Bar Notes for Mercantile Law
personality separate and distinct from
I the persons composing it (Doctrine of
LETTERS OF CREDIT
A DEFINITION AND NATURE
B PARTIES TO A LETTER OF CREDIT
1 RIGHTS AND OBLIGATIONS
IV.
CORPORATION CODE
-Based primarily from the 2017 UP Review lecture of
Prof. Nilo Divina, notes of author and recent cases of
J. Bersamin. -
A. CORPORATION
1 DEFINITION
A corporation is:
§ an artificial being
§ created by operation of law
§ having the right of succession and
§ the powers, attributes and properties
o expressly authorized by law, or
o incident to its existence.
2 ATTRIBUTES
1. Artificial being
§ By legal fiction, the corporation is
considered a person and has a
Corporate Entity)
§ Thus, it can:
o Incur obligations and bring civil
and criminal actions.
o Acquire and possess property
of all kinds.
2. Created by operation of law
§ A corporation comes into being not by
agreement, but by law. The corporation
owes its existence from law.
§ While the parties may execute articles
of incorporation (which is an agreement
between the parties), the corporation is
not born unless the law wills it.
§ Under the 1935 Constitution and
onwards, Congress cannot create a
private corporation by legislation.
§ The Corporation exists because the
State allows it. It is thus a mere creation
of the State and requires state
recognition and concession (theory of
concession).
o V: Genossenchaft theory which
considers a corporation as a
social and legal entity,
independent of state
recognition and concession.
3. Right of succession
§ The corporation is capable of continued
existence. Its terms can be extended by
amending the articles of incorporation.
§ It is not immortal, but capable of
continued extended existence.
§ This also means that the corporation
exists despite changes in the
stockholders.
4. Powers, attributes and properties expressly
authorized by law or incident to its existence.
§ It can only exercise the powers
conferred to it by law.
§ Outside these powers, the act is
considered ultra vires.
3 OTHER BUSINESS ORGS
Single proprietorship
§ Has no legal personality separate from
the proprietor. So the assets and
obligations of the sole proprietorship
are the assets and obligations of the
proprietor.
§ The obligation then of the proprietor is
beyond limit unlike in a corporation
where the obligation of the shareholders
are limited to subscription.
1 of 20

Bar Notes for Mercantile Law
Term of For any period Only 50 years,
Sole Corporation existence stipulated extendible to
Proprietorship 50 more in
Liability Unlimited liability Limited to one instance
subscription. Firm name “Ltd.” Is required May adopt
Reporting Easy to manage Subject to a lot for a limited any firm name
And and control, no of requirements partnership provided it is
control record keeping as to records not identical
keeping, or deceptively
reportorial by similar
SEC and other Dissolution May be Can only be
laws. dissolved at any dissolved with
time by will or the consent of
2. Partnership any or all the State
§ Created by two or more persons who partners
bind themselves to contribute money, Laws governing Civil Code Corporation
property or industry to a common fund, Code
with the intention of dividing the profits
among themselves.
3. Joint account
§ This does not pertain to a bank
Basis Partnership Corporation
account.
Manner of Mere agreement Created by
§ A joint account is a form of corporation
creation of the parties law or still allowed under the Code of
operation of Commerce. The business is run by the
law managing merchant, which unlike a
Number of At least 2 At least 5 partnership; has no separate legal
incorporators personality.
Commencement From the From date of § This is an instance where two or more
of juridical moment of issuance of merchants contribute money, and run
personality execution of certificate of by one merchant, and profits are
contract incorporation divided by agreement.
Powers Any power Only powers
authorized as expressly, 4. Joint venture
long as not impliedly § This is a form of particular partnership.
contrary to law, granted and § A corporation may enter into a joint
morals, etc. incidental venture.
Management When Board of § Does a JV have a separate legal
management not trustees or personality from the persons/entities
agreed, every directors composing it?
partner is an o If a JV is created by mere
agent agreement, i.e. corporation
Effect of Partner can sue The suit must with a natural person, there is
mismanagement a co-partner be in the no resulting entity with legal
who name of the personality.
mismanages corporation o If a JV is entered into by a
Right of No right of Has right of
corporation with a natural
succession succession
person and they create a
succession
corporation for that purpose
Liability to third Partners are Stockholders
whereby the corporation
persons liable personally are liable only
contributes money and the
and subsidiarily to the extent
natural person creates the
for partnership of their
corporation, there is an entity
debts to third investment
with legal personality.
persons
Transferability of Delectus Stockholder [Bance] May a corporation enter into a
interest personae can transfer partnership?
his shares Generally no, a corporation cannot
without prior enter into a partnership except that it may enter
consent

2 of 20

Bar Notes for Mercantile Law
into a joint venture, which is a form of particular
partnership.
The rule is that a corporation should
only be bound by the acts of its Board. By
entering into a partnership, a corporation may be
bound by the acts a stranger, i.e. acts done by
the natural person who is a partner.
Thus, a corporation may only enter into
a joint venture and provided further that the
partnership agreement provides that the partners
will manage the partnership so that management
of the corporate interest is not surrendered.
B. CLASSES OF CORPORATIONS
1 STOCK and NON-STOCK
Stock Corporation, elements
§ Divided into shares
§ Authorized to distribute shares
The Articles of Incorporation (AoI) provides
that the authorized capital stock of ABC
Corporation is P1B. Is the same valid?
§ No, because it has to be divided into
shares.
AoI provies that ABC Corporation shall
distribute its assets to a charitable
corporation upon dissolution. It is also silent
as to the share distribution. Stock or non-
stock?
§ Stock. The fact that it is silent as to
dividend distribution does not make it
non-stock. Once the corporation is
dissolved, the properties belong to the
shareholders and they can do away with
the properties, as they like.
DE JURE, DE FACTO, ESTOPPEL,
2
BY PRESCRIPTION
De Facto Corporation
2a
Elements/Requisites
1. Organized under a valid law.
2. Bona fide compliance with the
formalities of law.
3. User of corporate powers;
4. SEC issuance of certificate of
incorporation.
[Bance] De Leon lists down (4) as part of the
requisites while Villanueva, Vitug and Divina do
not. There is no conflict though that a Certificate
of Incorporation is essential for there to be
considered a bona fide compliance with the
formalities of law.
Congress created a private corporation and
was allowed to exist for some time.
§ Is it a de facto corporation?
o No, it was not established
under a valid law.
§ Is it a de jure corporation?
o No. Congress cannot create a
private corporation.
§ Is it a corporation by estoppel?
o Yes.
Is there a bona fide compliance when the
corporation does not submit its by-laws?
§ Yes, Sawadjaan v. CA.
Sawadjaan v. CA, 2005
§ In case the corporation fails to submit
its by-laws on time, the same may be
considered a de facto corporation. A
corporation which has failed to file its
by-laws within the prescribed period
does not ipso facto lose its powers as
such. The SEC rules on
suspension/revocation details the
procedures and remedies that may be
avavailed of before an order of
revocation can be issued. The
revocation can not be ordered if there is
no showing that such procedure has
been initiated.
Liability of de facto corporations and
Directors/Officers
Are they liable as general partners?
§ No. The liability as general partners
apply to corporations by estoppel. The
liability of de facto corporation officers
are the same as a de jure corporation.
Essential:
§ A de facto corporation has all the
powers of a de jure corporation until the
STate questions its corporate existence.
Furthermore, you cannot attack the
existence of a de facto corporation in a
collateral proceeding. It may only be
attacked on a direct, quo warranto
proceeding initiated by the Solictor
General.
2b Corporation by Estoppel
Liability
3 of 20

Bar Notes for Mercantile Law
§ They are liable as general partners.
Macasaet v. Francisco Co.
Macasaet v. Francisco Co, 2013 (Bersamin)
§ Co, a retired police officer, sued Abante
Tonight, its publisher Macasaet and
other persons claiming damages for a
libelous article. The sheriff tried to serve
summons to the individual defendants,
twice in the same day but failed. Hence,
substituted service of summons were
made. Macasaet et al argue that
substituted service was improper, and
that Abante could not be impleaded as
it is neither a juridical or natural person.
Rule.
§ On service:
o Substituted service was proper
as the Macasaet et al. were
always out and not available.
The sheriff found that there
was no likelihood of the
petitioners going to the office
during the business hours, he
concluded that further
attempts would be futile. The
sheriff is allowed to resort to
substituted service should he
be unable to effect personal
service within a reasonable
time.
§ Abante Tonight is a corporation by
estoppel for having represented itself to
the reading public as a corporation
despite its not being incorporated. A
corporation by estoppel may be
impleaded as a party defendant
considering that it possesses attributes
of a juridical person; otherwise, it can
not be held liable for damages and
injuries it may inflict to other persons.
o Furthermore, the editorial box
indicated nothing about
Monica Publishing owning
Abante.
International Express Travel v. CA, 2000
§ Henry Kahn bought tickets from IET but
he didn’t pay. A case was filed against
him but he claimed that it was him, but
the corporation by estoppel who should
be liable. Is the contention proper?
§ No. When the petitioner (IET) is not
trying to escape liability from the
contract but rather the one claiming
from the contract, the doctrine of
corporation by estoppel is not
applicable. This 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.
[Bance] This is in relation to the
provision of law which states that the
third person cannot deny the existence
of the ostensible corporation if he has
dealt with such corporation.
Lozano v. Delos Santos, 1997
§ The presidents of two associations
agreed to consolidate but the
consolidation did not push through.
May the proposed consolidated
corporation be considered as
corporation by estoppel?
§ No. If the dispute only involves
members of the corporation, the
doctrine of corporation by estoppel
finds no application. Corporation by
estoppel is founded on principles of
equity and is designed to prevent
injustice and unfairness.
§ Where there is no third party involved
and the conflict arises only among
those assuming the form of a
corporation, who know that it has not
been registered, there is no corporation
by estoppel.
Pioneer v. CA, Border Machinery, 1989
§ If a corporation fails to materialize, are
the incorporators liable as general
partners?
§ Where persons associate themselves
and their organization is so defecive as
to come short of creating a corporation,
they become in legal effect partners
inter se, and their rights as members of
the company to the property acquired
by the company will be recognized.
§ However, such relation does not
necessarily exist, for ordinarily persons
cannot be made to assume the relation
of partners, as between themselves,
when their purpose is that no
partnership shall exist, and it should be
implied only when necessary to do
justice between the parties.
§ Thus, one who takes no part except to
subscribe for stock in a proposed
corporation which is never legally
formed does not become a partner with
other subscribers who engage in
business under the name of the
pretended corporation, so as to be
liable as such in an action for settlement
of the alleged partnership and
contribution.
4 of 20

Bar Notes for Mercantile Law
Who may be held liable as general partners?
§ GR: Only those who engaged in the
business are liable as partners. A
person who merely subscribed to the
stock and who did not represent himself
as part of the corporation is not liable.
§ EX: Lim Tong Lim case
Lim Tong Lim v. PH Fishing Gear, 1999
§ A partnership may be deemed to exist
among parties who agree to borrow
money to pursue a business and to
divide the profits or losses that may
arise therefrom, even if it is shown that
they have not contributed any capital of
their own to a "common fund." Their
contribution may be in the form of credit
or industry, not necessarily cash or
fixed assets.
§ Being partners, they are all liable for
debts incurred by or on behalf of the
partnership. The liability for a contract
entered into on behalf of an
unincorporated association or
ostensible corporation may lie in a
person who may not have directly
transacted on its behalf, but reaped
benefits from that contract.
3 DOMESTIC and FOREIGN
ABC Corporation is a corporation formed in
the US and composed entirely of Filipinos?
§ Is it a domestic or foreign corporation?
o It is foreign. The test is the
place of incorporation. If not
organized in the PH, it is a
foreign corporation regardless
of its composition.
§ Is it a foreign national and can invest in
other corporations?
o Yes, and it can even invest in
nationalized ventures.
4 CLOSE and OPEN
Close corporation
§ Does not mean that it is a family
corporation.
§ A close corporation has certain
characteristics.
Requirements for close corporation
The AoI must expressly provide for the
following:
1. Number of stockholders not to exceed
20.
2. Restriction: right of first refusal in favor
of the stockholder of the corporation;
and
3. The stocks cannot be listed in the stock
exchange nor should they be publicly
offered.
When may a close corporation not be
considered as one
§ A close corporation is not deemed a
close corporation whenever 2/3 of the
voting stocks or voting rights is owned
or controlled by another corporation
which is not a close corporation.
Corporations which cannot be a close
corporation
1. Mining
2. Oil
3. Stock exchanges
4. Banks
5. Insurance companies
6. Public utilities
7. Educational institutions
8. Other corporations declared to be
vested with public interest.
In a close corporation, you can sell properties
without a board resolution.
5 PUBLIC or PRIVATE
BSP V. COA, 2011
§ Not all corporations, which are not
government owned or controlled, are
ipso facto considered private
corporations as there exists another
distinct class of corporations or
chartered institutions which are
otherwise known as “public
corporations.” These corporations are
treated by law as agencies or
instrumentalities of the government
which are not subject to the tests of
ownership or control and economic
viability but to different criteria relating
to their public purposes/interests or
constitutional policies and objectives.
§ Hence, it is subject to audit.
1 GOCC
Is Red Cross a GOCC?
§ In Baloy v. Braganza, the Court held that
Red Cross is a GOCC and the
employees are under the CSC because
Red Cross has its own charter.
5 of 20

Bar Notes for Mercantile Law
§ In the later case of Gordon v. Liban,
where Liban filed a petition against
Gordon alleging that Gordon is deemed
resigned upon his assumption as
chairman of Red Cross. The Court held
that Red Cross is sui generis.
Liban v. Gordon, 2011
§ Although the Red Cross was created by
a special charter, it can not be
considered a GOCC in the absence of
the essential elements of ownership and
control by the government. It does not
have government assets and does not
receive any appropriation from
Congress. It is a non-profit, donor-
funded, voluntary organization, whose
mission is to bring timely, effective and
compassionate humanitarian assistance
for the most vulnerable without
consideration of nationality, race,
religion.
§ This does not mean that the charter of
PNRC is unconstitutional. PNRC has a
sui generis status. Although it is neither
a subdivision, agency or instrumentality
of the government, nor a GOCC or
subsidiary thereof, such a conclusion
does not ipso facto imply that the
PNRC is a private corporation within the
contemplation of the Constitution.
§ The PNRC enjoys a special status as an
important ally and auxiliary of the
government in the humanitarian field in
accordance with its commitments under
international law.
§ The Court cannot all of a sudden refuse
to recognize its existence, especially
since the issue of the constitutionality of
PNRC Charter was never raised by the
parties.
GOCC
§ A stock or nonstock corporation owned
and controlled by the government and
organized for a public function, whether
governmental or proprietary in nature.
Dennis Funa v. MECO, 2014
§ As the Philippines subscribes to the
“One China Policy,” the PH ended its
diplomatic relations with the
government of Taiwan. Despite this, the
PH and Taiwan maintain unofficial
relationship through the Taipei
Economic and Cultural Office and the
Manila Economic and Cultural Office
(MECO). Is MECO a GOCC?
§ SC: MECO is not a GOCC nor is it a
governmental entity; however, certain
transactions of MECO are subject to
audit jurisdiction of COA (verification
fees and consular fees)
§ GOCCs are stock or non-stock
corporations vested with functions
relating to public needs that are owned
and controlled by the government
directly or through installments. By
definition, three attributes make an
entity a GOCC:
o Its organization as stock or
nonstock corporation.
o The public character of its
function; and
o Government ownership over
the same.
§ Possession of all three attributes is
necessary to deem an entity a GOCC.
§ The MECO is not a GOCC because it is
not owned by the government. It was
organized as a non-stock corporation.
However, despite its non-governmental
character, it handles government funds
in the form of verification fees it collects
on behalf of DOLE and other consular
fees its collects. Hence, these accounts
of MECO should be audited by COA.
Carandang v. Desierto, 2011 (Bersamin)
§ Benedicto ceded ownership of 72% to
the government. But then, he changed
his mind and only said that it should be
31% of shares to the Government.
While the case was pending, the
General Manager was terminated.
Where should the case be filed?
§ SC: When a stockholder ceded to the
government shares representing 72% of
the voting stock of the corporation but
subsequently clarified that it should be
reduced to 32%, the corporation shall
not be considered government owned
and controlled until the quantification of
shares is resolved with finality.
§ Hence, the case should be filed with the
LA.
7 SOLE and AGGREGATE
Can a corporation sole acquire real properties
in the PH?
§ A corporation sole can acquire real
properties in the PH regardless of the
nationality of the bishop as long as 50%
of the members are Filipino citizens.
Can a corporation sole encumber or sell its
properties? Can the bishop do the same?
6 of 20
Bar Notes for Mercantile Law
The Bishop cannot sell or encumber the
property without court intervention, except when
the rules of the church or corporation sole allows
for the disposition or encumbrance of property.
The sale is not just unenforceable, but void for
lack of authority.
ABC Corporation, a corporation engaged in the
PH, is a public utility company. It has an
outstanding capital of 100,000, of which 60% is
owned by Filipinos and 40% is owned by aliens.
May ABC Corporation engage in the business of
public utility?

First Test: Liberal Control Test

C. NATIONALITY OF CORPORATIONS
ABC

Three tests
1. Place of incorporation 60,000 40,000
2. Control test
3. Grandfather rule

XYZ Aliens
1 INCORPORATION TEST
Primary test
§ This is the primary test, the nationality 60% 40%
of the corporation is determined by its
place of incorporation.
Filipino Aliens

2 CONTROL TEST
Control test
§ In certain cases, the control test is
employed in addition to the nationality
test.
§ This applies only in activities reserved to Under the first test, share belonging to
Filipinos, i.e. Nationalized activities. corporations or partnerships at least 60% of the
§ This test is employed where in capital of which is owned by Filipinos shall be
special/extraordinary circumstances considered as of PH nationality. There is thus no
involving: more need to further trace the ownership of the
o Exploitation of natural 60% of the Investing Corporation (XYZ
resources Corporation) since a corporation which is at least
o Ownership of land 60% Filipino owned is considered as Filipino.
o Operation of public utility
o War time
Rule II: Strict Control Test or Grandfather
Rule
3 GRANDFATHER RULE
Grandfather rule ABC
§ Under this rule, the nationality of the
stockholders is material in determining
the nationality of a corporation or its 90,000 10,000
compliance with our laws on
permissible foreign investment.
§ This is done by attributing the
nationality of second or even XYZ Aliens
subsequent tier ownership to determine
the nationality of the corporate
shareholder. 50% 50%

3a Illustration Filipino Aliens

7 of 20

Bar Notes for Mercantile Law
Under the strict control test or grandfather rule, if
the percentage of Filipino ownership is less than
60%, only the number of shares corresponding
to such percentage shall be counted as of PH
nationality.
In this case, as the investing corporation (XYZ) is
only 50% owned by Filipinos, only the number of
shares corresponding to such percentage shall
be counted as of PH nationality. Hence, only
50% of the 90,000 shares invested by XYZ
Corporation shall be considered of PH
nationality. Hence, only 45,000 out of 100,000
shares are owned by Filipinos, the remaining
55,000 owned by foreigners (45,000
corresponding to half of XYZ Corporation’s share
and 10,000 invested by foreigners in ABC
Corporation).
In this case, ABC corporation may not be
considered of Philippine nationality and hence, it
may not engage in the business of public utility.
Prevailing mode of determining nationality
§ The control test is still the prevailing
mode of determining whether or not a
corporation is a Filipino corporation and
may engage in nationalized activities.
Narra Nickel v. Redmond, 2015
§ In cases of nationalized activities, the
tests used are the control test and the
grandfather rule.
§ The control test can be applied jointly
with the Grandfather rule to determine
the observance of foreign ownership
restriction in nationalized economic
activities. The control test and the
grandfather rule are not incompatible.
Rather, these methods can be used
cumulatively in the determination of the
ownership and control of corporations
engaged in fully or partly nationalized
activities.
The grandfather rule, when applied:
1. When ownership of Filipinos in investing
corporation is less than 60%; and
2. On paper, the corporation is compliant
but there is doubt as to who has
“beneficial ownership” and control of
the corporation.
If the Corporation issues a mixture of shares,
should the 60-40 allocation be mirrored
across the board?
§ Yes, it must be mirrored, even if the
preferred shares are non-voting, it must
still be 60-40. (Gamboa v. Teves, 2011)
§ BUT: Herbosa v. Roy, 2016
o The 60-40 need not be
mirrored in each class of
shares. As long as 60% of the
voting shares and 60% of the
outstanding shares are owned
by Filipinos.
Gamboa v. Teves, 2011
§ Does capital refer to common shares or
to the total outstanding capital stock
(combined total of common and non-
voting preferred shares)?
§ SC: The term “capital” required in 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.
§ 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. The legal and
beneficial ownership of 60% of the OCS
must rest in the hands of Filipino
nationals in accordance with the
constitutional mandate.
§ In this case, the Court held that Filipinos
hold less than 60% of the voting stock
and earn less than 60% of the dividends
of PLDT, in contravention of the
Constitution.
Herbosa v. Roy, 2016
• After the Gamboa ruling, the SEC was
directed by the Court to implement the
said ruling in its determination of
whether a corporation is compliant with
the 60-40 rule. SEC then issued MC No.
8 which requires two concurring
elements for a corporation to be
considered Filipino-owned: (a) the total
number of outstanding shares of stock
entitled to vote in the election of
directors; AND (b) the total number of
oustanding shares of stock, whether or
not entitled to vote in the election of
directors. Was the same issued with
grave abuse of discretion?
• No, SEC-MC No. 8 clearly incorporates
the voting control test laid down in
Gamboa. In fact, Sec. 2 goes beyond
requiring a 60-40 ratio in favor of
Filipino nationals in the voting stocks; it
moreover requires the 60-40
percentage ownership in the total
8 of 20

Bar Notes for Mercantile Law
number of outstanding shares of stock,
whether voting or note.
• The insistence of petitioners that the
60% equity must be applied to each
class of shares is beyond the literal text
and contemplation of the Constitution.
The application of the 60-40 Filipino-
foreign ownership requirement
separately to each class of shares,
whether common, preferred non-voting,
preferred voting or any other class of
shares fails to understand and
appreciate the nature and features of
stocks as financial instrument.
D. CORPORATE
JURIDICAL PERSONALITY
1 DOCTRINE OF SEPARATE LEGAL ENTITY
1a Relevant cases
Filipinas Broadcasting Network v. Ago, 2005
§ Broadcaster called Ago Medical Center
a dumping ground, garbage, for moral
and physical misfits.
§ SC: A juridical person is generally not
entitled to moral damages because,
unlike a natural person, it cannot
experience physical suffering or such
sentiments as wounded feelings.
§ Nevertheless Ago is entitled to moral
damages if it is the victim of libel,
slander and defamation under Art. 2219
of the CC. Art. 2219 does not qualify
whether the plaintiff is a natural or
juridical person.
Stronghold v. Cuenca, 2013 (Bersamin)
§ A sued B for collection with prayer for
issuance of writ of attachment.
Properties of ABC Corporation of which
B is a majority stockholder were
attached. B filed a petition questioning
the attachment. Will the petition
prosper?
§ No, it was the corporation’s property
which were attached.
§ Stockholders are not the real parties in
interest to claim and recover
compensation for damages arising from
the wrongful attachment of corporate
assets. Only the corporation is the real
party in interest for that purpose.
Saverios v. Puyat, 2013
§ The mere fact that the same controlling
stockholder/officer signed the loan
document on behalf of the corporation
does not prove that he exercised
control over the finances of the
corporation. Neither is the absence of a
Board Resolution authorizing him to
contract the loan nor the Corporation’s
failure to object thereto support this
conclusion.
§ While he is the signatory of the loan and
the money was delivered to him, the
proceeds of the loan were intended for
the business plan of the corporation.
That the business plan did not
materialize is also not sufficient proof to
justify a piercing, in the absence of
proof that the business plan was a
fraudulent scheme to secure funds from
the lender.
EPG Construction v. CA, 1992
§ EPG entered into a contract with UP for
the construction of the UP Law Library.
Due to poor workmanship, UP sued
EPG Construction and Guzman,
§ SC: Only EPG is liable. The fact that
Ernesto Guzman owns 90% of the
shares is not sufficient reason to
disregard the separate personality of
the President and the Corporation.
Palay v. Clave
§ Where the corporation sold property on
installment which it then can no longer
deliver, the action for rescission by the
buyer should be direct against the
corporation, and not the President, for
the corporation has a personality
distinct and separate.
PNB v. Rittrato Group, 2001
§ PNB has a subsidiary in Hongkong. The
subsidiary entered into a mortgage
secured by property located in the
Philippines. The mortgage was signed
by PNB, as agent of the subsidiary.
Rittrato group filed an action for
injunction against PNB to stop the
foreclosure. Will the suit prosper?
§ No, for the lender is the subsidiary and
not PNB. The subsidiary has a separate
personality from the mother company.
The suit should have been filed against
PNB as agent and not PNB itself.
DBP v. Hydro Resources, 2013
§ PNB and DBP granted loans to
Marinduque Mining secured by
9 of 20

Bar Notes for Mercantile Law
properties of Marinduque Mining. After
foreclosure, no exercise of right of
redemption. Properties were acquired
by PNB and DBP which set up a new
company – transferring the foreclosed
assets to the new company. The
directors and officers of the new
company engaged a consultant but the
consultant was not paid. He sued the
new company, DBP and PNB. Will the
suit prosper?
§ The suit will prosper against the new
company, but not against DBP and
PNB. The fact that these two banks
own the new company does not make it
proper to disregard the separate
corporate personality.
Mere identity of directors and officers,
ownership in the corporation whether
controlling or not, is not enough to disregard
the separate personality of the corporation.
Sps. Nisce v. Equitable PCI Bank, 2007
§ Nisce obtained a loan with Equitable
(Main) Bank and at the same, it had a
placement with PCI Capital which is its
subsidiary. These two companies
merged and became Equitable PCI
Bank. Nisce argues that its deposit with
PCI Capital should be set off against its
loan with Equitable PCI. Is the
contention proper?
§ No, two separate personalities. The fact
that Equitable became the owner of PCI
Bank is not sufficient to disregard the
separate personality. The fact that a
corporation owns all of the stocks of
another corporation, taken alone, is not
sufficient to justify their being treated as
one entity.
Aznar v. PNB, 2011
§ RISCO Corporation ceased operation
due to business reverses and hence, its
stockholders, the Aznars, contributed
money to purchase three parcels of
land. The lands were registered under
the name of RISCO, while the amounts
contributed by Aznar was considered a
lien. The properties were later
mortgaged and foreclosed. Aznar
argued that there was a trust created as
evidenced by Minutes of the Meeting of
the Board Resolution. Does Aznar have
title over the property?
§ No, the stockholder only has an
inchoate right or interest over the
properties of the corporation. A
corporation has a personality separate
and distinct from those of its
stockholders and other corporations to
which it may be connected. (Discount
issues as to trust)
WPM v. Labayen, 2014
§ WPM entered into a management
contract with Labayen to rehabilitate
and operate the Quickbite restaurant.
To renovate the existing Quickbite
outlets, Labayen engaged the services
of CLN Engineering. CLN was not paid
in full and hence, it filed a case against
Labayen. Labayen in turn filed a case
against WPM and Manlapaz, the
chairman, president and treasurer of
WPM at the same time. Labayen argues
that WPM is a mere instrumentality of
Manlapaz.
§ SC: Even granting that the latter
exercise a certain degree of control over
the finances, policies and practices of
the company, in view of his position as
president, chairman and treasurer of the
corporation, such control does not
necessarily warrant piercing the veil of
corporation fiction since there was not a
single proof that the company was
formed to defraud another or that the
acting President was guilty of bad faith
or fraud.
Polymer Rubber v. Ang, 2013
§ Company closed shop one day after
receiving an adverse decision. The
claimant would like to hold the
directors personally. Are they?
§ No, it is too superficial to close the
company mainly due to the adverse
court decision. The closure of the
business a day after receiving the court
decision is not indicative of bad faith
that will make the directors liable with
the corporation.
§ To hold a director or officer personally
liable for corporate obligations, two
requisites must concur:
o It must be alleged in the
complaint that the director or
officer assented to patently
unlawful acts of the
corporation or that the officer
was guilty of gross negligence
or bad faith; and
o There must be proof that the
officers acted in bad faith.
Hacienda Cataywa v. Lorezo, 2015 (Peralta)
§ Workers filed a case against the
Hacienda and also impleaded another
10 of 20

Bar Notes for Mercantile Law
corporation and the owners of such
corporation alleging that they are the
real owners, and praying that the veil of
corporate fiction be pierced. The only
evidence presented was the SSS form
of the employee where the natural
person appeared as employer. Should
the veil of corporate fiction be pierced?
§ No, this does not prove, in any way, that
the corporation is used to defeat public
convenience, justify wrong, protect
fraud, or defend crime, or when it is
made as a shield to to confuse the
legitimate issues, warranting that its
separate and distinct personality be set
aside.
Customs v. Oilink, 2014 (Bersamin)
§ URC and Oilink had interlocking
directors when Oilink started its
business. URC also manifested that
Oilink is 100% owned by URC. The
Customs Commissioner wanted to
collect special duties, VAT and excise
taxes from URC, and later on with
Oilink. May Oilink be held liable for
URC’s tax liability?
§ No. There is no ground to pierce the veil
of corporate fiction. The court held the
three elements of the alter-ego test. In
this case, the Commissioner did not
establish that Oilink had been set up to
avoid the payment of taxes or duties, or
for purposes that would defeat public
convenience, justify wrong, protect
fraud, defend crime, confuse legitimate
legal or judicial issues, perpetrate
deception or otherwise circumvent the
law.
§ Besides, it is clear that coming after
Oilink was a mere afterthought as the
Commissioner first sought payment
only from URC and only later on
included Oilink.
1b Liability for torts
Can a corporation be criminally prosecuted?
§ Yes, but it cannot be imprisoned. Not all
penalties consist of imprisonment.
Hence, a corporation may be
prosecuted.
PNB v. CA, 1978
§ A corporation is civilly liable in the same
manner as natural persons for torts,
because the rules governing the liability
of a principal or master for a tort
committed by an agent or servant are
the same whether the principal or
master be a natural person or a
corporation, and whether the servant or
agent be a natuarl or artificial person.
§ A corporation is liable, therefore,
whenever a tortious act is committed by
an officer or agent under express
direction or authority from the
stockholders or members acting as a
body or, generally from the directors as
the governing body.
Ching v. Secretary of Justice
§ The officers cannot invoke separate
personality. The law makes them liable.
The fact that they did not receive the
proceeds or the goods is not sufficient
reason. The law (Trust Receipts Law)
makes them liable.
1c Recovery of Moral Damages
Filipinas Broadcasting v. Ago
§ A juridical person is generally not
entitled to moral damages because
unlike natural persons, it cannot
experience physical suffering.
Nevertheless, if a corporation’s claim for
moral damages arises in case of libel,
slander or any form of defamation, then
moral damages may be awarded. This
is because Art. 2219 does not qualify
whether the plaintiff is natural or
juridical person.
Meralco v. TEAM Electronics, 2007
§ The exception to the general rule that a
corporation is not entitled to moral
damages is when its reputation is
debased, resulting in its humiliation in
the business realm. But in such cases, it
is imperative for the claimant to present
proof to justify the award. Thus, where
the records are bereft of any evidence
that the name or reputation of a
corporation has been debased as a
result of Meralco’s act, which in this
case is the disconnection of the
electricity supply to the building of the
corporation (without written notice) due
to nonpayment of differential billing
representing unregistered consumption
for alleged tampering with the electric
meter, the corporation is not entitled to
moral damages.
2 Piercing the Corporate Veil
11 of 20

Bar Notes for Mercantile Law
Doctrine of Piercing the Corporate Veil
§ The doctrine that allows the State to
disregard for certain justifiable reasons
the notion or fiction that the Corporation
has a separate personality distinct and
separate from the persons forming it.
Elements/Characteristics of the Doctrine
1. It is a principle/doctrine.
2. It is only the State that can pierce the
veil.
3. The piercing is done for justifiable
reasons.
1. PRINCIPLE OR DOCTRINE
2. ONLY STATE MAY PIERCE THE VEIL.
2. Only the State may pierce the veil.
§ Only the State then can pierce the
corporate fiction.
§ In one case, where it was the sheriff
who pierced the corporate fiction by
levying on the properties of a
corporation for liabilities of the director,
the same was considered improper.
COURT JURISDICTION VIS-À-VIS PIERCING
Should the court first acquire
jurisdiction over the corporation
involved before its legal personality
may be disregarded? (Cases below)
Kukan v. Reyes, 2010
§ Kukan Inc. (Kukan) entered into a
contract with A to put up signages in
buildings in Makati. A was not paid and
filed an action with Kukan. Kukan was
judged in default. A then levied on the
properties of Kukan International
Corporation (KIC), prompting Kukan
International Corporation to file a Third-
Party claiming ownership of the
properties.
§ SC: The court cannot pierce the
corporation fiction against Kukan
International Corporation for a case
must first be filed and a full-blown
hearing conducted.
Goldline Tours, Inc. v. Lacsa, 2012 (Bersamin)
§ Lacsa was a graduate of Ago Medical
Center and boarded a Goldline Bus
operated by Travel and Tours, Inc.
which collided with a jeepney. The heirs
of Lacsa filed a complaint against Travel
& Tours Inc, the owner of Goldline bus.
Judgment rendered in favor of Lacsa.
During execution of the judgment,
Goldline Tours, Inc. filed a third party
claim claiming that the bus being levied
was its property and not that of the
defendant Travel&Tours, Inc. It is also
noted that Goldline Tours was
incorporated shortly after the filing of
the civil case by Lacsa. The Court
denied the third party claim claiming
that Travel&Tours, Inc. has been known
in Sorsogon as Goldline.
§ Can the judgment be rendered against
Travel Tour be executed against the
property of Goldline tours?
§ Yes, the RTC had sufficient factual
basis to find that Travel&Tours and
Goldine were one and the same entity,
specifically: (a) documents submitted by
Lacsa showing that Cheng who was the
operator of T&T was also the
President/Manager and incorporator of
Goldline; and T&T has been known in
Sorsogon as Goldline.
§ Bersamin held that Goldline must not be
shielded from liability under the final
judgment through the use of the
doctrine of separate corporate identity.
Truly, this fiction of law must not be
employed to defeat the ends of justice.
Livesey v. Binswanger, 2014
§ Livesey is an employee of CBB Corp.
He filed a labor case against the latter
but later on entered into a compromise
agreement where he shall be paid an
amount in installments. After paying a
few installments, the installments
ceased as the company ceased
operations. Livesey tried to execute
against CBB but the same was not
satisfied. He then tried to execute
against Binswanger, alleging that CBB
and Binswanger are one and the same.
He claimed that CBB stood for
Chesterton Blumenauer Binswanger.
The President and CEO of CBB is also
the President of Binswanger. May the
veil be pierced?
§ Yes, for there is an indubitable link
between CBB’s closure and
Binswanger’s incorporation. CBB
ceased to exist only in mae; it re-
emerged in the person of Binswanger
for an urgent purpose – to avoid
payment by CBB of the last two
installments as well as its other financial
liabilities. Livesey’s evidence showed
continuity of business operations from
CBB to Binswanger for (1) it holds office
12 of 20

Bar Notes for Mercantile Law
in the same building, on the same floor
where CBB once stood; (2) same key
officers performing same task; (3)
Binswanger’s takeover of CBB’s project
with PNB.
Pacific Rehouse v. CA and Export Bank, 2014
§ Export Bank Inc. (parent company)
owns EIB Inc., a stockbroker firm. EIB
Inc. sold shares without the consent of
the owners of the shares. The shares
could no longer be retrieved. Judgment
was rendered against EIB but no
property could be levied. The court then
issued an alias writ against Export
Bank. Is the same proper?
§ No, the Court held that doctrine of
piercing the veil of corporate fiction
comes to play only during the trial of the
case after the court has already
acquired jurisdiction over the
corporation. Hence, before this doctrine
can be applied, it is imperative that the
court must first have jurisdiction over
the corporation.
Pioneer Insurance v. Morning Star, 2015
§ Morning Star Corporation is the
accredited agent of International Air
Transport Association (ATA) whereby
Morning Star is required to report and
account for ticket sales to ATA. ATA
took out an insurance policy to assure
itself of payments. When Morning Star
defaulted, ATA demanded from its
insurer, Pioneer, the sum under the
policy. Pioneer then sued Morning Star
and its directors for a sum of money.
RTC ruled in favor of Pioneer but the CA
later modified the judgment by
absolving the directors. Was the CA
ruling proper?
§ Yes. Piercing the corporate veil in order
to hold corporate officers personally
liable for the corporation’s debts
requires that “the bad faith or
wrongdoing of the director must be
established clearly and convincingly as
bad faith is never presumed.
§ The fact that Morning Star has been
incurring huge losses and that it has no
assets at the time it contracted large
financial obligations to ATA cannot be
considered that the officers acted in
bad faith.
§ (As to other corporation linked with
Morning Star named as “Morning Star
Tour Planners, Inc.”
o Compliance with the
recognized modes of
acquisition of jurisdiction
cannot be dispensed with even
in piercing the veil of corporate
fiction. The insurer cannot hold
an unimpleaded corporation
liable as it would offend due
process.
Divina: Rule based similarity of facts of cases
§ There appears to be a lack of
conclusive yardstick as to when the
court may pierce the veil of corporate
fiction which has not been brought to its
jurisdiction by summons or other
recognized modes of acquiring
jurisdiction.
3. FOR JUSTIFIABLE REASONS
What are the areas where the
doctrine applies?
Types of piercing application (When piercing
available)
1. Defeat of public convenience, as when
the corporate fiction is used as a vehicle
for the evasion of an existing obligation
(“equity piercing”);
2. Fraud cases, as when the corporation is
used to justify a wrong, protect a fraud,
or defend a crime (“fraud piercing”);
3. Alter ego cases, as when a corporation
is merely a farce since it is a 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 (“Alter
Ego piercing or instrumentality test”)
1. To defeat public convenience
§ When used to evade payment of
obligations.
Villarama v. Pantranco, 1968
§ Villarama sold the transit, with the
agreement including a restriction to
engage in the same business for 10
years. He later put up a corporation
owned by his wife and children, and the
corporation engaged in the same
business.
§ SC held that the personality may be
pierced for the corporation was set up
to evade an obligation.
2. Fraud
AC Ransom v. NLRC
13 of 20

Bar Notes for Mercantile Law
§ AC Ransom was a respondent in a labor
case and while the case was pending, it
set up a runaway corporation and
transferred all the assets to the new
corporation. Can the new corporation
be held liable?
§ SC: Yes, as the new corporation was
set up to perpetuate fraud. Considering
that the corporation was set up while
the case was pending, manned by the
same directors and officers, ain the
same premises and ran the same
business, no other conclusion may be
drawn.
Times Trans v. Sotelo, 2005
§ Corporation sold all its assets to the
daughter of the owner. Hence, the
laborers were unable to claim from
company. May the veil be pierced?
§ SC: Yes, set up to perpetrate fraud.
3. Alter Ego or Instrumentality test
Three-pronged test in determining
applicability of piercing the veil based on alter
ego or instrumentality doctrine (elements of
alter ego test)
1. 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. Such control must have been used by
the defendant to commit fraud or
wrong, to perpetuate the violation of a
statutory or other positive legal duty, or
dishonest and unjust act in
contravention of plaintiff’s legal right;
and
3. The control and breach of duty must
have proximately caused the injury or
unjust loss complained of.
EFFECTS
What are the effects when you pierce
the veil?
1. In case of persons, they are bound by the
obligations of the corporation.
Lanuza v. BF Corporation, 2014
§ This involves the construction of
Shangri-la Mall. The construction
agreement contains an arbitration
clause but the directors and officers of
the corporation refuse to attend
arbitration. May they be compelled to
submit to arbitration?
§ Yes. The directors may be compelled to
submit to arbitration based on the
contract entered into by the
corporation. If there is allegation of bad
faith, there is an attempt to violate the
corporate fiction, then they may be
considered one and the same and
hence, the directors may be compelled
to participate.
2. In case of corporations, one and the same
entity.
Heirs of Fe Tan Uy v. International Exchange
Bank, 2013
§ International Exchange Bank granted
loans to Hammer Corporation, which
was secured by properties of Goldkey
Development Corporation (third-party
mortgagor). For failure of Hammer to
pay, the bank foreclosed the properties
of Goldkey. Furthermore, Goldkey was
also made liable for the deficiency. Is
the same proper?
§ Yes. While a third party mortgagor is
liable only up to the extent of the value
of the mortgaged property, such third
party mortgagor may be required to pay
the deficiency between the loan
obligation and the proceeds if it is only
an instrumentality or alter ego of the
borrower corporation.
§ The Court treated the two corporations
as one because: (a) both are family
corporations controlled by the same
shareholder; (b) share the same office
and practically transact business from
the same place; (c) had a common
President; (d) PNs were signed by the
same person as President of both
borrower corporation (Hammer) and
mortgagor corporation (Goldkey); and
(e) the assets of the two corporation are
co-mingled.
E. INCORPORATION and
ORGANIZATION
Steps
1. Submit the required documents.
a. Articles in conformity with the
requisites prescribed by the
Code.
b. Adoption or execution of by-
laws.
14 of 20

Bar Notes for Mercantile Law
c. Treasurer’s affidavit stating Incorporator Corporator
that 25% has been subscribed Named in the AoI and Not named in the AoI
of which 25% has been paid. signs the same nor signs the same
d. Undertaking to change Not les than 5, nor No limit
corporate name if similar to more than 15
existing corporation. Must be natural Not necessary, i.e.
e. Verification slip that it is not persons; natural or juridical
similar to an existing corporate Necessarily Not necessarily
name. corporators incorporators
f. Bank certificate as to capital
requirements, and that it is Nautica Canning v. Yumul, 2005
placed in bank. § It is possible for a business to be wholly
g. Endorsement of BSP, in case owned by one individual because the
of banks. validity of its incorporation is not
h. Registration Statement that affected when such individual gives
contains the authorized capital nominal ownership of only one share of
stock, directors, subscribers. stock to each of the other four
2. Pay the corresponding fee. incorporators. As between the
3. Certificate of incorporation issued. corporation on the one hand, and its
shareholders and third persons on the
1 NUMBER AND QUALIFICATIONS other, the corporation looks only to its
books for the purpose of determining
who its shareholders are.
Basic principles
§ Corporations cannot exercision
profession which requires qualifications 2 CORPORATE NAME
that only natural persons may possess.
When confusing or similar
Alfarfara (Samahan ng mga Optometrist) v. To fall within prohibition as to similar or
Acebedo, 2002 confusing corporate names, 2 elements must
§ Samahan ng mga Optometrist sa Cebu exist to bar adoption:
filed an injunction against Acebedo 1. Complainant corporation acquired a
Optical to prevent it from practicing the prior right over the corporate name;
profession. 2. The proposed name is identical or
§ SC: Acebedo is not practicing a confusingly similar or is deceptive or
profession. The fact that Acebedor hires contrary to law.
optometrists who practiced their
profession in the course of their “Corporation,” “Incorporated,” or
employment in Acebedo’s optical shops abbreviations
did not mean that it was itself engaged § Must be included in the corporate
in the practice of optometry. name, or else, it will be rejected by the
SEC.

1a Incorporators GSIS Family Bank-Thrift Bank v. BPI Family

Bank, 2015
Qualifications § Petitioner’s corporate name is “GSIS
1. Of legal age Family Bank – A Thrift Bank” and
2. Not less than 5 and not more than 15 respondent’s corporate name is “BPI
• Except: Family Bank.” Is it similar or confusingly
i. Corporation sole similar?
ii. Non-profit, non-stock § SC: Yes, the only words that distinguish
corporations. the two are “BPI,” “GSIS,” and “Thrift.”
3. Natural persons The first two words are merely
• Except: acronyms of the proper names by which
i. Cooperatives; and the two corporations identify
ii. Rural banks. themselves; and the third word simply
4. Majority are PH residents describes the classification of the bank.
5. At least one share of stock must be The overriding consideration in
under their name. determining whether a person, using

15 of 20

Bar Notes for Mercantile Law
ordinary care and discrimination, might
be misled is the circumstance that both
petitioner and respondent are engaged
in the same business of banking.
§ The likelihood of confusion is
accentuated in cases where the goods
or business of one corporation are the
same or substantially the same or
substantially the same to that of another
corporation.
Industrial Refractories v. CA, 2002
§ Refractories Corporation of the
Philippines is confusingly similar with
Industrial Refractories Corporation of
the Philippines. Being the prior
registrant, RCP has acquired the right to
use the word “Refractories” as part of
its corporate name.
PCI Javier V. CA, 2005
§ Court cannot impose on a bank that
changes its corporate name the
obligation to notify a debtor of such
change absent any law, circular or
regulation requiring it. The formal
notification is therefore, discretionary on
the bank. It remains to be an internal
policy that banks may or may not
adopt.
Should a case be dismissed because the
corporation filed the same under its former
name?
§ No, NM Rothschild v. Lepanto.
NM Rothschild v. Lepanto, 2011
§ While the SC stand by in its
pronouncement on the importance of
the corporate name, it shall not go so
far as to dismiss a case filed by the
proper party using its former name
when adequate identification is
presented.
Mere change in corporate name does not
create a new corporation
Zuellig Freight v. NLRC, 2013
§ Mere change in the corporate name is
not considered under the law as the
creation of a new corporation. Verily,
the amendments of the Articles of
Incorporation changing the corporate
name did not produce the dissolution of
the former as a corporation.
Lyceum of the Ph v. CA
§ Lyceum of the Philippines cannot enjoin
other schools from using Lyceum as
part of their name. It is a generic name
which refers to a school.
3 CORPORATE TERM
What is the term of a corporation?
§ It is the terms specified in its Articles of
incorporation, but it cannot exceed 50
years.
PNP v. CFI, 1992
§ Once the term expires, there is no more
need to file a petition for dissolution.
The corporation is deemed ipso facto
dissolved.
What is the remedy of the corporation if the
term expires? Can the corporation file an
extension during the liquidation?
§ No. A corporation can only extend its
terms during its life. The remedy of a
corporation whose term has expired is
to reincorporate.
§ However, the assets of the defunct
corporation are not transferred
automatically. The assets should still be
liquidated and transferred.
Chu v. IAC
§ The stockholders should assign their
rights to the properties to the new
corporation as their subscriptions to the
new corporation.
4 MINIMUM CAPITAL STOCK
MSCI-NACUSIP v. NWPB, 1997
§ Not all funds or assets received by the
corporation can be considered paid-up
capital, for this term has a technical
signification in Corporation Law which
is the portion of the authorized capital
stock of the corporation, subscribed
and then actually paid.
What are the minimum capital requirements
and subscription requirements to set up a
corporation?
§ At least 25% is subscribed, 25% of
which must be paid.
Is it important that each subscriber pay 25%
of his subscription?
§ No, as long as 25% of the whole
subscription is paid.
16 of 20

Bar Notes for Mercantile Law
The rule: The standing of stockholders is
determined by his subscription and not by his
paid subscription.
When should the balance of his subscription
be paid?
§ On the due date provided in the
contract of subscription. If there is a
due date, demand is not necessary.
§ If there is NO due date, it must be paid
upon call.
Illustration: Juan subscribed to 100,000 worth
of shares and paid only 25,000. The balance was
due on June 1, 2016. On June 15, 2016, there
was a board meeting.
§ Juan can still vote for he is not yet a
delinquent subscriber.
§ If on June 21, the corporation declared
cash dividends:
o Juan can receive cash
dividends. Holders of unpaid
shares have all the rights as
long as not yet declared
delinquent.
o The entire 100,000 shares is
entitled to cash dividends.
o The corporation CANNOT
apply the cash dividends
against the unpaid
subscription because the
shares of Juan are not
delinquent shares, merely
unpaid shares.
Nationalized activities and Filipino capital
requirement
Mass Media 100%
Retail If paid up capital is at
least USD2.5M,
foreigners may
engage.
5 ARTICLES OF INCORPORATION
a Nature and Function
Gala v. Ellice Agro-Industrial, 2003
§ If the corporation’s purpose as stated in
the AoI is lawful, then the SEC has no
authority to inquire whether the
corporation has purposes other than
those stated, and mandamus will lie to
compel it to issue the certificate of
incorporation.
Lanuza v. CA
§ AoI provides that A has 300 founder
shares and x number of shares. But the
stock and transfer book only provides
for 89 founder shares and reduced
number of common shares. How many
shares does A have?
§ SC: The quorum is based on the totality
of the shares which have been
subscribed and issued, whether it be
founders shares or common shares. To
base the computation solely on the
obviously deficient, if not inaccurate
stock and transfer book and completely
disregarding the AoI would work
injustice to the owners and/or
successors in interest of the said
shares.
Forest Hills v. Gardpro, 2014 (Bersamin)
§ Members of Forest Hills are given
playing rights. Corporate members are
entitled to designate a nominee. Under
the by-laws, Forest Hills is entitled to
charge a “transfer fee” of 10,000 for
every change in the designated
nominees of a corporation. This is
different from the 60,000 transfer fee for
corporate members for each transfer of
stock in the club’s books. Gardpro
changed its nominees. Is it required to
pay the P60k transfer fee or the
P10,000 transfer fee for change of
designated nominees?
§ Only the P10,000 fee for change of
nominee. It is Gardpro who is the real
member of Forest Hills, and not its
nominees. Hence, when Gardpro
decided to replace its designated
nominees, it should not be required to
pay membership fees again as it has
already paid such fees for the original
designated nominees. As the real Club
members, respondent should not be
assessed membership fees every time it
changes its nominees.
Illustration: The AoI stated: “Toho Marketing
Company. Principal location: Metro Manila.
Capital stock: 1B.
§ Is its name valid?
o No, there must be
“Corporation” or
“Incorporated” or its
abbreviation in the corporate
name.
§ Is the principal office valid?
17 of 20

Bar Notes for Mercantile Law
o No, it must be specific.
§ Is the capital stock valid?
o No, it must be divided into
shares.
b Contents
Hyatt Elevators v. Goldstar Elevators, 2005
§ The venue was improperly laid because
the principal office of Hyatt as stated in
its AoI which is in Makati. Instead, the
case was filed in Mandaluyong where
Hyatt transferred its operations. Since
the principal place of business of a
corporation determines its residence or
domicile, then the place indicated in
Hyatt’s articles of incorporation
becomes controlling in determining the
venue of the filing of a case.
c Amendment
Requirements for amending the AoI
1. It must be approved by majority of the
board in a meeting called for that
purpose.
2. Approved by at least 2/3 of the
oustanding capital stock.
Can the term be extended by mere approval
of majority of board or referendum or without
a stockholder’s meeting?
§ No, for extension of term, there must be
a meeting called for that purpose.
Turner v. Lorenzo Shipping, 2010 (Bersamin)
§ Lorenzo Shipping decided to amend its
AoI to remove the stockholders pre-
emptive rights to newly issued shares of
stock. The petitioners voted against the
amendment and demanded payment of
their shares.
§ If the corporation amends the AoI to
deny preemptive right, can a 1. Names of incorporators
stockholder exercise his appraisal right?
o Yes, in matters affecting
substantial rights or restricting
the rights of the stockholders,
appraisal right is allowed.
§ Can the stockholder be paid the fair
value shares even if there is no surplus
profit?
o No. The Code provides that no
payment shall be made unless
the corporation has
unrestricted retained earnings
in its books to cover the
payment.
§ May they recover if the corporation
earned profit during the pendency of the
case?
o No, for the presence of
unrestricted retained earnings
after does not retroact to the
time when such was required
by law.
May the amendment to deny the stockholders
preemptive right be made by mere
referendum?
§ Yes.
Grounds for disapproval of AoI and
amendments
1. Non-conformity with the form
prescribed by the Code.
2. Purposes contrary to law, Constitution,
morals, public order or public policy.
3. Affidavit of treasurer is false
4. Ownership equity (for nationalized
corporations) is not complied with.
5. Other grounds
a. Fraud in procuring certificate of
application
b. Non-fulfillment of requirements
and reports required by SEC.
c. Violation of any rule, rules and
regulations of SEC.
Can the SEC inquire as to the purposes of the
Corporation, other than those specified in the
Articles of Incorportion (Can it go beyond the
4-corners of the application)?
§ No, the SEC must take at face value the
Articles of Incorporation. If it turns out
later on that it was incorporated for a
contrary purpose, then the corporate
franchise may be revoked accordingly.
d Non-amendable Items
The following items cannot be amended
2. First set of directors and subscribers
3. Initial treasurer
4. Original subscription
5. Place and date of execution of the first
AoI.
An accomplished fact cannot be amended.
6 ISSUANCE OF CERTIFICATE
18 of 20

Bar Notes for Mercantile Law
Corporation acquires legal personality upon
issuance of certificate of incorporation under
its official seal.
Illustration: A contributed to the proposed
corporation real property received by treasurer-
in-trust. While the application is pending, H, the
real owner filed an action against the
corporation. Will the same prosper?
§ No, the suit will not prosper for it has
not yet acquired a legal personality. It
should be the treasurer-in-trust who
should be sued.
7 ADOPTION OF BY-LAWS
a Nature and Function of By-laws
Gokongwei v. SEC, 1979
§ A corporation has the inherent power to
adopt by-laws for its internal
government, and to regulate the
conduct and prescribe the rights and
duties of its members towards itself and
among themselves in reference to the
management of its affairs.
Citibank v. Chua, 1993
§ Corporate powers may be directly
conferred upon corporate officers or
agents by statute, the AoI, the by-laws
or resolution or other act of the BoD.
Since the by-laws are a source of
authority for corporate officers and
agents, a resolution of the Board
appointing an attorney-in-fact to
represent and bind it during the pre-trial
conference of the case at bar is not
necessary because its by-laws allow its
officers – the Executing Officer and
Secretary Pro-Term – to execute a
power of attorney to a designated bank
officer clothing him with authority to
direct and manage corporate affairs.
Loyola Grand villas v. CA, 1997
§ Non-filing of the by-laws will not result
in automatic dissolution of the
corporation. Under the law, the SEC is
empowered to ‘suspend or revoke”
after proper notice and hearing, the
franchise or certificate of registration of
a corporation’ on the ground inter alia of
failure to file by-laws within the required
period.
b Requisites of valid by-laws
c Binding effects
F.
CORPORATE POWERS
G.
BOARD OF DIRECTORS & TRUSTEES
1 DOCTRINE OF CENTRALIZED MNGT
Doctrine of centralized management
§ Corporate powers are exercised by a
group of persons called the BoD.
Tri-level Hierarchy of Authority
§ There is tri-level hierarchy of authority in
the corporation for:
o The stockholders elect the
board.
o The board exercise corporate
powers; and
o The Board appoints the
officers.
§ Thus, the stockholders cannot supplant
the Board. Their only remedy is to
remove the BoD or elect a new one
when his term expires.
Illustration: The counsel of the corporation who
is also an admin manager entered into a
compromise. Is the same valid?
§ No, the agreement must be approved or
entered into pursuant to a power
granted by the Board.
BUSINESS JUDGMENT RULE
2
Business Judgment rule
§ The court and stockholders cannot
interfere with the Board on how to run
the corporation. Questions of policy and
19 of 20

Bar Notes for Mercantile Law
management are left to the sound § It may only be created by the AoI or by-
discretion of the BoD. As long as it is laws.
done in good faith, the acts are not
reviewable by the Court or revocable by Matling v. Coros, 2010
the stockdholders. § A position must be expressly mentioned
in the by-laws in order to be considered
Can the board create an office, department or as a corporate office. Thus, the creation
officer? See cases. of an office pursuant to or under a by-
law enabling provision is not enough to
Filipinas Port v. Go, 2007 make a position of a corporate office.
§ The BoD created the office of the VP
and the former President filed a
derivative suit alleging that the Board
does not have the power to create the
office. Furthermore, the former
President also questioned the creation
of an Executive Committee.
§ Can the BoD create an office?
o Yes. Under the business
judgment rule, the Board has
the sole authority to determine
policies, enter into contracts
and conduct the ordinary
business of the corporation.
The board is thus authorized to
create positions of Assistant
Vice Presidents and other
positions in accordance with
the regular business
operations of the corporation
as authorized by the
corporation by-laws, pursuant
to the Corporation Code.
§ Can the Board create an execom?
o No, if it will function as the
same Executive committee
under Sec. 35 of the
Corporation Code. This is
because the Executive
Committee is as powerful as
the Board itself and in effect
acting for the board itself
should be distingished from
other committees which are
within the competency of the
board to create at any time
and whose actions require
ratification and confirmation by
the Board.
o The creation of the Executive
Committee under Sec. 35
should be created by the by-
laws. But if it is merely named
“Executive Committee” but
does not have the same
function under Sec. 35, then
the BoD may create such.

Can the BoD create a corporate office?

20 of 20