03-Nature & Attributes of Corporations PDF
03-Nature & Attributes of Corporations PDF
03-Nature & Attributes of Corporations PDF
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1
This portion is taken from the introduction of the published article entitled "Corporate
Contract Law: Unifying Theme on Theories Relating to Promoter's Contracts, De Facto
Corporations, Corporations by Estoppel, Articles of Incorporation, By-Laws, and Ultra Vires Acts,"
37 ATENEO L.J. 1 (No. 2, June 1994).
2
Sec. 2, Corporation Code.
The present statutory definition of the corporation is essentially a narrow
and antiquated view of the corporate vehicle. It looks at only one aspect—the
relationship between the corporation and the State—of the otherwise
multifaceted relationships that a corporation would have in the business
environment. The statutory definition views the corporation merely as a creature
of the law, when actually juridical personality is merely one aspect of corporate
existence. The corporate setting embodies contractual relationships of varying
degrees, and consequently, principles of Contract Law, Agency Law, and even
Labor Law, tend to be enmeshed into Corporate Law principles. The resulting
interactions between principles of Corporate Law and other legal disciplines have
continued to create tension and sometimes hybrid legal products, that animate
the Philippine legal system.
1. Theory of Concession
Tayag v. Benguet Consolidated, Inc.,3 characterized a corporation as an
artificial being, created by operation of law. . . "It owes its life to the state, its birth
being purely dependent on its will."
Tayag expressly denied the application of the genossenschaft theory
enunciated by Friedmann4 which treated a corporation as "the reality of the group
as a social and legal entity, independent of state recognition and concession."5 It
held that a corporation is "a creature without any existence until it has received
the imprimatur of the state acting according to law," and that "[i]t is logically
inconceivable therefore that it will have rights and privileges of a higher priority
than that of its creator. . . [and] cannot legitimately refuse to yield obedience to
acts of its state organs, certainly not excluding the judiciary whenever called
upon to do so."6
Ang Pue & Co. v. Secretary of Commerce and Industry,7 would hold that to
"organize a corporation or a partnership that could claim a juridical personality of
its own and transact business as such, is not a matter of absolute right but a
privilege which may be enjoyed only under such terms as the State may deem
necessary to impose."
Torres v. Court of Appeals,8 in invalidating the act of the principal
stockholder of a family corporation in canceling stock certificates and issuing new
3
26 SCRA 242, 252 (1968)
4
LEGAL THEORY, pp. 164-168 (1947); also Holdsworth, English Corporation Law, 31 YALE
L.J. 382 (1922).
5
26 SCRA 242, 253.
6
Ibid.
7
5 SCRA 645, 647 (1962).
8
278 SCRA 793 (1997).
once and not coursing the same through the Corporate Secretary, held that “[a]ll
corporations, big or small, must abide by the provisions of the Corporation Code.
Being a simple family corporation is not an exemption. Such corporations cannot
have rules and practices other than those established by law.”
Under the theory of concession, although fiction cannot be created unless
there is an enterprise or group upon whom it may be conferred, and in spite of
the underlying contract among the persons wanting to form the corporation, the
grant is only by virtue of a primary franchise given by the State. It is within the
power of the State whether to grant it or not. The theory of concession is also the
underlying basis for the ultra vires doctrine.
The theory of concession, therefore, looks at a corporation simply as a
creature of the State, completely within the control of the latter. This is the theory
covered by Section 2 of the Corporation Code as it defines a corporation.
9
Berle, The Theory of Enterprise, 47 COL. L. REV. No. 3 (April, 1947).
10
Ibid, at 345.
11
Ibid.
the law, which may tend to project to their business dealings done through the
corporation.
Although generally the enterprise entity theory has to a great extent been
discarded in American corporate literature, its basic flaw may not pertain to
Philippine setting because we have in our jurisdiction a different principle on
juridical personality. While under American common law, a partnership does not
have a personality separate and distinct from the partners, under Philippine civil
law tradition, although a partnership is inherently a contractual relationship, the
Civil Code grants to it a personality separate and distinct from the partners.12
Therefore, other than a general code provision granting it a juridical personality,
the partnership personality becomes a reality by two or more persons deciding to
contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves without need of a grant of specific
authority by the state.
To a great extent, once a corporate entity comes into being it has certain
rights almost independent of the whims of its creator. Even though the
corporation is a creature of the State, the underlying relationship is still
composed of moral individuals who are not at all creatures of the State. For
example, the State would not destroy the group nor the business, without
observing the due process clause of the Constitution. In Bache & Co. (Phil.), Inc.
v. Ruiz,13 the Court held that a corporation is entitled to immunity against
unreasonable searches and seizures. It recognized that "[a] corporation is, after
all, but an association of individuals under an assumed name and with a distinct
legal entity. In organizing itself as a collective body it waives no constitutional
immunities appropriate for such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law, and is
protected against unlawful discrimination."
In Philippine Stock Exchange, Inc. v. Court of Appeals,14 the Court
recognized that “[a] corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a distinct legal personality
[and that in] organizing itself as a collective body, it waives no constitutional
immunities and perquisites appropriate to such a body.” The Court held that
although the Securities and Exchange Commission (SEC), under the Revised
Securities Act, Pres. Decree 902-A, and other pertinent laws, has been entrusted
the serious responsibility of enforcing all laws affecting corporations and other
forms of associations not otherwise vested in some other government office,
nevertheless, the SEC did not have absolute control on the management
prerogatives of the Board of Directors of the Philippine Stock Exchange (PSE),
12
Art. 1768 of the Civil Code provides: “The partnership has a juridical personality separate
and distinct from that of each of the partners,” even in case of failure to comply with the
requirements of the law on registration. In contrast there now provision in the Corporation Code
that expressly provides a juridical personality of a corporation “separate and distinct from that of
each of the stockholders or members” that compose it. See also Campos Rueda & Co. v. Pacific
Commercial Co., 44 Phil. 916 (1922).
13
37 SCRA 823 (1971).
14
281 SCRA 232, 88 SCAD 589 (1997).
since the “PSE is, after all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business.”
The enterprise theory therefore hinges itself on the fact that there can be
no corporate existence without persons to compose it; there can be no
association without associates.15 The separate juridical existence granted to a
corporation is mere legal fiction, and therefore whenever necessary for the
interests of the public or for the protection or enforcement of the rights of the
members, courts will disregard the legal fiction and operate upon both the
corporation and the persons composing it.
The recognition of the organizational existence of a groups of individuals
extant any State grant or recognition is now more recognized in the case of
unincorporated associations. On matters involving affairs of an unincorporated
association, such as election contests for officers of civic clubs, the courts
generally will not interfere in the ruling of its policy-making body.16 If the State
would consider binding among the associates in an unincorporated associations
their acts and actuations, then the more so in a duly incorporated association,
which has a juridical personality.
To a great extent, this underlying relationship between and among
individuals as the root of every corporate setting is recognized and reinforced by
the Corporation Code itself that requires that no corporation can be organized
unless formed by "[a]ny number of natural persons not less than five (5) but not
more than fifteen (15), all of legal age and a majority of whom are residents of
the Philippines."17
15
Arnold v. Willets & Patterson, Ltd. 45 Phil. 634 (1923).
16
Lions Club International v. Amores, 121 SCRA 621 (1983).
17
Sec. 10, Corporation Code.
(d) Between the corporation and third parties or "outsiders",
which is essentially governed by Contract Law; and Labor
Law when it comes to relationship with officers and
employees.
18
VALIX & PERALTA, FINANCIAL ACCOUNTING (Vol. One), 1976 ed., pp. 13 and 18.
19
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 305 (1978).
20
Philippine National Bank v. Court of Appeals, 83 SCRA 237 (1978)
21
See more exhaustive discussions in Chapter 4 on Corporate Juridical Personality and
Doctrine of Piercing the Veil of Corporate Fiction.
22
Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).
23
Arnold v. Willits & Patterson, Ltd., 44 Phil. 634 (1923).
24
Ibid, at p. 644, quoting THOMPSON ON CORPORATIONS, 2d ed. Vol. I, Sec. 10.
CORPORATION AS A CREATURE OF THE LAW
1. Constitutional Provisions
The power to create corporations is one of the attributes of sovereignty.25
The exercise of the power is legislative in character, and that Legislature may,
subject to the restrictions of the Constitution, create a particular corporation by
direct act, or make provisions, by general law, for the organization of
corporations by natural persons upon compliance with the prescribed
conditions.26
Under the Constitution,27 Congress cannot, except by general law, provide
for the formation, organization, or regulation of private corporations. The same
constitutional provisions allows government-owned or -controlled corporations to
be created or established by special charters in the interests of the common
good and subject to the test of economic viability. Consequently, it has been held
that a private corporation created pursuant to a special law is a nullity, and such
special law is unconstitutional for being violative of the Constitution.28
The constitutional provision taking away from Congress the power to grant
specific franchises to private corporations comes from a history of corruption
when such power was exercised by Legislatures in common law jurisdiction,
where only the rich and powerful could obtain such franchises, and therefore be
able to have monopolies of certain endeavors.
In Philippine jurisdiction, the Corporation Code is the general law under
which private corporations are organized pursuant to the mandates of the
Constitution.29
30
11 SCRA 634 (1964).
31
Ibid, p. 638, quoting from Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158.
32
74 Phil. 560 (1944).
33
Ibid, at pp. 566-567.
come into being by mere consent of the parties; there must be a law granting it,
and once granted form the primary franchise of the corporation.
There must first be an underlying contract among the individuals forming
the corporation upon which the state grant may be conferred. Therefore, you
have an inter-play of State grant and contractual relations between the parties.
Which principle has precedence in resolving conflict would depend upon the
public interest or issue to be resolved. This issue is discussed more in details in
Chapter IV, on Corporate Contract Law.
3. Right of Succession
The corporation has the capacity for continuous existence despite the
death or replacement of its shareholders or members, for it has a personality
separate and distinct from those who compose it. The strong legal personality of
the corporation is an attribute that has made it most attractive to businessmen
when compared to other media.
34
Subsec. 5.2 of Republic Act No. 8799.
35
Dated 21 November 2000.
36
San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645,
99 SCAD 281, 298 (1998).
37
Art. 1816 of the Civil Code provides that “All partners are liable pro rata with all their
properties and after partnership assets have been exhausted, for all partnership debts.
Art. 1817 provides that “Any stipulation against personal liability of partners for partnership
debts is void, except as among them.”
Art. 1824, provides that “All partners are liable solidarily with the partnership for everything
chargeable to the partnership when caused by the wrongful act or omission of any partner acting
Of course, through contractual stipulations, there are many ways to go
around the limited liability feature of a corporation and to make major
shareholders still liable for more than their actual or promised investments in the
corporation. For example in case of bank loans, bankers sometimes demand
additional security or may require that in addition corporate officers make
themselves also personally liable for the corporate debt.
The advantage of the corporate setting is the default rule of limited liability
affords a more efficient means to encouraging investments in the venture, and
additional economic cost is spent only when parties attempt to go around the
limited liability feature. A corporation and its stockholders may therefore choose
whether or not to concede the advantage or protection of limited liability, while in
a partnership, there is already an implied contract that if the partnership's assets
are insufficient, the partners separate properties would be liable.
4. Centralized Management
A corporation's management is centralized in the board of directors.
Shareholders are not agents of the corporation, nor can they bind the
corporations, unlike in a partnership setting, where each partner may bind the
partnership,39 even without the knowledge of the other partners. Therefore, in its
legal relationship, a corporation presents a more stable and efficient system of
governance and dealings with third parties, since management prerogatives are
centralized in its board of directors. By imposition of law, and except in
in the ordinary course of business of the partnership or with authority from the other partners and
for partner’s act or misapplication of properties.”
38
CLARK, CORPORATE LAW, (Little Brown and Company, 1986 ed.), p. 3.
39
In the absence of contractual stipulation, all partners shall be considered agents and
whatever any one of them may do alone shall bind the partnership. Arts. 1803(1) and 1818, Civil
Code.
particularly designated instances, stockholders are bound by the management
decisions and transactions of the board of directors of the corporation, whether
they like it or not.
5. Double Taxation
The corporation has traditionally been subjected to heavier taxation than
other forms of business organizations; the profits of the corporation which are
already subjected to corporate income tax when declared and distributed as
dividends to the stockholders are again subjected to further income tax.
With the trust of Government to encourage both local and foreign
investments in the country, and to entice the use of the corporation as the vehicle
for such investments, many of the previous tax laws that tended to make
corporate vehicles expensive have been abolished. Except for dividends
declared by domestic corporation in favor of foreign corporation,42 dividends
received by individuals from corporation,43 as well as inter-corporate dividends
between domestic corporations,44 were subject to zero rate of income taxation.
There had also been an abolition of the personal holding companies tax and tax
on unreasonably accumulated surplus of corporations.45
However, with the passage of the Tax Reform Act of 1997, beginning
1998, there has been imposed the following tax burdens on the means of doing
business through the medium of the corporation:
42
Sec. 25(a) and (b), National Internal Revenue Code of 1977.
43
Sec. 21, National Internal Revenue Code of 1977.
44
Sec. 24, National Internal Revenue Code of 1977.
45
Executive Order No. 37 (1986).
46
Sec. 24(B)(2), National Internal Revenue Code of 1997.
47
Sec. 27(E), National Internal Revenue Code of 1997.
48
Sec. 29, National Internal Revenue Code of 1997.
COMPARING THE CORPORATION WITH
OTHER MEDIA OF BUSINESS ENDEAVORS
1. Sole Proprietorships
Sole proprietorships are less saddled with the many requirements and
regulations which corporations are often subjected to by law. The owner is in
command of his whole business and he stands to lose as much as he puts in and
even more to the extent of all his personal holdings.
This is in contrast to a corporation where control belongs to the board of
directors, and there is limited liability on the part of the shareholders.
Consequently, sole proprietorships work well only for carrying-on simple or
small business endeavors, and do not function well in cases of large enterprises
which require huge capital investments and specialized management skills.
2. Partnerships49
Article 1768 of the Civil Code provides that the partnership has a juridical
personality separate and distinct from that of each of the partners, even in case
of failure to comply with the registrations requirements of the Code.50
The most important distinction between the corporation and the
partnership are their legal capacities. A corporation has a stronger legal
personality, enabling it to continue despite the death, insolvency or withdrawal of
any of its stockholders or members. In a partnership, the withdrawal, death or
insolvency of any partner would automatically bring about the dissolution of the
partnership.51
Limited liability is a main feature in a corporate setting, whereas partners
are liable personally for partnership debts not only to what they have invested in
the partnership but even as to their other properties.52
Generally, every partner is an agent of the partnership53 and by his sole
act, he can bind the partnership,54 whereas in a corporation, only the board of
directors or its agents can bind the corporation.
49
Please see capsule on Philippine Partnership Law, Appendix A.
50
See Art. 1772, first paragraph, Civil Code.
51
Arts. 1828 and 1830, Civil Code.
52
Arts. 1816, 1817, 1824, and 1839, Civil Code.
53
Arts. 1803(1), 1818, and 1819, Civil Code.
54
Arts. 1822 and 1823, Civil Code.
When five or more persons come together to contribute money or property
to a venture with the intention of receiving profits therefrom and intending to form
a corporation, but because of certain defects no corporation is formed under the
law, do we then consider at the very least, that a partnership with a separate
juridical personality has been created? The author believes that the answer
would be in the negative, based on two grounds:
First, both corporate and partnership relationship are fundamentally
contractual relationship created by the co-venturers who consent to come
together under said relationship. If the parties had intended to create an
association in the form of a corporation, a partnership cannot be created in its
stead since such is not within their intent, and therefore does not constitute a part
of their consent to the contractual relationship.
Second, the important differences between the corporation and the
partnership cannot lead one to the conclusion that in the absence of the first, the
contracting parties would have gone along with the latter. Limited liability,
centralized management and easy transferability of the units of ownership in a
corporation are by themselves strong factors for parties' intention to be bound in
the corporate relationship, and one cannot presume that if these features are not
met that they would in the alternative wish to be covered by a partnership
relationship, which has generally would involve unlimited liability, mutual agency
among the partners, and the delectus personarum feature.
It is the legal principle that when parties come together and all the
elements of a particular contract are present, although the parties may have
nominated it otherwise, the law will impose such contractual relationship upon
them. In other words, the contract or relationship is what the law says it is, not
how the parties wish to call it. Therefore, when five or more persons come
together to contribute money or property to a common venture or fund with the
intention of dividing the profits among themselves, the parties may wish to call it
otherwise; however, under the definition of the Article 1767 of the Civil Code, it
would still be a partnership, even if the parties had intended a corporation but did
not materialize because of certain registration deficiencies.
Nevertheless, such principle cannot apply, since the essence of what
constitutes the contractual relationship of partnership under Article 1767 is the
coming "together" or what is known in partnership law as "delectus personarum"
and not just the joint venture. The essence of partnership is the personal
relationship, i.e., that each would-be partner goes into the venture precisely
because he wants the other co-venturers, and no other persons, to be with him in
the venture. A venturer who seeks to enter into a corporate relationship perhaps
does not even care about the personality of the other co-venturers, and fully
aware that he himself and others have the ability to transfer their investments to
outsiders.
On the other hand, there seems to be indications of contrary view to the
above. Under Section 21 of the Corporation Code, when parties act and pretend
to be a corporation, when in fact none exist, the law would impute to them a
juridical personality to validate the contract under the corporation by estoppel
doctrine; however, it would treat the parties as partners since it expressly makes
them liable as "general partners."
Under such contrary view, the main issue would be the priority between
the personal creditors of the "partners" in a corporation by estoppel doctrine, and
the "corporate" creditors of the corporation by estoppel, as to the assets invested
into the venture. The author would presume that it would have to be the
corporate creditors that would have priority over the “corporate” assets as this
seems to be the moving spirit of the corporation by estoppel doctrine.
This position of the author has been partially justified by the discussions of
the Supreme Court in Pioneer Insurance & Surety Corp. v. Court of Appeals,55
when it resolved the issue of "What legal rules govern the relationship among co-
investors whose agreements was to do business through the corporate vehicle
but who failed to incorporate the entity in which they had chosen to invest?"56
Quoting from American jurisprudence, the Supreme Court in Pioneer
Insurance held that there has been the position that as among themselves the
rights of the stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating thereto and
not by the rules governing partners,57 nevertheless it has been held that
“ordinarily 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,58
and their rights as members of the company to the property acquired by the
company will be recognized.”59
Notwithstanding the foregoing, the Supreme Court took the position that
such partnership relationship does not 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 contributions. . . 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.60 Nor will
it make the investor to a would-be corporation liable for losses sustained from its
55
175 SCRA 668 (1989).
56
Ibid, at p. 681.
57
Quoting from CORPUS JURIS SECUNDUM which cited Cannon v. Brush Electric Co., 54 A.
121, 96 Md. 446, 94 Am. S.R. 584.
58
Ibid, citing Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913 A. 1065.
59
Ibid, citing Smith v. Schoodoc Pond Packing Co., 84 A, 268m 109 Me. 555; Whipple v.
Parker, 29 Mich 369.
60
Ibid, at p.683, quoting from CORPUS JURIS SECUNDUM, Vol. 68, p. 464.
operations under a partnership inter se theory.”61 The key elements in resolving
the issue seem to have been in Pioneer Insurance those of intent and
participation in business activities.
The doctrinal pronouncement is Pioneer Insurance can be summarized as
follows: When parties come together intending to form a corporation, but no
corporation is formed due to some legal cause, then:
3. Business Trusts
As compared to a corporation, a business trust is simply a deed of trust
which is easier and less expensive to constitute for it is not bound by any legal
requirements like the former. It does not have a separate juridical personality,
and is mainly governed by contractual doctrines and the common law principles
on trust. Trust relationship is centered upon properties, and which places naked
titled in the trustee, and beneficial title in the beneficiary.
4. Joint Ventures62
The Supreme Court has held that the legal concept of a joint venture is of
common law origin, and has no precise legal definition. Under Philippine law, a
joint venture is a form of partnership and should thus be governed by the law of
partnerships,63 which would then include the features of separate juridical
personality, mutual agency among the co-venturers, and unlimited liability.
61
Ibid, at p. 685.
62
For a more comprehensive discussion on joint ventures, see Appendix C on Philippine
Law on Joint Ventures.
63
Aubach v. Sanitary Wares Mfg. Corp., 189 SCRA 130 (1989). In that case the Supreme
Court held also: "It has been held that while generally a corporation cannot enter into a
The element of a joint ventures, being basically those of the partnership,
has been affirmed in Kilosbayan, Inc. v. Guingona, Jr.:64
5. Cooperatives66
A cooperative is a duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve lawful common
social or economic end, making equitable contributions to the capital required
and accepting a fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles.67
A cooperative, like an ordinary corporation, has a juridical personality
separate and distinct from its members, and has limited liability feature.68
Unlike an ordinary corporation, cooperatives are governed by principles of
democratic control where the members in primary cooperatives shall have equal
voting rights on a one-member-one-vote principle;69 where the board of directors
manages the affairs of the cooperative, but it is the general assembly of full
membership that exercises all the rights and performs all of the obligations of the
cooperative;70 and are under the supervision and control of the Cooperative
Development of Authority71 and not the SEC.
Unlike an ordinary stock corporation which is organized for profit, and a
non-stock corporation which can be organized for any eleemosynary purpose
and no part of the net income is to be distributed to the officers and members
thereof, the primary objective of every cooperative is self-help: "to provide goods
partnership contract, it may however engage in a joint venture with others. Some features of a
joint venture agreement, carried out in the form of a corporation, are that a minority group is given
a specified number of seats in the board of directors, i.e., three directors in a board of nine
directors; the minority group is entitled to designate a member of the executive committee and his
vote is required for certain transactions; the quorum is required for amendment of the articles and
by-laws is more than the number specified in the law, i.e. 75 % of outstanding shares of stock."
64
232 SCRA 110, 143 (1994).
65
Ibid, citing BLACK’S LAW DICTIONARY, Sixth ed., at p. 839.
66
More detailed discussions on legal requirements covering cooperatives are found in
Chapter 17 on Non-Stock Corporations and Foundations.
67
Art. 3, Cooperative Development Authority Act (R.A. 6938)
68
Arts. 12 and 30, ibid.
69
Art. 4(2), ibid.
70
Arts. 5(3) and 34, ibid.
71
The Cooperative Development Authority Act (R.A. 6939).
and services to its members and thus enable them to attain increased income
and savings, investments, productivity, and purchasing power and promote
among them equitable distribution of net surplus through maximum utilization of
economies of scale, cost-sharing and risk-sharing without conducting the affairs
of the cooperative for eleemosynary or charitable purposes."72
The Law on cooperatives declares it a policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for promoting self-
reliance and harnessing people power towards the attainment of economic
development and social justice.73
72
Art. 7, The Cooperative Code of the Philippines (R.A. 6938).
73
Art. 2, ibid.
74
40 Phil. 136 (1919).
75
Ibid, at p. 144.
76
20 SCRA 383 (1967).
said officers. It held that the legality of a seizure can be contested only by the
party whose rights have been impaired thereby; and the objection to an unlawful
search is purely personal and cannot be availed of by third parties, such as
officers of the corporation who interpose it for their personal interests.
In Bache & Co. (Phil.), Inc. v. Ruiz,77 the Court held that a corporation is
entitled to immunity against unreasonable searches and seizures. "A corporation
is, after all, but an association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it waives no
constitutional immunities appropriate for such body. Its property cannot be taken
without compensation. It can only be proceeded against by due process of law,
and is protected, under the 14th Amendment, against unlawful discrimination."78
In the same case, however, the Court denied that corporations have a
right to claim protection on the constitutional right against self-incrimination. By
applying American doctrine, the Court held that the privilege against self
incrimination "is a personal one, applying only to natural individuals,"79 and a
corporation may be compelled to submit to the visitorial powers of the State even
if this result in disclosure of criminal acts of the corporation.80
In Bataan Shipyard & Engineering Co., Inc. v. PCGG,81 the Court held that
the right against self-incrimination has no application to juridical persons: "While
an individual may lawfully refuse to answer incriminating questions 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 when
charged with an abuse of such privilege."82
The denial of the right against self-incrimination is extensively quoted in
Bataan Shipyard from Wilson v. United States:83
77
37 SCRA 823 (1971).
78
Ibid, at p. 837, quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.
79
United States v. White, 322 U.S. 694, 698 (1944).
80
Hale v. Henkel, 201 U.S. 43 (1906); Wilson v. United States, 221 U.S. 361 (1911). See
also BERNAS, CONSTITUTIONAL RIGHTS & DUTIES (Vol. I, 1974 ed.) pp. 299-300.
81
150 SCRA 181 (1987).
82
Ibid, at p. 234, quoting from Hal v. Henkel, 201 U.S. 43.
83
55 L.Ed. 771,780.
how these franchises had been employed, and whether they
had been abused, and demand the production of the corporate
books and papers for that purpose. The defense 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 unless protected by
an immunity statute, it does not follow that a corporation,
vested with special privileges, and franchise may refuse to
show its hand when charged with an abuse of such privileges.
84
U.S. v. Tan Teng, 23 Phil. 145, 152 (1912).
85
Tayag v. Benguet Consolidated, Inc., 26 SCRA 242, 248 (1968).
86
83 SCRA 237 (1978).
87
Ibid, at p. 247, citing 10 FLETCHER CYCLOPEDIA CORPORATION, 1970 ed., pp. 266-267.
as in the Philippine National Bank case, or having taken advantage of such an
tortuous act the corporation, through its board, expressly or impliedly ratifies such
an act or is estopped from impugning such an act.
Since the board of directors of a corporation is the embodiment of the very
power and prerogatives of a corporation, the act of the board in directing or
undertaking a tortuous act is necessarily that of the corporation. In short, the act
of the board is essentially that of the corporation, and therefore corporate assets
cannot escape enforcement of the claims for damages of the tort victim. The tort
liability of the corporation is without prejudice to a derivative suit being filed by
the stockholders to recover from the responsible board members and officers the
damages suffered by the corporation.
Sergio F. Naguiat v. NLRC,88 although admitting that “[o]ur jurisprudence
is wanting as to the definite scope of ‘corporate tort’,” nevertheless sought to
encompass corporate tort to “consists in the violation of a right given or the
omission of a duty imposed by law . . , tort is a breach of a legal duty.” In that
case, for failure of the corporate employer to grant separation pay to employees
in case of closure or cessation of operations of establishments or undertaking not
due to serious business losses or financial reverses as mandated in Article 283
of the Labor Code, the Court held the corporate employer liable for tort, including
its stockholder who was actively engaged in the management or operation of the
business.
88
269 SCRA 564, 80 SCAD 502 (1997).
89
27 Phil. 401 (1914).
90
Ibid, at p. 407-408.
creatures of statute have only those powers conferred upon them by statute,
which would naturally come from Spanish and not from common law sources.
The Court went on to say -
95
39 SCRA 303 (1971).
96
121 SCRA 655 (1983).
97
Ibid, at p. 662. For example, under Section 1 (2) of Pres. Decree 772, if the offense of
squatting is committed by a corporation or an association, the penalty imposed by law shall be
meted out on the president, director, manager or managing partners of the corporation or
association who shall be liable thereon.
the ones to assume the criminal liability; otherwise this liability
as created by the law would be illusory, and the deterrent
effect of the law, negated.98
At the time of Sia, Pres. Decree 115 had not been enacted making it
expressly a case of estafa for violating the terms of the trust receipts and
imposing expressly the criminal liability upon the responsible officer, directors,
officers, employees or other officials of a corporation. Since at the time of Sia the
act alleged to be a crime was not in the performance of an act directly ordained
by the law to performed by the corporation, and that the crime imputed would
only arise based on the intent and the agreement of the parties to the trust
receipt, and not by the direct provision of law, then "[t]he intention of the parties,
therefore, is a factor determinant whether a crime was committed or whether a
civil obligation alone [was] intended by the parties."99
The Court then held in the absence of an express provision of law making
the President liable for the criminal offense committed by the corporation, the
existence of a criminal liability on his part may not be said to be beyond any
doubt, as is the quantum of evidence required in criminal cases. "In all criminal
prosecutions, the existence of criminal liability for which the accused is made
answerable must be clear and certain. The maxim that all doubts must be
resolved in favor of the accused is always of compelling force in the prosecution
of offenses."100
Although before Sia, the Court had convicted an individual liable for estafa
under a trust receipt transaction in Samo v. People,101 it held that it was
inapplicable since in that case the individual was shown to be acting for his own
behalf and not in behalf of a corporation. The Court held in Sia that it "has thus
far not ruled on the criminal liability of an officer of a corporation signing in behalf
of said corporation a trust receipt of the same nature as that involved herein."102
Such pronouncement of the Court would mean that when an officer does
an act for and in behalf of the corporation, his intent would not be ascribed to him
in his personal capacity, but should be ascribed as the intent of the corporation
as it pertains to the transaction. This would amount to respecting the separate
juridical personality of a corporation, even in criminal cases, so that the intent
and motivation of corporate officers acting for in behalf of the corporation would
be ascribable to the corporation as corporate offenses, and the responsible
officer liable for the criminal act as the "personification" of the corporation in the
real world.
Such an implied conclusion can be drawn-out from the concurring opinion
of then Justice Teehankee in Sia when he ruled that —
98
Ibid.
99
Ibid, at p. 663.
100
Ibid.
101
5 SCRA 354 (1962).
102
Samo v. People, 5 SCRA 354, 663.
. . . Petitioner personally cannot be charged and
convicted for the crime of estafa for failure of the corporation
(MEMAP) represented by him as president and general
manager to pay . . .
All these acts were corporate acts with the accused duly
representing the corporation as its president and general
manager: the application for bank financing, the deposit (which
was from corporate funds, and not a deposit made by the
petitioner, as wrongly alleged in the information), the receipt of
the steel sheets, then manufactured into finished products
(which could not technically be done under the terms of the
trust receipt required by the bank, under which the very sheets
were supposed to be sold by the corporation) and the non-
payment of the credit extended by the bank. There is not the
slightest evidence nor intimation that these corporate acts
were unauthorized or that petitioner personally had committed
any fraud or deceit in connection therewith or that he had
personally been responsible for or benefited from the
corporation's failure to pay the bank the balance due under the
trust receipt.103
103
121 SCRA 655, 668.
104
Ibid, at p. 662.
Finally, the Supreme Court clarified in Cometa v. Court of Appeals,105 that
although a criminal case can only be filed against the officers of a corporation
and not against the corporation itself, it does not follow that the corporation
cannot be a real-party-in-interest for the purpose of bringing a civil action for
malicious prosecution for the damages incurred by the corporation for the
criminal proceedings brought against its officer.
105
301 SCRA 459, 102 SCAD 360 (1999).
106
Mambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968). See also
People v. Manero, 218 SCRA 85 (1993).
107
Ibid, at p. 380.
108
Prime White Cement Corp. v. Intermediate Appellate Court, 220 SCRA 103, 113-114
(1993); also Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267, 84 SCAD 366 (1997).
109
300 SCRA 579, 101 SCAD 1028 (1998).
110
301 SCRA 589, 102 SCAD 459 (1999).
contemplation, it has no feelings, no emotions, no senses. It
cannot, therefore, experience physical suffering and mental
anguish, which can be experienced only by one having a
nervous system. The statement in People v. Manero [218
SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB [130
Phil. 366 (1968)], that a corporation may recover moral
damages if it “has a good reputation that is debased, resulting
in social humiliation” is an obiter dictum. . . The possible basis
of recover of a corporation would be under Articles 19, 20 and
21 of the Civil Code, but which requires a clear proof of malice
or bad faith.
NATIONALITY OF CORPORATIONS
The nationality of a corporation "serves as a legal basis for subjecting the
enterprise or its activities to the laws, the economic and fiscal powers, and the
various social and financial policies, of the state to which it is supposed to
belong."111
In Philippine jurisdiction, the principal doctrine on the test of nationality of
a corporate entity is the place of incorporation test: that a corporation is a
national of the country under whose laws is has been organized and registered.
This is embodied in Section 123 of the Corporation Code which provides that "a
foreign corporations is one formed, organized or existing under any laws other
than those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state."
The other test of nationality is the control test, under which the nationality
of a corporation is determined by the nationality of the majority of the
stockholders on whom control is vested.
Nationality is only one basis by which a state controls the affairs of the
corporation. The place of principal business test is also applied to determine
whether a state has jurisdiction over the existence and legal character of a
corporation, its capacity or powers, internal organization, capital structure, the
rights and liabilities of directors, officers, and shareholders towards each other
and to creditors and third persons.112 Under that test, the corporation is a
"national" or subject to the jurisdiction of the place where its principal office or
center of management (siege social) is located.
Although the place of incorporation test is the primary test of nationality of
corporations in the Philippines, in the following cases, in addition to the place of
incorporation test, the control test is also applied:
111
SALONGA, PRIVATE INTERNATIONAL LAW (1979 ed.), p. 338.
112
SALONGA, ibid, at pp. 348-350.
Section 2, Article XII of the Constitution provides that "[a]ll lands of the
public domain, waters, minerals, coal, petroleum, and other mineral oils, all
forces of potential and other natural resources are owned by the State. . . The
State may directly undertake such activities, or it may enter into co-production,
joint venture, or production sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose capital is owned
by such citizens."113
The policy of the State to ensure that the exploitation of natural resources
or the pursuit of activities deemed to be of public or national interest are in the
control of Filipinos.
In addition, the section authorizes the President to enter into agreements
with foreign-owned corporations involving either technical or financial assistance
for large-scale exploration, development, and utilization of minerals, petroleum,
and other mineral oils according to general terms and conditions provided by law,
based on real contributions to the economic growth and general welfare of the
country. However, the President shall notify the Congress of very contract
entered into within 30 days from its execution.
Even if the corporation is a creature of the State, which can be controlled,
there was a need to further safeguard the exploitation of our natural resources. If
a creature of the Philippine law does not assure the Legislature of its control,
then a creature created by another state must necessarily be disqualified.
Allegiance, by virtue of nationality of said corporation, is owed to the State which
created it.
The constitutional provision114 on limiting the exploitation of natural
resources to corporations at least 60% of the capital stock is owned by Filipino
citizens, does not contain the place of incorporation test. But it must necessarily
be presumed that the control test provided in the Constitution would pertain only
to domestic corporations; and that necessarily a foreign corporation even though
controlled by Filipino citizens would not be qualified to exploit our natural
resources.
The constitutional provision does not distinguish between voting shares
and non-voting shares. So that, even if the voting shares are controlled by
Filipinos, if the total shareholdings of the company (both voting and non-voting)
does not meet the minimum 60% Filipino ownership requirement of the
Constitution, such corporation would still not be qualified to engage in activities
that seek to exploit our natural resources. The broadness of the constitutional
language by not distinguishing voting from non-voting shares seems to square
with Section 6 of the Corporation Code, where in eight fundamental corporate
restructuring or transactions, all shares, including non-voting shares, would be
entitled to vote. Therefore, in those eight case enumerated in Section 6, even
foreigners who hold non-voting shares would be entitled to vote.
113
Emphasis supplied.
114
Sec. 2, Art. XII, 1987 Constitution.
Register of Deeds of Rizal v. Ung Sui Si Temple115 laid down the principle
"that the purpose of the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or to exploit
natural resources shall be controlled by Filipinos; and that the spirit of the
Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens."116 In that case, the Court
disqualified a non-incorporated religious organization, whose trustees and whose
members were Chinese nationals, from acquiring by donation a piece of land.
In Roman Catholic Administrator of Davao, Inc. v. The LRC and the
Register of Deeds of Davao,117 held that a corporation sole would have no
nationality at all to disqualify it from owning land in the Philippines even though
its only corporator was a Canadian citizen.
Studying the history of the Roman Catholic Apostolic Church in the
Philippines, the Court held that —
115
97 Phil. 58 (1955).
116
Ibid, at p. 61.
117
102 Phil. 597 (1957).
118
Ibid, at p. 612.
for the benefit of the Roman Catholic faithful of their respective locality or
diocese.
The reasoning of the majority decision in Roman Catholic Administrator
has serious flaws. As observed by Justice J.B.L. Reyes in his dissenting opinion,
"[i]n requiring corporations or associations to have 60% of their capital owned by
Filipino citizens, the constitution manifestly disregarded the corporate fiction, i.e.,
the juridical personality of such corporations or associations. It went behind the
corporate entity and looked at the natural persons that composed it, and
demanded that a clear majority in interest (60%) should be Filipino."119 He
observed the doctrine in Ung Siu Si Temple, that if the association had no
capital, its controlling membership must be composed of Filipinos "[b]ecause
ownership divorced from control is not true ownership."120
Since under the rules governing corporation sole, the members of the
religious association cannot overrule or override the decisions of the sole
corporator, then it would be wrong to conclude that the control of the corporation
sole would be in the members of the religious association.
What the Court held in Roman Catholic Administrator as "the unhappy
freak of English law" has certainly now become a freak in Philippine Corporate
Law.
119
Ibid, at p. 636.
120
Ibid, at p.637.
121
93 Phil. 333 (1953).
already in existence but without the requisite proportion of Filipino capital.
Quasha therefore draws the distinction between the primary franchise of a
corporate entity by virtue of which it is constituted as a body politic endowed with
separate juridical personality, and the secondary franchise that it may receive
during its life for the exercise of a privilege granted by law, such as the operation
of a public utility.
The ruling in Quasha can be pointed to as the basis to show that the
constitutional provision122 prohibiting Congress, except by general law, to provide
for the formation, organization, or regulation of private corporations, really serves
no useful benefit, since all that it covers is the primary franchise, which merely
constitutes the corporation into a juridical entity. It is the secondary franchise by
which the corporation may be granted special privileges, licenses or benefits not
enjoyed by other corporations, where the real abuse may be committed. And yet,
there is no doubt that under the Constitution, Congress has the power to directly
grant secondary franchises to private corporations.
The Quasha doctrine was reiterated in Tatad v. Garcia, Jr.,123 which held
that although the Constitution requires in no uncertain terms that a franchise for
the operation of a public utility can be granted only to corporations at least 60%
of the capital of which is owned by Filipinos; however, "it does not require a
franchise before one can own the facilities needed to operate a public utility so
long as it does not operate them to serve the public. In law, there is a clear
distinction between the ‘operation’ of a public utility and the ownership of the
facilities and equipment used to serve the public."124 Therefore, the Court held
that in a railway system, while a foreign corporation may own the rail tracks,
rolling stocks like the coaches, rail stations, terminals and the power plant, and
although a franchise is needed to operate these facilities to serve the public, they
do not by themselves constitute a public utility. "What constitutes a public utility is
not their ownership but their use to serve the public."125 The Court held that in
law, there is a clear distinction between the "operation" of a public utility and the
"ownership" of the facilities and equipment used to serve the public.126
3. Mass Media
Under Section 11, Article XVI of the 1987 Constitution, the ownership of
mass media shall be limited to citizens of the Philippines, or to corporations,
cooperatives or associations, wholly-owned and managed by such citizens. Mass
media includes radio, television, and printed media and does not include
122
Sec. 16, Art. XII, 1987 Constitution.
123
243 SCRA 436, 60 SCAD 480 (1995).
124
Ibid, at pp. 452-453.
125
Ibid, at pp. 453, citing Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551
(1923).
126
Ibid, at pp. 452-453, citing Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil.
551, 557-558 (1923).
commercial telecommunications, which are considered as public utilities, nor the
advertising industry.127
The term "mass media" shall mean the gathering, transmission of news,
information, messages, signals, and forms of written, oral and all visual
communication and shall embrace the print medium, radio, television, films,
movies, advertising in all its phases, and their business managerial.128 The
distinctive features of any mass media undertaking is the dissemination of
information and ideas to the public, or a portion thereof.129 It is divided into the
print media and the broadcast media; the broadcast media includes radio and
television broadcasting in all their aspects and all other cinematographic or radio
promotion and advertising.130 The term covers any medium of communication, a
newspaper, radio, motion pictures, or television, designed to reach the masses
and that tends to set the standards, ideals and aims of the masses.131 The term
has also been opined to include cable television.132
Although the constitutional provision governing mass media does not
expressly include the place of incorporation test, the same shall be deemed
included under the same principle governing exploitation of natural resources. In
fact, the ancillary control test for mass medium under the Constitution is actually
more stringent than in other defined areas, since it requires not only 100%
Filipino ownership of the capital stock of the corporation, but also 100%-Filipino
management of the entity.
4. Advertising Industry
Section 11, Art. XVI of the 1987 Constitution provides that the advertising
industry is impressed with public interest, and shall be regulated by law for the
protection of consumers and the promotion of the general welfare.
Only Filipino citizens or corporations or associations at least seventy
percent (70%) of the capital of which is owned by such citizens shall be allowed
to engage in the advertising industry. It also provides that the participation of
127
BERNAS, THE CONSTITUTIONS OF THE REPUBLIC OF THE PHILPPINES—A COMMENTARY
(1988 ed.), p. 563; Chapter 1, Rules and Regulations for Mass Media in the Philippines.
128
Pres. Decree 36, as amended by Pres. Decrees 191 and 197.
129
DOJ Opinion No. 120, series of 1982.
130
Section 2, Pres. Decree 576; SEC Opinion, 24 March 1983, addressed to Justice Manuel
Lazaro.
131
DOJ Opinion 163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC QUARTERLY
BULLETIN, 31 (No. 4, Dec. 1991).
132
The National Telecommunications Commission (NTC), which regulates and supervises
the cable television industry in the Philippines under Section 2 of Executive Order No. 436, s.
1997, has provided under NTC Memorandum Circular No. 8-9-95, under item 920(a) thereof
provides that “Cable TV operations shall be governed by E.O. No. 205, s. 1987. If CATV
operators offer public telecommunications services, they shall be treated just like a public
telecommunications entity.” Under DOJ Opinion No. 95, series of 1999, the Secretary of Justice,
taking its cue from Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d
70, considered CATV as “a form of mass media which must, therefore, be owned and managed
by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by
Filipino citizens pursuant to the mandate of the Constitution.”
foreign investors in the governing body of the entities in such industry shall be
limited to their proportionate share in the capital thereof, and all the executive
and managing officers of such entities must be citizens of the Philippines.
5. War-Time Test
In Filipinas Compañia de Seguros v. Christern,133 the Court held that in
times of war, the nationality of a private corporation is determined by the
character or citizenship of its controlling stockholders. The Court considered the
juridical entity an enemy based on the fact that the "majority of the stockholders
of the respondent corporation were German subjects." It ruled that the control
test was applicable only in war-time. It refused the sole application of the place of
incorporation test during war-time to determine the nationality of an enemy
corporation.
The war-time test enunciated by Filipinas Compañia has since been
adhered to in subsequent decisions of the Court.134
It must be stressed however, that the afore-quoted SEC rule applies only
for purposes of resolving issues on investments. The SEC was quick to add:
133
89 Phil. 54 (1951).
134
Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952).
135
DOJ Opinion No. 18, s. 1989.
136
SEC Opinion, 23 November 1993, XXVIII SEC QUARTERLY BULLETIN 39 (No. 1, March
1994); SEC Opinion, 14 April 1993, XXVII SEC QUARTERLY BULLETIN 29 (No. 3, Sept. 1993); SEC
Opinion, 23 March 1993, XXVII SEC QUARTERLY BULLETIN 15 (No. 3, Sept. 1993); SEC Opinion, 6
August 1991, SEC QUARTERLY BULLETIN 44 (No. 4, Dec. 1991); SEC Opinion, 30 May 1990, XXIV
SEC QUARTERLY BULLETIN 52 (No. 3, Sept. 1990); SEC Opinion, 14 December 1989, XXIV SEC
QUARTERLY BULLETIN 7 (No. 2, June 1990); SEC Opinion, 6 November 1989, XXIV SEC
QUARTERLY BULLETIN 56 (No. 1, March 1990.
"However, while a corporation with 60% Filipino and 40% Foreign equity
ownership is considered a Philippine national for purposes of investment, it is not
qualified to invest in or enter into a joint venture agreement with corporations or
partnerships, the capital or ownership of which under the constitution or other
special laws are limited to Filipino citizens only."137 A joint venture arrangement
would mean that such corporation has become a partner and is deemed then to
be acting or involving itself in the operations of a nationalized activity by the acts
of the local partners by virtue of the principle of mutual agency applicable to
partnerships.
Under Section 3(a) of the Foreign Investment Act of 1991, the term
"Philippine national" as it refers to a corporate entity shall mean a corporation
organized under the laws of the Philippines of which at least sixty percent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines. However, it provides that where a corporation and its non-
Filipino stockholders own stocks in a SEC-registered enterprise, at least sixty
percent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least
sixty percent (60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines, in order that the corporation
shall be considered a Philippine national. The law therefore, limits the test to
voting shares, but however, makes it more stringent when it comes to actual
control by making a double 60% rule requirement as to both holding and held
company, as well as their board of directors.
How many levels should grandfather rule be applied? In the early case of
Palting v. San Jose Petroleum Inc.,138 the Supreme Court refused the registration
and sale into the Philippines of securities of a Panamanian registered company
the proceeds of which were to be exclusively used to finance the oil exploration
efforts of a domestic corporation, which was owned 90% by the Panamanian
company. The Panamanian company sought authority to issue the securities on
the basis of the parity rights under the Laurel-Langley Agreement.
It was the contention of the Panamanian company that since its majority
shareholdings are owned by another Panamanian company, which in turn was
owned 100% by two (2) Venezuelan companies whose shares were being traded
in the stock exchanges in the United States, then it was qualified to exercise the
privileges granted under the Laurel-Langley agreement.
In refusing to apply the long chain of ownership source to find control to be
with American citizens in the United States who have bought the shares of the
two (2) Venezuelan companies, the Court held that "with a long chain of
intervening foreign corporations . . . is to unduly stretch and strain the language
and intent of the law. For, to what extent must the word 'indirectly' be carried?
Must we trace the ownership or control of these various corporations ad infinitum
137
SEC Opinion, 14 December 1989, XXIV SEC QUARTERLY BULLETIN 7 (No. 2, June 1990).
138
18 SCRA 924 (1966).
for the purpose of determining whether the American ownership-control-
requirement is satisfied?"139
In short, the message of Palting is that the application of the grandfather
rule to determine the nationality of the ultimate controller of a subject corporation
cannot go beyond the level of what is reasonable. The further away the level of
ownership from the subject corporation, the less can one practically associate
control of the subject corporation.
In a 1977 internal memorandum issued by the SEC applying the
grandfather rule, it suggested that the rule be applied on two (2) levels of
corporate relations for publicly-held corporations or where the shares are traded
in the stock exchanges; and to apply the rule on three (3) levels for closely held
corporations or the shares of which are not traded in the stock exchange. On the
other hand, under Central Bank Circular No. 1171,140 the Monetary Board in
applying the grandfather rule in corporate ownership in banking institutions
directed application up to the fourth level or fourth tier of corporate ownership.
Aside from the General Banking Law of 2000 which expressly provides for
the application of the grandfather rule,141 the Investment Houses Law also applies
the rule.142
143
See Vasquez, Nationality of Juridical Persons: Evaluation and Departure, 60 PHIL. L.J.
292 (1985).
144
SALONGA, PRIVATE INTERNATIONAL LAW, (U.P. Law Center, 1979 ed.), pp. 136-137.
PARAS, PHILIPPINE CONFLICT OF LAWS, (Rex Book Store, 1979 ed.), pp. 108-109.
CLASSIFICATIONS OF CORPORATIONS
For purely academic purposes, certain classes of corporations will be
discussed hereunder. However, for a better philosophical approach on certain
classifications other chapters of this book should be referred to.
The substantial issues relating to de facto corporations and the
corporation by estoppel doctrine are discussed in Chapter 5 on Corporate
Contract Law. The underlying doctrine on non-stock corporations, as
distinguished from stock corporations, is thoroughly discussed in Chapter 16 on
Non-Stock Corporations and Foundations. The substantial aspect of doing
business in the Philippines of foreign corporations, as distinguished from
domestic corporation, is discussed in Chapter 17 on Foreign Corporations and
the Concept of Doing Business.
146
91 Phil. 359 (1952).
continue to be private corporations, such as the National Development
Corporation, the Philippine National Railways, etc.
3. Quasi-Public Corporations
There is a group of corporations that seem to be a cross between private
corporations and public corporations, and they are classified as quasi-public
corporations. These usually cover school districts, water districts, and the like.
Marilao Water Consumers Association, Inc. v. Intermediate Appellate
147
Court, held that water districts organized under Pres. Decree 198, although
considered as quasi-public corporations and authorized to exercise the powers,
rights and privileges given to private corporations under existing laws, are
entirely distinct from corporations organized under the Corporation Code, and not
within the jurisdiction of the SEC.
PNOC-Energy Development Corp. v. Leogardo,148 PNOC-Eneregy
Development Corp. v. NLRC,149 and Davao City Water District v. Civil Service
Commission,150 held that the doctrine that employees of government-owned and
controlled corporations, whether created by special law or formed as subsidiaries
under the general corporation law are governed by the Civil Service Law and not
by the Labor Code, has been supplanted by the 1987 Constitution. The present
doctrine is that: The test in determining whether a government-owned or
controlled corporation is subject to the Civil Service Law is the manner of its
creation, such that government corporations created by special charter are
subject to its provisions while those incorporated under the general corporation
law are not within the coverage, and therefore are governed by the Labor Code.
Boy Scouts of the Philippines v. NLRC,151 held that although Boy Scouts of
the Philippines does not receive any monetary or financial subsidy from the
Government, and that its funds and assets are not considered government in
nature and not subject to audit by the Commission of Audit, the fact that it
received a special charter from the government, that its governing board are
appointed by the Government, and that its purpose are of public character, for
they pertain to the educational, civic and social development of the youth which
constitute a very substantial and important part of the nation, it is not a public
corporation in the same sense that municipal corporation or local governments
are public corporation since its does not govern a portion of the state, but it also
does not have proprietary functions in the same sense that the functions or
activities of government-owned or -controlled corporations such as the National
Development Company or the National Steel Corporation, is may still be
considered as such, or under the 1987 Administrative Code as an instrumentality
147
201 SCRA 437 (1991).
148
175 SCRA 26 (1989).
149
201 SCRA 487 (1991).
150
201 SCRA 593 (1991).
151
196 SCRA 176 (1991).
of the Government. Therefore, the employees are subject to the Civil Service
Law.
Under Rep. Act 7656, which required government-owned or controlled
corporations to declare dividends to the National Government, the term
"government-owned or controlled corporations" has been specifically defined as
"corporations organized as a stock or non-stock corporation vested with functions
relating to public needs, whether governmental or proprietary in nature, and
owned by the Government directly or through its instrumentalities either wholly
or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one percent (51%) of its capital stock." The term also includes financial
institutions, owned or controlled by the National Government, "but shall exclude
acquired asset corporations."
AS TO PLACE OF INCORPORATION
1. Domestic Corporations
A domestic corporation is one incorporated under laws of the Philippines.
Under Section 123 of the Corporation Code, "a foreign corporation is one formed,
organized or existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business in its own
country or State. It shall have the right to business in the Philippines after it shall
have obtained a license to transact business in the country in accordance with
this code and a certificate of authority from the appropriate government agency."
2. Foreign Corporations
A foreign corporation may be licensed by the SEC to do business in the
Philippines only under the principle of reciprocity, after securing a certificate of
authority from the Board of Investments under Executive Order 226, or the
Omnibus Investments Code, and after complying with the conditions for issuance
of the license on application forms, structural organizations and capitalization.
The objectives of the statutory provisions prescribing conditions under
which foreign corporations are permitted to do business in a state other than that
of their creation:
AS TO LEGAL STATUS
1. De Jure Corporation
A corporation has de jure existence if there is a full or substantial
compliance with the requirements of an existing law permitting organization of
such corporation as by proper articles of incorporation duly executed and filed.
Generally, its juridical personality is not subject to attack in the courts from any
source.
If a corporation is a de jure corporation, its due incorporation cannot be
successfully attacked even in a quo warranto proceeding by the State. Therefore
if such proceeding is brought against a corporation and the State has a prima
facie case, the corporation must show that it is a de jure corporation.
2. Corporation De Facto
A corporation has de facto existence where there is a bona fide attempt to
incorporate, colorable compliance with the statute and user of corporate powers.
Under Section 20 of the Corporation Code, the "due incorporation of any
corporation claiming in good faith to be a corporation . . . and its right to exercise
corporate powers, shall not be inquired into collaterally in any private suit ot
which such corporation may be a party." Such inquiry may be made by the
Solicitor General in a quo warranto proceeding.154
The doctrine grew out of the necessity to promote the security of business
transactions and to eliminate quibbling over irregularities. It would be a rare case
where a third persons dealing with a corporation is prejudiced by its recognition
152
Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 (1951);
Davis Winship v. Philippine Trust Co., 90 Phil. 744 (1952); Haw Pia v. China Banking Corp., 80
Phil. 604 (1948).
153
See discussions on doing business in Chapter 17 on Non- Stock Corporations and
Foundations.
154
Ibid.
as a separate entity despite some minor defects in its incorporation. It would be
unfair to allow a claimant against the alleged corporation to insist on the
individual liability of innocent investors merely because of some minor flaws in its
incorporation.
A more thorough discussion of the de facto corporation doctrine is
provided for in Chapter 5 on Corporate Contract Law.
3. Corporation by Estoppel
Although an entity may not be a corporation de jure or de facto, a
particular person or party may, by estoppel or admission, be precluded from
denying its corporate existence. A group of persons may assume to do business
as a corporation without having gone far enough to give a de facto existence to
the entity.
Under certain circumstances and for certain purposes, either the group or
third persons contracting with the purported corporation may be estopped to
deny its corporate status.
Under Section 21 of the Corporation Code, "[a]ll 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.”
In addition, the same section provides that "[o]ne who assumes an
obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation."
The corporation by estoppel doctrine is founded on procedural
convenience, avoidance of inquiries into irrelevant formalities, and fairness to all
parties concerned.
The corporation by estoppel doctrine is properly discussed in Chapter 5 on
Corporate Contract Law.
4. Corporation by Prescription
The Roman Catholic Church is a corporation by prescription, with
acknowledged juridical personality inasmuch as it is an institution which
"antedated by almost a thousand years any other personality in Europe, and
which existed ‘when Grecian eloquence still flourished in Antioch and when idols
were still worshipped in the temple of Mecca.’"155
155
Barlin v. Ramirez, 7 Phil. 41 (1906).
AS TO EXISTENCE OF SHARES OF STOCKS
1. Stock Corporations
Corporations which have a capital stock divided into shares and are
authorized to distribute to the holders dividends. If not authorized by the by-laws
to distribute the dividends, but it is a stock corporation, can a corporation
distribute dividends to its shareholders? The answer seems to be in the
affirmative, since one of the expressed powers granted to stock corporations
under Section 43 of the Corporation Code is the power to declared dividends.
2. Non-Stock Corporations
Section 87 of the Corporation Code provides that a non-stock corporation
is one where on part of its income is distributable as dividends. Under the 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 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 or the provisions of this title.
This provisions governing stock corporations, when pertinent shall be
applicable to non-stock corporations, except as may be covered by specific
provisions of this title.
Section 88 provides that non-stock corporations may be formed or
organized for charitable, religious, educational professional, cultural, recreational,
fraternal, literary, scientific, social, civic service, or similar purposes, like trade,
industry, agriculture and like chambers, or any combination thereof, subject to
the special provisions of this title governing particular classes of non stock
corporations.
In Collector of Internal Revenue v. Club Filipino,156 the Club Filipino was a
civic organization created for recreational purposes, and neither in the articles of
incorporation nor in the by-laws was there a provision relative to dividends and
their distribution, although it is covenanted that upon its dissolution, the club's
remaining assets, after paying debts, shall be donated to a charitable institution.
Whatever profits the club had were used to defray its overhead expenses and to
improve its golf course. The issue is whether or not the club is liable to pay
business taxes. The Court found that the plain and ordinary meaning of business
is restricted to activities or affairs where profit is the purpose. Having found that
the club was organized to help develop and cultivate sports; that whatever profit
it derives are actually used to defray its over head expenses, it stands to reason
that the club is not engaged in the business of an operation of a bar and
restaurant.
156
5 SCRA 321 (1962).
It would seem therefore that for a stock corporation to exist, two requisites
must be complied with: (a) a capital stock divided into shares; and (b) authority to
distribute dividends. However, it is to be noted that nowhere in its articles or by
laws could be found an authority for the distribution of its dividends or surplus
profits.
There is no authorization to declare dividends and this authorization can
only be found either in the articles, the by-law or the resolutions.
Thus, every time there is an express authorization in either the articles of
incorporation or by-laws of a corporation to declare dividends, it is undoubtedly a
stock corporation. When there is no express prohibition not to distribute
dividends, it would seem that the corporation is a non-stock corporation. And like
the Club Filipino case, where there is no express authorization, no express
prohibition, and practice of the corporation shows that it has never declared
dividends in the past and the purpose of the corporation is eleemosynary, it is a
non-stock corporation.
2. Affiliate Company
An affiliate is a company which is subject to common control of a mother
or holding company and operated as part of a system.158 An "affiliate" is defined
by SEC as a person that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with, the
person specified, through the ownership of voting shares, by contract, or
otherwise.159
157
SEC Opinion, 30 September 1986, XX SEC QUARTERLY BULLETIN (Nos. 3 & 4, Sept. &
Dec, 1986), p. 308, quoting from BALLANTINE LAW ON CORPORATIONS.
158
Ibid.
159
Rule 1-2, SEC Rules on Form and Content of Financial Statements Required to Filed by
Corporations Whose Shares of Stock are Sold Or Offered for Sale to the Public. (1973).
person is an affiliate controlled by such person, directly or indirectly, through one
or more intermediaries.160
When it comes to listed companies, the SEC Rules on Form and Content
of Financial Statements161 require consolidated financial statements to be filed
combining the operations of both the parent and the subsidiary companies.
The SEC Rules define the term "control" as the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of the corporation, either through the ownership of its voting shares or by
the existence of a contract or by any other lawful means. In general, the SEC
rules provide that any corporation owning 20% of the outstanding voting shares
of another shall be presumed to be in control of the other.162
Other factors shall also be considered, other than the control factor, thus:
160
Ibid.
161
Issued under SEC Circular No. 2, Series of 1973.
162
Rule 1-2, SEC Rules on Form and Content of Financial Statements Required to Filed by
Corporations Whose Shares of Stock are Sold Or Offered for Sale to the Public (1973).
restrictions, controls or other governmentally imposed
uncertainties so severe that they cast significant doubt on
the parent's ability to control the subsidiary.
—oOo—
163
See also Sandiego, Director, Examiners and Appraisers Dept., SEC, Accounting Times
(1st Quarter, 1993).