary funds. Because of this, Tibe was
able to acquire cash advances and sums
representing his per diems. CCE filed a
complaint to recover said amounts claiming
that the BOD resolutions are invalid since they
are against the by-laws.
RULING: The resolutions are invalid for being
ultra vires. The by-laws provide that the
stockholders/members are the ones authorized
to fix compensation. And even without that
reservation, directors are not entitled to
compensation. It is well-settled that directors
of a corporation presumptively serve without
compensation and in the absence of agreement
or resolution in relation thereto, no claim can
be asserted therefor.
FOGELSON v. AMERICAN WOOLEN Co.
1948, Swan, J.
FACTS: American Woolen Co. proposed a
Retirement Income Plan, under which its
President, who will be retiring soon, will be
receiving $54,220 annually for life.
Stockholders were assailing its validity.
Corporation moved for summary judgment and
was granted.
RULING: Lower court erred in granting
summary judgment as there are triable issues
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of facts relating to the validity of the grant of
retirement plan: Whether the directors did
exercise their honest business judgment or
were motivated by the alleged purpose of
favoring the president. The practice (WON they
provide a limitation as to the amount of
pension that may be granted) of other
companies, while not conclusive, is relevant in
the settlement of this dispute and obviously
cannot be tried out upon affidavits.
The size of a bonus may raise a justifiable
inquiry as to whether it amounts to spoliation
or waste of corporate property. o On of the
reasons for adoption of a retirement plan is
that it serves as an inducement to competent
personnel to accept employment and retain it
until retirement age. Moreover, it accords
justice to superannuated employees.
KERBS v. CALIFORNIA EASTERN AIRWAYS
July 17, 1952, Wolcott, J.
FACTS: Plaintiffs wish to enjoin the
enforcement of a stock option plan and profit-
sharing plan adopted and ratified by the
stockholders. Beneficiaries of the plans were
officers and directors.
RULING: The stock option plan was deficient
as it was not reasonably created to insure that
the corporation would receive contemplated
benefits. A validity of a stock option plan
depends upon the existence of consideration
and the inclusion of circumstances which may
insure that the consideration would pass to the
corporation. The options provided may be
exercised in toto immediately upon their
issuance within a 6-month period after the
termination of employment. In short, such
plan did not insure that any optionee
would remain with the corporation.
The validity of a stock option plan, under
which selected personnel of a corporation may
acquire a stock interest in the corporation,
depends directly upon the existence of
consideration to the corporation and the
inclusion in the plan of conditions, or the
existence of circumstances which may be
expected to insure that the contemplated
consideration will in fact pass to the
corporation.
As to the profit sharing plan, it was held to be
valid because it was ratified by a majority of
the stockholders.
3. Using Inside Information
• As insiders, directors and officers have
access to confidential information relating to
the business of the corporation.
• Their fiduciary position prohibits them from
using any such information to benefit
themselves or any competitor corporation in
which they have a more substantial interest
• Sec. 31 covers the liability of directors on
inside information
• Revised Securities Act contains provisions
expressly referring to use of inside
information:
SECTION 3.8. Securities Regulation Code.
"Insider" means (a) the issuer; (b) a director or
officer (or any person performing similar functions)
of, or a person controlling the issuer; gives or gave
him access to material information about the issuer
or the security that is not generally available to the
public; (d) A government employee, director, or
officer of an exchange, clearing agency and/or self-
regulatory organization who has access to material
information about an issuer or a security that is not
generally available to the public; or (e) a person
who learns such information by a communication
from any forgoing insiders.
SECTION 27. Insider’s Duty to Disclose When
Trading. –
27.1. It shall be unlawful for an insider to sell or
buy a security of the issuer, while in possession of
material information with respect to the issuer or
the security that is not generally available to the
public, unless: (a) The insider proves that the
information was not gained from such relationship;
or (b) If the other party selling to or buying from
the insider (or his agent) is identified, the insider
proves: (I) that he disclosed the information to the
other party, or (ii) that he had reason to believe
that the other party otherwise is also in possession
of the information. A purchase or sale of a security
of the issuer made by an insider defined in
Subsection 3.8, or such insider’s spouse or relatives
by affinity or consanguinity within the second
degree, legitimate or common-law, shall be
presumed to have been effected while in possession
of material nonpublic information if transacted after
such information came into existence but prior to
dissemination of such information to the public and
the lapse of a reasonable time for market to absorb
such information: Provided, however, That this
presumption shall be rebutted upon a showing by
the purchaser or seller that he was aware of the
material nonpublic information at the time of the
purchase or sale.
27.2. For purposes of this Section, information is
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"material nonpublic" if: (a) It has not been
generally disclosed to the public and would likely
affect the market price of the security after being
disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or (b) would be considered by a
reasonable person important under the
circumstances in determining his course of action
whether to buy, sell or hold a security.
• Under Sec. 36 of the RSA, the liability of the
guilty director or officer is to the corporation
and not to anyone else.
o No presumption of disloyalty as the act
complained of constitute the very basis
of the action
• Sec 30 covers all acts of unfair use of inside
information, and all such acts are
considered unlawful.
o Notable effect: The mere fact that the
sale and purchase or purchase and sale
occur within the 6-month period will
give rise to the presumption that there
was unfair use of insider information.
o Burden of proving that there is no such
use is on the director
• All contracts under Sec. 30 and Sec. 36 are
VOID, but only as to the rights of the guilty
director or officer.
o Hence, the innocent party can rightfully
enforce the contract as to him, but if
prejudiced, may recover what he has
paid or delivered.
STRONG et al v. REPIDE
1909, Peckham, J.
FACTS: Government wanted to buy friar lands
from the Phil. Sugar Estates, of which Repide
was the majority shareholder and the
administrator general. While the negotiations
were ongoing, Repide ordered his agent Mr.
Kauffman to buy the 800 the shares owned by
another shareholder, Mrs. Strong. Mr.
Kauffman in turn hired Mr. Sloan, a broker, to
negotiate the sale of the shares. The shares
were possessed by Mrs. Strong’s agent Mr.
Jones, with whom Mr. Sloan exclusively
communicated with. Mr. Jones agreed to sell
the shares. However, neither Mr. Sloan nor Mr.
Jones were aware that Repide was the actual
buyer. Repide eventually accepted the
government’s offer and sold the lands, thereby
increasing the value of the shares. Mrs. Strong
then sued Repide to recover the shares
alleging that she was defrauded because
Repide had the duty to disclose the actual
value of the shares and the true facts
regarding the sale of the lands.
RULING: The sale of the shares is void. Under
the circumstances, Repide committed fraud
because he failed to perform his duty to state
the facts before purchasing the shares. A
director may be accountable directly to the
stockholder where the special facts
surrounding the transaction give rise to the
obligation to disclose his identity or the inside
information he possesses.
TAYLOR v. WRIGHT
1945, Peters, Judge.
FACTS: Emma Taylor filed an action against
Marie and Allen Wright, directors, to recover
damages for their fraudulent purchase of 3,750
shares of stock owned by her at less than its
actual value. These stocks were pledged with
the American Trust Company which was
approached by Stowell offering to pay for the
same at a value less than its liquidating value
or book value. Stowell was hired by Allen to
buy stocks from complaining/ dissatisfied
stockholders. He was instructed not to reveal
the identity of the purchaser who was Marie.
RULING: Taylor entitled to damages. The
Wrights had a duty to disclose information
regarding the shares of stock, hence she was
guilty of fraud for concealing said information.
They had full knowledge but concealed value of
stock, concealed their identity as purchasers,
active in inducing the sale, stocks not traded in
any exchange, knew stocks were pledge and
condition of the loan, knew that the bank's
primary interest was to secure enough for the
stock to put the loan in a sound condition knew
that respondent would find it difficult to resist
their offer should the bank deem it acceptable.
Minority Rule: Recognizes the director's
obligation to the stockholders individually as
well as collectively, and refuses to permit him
to profit at the latters' expense by the use of
information obtained as a result of his official
position and duties.
Majority Rule: Directors and officers owe no
fiduciary duty at all to stockholders, but may
deal with them at arm's length. No duty of
disclosure of facts known to the director or
officer exists. Nondisclosure cannot constitute
constructive fraud; director owes fiduciary
obligation only to the corporation.
Exception (Special Facts Rule): Where
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special circumstances or facts are present
which make it inequitable for the director to
withhold information from the stockholder, the
duty to disclose arises, and concealment is
fraud.
GOKONGWEI v. SEC
April 11, 1979, Antonio, J.
FACTS: Gokongwei filed a petition for
declaration of nullity of SMC’s amended by-
laws, specifically the by-law which rendered
stockholders ineligible to be director if he is
also a director in a corporation whose business
is in competition with that of the other
corporation.
RULING: The by-law is valid. An amendment
to the by-laws which renders a stockholder
ineligible to be director if he be also a director
in a corporation whose business is in
competition with that of the other corporation
is valid.
It is not denied that a member of the BOD of
the SMC has access to sensitive and highly
confidential information, such as: (a)
marketing strategies and pricing structure; (b)
budget for expansion and diversification; (c)
research and development; and (d) sources of
funding, availability of personnel, proposals of
mergers or tie-ups.
The Constitution and anti-trust laws prohibit
combinations in restraint of trade or unfair
competition, monopolies, and are aimed at
raising levels of competition by improving the
consumer’s effectiveness as the final arbiter in
free markets. The election of PET in the BOD
can bring about such an illegal situation.
4. Seizing Corporate Opportunity
SECTION 34. Disloyalty of a director. - Where a
director, by virtue of his office, acquires for himself
a business opportunity which should belong to the
corporation, thereby obtaining profits to the
prejudice of such corporation, he must account to
the latter for all such profits by refunding the same,
unless his act has been ratified by a vote of the
stockholders owning or representing at least two-
thirds (2/3) of the outstanding capital stock. This
provision shall be applicable, notwithstanding the
fact that the director risked his own funds in the
venture. (n)
• Under Section 34, if the transaction is one in
which the corporation has the right to
appropriate, it is the specific duty of a
director not to seize for himself.
o Should he do so, he must account for it
• Versus Section 32: Voidable even if it
suffered no injury
• Sec 34 covers only directors and not officers
• Officers are covered by the general provision
under Section 31
Doctrine of Corporate Opportunity -
directors, officers, and controlling shareholders
of a corporation must not take for themselves
any business opportunity that could benefit the
corporation. The corporate opportunity
doctrine is one application of the fiduciary duty
of loyalty.
The doctrine of "corporate opportunity" is
precisely a recognition by the courts that the
fiduciary standards could not be upheld where
the fiduciary was acting for two entities with
competing interests. This doctrine rests
fundamentally on the unfairness, in particular
circumstances, of an officer or director taking
advantage of an opportunity for his own
personal profit when the interest of the
corporation justly calls for
protection. [Gokongwei v. SEC]
SINGER v. CARLISLE
July 25, 1940, Shientag, J.
FACTS: Bernard Singer and another, as
administrators of the estate of Rose M. Singer,
and others, filed a derivative suit against Floyd
Carlisle and other defendants (juridical
persons) for allegedly diverting underwriting
business from the United Corporation, and for
eliminating the United Corporation as a
competitor. All of the defendants, except for
the individuals, are engaged in the same
underwriting business in competition both with
United and NY United Corporation. DEF
directors and officers filed MTD.
RULING: While the third cause of action is
generally sound in law, it is dismissed for
failure of petitioners to incorporate certain
essential allegations.
IRVING TRUST Co v. DEUTSCH et al
September 17, 1934, Swan, Circuit Judge
FACTS: Bell was employed by Acoustic
Products (now Sonora Products) to negotiate
with Reynolds and Reynolds & Co. who were in
control of De Forest Cormpany. It was
essential for Acoustic to acquire rights to
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manufacture under basic patents in the radio
art, and such right was to be acquired from De
Forest. Negotiations led to an agreement that
Acoustic would have 1/3 participation. A
resolution was then enacted instructing its
President, Deutsch to endeavor to obtain
sufficient funds to enable Acoustic to carry out
its obligations in the event of its final
acceptance of offer. Deustch reported his
inability to procure funds but said that he and
other directors were willing to shoulder the
costs. So the “Biddle Group” paid for the value
of the shares. Irving Trust, trustee of the now
bankrupt Acoustic, filed this case to hold the
directors to account of such profits. RESPs’
main allegation is that the prohibition against
corporate officers acting on their own behalf is
removed if the corporation itself is financially
unable to enter into the transaction.
RULING: The directors Biddle, Deutsch
Hammond, and agent Bell are liable. Stein and
White are not. If directors are permitted to
justify their conduct on their theory, there will
be a temptation to refrain from exerting their
strongest efforts on behalf of the corporation
since, if it does not meet the obligations, an
opportunity to profit will be open to them
personally.
It was found that Deustch owed Acoustic
$125K, yet no effort was made to collect it or
to realize on the collateral. The validity of the
defense of Deutsch is doubted. No efforts were
also made to raise for Acoustic the $100K
required for the De Forest stock. Moreover,
Acoustic did have substantial banking
accomodations, and if these had been made
available a few weeks earlier, it would have
been able to perform its contract with Reynolds
& Co.
If the directors are uncertain whether the
corporation can make the necessary outlays,
they need not embark it upon the venture; if
they do, they may not substitute themselves
for the corporation any place along the line and
divert possible benefits into their own pockets.
As to Bell: even if his agency is disregarded, it
a principle that one who knowingly joins a
fiduciary in an enterprise where the
personal interest of the latter is or may be
antagonistic to his trust becomes jointly
and severally liable with him for the
profits of the enterprise.
5. Interlocking Directors
SECTION 33. Contracts between corporation
with interlocking directors. – Except in cases of
fraud, and provided the contract is fair and
reasonable under the circumstances, a contract
between two or more corporations having
interlocking directors shall not be invalidated
on that ground alone: Provided, That if the
interest of the interlocking director in one
corporation is substantial and his interest in
the other corporation or corporations is merely
nominal, he shall be subject to the provisions
of the preceding section insofar as the latter
corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent
of the outstanding capital stock shall be
considered substantial for purposes of
interlocking directors. (n)
• Under this section, a contract with
interlocking directors cannot be invalidated
on this ground alone provided: (1) it is
fair and reasonable and (2) there is no
fraud
• Without Sec. 33, few dealings would be
possible between a parent company and its
subsidiaries, since interlocking directors
often constitute a majority of the boards of
both parent and subsidiary.
• Burden of Proof: prevailing view is it is on
the corporation which seeks to uphold the
contract
GLOBE WOOLEN CO v. UTICA GAS &
ELECTRIC CO.
1918, Cardozo, J.
FACTS: John Maynard was both president and
a director of Globe Woolen Co., an operator of
two textile mills. Maynard was also on the BOD
of Utica Gas & Electric Co., though he held no
stock in Utica. Maynard wished to convert the
mills from steam power to electric power but
was concerned that the cost of conversion
would be too high. Greenidge, the GM of Utica,
engaged in negotiations with Maynard that
resulted in two contracts to provide electricity
to the mills. The contracts included a
guarantee that the monthly cost of electricity
would be at least $300 less than Globe’s prior
steam expenses. After Greenidge and Maynard
had agreed to the terms, the contracts were
presented to Utica’s board for ratification in
December 1906 and February 1907. Greenidge
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presented the contracts and vouched for them.
Maynard was silent at the meetings and
did not vote on either contract. After
realizing that it was generating huge losses,
Utica rescinded the contract. Globe sued for
specific performance. Lower Court ruled in
favor of Utica.Globe appealed to this court,
arguing that since Maynard had abstained from
voting on the contracts, he and Globe were
shielded from these claims.
RULING: A beneficiary, about to plunge into a
ruinous course of dealing, may be betrayed by
silence as well as by the spoken word. The
trustee is free to stand aloof, while others act,
if all is equitable and fair. He cannot rid himself
of the duty to warn and to denounce, if there is
improvidence or oppression, either apparent on
the surface, or lurking beneath the surface, but
visible to his practised eye.
There was an influence here, dominating
perhaps, and surely potent and persuasive,
which was exerted by Mr. Maynard from the
beginning to the end. In all the stages of
preliminary treaty, he dealt with a subordinate,
who looked up to him as to a superior, and was
alert to serve his pleasure. The members of
the committee, hearing the contract for the
first time, knew that it had been framed by the
chairman of the meeting. They were assured in
his presence that it was just and equitable.
Faith in his loyalty disarmed suspicion.
The mischief consists in this: that the
guarantee has not been limited by a statement
of the conditions under which the mills are to
be run.
CLOSE CORPORATIONS
• Recall that when stockholders of a close
corporation choose to manage corporation
themselves, law treats them as directors.
• Sec. 100 makes stockholders personally
liable for corporate torts (cf. directors of
stock corps who are liable only in case of
negligence in performance of duties)
• Stockholders are jointly and severally liable
DUTY OF CONTROLLING INTEREST
A majority shareholder is subject to the duty of
good faith when he acts by voting at a
stockholders’ meeting with respect to a matter
in which he has a personal interest.
• Ex. votes to ratify a voidable action;
Transactions where SH vote is necessary
like merger, dissolution, or sale of all the
corporate assets.
General Rule: a controlling stockholder may
dispose of his stock at any time and at such
price as he chooses
• However, controlling SH cannot go against
his duty by transferring office to persons
who are known or should be known as
intending to raid the corporate treasury or
otherwise improperly benefit themselves
(Insuranshares Corp. v. Northern Fiscal
Corp.)
Remedy: liability on the resigning directors and
officers for all damages sustained by the
corporation and to require that any bonus
received for such transfer of their office be
returned to the corp.
DUTY TO CREDITORS
When a corporation is insolvent, directors will
be deemed trustees of the creditors and
should manage its assets with strict regard to
the creditors’ interest.
INSURANSHARES CORP v. NORTHERN
FISAL CORP.
September 10, 1940, Kirkpatrick, J.
FACTS: The former management of
Insuranshares sold their minority, but
controlling, interest, to a group of Boston
lawyers, who, upon obtaining control, financed
the deal through an unsecured loan, which, in
turn, was liquidated through corporate assets.
Effectively, they bought the control of the
corporation by paying with corporate assets.
Insuranshares now sues the former
management for damages suffered through the
looting of the Boston lawyers. The District
Court held the management group liable,
ruling that, under the circumstances of the
sale, they had the duty to inquire on the sale,
which they failed to discharge, to the prejudice
of Insuranshares.
RULING: The former directors are liable. The
facts and circumstances leading up to this sale
were sufficient to indicate to any reasonable
man in the position of Hepburn, the agent of
the management group, that the Boston group
were acquiring the control of the corporation
by improper means and for an improper
purpose. The sale was not a simple sale of
stock but a sale of control of the corporation.
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The owners of control are under a duty not to

transfer it to outsiders if the circumstances
surrounding the proposed transfer are such as
to awaken suspicion and put a prudent man on
his guard. If they were deceived by false
representations, there might not be liability.
But if the circumstances put them on notice
but they failed to make an adequate
investigation is made and harm follows, then
liability also follows.

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CHAPTER IX: THE RIGHT OF
INSPECTION
BASIS OF RIGHT
As beneficial owners of the business, the
stockholders have the right to know not only the
financial condition of the corporation but also
how the corporate affairs are being managed by
their elected directors, sot that if they find the
conditions unsatisfactory, they may be able to
take the necessary measures to protect their
investment
The right of inspection is preventive as
well as remedial.
• PREVENTIVE – it may to a limited extent
serve as a deterrent to an ill-mentioned
management to know that its acts may be
scrutinized
• REMEDIAL – a dissatisfied stockholder may
resort to the right of inspection as a
preliminary step to seeking more remedies
against abuses committed by management
SECTION 74. Books to be kept; stock transfer agent.
- Every corporation shall keep and carefully preserve
at its principal office a record of all business
transactions and minutes of all meetings of
stockholders or members, or of the board of directors
or trustees, in which shall be set forth in detail the
time and place of holding the meeting, how
authorized, the notice given, whether the meeting
was regular or special, if special its object, those
present and absent, and every act done or ordered
done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time
when any director, trustee, stockholder or member
entered or left the meeting must be noted in the
minutes; and on a similar demand, the yeas and nays
must be taken on any motion or proposition, and a
record thereof carefully made. The protest of any
director, trustee, stockholder or member on any
action or proposed action must be recorded in full on
his demand.
The records of all business transactions of the
corporation and the minutes of any meetings shall be
open to inspection by any director, trustee,
stockholder or member of the corporation at
reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
Any officer or agent of the corporation who shall
refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy
excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to
such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144
of this Code: Provided, That if such refusal is made
pursuant to a resolution or order of the board of
directors or trustees, the liability under this section
for such action shall be imposed upon the directors or
trustees who voted for such refusal: and Provided,
further, That it shall be a defense to any action under
this section that the person demanding to examine
and copy excerpts from the corporation's records and
minutes has improperly used any information secured
through any prior examination of the records or
minutes of such corporation or of any other
corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.
Stock corporations must also keep a book to be
known as the "stock and transfer book", in which
must be kept a record of all stocks in the names of
the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for which
subscription has been made, and the date of payment
of any installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, and
by and to whom made; and such other entries as the
by-laws may prescribe. The stock and transfer book
shall be kept in the principal office of the corporation
or in the office of its stock transfer agent and shall be
open for inspection by any director or stockholder of
the corporation at reasonable hours on business
days.
No stock transfer agent or one engaged principally in
the business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to
operate in the Philippines unless he secures a license
from the Securities and Exchange Commission and
pays a fee as may be fixed by the Commission, which
shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or
making transfer of its own stocks, in which case all
the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein
provided, shall be applicable.
SECTION 75. Right to financial statements. - Within
ten (10) days from receipt of a written request of any
stockholder or member, the corporation shall furnish
to him its most recent financial statement, which
shall include a balance sheet as of the end of the last
taxable year and a profit or loss statement for said
taxable year, showing in reasonable detail its assets
and liabilities and the result of its operations.
At the regular meeting of stockholders or members,
the board of directors or trustees shall present to
such stockholders or members a financial report of
the operations of the corporation for the preceding
year, which shall include financial statements, duly
signed and certified by an independent certified
public accountant.
However, if the paid-up capital of the corporation is
less than P50,000.00, the financial statements may
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be certified under oath by the treasurer or any
responsible officer of the corporation. (n)
WHAT RECORDS COVERED
(1) Records of all business transactions
a. Books of inventories and balances,
journal, ledger, book of copies of
letters and telegrams, vouchers and
receipts, income tax returns, contracts
and all papers pertaining to said
contract, voting trust agreements
(2) Minutes of the meetings of the
directors/trustees, or of the
stockholders/members
(3) Stock and transfer book
(4) Financial statements [Sec. 75]
EXTENT OF AND LIMITATIONS ON RIGHT
(1) Limitations as to time and place –
stockholder can exercise his right only at
reasonable hours on business days
a. The by-laws cannot limit the
inspection to merely a few days during
the year chosen by the directors
b. It should also be made as not to
impede the efficient operations of the
corporation
(2) Purpose – Under the Code, the purpose is
material; and it is presumed to be a proper
one and the corporation cannot refuse to
grant him the right on its mere belief that
his motive is improper
a. However, the corporation may raise
affirmative defenses to justify its
refusal
b. The three valid justifications would be:
i. Person demanding to examine
and copy excerpts from the
corporation’s records and minutes
has improperly used any
information secured through any
prior examination of the records
or minutes of such corporation or
any corporation
ii. Person was not acting in good
faith
iii. Inspection is not for a legitimate
purpose
WHO MAY EXERCISE RIGHT
The right of inspection belongs to every
director, trustee, stockholder, or member
personally. But they may be exercised
personally or through an agent, who may be
an accountant or lawyer or any other person
who can help him understand and interpret the
records
REMEDIES AVAILABLE IF INSPECTION
REFUSED
(1) Writ of mandamus
a. When it is granted, the writ should
be directed against the corporation,
but the secretary thereof may be
joined as party defendant
(2) Injunction
(3) Civil and criminal offenses against officer or
agent who refused to allow inspection
W.G. PHILPOTTS V. PHIL.
MANUFACTURING CO.
November 8, 1919, Street, J.
FACTS: Philpotts is a stockholder in Phil.
Manufacturing Co. He filed a petition for a writ
of mandamus to compel PMC to allow him or his
agent to inspect and examine the corporation’s
books. The corporation raised the defense that
the Corporation Law only allows him to exercise
the right to inspect personally and not through
an agent.
RULING: Petition granted. The right of
inspection given to a stockholder in the the
Corporation Law can be exercised either by
himself or by any proper representative or
attorney in fact, and either with or without the
attendance of the stockholder. The general rule
is that what a man may do in person, he may
do through another; and there is nothing in the
statute that would justify in qualifying said
right.
PARDO v. HERCULES LUMBER CO.
1924, Street, J.
FACTS: Pardo, a stockholder of Hercules
Lumber Co, expressed his desire to inspect the
records and business transactions of the
company at certain times, but this was denied
by the company secretary, Ferrer. He then filed
this case for mandamus. The corporation raised
the defense that as per Sec. 10 of its by-laws,
the right of inspection must be exercised on
days annually fixed by the BOD; and the BOD
issued a Resolution stating that the books are
open for examination from March 15-25, at
appropriate hours.
RULING: Mandamus granted. The resolution
and the by-laws are invalid.
Reasonable hours” as provided by the law
merely means that it must be made at
reasonable hours on business days throughout
the year, and not merely during some arbitrary
period of a few days.
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GONZALES v. PNB
May 30, 1983, Vasquez
FACTS: Gonzales instituted 3 cases as a
taxpayer against PNB involving 3 transactions of
PNB. Later, it acquired 1 share of PNB, and then
instituted 3 cases as taxpayer and stockholder
against the bank and its BOD. He then sent a
letter to the bank president, requesting to look
into the records of the bank regarding certain
transactions. This was denied, hence he filed a
case for mandamus to compel PNB to allow him
to look into the books and records of PNB. CFI
dismissed.
RULING: Gonzales is not entitled to the right of
inspection. The circumstances under which he
acquired one share of stock in the respondent
bank purposely to exercise the right of
inspection do not argue in favor of his good faith
and proper motivation. He sought to be a
stockholder in order to pry into
transactions entered into by the
respondent bank even before he became a
stockholder. His obvious purpose was to
arm himself with materials which he can
use against the PNB for acts done by the
latter when Gonzales was a total stranger
to the same. He could have been impelled by a
laudable sense of civic consciousness, but it
could not be said that his purpose is germane to
his interest as a stockholder. Also, the
inspection sought to be exercised would be
violative of the provisions of PNB’s charter.
DOCTRINE: Under the Corporation Code, it is
now required as a condition for the right of
inspection that the one requesting it must not
have been guilty of using improperly any
information through a prior examination, and
that he must be acting in good faith and for a
legitimate purpose in making his demand.
VERAGUTH v. ISABELA SUGAR CO.
1932, Malcolm, J.
FACTS: Veraguth, a stockholder and director of
Isabel Sugar Co, filed a case against the
directors of Isabel Sugar to show case why they
refused to notify him of BOD meetings, and to
place at his disposal, for inspection at
reasonable hours, the documents and books of
the corporation.
RULING: Petition denied. Directors of a
corporation have the unqualified right to inspect
the books and records of the corporation at all
reasonable times. Such right cannot be denied
on the ground that the director or shareholder is
on unfriendly terms with the officers of the
corporation. However, a director or
stockholder does not have an absolute
right to secure certified copies of the
minutes until these have been written up
and approved by the directors. The Court
does not think that anything improper occurred
when the secretary declined to furnish certified
copies which had not been approved.
GOKONGWEI v. SEC
April 11, 1979, Antonio, J.
FACTS: Gokongwei sought to inspect several
documents of SMC, among other those the
latest balance sheet of San Miguel International
(SMI), a wholly-owned foreign subsidiary of
SMC.
RULING: Gokongwei should be allowed to
examine the books considering that SMC wholly
owns the foreign subsidiary.
DOCTRINE: Where a corporation owns
approximately no property except the shares of
stock of subsidiary corporations which are
merely agents or instrumentalities of the
holding company, the legal fiction of distinct
corporate entities may be disregarded and the
books, papers and documents of all the
corporations may be required to be produced for
examination, and that a writ of mandamus may
be granted, as the records of the subsidiary
were, to all intents and purposes, the records of
the parent even though the subsidiary was not
named as a party.
SLAY v. POLONIA PUBLISHING CO.
1930, Sharpe, J.
FACTS: Slay, owner of 1 stock, filed a petition
for mandamus to permit him to inspect the
books when he was denied by the corporation.
Corporation argued that the stockholder was an
agent of its competitor, who sought to ruin the
corporation.
RULING: While under the current law, the
purpose of a stockholder in inspecting is
presumed to be valid, the corporation may set
up facts to show that the stockholder’s purpose
is proper. Under the circumstances (Slay being
an agent of a competitor), the writ of
mandamus should be denied. While a
stockholder has an absolute right to inspect,
mandamus is a discretionary writ, which will not
be issued to enforce such right except for a just
cause and proper purpose.
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DOCTRINE: Before the enactment of the
provision granting the right of inspection, under
common law, the stockholder must prove that
his motives were lawful and proper, to be
allowed access to the records and documents.
At present, the law no longer contains any such
limitation on the part of the stockholder to
prove that his motives were lawful and proper.
It is therefore to be assumed that the request is
made for a proper purpose, and that the
stockholder is acting in good faith, and only
seeking to protect his own interests.
However, when a stockholder’s request is
denied, and he seeks mandatory relief
(mandamus), and the corporation sets up facts
from which it appears that his purpose is not
proper, but is instead inimical to the best
interest of the corporation, the writ of
mandamus shall not be issued.
KLEIN v. SCRANTON LIFE INSURANCE CO
March 11, 1940, Stadtfeld, J.
FACTS: Klein is a stockholder of Scranton Life
Insurance. He asked the corporation several
times that he be allowed to examine its books
so that he may ascertain the value of his shares
and also that he may copy a list of the
shareholders in order to solicit proxies for voting
at the annual shareholders’ meeting. His
requests were denied except in one occasion
(allowed to inspect for two hours but not
allowed to make notes).
RULING: Klein has the right to inspect the
books of the company, at a proper time, and in
a proper way so as to not unduly interfere with
the operation of the business, even though his
only object be to ascertain whether the business
has been properly conducted. Such a right is
necessary for the protection of stockholders.
The books and papers of a corporation are the
common property of all the stockholders. It is
not necessary for a stockholder to aver
mismanagement or fraud to obtain his right to
inspect corporate records. There is no evidence
to sustain a finding that the examination of the
books was sought for speculative purposes,
rather than for the reasons averted in the bill.
The law presumes that the list is desired for a
proper purpose, and he who denies this has the
burden of clearly and explicitly averring and
proving that he is right.
YUJUICO v. QUIAMBAO
January 29, 2007, Sandoval-Gutierrez, J.
FACTS: Yujuico was elected president of
STRADEC, replacing Quiambao. But after the
BOD meeting, Quiambao et al removed the
corporate records of STRADEC from the office
and was deposited in Equitable PCI Bank.
Months later, it was withdrawn and brought to
STRADCOM, but was again deposited, this time
with Export and Industry Bank. Yujuico et al.
then filed a criminal case against Quiambao et
al alleging that Quiambao refused to turn over
the corporate records upon Yujuico’s demand.
MTC dismissed the case and affirmed by RTC,
ruling that the act of refusing to allow inspection
of the stock and transfer book is not punishable
as an offense under the Corporation Code.
RULING: Petition dismissed.
First, the Court ruled that the RTC erred in
ruling that the refusal to allow inspection is not
punishable. While Section 74 of the Corporation
Code expressly mentions the application of
Section 144 only in relation to the act of
“refus[ing] to allow any director, trustees,
stockholder or member of the corporation to
examine and copy excerpts from [the
corporation’s] records or minutes,” the same
does not mean that the latter section no longer
applies to any other possible violations of the
former section. There is no cogent reason why
Section 144 cannot be made to apply to
violations of the right of a stockholder to inspect
the stock and transfer book of a corporation
under Section 74 given the already unequivocal
intent of the legislature to penalize violations of
a parallel right (inspection of records).
Despite this, the case should be dismissed. A
criminal action based on the violation of a
stockholder’s right to examine or inspect the
corporate records and the stock and transfer
book can only be maintained against
corporate officers or any other persons
acting on behalf of the corporation.
Respondents do not fall under any of the
categories above. Yujuico failed to establish that
Quiambao were acting on behalf of STRADEC.
PETs are not actually invoking their right to
inspect under Sec. 74. What they seek to
enforce is the proprietary right of STRADEC to
be in possession of such records and book. Such
right, though certainly legally enforceable by
other means, cannot be enforced by a criminal
prosecution based on a violation of Sec. 74.
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CHAPTER X: DERIVATIVE SUITS
Three Types of Suits:
(1) Individual Suits
(2) Class Suits
(3) Derivative suits
NATURE AND BASIS OF DERIVATIVE SUIT:
DISTINGUISHED FROM INDIVIDUAL AND
REPRESENTATIVE SUIT
• It is a suit by a shareholder to enforce a
corporate cause of action. The corporation is
a necessary party to the suit, and the relief
which is granted is a judgment against a
third person in favor of the corporation
(Chua v. CA, 2004)
• It is a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it, or protect/vindicate
corporate rights whenever the officials of
the corporation refuse to sue, or the ones to
be sued, or has control of the corporation.
(Sundiang and Aquino)
• Suits of stockholders based on wrongful or
fraudulent acts of directors or other
persons.
REQUISITES FOR DERIVATIVE SUIT [Sec.
1, Rule 8, Interim Rules on Intra-
Corporate Disputes]
(1) The person filing must be a stockholder
or a member at the time the acts or
transactions subject of the action
occurred at the time the action was filed
(2) He must have exerted all reasonable
efforts and alleges the same with
particularity in the complaint, to exhaust
all remedies available under the AOI, by-
laws, or rules governing the corporation
or partnership to obtain the relief he
desires
(3) No appraisal rights are available for the
act/s complained of
(4) The suit is not a nuisance/harassment
suit
(5) The action must be brought in the name
of the corporation
PASCUAL v. OROZCO
1991, Trent, J.
FACTS: Pascual, stockholder, brought a
derivative suit against the directors of the bank
for allegedly defrauding the latter. These acts,
however, were committed before Pascual
became a stockholder of the bank. The
directors filed a demurrer questioning Pascual’s
standing.
RULING: Pascual has a right to maintain a suit
on behalf of the bank as to the 1st cause of
action, but not ss to the 2nd cause of action
since they occurred before he became a
stockholder.
It is clear that Pascual, by reason of the fact
that he is a stockholder in the bank
(corporation) has a right to maintain a suit for
and on behalf of the bank, but the extent of
such a right must depend upon when,
how, and for what purpose he acquired
the shares which he now owns.
Sound reason and good authority sustain the
rule that a purchaser of stock cannot complain
of the prior acts and management of the
corporation. The weight of authority seems to
be that a person who did not own stock at the
time of the transactions complained of cannot
complain or bring a suit to have them declared
illegal.
In this case, Pascual, before he acquired the
shares, was not injured or affected in any
manner by the transactions set forth in the 2nd
cause of action. His vendor could have
complained, but he chose not do so.
DOCTRINE: A stockholder in a corporation
who was not such at the time of the
transactions complained of, or whose shares
had not devolved upon him since by operation
of law, cannot maintain suits of this character,
unless such transactions continue and are
injurious to the stockholder, or affect him
especially and specifically in some other way.
EVANGELISTA v. SANTOS
May 19, 1950, Reyes, J.
FACTS: Evangelista et al, minority
stockholders filed an action against the
principal officer of the corporation for damages
due to mismanagement of corporate affairs;
prayed that they be paid the value of their
respective participation in the corporate assets
on the basis of the value of the stocks held by
them. TC dismissed the complaint for failure to
state a cause of action.
RULING: The stockholders did not have the
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right to bring the action for their own benefit
because injury complained of is primarily to
the corporation, so that the suit for the
damages claimed should be by the corporation
rather than by the stockholders, or by the
stockholders on behalf of the corproation. The
stockholders may not directly claim those
damages for themselves for that would result
in appropriation by, and the distribution among
them of part of the corporate assets before the
dissolution of the corporation and the
liquidation of its debts and liabilities,
something which cannot be legally done.
LIKEN v. SHAFFER
1946, Graven, District Judge
FACTS: Liken et al. filed a case against Shaffer
et al, directors and officers of Shores-Mueller
Company, claiming that RESPs despoiled the
company of its assets by means of fraudulent
and collusive receivership proceedings and
receiver’s sale. They prayed that the properties
sold be restored to the corporation, and that
the RESPs render an accounting. 2 cases were
previously filed by different stockholders
against Shaffer et al. on the same grounds,
where the Court ruled in favor of Shaffer et al.
RULING: Case should be dismissed on the
ground of res judicata. The general rule is that
a judgment of a defendant or defendants in a
stockholder’s derivative suit operates as a bar
in favor of such defendant/s on the same claim
or cause of action in a subsequent
stockholder’s derivative suit by other
stockholders.
KEENAN v. ESHLEMAN
1938, Layton, C.J.
FACTS: Stone, which was engaged in the
business of financing small companies, had
Sanitary as one of its clients, Eventually, Stone
failed, and its assets, including 4,500 shares of
stock of Sanitary were transferred to
Consolidated who, in turn, transferred all of its
stocks to Keenan and Brewer. So K&B gained
control of both Sanitary and Consolidated. A
resolution was then adopted by Sanitary where
it agreed to pay $300/month as management
fees to Consolidated, which essentially went to
K&B. So K&B received double compensation –
(1) from Sanitary as mgmt fees, (2) from
Consolidated as its officers. The minority
shareholders of Sanitary then filed a bill for
accounting to recover the amounts received by
K&B as management fees from Sanitary.
While the bill was pending, the majority
stockholders ratified the resolution. The
lower court decreed restitution in full
notwithstanding waiver.
RULING: Lower Court’s ruling affirmed. The
action here was a derivative one, brought on
behalf of the corporation, and the complaint
and the defenses are to be considered
as though the corporation itself were suing the
defendants. If such were the action, releases
to the individual defendants by one or more
stockholders would be without legal effect, and
in a derivative suit, such as this, releases,
ratifications or waivers are equally
ineffective. To permit recovery to be
diminished by an amount in proportion to the
stockholdings of ratifying directors would tend
to encourage fraud and weaken, if not destroy,
the efficacy of a stockholder’s action to correct
a corporate action. To allow petitioners to
retain a part of the misappropriations in
proportion to the stock interest of ratifying
stockholders would be to permit ratification of
illegal acts to that extent.
DOCTRINE: Generally, where the action is a
derivative one, brought for the benefit of a
going corporation, equitable principles demand
that the theory of the action be recognized and
that the whole recoverable amount be decreed
to be paid to the corporation, notwithstanding
releases, ratifications or waivers after the
event.
OTIS v. PENNSYLVANIA R. CO.
1944, Kalonder, J.
FACTS: In a derivative suit brought by Otis &
Co. against P.R.R. and P.R.O. companies (the
latter allegedly were remiss in failing to sue to
rescind sale of bonds, see Chapter VIII for
facts), Otis wanted to strike out the answers of
P.R.R. and P.R.O.
RULING: The corporations may join as party
defendants and may therefore file an answer.
The all important question when the
corporation seeks to defend is that of the
nature of the complaint and the interest of the
corporation in the controversy.
Even under the well-known theory of the
nature of the stockholders’ suit, that there are
two causes of action combined (one versus the
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corporation and another versus the individual
defendants), the defendant corporations here
have a right to defend their refusal to sue.
It must be kept in mind that this is the
stockholders’ secondary action and inherent in
such action is the corporations’ prior failure to
enforce an alleged right. The stockholders’
action is critical of the corporation’s
management and the corporations should have
a right to answer, subject to some exceptions
where the essence of the action is fraud of the
directors or management.
REPUBLIC BANK v. CUADERNO
March 30, 1967, Reyes, J.
FACTS: Perez, a stockholder of Republic Bank
filed a derivative suit against Cuaderno
(Governor of Central Bank) et. al. and BD of
Republic Bank. He alleged that the Chairman,
Roman, engaged Cuaderno to be technical
consultant in order to protect Roman from
prosecution for issuing spurious loans. Roman
and the BD’s defense was that these were
corporate acts which Perez cannot interfere
with.
RULING: Perez may bring the derivative suit.
An individual SH is permitted to file a
derivative suit on behalf of the corporation to
protect or vindicate corporate rights, whenever
the officials of the corporation refuse to sue, or
are the ones to be suid, or hold the control of
the corporation. In such actions, the suing SH
is considered a nominal party while the
corporation is the real party in interest.
The suit was justified here because it was futile
to demand action from the corporation given
that all the members of the Board were
nominees and creatures of Roman.
Should the corporation be joined as party
plaintiff or defendant? Yes. Regardless if it is a
plaintiff or defendant, what is important is that
the corporation should be made a party in
order to make the cour’s judgment binding
upon it, and thus bar future relititagion of the
issues.
REYES v. TAN
September 30, 1961, Labrador, J.
FACTS: Reyes, a SH of Roxas-Kalaw Textile
Mills, Inc., sued the BD for approving a
purchase of what were supposedly raw
materials for the textile mill but were actually
finished products purchased from a company
with which Dalamal, a Director, had interest.
Reyes also asked for appointment of a
receiver.
RULING: The derivative suit is justified. A
breach of trust by the Board was committed
when they consented to the misuse of dollar
allocations to buy finished products instead of
raw materials.
Where corporate directors are guilty of a
breach of trust and intracorporate remedy is
futile or useless, a SH may institute a suit in
behalf of himself and other SHs and for the
benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the
corporation and indirectly upon the SHs.
Also, the appointment of a receiver was not
only expedient but also necessary to restore
the faith and confidence of the Central Bank in
the administration of the corporation’s affairs,
which would lead to restoration of the dollar
allocation that is essential to operate the
textile mills.
CHASE v. CFI
October 29, 1966, Dizon, J.
FACTS: Chase, a minority stockholder of
AMPARTS, sued the majority stockholders and
directors of AMPARTS for breach of trust, with
application to appoint a receiver. The lower
court found the defendants guilty and ordered
that Chase have access to AMPARTS records,
to have a temporary veto right in all
management decisions, and that the directors
file a bond to answer for damages to Chase,
but did not appoint a receiver.
RULING: The orders of the lower court are
justified. Where corporate directors are guilty
of breach of trust and intracorporate remedy is
futile, the minority stockholders may resort to
the courts for appropriate relief and,
incidentally, ask for the appointment of a
receiver for the protection of their rights. The
discretion of the court to appoint a receiver
should be exercised with great caution and
only when the necessity therefor is clear.
The orders of the lower court are all sound so
appointing a receiver is not necessary.
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HOLMES v. CAMP
1917, Scott, J.
FACTS: Doe Run Lead Company held majority
of shares of stock of St. Joseph Lead Company
but St. Joseph held these in trust for Doe Run.
Jones, the VP of Doe Run, who is also an
officer and director of St. Joseph Lead
Company, purchased St. Joseph shares of
stock owned by Doe Run, which he secretly
knew were of higher value. Holmes, a minority
shareholder of Doe Run, along with other
plaintiffs, filed a derivative suit vs Jones. The
other plaintiffs are former stockholders of Doe
Run who exchanged their shares for St. Joseph
shares causing 97% of Doe Run shares to be
held by St. Joseph. The defendants alleged a
misjoinder of parties because the fraud was
committed on Doe Run, the real owner of the
shares, yet the plaintiffs are mostly
shareholders of St. Joseph.
RULING: A stockholder of a holding company
(St. Joseph) may file a derivative suit on behalf
of the subsidiary (Doe Run).
Representative actions of stockolders are not
brought for their benefit but for the
corporation. The part which a stockholder plays
is purely that of an instigator. The cause of
action is of the corporation and the recovery
must run in its favor.
Under these circumstances, it is not easy to
see why a stockholder in a holding company
may not maintain such an action for the
benefit of the subsidiary, and thus indirectly for
the benefit of the holding company. His stock
interest in the holding company is sufficient to
relieve him from the imputation of being a
mere inofficious and impertinent meddler.
GAMBOA v. VICTORIANO
May 5, 1979, Concepcion, J.
FACTS: Lopue et. al. sued Gamboa et. al. to
nullify issuance of 823 shares of Inocentes de
la Rama Inc. in favor of Gamboa et. al. It was
alleged that the shares were sold in violation of
Lopue et. al.’s pre-emptive rights and without
approval of the BD. Gamboa et. al.’s defense
was that Lopue et. al. should have filed a
derivative suit.
RULING: A derivative suit is not proper. An
individual stockholder is permitted to institute
a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or
vindicate corporate rights whenever the
officials of the corporation refuse to sue or are
the ones being sued or hold control of the
corporation. In such actions, the suing
stockholder is regarded as a nominal party
with the corporation as a real party in interest.
In this case however, the plaintiffs are alleging
and vindicating their own individual interests or
prejudice and not that of the corporation.
SAN MIGUEL v. KHAN
August 11, 1989, Narvasa, J.
FACTS: Delos Angeles assailed a Board
Resolution of SMC assuming a loan incurred by
its remote subsidiary, Neptunia Corporaiton.
He filed a derivative suit in behalf of SMC with
the SEC. The other directors assail his standing
because he only owned shares which were
issued to him by PCGG from its sequestered
shares as qualifying shares to be in the BOD.
Additionally, the 20 shares he owned
personally cannot fairly and adequately
represent the interest of the minority of the
corporation.
RULING: Delos Angeles has standing. The
bona fide ownership by a stockholder in his
own right suffices to invest him with the
standing to bring a derivative suit for the
benefit of the corporation. It is undisputed that
apart from the qualifying shares given to him
by the PCGG, he owns 20 shares in his own
right. The number of his shares is
immaterial since he is not suing in his own
behalf, or for the protection or vindication of
his own particular right, or the redress of a
wrong committed against him individually but
in behalf and for the benefit of the corporation.
VILLAMOR v. UMALE
September 24, 2014, Leonen, J.
FACTS: Balmores, a stockholder of PPC filed
an intra-corporate controversy complaint
against the company’s directors alleging that
the directors committed acts amounting to
fraud or misrepresentation detrimental to the
interest of the Corporation. RTC dismissed the
case because of failure to implead PPC as an
indispensable party. CA reversed and held that
the case filed was actually a derivative suit.
RULING: CA decision set aside. The action is
not a derivative suit. A derivative suit is an
action filed by stockholders to enforce a
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corporate action. It is an exception to the
general rule that the corporation's power to
sue is exercised only by the board of directors
or trustees. Under the Interim Rules of
Procedure for Intra-Corporate Controversies,
the minority shareholder suing for and on
behalf of the corporation must allege in his
complaint that he is suing on a derivative
cause of action on behalf of the corporation
and he must have exhausted all available
remedies, and that the appraisal right is not
available. In this case, Balmores’ action failed
to satisfy these 3 requirements.
Moreover, Balmores’ action was not for the
benefit of the corporation. His intention was to
vindicate his individual interest and not PPC’s
or a group of stockholders.
ANG v. ANG
June 19, 2013, Carpio, J.
FACTS: Nancy Ang, sister of brothers Roberto
and Juanito Ang, and her husband Theodore,
agreed to extend a loan to the Ang brothers
and their spouses to settle the obligations of
Sunrise Marketing Bacolod and other
corporations owned by the Ang family. Sps.
Ang later demanded repayment. Juanito and
wife acknowledged the debt but Roberto did
not. Hence, Juanito filed a derivative suit
against Roberto Ang and his wife, alleging that
his refusal to settle 50% share of the total
obligation to Sps. Ang will affect the financial
viability of SMBI..
RULING: Case dismissed. The suit filed by Ang
is a mere harassment suit. It failed to comply
with the requisites for a derivative suit under
the Interim Rules. The complaint failed to show
that the acts of Roberto and his wife resulted
to the detriment of SMBI. Moreover, the loan
was not a corporate obligation, but rather a
personal debt of the Ang brothers with their
spouses. And while Juanito and wife
acknowledged the debt, it cannot bind SMBI as
it was done in their personal capacities. SMBI
was never a party to the settlement
agreement.
CUA v. TAN
December 4, 2009, Chico-Nazario, J.
FACTS: Philippine Racing Club Inc (PRCI),
corporation principally organized to carry on
the business of a racecourse, acquired two
properties – in Makati and Cavite. The
management later decided that it was best to
spin off the management and development of
the Makati property to a wholly owned
subsidiary. It then opted to acquire JTH Davies
Holding Inc. A BOD meeting was held for this
matter, and all the directors, except RESP
Dulay, approved the acquisition of shares of
JTH. A sale was then executed for the
acquisition of 99.5% of the OCS of JTH. The
Makati property was later approved the BOD to
be transferred to JTH. But before it could be
presented to the stockholders for approval,
RESPs Miguel et al, minority stockholders filed
a complaint, denominated as a derivative suit
with prayer for issuance of TRO/Injunction
against PRCI directors based on their alleged
schemes amounting to fraud or
misrepresentation. Cua et al allege that the
complaint did not constitute a valid derivative
suit because they failed to allege that they had
no appraisal right. Later, another set of
minority stockholders (TAN et al) filed a
complaint against Cua et al alleging the same
thing.
RULING: The suit filed by Miguel et al is not a
valid derivative suit. The acts complained of
were approved by the BOD and also by the
stockholders. As to the action filed by Tan et
al, it should be dismissed. The corporation
cannot bring subsequent suit against the
same defendants for the same cause of
action.
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