contract not authorized by its charter.

Its rights to act as a corporation are

WEEK 1 & 2 only preserved to it so long as it obeys the laws of its creation. There is a
reserve right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange anomaly to hold
that a state, having chartered a corporation to make use of certain franchises,
could not, in the exercise of sovereignty, inquire how these franchises had
I. INTRODUCTION been employed, and whether they had been abused, and demand the
production of the corporate books and papers for that purpose. The defense
Historical Background of Philippine Corporate Law amounts to this, that an officer of the corporation which is charged with a
criminal violation of the statute may plead the criminality of such corporation
as a refusal to produce its books. To state this proposition is to answer
it. While an individual may lawfully refuse to answer incriminating questions
II. CONCEPT AND ATTRIBUTES OF A unless protected by an immunity statute, it does not follow that a corporation,
vested with special privileges and franchises may refuse to show its hand
CORPORATION when charged with an abuse of such privileges (Bataan Shipyard vs. PCGG
May 27, 1987)

A. Statutory definition of a corporation (Section iii. criminal liability

2, CC) General Rule: the corporation itself cannot be held liable for a crime
committed by its officer since it does not have malice.
Section 2. Corporation defined. - A corporation is an artificial being
Exception: the corporation is held criminally liable by express provision of
created by operation of law, having the right of succession and the powers,
law (e.g Trust Receipts Law, Anti-Dummy Law and Anti-Money Laundering
attributes and properties expressly authorized by law or incident to its
Act. In such case, the responsible officers would be criminally liable (People
existence. (2)
vs. Tan Boon Kong March 15, 1930)
A corporation, being a creature of law, "owes its life to the
This principle applies to corporate agents who themselves commit the crime
state, its birth being purely dependent on its will," it is "a creature without
and to those, who, by virtue of their managerial positions or other similar
any existence until it has received the imprimatur of the state acting
relation to the corporation, could be deemed responsible for its commission, if
according to law." A corporation will have no rights and privileges of a higher
by virtue of their relationship to the corporation, they had the power to
priority than that of its creator and cannot legitimately refuse to yield
prevent the act (Ching vs Secretary of Justice)
obedience to acts of its state organs. (Tanyag v. Benguet Corporation)
iv. right to recover moral damages
Right to recover moral damages – A corporation is not entitled to moral
damages because it has no feelings, no emotions, no senses (ABS-CBN vs.
B. Attributes of a corporation CA, Jan 21, 1999)
Definition and Attributes of a Corporation Exception: when a corporation has a good reputation that is debased,
A corporation is an artificial being created by operation of law, resulting in its humiliation in the business realm (Coastal Pacific Trading Inc.
having the right of succession and the powers, attributes and properties v. Rolling Mills Co., Inc. July 28, 2006)
expressly authorized by law or incident to its existence. Note: the award of moral damages to corporations is not a hard and fast rule.
A corporation, being a creature of law, "owes its life to the state, Indeed, while the Court may allow the grant of moral damages of
its birth being purely dependent on its will," it is "a creature without any corporations, it is not automatically granted. There must still be proof of the
existence until it has received the imprimatur of the state acting according to existence of the factual basis of the damage and its causal relation to the
law." A corporation will have no rights and privileges of a higher priority than defendant’s acts (Crystal vs. BPI Nov 28, 2008)
that of its creator and cannot legitimately refuse to yield obedience to acts of
its state organs. (Tanyag v. Benguet Corporation)
b. Doctrine of Piercing the Veil of
A corporation has four (4) attributes: (SOAP)
(1) It is an artificial being;
Corporate Entity
The court must first acquire jurisdiction over the corporation or
(2) Created by operation of law;
corporations involved before its or their separate personalities are
(3) With right of succession; disregarded; and the doctrine of piercing the veil of corporate entity can only
(4) Has the powers, attributes, and properties as expressly be raised during a full-blown trial over a cause of action duly commenced
authorized by law or incident to its existence. involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service. Kukan International
Corporation vs. Hon. Judge Amor Reyes, G.R. No. 182729, 29
1. Artificial being September 2010
However, in another case involving an action for breach of contract of
a. Doctrine of Corporate Entity carriage resulting to the death of one of the passengers , Supreme Court
ruled that if the RTC had sufficient factual basis to conclude that the two
Doctrine of Corporate Entity (Doctrine of Separate Personality) – a
corporations are one and the same entity as when they have the same
corporation is a legal or juridical person with a personality separate and apart
President and controlling shareholder and it is generally known in the place
from its individual stockholders or members and from any other legal entity to
where they do business that both transportation companies are one, the third
which it may connected.
party claim filed by the other corporation was set aside and the levy on its
property held valid even though the latter was not made a party to the case .
i. residence and nationality The judgment may be enforced against the other corporation to prevent
The residence of the corporation is the place of its principal office as may be multiplicity of suits and save the parties unnecessary expenses and delay.
indicated in its articles of incorporation and may, therefore, be sued only at Gold Line Tours vs. Heirs of Maria Concepcion Lacsa, GR No. 159108,
that place. (CRS vs. Antillon). 18 June 2012

General rule: The “incorporation test” is applied in determining whether a The doctrine of piercing the veil of corporate fiction is applicable not only to
corporation is domestic or foreign. If it is incorporated in another state, it is a corporations but also to a single proprietorship as when the corporation
foreign corporation, while if it is registered under Philippine laws, it is deemed transferred its employees to the company owned by the controlling
a Filipino or domestic corporation irrespective of the nationality of its stockholder of the corporation and yet despite the transfer, the employees’
stockholders. daily time records, reports, daily income remittances and schedule of work
Exception: In times of war, the “control test” would apply in determining the were all made, performed, filed and kept in the corporation. The corporation
corporate nationality, i.e., the citizenship of the controlling stockholders is clearly hiding behind the supposed separate and distinct personality of the
determines the nationality of the corporation. company. As such, the corporation and the company should be solidarily
liable for the claims of the illegally dismissed employees. Prince Transport,
ii. constitutional rights Inc. vs. Garcia, GR No. 167291, January 12, 2011
Constitutional rights – corporation is entitled to certain constitutional
rights (due process and equal protection). A corporation is considered under Although the corporate veil between two corporations cannot be pierced for
the due process clause pursuant to sec.1 of Art III of BoR. Equal protection lack of legal basis, it does not necessarily mean that the corporate officers of
against unreasonable searches and seizures (Stonehill vs. Diokno 1967) such corporations are exempt from liability. Section 31 of the Corporation
However, it is not entitled to certain constitutional rights (e.g the Code makes a director or officer personally liable if he is guilty of bad faith or
right against self-incrimination particularly production of corporate gross negligence in directing the affairs of the corporation. In this case, the
documents) not only because it is an artificial being but also because it is a officers of the corporation who maliciously terminated the employment of
mere creature of law. certain employees without any valid ground and in order to suppress their
Note: it is not entitled to invoke the right against self-incrimination. The right to self-organization, having acted in bad faith in directing the affairs of
State has reserved the right to investigate its contracts and find out whether the corporation, are solidarily liable with the corporation for the unlawful
it has exceeded its powers. It would be a strange anomaly to hold that a dismissal. Park Hotel vs. Soriano, GR No. 171118, September 10, 2012
state, having chartered a corporation to make use of certain franchise, could Where the court rendered judgment against a stock brokerage firm directing
not, in the exercise of sovereignty, inquire how these franchises had been the latter to return shares of stock which it sold without authority, but the
employed, and whether they had been abused, and demand the production writ of execution was returned unsatisfied, an alias writ of execution could
of the corporate books and papers for that purpose (Bataan Shipyard vs. not be enforced against its parent company because the court has not
PCGG May 27, 1987) acquired jurisdiction over the latter and while the parent company owns and
* * The corporation is a creature of the state. It is presumed to be controls the brokerage firm, there is no showing that the control was used to
incorporated for the benefit of the public. It received certain special privileges violate the rights of the plaintiff. Pacific Rehouse Corporation vs. Court
and franchises, and holds them subject to the laws of the state and the of Appeals, GR. No. 199687, March 24, 2014
limitations of its charter. Its powers are limited by law. It can make no
a. Grounds for Application of Doctrine records, and (4) Methods of conducting the business. (Heirs of Fe Tan Uy,
When an operator of a bus transportation sold his two certificates of public represented by her heir, Mauling Uy Lim vs. International Exchange
convenience to another corporation with the condition, among others, that he Bank, G.R. No. 166282 & 83, February 13, 2013)
shall not for a period of 10 years from the date of the sale, apply for any TPU
service identical or competing with the buyer, the organization of a The doctrine of piercing the corporate veil applies only in three (3) basic
corporation barely 3 months after the sale with the wife of operator and his areas, namely: 1) defeat of public convenience as when the corporate fiction
brother and sister-in-law as the incorporators is a clear violation of the is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or
condition. A seller or promisor may not make use of a corporate entity as a when the corporate entity is used to justify a wrong, protect fraud, or defend
means of evading the obligation of his covenant. Where the Corporation is a crime; or 3) alter ego cases, where a corporation is merely a farce since it is
substantially the alter ego of the covenantor to the restrictive agreement, it a mere alter ego or business conduit of a person, or where the corporation is
can be enjoined from competing with the covenantee. (Villa Rey Transit, so organized and controlled and its affairs are so conducted as to make it
Inc. vs. Eusebio E. Ferrer, Pangasinan Transportation Co., Inc. and merely an instrumentality, agency, conduit or adjunct of another corporation.
Public Service Commission, G.R. No. L-23893, October 29, 1968)

In this connection, case law lays down a three-pronged test to determine the
Aggravating RANSOM's clear evasion of payment of its financial obligations is application of the alter ego theory, which is also known as the instrumentality
the organization of a "run-away corporation," ROSARIO, in 1969 at the time theory, namely:
the unfair labor practice case was pending before the CIR by the same
1. Control, not mere majority or complete stock control, but complete
persons who were the officers and stockholders of RANSOM, engaged in the
domination, not only of finances but of policy and business practice in
same line of business as RANSOM, producing the same line of products,
respect to the transaction attacked so that the corporate entity as to this
occupying the same compound, using the same machineries, buildings,
transaction had at the time no separate mind, will or existence of its own
laboratory, bodega and sales and accounts departments used by RANSOM,
and which is still in existence. This is another instance where the fiction of 2. Such control must have been used by the defendant to commit fraud
separate and distinct corporate entities should be disregarded as the second or wrong, to perpetuate the violation of a statutory or other positive legal
corporation seeks the protective shield of a corporate fiction whose veil in the duty, or dishonest and unjust act in contravention of plaintiff’s legal right;
present case could, and should, be pierced as it was deliberately and and
maliciously designed to evade its financial obligation to its employees. (A.C. 3. The aforesaid control and breach of duty must have proximately
Ransom Labor Union-CCLU vs. National Labor Relations Commission, caused the injury or unjust loss complained of.
et al., G.R. No. L-69494, May 29, 1987)
The first prong is the "instrumentality" or "control" test. This test requires that
The fact that the businesses of private respondent and Acrylic are related, the subsidiary be completely under the control and domination of the parent.
that some of the employees of the private respondent are the same persons It inquires whether a subsidiary corporation is so organized and controlled
manning and providing for auxilliary services to the units of Acrylic, and that and its affairs are so conducted as to make it a mere instrumentality or agent
the physical plants, offices and facilities are situated in the same compound, it of the parent corporation such that its separate existence as a distinct
is the Court’s considered opinion that these facts are not sufficient to justify corporate entity will be ignored. In addition, the control must be shown to
the piercing of the corporate veil of Acrylic. Hence, the Acrylic not being an have been exercised at the time the acts complained of took place.
extension or expansion of private respondent, the rank-and-file employees
working at Acrylic should not be recognized as part of, and/or within the
The second prong is the "fraud" test. This test requires that the parent
scope of the petitioner, as the bargaining representative of private
corporation’s conduct in using the subsidiary corporation be unjust, fraudulent
respondent. (Indophil Textile Mill Workers Union-PTGWO vs.
or wrongful. It examines the relationship of the plaintiff to the corporation. It
Voluntary Arbitrator Teodorico P. Calica and Indophil Textile Mills,
recognizes that piercing is appropriate only if the parent corporation uses the
Inc., G.R. No. 96490, February 3, 1992)
subsidiary in a way that harms the plaintiff creditor. As such, it requires a
showing of "an element of injustice or fundamental unfairness."
The defense of separateness will be disregarded where the business affairs of The third prong is the "harm" test. This test requires the plaintiff to show that
a subsidiary corporation are so controlled by the mother corporation to the the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair
extent that it becomes an instrument or agent of its parent. But even when manner toward it, caused the harm suffered. A causal connection between
there is dominance over the affairs of the subsidiary, the doctrine of piercing the fraudulent conduct committed through the instrumentality of the
the veil of corporate fiction applies only when such fiction is used to defeat subsidiary and the injury suffered or the damage incurred by the plaintiff
public convenience, justify wrong, protect fraud or defend crime. (Bibiano O. should be established. The plaintiff must prove that, unless the corporate veil
Reynoso, IV vs. Hon. Court of Appeals and General Credit is pierced, it will have been treated unjustly by the defendant’s exercise of
Corporation, G.R. Nos. 116124-25, November 22, 2000) control and improper use of the corporate form and, thereby, suffer damages.
Development Bank of the Philippines vs. Hydro Resources
The sale of Times’ franchise as well as most of its bus units to a company Contractors Corporation, GR. No. 167603, March 13, 2013
owned by Rondaris’ daughter and family members, right in the middle of a
labor dispute, is highly suspicious. It is evident that the transaction was made PIERCING THE VEIL OF CORPORATE FICTION
in order to remove Times’ remaining assets from the reach of any judgment Piercing the veil of the corporate fiction is resorted to only in cases where
that may be rendered in the unfair labor practice cases filed against it. the corporation is used or being used to defeat public convenience, justify
(Times Transportation Company, Inc. vs. Santos Sotelo, et al., G.R. wrong, protect fraud, defend crime, confuse legitimate issues, or to
No. 163786, February 16, 2005) circumvent the law or perpetuate deception, or an alter-ego, adjunct or
business conduit for the sole benefit of a stockholder or a group of
Piercing the veil of corporate fiction is warranted when a corporation ceased stockholders or another corporation.
to exist only in name as it re-emerged in the person of another corporation,
Test in determining the applicability of the doctrine of piercing the veil
for the purpose of evading its unfulfilled financial obligation under a
of corporation fiction:
compromise agreement. Thus, if the judgment for money claim could not be 1. Control, not mere majority or complete stock control, but complete
enforced against the employer corporation, an alias writ may be obtained
domination, not only of finances but of policy and business practice in
against the other corporation considering the indubitable link between the
respect to the transaction attacked so that the corporate entity as to this
closure of the first corporation and incorporation of the other. Livesey vs.
transaction had at the time no separate mind, will or existence of its
Binswanger Philippines, GR No. 177493, March 19, 2014
own;

b. Test in Determining Applicability 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
The test in determining the applicability of the doctrine of piercing the
duty, or dishonest and unjust act in contravention of plaintiff's legal
veil of corporate fiction is as follows: 1.) Control, not mere majority or
rights; and
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 3. The aforesaid control and breach of duty must proximately cause the
corporate entity as to this transaction had at the time no separate mind, will injury or unjust loss complained of. (Instrumentality Rule, Concept
or existence of its own; 2.) Such control must have been used by the Builders, Inc. vs. NLRC)
defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED
contravention of plaintiff’s legal rights; and 3.) The aforesaid control and Corporate fiction cannot be disregarded in the absence of intent to defraud
breach of duty must proximately cause the injury or unjust loss complained in corporate transactions. (Remo, JR vs. IAC)
of. (Concept Builders, Inc. vs. the National Labor Relations
Commission, et al., G.R. No. 108734, May 29, 1996) For the separate juridical personality of a corporation to be disregarder, the
wrongdoing must be clearly and convincingly established. (Del Rosario vs.
NLRC)
Concept Builders ceased its business operations in order to evade the
payment to private respondents of backwages and to bar their reinstatement
Mere corporate ownership of all the stocks of another corporation will not
to their former positions. It is very obvious that the second corporation seeks
justify their being treated as single entity. (PNB vs. Ritratto)
the protective shield of a corporate fiction whose veil in the present case
could, and should, be pierced as it was deliberately and maliciously designed There being not the least indication that the second corporation is a
to evade its financial obligation to its employees. (Ibid.) dummy or serves as a client of the first corporation, the fiction
Under a variation of the doctrine of piercing the veil of corporate fiction, when
two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third (i) alter ego principle and instrumentality rule
parties, disregard the legal fiction that two corporations are distinct entities When one corporation is so organized and controlled and its affairs are
and treat them as identical or one and the same. While the conditions for the conducted so that it is in fact a mere instrumentality or adjunct of the other,
disregard of the juridical entity may vary, the following are some probative the fiction of the corporate entity to the instrumentality may be
factors of identity that will justify the application of the doctrine of piercing disregarded (Concept Builders Inc. vs. NLRC, 257 SCRA 149 [1996]).
the corporate veil, as laid down in Concept Builders, Inc. v NLRC: (1) Stock
ownership by one or common ownership of both corporations; (2) Identity of Test:
directors and officers; (3) The manner of keeping corporate books and
1. Control, not mere majority or complete stock control, but complete contract within their powers. The doctrine of ultra vires, when invoked for or
dominion, not only of finances but of policy and business in respect to against a corporation, should not be allowed to prevail where it would defeat
the transaction attacked so that the corporate entity as to this transaction had the ends of justice or work a legal wrong. (Carlos vs. Midoro Sugar Co.)
at the time no separate mind, will, or existence of its own; Actions which are beyond the powers of the corporation as embodied in its
2. Such control must have been used by the defendant to commit fraud or articles of incorporation and have absolutely no relation to the avowed
wrong in contravention of plaintiff’s legal rights; and purpose of the corporation are ultra-vires. (Japanese War Notes Claimants
3. The aforesaid control and breach of duty must proximately cause the injury Assoc., Inc. vs. SEC)
or unjust loss complained of (Concept Builders Inc. vs. NLRC, 257 SCRA 149
Corporate officers have no power to execute for mere accommodation a
[1996]).
negotiable instrument of the corporation for their individual debts or
transactions arising from or in relation to matters in which the corporation has
(ii) probative factors of identity no legitimate concern. Since such accommodation paper cannot thus be
a. Stock ownership by one or common ownership of both corporations; enforced against the corporation, especially since it is not involved in any
b. Identity of directors and officers; aspect of the corporate business or operations, the signatories thereof shall
c. The manner of keeping corporate books and records; and be personally liable therefor, as well as for the consequences arising from
d. Methods of conducting the business (Concept Builders, Inc. v. NLRC, 257 their acts in connection therewith. (Crisologo-Jose vs. CA)
SCRA 149 [1996])
Distinctions between a corporation and a partnership
2. Creature of Law CORPORATION PARTNERSHIP
1. Created by law or operation of 1. Created by mere agreement of the
(See constitutional limitations on the creation of a private law parties
corporation, Article 12, Section 16, Constitution; Concession theory) 2. Generally there must be at least 2. May be formed by 2 or more
Art 12 SECTION 16. The Congress shall not, except by general law, provide 5 incorporators natural persons
for the formation, organization, or regulation of private corporations. 3. Can exercise only such powers 3. Can do anything by agreement of
Government-owned or controlled corporations may be created or established and functions expressly granted to the parties provided only that it is not
by special charters in the interest of the common good and subject to the test it by law and those necessary or contrary to law, morals, good
of economic viability. incident to its existence customs, public policy and public
order
Corporations are entitled to certain constitutional rights. 4. Unless validly delegated 4. In absence of agreement to the
a. Due process (Albert v. University Publishing, Inc. 13 SCRA 84 [1965]) expressly or impliedly, must contrary, any one of the partners
b. Equal Protection of the law (Smith, Bell & Co. v. Natividad, 40 Phil. 136 transact its business through the may validly bind the partnership
[1919]) board of directors
c. Protection against unreasonable searches and seizures (Stonehill v. Diokno, 5. Has the right of succession 5. Based on mutual trust and
20 SCRA 383 [1967]) which presupposes that it confidence such that the death,
continues to exist despite the incapacity, insolvency, civil
However, it is not entitled to certain constitutional rights such as political death, withdrawal, incapacity or interdiction or mere withdrawal of
rights or purely personal rights not only because it is an artificial being but civil interdiction of the one partner would result in it
also because it is a mere creature of law (Reviewer in Commercial Law, stockholders or members dissolution
Jose R. Sundiang & Timoteo Aquino, 2005 ed.). 6. Any stockholder can ordinarily 6. A partner cannot transfer his rights
d. Right against self-incrimination (Bataan Shipyard v. PCGG, 150 SCRA transfer, sell or assign his shares or interest in the partnership so as to
[1987]). of stock without the consent of make the transferee a partner
the other stockholders without the consent of the other
3. Right of Succession partners
7. The liability of the stockholders 7. All partners are liable pro rata with
It is the capacity to have continuity of existence despite the changes on the or members in is limited to the all their property and after all the
persons who compose it. Thus, the personality continues despite the extend of their subscription or partnership property has been
change of stockholder, members, board members or officers (Reviewer in their promised contribution exhausted, for all partnership liability
Commercial Law, Jose R. Sundiang & Timoteo Aquino, 2005 ed.). 8. Term of existence is limited 8. May exist for an indefinite period
only to 50 years unless extended
4. Creature of Enumerated Powers, 9. Consent of the State is 9. Partners may dissolve at will
necessary for its dissolution
Attributes and Properties

a. Doctrine of limited capacities as

Classification of Private
compared to the Doctrine of general Corporations
capacities)
1. stock and non-stock
Stock Non-Stock
b. Ultra vires doctrine
While as a rule an ultra vires act is one committed outside the object for
which a corporation is created as defined by law of its organization and Definition Corporations which All other private
therefore beyond the powers conferred upon it by law, there are however have capital stock corporations (§3)
certain corporate acts that may be performed outside of the scope of the divided into shares and
powers expressly conferred if they are necessary to promote the interest or are authorized to One where no part of its
welfare of the corporation. (Republic vs. Acoje Mining Co., Inc.) distribute to the holders income is distributable as
of shares dividends or dividends to its members,
allotments of the trustees or officers. (§87)
ULTRA-VIRES ACTS surplus profits on the
Ultra-vires acts – are those that can not be executed or performed by a basis of the shares (§3)
corporation because they are not within its express, inherent or implied
powers as defined by its charter or articles of incorporation.
Consequences of ultra-vires acts:
Purpose Primarily to make May be formed or
1. On the corporation itself – the proper forum may suspend or revoke, after
profits for its organized for charitable,
proper notice and hearing, the franchise or certificate of registration of the
shareholders religious, educational,
corporation for serious misrepresentation as to what the corporation can do
professional, cultural,
or is doing to the great damage or prejudice of the general public.
fraternal, literary,
2. On the rights of the stockholders – a stockholder may either an individual scientific, social, civic
or derivative suit to enjoin a threatened ultra-vires act or contract. service, or similar
3. On the immediate parties – (a) if the contract is fully executed on both purposes like trade,
sides, the contract is effective; (b) if the contract is executory on both sides, industry, agricultural and
neither party can maintain an action for its non-performance; and (c) if the like chambers, or any
contract is executory on one side only, and has been fully performed on the combination thereof. (§88)
other, the party who has received the benefits is estopped to set up that the
contract is ultra-vires.
Acts which are clearly beneficial to the company or necessary to promote
the interest or welfare of the corporation, its employees and their families, or Distribution of Profit is distributed to Whatever incidental profit
in the legitimate furtherance of its business are within corporate powers. Profits shareholders made is not distributed
(Republic vs. Acoje Mining) among its members but is
used for furtherance of its
Mere ultra-vires acts which are not illegal per se may become binding and purpose. AOI or by-laws
enforceable either by ratification, estoppel or on equitable grounds unless the may provide for the
public or third parties are thereby prejudiced. (Privano vs. De la Rama distribution of its assets
Steamship) among its members upon
Corporations authorized to acquire the bonds have the implied power to its dissolution. Before
guarantee them in order to place them upon the market under better, more then, no profit may be
advantageous conditions, and thereby secure the profit derived from their made by members.
sale. When a contract is not on its face necessarily beyond the scope of the
power of the corporation by which it was made, it will, in the absence of
proof to the contrary, be presumed to be valid. Corporations are presumed to Composition Stockholders Members
 any private suit to which such corporation may be a party. Such inquiry may
Scope of right to Each stockholder votes Each member, regardless be made by the Solicitor General in a quo warranto proceeding. (n)
vote according to the of class, is entitled to one
proportion of his shares (1) vote UNLESS such What is a ‘de facto’ corporation?
in the corporation. No right to vote has been
A ‘de facto’ corporation is a defectively organized corporation,
shares may be deprived limited, broadened, or
which has all the powers and liabilities of a ‘de jure’ corporation
of voting rights except denied in the AOI or by-
and, except as to the State, has a juridical personality distinct and
those classified and laws. (Sec. 89)
separate from its shareholders, provided that the following
issued as "preferred" or
requisites are concurrently present:
"redeemable" shares,
and as otherwise (1) That there is an apparently valid statute under which
provided by the the corporation with its purposes may be formed;
Code. (Sec. 6) (2) That there has been colorable compliance with the
legal requirements in good faith; and,
(3) That there has been use of corporate powers, i.e., the
Voting by proxy May be denied by the Cannot be denied. (Sec.
AOI or the by-laws. 58) transaction of business in some way as if it were a
corporation.
(Sec. 89)
Can a corporation transact business as a ‘de facto’
corporation while application is still pending with SEC?
Voting by mail May be authorized by Not possible.
No. In the case of Hall v. Piccio (86 Phil. 603; 1950),
the by-laws, with the
where the supposed corporation transacted business as a
approval of and under
corporation pending action by the SEC on its articles of
the conditions
incorporation, the Court held that there was no ‘de facto’
prescribed by the SEC.
corporation on the ground that the corporation cannot claim to be
(Sec. 89)
in ‘good faith’ to be a corporation when it has not yet obtained its
certificate of incorporation.
Who exercises Board of Directors or Members of the
Corporate Powers Trustees corporation De jure corporations.
§23
a. De jure corporations – juridical entities created or organized in strict or
substantial compliance with the statutory requirements of incorporation and
Governing Board Board of Directors or Board of Trustees, which whose right to exist as such cannot be successfully attacked even by the
Trustees, consisting of may consist of more than State in a quo warranto proceeding.
5-15 directors / 15 trustees unless De facto corporations.
trustees. otherwise provided by the
a. De facto corporations – those which exist by virtue of an irregularity or
AOI or by-laws. (Sec, 92)
defect in the organization or constitution or from some other omission to
comply with the conditions precedent by which corporations de jure are
Term of directors or Directors / trustees Board classified in such a created, but there was colorable compliance with the requirements of the law
trustees shall hold office for 1 way that the term of office under which they might be lawfully incorporated for the purposes and powers
year and until their of 1/3 of their number assumed, and user of the rights claimed to be conferred by law.
successors are elected shall expire every year. Corporations by estoppel.
and qualified (Sec. 23). Subsequent elections of a. Corporations by estoppel – those which are so defectively formed as not to
trustees comprising 1/3 of be either de jure or de facto corporations but which are considered as
the board shall be held corporations in relation only to those who cannot deny their corporate
annually, and trustees so existence due to their agreement, admission or conduct.
elected shall have a term
of 3 years. (Sec. 92)
DE FACTO CORPORATION
De facto corporation – one that is so defectively created as not to be a de
Election of officers Officers are elected by Officers may directly
jure corporation but nevertheless exists, for all practical purposes, as a
the Board of Directors elected by the members
corporate body, by virtue of its bona fide attempt to incorporate under
(Sec. 25), except in UNLESS the AOI or by-
existing statutory authority, coupled with the exercise of corporate powers.
close corporations laws provide
where the stockholders otherwise. (Sec. 92)
themselves may elect
the officers. (Sec. 97)

Place of meetings Any place within the Generally, the meetings

Philippines, if provided must be held at the
for by the by-laws (Sec. principal office of the
93) corporation, if
practicable. If not, then
anyplace in the city or
municipality where the
principal office of the
corporation is
located. (Sec. 51)

Transferability of Transferable. Generally non-transferable

interest or since membership and all
membership rights arising therefrom
are personal. However,
the AOI or by-laws can
provide otherwise. (Sec.
90)

Distribution of See Sec. 94.

assets in case of
dissolution

2. Domestic and foreign

3. As to laws of incorporation:
4. a. domestic corporation – corporation formed, organized or
existing under Philippine laws;
5. Note: issues of intra-corporate nature are governed by Philippine
law.
6.
7. b. foreign corporation – a corporation formed, organized or
existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporation to do business
in its own country or state.

8. dejure and de facto (Sec. 20, CC)

Section 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this Code, and its
right to exercise corporate powers, shall not be inquired into collaterally in
 Requisites: act on behalf of the corporation. However, having reaped the benefits of the
1. There is a valid law under which the corporation could have been contract entered into by persons with whom he previously had an existing
created as a de jure corporation; relationship, he is deemed to be part of said association and is covered by the
scope of the doctrine of corporation by estoppel. (Lim Tong Lim vs. Philippine
2. An attempt, in good faith, to form a corporation according to the
Fishing Gear Industries, Inc., G.R. No. 136448, 3 November 1999)
requirements of law (colorable compliance);
3. A user of corporate powers; and
Distinguish a de facto corporation from a corporation by estoppel.
4. Good faith in claiming to be and doing business as a corporation.
The ‘de facto’ doctrine differs from the estoppel doctrine in that
Rules on collateral and direct attack against corporate existence:
where all the requisites of a ‘de facto’ corporation are present, then the
1. The corporate existence of a de jure corporation cannot be directly defectively organized corporation will have the status of a ‘de jure’
attacked either directly or collaterally, even by the State. corporation in all cases brought by and against it, except only as to the State
2. The corporate existence of a de facto corporation can be directly in a direct proceeding. On the other hand, if any of the requisites are absent,
attacked on a quo warranto proceeding. then the estoppel doctrine can apply only if under the circumstances of the
3. The corporate existence of a de facto corporation is not subject to particular case then before the court, either the defendant association is
collateral attack by any party. estopped from defending on the ground of lack of capacity to be sued, or the
defendant third party had dealt with the plaintiff as a corporation and is
A municipal corporation created by an unconstitutional law cannot be
deemed to have admitted its existence.
cannot exist as a de facto corporation unless there is some other valid law
giving corporate vitality to the organization. An unconstitutional law confers (De facto – has status of ‘de jure’ corpo, except separate personality
no rights. (Municipality of Malabang vs. Benito) against State, provided all requisites are present)
Without having obtained a certificate of incorporation, a corporation – even
its stockholders – may not claim in good faith to be a corporation. (Hall vs. What are the effects of a Corporation by Estoppel in suits brought:
Piccio)  against the Corporation? Considered a corporation in suits
brought against it if it held itself out as such and denies
CORPORATION BY ESTOPPEL capacity to be sued;
Sec. 21. Corporation by estoppel. - All persons who assume to act as  against third party? Third party cannot deny existence of
corporation knowing it be without authority to do so shall be liable as general corporation if it dealt with it as such.
partners for all debts, liabilities and damages incurred or arising as a result
thereof; Provided, however, That when any such ostensible corporation is
sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of 9. holding, affiliate and subsidiary
corporate personality.
The doctrine of corporation by estoppel may apply to the alleged 10. open and close
corporation or to a third party transacting with the former.
The principle of estoppel cannot be invoked in favor of a person who is a
member of the association and therefore must be presumed to know that it is
not a corporation. (Lozano vs. De Los Santos)
The principle of estoppel applies when persons assume to form a
corporation and exercise corporate functions and enter into business relations
with third persons. Where there is no third person involved and the conflict
arises only among those assuming to form a corporation, who therefore know
that it has not been registered, there is no corporation by estoppel. (Lozano
vs. De Los Santos)
One who has induced another to act upon his willful misrepresentation that
a corporation was duly organized and existing under the law, cannot,
thereafter set up against his victim the principle of corporation by estoppel.
Such persons becomes liable for the contracts entered into by such ostensible
corporation. (Albert vs. University Publishing Co., Inc.)
A person who has contracted or dealt with an association in such a way as
to recognize its existence as a corporate body is estopped from denying the
same in an action arising out of such transaction or dealing, yet this doctrine
may not be held to be applicable where fraud takes part in the said
transaction. (Salvatierra vs. Garlitos)
Persons who have continuously and for a long period misrepresented
themselves as a corporation as estopped from denying such personality to
defeat claims against it. (Chiang Kai Shek School vs. CA)
In the absence of fraud, a person who has contracted or dealt with an
association in such a way as to recognize and in effect admit its legal
existence as a corporate body is thereby estopped to deny its corporate
existence in an action leading out of or involving such contract or dealing,
unless the existence is attacked for causes which have arisen since making
the contract or other dealing relied on as an estoppel. (Asia Banking Corp. vs.
Standard Products Co., Inc.)
The doctrine of estoppel applies to a third party only when he tries to
escape liability on a contract from which he has benefited. It does not apply
when the third party is the one claiming from the contract. (International
Express Travel & Tours Services, Inc. vs. CA)
The doctrine of estoppel applies to foreign as well as domestic
corporations. Foreign corporations doing business in the Philippines may sue
in Philippine courts although not authorized to do business here against the
Philippine citizen who had contracted with and been benefited by said
corporation. (Georg Grotjahn GMBH & Co. vs. Isnani)

If a corporation by estoppel exists and enters into a contract or transacts

business with a third party, the latter has three remedies:
1. He may file a suit against the ostensible corporation to recover from
the corporate properties;
2. He may file the case directly against the associates personally who
held out the association a corporation; and
3. Against both the ostensible corporation and persons forming it, jointly
and severally.
As regards the liability of the associates of the alleged corporation, only
those who actively participated in holding out the association as a corporation
should be held personally liable.

(See: doctrine of corporation by estoppel [Sec. 21, CC])

Section 21. Corporation by estoppel. - All persons who
assume to act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, That when any
such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.
Under the law on estoppel, those acting on behalf of a corporation
and those benefited by it, knowing it to be without valid existence, are held
liable as general partners. Technically, it is true that petitioner did not directly