Chapters I: Introduction (4) powers, attributes, and properties expressly authorized by law or

incident to its existence

Role of corporation in modern business
Advantages of Corporate Form
— Corporate form of business organization permits the combination
of funds from various sources to raise the big capital needed for 1. strong legal personality
large business and industrial enterprise 2. limited liability to investors
— Combination of resources+advantages of limited liability= a. limited to their shares
corporation’s popularity b. in partnerships—creditors can still go after individual
properties of the partners
Definition and attributes of a corporation 3. free transferability of units of investment
a. GR: shares of stocks can be transferred even without the
Section 2. Corporation defined. - A corporation is an artificial being created consent of other SHs
by operation of law, having the right of succession and the powers, attributes 4. Centralized management
and properties expressly authorized by law or incident to its existence. (2) a. Centralized in the Board
b. SHs are not agents and cannot bind the corporation
c. SHs are bound by management decisions and transactions
Four attributes: of the board, generally

(1) artificial being— Advantages Disadvantages

— By operation of law, becomes a being with the attributes of an
individual with full capacity to enter into contractual relations 1 Strong legal personality Complicated and costly formation
— a juridical person capable of having rights and obligations; 2 Limited liability Lack of personal element
— with a personality separate and distinct from its members or SHs 3 Free transferability Abuse of corporate management
— fundamental principle in corporate law: SHs are not personally 4 Centralized management Limited liability hits innocent
liable for corporate obligations, and cannot be liable beyond victims
their contribution to the corporate capital 5 Double taxation
— corporation not liable for personal obligations of its SHs
(2) created by operation of law
— from a strict legal point of view, a corporation cannot come into
Laws governing Philippine corporations
being by mere consent of the parties
o there must be a law granting it
Choice of Business organizations
o once granted, form the primary franchise of the corporation
o mere consent insufficient (1) The Individual Proprietorship
— State must have given its consent either through a special law or — works well for carrying simple or small businesses
general enabling law — owner’s unlimited personal liability
o General law: The Corporation Code — difficulties in expansion
o Compliance with the Code=acquisition of juridical — upon death business will have to stop and be liquidated
personality
— There must be an underlying contract among the individuals (2) The Partnership
forming the corporation — 1767: two or more persons bind themselves to contribute money
o Interplay of State grant and contractual relations or industry to a common fund, with the intention of dividing the
(3) right of succession profits among themselves
— Continued existence cannot be affected by any change in the — partners are personally liable for debts of the partnership; while
members or SHs SHs cannot be made to personally answer to corporate creditors
beyond the amount contributed

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 — much simpler to form a partnership: 5 incorporators vs. at least
2 for partners
— Personal relationship between and among partners based on
mutual trust and confidence
o Death or insolvency of partner will result in dissolution
o Corporations cannot be voluntarily dissolved except by 2/3
vote of stock + some State act, whether judicial or
administrative (SEC)
— Mere agreement is sufficient to give rise to a partnership v.
substantial compliance with the Corpo Code for corporations
— Management—every partner is an agent of the partnership, with
capacity to bind vs. centralized management in the BoD for
corporations
o SH has no voice in the management except to elect directors
(3) The Close Corporation
Section 96. Definition and applicability of Title. - 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 not be deemed a close corporation when at
least two-thirds (2/3) of its voting stock or voting rights is owned or
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 and corporations declared to be vested with
public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
— Small closely-knit group like a family
— They act and feel as partners but wishing to avail of limited
liability
— Most distinct characteristic: all or most SHs are active in the
corporate business either as directors or officers
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— “De facto partnership with a corporate shell”
o AOI of close corp can do away with a BOD
o Can vest management exclusively with the SHs
o SHs active in management are made liable for personal torts
o Business/industry imbued with public interest cannot be by a
close corporation
(4) The Joint Venture—a form of partnership and should be
governed by the law on partnerships
— Common defn: organization formed for some temporary purpose
— Community of interests, sharing of profits and losses, mutual
agency
— Formed for the execution of a single transaction, and is thus of a
temporary nature
— Form of partnership and should be governed by the law on
partnerships
— SC has ruled that a corporation can enter into a JV, but not a
partnership
— Separate juridical personality
— Mutual agency
— Unlimited liability
The Business Trust—a vesting of title to the assets of a business
enterprise in trustees who act as representative thereof, for the benefit of
others called the cestui que trust
— deed of trust which is easier and less expensive to constitute for
it is not bound by any legal requirements
— No separate juridical personality
— Governed by contract law and common law principles on trusts
Government regulation of corporations
By the Legislature
By the SEC
Union Glass v SEC. F: The complainant Carolina Hofileña is a stockholder of
Pioneer Glass Manufacturing Corporation, engaged in the operation of silica mines and
the manufacture of glass and glassware. Since 1967, Pioneer Glass had obtained various
loan accommodations from the Development Bank of the Philippines [DBP], and also
from other local and foreign sources which DBP guaranteed. As security for said loan
accommodations, Pioneer Glass mortgaged and/or assigned its assets, real and
personal, to the DBP, in addition to the mortgages executed by some of its corporate
officers over their personal assets. The proceeds of said financial exposure of the DBP
were used in the construction of a glass plant in Rosario, Cavite, and the operation of
seven silica mining claims owned by the corporation. Through the conversion into
equity of the accumulated unpaid interests on the various loans amounting to P5.4
million as of January 1975, and subsequently increased by another P2.2 million in 1976,
the DBP was able to gain control of the outstanding shares of common stocks of Pioneer
Glass, and to get two, later three, regular seats in the corporation's board of directors.
When Pioneer Glass suffered serious liquidity problems such that it could no longer
meet its financial obligations with DBP, it entered into a dacion en pago agreement with
the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full
satisfaction of the corporation's obligations in the total amount of P59,000,000.00.
Part of the assets transferred to the DBP was the glass plant in Rosario, Cavite, which
DBP leased and subsequently sold to herein petitioner Union Glass and Container
Corporation, hereinafter referred to as Union Glass. Hofileña filed a complaint before
the respondent SEC against the DBP, Union Glass and Pioneer Glass, asserting the
alleged illegality of the aforesaid dacion en pago resulting from: [1] the supposed
unilateral and unsupported undervaluation of the assets of Pioneer Glass covered by the
agreement; [2] the self-dealing indulged in by DBP, having acted both as
stockholder/director and secured creditor of Pioneer Glass; and [3] the wrongful
inclusion by DBP in its statement of account of P26M as due from Pioneer Glass when
the same had already been converted into equity. Union Glass moved for dismissal of
the case on the ground that the SEC had no jurisdiction over the subject matter or
nature of the suit.
I: W/N the SEC or the TC has jurisdiction over the suit of Hofilena
H: In the ordinary course of things, petitioner Union Glass, as transferee and possessor
of the glass plant covered by the dacion en pago agreement, should be joined as party-
defendant under the general rule which requires the joinder of every party who has an
interest in or lien on the property subject matter of the dispute. But since petitioner
Union Glass has no intra-corporate relation with either the complainant or the DBP, its
joinder as party-defendant in SEC Case No. 2035 brings the cause of action asserted
against it outside the jurisdiction of the respondent SEC, as delineated by Section 5 of
PD No. 902-A. This grant of jurisdiction must be viewed in the light of the nature and
function of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter
(SEC) "absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are grantees of primary franchise and/or license or
permit issued by the government to operate in the Philippines ... " The principal
function of the SEC is the supervision and control over corporations, partnerships and
associations with the end in view that investment in these entities may be encouraged
and protected, and their activities pursued for the promotion of economic development.
Otherwise stated, in order that the 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.
The fact that the controversy at bar involves the rights of petitioner Union Glass who
has no intra-corporate relation either with complainant or the DBP, places the suit
beyond the jurisdiction of the respondent SEC. The case should be tried and decided by
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the court of general jurisdiction, the Regional Trial Court. Since petitioner has no intra-
corporate relationship with the complainant, it cannot be joined as party-defendant in
said case as to do so would violate the rule or jurisdiction. Hofileñas complaint against
petitioner for cancellation of the sale of the glass plant should therefore be brought
separately before the regular court. The SC added however that for Hofileñas complaint
against Union Glass to prosper, final judgment must first be rendered in the issue of the
validity of the dacion en pago, which is a prejudicial question, the resolution of which is
a logical antecedent of the issue involved in the action against petitioner Union Glass.
But the Court held that the SEC had no jurisdiction over petitioner Union Glass Corp.,
impleaded as third party purchaser of the plant from DBP in the action to annul the
dacion en pago. The Court held that such action for recovery of the glass plant could be
brought by the dissenting stockholder to the regular courts only if and when the SEC
rendered final judgment annulling the dacion en pago and furthermore subject to
Union Glass' defenses as a third party buyer in good faith.
Abejo v dela Cruz. F: Case involves a dispute between the principal stockholders
of the corporation Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice paging
corporation," namely, the spouses Jose Abejo and Aurora Abejo vs. De la Cruz Abejo
(hereinafter referred to as the Abejos) and the purchaser, Telectronic Systems, Inc.
(hereinafter referred to as Telectronics) of their 133,000 minority shareholdings (for P6
million) and of 63,000 shares registered in the name of Virginia Braga and covered by
five stock certificates endorsed in blank by her (for P1,674,450.00), and the spouses
Agapito Braga and Virginia Braga (hereinafter referred to as the Bragas), erstwhile
majority stockholders. With the said purchases, Telectronics would become the
majority stockholder, holding 56% of the outstanding stock and voting power of the
corporation Pocket Bell. Telectronics requested the corporate secretary of the
corporation, Norberto Braga, to register and transfer to its name, and those of its
nominees the total 196,000 Pocket Bell shares in the corporation's transfer book, cancel
the surrendered certificates of stock and issue the corresponding new certificates of
stock in its name and those of its nominees. Norberto Braga, the corporate secretary
and son of the Bragas, refused to register the aforesaid transfer of shares in the
corporate books, asserting that the Bragas claim preemptive rights over the 133,000
Abejo shares and that Virginia Byaga never transferred her 63,000 shares to
Telectronics but had lost the five stock certificates representing those shares. This
triggered off the series of intertwined actions between the protagonists, all centered on
the question of jurisdiction over the dispute. The Bragas assert that the regular civil
court has original and exclusive jurisdiction as against the Securities and Exchange
Commission, while the Abejos and Telectronics, as new majority shareholders, claim
the contrary. Respondent Judge de la Cruz issued an order rescinding the order which
dismissed the complaint of the Bragas in the RTC, thus holding that the RTC and not
the SEC had jurisdiction. Respondent judge also revived the temporary restraining
order previously issued restraining Telectronics' agents or representatives from
enforcing their resolution constituting themselves as the new set of officers of Pocket
Bell and from assuming control of the corporation and discharging their functions.
The Abejos filed a MR, which motion was duly opposed by the Bragas, which was
denied by respondent Judge.
I: W/N the RTC, as claimed by the Bragas, has jurisdiction over the case or the SEC, as
claimed by the Abejos
H: The Court ruled that the SEC has original and exclusive jurisdiction over the dispute
between the principal stockholders of the corporation Pocket Bell, namely, the Abejos
and Telectronics, the purchasers of the 56% majority stock on the one hand, and the
Bragas, erstwhile majority stockholders, on the other, and that the SEC, through its en
banc Resolution of May 15, 1984 correctly ruled in dismissing the Bragas' petition
questioning its jurisdiction, that "the issue is not the ownership of shares but rather the
nonperformance by the Corporate Secretary of the ministerial duty of recording
transfers of shares of stock of the Corporation of which he is secretary." The SEC ruling
upholding its primary and exclusive jurisdiction over the dispute is correctly premised
on, and fully supported by, the applicable provisions of P.D. No. 902-A which
reorganized the SEC with additional powers "in line with the government's policy of
encouraging investments, both domestic and foreign, and more active public
participation in the affairs of private corporations and enterprises through which
desirable activities may be pursued for the promotion of economic development and, to
promote a wider and more meaningful equitable distribution of wealth.” The dispute at
bar, as held by the SEC, is an intracorporate dispute that 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 as erstwhile majority shareholders, to
perform his "ministerial duty" to record the transfers of the corporation's controlling
(56%) shares of stock, covered by duly endorsed certificates of stock, in favor of
Telectronics as the purchaser thereof. Mandamus in the SEC to compel the corporate
secretary to register the transfers and issue new certificates in favor of Telectronics and
its nominees was properly resorted to therefore.
The very complaint of the Bragas for annulment of the sales and transfers as filed by
them in the regular court questions the validity of the transfer and endorsement of the
certificates of stock, claiming alleged preemptive rights in the case of the Abejos' shares
and alleged loss of the certificates and lack of consent and consideration in the case of
Virginia Braga's shares. Such dispute clearly involves controversies "between and
among stockholders," as to the Abejos' right to sell and dispose of their shares to
Telectronics, the validity of the latter's acquisition of Virginia Braga's shares, who
between the Bragas and the Abejos' transferee should be recognized as the controlling
shareholders of the corporation, with the right to elect the corporate officers and the
management and control of its operations. Such a dispute and case clearly fall within
the jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A.
Insofar as the Bragas and their corporate secretary's refusal on behalf of the corporation
Pocket Bell to record the transfer of the 56% majority shares to Telectronics may be
deemed a device or scheme amounting to fraud and misrepresentation employed by
them to keep themselves in control of the corporation to the detriment of Telectronics
(as buyer and substantial investor in the corporate stock) and the Abejos (as substantial
stockholders-sellers), the case falls under paragraph (a). The dispute is likewise an
intra-corporate controversy between and among the majority and minority
stockholders as to the transfer and disposition of the controlling shares of the
corporation, falling under paragraph (b) of Sec 5 PD 902-A. As pointed out by the
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Abejos, Pocketbell is not a close corporation, and no restriction over the free
transferability of the shares appears in the Articles of Incorporation, as well as in the
bylaws 10 and the certificates of stock themselves, as required by law for the
enforcement of such restriction. As the SEC maintains, "There is no requirement that a
stockholder of a corporation must be a registered one in order that the Securities and
Exchange Commission may take cognizance of a suit seeking to enforce his rights as
such stockholder." This is because the SEC by express mandate has "absolute
jurisdiction, supervision and control over all corporations" and is called upon to enforce
the provisions of the Corporation Code, among which is the stock purchaser's right to
secure the corresponding certificate in his name under the provisions of Section 63 of
the Code.
An intra-corporate controversy is one which arises between a stockholder and the
corporation. There is no distinction, qualification, nor any exemption whatsoever. The
provision is broad and covers all kinds of controversies between stockholders and
corporations.
Effect of Corporation Code on Existing Corporations
Section 148. Applicability to existing corporations. - All corporations lawfully
existing and doing business in the Philippines on the date of the 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 two (2) years from the effectivity of this Code
within which to comply with the same. (n)
— Must be understood to be subject to the accrued or vested rights of the
existing corporation, its SHs and 3rd parties
— Any rights accrued or liabilities incurred prior to the effectivity of the
latter in favor of or against such corporation, its SHs must be respected
— Any additional requirements imposed by the Code must be complied
with within 2 years from its effectivity
Magalad v Premiere Financing Corporation (209 SCRA 261). F:
Premiere is a financing company engaged in soliciting and accepting money market
placements or deposits. On September 12, 1983 with expired permit to issue
commercial papers and with intention not to pay or defraud its creditors, Premiere
induced and misled Magalad into making a money market placement of P50,000.00 at
22% interest per annum for which it issued a receipt as well as two (2) post-dated
checks in the total sum of P51,079.00 and assigned to Magalad its receivable from a
certain David Saman for the same amount. Drawee bank dishonored the checks for lack
of sufficient funds to cover the amount. Despite demands by Magalad for the
replacement of said checks with cash, Premiere, for no valid reason, failed and refused
to honor such demands and due to fraudulent acts of Premiere. The TC found that
Magalad has fully established her claim that defendant had indeed acted fraudulently in
incurring the obligation and considering that no evidence has been adduced by the
defendant to contradict the same, judgment is hereby rendered ordering the defendant
to pay Magalad. Premiere contends that the Securities and Exchange Commission
(SEC) has exclusive and original jurisdiction over a corporation under a state of
suspension of payments. Magalad submits that the legal suit which she has brought
against Premiere is an ordinary action for damages with the preliminary attachment
cognizable solely by the RTC.
H: Considering that Magalad's complaint sufficiently alleges acts amounting to fraud
and misrepresentation committed by Premiere, the SEC must be held to retain its
original and exclusive jurisdiction over the case, despite the fact that the suit involves
collection of sums of money paid to said corporation, the recovery of which would
originally fall within the jurisdiction of regular courts. The fraud committed is
detrimental to the interest of the public and, therefore, encompasses a category of
relationship within the SEC jurisdiction. Otherwise stated, in order that the 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 so far as its franchise, permit or license to operate is concerned; and (d) among the
stockholders, partners or associates themselves (Union Glass & Container Corp. v. SEC,
126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987).
The fact that Premiere's authority to engage in financing already expired will not have
the effect of divesting the SEC of its original and exclusive jurisdiction. The expanded
jurisdiction of the SEC was conceived primarily to protect the interest of the investing
public. That Magalad's money placements were in the nature of investments in
Premiere can not be gainsaid. Magalad had reasonably expected to receive returns from
moneys she had paid to Premiere. Unfortunately, however, she was the victim of alleged
fraud and misrepresentation. Reliance by Magalad on the case of Union Glass &
Container Corp. v. SEC (126 SCRA 31), where the jurisdiction of the ordinary Courts
was upheld, is misplaced for, as explicitly stated in those cases, nowhere in the
complaints therein is found any averment of fraud of misrepresentation committed by
the respective corporations involved. The causes of action, therefore, were nothing
more than simple money claims. Further bolstering the jurisdiction of the SEC in this
case is the fact that said agency already appointed a Rehabilitation Receiver for
Premiere and has directed all proceedings or claims against it be suspended. This,
pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing that "upon appointment of a .
. . rehabilitation receiver . . . all actions for claims against corporations . . . under
receivership pending before any court, tribunal, board or body shall be suspended
accordingly." By so doing, SEC has exercised its original and exclusive jurisdiction to
hear and decide cases involving: "a) Petitions of corporations, partnerships or
associations to be declared in the state of suspension of payments.”
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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. (3a)
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. (n)
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. (n)
— 2 elements to become a stock corporation:
o capital stock divided into shares
o stock must be authorized to distribute dividends to its SHs
o because the main purpose of the corporation is to make
profits for its shareholders
— GR: a business corporation should organize as a stock
corporation
— Non-stock corporation: special kind of corporation with needs
different from those of stock corporations
CIR v Club Filipino. The "Club Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation, owning and operating a club house, a bowling alley, a golf course, and a
bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its
members and their guests. The bar-restaurant was a necessary incident to the operation
of the club and -its golf-course. The club is operated mainly with funds derived from
membership fees and dues. Whatever profits it had, were used to defray its overhead
expenses and to improve its golf-course. In 1951, as a result of a capital surplus, arising
from the re-valuation of its real properties, the value or price of which increased, the
Club declared stock dividends; but no actual cash dividends were distributed to the
stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage
tax on the gross receipts of its bar and restaurant. The Collector of Internal Revenue
assessed against and demanded from the Club, percentage taxes on its gross receipts as
well as fixed taxes and compromise penalty. The Club wrote the Collector, requesting
for the cancellation of the assessment. The request having been denied, the Club filed
the instant petition for review.
I: W/N the respondent Club is liable for the payment of the sum of P12,068.84, as fixed
and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax
Code, under which the assessment was made, in connection with the operation of its
bar and restaurant, during the periods mentioned
H: It has been held that the liability for fixed and percentage taxes, as provided by these
sections, does not ipso facto attach by mere reason of the operation of a bar and
restaurant. For the liability to attach, the operator thereof must be engaged in the
business as a barkeeper and restaurateur. The plain and ordinary of a business is
restricted to activities or affairs where profit is the purpose or livelihood is the motive,
and the term business when used without qualification, should be construed in its plain
and ordinary meaning, restricted to activities for profit or livelihood. Having found as a
fact that the Club was organized to develop and cultivate sports of all, class and
denomination, for the healthful recreation and entertainment of its stockholders and
members; that upon its dissolution, its remaining assests, after paying debts, shall be
donated to a charitable Philippine Institution in Cebu; that it is operated mainly with
funds derived from membership fees and dues; that the Club's bar and restaurant
catered only to its members and their guests; that there was in fact no cash dividend
distribution to its stockholders and that whatever was derived on retail from its bar and
restaurant was used to defray its overall overhead expenses and to improve its golf-
course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in
the business of an operator of bar and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant,
but such fact does not necessarily convert it into a profit-making enterprise. The bar
and restaurant are necessary adjuncts of the Club to foster its purposes and the profits
derived therefrom are necessarily incidental to the primary object of developing and
cultivating sports for the healthful recreation and entertainment of the stockholders
and members. That a Club makes some profit, does not make it a profit making club.
The fact that the capital stock of the respondent Club is divided into shares, does not
detract from the finding of the trial court that it is not engaged in the business of
operator of bar and restaurant. What is determinative of whether or not the Club is
engaged in such business is its object or purpose, as stated in its articles and by-laws. It
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is a familiar rule that the actual purpose is not controlled by the corporate form or by
the commercial aspect of the business prosecuted, but may be shown by extrinsic
evidence, including the by-laws and the method of operation.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit:
(1) a capital stock divided into shares and (2) an authority to distribute to the holders of
such shares, dividends or allotments of the surplus profits on the basis of the shares
held (see. 3, Act No. 1459). In the case at bar, while the respondent Club's capital stock
is divided into shares, nowhere in its articles of incorporation or by-laws could be found
an authority for the distribution of its dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock corporation, within the contemplation of the
corporation law. "A tax is a burden, and, as such, it should not be deemed imposed
upon fraternal, civic, non-profit, non-stock organizations, unless the intent to the
contrary is manifest and patent."
Manual R. Dulay Ent. Inc. v. CA (225S 678). Petitioner corporation through
its president, Manuel Dulay, obtained various loans for the construction of its hotel
project, Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money
from petitioner Virgilio Dulay to be able to continue the hotel project. As a result of said
loan, petitioner Virgilio Dulay occupied one of the unit apartments of the subject
property since 1973 while at the same time managing the Dulay Apartment as his
shareholdings in the corporation was subsequently increased by his father. Manuel
Dulay by virtue of Board Resolution No. 186 of petitioner corporation sold the subject
property to private respondents spouses, Maria Theresa and Castrense Veloso in the
amount of P300,000.00. The parties then executed a Memorandum to the Deed of
Absolute, giving Manuel Dulay within two (2) years or until December 9, 1979 to
repurchase the subject property for P200,000.00 which was however, not annotated.
Thereafter private respondent Maria Veloso, without the knowledge of Manuel Dulay,
mortgaged the subject property to private respondent Manuel A. Torres for a loan of
P250,000.00 which was duly annotated. The subject property was sold on April 1, 1978
to private respondent Torres as the highest bidder in an extrajudicial foreclosure, upon
default of Veloso to pay the loan. Veloso then executed a Deed of Absolute Assignment
of the Right to Redeem in favor of Manuel Dulay assigning her right to repurchase the
subject property from private respondent Torres. As neither private respondent Maria
Veloso nor her assignee Manuel Dulay was able to redeem the subject property within
the one year statutory period for redemption, private respondent Torres sought to
consolidate his ownership over the property. Petitioner Virgilio Dulay appeared in court
to intervene in said case alleging that Manuel Dulay was never authorized by the
petitioner corporation to sell or mortgage the subject property, and sought to cancel the
sheriff sale to Torres and regain possession of the property. TC rules ifo Torres, Veloso
et al. The corporation and Virgilio Dulay contend that the respondent court had acted
with grave abuse of discretion when it applied the doctrine of piercing the veil of
corporate entity in the instant case considering that the sale of the subject property
between private respondents spouses Veloso and Manuel Dulay has no binding effect
on petitioner corporation as Board Resolution No. 18 which authorized the sale of the
subject property was resolved without the approval of all the members of the board of
directors and said Board Resolution was prepared by a person not designated by the
corporation to be its secretary.
H: In the instant case, petitioner corporation is classified as a close corporation and
consequently a board resolution authorizing the sale or mortgage of the subject
property is not necessary to bind the corporation for the action of its president. At any
rate, a corporate action taken at a board meeting without proper call or notice in a close
corporation is deemed ratified 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 this case, petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which has a personality
distinct and separate from its individual stockholders or members, the veil of corporate
fiction may be pierced when it is used to defeat public convenience, justify wrong,
protect fraud or defend crime. The privilege of being treated as an entity distinct and
separate from. its stockholders or members is therefore confined to its legitimate uses
and is subject to certain limitations to prevent the commission of fraud or other illegal
or unfair act. When the corporation is used merely as an alter ego or business conduit of
a person, the law will regard the corporation as the act of that person. The Supreme
Court had repeatedly disregarded the separate personality of the corporation where the
corporate entity was used to annul a valid contract executed by one of its members.
Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to
private respondents spouses Veloso is null and void as the alleged Board Resolution No.
18 was passed without the knowledge and consent of the other members of the board of
directors cannot be sustained. Virgilio is very much privy to the transactions involved.
To begin with, he is an incorporator and one of the board of directors designated at the
time of the organization of Manuel R. Dulay Enterprises, Inc. In ordinary parlance, the
said entity is loosely referred to as a family corporation'. The nomenclature, if
imprecise, however, fairly reflects the cohesiveness of a group and the parochial
instincts of the individual members of such an aggrupation of which Manuel R. Delay
Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives namely,
three (3) children and their father whose name identifies their corporation.
Petitioner corporation is liable for the act of Manuel Dulay and the sale of the subject
property to private respondents by Manuel Dulay is valid and binding. The sale between
Manuel R. Dulay Enterprises, Inc. and the spouses Maria Theresa V. Veloso and
Castrense C. Veloso, was a corporate act of the former and not a personal transaction of
Manuel R. Dulay. This is so because Manuel R. Dulay was not only president and
treasurer but also the general manager of the corporation. The corporation, was a
closed family corporation, where the incorporators and directors belong to one single
family. It cannot be concealed that Manuel R. Dulay as president, treasurer and general
manager almost had absolute control over the business and affairs of the corporation.
NDC v Philippine Veterans Bank (192 SCRA 257). AGRIX executed ifo Phil
Veterans Bank a REM over 3 parcels of land. During the existence of the mortgage,
AGRIX went bankrupt. Veterans Bank than filed a claim with the AGRIX Claims
7
Committee for the payment of its loan credit. Agrix and NDC refused to recognize the
claim, invoking PD 1717 which ordered the rehabilitation of the Agrix Group of
Companies is administered by the National Development Company. Sec 4(1) thereof
provides all mortgages and other liens attached to the assets of the dissolved
corporations are hereby extinguished. Agrix proceeded to cancel the mortgage lien in
light of the PD. TC annulled the entire PD 1717. NDC appeals. It claims that since
Veterans Bank invoked questioned PD when it filed a claim with the Agrix Claims
committee, it is thus estopped from questioning the validity of the PD which also
provides that all mortgages attached to properties of Agrix shall be extinguished.
H: Estoppel does not apply where Veterans Bank invoked the questioned PD when Pres
Marcos was still absolute ruler and his decrees were absolute law. Not a single act or
issuance of Marcos was ever declared unconstitutional as long as he was in power.
In this case, Veterans Bank has not been paid a single centavo on its claim, which was
kept pending for more than 7 years. The new corporation, New Agrix Inc, is neither
owned nor controlled by the government. The DC was merely required to extend a loan
of not more than P10M to New Agrix Inc. it is entirely private and so should have been
organized under the Corporation Law. The Court thus declared the PD 1717 as
unconstitutional.
Does a defective incorporation result into a partnership? NO.
1. If parties intended to create a corporation, then a partnership
arrangement cannot be created in its stead since such is not
within their intent
2. Important differences between the corporation and partnership,
such as limited liability, centralized management, and easy
transferability of shares are by themselves strong factors to be
bound by a corporate agreement
Pioneer Insurance v CA (175 SCRA 668). F: In 1965, Jacob S. Lim was
engaged in the airline business as owner-operator of Southern Air Lines (SAL) a single
proprietorship. On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and
Lim entered into and executed a sales contract for the sale and purchase of two (2) DC-
3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. The 2 planes were delivered to Lim in Manila.
On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed and
issued its Surety Bond in favor of JDA, in behalf of its principal, Lim, for the balance
price of the aircrafts and spare parts. It appears that Border Machinery and Heavy
Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and Constancio Maglana contributed some funds used in the purchase of
the above aircrafts and spare parts. The funds were supposed to be their contributions
to a new corporation proposed by Lim to expand his airline business. Lim had duly
received the amount of P151,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject airplanes and
spare parts. The indemnitors then executed two (2) separate indemnity agreements in
favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL,
Bormaheco and the Cervanteses. The indemnity agreements stipulated that the
indemnitors principally bind themselves jointly and severally to indemnify and hold
and save harmless Pioneer from and against any/all damages, losses, costs, damages,
taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may
incur in consequence of having become surety upon the bond. Lim doing business
under the name and style of SAL executed in favor of Pioneer as deed of chattel
mortgage as security for Pioneer’s suretyship. Lim defaulted on his subsequent
installment payments prompting JDA to request payments from the surety. Pioneer
paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial
foreclosure of the said chattel mortgage. The Cervanteses and Maglana, however, filed a
third party claim alleging that they are co-owners of the aircrafts. Pioneer also filed an
action for judicial foreclosure with an application for a writ of preliminary attachment
against Lim and respondents, the Cervanteses, Bormaheco and Maglana. After trial on
the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants. CA modified the trial court's decision
in that the plaintiff’s complaint against all the defendants was dismissed. In all other
respect the trial court's decision was affirmed. Lim asserted that as a result of the failure
of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim
to incorporate, a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution.
I: What legal rules govern the relationship among co-investors whose agreement was to
do business through the corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest? How are the losses to be treated in situations where
their contributions to the intended 'corporation' were invested not through the
corporate form?
H: 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. Where persons associate themselves together under articles to purchase property to
carry on a business, and their organization is so defective as to come short of creating a
corporation within the statute, 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 a 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. A partnership relation between certain stockholders and other
stockholders, who were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for payment of debts illegally
contracted by the latter.
In this case, it was established by the evidence contrary to Lim’s postulations, that
Cervantes, Bormacheo, and Maglana contributed the amount needed by Lim to put up
the corporation as he promised, which he received. It is therefore clear that the
petitioner never had the intention to form a corporation with the respondents despite
his representations to them. This gives credence to the cross-claims of the respondents
to the effect that they were induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the petitioner reneged on their
agreement. Necessarily, no de facto partnership was created among the parties which
would entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner 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.
(When parties come together intending to form a corporation, but no
corporation is formed due to some legal cause:
(1) parties who intended to participate or actually participated in the
business affairs of the proposed corporation would be considered as
partners under a de facto corporation
(2) parties who took no part except to subscribe for stock in a proposed
corporation, do not become partners with the subscribers engaged
in the business of the corporation)
Corporation Sole
— only a religious corporation can become a corporation sole
Parent and Subsidiary corporations; holding companies; affiliate
corporations
— subsidiary corporation: one where the control, in the form
of ownership of majority shares, is in another corporation
called the parent corporation
— parent has the power to elect the subsidiary’s directors,
thus controlling management properties
— holding company: a parent company where the sole
function is to hold the shares of other corporations which it
controls
i. no other business other than holding of shares
— investment company: a corporation which holds shares
not for control but for investment
— affiliates: corporations subject to common control and
operated as part of a system
i. also called sister corporations