DEFINITION OF CORPORATION

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and
properties expressly authorized by law or incidental to its existence. (Sec. 2, RCC)

ATTRIBUTES OF A CORPORATION (A-L-S-P-A-P-I)

1. It is an Artificial being;
2. It is created by operation of Law;
3. It enjoys the right of Succession; and
4. It has the Powers, Attributes, and Properties expressly authorized by law or Incidental to its existence.

ARTIFICIAL BEING
A corporation is a legal or juridical person with a personality separate and distinct from its individual stockholders or members
and from any other legal entity into which it may be connected or related. A corporation is entitled to the rights of a person
under the Bill of Rights. It may even invoke the right against unreasonable search and seizure. (Divina, 2021 citing Stonehill v.
Diokno, G.R. No. L-19550, 19 June 1967)
NOTE: It cannot involve the right against self-incrimination. (Divina, 2021 citing BASECO v PCGG, G.R. No. 75885, 27 May 1987)

CORPORATION AS A CREATION OF LAW OR BY OPERATION OF LAW

A corporation is not created by mere agreement of the incorporators nor by their execution of the AOI. There ought to be a law
from which the corporation derives its legal existence. This may be a general law governing the formation of private
corporations, which is the RCC, or a special law passed by Congress to create a government-owned and controlled corporation.
(Divina, 2021)

THE CREATION OF A CORPORATION IS BY OPERATION OF LAW

NOTE: Philippine jurisprudence adopted the Concession or Fiat Theory, which states that a corporation is conceived as an
artificial person owing its existence through creation by a sovereign power. Further, a corporation is without any existence until it
has received the imprimatur of the State acting according to law, through the SEC. (Tayag v. Benguet Consolidated, Inc., G.R. No.
L- 23145, 29 Nov. 1968)

Q: Since Feb. 8, 1935, the legislature has not passed even a single law creating a private corporation. What provision of the
constitution precludes the passage of such law? (2008 BAR)

A: Sec. 16, Art. XII of the 1987 Constitution provides that the Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government owned and controlled corporations may be created
or established by special charters in the interest of the common good and subject to the test of economic viability.

GOVERNMENT CORPORATIONS
Q: A Special Audit Team from COA audited the accounts of Leyte Metropolitan Water District (LMWD). Subsequently, LMWD
received a request for payment of auditing fees from COA. LMWD General Manager Feliciano sent a reply informing COA that
the water district could not pay the auditing fees, citing as basis for his action P.D. 198 as well as R.A. No. 6758. Thereafter,
Feliciano asked COA for a refund of all auditing fees LMWD previously paid to COA. The COA Chairman denied LMWD’s
request. Feliciano maintains that Local Water Districts (LWDs) are not GOCCs with original charters. He argues that LWDs are
private corporations, and thus, not subject to COA’s jurisdiction. Is an LWD created under P.D. 198, as amended, a GOCC
subject to the audit jurisdiction of COA?

A: YES. LWDs are GOCCs subject to the audit jurisdiction of COA. The Constitution and existing laws mandate COA to audit all
government agencies, including GOCCs with original charters. An LWD is a GOCC with an original charter. The Constitution
recognizes two classes of corporations. The first refers to private corporations created under a general law. The second refers to
GOCCs created by special charters. Congress cannot enact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a general law. The Constitution authorizes
Congress to create GOCCs through special charters. Since private corporations cannot have special charters, it follows that
Congress can create corporations with special charters only if such corporations are government-owned or controlled. Obviously,
LWDs are not private corporations because they are not created under the Corporation Code. (Feliciano v. COA, et al., G.R. No.
147402, 14 Jan. 2004)

Q: Is the Philippine National Red Cross (“PNRC”) a GOCC?

A: Initially, the Supreme Court held PNRC is not a GOCC. Although the PNRC was created by a special charter, it cannot be
considered a GOCC in the absence of the essential elements of ownership and control by the government. Although it is neither a
subdivision, agency, or instrumentality of the government nor a government-owned or -controlled corporation or a subsidiary
thereof, the PNRC enjoys a special status as an important ally and auxiliary of the government in the humanitarian field in
accordance with its commitments under international law. The court cannot all of a sudden refuse to recognize its existence,
especially since the issue of the constitutionality of the PNRC Charter was never raised by the parties. (Liban, et al., v. Gordon,
G.R. No. 175352, 18 Jan. 2011)

Q: Pursuant to E.O. 123, the Ministry of National Defense and the Philippine Tourism Authority executed a MOA for the
development of Corregidor. The Philippine Tourism Authority Board of Directors adopted a Resolution, approving the creation
of a foundation for the development of Corregidor. The Corregidor Foundation, Inc. was incorporated.
The Commission on Audit (COA) issued an Audit Observation Memorandum noting that certain personnel of the Philippine
Tourism Authority who were concurrently rendering services in Corregidor Foundation, Inc. received honoraria and cash gifts.
The Legal and Adjudication Office-Corporate of the COA issued Notice of Disallowance, disallowing in audit the honoraria and
cash gift paid to said personnel. The personnel argue that Corregidor Foundation, Inc. is a private corporation created under
the Corporation Code and, therefore, cannot be audited by the COA. Is Corregidor Foundation, Inc. a GOCC under the audit
jurisdiction of the COA?

A: YES. The Corregidor Foundation, Inc. is a government-owned or controlled corporation under the audit jurisdiction of the COA.
Corregidor Foundation, Inc. was organized as a non-stock corporation under the Corporation Code. It was issued a certificate of
registration by the SEC on 28 Oct. 1987 and, according to its Articles of Incorporation, Corregidor Foundation, Inc. was organized
and to be operated in the public interest. Corregidor Foundation, Inc. was organized primarily to maintain and preserve the war
relics in Corregidor and develop the area's potential as an international and local tourist destination. Corregidor Foundation,
Inc.'s purposes as stated in its AOI are related to the promotion and development of tourism in the country, a declared state
policy and, therefore, a function public in character. Even a cursory reading of the statutory definitions of "government owned-or
controlled corporation" readily reveals that a non-stock corporation may be government-owned or controlled. Further, there is
nothing in the law which provides that government-owned or controlled corporations are always created under an original
charter or special law. (Oriondo v. COA, G.R. No. 211293, 04 June 2019)

RIGHT TO SUCCESSION
The right of succession of a corporation does not connote that a corporation is immortal. It simply means that it has the power to
exist continuously, either by opting to have perpetual existence or to extend its corporate life if a fixed term is specified in its
AOI. Its capacity for continued existence is not affected by any changes in the composition of corporators. (Divina, 2020)

POWERS, ATTRIBUTES AND PROPERTIES OF A CORPORATION

This means that a corporation can only exercise powers conferred upon it by law, its AOI, those implied from the conferred
powers, or incidental to its existence. Any act of the corporation contrary to or outside these powers is ultra vires. (Divina, 2020)

TEST: Whether the corporate act or transaction is related to or in furtherance of the purposes of the corporation.
For instance, whether or not a corporation may acquire property will not only be tested by the lawfulness of the consideration
but whether such property is necessary to achieve the purpose of the corporation. Thus, a corporation engaged in mining cannot
acquire properties for urban development. (Heirs of Antonio Pael v. CA, G.R. No. 133547, 07 Dec. 2001) A corporation organized
as a lending investor cannot engage in pawnbroking. (Divina, 2020)

ENGAGEMENT INTO A CONTRACT OF PARTNERSHIP OR A JOINT VENTURE

Corporations are empowered to enter into a partnership, joint venture, merger, consolidation, or any other commercial
agreement with natural and juridical persons. (Sec. 35(h), RCC) Another significant revision under the new law is the express
grant of power to corporations to enter into any commercial agreement, including but not limited to partnership, joint venture,
merger, consolidation.
NOTE: Under Sec. 36 of the OCC, corporations were expressly allowed to only enter into merger or consolidation with other
corporations as a form of corporate combination.

Q: May a corporation enter into a joint venture? (1996 BAR)

A: YES. A corporation may enter into a joint venture with another where the nature is in line with the business authorized by its
charter. (Tuason v. Bolaños, G.R. No. L-4935, 28 May 1954) As far back as the case of Aurbach v. Sanitary Wares Manufacturing
Corporation, (G.R. No. 75875, 75951, 75975-76, 15 Dec. 1989) the Supreme Court had already ruled that a joint venture is a form
of partnership and should thus be governed by the law of partnerships. The Supreme Court, however, recognized a distinction
between these two business forms and held that although a corporation cannot enter into a partnership contract, it may
however engage in a joint venture with others. (Divina, 2020)

ADVANTAGES OF THE CORPORATE FORM OF BUSINESS

1. CAPACITY TO ACT AS A SINGLE UNIT – any number of persons may unite in a single enterprise without using their names,
without difficulty or inconvenience, and with the valuable right to contract, to sue and be sued, and to hold or convey
property, in the corporate name;
2. LIMITED SHAREHOLDER ‘S LIABILITY – the limit of his liability since stockholders are not personally liable for the debts of the
corporation;
3. CONTINUITY OF EXISTENCE – rights and obligations of a corporation are not affected by the death, incapacity or replacement
of the individual members;
4. FEASIBILITY OF GREATER UNDERTAKING – it enables the individuals to cooperate in order to furnish the large amounts of
capital necessary to finance large scale enterprises;
5. TRANSFERABILITY OF SHARES – unless reasonably restricted, shares of stocks, being personal properties, can be transferred
by the owner without the consent of the other stockholders;
6. CENTRALIZED MANAGEMENT – the vesting of powers of management and appointing officers and agents in board of
directors gives to a corporation the benefit of a centralized administration which is a practical business necessity in any large
organization; and
7. STANDARDIZED METHOD OF ORGANIZATION, MANAGEMENT AND FINANCE – which are provided under a well-drawn
general corporation law. The corporation statutes enter into the charter contract, and these are constantly being interpreted
by courts. An established system of management and protection of shareholders and creditors’ rights has thus been and are
being evolved.

DISADVANTAGES OF THE CORPORATE FORM OF BUSINESS

1. To have a valid and binding corporate act, formal proceedings, such as board meetings are required;
2. The business transactions of a corporation is limited to the State of its incorporation and may not act as such corporation in
other jurisdiction unless it has obtained a license or authority from the foreign state;
3. The shareholders’ limited liability tends to limit the credit available to the corporation as a separate legal entity;
4. Transferability of shares may result to uniting incompatible and conflicting interests;
5. The minority shareholders have practically no say in the conduct of corporate affairs;
6. In large scale enterprises, stockholders’ voting rights may become merely fictitious and theoretical because of disinterest in
management, wide-scale ownership and inaccessible place of meeting;
7. Doubt taxation‖ may be imposed on corporate income; and
8. Corporations are subject to governmental regulations, supervision and control including submission of reportorial
requirements not otherwise imposed in other business form.

PARTNERSHIP VS. CORPORATION

DIFFERENCES PARTNERSHIP CORPORATION
As to the creation and Created by mere agreement of the Created by the operation of law and governed
governing Law parties and governed by the Civil Code. by the Revised Corporation Code.
Existence of the corporation
From the moment of the meeting of minds
commences from the date of issuance of the
As to the commencement of of the partners.
Certificate of
juridical personality and The term of a partnership may be
Incorporation by the SEC.
term of existence established for any period of time
Has perpetual existence, unless its
stipulated by the partners.
AOI provide otherwise.
Any person, partnership, association, or
corporation, singly or jointly with others but
not more than 15.
As to number of formators May be organized by at least 2 persons.
NOTE: A corporation with a single
stockholder is considered a One
Person Corporation.
GR: May exercise any power authorized by
May exercise only such powers as may be
the partners.
conferred by law and its AOI, those implied
As to Powers XPN: Acts which are contrary to law, morals,
therefrom or
good customs,
incidental thereto.
public order, public policy.
As to Management Managed by the Managing Partner, or in the The business of a corporation is
 absence of designation, by any of the
generally conducted by the Board of Directors.
General Partners.
GR: Partners are liable personally and
Stockholders are liable only to the extent of
As to the extent of liability subsidiarily (sometimes solidarily) for
the shares subscribed by
to third persons partnership debts to third persons,
them whether paid or not.
XPN: Limited partner
No right of succession. (i.e., a partnership
As to the right of succession Has right of succession.
dissolves upon death of a partner)
A stockholder has the right to transfer his
A partner cannot transfer his interest in the
As to transferability of shares without prior consent of the other
partnership without the consent of all the
interest stockholders, subject to limitations embodied
other existing partners.
in the AOI.
May be dissolved any time by the will of any
Can only be dissolved with the consent of the
or all of the partners. Death, civil
As to dissolution State. Death or insolvency of shareholders will
interdiction, and insolvency of a partner
note result to dissolution of the corporation.
dissolve the partnership.

THE FOLLOWING ARE THE CLASSES OF CORPORATIONS:

1. As to Existence of Shares of Stock:
a. Stock – one which has:
 Capital stock divided into shares; and
 Are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the
shares held. (Sec. 3, RCC)
b. Nonstock – All other corporations not classified as stock corporation are nonstock corporations (Sec. 3, RCC). It is one where
no part of its income is distributable as dividends to its members, trustees, or officers (Sec. 86, RCC). These corporations may be
formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service,
or similar purposes. (Sec. 87, RCC)

2. As to Place of Incorporation:
a. Domestic – incorporated and organized under the laws of the Philippines.
b. Foreign – 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. (Sec. 140, RCC)

3. As to their Legal Status:

a. De jure – one that has fulfilled all the requirements mandated by law and can successfully resist a suit by the State to
challenge its existence. De jure means “a matter of law” that validates the corporation as a legal entity.
b. De facto – one organized with colorable compliance with the requirements of a valid law. Its existence cannot be inquired
collaterally. Such inquiry may be inquired only by a direct attack by the State through
a quo warranto proceeding. (Sec. 19, RCC)
c. By Estoppel – exists when two or more persons assume to act as a corporation knowing it to be without authority to do so.
They are 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. (Sec. 20, RCC)

Q: MAGNA, a domestic corporation, entered an agreement for professional services with ANDERSEN, a foreign corporation
unlicensed to do business in the Philippines and engaged in consultation and design services. MAGNA asked ANDERSEN to
design its cement plant. After the contract was consummated, ANDERSEN sued MAGNA for the unpaid balance under the
agreement. MAGNA filed a motion to dismiss, arguing that ANDERSEN has no legal capacity to sue because it was doing
business in the Philippines without the requisite license. Rule on the motion.

A: The motion to dismiss should be denied. MAGNA is already estopped from challenging ANDERSEN's legal capacity to sue. A
party cannot take undue advantage by challenging the foreign corporation's
personality or legal capacity to sue when the former already acknowledged the same by entering into a contract with the latter
and derived benefits therefrom. (Magna Ready Mix Concrete Corp. v.
Andersen Bjornstad Kane Jacobs, Inc., G.R. No. 196158, 20 Jan. 2021, J. Hernando)

d. By Prescription – one which has exercised corporate powers for an indefinite period without interference on the part of the
sovereign power, e.g., Roman Catholic Church. (Divina, 2020)
4. As to their Relationship of Management and Control:
a. Holding Corporation – a corporation that holds stocks in other companies for purposes of control rather than for mere
investment.
b. Subsidiary Corporation – a company that is owned or controlled by another company, called the parent company.
c. Affiliates – two companies are affiliates when one company owns less than the majority of the voting stock of the other.
d. Parent Company – a corporation that owns enough voting stock in another company to control management and operation by
influencing or electing its board of directors. Companies that
operate under this management are deemed subsidiaries of the parent company. (Divina, 2020)

5. As to whether they are for Public (government) or Private Purpose or Function (2004, 2001 BAR)
a. Public – formed or organized for the government of a portion of the State (like cities and municipalities) for the purpose of
serving the general good and welfare. (Aquino, 2014)
b. Private – one formed for some private purpose, benefit, or end. It may either be a stock or non-stock. (Ibid.)

6. Other Classifications:
a. Closed Corporation ‐ one whose AOI provides that all of the corporation’s issued stock of all classes, exclusive of treasury
shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); subject to specified
restrictions on transfers; and it shall not list in any stock exchange or make any public offering of its stocks of any class. A
corporation is “going private” when it is adopting the features of a closed corporation; (Divina, 2020)
b. Special Corporations – include educational corporations and religious corporations; (Secs. 105-107, RCC) Religious
corporations include corporation sole and religious societies. (Secs. 108 & 114, RCC) and
c. One-Person Corporation – a corporation wherein all of the stocks are held directly or indirectly by one person. It is not
necessarily illegal for as long as it follows and observes the law throughout its existence and conducts its business affairs lawfully,
otherwise, the doctrine of piercing the veil may be applied in such a case. (Divina, 2020; Sec. 116, RCC)

NATIONALITY OF CORPORATIONS
Tests in Determining the Nationality of Corporations
1. Control Test; and
2. Grandfather Rule

a) CONTROL TEST It is a mode of determining the nationality of a corporation engaged in nationalized areas of activities,
provided for under the Constitution and other applicable laws, where corporate shareholders with foreign shareholdings are
present, by ascertaining the nationality of the controlling stockholder of the corporation. If the capital of the investing
Corporation is at least 60% owned by Filipinos, then the entire shareholdings of the investing Corporation shall be recorded
as Filipino-owned thus making both the investing and investee - corporations Philippine national. (Divina, 2021)

In determining the nationality of a corporation, the control test uses the nationality of the controlling stockholders or
members of the corporation.

A corporation organized/incorporated abroad and registered as doing business in the Philippines under the Corporation
Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos, may be considered a
Philippine National under the Foreign Investments Act of 1991. This is the only exception to the place of incorporation test.
(SEC Opinion No. 04-14, 3 a. 2004; De Leon, 2010)

Who are Considered as Philippine Nationals

Under R.A. No. 7042 (Foreign Investments Act of 1991), other than a citizen of the Philippines, the following are also
considered Philippine Nationals:
1. Corporations organized under Philippine laws of which at least 60% of the capital stock outstanding and entitled to vote
is owned and held by Filipino citizens.
2. Corporations organized abroad and registered as doing business in the Philippines under the Corporation Code of which
100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension
or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine nationals:

NOTE: R.A. No. 7042 provides that where a corporation and its non-Filipino stockholders own stocks in a SEC-registered
enterprise, at least 60% of the capital stock outstanding and entitled to vote of each of both corporations and at least
 60% of the members of the Board of Directors of each of both corporations must be citizens, in order that the
corporation shall be considered a Philippine national. (DOUBLE 60% RULE)

NOTE: The fact that the religious organization has no capital stock does not suffice to escape the constitutional
inhibition, since it is admitted that its members are of foreign nationality. The purpose of the 60% 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 the spirit of the Constitution demands that in the absence of capital stock, the
controlling membership should be composed of Filipino citizens. (Register of Deeds v.Ung Siu Si Temple, G.R. No. L-6776,
21 May 1955)

b) GRANDFATHER RULE this is the method by which the percentage of Filipino equity in a corporation engaged in nationalized
and/or partly nationalized areas of activities, provided for under the Constitution and other applicable laws, is accurately
computed, in cases where corporate shareholders with foreign shareholdings are present, by attributing the nationality of
the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.

Thus, to arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the
corporation are determined. In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run
continuously along the chain of ownership until it finally reaches the individual stockholders. (Divina, 2020)

The purpose of this rule is to trace the nationality of the stockholder of investor corporations to ascertain the nationality of
the corporation where the investment is made. (SEC Opinion, 4 May 1987, as cited in Divina, 2020)

The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution. (Narra Nickel Mining and
Development Corp., et al. v. Redmont Consolidated Mines Corp., G.R. No. 195580, 28 Jan. 2015; SEC Opinion No. 16-15)

Rules Governing the Application of the Grandfather Rule

1. This should be used in determining the nationality of a corporation engaged in a partly nationalized activity. This applies
in cases where the stocks of a corporation are owned by another corporation with foreign stockholders exceeding 40%
of the capital stock of the corporation. (SEC-OGC Opinion No. 10-31, 09 Dec. 2010)
2. This will not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural resource corporation
is not in doubt. If the stockholder corporation is 60% or more owned by Filipinos, all the stock held by the stockholder
corporation is deemed to be held by Filipinos. (DOJ Opinion No. 19, s. 1989)
3. When there is doubt as to the actual extent of Filipino equity in the investee corporation, the SEC is not precluded from
using the Grandfather Rule. (SEC-OGC Opinion No. 22-07, 07 Dec. 2007)

Q: What is the prevailing mode of determining the nationality of corporations engaged in nationalized activities?

A: The "control test" is the prevailing mode of determining the nationality of corporation engaged in nationalized activities.
However, when in the mind of the Court there is doubt as to where beneficial ownership and control reside, based on the
attendant facts and circumstances of the case, then it may apply the "grandfather rule." (Narra Nickel Mining and Development
Corp. v. Redmont Consolidated Mining Corp., G.R. No. 195580, 21 Apr. 2014)

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it
could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities.
Hence, it is only when the Control Test is first complied with that the Grandfather Rule may be applied.

The Supreme Court stressed, however, that when the 60% Filipino ownership, is never in doubt, the control test prevails. In the
relevant case, it was held that the petition is severely wanting in facts and circumstances to raise legitimate challenges to the
joint venture company's 60-40 Filipino-Foreigner ownership. The application of the control test will already yield the result that
the company is a Philippine national. The grandfather rule no longer applies. (Leo Querubin v. COMELEC, G.R. No. 218787, 08
Dec. 2015)
NOTE: "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and pertinent laws,
then it becomes illegal.

Q: Following the decision of the Court in the case of Gamboa v. Teves, the SEC issued a Memorandum Circular (SEC-MC No. 8),
which are guidelines on compliance with the Filipino foreign ownership requirement prescribed in the Constitution and/or
existing laws by corporations engaged in nationalized and partly nationalized activities. The dispositive portion of the Gamboa
Decision stated that the term ‘capital’ referred only to shares of stock entitled to vote in the election of directors, while there
were certain statements made in the body of the Resolution to the effect that the 60-40 Filipino foreign ownership
requirement applies to each class of shares, whether voting or non-voting. Hence, Roy filed a case alleging that SEC-MC No. 8
is not compliant with the Gamboa Decision and Resolution as it did not apply the 60 to 40 Filipino-foreign ownership
requirements separately to each class of share. Is Roy correct?

A: NO. While there is a passage in the body of the Gamboa Resolution that might have appeared contrary to the fallo of the
Gamboa Decision, the definiteness and clarity of the fallo of the Gamboa Decision must control over the obiter dictum in the
Gamboa Resolution.

The Gamboa Decision already held, in no uncertain terms, that what the Constitution requires is "full and legal beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights must rest in the hands of
Filipino nationals." and, precisely that is what SEC-MC No. 8 provides, viz.: “For purposes of determining compliance with the
constitutional or statutory ownership, the required percentage of Filipino ownership shall be applied to BOTH (a) the total
number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote." (Roy v. Herbosa, G.R. No. 207246, 18 Apr. 2017)

DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

The doctrine of corporate juridical personality states that a corporation is a juridical entity with legal personality separate and
distinct from those acting for and, in its behalf, and, in general, from the people comprising it. (Francisco v. Mallen Jr., G.R. No.
173169, 22 Sept. 2010)

Q: An employee of Price Richardson Corporation executed a sworn affidavit at the NBI’s Interpol Division, alleging that Price
Richardson was "engaged in boiler room operations, wherein the company sells non-existent stocks to investors using high
pressure sales tactics." The SEC filed before the DOJ its complaint against, along with its incorporators and directors, Price
Richardson, for violation of Art. 315(1)(b) of the Revised Penal Code (RPC) and Secs. 26.3 and 28 of the Securities Regulation
Code (SRC). Velarde- Albert was its Director for Operations and Resnick was its Associated Person. Can Velarde- Albert and
Resnick be indicted for violations of the SRC and the RCC?

A: NO. Velarde-Albert and Resnick cannot be indicted for violations of the SRC and the RPC. Petitioner failed to allege the specific
acts of respondents Velarde-Albert and Resnick that could be interpreted as participation in the alleged violations. There was
also no showing, based on the complaints, that they were deemed responsible for Price Richardson's violations. To be held
criminally liable for the acts of a corporation, there must be a showing that its officers, directors, and shareholders actively
participated in or had the power to prevent the wrongful act. A corporation’s personality is separate and distinct from its officers,
directors, and shareholders. (SEC v. Price Richardson Corp, G.R. No. 197032, 26 July 2017)

Q: Richard owns 90% of the shares of the capital stock of GOM Co. On one occasion, GOM represented by Richard as President
and General Manager executed a contract to sell a subdivision lot in favor of Tomas. For failure of GOM to develop a
subdivision, Tomas filed an action for rescission and damages against GOM and Richard. Will the action prosper? Explain (1996
BAR)

A: The action will prosper against GOM Corporation but not against Richard. Richard has a separate and distinct personality from
GOM. His mere ownership of 90% of the shares of the capital stock of GOM does not make him one and the same as the
corporation. Mere ownership by a single stockholder, or by another corporation, of all or nearly all of the capital stock of a
corporation is not itself a sufficient ground for disregarding the separate corporate personality. (Secosa v. Heirs of Erwin Suarez
Francisco, G.R. No. 160039, 29 June 2004)

Q: A contract of sale was entered into between DHLFMC and ASIAMED whereby the former agreed to purchase machines from
the latter for a consideration of P31 million to be paid no later than two days from the date of delivery. Despite receiving the
machines, with invoices signed by Anthony and Alejandro, DHLFMC did not pay the whole consideration. The RTC found
DHLFMC and Anthony jointly and severally liable. On appeal, the CA ruled that the DHLFMC and Anthony were estopped from
raising the separate juridical personality of DHLFMC in view of their denial of the allegation that DHLFMC was an entity
representing itself to be a corporation duly organized and existing, stating that they never represented that DHLFMC was a
corporate entity duly organized and existing. Hence, he should be held solidarily liable. Are they estopped from invoking the
separate juridical personality of DHLFMC?

A: YES. DHLFMC and Anthony do not dispute that they specifically denied the allegation regarding DHLFMC's corporate
circumstances, the truth being that they never represented that DHLFMC is a corporate entity duly organized and existing under
and by virtue of the laws of the Republic of the Philippines. They merely insist that petitioner Anthony was not shown to have
acted in bad faith, and thus, cannot be held solidarily liable with petitioner DHLFMC. However, petitioners do not point to
anything on record to counter their own specific denial that would establish DHLFMC's existence as a corporation with separate
juridical personality. (Dee Hwa Liong Foundation v. ASIAMED, G.R. No. 205638, 23 Aug. 2017)

Q: Rodriguez Tan, doing business under the name and style of Yon Mitori, is a depositor maintaining a Current Account with
Union Bank. In said account, Tan deposited P420,000 through BPI Check drawn against the account of Angli Lumber &
Hardware, Inc, which is one of Tan’s clients. The BPI Check was entered in Tan’s bank records. Tan withdrew from said account
the amount of P480,000.00. Later that day, however, the BPI Check was returned to Union Bank as the account against which
it was drawn had been closed. Union Bank discovered that Tan’s account had been mistakenly credited so their branch
manager immediately called Tan to recover the funds mistakenly released but Tan refused. During Union Bank’s investigation,
it was discovered that Tan previously deposited five BPI checks drawn by Angli Lumber against the same BPI account, and
these checks were all previously dishonored. Union Bank sent Tan a letter demanding the reimbursement of P420,000, but Tan
refused. Union Bank then debited the available balance in Tan’s account as a set-off, and thereafter instituted a Complaint for
Sum of Money for the recovery of the remaining balance. Tan argues that Union Bank should not be allowed to recover the
amount erroneously deposited in his account because of Union Bank’s own gross negligence. On appeal before the CA, Tan
named Yon Mitori as co-appellant. In appealing to the
Supreme Court, Yon Mitori was named as sole petitioner in the Petition.

a. Is Yon Mitori a real party in interest?

A: NO. Yon Mitori has no separate juridical personality. A single proprietorship is not considered a separate juridical person
under the Civil Code. The Petition should have been filed in Tan's name, the latter being the real party in interest who possesses
the legal standing to file this Petition. Nevertheless, the Court permits the substitution of Tan as petitioner. Sec. 4, Rule 10 of the
ROC provides that “a defect in the designation of the parties and other clearly clerical or typographical errors may be summarily
corrected by the court at any stage of the action, at its initiative or on motion, provided no prejudice is caused thereby to the
adverse party.”

b. Is Tan obligated to return the value of the BPI Check?

A: YES. Tan is bound to return the proceeds of the dishonored BPI Check based on the principle of unjust enrichment. Art. 22 of
the NCC states that “every person who through an act of performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just or legal ground, shall return the same to him.” Here, it was
unequivocally established that Tan withdrew and utilized the proceeds of the BPI Check fully knowing that he was not entitled
thereto. To note, Tan had deposited five other checks drawn against the same account. He was fully aware that Angli Lumber's
account with BPI had been closed. So, he could not have expected that the BPI Check in question would be honored. (Yon Mitori
International Industries v. Union Bank of the Philippines, G.R. No. 225538, 14 Oct. 2020)

SIGNIFICANCE OF THE DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

1. Liability for acts or contracts – As a general rule, the obligation of the corporation is not the liability of the stockholders,
directors, or officers. (2010,1996, 1992 BAR)

A corporation may not, generally, be made to answer for acts or liabilities of its stockholders or those of the legal entities to
which it may be connected, and vice versa. (Cease v. CA, G.R. No. L-33172, 18 Oct. 1979)

2. Right to bring actions – may bring civil and criminal actions in its own name in the same manner as natural persons. (Art. 46,
NCC)

NOTE: Rights belonging to the corporation cannot be invoked by the stockholders (or directors and officers) even if the latter
own substantial majority of the shares in that corporation; and rights of the stockholders, directors and officers cannot be
invoked by the corporation. (Stonehill v. Diokno, G.R. No. L- 19550, 19 June 1967)

3. Right to acquire and possess property – property conveyed to or acquired by the corporation is in law the property of the
corporation itself as a distinct legal entity and not that of the stockholders or members. (Boyer-Roxas v. CA, G.R. No. 100866,
14 July 1992)

4. Acquisition of jurisdiction – When the defendant is a corporation, partnership or association organized under the laws of the
Philippines with a juridical personality, service may be made on the president, managing partner, general manager,
corporate secretary, treasurer, or in-house counsel of the corporation wherever they may be found, or in their absence or
unavailability, on their secretaries. If such service cannot be made upon any of the foregoing persons, it shall be made upon
the person who customarily receives the correspondence for the defendant at its principal office. (Sec. 12, Rule 14, ROC)
5. Changes in individual membership – corporation remains unchanged and unaffected in its identity by changes in its
individual membership or ownership of its stocks.

STOCKHOLDERS ARE NOT THE OWNERS OF CORPORATE PROPERTIES AND ASSETS (2000, 1996 BAR)
A corporation is a juridical person distinct from the members composing it. Properties in the name of the corporation are owned
by it as an entity separate and distinct from its members. While shares of stocks constitute personal property, they do not
represent property of the corporation. The corporation has properties of its own. A share of stock only represents an aliquot part
of the corporation’s property, or the right to share in its proceeds but its holder is not the owner of any. (Silverio v. Filipino
Business Consultants, Inc., G.R. No. 143312, 12 Aug. 2005; Saw v. CA, G.R. No. 90580, 08 Apr. 1991)

Moreover, under the trust fund doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors which are preferred over the stockholders in the distribution of corporate assets.
The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders,
officers, or directors of the corporation unless the indispensable conditions and procedures for the protection of corporate
creditors are followed. (Yamamoto v. Nishino Leather Industries, Inc., G.R. No. 150283, 16 Apr. 2008)

Q: RISCO ceased operation due to business reverses. Due to Aznar et. al’s desire to rehabilitate RISCO, they contributed a total
amount of P212,720.00 which was used in the purchase of three (3) parcels of land located in various areas in the Cebu
Province. Pursuant to the Minutes of the Special Meeting of the Board of Directors of RISCO, the contributed amounts
constitute liens and encumbrances on the aforementioned properties as annotated in the titles of the said parcels of land.
Thereafter, various subsequent annotations were made on the same titles in favor of PNB. As a result, a Certificate of Sale was
issued in favor of PNB, being the lone and highest bidder of the three parcels of land and was also issued Transfer Certificate
of Title over the said parcels of land. Aznar, et. al filed a complaint seeking the quieting of their supposed title to the subject
properties. They alleged that the subsequent annotations on the titles are subject to the prior annotation of their liens and
encumbrances. On the other hand, PNB assert that, as mere stockholders of RISCO, they do not have any legal or equitable
right over the properties of the corporation. Do Aznar et. al. have the legal or equitable rights over the subject properties?

A: NO. Aznar, et al., have no right to ask for the quieting of title of the properties at issue because they have no legal and/or
equitable rights over the properties that are derived from the previous registered owner which is RISCO. Aznar, et al., who are
stockholders of RISCO, cannot claim ownership over the properties at issue in this case on the strength of the Minutes which, at
most, is merely evidence of a loan agreement between them and the company. There is no indication or even a suggestion that
the ownership of said properties were transferred to them which would require no less that the said properties be registered
under their names. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it
does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being
equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the
corporation as a distinct legal person. (PNB v. Aznar, et al, G.R. No. 171805, 30 May 2011)

NOTE: Where stockholders granted a loan to the corporation to finance the acquisition of property which was eventually
mortgaged to a bank to secure a corporate loan, the right of the stockholders is subordinate to the mortgagee. The stockholder
has the right to be paid the loan but not to the property of the corporation. (Divina, 2021 citing PNB v. Aznar, supra)

STOCKHOLDERS ARE NOT REAL PARTIES IN INTEREST TO CLAIM DAMAGES AND RECOVER COMPENSATION
The stockholders were clearly not vested with any direct interest in the personal properties coming under the levy on attachment
by virtue alone of their being stockholders of the corporation. Their stockholdings represented only their proportionate or
aliquot interest in the properties of the corporation but did not vest in them any legal right or title to any specific properties of
the corporation. Without doubt, the corporation remained the owner as a distinct legal person. Given the separate and distinct
legal personality of the corporation, the stockholders lacked the legal personality to claim the damages sustained from the levy
of the former’s properties. (Stronghold Insurance Company, Inc. v. Cuenca, G.R. No. 173297, 06 Mar. 2013)

Q: Ronald Sham, doing business under the name of SHAMRON Machineries (Shamron), sold to Turtle Mercantile (Turtle) a
diesel farm tractor. In payment, Turtle’s President and Manager Dick Seldon issued a check for P50,000 in favor of Shamron. A
week later, Turtle sold the tractor to Briccio Industries (Briccio) for P60,000. Briccio discovered that the engine of the tractor
was reconditioned so it refused to pay Turtle. As a result, Dick Seldon ordered the “Stop Payment” of the check issued to
Shamron. Shamron sued Turtle and Dick Seldon. Shamron obtained a favorable judgment holding codefendants Turtle and
Dick Seldon jointly and severally liable. Comment on the decision of the trial court. Discuss fully. (1995 BAR)
A: I disagree with the trial court’s ruling. Dick Seldon should not be held solidarily liable with Turtle in his capacity as President
and Manager of Turtle. Turtle has a separate juridical personality from its officers. (Consolidated Bank and Trust Corp. v. CA, G.R.
No. 114286, 19 Apr. 2001)

NON-APPLICABILITY OF DOCTRINE OF SEPARATE JURIDICAL PERSONALITY IN EXAMINATION OF OFFICERS TO ASCERTAIN

PROPERTIES, INCOME WHICH CAN BE SUBJECTED TO EXECUTION.
The Doctrine of Separate Juridical Personality does not apply if the judgment creditor wanted the officers to be examined not for
the purpose of passing unto them the liability of the judgment obligor but to ascertain the properties and income of the latter
which can be subjected for execution in order to satisfy the final judgment and nothing else. (Linden Suites, Inc. v. Meridien Far
East Properties, Inc., G.R. No. 211969, 04 Oct. 2021)

OFFICERS NOT LIABLE FOR DISMISSAL OF EMPLOYEE EXCEPT IN CASES OF EVIDENT MALICE AND/OR BAD FAITH

Q: Respondents had been employed as security guards by petitioner Symex. They were not give a rest day, and were not paid
their overtime pay, five-day service incentive leave pay, and 13 th month pay. Thus, respondents filed a complaint against
Symex and its President and Chairman of the Board, Arcega. Capt. Cura, the operations manager of Symex, told respondents
that they would not be given a duty assignment unless they withdrew the complaint they filed. Respondents refused to obey
Capt. Cura, who then told them that they were dismissed. Is Arcega solidarily liable for the obligations of Symex to
respondents?

A: NO, there was no showing that Arcega, as President of Symex, willingly and knowingly voted or assented to the unlawful acts
of the company. A corporation is a juridical entity with a legal personality separate and distinct from those acting for and, in its
behalf, and, in general, from the people comprising it. Thus, as a rule, an officer may not be held liable for the corporation's labor
obligations unless he acted with evident malice and/or bad faith in dismissing an employee. To hold a director or officer
personally liable for corporate obligations, two requisites must concur: (1) it must be alleged in the complaint that the director or
officer assented to patently unlawful acts of the corporation or that the officer was guilty of gross negligence or bad faith; and (2)
there must be proof that the officer acted in bad faith. (Symex Security Services, Inc. v. Rivera, Jr., G.R. No. 202613, 08 Nov. 2017)

CORPORATION MAY BE HELD LIABLE FOR TORTS

A corporation is liable whenever a tortious act is committed by an officer or agent under express direction or authority from the
stockholders or members acting as a body, or, generally, from the directors as the governing body. (PNB v. CA, G.R. No. L-27155,
18 May 1978)

LIABILITY OF A CORPORATION IN CASE OF CRIMES

GR: If the crime is committed by a corporation or other juridical entity, the directors, officers, employees, or other officers
thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime
and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable
by imprisonment. (Ching v. Secretary of Justice, G.R. No. 164317, 06 Feb. 2006)
XPN: However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine. Even if the statute
prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined. (Ibid.)

RECOVERY OF MORAL DAMAGES

GR: A corporation is not entitled to moral damages because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses. (ABS-CBN Broadcasting Corp. v. CA, G.R. No. 128690, 21 Jan. 1999)
XPNs:
1. A corporation may recover moral damages under item 7 of Art. 2219 of the NCC because said provision expressly authorizes
the recovery of moral damages in cases of libel, slander, or any other form of defamation. Said provision does not qualify
whether the injured party is a natural or juridical person. (Filipinas Broadcasting Network, Inc. v. AMEC-BCCM, G.R. No. 141994,
17 Jan. 2005)
2. When the corporation has a reputation that is debased, resulting in its humiliation in the business realm. But in such a case, it
is imperative for the claimant to present proof to justify the award. It is essential to prove the existence of the factual basis of the
damage and its causal relation to petitioner’s acts. (MERALCO v. T.E.A.M. Electronics Corp., et. al., G.R. No. 131723, 13 Dec. 2007)
NOTE: While the court may allow the grant of moral damages to corporations, it is not automatically granted; there must still be
proof of the existence of the factual basis of the damage and its causal relation to the defendant’s acts. This is so because moral
damages, though incapable of pecuniary estimation, are in the category of an award designed to compensate the claimant for
actual injury suffered and not to impose a penalty on the wrongdoer. (Crystal v. BPI, G.R. No. 172428, 28 Nov. 2008)
DOCTRINE OF PIERCING THE CORPORATE VEIL
The Doctrine of Piercing the Corporate Veil is the doctrine that allows the State to disregard, for certain justifiable reasons, the
notion that a corporation has a personality separate and distinct from the persons composing it. Where it appears that business
enterprises are owned, conducted, and controlled by the same parties, law and equity will disregard the legal fiction that these
corporations are distinct entities and shall treat them as one. This is in order to protect the rights of third persons. (Vicmar
Development Corporation v. Elarcosa, et al., G.R. No. 202215, 09 Dec. 2015)

Absent any allegation or proof of fraud or other public policy considerations, the existence of interlocking directors, officers and
stockholders is not enough justification to pierce the veil of corporate fiction as in the instant case. (Hacienda Luisita
Incorporated v. Presidential Agrarian Reform Council, G.R. No. 171101, 22 Nov. 2011)

EFFECT OF PIERCING THE CORPORATE VEIL

1. The corporation will be treated merely as an association of persons, undertaking a business and the liability will attach directly
to the officers and stockholders.
2. Where there are two (2) corporations, they will be merged into one, the one being merely regarded as the instrumentality,
agency, conduit, or adjunct of the other.

NOTE: Notwithstanding that the corporate veil has been pierced, the corporation continues for other legitimate objectives, the
corporate character is not necessarily abrogated. (Reynoso IV v. CA, G.R. Nos. 116124-25, 22 Nov. 2000)

GROUNDS FOR APPLICATION OF DOCTRINE OF PIERCING THE CORPORATE VEIL

It applies upon the following circumstances: (F-A-C-O)
1. If the fiction is used to perpetrate fraud (Fraud Test);
2. If a certain corporation is only an adjunct or an extension of the personality of the corporation (Alter Ego or Instrumentality
Test);
3. If the complete control of one corporate entity to another which perpetuated the wrong is the proximate cause of the injury
(Control Test); or
4. If the fiction is pierced to make the stockholders liable for the obligation of the corporation (Objective Test).

Q: Romeo Morales was able to obtain a favorable judgment for a sum of money against Kukan, Inc. With the judgment
attaining finality, the sheriff levied on execution various personal properties found at what was supposed to be Kukan’s office.
Kukan International Corporation (KIC) filed a third-party complaint, alleging that it was the owner of the levied properties.
Morales prayed that the principle of piercing the veil of corporate fiction be applied in order to satisfy the judgment debt of
Kukan. The RTC granted the motion of Morales and declared KIC and Kukan as one and the same corporation. The CA affirmed
the RTC. Did the RTC properly apply the doctrine?

A: NO. The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and
the same juridical person with respect to a given transaction, is basically applied only to determine established liability; it is not
available to confer on the court a jurisdiction it has not acquired over a party not impleaded in a case. Elsewise put, a corporation
not impleaded in a suit cannot be subject to the courts process by piercing the veil of its corporate fiction. In that situation, the
court has not acquired jurisdiction over the corporation and, hence, any proceedings taken against that corporation and its
property would infringe on its right to due process.

TWO-FOLD IMPLICATION
1. The court must first acquire jurisdiction over the corporation or corporations involved before its or their separate personalities
are disregarded; and
2. The doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the court by way of service of summons or what passes as such
service. (Kukan International Corp v. Reyes, G.R. No. 182729, 29 Sept. 2010)

NOTE: The Supreme Court, however, ruled differently in Gold Line Tours v. Lacsa (G.R. No. 159108, 18 June 2012). It held that if
the RTC had sufficient factual basis to conclude that the two corporations are one and the same entity as when they have the
same president and controlling shareholder and it is generally known in the place where they do business that they are one, the
third party claim filed by the other corporation was properly set aside and the levy on its property held valid even though the
latter was not made a party to the case. The judgment may be enforced against the other corporation to prevent multiplicity of
suits and save the parties unnecessary expenses and delays. (Divina, 2021)
Q: Ma. Concepcion Lacsa was riding a Goldline passenger bus owned and operated by Travel & Tours Advisers, Inc. (TTAI)
when the bus collided with a passenger jeepney, causing her instant death. The Heirs of Concepcion instituted a suit in the
RTC for damages due to breach of contract, with the complaint set against “Travel & Tours Advisers, Inc. (Goldline)” and the
bus driver. The RTC ruled in favor of the Heirs, holding TTAI liable to pay the heirs damages and expenses. A writ of execution
was served upon TTAI and Cheng, operator of the Goldline bus. Cheng failed to settle the judgment; thus, a tourist bus was
levied. Gold Line Tours Inc. filed a third-party claim, claiming that the levied tourist bus be returned to it because it was its
owner, it had not been made a party to the case, and it was a corporation entirely different from TTAI. Is Gold Line’s
contention, correct?

A: NO. Whenever necessary for the interest of the public or for the protection of enforcement of their rights, the notion of legal
entity should not and is not to be used to defeat public convenience, justify wrong, protect fraud, or defend crime. There is
sufficient factual basis to find that Goldline and TTAI were one and the same entity, specifically: (a) documents submitted
showing that Cheng, who claimed to be the operator of TTAI, is also the President/Manager and an incorporator of Gold Line;
and (b) Travel and Tours Advisers, Inc. had been known in Sorsogon as Goldline. The RTC was correct in finding that the two
companies are actually one and the same, hence the levy for the bus in question was proper. The RTC thus rightly ruled that
Goldline might not be shielded from liability under the final judgment through the use of the doctrine of separate corporate
identity. Truly, this fiction of law could not be employed to defeat the ends of justice. (Gold Line Tours, Inc. v. Heirs of Maria
Concepcion Lacsa, G.R. No. 159108, 18 June 2012)

Q: Gesolgon and Santos (Petitioners) alleged that they were hired by Mikrut, the CEO of both CyberOne AU and CyberOne PH
(Respondents), as part-time home-based remote Customer Service Representatives of CyberOne AU. They were asked to
become dummy directors and/or incorporators of CyberOne PH. They were promoted as Managers and were given increases
in their salaries, which were made to appear as paid for by CyberOne PH. Mikrut made them choose one from three options:
(a) to take an indefinite furlough and be placed in a manpower pool to be recalled in case there is an available position; (b) to
stay with CyberOne AU but with an entry level position; or (c) to tender their irrevocable resignation. Petitioners alleged that
they were constrained to pick the first option in order to save their jobs. They later filed a case against respondents and
CyberOne AU for illegal dismissal; and claimed for non-payment or underpayment of their salaries and 13th month pay.
CyberOne PH, Mikrut and Juson denied that any employer employee relationship existed between petitioners and CyberOne
PH. They insisted that petitioners were incorporators or directors and not regular employees of CyberOne PH. They claimed
that petitioners were employees of CyberOne AU. Should the doctrine of piercing the corporate veil be applied in this case?

A: NO, the application of the doctrine of piercing the corporate veil is unwarranted in the present case. No evidence was
presented to prove that CyberOne PH was organized for the purpose of defeating public convenience or evading an existing
obligation. Petitioners failed to allege any fraudulent acts committed by CyberOne PH to justify a wrong, protect a fraud, or
defend a crime. The mere fact that CyberOne PH's major stockholders are CyberOne AU and respondent Mikrut does not prove
that CyberOne PH was organized and controlled, and its affairs conducted in a manner that made it merely an instrumentality,
agency, conduit or adjunct of CyberOne AU. Petitioners failed to prove that CyberOne AU and Mikrut, acting as the Managing
Director of both corporations, had absolute control over CyberOne PH. Even granting that CyberOne AU and Mikrut exercised a
certain degree of control over the finances, policies, and practices of CyberOne PH, such control does not necessarily warrant
piercing the veil of corporate fiction since there was not a single proof that CyberOne PH was formed to defraud petitioners or
that CyberOne PH was guilty of bad faith or fraud. Hence, the doctrine of piercing the corporate veil cannot be applied in the
instant case. (Gesolgon v. CyberOne PH., Inc., G.R. No. 210741, 14 Oct. 2020, J. Hernando)

CIRCUMSTANCES WHICH DID NOT RESULT TO THE PIERCING OF THE CORPORATE VEIL
The mere fact that: (Fi-Co-S)
1. A corporation owns Fifty (50%) of the capital stock of another corporation, or the majority ownership of the stocks of a
corporation is not per se a cause for piercing the veil.
2. Two corporations have Common directors or same or single stockholder who has all or nearly all of the capital stock of both
corporations is not in itself sufficient ground to disregard separate corporate entities.
3. There is a Substantial identity of the incorporators of the two (2) corporations does not necessarily imply fraud and does not
warrant piercing the corporate veil.

THREE-PRONGED TEST TO DETERMINE THE APPLICATION OF THE ALTER EGO OR INSTRUMENTALITY THEORY (C-F-H)
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own (Instrumentality or Control test);
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right (Fraud test); and
3. The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of. (Harm test)

INSTRUMENTALITY OR CONTROL TEST

This test requires that the subsidiary be completely under the control and domination of the parent. It examines the parent
corporation’s relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled and its
affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence
as a distinct corporate entity will be ignored. It seeks to establish whether the subsidiary corporation has no autonomy and the
parent corporation, though acting through the subsidiary in form and appearance, “is operating the business directly for itself.”

FRAUD TEST
This test requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent, or wrongful. It
examines the relationship of the plaintiff to the corporation. It recognizes that piercing is appropriate only if the parent
corporation uses the subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing of “an element of
injustice or fundamental unfairness.”

HARM TEST
This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal, or otherwise unfair manner
toward it, caused the harm suffered. A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The
plaintiff must prove that, unless the corporate veil is pierced, it would have been treated unjustly by the defendant’s exercise of
control and improper use of the corporate form and, thereby, suffer damages.

NOTE: Piercing the corporate veil based on the alter ego theory requires the concurrence of the three elements – (1) control, (2)
fraud or fundamental unfairness, and (3) harm or damage. The absence of any of these elements prevents piercing the corporate
veil. (DBP v. Hydro Resources Contractors Corp., G.R. Nos. 167603, 167561, & 167530, 13 Mar. 2013)

PIERCING THE VEIL OF CORPORATE FICTION ON THE BASIS OF EQUITY

Equity cases applying the piercing doctrine are what are termed the "dumping ground," where no fraud or alter ego
circumstances can be culled by the Court to warrant piercing.
Specifically, the equity test can be applied when:
1. The corporate personality would be inconsistent with the business purpose of the legal fiction;
2. The piercing the corporate fiction is necessary to achieve justice or equity for those who deal in good faith with the
corporation; or
3. The use of the separate juridical personality is used to confuse legitimate issues.

INDICATIONS THAT A SUBSIDIARY CORPORATION IS A MERE INSTRUMENTALITY OF ITS PARENT CORPORATION

1. The parent corporation owns all or most of the capital stock of the subsidiary;
2. The parent and subsidiary corporations have common directors or officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;
7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by
the parent corporation;
8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or
division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own;
9. The parent corporation uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders
from the parent corporation;
11. The formal legal requirements of the subsidiary are not observed. (PNB v. Ritratto Group, G.R. No. 142616, 13 July 2001)

PIERCING THE CORPORATE VEIL MAY APPLY TO NATURAL PERSONS

1. When the Corporation is the Alter Ego of a Natural Person – the piercing of the corporate veil may apply to corporations as
well as natural persons involved with corporations. The "corporate mask may be lifted and the corporate veil may be pierced
when a corporation is just but the alter ego of a person or of another corporation."
2. Reverse Piercing of the Corporate Veil – from American parlance of what is called Reverse Piercing or Reverse Corporate
Piercing or piercing the corporate veil "in reverse." As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership,
"in a traditional veilpiercing action, a court disregards the existence of the corporate entity so a claimant can reach the
 assets of a corporate insider. In a reverse piercing action, however, the plaintiff seeks to reach the assets of a corporation to
satisfy claims against a corporate insider. Reverse-piercing flows in the opposite direction (of traditional corporate veil
piercing) and makes the corporation liable for the debt of the shareholders." (IAM/E v. Litton and Company Inc., G.R. No.
191525, 13 Dec. 2017)

TWO (2) TYPES OF REVERSE PIERCING

1. Outsider reverse piercing occurs when a party with a claim against an individual or corporation attempts to be repaid with
assets of a corporation owned or substantially controlled by the defendant.
2. Insider reverse piercing, the controlling members will attempt to ignore the corporate fiction in order to take advantage of a
benefit available to the corporation, such as an interest in a lawsuit or protection of personal assets. (IAM/E v. Litton and
Company Inc., supra)

Q: Plaintiffs filed a collection action against X Corporation. Upon execution of the court's decision, X Corporation was found to
be without assets. Thereafter, the plaintiffs filed an action against its present and past stockholder, Y Corporation, which
owned substantially all of the stocks of X corporation. The two corporations have the same board of directors and Y
Corporation financed the operations of X corporation. May Y Corporation be held liable for the debts of X Corporation? Why?
(2001 BAR)

A: YES. Y Corporation may be held liable for the debts of X Corporation. The doctrine of piercing the veil of corporation fiction
applies to this case. The two corporations have the same board of directors, Y Corporation owned substantially all of the stocks
of X Corporation, and Y Corporation controls the finances of X Corporation. These facts justify the conclusion that the latter is
merely an extension of the personality of the former, and that the former controls the policies of the latter. An overall appraisal
of the circumstances presented by the facts of the case, yields to the conclusion that the X Corporation is merely an adjunct,
business conduit or alter ego, of Y Corporation and that the fiction of corporate entities, separate and distinct from each, should
be disregarded. (CIR v. Norton & Harrison Company, G.R. No. L‐17618, 31 Aug. 1964)

NOTE: There is no hard and fast rule when to apply the doctrines of separate legal entity and piercing the veil of corporate
fiction. Each case must be judged based on its own particular circumstances. The undeniable yardstick though is that lacking any
harm or injury to another, or in the absence of abuse of the legal fiction of the corporation, the doctrine of separate legal entity
stands. (Divina, 2020)

INCORPORATOR VS. CORPORATOR

DIFFERENCES INCORPORATOR CORPORATOR
Those who compose a corporation, whether
Those stockholders or members mentioned as stockholders or as members. A stockholder
in the AOI as originally forming and may or may not be a subscriber. Subscribers
Who are they
composing the corporation and who are are persons who have agreed to take and pay
signatories thereof. for original, unissued shares of a corporation
formed or to be formed.
Signatory of the AOI A signatory of the AOI. May or may not be signatory of the AOI.
Ceases to be a corporator by sale of his
Effect upon the Sale of his Does not cease to be an incorporator upon shares in case of stock corporation. In case of
Shares sale of his shares. non-stock corporation, the corporator ceases
to be a member.
GR: No limit.
XPN: Close corporations – not more than a
Number of specified number of persons, not exceeding
Not more than 15.
Incorporators/Corporators 20. (Sec. 95, RCC)
NOTE: There must only be one stockholder in
a One Person Corporation.
GR: Filipino citizenship is not a requirement.
XPN: When engaged in a business which is wholly or partly nationalized. In the case of partly
Filipino Citizenship
nationalized, the requisite percentage of Filipino stockholdings /membership must be
attained, and the Board of Directors / Trustees must be to the same extent.

NUMBER AND QUALIFICATIONS OF INCORPORATORS

1. The RCC provides that any person, partnership, association, or corporation, singly or jointly with others;
 NOTE: The word “singly” pertains to a One Person Corporation, which may only be incorporated by a natural person, trust,
or estate;
2. Incorporators must not be more than 15;
3. A natural person incorporator must be of legal age;
4. Each must own or subscribe to at least one (1) share of the capital stock. (Sec. 10, RCC)

Q: Must all incorporators and directors be residents of the Philippines? (2006 BAR)

A: NO. The RCC has removed the residency requirement. Thus, incorporators and directors do not need to be residents of the
Philippines.

CAPITAL STOCK REQUIREMENTS

GR: Stock corporations shall not be required to have a minimum capital stock. (Sec. 12, RCC)
XPN: As otherwise specifically provided by special law.

SUBSCRIPTION AND CAPITAL REQUIREMENTS

Under the old law, at least 25% of the authorized capital stock must be subscribed and at least 25% of the subscribed capital
should be paid at the time of incorporation. However, Sec. 12, RCC provides that stock corporations are no longer required to
have a minimum subscription and paid-up capital requirement, except as otherwise provided by a special law. (Divina, 2021)
NOTE: The 25%-25% rule, though not applicable in incorporation, should still be complied with in case of increase of capital
stock.

Q: Sec. 11, Art. 12 of the 1987 Constitution provides that “at least 60% of the ‘capital’ of corporations engaged in public utility
should be owned by Filipinos.” What does the term “capital” in the aforementioned provision refer to?

A: The SC clarified that the term “capital” in Sec. 11, Art. 12 of the 1987 Constitution refers to shares with voting rights, as well as
with full beneficial ownership. This is precisely because the right to vote in the election of directors, coupled with full beneficial
ownership of stocks, translates to effective control of a corporation. (Divina, 2021 citing Roy III v. Herbosa, G.R. No. 207246, 22
Nov. 2016)

CORPORATE TERM
A corporation shall have perpetual existence unless its articles of incorporation provides otherwise.

EXTENSION OF CORPORATE TERM

The period to extend corporate term should be made within 3 years prior to the original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier extension as may be determined by the SEC (Sec. 11, RCC)
NOTE: Extension of corporate term shall take effect only on the day following the original or subsequent expiry date(s). (Divina,
2021)

REQUISITES FOR EXTENSION OR SHORTENING OF CORPORATE TERM

1. Amendment of articles of incorporation;
2. The extension must be approved by at least the majority of the board of directors and the stockholders rep resenting at least
2/3 of the outstanding capital stock;
3. No extension may be made earlier than 3 years prior to the original or subsequent expiry date(s), unless there are justifiable
reasons;
4. Extension of corporate term shall take effect only on the day following the original or subsequent expiry date(s); and
5. The extension or shortening of term is effective only upon approval of the SEC.

KINDS OR CLASSIFICATIONS OF SHARES

1. PAR VALUE SHARES;
Shares with a value fixed in the AOI and the certificates of stock. The par value fixes the minimum issue price of the shares.
2. NO PAR VALUE SHARES;
These are shares having no stated par value in the AOI.
Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares
shall not be liable to the corporation or to its creditors in respect thereto (Sec. 6, RCC).

LIMITATIONS ON NO PAR VALUE SHARES

 1. The issued price of no-par value shares may be fixed in the AOI or by the board of directors pursuant to authority
conferred by the AOI or the bylaws, or if not so fixed, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose provided that the issued price of no-par value shares
shall not be less than P5.00. (Sec. 6 in relation to Sec. 61, RCC)
2. The entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not
be available for distribution as dividends. (Sec. 6, RCC) Banks, trust, insurance, and pre-need companies, public utilities,
building and loan associations, and other corporations authorized to obtain or access funds from the public, whether
publicly listed or not, shall not be permitted to issue no par value shares of stock. (ibid.)
NOTE: Preferred shares of stock may be issued only with a stated par value.

3. COMMON SHARES;
Common shares are the basic class of stock ordinarily and usually issued without privileges or advantages except that they
cannot be denied the right to vote. Owners are entitled to a pro-rata share in the profits of the corporation and in its assets
upon dissolution and liquidation, and in the management of its affairs. (Divina, 2020)
4. PREFERRED SHARES;
Preferred shares are par-value shares given preference in the distribution of dividends and in the distribution of corporate
assets in case of liquidation, or such other preferences. The board of directors, where authorized in the AOI, may fix the
terms and conditions of preferred shares of stock or any serie thereof: Provided, further, That such terms and conditions
shall be effective upon filing of a certificate thereof with the SEC. . (Sec. 6, RCC)

KINDS OF PREFERRED SHARES

1. As to Preference –
a. Preferred shares as to assets – gives the holder preference in the distribution of the assets of the corporation in case of
liquidation.
b. Preferred shares as to dividends – entitled to receive dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock.
2. As to Participation –
a. Participating preferred shares – entitled to participate with the common shares in excess distribution.
b. Non-participating preferred shares – not entitled to participate with the common shares in excess distribution.
3. As to Cumulation –
a. Cumulative preferred shares – if a dividend is omitted in any year, it must be made up in a later year before any
dividend may be paid on the common shares in the later year.
b. Non-cumulative preferred shares – there is no need to make up for undeclared dividends.

HOLDERS OF PREFERRED SHARES ARE NOT CREDITORS OF THE CORPORATION

Preferences granted to preferred stockholders do not give them a lien upon the property of the corporation nor make them
creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when
there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the
discretion to determine whether or not dividends are to be declared. Shareholders, both common and preferred, are considered
risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully
paid. (Republic Planters Bank v. Agana, Sr., G.R. No. 51765, 03 Mar. 1997)

COMMON VS. PREFERRED SHARES

DIFERRENCES COMMON SHARES PREFERRED SHARES
Stock which entitles the holder to some
Stock which entitles the owner to an equal
Definition preference, either in the dividends, or in
pro rata division of profits.
distribution of assets, or both.
Value Depends if it is a par or no-par value share. Par value.
Usually vested with the exclusive right to May be deprived of voting rights except in the
Voting Rights
vote. instances provided by law. (Sec. 6, RCC)
Preference upon No advantage, priority, or preference over Has preference over dividends/profits/
liquidation any other stockholder in the same class. distribution of assets.

5. REDEEMABLE SHARES;
These are shares which may be purchased by the corporation from the holders of such shares upon
 the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation,
and upon such other terms and conditions stated in the AOI and the certificate of stock representing the shares, subject to
rules and regulations issued by the Commission. (Sec. 8, RCC)

KINDS OF REDEEMABLE SHARES

1. Mandatory – the issuing corporation must redeem the shares after the expiration of a stated period or when demanded by
the holder; provided that the corporation has sufficient assets to pay for the shares or the redemption will not bring about
the insolvency of the corporation.

2. Optional – the issuing corporation may or may not redeem the shares after a stated period. If the terms of the preferred
shares are silent, the redemption is at the option of the corporation. (Divina, 2020)

LIMITATIONS ON REDEEMABLE SHARES (A-T-V-I)

1. The issuance of redeemable shares must be expressly provided in the Articles of incorporation.
2. The Terms and conditions affecting said shares must be stated both in the AOI and in the certificates of stock.
3. Redeemable shares may be deprived of Voting rights in the AOI, unless otherwise provided in the Code. (Sec. 6, RCC)
4. Redemption may not be made where the corporation is Insolvent or if such redemption will cause insolvency or inability of
the corporation to meet its debts as they mature. (Republic Planters Bank v. Agana, Sr., G.R. No. 51765, 03 Mar. 1997)

Q: Planters Bank issued preferred redeemable shares with a feature that entitles them to be preferred in the payment of
dividends. Subsequently, the bank experienced liquidity problems. The Central Bank ruled that the bank has a reserve
deficiency. Despite the condition, one of the stockholders holding the preferred shares filed an action against the corporation
to redeem his shares and pay the dividends due. Will the suit prosper?

A: NO. While redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject
to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of
capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as they mature. (Republic Planters Bank v. Judge Agana, G.R. No.
51765. March 3, 1997)

REISSUANCE OF REDEEMED SHARES

In the case of redeemable shares reacquired, the same shall be considered retired and no longer issuable, unless otherwise
provided in the Articles of Incorporation. (SEC-OGC Opinion 19-20 dated 17 May 2019, citing 1982 SEC Rules Governing
Redeemable and Treasury Shares)

6. TREASURY SHARES;
Shares that have been earlier issued and fully paid for, but have been reacquired by the corporation through purchase,
donation, redemption or through some other lawful means. (Sec. 9, RCC)

NOTE: Treasury shares do not revert to the unissued shares of the corporation but are regarded as property acquired by the
corporation which may be reissued or sold by the corporation at a price to be fixed by the Board of Directors. (SEC-OGC
Opinion 19-20 dated 17 May 2019, citing 1982 SEC Rules Governing Redeemable and Treasury Shares)

LEGITIMATE PURPOSE TO ACQUIRE OWN SHARE

1. To collect or compromise unpaid indebtedness to the corporation arising out of unpaid subscription, in a delinquency
sale, and to purchase delinquent shares sold during said sale;
2. To eliminate fractional shares arising out of stock dividends;
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code;
4. Redemption of Redeemable Shares; and
5. Purchase of Shares when ordered by the SEC due to a deadlock in a Close corporation.

LIMITATIONS ON TREASURY SHARES

1. It may be re-issued or sold again as long as it is for a reasonable price fixed by the BOD;
2. Cannot participate in dividends;
3. It has no voting right as long as such remains in the Treasury, hence cannot participate in meetings as voting stocks; and
4. The amount of unrestricted retained earnings (URE) equivalent to the cost of treasury shares being held shall be restricted
from being declared and issued as dividends.

Apart from reacquiring the shares through some lawful means, the Corporation Code is also explicit that while a corporation has
the power to purchase or acquire its own shares, the corporation must have unrestricted retained earnings in its books to cover
the shares to be purchased or acquired. In addition, in cases where the reason for reacquiring the shares is because of the unpaid
subscription, the Corporation Code is likewise explicit that the corporation must purchase the same during a delinquency sale.
(Salido, Jr. v. Aramaywan Metals Development Corp., G.R. No. 233857, 18 Mar. 2021)

TREASURY SHARES DISTRIBUTED VIA DIVIDENDS

They can be distributed only as property dividends. They cannot be declared as stock or cash dividends because they are not
considered part of earned or surplus profits. The distribution of cash or stock dividends out of treasury shares would be
converting the corporation into both a debtor and creditor for the same amount at the same time or requiring it to take money
or stock from one of its pockets and putting it in another, which is absurd. Treasury shares may be declared as property dividend
to be issued out of the retained earnings previously used to support their acquisition provided that the amount of the said
retained earnings has not been subsequently impaired by losses. (SEC Opinion, 17 July 1984)

NOTE: Although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be
declared by the corporation to itself, nor in the meetings of the corporation as voting stock, for otherwise equal distribution of
voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the
corporation, though it still represents a paid-for interest in the property of the corporation. (CIR v. Manning, G.R. No. L-28398, 06
Aug. 1975)

TREASURY SHARES VS. REDEEMABLE SHARES

DIFFERENCES TREASURY SHARES REDEEMABLE SHARES

Shares so acquired by the corporation
Issued by the corporation when
Description through purchase, donation, redemption,
expressly so provided in the AOI.
or any other lawful means.
Redeemable shares may be acquired even
Can only be acquired in the presence of
Manner of Acquisition without URE for as long as it will not result
unrestricted retained earnings (URE).
in the insolvency of the corporation.
Applicability of the Trust Fund
Must comply with the trust fund doctrine. Is an exception to the trust fund doctrine.
Doctrine
Are not redeemable; they may be re- While redeemable, they are not re-issued,
Effect of Redemption
issued. unless otherwise provided.

7. FOUNDER’S SHARE;
Shares classified as such in the AOI, and which may be given certain rights and preferences not enjoyed by the owner of
other stocks. (Sec. 7, RCC)

NOTE: Where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited
period not to exceed five (5) years from the date of incorporation: Provided, That such exclusive right shall not be allowed if
its exercise will violate Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law”; R.A. No. 7042, otherwise
known as the “Foreign Investments Act of 1991”; and other pertinent laws.(Sec. 7, RCC)

8. VOTING SHARES;
Shares with a right to vote on all corporate acts. Usually refers to common shares, although the corporation may also grant
voting rights to preferred shares under its AOI.

9. NON-VOTING SHARES; AND

Shares without the right to vote. The law only authorizes the denial of voting rights in the case of redeemable shares and
preferred shares, provided that there shall always be a class or series of shares which have complete voting rights (common
shares). (Sec. 6, RCC)

INSTANCES WHEN HOLDERS OF NON-VOTING SHARES ARE STILL ENTITLED TO VOTE

 These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be entitled to vote on the
following fundamental matters: (A-A-S-I-I-M-I-D)
1. Amendment of articles of incorporation;
2. Adoption and amendment of By-laws;
3. Sale, Lease, Exchange, Mortgage, Pledge or Other disposition (Sa-Le-M-P-O) of all or substantially all of the corporate
property;
4. Incurring, creating, or increasing bonded Indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation. (Sec. 6, RCC)

NOTE: Except as provided in the foregoing eight (8) instances, the vote required under the RCC to approve a particular
corporate act shall be deemed to refer only to stocks with voting rights (Sec. 6, RCC)

10. CONVERTIBLE SHARES;

A share that is changeable by the stockholder from one class to another at a certain price and within a certain period.
(Divina, 2020)

OTHER KINDS OF SHARES:

1. Fractional Share – A fractional share is a share of equity that is less than one full share.
2. Shares in Escrow – A stock deposited with a third person to be delivered to a stockholder or his assign, after complying
with certain conditions, usually the full payment of subscription or purchase price. (Divina, 2020)

NOTE: The classification of shares, their corresponding rights, privileges, or restrictions, and their stated par value, if any,
must be indicated in the AOI. A corporation may further classify its shares for the purpose of ensuring compliance with
constitutional or legal requirements. (Sec. 6, RCC)

WHO MAY CLASSIFY SHARES

1. Incorporators – the classes and number of shares which a corporation shall issue are first determined by the incorporators
as stated in the AOI filed with the SEC;
2. Board of directors and stockholders – after the corporation comes into existence, classification of shares may be altered by
the board of directors and the stockholders by amending the AOI pursuant to Sec. 15, RCC.

PROMOTER
A promoter is a person who brings about the formation and organization of a corporation by bringing together the incorporators
or person interested in the enterprise, procuring subscriptions or capital to the corporation.

NOTE: Notwithstanding the role of the promoter of “bringing together” the incorporators, a promoter is not in any sense an
agent of a corporation. (Divina, 2021)

LIABILITY OF PROMOTER
GR: Promoters are personally liable on their contracts made on behalf of the corporation to be formed.
XPN: If there is an express or implied agreement to the contrary. It must be noted that the corporation to- be-formed has
adopted or ratified the contract does not release the promoter from responsibility unless a novation was intended.

LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACT

GR: A corporation is not bound by the promoter’s contract. Since a corporation is yet to be made with the assistance of a
promoter, it still has no legal existence. (Cagayan Fishing Development Co., Inc. v. Sandiko, G.R. No. L-43350, 23 Dec. 1937)
XPN: A corporation may be bound by the contract if it makes the contract its own through:
1. Adoption or ratification of the contract in entirety;
2. Acceptance of the contract’s benefits with knowledge of the terms thereof.

NOTE: The rule held by the SC in Cagayan Fishing Development v. Sandiko is NOT absolute. Although the Cagayan Fishing case
states that there should be a prior complete organization before a corporation enters into any kind of contract, one of the
exceptions that is recognized by American courts is that “a contract made by promoters of a corporation on its behalf may be
adopted, accepted or ratified by the corporation when organized.” (Rizal Light v. PSC, G.R. No. L-20993, 28 Sep. 1968)
SUBSCRIPTION CONTRACT
It is a contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed, notwithstanding
the fact that the parties refer to it as purchase or some other contract. (Sec. 59, RCC)

NATURE OF SUBSCRIPTION CONTRACT

A subscription contract is indivisible. Consequently, where stocks were subscribed and part of the subscription contract price was
not paid, the whole subscription shall be considered delinquent and not only the shares which correspond to the amount not
paid. This is called the Doctrine of Individuality (Indivisibility) of Subscription. (Sec. 63, RCC)

PURCHASE VS. SUBSCRIPTION

DIFFERENCES PURCHASE SUBSCRIPTION
Pertains to shares already issued by the
As to what it pertains to Pertains to unissued shares.
corporation.
Buyer cannot exercise the rights pertaining Subscriber is entitled to exercise the rights of a
to the purchased sales without full payment stockholder even without full payment of the
As to exercise of rights
of purchase price unless the sale agreement subscription; provided the subscriber is not
provides otherwise. delinquent
The creditor of the corporation cannot The creditor of the corporation may
As to enforcement of
enforce payment of the unpaid purchase enforce payment on the unpaid subscriptions
payment
price for lack of privity to the contract. under the trust fund doctrine.

KINDS OF SUBSCRIPTION
1. Pre-incorporation Subscription – entered into before incorporation; (Sec. 60, RCC)
2. Post-incorporation Subscription – entered into after incorporation.

RULES GOVERNING PRE-INCORPORATION CONTRACTS

GR: A pre-incorporation subscription agreement is irrevocable for a period of 6 months from the date of subscription.
XPNs:
1. If all of the other subscribers consent to the revocation;
2. If the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated
in the contract of subscription.
PROVIDED: No pre-incorporation subscription may be revoked after the submission of the AOI to the Securities and Exchange
Commission. (Sec. 60, RCC)

Stockholder is entitled to the rights pertaining to shares of stock subscribed although not fully paid
As long as the shares are not considered delinquent, stockholders are entitled to all rights granted to said shares whether or not
the subscription is fully paid.

VALID CONSIDERATIONS IN A SUBSCRIPTION AGREEMENT

1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received the corporation and necessary or convenient for its use and lawful
purposes a fair valuation equal to the par or issued value of the stock issued;
3. Labor or services actually rendered to the corporation;
4. Prior corporate obligations or indebtedness;
5. Amounts transferred from unrestricted retained earnings to stated capital (in case of declaration of stock dividends);
6. Outstanding shares in exchange for stocks in the event of reclassification or conversion;
7. Shares of stock in another corporation; and/or
8. Other generally accepted form of consideration. (Sec. 61, RCC)
NOTE: Promissory notes or future services are not valid considerations.

AMOUNT OF CONSIDERATION
Shares of stock issued from the unissued portion of the authorized capital stock shall not be issued for a consideration less than
the par or issued price thereof.

WHEN PROPERTY IS ACCEPTED AS A CONSIDERATION FOR THE ISSUANCE OF ITS SHARES OF STOCK
A corporation may accept property as consideration for the issuance of its shares of stock under the
following conditions:
1. It must be necessary or convenient for its use and lawful purposes.
2. It must be fairly valued, at least equal to the par or issued value of the stock issued.
3. The valuation thereof shall initially be determined by the stockholders or the board of directors.
4. The valuation is subject to the approval of the SEC. (Sec. 61, RCC)

If the shares will not be issued in favor of existing stockholders, the issuance should be approved by the board of directors, as
well as by the stockholders representing at least 2/3 of the outstanding capital stock, otherwise, it will amount to a violation of
the preemptive right of the stockholders. (Sec. 38, RCC; Divina, 2022)

ARTICLES OF INCORPORATION
It is the document prepared by the incorporators organizing a corporation containing the matters required by the RCC. It offers
the ultimate evidence of the nature and purpose of a corporation. (Divina, 2021)

THREE-FOLD NATURE OF AOI

An AOI, which stands as the corporate charter, is a contract of three-fold nature because it is a contract between:
1. The State and the corporation;
2. The corporation and the stockholders; and
3. The stockholders inter se.

CONTENTS OF AOI
All corporations organized under the Code shall file with the SEC an AOI in any of the official languages duly signed and
acknowledged or authenticated, in such form and manner as may be allowed by the Commission, containing substantially the
following matters, except as otherwise prescribed by the Code or by special law: (Na-P- Pla-T-I-Num-A-S-O-N-O)
1. Name of corporation;
2. Purpose/s, indicating the primary and secondary purposes (Purpose clause);
NOTE: The purpose clause determines whether the acts performed by the corporation are authorized or beyond its powers.
Acts beyond the corporation’s powers are called ultra vires acts.
3. Place of principal office;
4. Term of existence (if the corporation has not elected perpetual existence);
5. Names, nationalities and residences of Incorporators;
6. Number of directors, which shall not be more than 15 or the number of trustees which may be more than 15;
7. Names, nationalities, and residences of the persons who shall Act as directors or trustees until the first regular ones are
elected and qualified;
8. If a Stock corporation, the amount of its authorized capital stock, number of shares and in case the shares are par value
shares, the par value of each share;
9. Names, nationalities, number of shares, and the amounts subscribed and paid by each of the Original subscribers;
10. If Non-stock, the amount of capital, the names, residences, and amount paid by each contributor;
11. Other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. (Sec. 13,
RCC)

IMPORTANCE OF INDICATING THE PRINCIPAL OFFICE IN THE AOI

The principal office of a corporation determines its residence or domicile. As such, the place indicated in the corporation’s AOI
becomes controlling in determining the venue for the filing of legal action involving the corporation.
NOTE: The principal office of the corporation is that which is stated in the AOI and NOT the place of its actual operations. (Divina,
2021)

NON-AMENDABLE ITEMS IN THE AOI

Those matters referring to accomplished facts, except to correct mistakes, such as:
1. Name of incorporators;
2. Name of original subscribers to the capital stock of the corporation and their subscribed and paid-up capital;
3. Name of the original directors;
4. Treasurer elected by the original subscribers;
5. Members who contributed to the initial capital of the non‐stock corporation; or
6. Witnesses to the execution of the AOI.
7. Notarial Certificate

CORPORATE NAME AND LIMITATIONS ON ITS USE

No corporate name shall be allowed by the Commission if it is not distinguishable from that already reserved or registered for
the use of another corporation, or if such name is already protected by law, or when its use is contrary to existing law, rules and
regulations.
A name is not distinguishable even if it contains one or more of the following:
a. The word “corporation”, “company”, “incorporated”, “limited”, “limited liability”, or an abbreviation of one of such words;
and
b. Punctuations, articles, conjunctions, contractions, prepositions, abbreviations, different tenses, spacing, or number of the
same word or phrase.

THE COMMISSION, UPON DETERMINATION THAT THE CORPORATE NAME IS:

1. Not distinguishable from a name already reserved or registered for the use of another corporation;
2. Already protected by law; or
3. Contrary to law, rules and regulations, may summarily order the corporation to immediately cease and desist from using
such name and require the corporation to register a new one. The Commission shall also cause the removal of all visible
signages, marks, advertisements, labels, prints and other effects bearing such corporate name. Upon the approval of the
new corporate name, the Commission shall issue a certificate of incorporation under the amended name. If the corporation
fails to comply with the Commission’s order, the Commission may hold the corporation and its responsible directors or
officers in contempt and/or hold them administratively, civilly and/or criminally liable under this Code and other applicable
laws and/or revoke the registration of the corporation. (Sec. 17, RCC)

NOTE: Priority of adoption determines the right to the exclusive use of a corporate name with freedom from infringement.
Further, to determine whether a given corporate name is “deceptively” or “confusingly similar” with another entity’s corporate
name, the corporate names must be evaluated in their entirety. (Lyceum of the Philippines v. CA, G.R. No. 101897, 05 Mar. 1993)

Q: When may a corporation prohibit the use of a corporate name by another corporation?

A:
1. When the complainant corporation acquired a prior right over the use of such corporate name through earlier registration;
and
2. The proposed name is either: not distinguishable from that already reserved or registered for the use of the complainant
corporation; already protected by law or; its use is contrary to existing law, rules, and
regulations. (Divina, 2021)

A Corporation that Changes its Corporate Name is NOT considered as a New Corporation
A corporation that changes its corporate name is not considered as a new corporation. It is the same corporation with a different
name, and its character is in no respect changed. (Republic Planters Bank v. CA, G.R. No. 93073, 21 Dec. 1992; Zuellig Freight and
Cargo Systems vs. NLRC, et al., G.R. No. 157900, 22 July 2013)

Corporation’s Commencement of Corporate Existence and Juridical Personality

A private corporation organized under the RCC commences its corporate existence and juridical personality from the date the
SEC issues the Certificate of Incorporation under its official seal.
NOTE: A corporation does not acquire legal personality from the mere execution of AOI or its filing with the SEC. (Divina, 2021) A
corporation created under a special law acquires legal personality upon effectivity of the special law creating it or compliance
with the conditions imposed by such law for the commencement of corporate existence. (Ibid.)
h) ELECTION OF DIRECTORS OR TRUSTEES
Requirements and Limitations for the Election of Directors or Trustees during the Regular Meeting of the Stockholders or
Members
1. Presence of Stockholders representing a majority of the outstanding capital stock of the corporation or majority of the
members, either in person or by proxy;
NOTE: Sec. 23 of the RCC provides new ways to vote such as through remote communication or in absentia.
GR: It must be authorized in the by-laws or by a majority of the Board of Directors.
XPN: The right to vote through such modes may be exercised in corporations vested with public interest notwithstanding the
absence of a provision in the bylaws of such corporations.
2. The election must be by ballot, if requested by any voting stockholder or member;
3. The total number of votes cast by him must not exceed the number of shares owned by him as shown in the books of the
corporation multiplied by the whole number of directors to be elected;
4. No delinquent stock shall vote or be voted for;
5. A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the
methods of voting in the election of directors;
6. The candidates receiving the highest number of votes shall be declared elected. (Sec. 23, RCC)

REPORTORIAL REQUIREMENT
Within 30 days after the election of directors, trustees and officers of the corporation, the secretary or any other officer of the
corporation, shall submit to the Commission, the names, nationality, shareholdings, and residence addresses of the directors,
trustees and officers elected. (Sec. 25, RCC)

Q: In case where there are 2 lists of BOD submitted to SEC, which one is controlling?

A: It is the list of directors in the latest general information sheet as filed with the SEC which is controlling. (Premium Marble
Resources, Inc. v. CA, G.R. No. 96551, 04 Nov. 1996)

DIFFERENT METHODS OF VOTING

1. Straight Voting - every stockholder may vote such number of shares for as many persons as there are directors to be
elected.
2. Cumulative voting for one candidate – a stockholder is allowed to concentrate his votes and give one candidate, as many
votes as the number of directors to be elected multiplied by the number of his shares shall equal.
3. Cumulative voting by distribution – a stockholder may cumulate his shares by multiplying the number of his shares by the
number of directors to be elected and distribute the same among as many candidates as he shall see fit.

Q: What happens if no election was held, or the owners of majority of the outstanding capital stock or majority of the
members entitled to vote are not present?

A: The meeting may be adjourned, and the outgoing directors or trustee shall serve in a hold-over capacity. (Sec.23, RCC) The
non-holding of elections and the reasons therefor shall be reported to the SEC within 30 days from the date of the scheduled
election. The report shall specify a new date for the election, which shall not be later than 60 days from the scheduled date. If no
new date has been designated, or if the rescheduled election is likewise not held, the SEC may, upon the application of a
stockholder, member, director or trustee, and after verification of the unjustified non-holding of the election, summarily order
that an election be held. The SEC shall have the power to issue such orders as may be appropriate, including orders directing the
issuance of a notice stating the time and place of the election, designated presiding officer, and the record date or dates for the
determination of stockholders or members entitled to vote.
Notwithstanding any provision of the articles of incorporation or bylaws to the contrary, the shares of stock or membership
represented at such meeting and entitled to vote shall constitute a quorum for purposes of conducting an election under this
section. (Sec. 25, RCC)

ADOPTION OF BY-LAWS
By-laws are rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions,
affairs and concerns and of its stockholders or members and directors and officers in relation thereto and among themselves in
their relation to it. (Sec. 23, RCC; Valley Golf & Country Club, Inc. vs. Vda. De Caram, G.R. No. 158805, 16 Apr. 2009)

BY-LAWS ARE ADOPTED EITHER PRIOR TO INCORPORATION OR AFTER INCORPORATION

Prior to Incorporation:
1. This must be approved and signed by the incorporators and
2. Must be submitted together with the AOI to the commission.

After Incorporation:
1. The affirmative vote of the stockholders must compose of at least majority of the OCS or at least majority of the
members for non-stock corporation.
2. It must be signed by the stockholders or members voting them.
3. It must be kept in the principal office subject to the inspection of the stockholders and members during office hours.
4. It must be certified by majority of directors or trustees and undersigned by the corporate secretary. This must be filed to
the commission attached to the original AOI.

CONTENTS OF BY-LAWS
1. Time, place and manner of calling and conducting regular or special meetings of directors or trustees.
2. Time and manner of calling and conducting regular or special meetings of the stockholder or members.
3. The required quorum in meeting of stockholders or members and the manner of voting therein.
4. The modes by which a stockholder, member, director, or trustee may attend meetings and cast their votes;
5. The form for proxies of stockholders and members and the manner of voting them.
6. The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for setting the compensation of directors
or trustees and officers, and the maximum number of other board representations that an independent director or trustee
may have which shall, in no case, be more than the number prescribed by the Commission;
7. Time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof.
8. Manner of election or appointment and the term of office of all officers other than directors or trustees.
9. Penalties for violation of the by-laws.
10. In case of stock corporations, the manner of issuing certificates.
11. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs for the
promotion of good governance and anti-graft and corruption measures. (Sec. 46, RCC)
NOTE: An arbitration agreement may be provided in the by-laws pursuant to Sec. 181 of RCC.

EFFECT OF NON-SUBMISSION OF BY-LAWS

This will not result in the automatic dissolution of the corporation. Though it is one of the requirements in the incorporation, non-
filing of the bylaws will consider the corporation as de facto. It will enjoy all the power and privileges of a corporation under the
RCC until the state questions its existence through direct proceedings.
NOTE: Section 46 of the old Corporation Code provides that there is a 1-month period to adopt bylaws after corporation, but this
has been removed by the Revised Corporation Code. (Divina, 2021)

BINDING EFFECTS
The following are the binding effects of by-laws:
1. As to members/ stockholders, officers, trustees/ directors and corporation - They are bound by and must comply with it.
They are presumed to know the provisions of the by-laws.
2. As to third persons
GR: They are not bound.
XPN: They have knowledge or notice of the by-laws at the time the contract was executed. (China Banking Corp. v. CA, G.R.
No. 117604, 26 Mar. 1997)

Q: When do by-laws become effective?

A: By-laws become effective only upon issuance of SEC of a certification that the by-laws are in accordance with the RCC. (Sec.
45, RCC)

AMENDMENTS
Ways of Amending, Repealing or Adopting New By-laws:
1. Amendment may be made by stockholders together with the Board – by majority vote of directors and owners of at least a
majority of the outstanding capital stock/members; or
2. By the board only after due delegation by the stockholders owning 2/3 of the outstanding capital stock/members. Provided,
that such power delegated to the board shall be considered as revoked whenever stockholders owning at least majority of
the outstanding capital stock or members, shall vote at a regular or special meeting. (Sec. 47, RCC)

EFFECTS OF NON-USE OF CORPORATE CHARTER

If a corporation does not formally organize and commence its business within five (5) years from the date of its incorporation, its
certificate of incorporation shall be deemed revoked as of the day following the end of the five-year period. If a corporation has
commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive years, the
Commission may, after due notice and hearing, place the corporation under delinquent status. A delinquent corporation shall
have a period of two (2) years to resume operations and comply with all requirements that the Commission shall prescribe. Upon
compliance by the corporation, the Commission shall issue an order lifting the delinquent status. Failure to comply with the
requirements and resume operations within the period given by the Commission shall cause the revocation of the corporation’s
certificate of incorporation. (Sec. 21, RCC)

CORPORATE POWERS
Kinds of Corporate Powers
1. Express Powers – granted by law, the Corporation Code, and its Articles of Incorporation or Charter, and administrative
regulations;
2. Inherent/Incidental Powers – not expressly stated but are deemed to be within the capacity of corporate entities; and
3. Implied/Necessary Powers – exists as a necessary consequence of the exercise of the express powers of the corporation or
the pursuit of its purposes as provided for in the Charter.

Q: Eliodoro Cruz was the former president of Filport. During the general stockholders’ meeting, he wrote a letter to the
corporation’s Board of Directors questioning the board’s creation of certain positions and their corresponding monthly
remuneration. Because his letter was not heeded favorably, Cruz, purportedly in representation of Filport and its
stockholders, filed with SEC a petition which he describes as a derivative suit against the incumbent members of Filport’s BOD,
for alleged acts of mismanagement detrimental to the interest of the corporation and its shareholders at large. Did Filport’s
BOD act within its powers in creating the executive committee and the positions of AVPs for Corporate Planning, Operations,
Finance and Administration, and those of the Special Assistants to the President and the Board Chairman, each with
corresponding remuneration?

A: YES. The governing body of a corporation is its board of directors. Sec. 22 of the RCC provides that unless otherwise provided
in this Code, the Board of directors or trustees shall exercise the corporate powers, conduct all business, and control all
properties of the corporation. Thus, with the exception only of some powers expressly granted by law to stockholders (or
members, in case of nonstock corporations), the board of directors (or trustees, in case of non-stock corporations) has the sole
authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its
charter, i.e., its AOI, by-laws and relevant provisions of law. Verily, the authority of the board of directors is restricted to the
management of the regular business affairs of the corporation, unless more extensive power is expressly conferred. In the
present case, the board’s creation of the subject positions was in accordance with the regular business operations of Filport as it
is authorized to do so by the corporation’s by-laws, pursuant to the Corporation Code. (Filipinas Port Services, Inc., v. Go, et al.,
G.R. No. 161886, 16 Mar. 2007)

THREE (3) LEVELS OF CONTROL IN THE CORPORATE HIERARCHY

1. The board of directors – responsible for corporate policies and the general management of the business affairs of the
corporation;
2. The officers of the corporation – execution of the policies laid down by the board, but in practice often have wide latitude in
determining the course of business operations;
3. The stockholders – have the residual power over fundamental corporate changes, like amendments of the AOI. (Citibank,
N.A. v. Chua, G.R. No. 102300, 17 Mar. 1993)

THEORY OF GENERAL CAPACITY

Under the Theory of General Capacity, a corporation holds such powers which are not prohibited or withheld from it by general
laws. (Divina, 2021)

The general powers of a corporation are the following: (Su-Per-C-A-B-S-P-E-D-R-O)

1. To Sue and be sued;
2. To have Perpetual existence unless the certificate of incorporation provides otherwise;
3. To adopt and use of Corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For stock corporations: issue and Sell stocks to subscribers and treasury stocks; for non-stock corporations: admit members;
7. To Purchase, receive, take, or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property,
securities, and bonds subject to the Constitution and existing laws;
8. To Enter into merger or consolidation, (To enter into a partnership, joint venture, merger, consolidation, or any other
commercial agreement with natural and juridical persons);
9. To make reasonable Donations, including those for public welfare, or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, that no foreign corporation shall give donations in aid of:
a. Any political party;
b. Candidate; or
c. Partisan political activity.
NOTE: It shall be unlawful for any foreigner, whether judicial or natural person, to aid any candidate or political party,
directly or indirectly, or take part in or influence in any manner any election, or to contribute or make any expenditure in
connection with any election campaign or partisan political activity. (Sec. 81, Omnibus Election Code)
10. To establish pension, Retirement, and other plans for the benefit of its directors, trustees, officers, and employees – basis of
which is the Labor Code; and
11. To exercise Other powers essential or necessary to carry out its purpose or purposes as stated in the articles of
incorporation. (Sec. 35, RCC)

LIMITATION ON CORPORATION’S EXERCISE OF ACTS OF PROPERTY OF OWNERSHIP

The power of the corporation to exercise acts of ownership over its assets and properties is limited by the following:
1. The transaction of corporate property is reasonably and necessarily required by the lawful business of the corporation; and
2. The transaction is done within the limits prescribed by law or Constitution. (Sec. 35(g), RCC)

COMMENCEMENT OF THE POWER TO SUE AND BE SUED

The power to sue and be sued commences upon issuance by SEC of the Certificate of Incorporation.

THE POWER OF THE CORPORATION TO SUE AND BE SUED IS EXERCISED BY THE BOARD OF DIRECTORS
The power of the corporation to sue and be sued is exercised by the board of directors. The physical acts of the corporation, like
the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by
a specific act of the board. Absent the said board resolution, a petition may not be given due course. (Esguerra, et al. vs Holcim
Philippines, Inc., G.R. No. 182571, 02 Sept. 2013) If the real party in interest is a corporate body, an officer of the corporation can
sign the verification against forum shopping so long as he has been duly authorized by a resolution of its board of directors. ( San
Miguel Bukid Homeowners Association, Inc. v. City of Mandaluyong, et al., G.R. No. 153653, 02 Oct. 2009; Republic v. Coalbrine
International Philippines, et al., G.R. No. 161838, 07 Apr. 2010)

AN UNREGISTERED CORPORATION HAS NO RIGHT TO SUE OR BE SUED FOR WANT OF CORPORATE PERSONALITY
“Lideco Corporation” had no personality to intervene since it had not been duly registered as a corporation. If petitioner
“Laureano Investment & Development Corporation” legally and truly wanted to intervene, it should have used its corporate
name as the law requires and not another name which it had not registered. (Laureano Investment & Development Corp. v. CA,
G.R. No. 100468, 06 May 1997)

LIMITATIONS OF THE CORPORATION IN DEALING WITH PROPERTY

1. It must be in the furtherance of the purpose for which the corporation was organized;
2. Constitutional limitations – Private corporations or associations may not hold such alienable lands of the public domain
except by lease; (Sec. 3, Article XII, 1987 Constitution)
With regard to private land, 60% of the corporation must be owned by the Filipinos, same with the acquisition of a
condominium unit.
NOTE: No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the
allowed foreign equity, what the law disqualifies is the corporation from owning land. (JG Summit Holdings, Inc. v. CA, G.R.
No. 124293, 31 Jan. 2005)
3. Special law – subject to the provisions of the Bulk Sales Law and law against monopoly, illegal combination, or restraint of
trade.

REQUISITES FOR A VALID DONATION (P-A-I-R)

1. The donation must be Reasonable;
2. It must be for valid Purposes including public welfare, hospital, charitable, cultural, scientific, civic, or similar purposes;
3. The donation must bear a reasonable relation to the corporation’s Interest and must not be so remote and fanciful; and
4. For foreign corporations, it must not be an Aid in any:
a. Political party;
b. Candidate; or
c. Partisan political activity. (Divina, 2020)

IMPLIED POWERS OF A CORPORATION

A corporation is not restricted to the exercise of powers expressly conferred upon it by its charter but has the power to do what
is reasonably necessary or proper to promote the interest or welfare of the corporation. (NAPOCOR v. Vera, G.R. No. 83558, 27
Feb. 1989)

THEORY OF SPECIFIC CAPACITY

Under the Theory of Specific Capacity, a corporation cannot exercise powers except those expressly or
impliedly given to it. (Divina, 2021)
The specific powers of a corporation are the following: ESCAPED-BI-DECAMP
1. Enter into merger and consolidation. (Sec. 75, RCC) and
2. Sell, dispose, lease, encumber all or substantially all of corporate assets; (Sec. 39, RCC)
3. Power to extend or shorten Corporate term; (Sec. 36, RCC)
4. Amend Articles of Incorporation. (Sec. 15, RCC)
5. Purchase or acquire own shares; (Sec. 40, RCC)
6. Create Executive Committees and Special Committees; (Sec 34, RCC)
7. Apply for voluntary Dissolution. (Secs. 134 and 135, RCC)
8. Incur, create, or increase Bonded indebtedness; (Sec. 37, RCC)
9. Invest corporate funds in another corporation or business or for other purpose other than primary purpose; (Sec. 41, RCC)
10. Declare Dividends; (Sec. 42, RCC)
11. Elect, Appoint, and Remove Directors and Corporate Officers; (Secs. 23, 24, and 27, RCC)
12. Increase or decrease Capital stock; (Sec. 37, RCC)
13. Adopt and Amend Bylaws; (Secs. 45 and 46, RCC)
14. Enter into Management contract with another corporation;(Sec. 43, RCC) and
15. Deny Pre-emptive right; (Sec. 38, RCC)

POWER TO EXTEND OR SHORTEN CORPORATE TERM

Procedural Requirements in Extending or Shortening Corporate Term
1. Majority vote of the Board of Directors or Board of Trustees;
2. Ratification by shareholders representing at least 2/3 of the outstanding capital stock (OCS), or by at least 2/3 of the
members in case of non-stock corporation;
3. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally or when allowed in the bylaws or done with the consent of the
stockholder, sent electronically in accordance with the rules and regulations of the Commission on the use of electronic data
messages;
4. Copy of the amended AOI shall be submitted to the SEC for its approval; (Sec. 36, RCC)
5. In case of banks, banking, and quasibanking institutions, preneed, insurance and trust companies, NSSLAS, pawnshops, and
other financial intermediaries, a favorable recommendation of appropriate government agency; (Sec. 16, RCC)
6. The extension must be done during the lifetime of the corporation not earlier than 3 years prior to the expiry date unless
there is justifiable reason for an earlier extension (Sec. 11, RCC)

Q: What is the effect of the failure of the corporation to extend its corporate term?

A: In the case of PNB v. CFI of Rizal, Pasig (G.R. No. 63201, 27 May 1992), the Supreme Court ruled that upon the expiration of
the period fixed in the AOI, in the absence of compliance with the legal requisites for the extension of the period, the corporation
ceases to exist and is dissolved ipso facto. The automatic dissolution of the corporation is no longer applicable under the RCC
given the option available to the corporation to revive the corporate term (Sec. 11, RCC). Since the period of revival is not
indicated in the RCC, the option may be exercised within a reasonable period, but prior to the dissolution and liquidation of the
corporation. What is a reasonable period is for the SEC to determine. (Divina, 2021)

Remedy of the Stockholder Not in Favor of Extending or Shortening the Corporate Term
The stockholder not in favor of extension of the corporate term may exercise his appraisal right, that is, he may get out of the
corporation and demand for the payment of the fair value of his shares subject to the conditions specified in Sec. 80 of the RCC .
(Ibid.)

A stockholder may also exercise appraisal right in case of shortening of the corporate term. While Sec. 36 of the RCC refers to the
remedy of appraisal right only in case of extension of corporate term, Sec. 80 of the RCC also provides for the same remedy in
case a stockholder votes against the shortening of corporate term. (Ibid.)

POWER TO INCREASE OR DECREASE CAPITAL STOCK OR INCUR, CREATE, INCREASE BONDED INDEBTEDNESS

PROCEDURAL REQUIREMENTS IN INCREASING OR DECREASING CAPITAL STOCK

1. Approved by majority vote of the Board of Directors;
2. Approved by stockholders representing at least 2/3 of the OCS;
3. Written notice of the time and place of the stockholder’s meeting and the purpose of the said meeting must be sent to the
stockholders at their places of residence as shown in the books of the corporation and served on the stockholders personally
or through electronic means recognized in the corporation’s bylaws and/or the Commission’s rules as a valid mode for
service of notices;
4. A certificate in duplicate must be signed by a majority vote of the directors of the corporation and countersigned by the
chairperson and the secretary of the stockholders’ meeting, setting forth:
a. That the requirements of Sec. 37 of the RCC have been complied with;
b. The amount of increase or decrease of the capital stock;
c. In case of an increase of the capital stock, the amount of capital stock or number of shares of no par stock actually
subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or
number of no par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or
the amount of capital stock or number of shares of no par stock allotted to each stockholder if such increase is for
the purpose of making effective stock dividend authorized;
d. Any bonded indebtedness to be incurred created, or increased;
e. The amount of stock represented at the meeting; and
f. The vote authorizing the increase or diminution of the capital stock, or the incurring, creating, or increasing of any
bonded indebtedness. (Sec. 37, RCC) Prior to the approval of the SEC of the increase in the authorized capital stock,
such payments cannot yet be deemed part of the corporation’s paid-up capital, technically speaking, because its
capital stock has not yet been legally increased. Such payments constitute deposits on future subscriptions, money
which the corporation will hold in trust for the subscribers until it files a petition to increase its capitalization and a
certificate of filing of increase of capital stock is approved and issued by the SEC. (Central Textile Mills, Inc. v. NWPC,
et al., G.R. No. 104102, 07 Aug. 1996)

ADDITIONAL REQUIREMENT WITH RESPECT TO INCREASE OF CAPITAL STOCK – TREASURER’S AFFIDAVIT (25%-25% RULE)
The application to be filed with the SEC shall be accompanied by the sworn statement of the treasurer of the corporation,
showing that at least 25% of the increase in the capital stock was subscribed and that at least 25% of the said amount has been
paid either in actual cash to the corporation or that property, the valuation of which is equal to 25% of the subscription. (Sec. 37,
RCC)

WAYS OF EFFECTING THE INCREASE OR DECREASE OF THE CAPITAL STOCK

By increasing or decreasing the: NR-PR-NP
1. Number of shares and retaining the par value;
2. Par value of existing shares and retaining the number of shares; or
3. Number of shares as well as the par value.
NOTE: The following will result to decrease in capital stock, provided the shares are cancelled or retired thereafter:R-P-C
1. Redemption of redeemable shares; (Sec. 8, RCC)
2. Purchase of own shares; (Sec. 40, RCC)
3. Cancelling shares which have not yet been issued.

LIMITATION ON POWER TO DECREASE AUTHORIZED CAPITAL STOCK

No decrease in the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors.
(Sec. 37, RCC)

Q: If the subscribed capital stock is P60,000,000 divided into 60,000,000 shares with par value of Php 1.00 per share and the
paid-up capital stock is Php 50,000,000 divided into 50,000,000 shares with par value of P 1.00 per share, can the corporation
reduce the capital stock to Php 50,000,000?

A: NO, the capital stock of the corporation may be decreased only if it will not result in prejudice to corporate creditors. In this
case, the reduction of the capital stock to 50,000,000 will mean the release or condonation of the 10,000,000 unpaid
subscription, thereby causing prejudice to the creditors as subscriptions to the capital stock are funds held in trust for their
benefit under the trust fund doctrine. (Divina, 2021)

Q: In August 1998, Sinophil entered into a Share Swap Agreement with Metroplex and Paxell. In 2001, Sinophil and Belle
executed a Memorandum Of Agreeement with Metroplex and Paxell rescinding the 1998 Swap Agreement. In 2002 and 2005,
the shareholders of Sinophil voted for the reduction of the company's authorized capital stock. The Company Registration and
Monitoring Department (CRMD); the Corporation Finance Department (CFD) of SEC approved the first amendment of the AOI
of Sinophil. In 2007, Sinophil’s shareholders’ approved the further reduction of the ACS. The CRMD and the CFD also approved
the second amendment. Metroplex and Paxell filed a Petition for Review Ad Cautelam Ex Abundanti before the SEC assailing
the approvals. The SEC, in denying the petition, found that the decrease complied with the requirements imposed by Sec. 38
of the Corporation Code. It held that the equal or unequal reduction of a corporation's capital stock is a matter solely between
the stockholders and cannot be enjoined either by the courts or the creditors. It found no basis to grant the prayer for the
issuance of a cease and desist order. The CA upheld the findings of the SEC. Is the CA correct in upholding the findings of the
SEC?

A: YES. Sec. 38 is clear that a corporation can only decrease its capital stock if the following are present:
1. Approval by a majority vote of the board of directors;
2. Written notice of the proposed diminution of the capital stock, and of the time and place of a stockholders' meeting duly
called for the purpose, addressed to each stockholder at his place of residence;
3. 2/3 of the outstanding capital stock voting favorably at the said stockholders' meeting duly;
4. Certificate in duplicate, signed by majority of the directors and countersigned by the chairman and secretary of the
stockholders' meeting stating that legal requirements have been complied with;
5. Prior approval of the SEC; and
6. Effects do not prejudice the rights of corporate creditors.

So long as written notice of the proposed increase or diminution of the capital stock was made to all stockholders, the presence
and approval of at least 2/3 of the capital stock is enough to make the increase or diminution valid . This is the plain language of
the provision over which no other interpretation may be made. After a corporation faithfully complies with the requirements laid
down in Section 38, the SEC has nothing more to do other than approve the same. For third persons or parties outside the
corporation like the SEC to interfere with the decrease of the capital stock without reasonable ground is a violation of the
"business judgment rule." (Metropolex Berhad v. Sinophil Corp., G.R. No. 208281, 28 June 2021, J. Hernando)

THE BOARD OF DIRECTORS MAY ISSUE ADDITIONAL SHARES OF STOCK WITHOUT STOCKHOLDER APPROVAL
A stock corporation is expressly granted the power to issue or sell stocks. The power to issue stocks is lodged with the Board of
Directors and no stockholders’ meeting is required to consider it because additional issuance of stock (unlike increase in capital
stock) does not need approval of the stockholders. What is only required is the board resolution approving the additional
issuance of the shares. The corporation shall also file the necessary application with the SEC to exempt these from the
registration requirements under the SRC. (Majority Stockholders of Ruby Industrial Corp. v. Miguel Lim and Minority Stockholders
of Ruby Industrial Corp., G.R. Nos. 165887 & 165929, 06 June 2011)

BONDED INDEBTEDNESS
It is a borrowing by the corporation which is long term in nature involving a large number of lenders and secured by the
encumbrance on corporate assets. Since bonds are securities, they should also be registered with the SEC. (Divina, 2021)
NOTE: The requirements for the power to incur, create or increase bonded indebtedness is also the same with the power to
increase or decrease capital stock, except that this power may also be exercised by a non-stock corporation.

REGISTRATION OF THE BONDS ISSUED BY THE CORPORATION

Bonds issued by a corporation shall be registered with the SEC which shall have the authority to determine the sufficiency of the
terms thereof. (Sec. 37, RCC)

POWER TO DENY PRE-EMPTIVE RIGHTS

Pre-emptive Right (2019 BAR)

All stockholders shall enjoy the pre-emptive right to subscribe to all issues or disposition of shares of any class in proportion to
their present shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto. (Sec. 38, RCC)

This means that except in the cases provided by law, shares of stock of the corporation should first be offered to the stockholders
prior to any offer to nonstockholders.

PURPOSE OF PRE-EMPTIVE RIGHT

The purpose of pre-emptive right is to enable the shareholder to retain his proportionate control in the corporation and to retain
his equity in the surplus.
NOTE: Pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum
stock ownership by the public; or to shares issued in good faith with the approval of the stockholders representing 2/3 of the
OCS, in exchange for property needed for corporate purposes or in payment of a previously contracted debt; (Sec. 38, RCC)
PRE-EMPTIVE RIGHT IS AVAILABLE ON THE REISSUANCE OF TREASURY SHARES
Since Sec. 38 of the RCC uses the phrase “all issues or disposition of shares of any class”, pre-emptive right extends not only to
the issuance of new shares resulting from an increase in capital stock but also to the issuance of previously subscribed shares
which form part of the existing authorized capital stock, as well as to the disposition of treasury shares. (Divina, 2020)

PRE-EMPTIVE RIGHT MAY BE WAIVED (2019 BAR)

The pre-emptive right may be waived by the stockholder. However, the waiver should be given individually by the stockholder
concerned or by another by way of Special Power of Attorney. Being a personal right, the waiver cannot be waived by the
corporation itself through a stockholders’ resolution. (SEC Opinion, 12 Dec. 1994)

A stockholder cannot be forced to waive the right even if the majority of the stockholders opt to waive it. (SEC Opinion No. 08-
08, 31 Mar. 2008)
NOTE: If the board resolution approving the issuance of shares prescribes a certain number of days to exercise pre-emptive right
and the stockholder fails to exercise such right within the fixed period, the stockholder is deemed to have impliedly waived his
right. (Divina, 2021)

REMEDIES OF A STOCKHOLDER WHOSE PRE-EMPTIVE RIGHT IS VIOLATED

A stockholder whose pre-emptive right is violated may maintain an action to compel the corporation to give him that right. If the
denial is by amendment to the AOI, he may exercise his appraisal right as such action restricts his rights as a stockholder. (Sec.
80(a), RCC)

NON-EXISTENCE OF PRE-EMPTIVE RIGHT DOES NOT BAR CHALLENGE TO VALIDITY OF ISSUANCE OF ADDITIONAL SHARES IF
DONE IN BREACH OF TRUST
Even if pre-emptive right does not exist either because the issue comes within the exceptions in Sec. 38, RCC or because it is
denied in the AOI, an issue of shares may still be objectionable if the directors acted in breach of trust and their primary purpose
is to perpetuate or shift control of the corporation or to “freeze out” the minority interest. The issuance of unissued shares out of
the original authorized capital stock pursuant to a rehabilitation plan the propriety or validity of which was on question by the
minority stockholders and subsequently disapproved by the Supreme Court amounts to unlawful dilution of the minority
shareholdings. (Majority Stockholders of Ruby Industrial Corp. v. Miguel Lim and Minority Stockholders of Ruby Industrial Corp.,
supra; Divina, 2014)

PRE-EMPTIVE RIGHT VS. RIGHT OF FIRST REFUSAL

DIFFERENCES PRE-EMPTIVE RIGHT RIGHT OF FIRST REFUSAL
Right to subscribe to all issuance or
dispositions of shares of the corporation
Description Right to purchase shares of a stockholder.
even to the subsequent sale of treasury
stocks.
Pertains to unsubscribed portion Pertains to the sale of the stocks already owned
To What does it Pertain
of the authorized capital stock. by another stockholder.
Against Whom is it
Right exercised against the corporation. Right exercised against a co-stockholder.
Exercised
Effect of the Absence of May be exercised even when there is no
Can only be exercised when so provided in the
Express express provision in the AOI or amendment
AOI, by-laws and printed in the stock certificate.
Provision in the AOI thereto.
Treasury Shares It includes treasury shares. Does not include treasury shares.

POWER TO SELL OR DISPOSE CORPRORATE ASSETS

Procedural Requirements for Sale, Lease, Exchange, Mortgage, Pledge, and any Other Disposition (Sa-L-E-M-P-O) of All or
Substantially All of Corporate Assets
1. Majority vote of the BOD or BOT;
2. Approval by stockholders representing at least 2/3 of the OCS, or by at least 2/3 of the members in case of nonstock
corporation; and
3. Written notice of the proposed action and of the time and place of the meeting addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with
postage prepaid, served personally, or when allowed by the bylaws or done with the consent of the stockholder, sent
electronically: Provided, That any dissenting stockholder may exercise the right of appraisal under the conditions provided in
this Code. (Sec. 39, RCC)
 NOTE: The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies,
including R.A. No. 10667, otherwise known as the “Philippine Competition Act.” Further, in case of non-stock corporations,
where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized by this section. (Sec. 39, RCC)

SUBSTANTIALLY ALL OF CORPORATE ASSETS

A sale or other disposition shall be considered shall be deemed to cover substantially all the corporate property and assets if in
the process thereof, the corporation would be rendered:
1. Incapable of continuing the business; or
2. Incapable of accomplishing the purpose for which it was incorporated. (Sec. 39, RCC)

INSTANCES WHEN APPROVAL OF STOCKHOLDERS OR MEMBERS IS NOT REQUIRED

1. If sale is necessary in the usual and regular course of business; or
2. If the proceeds of the sale or other disposition of such property and assets are to be appropriated for the conduct of the
remaining business.

ABANDONMENT OF THE PLAN FOR SaLEMPO EVEN AFTER APPROVAL OF THE STOCKHOLDERS OR MEMBERS
The BOD, in its discretion, may abandon the plan for SaLEMPO even after such authorization or approval by the stockholders,
subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders
or members. (Sec. 39, RCC)

NELL DOCTRINE (2017 BAR)

GR: Where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the
debts and liabilities of the transferor.
XPNs: The transferee of corporate assets or property is liable for the debts of the transferor in case of:
1. Express assumption of liability - where the purchaser expressly or impliedly agrees to assume such debts;
2. Transaction amounts to a consolidation or merger of the corporations - The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and franchises of each constituent corporation; and all real or personal
property, all receivables due on whatever account, including subscriptions to shares and other choses in action, and every
other interest of, belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or deed; (Sec. 79 (d), RCC)
3. Business Enterprise Transfer – where the purchasing corporation is merely a continuation of the selling corporation; and
4. Entered Fraudulently - Where the transaction is entered into fraudulently in order to escape liability for such debts. (Nell v.
Pacific Farms, G.R. No. L-20850, 29 Nov. 1965)

Q: Divine Corporation, engaged in the manufacture of garments for export, was able to obtain loans from individuals and
financing institutions. However, due to the drop in the demand for garments in the international market, Divine Corporation
could not meet its obligations. It decided to sell all its equipment such as sewing machines, permapress machines, high-speed
sewers, cutting tables, ironing tables, etc., as well as its supplies and materials to Top Grade Fashion Corporation, its
competitor.

a. How would you classify the transaction?

A: The transaction is deemed classified as a sale of all or substantially all of the corporate assets because the corporation would
be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

b. Can Divine Corporation sell aforesaid items to its competitor, Top Grade Fashion Corporation? What are the requirements
to validly sell the items? Explain. (2005 BAR)

A: YES. The law does not prohibit sale of all or substantially all of corporate assets to competitor company provided said sale is
subject to laws against illegal combination, monopoly, or restraint of trade and Bulk Sales Law. The facts did not state that the
competitor-company lies within the restrictions provided for by law. For the transaction to be valid, it needs a majority vote of its
board of directors and approval of the stockholders representing at least 2/3 of outstanding capital stock. Further, the provisions
of the Bulk Sales Law must be complied with:
a. The seller must provide the buyer with a verified list containing the name of the creditors, their addresses, amounts
owing to each of them, and the respective maturity dates;
b. A full detailed inventory of the properties or assets to be sold, including their cost or acquisition price; and
c. The list of inventory must be filed with the DTI.
Where an asset constitutes the only property of the corporation, its sale to a 3rd party is a sale or disposition of all the corporate
property and assets of the corporation falling squarely within the contemplation of Sec. 39 of the RCC. Hence, for the sale to be
valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of
the corporation should have been obtained. (Islamic Directorate of the Philippines, et al., v. CA, G.R. No. 117897, 14 May 1997)

POWER TO ACQUIRE OWN SHARES

Q: May a corporation acquire its own shares of stock?

A: Ordinarily, a stock corporation has no power to acquire its own shares as it is illogical for the corporation to be its own
stockholder. Moreover, the funds of the corporation should be devoted to attain the purposes of incorporation. However, the
RCC allows the corporation to acquire or purchase its own shares in certain instances. (Divina, 2020)

INSTANCES WHEN A CORPORATION MAY ACQUIRE ITS OWN SHARES (1991, 1992, 2005 BAR) F-I-D-T-R-D-D
1. To eliminate fractional shares arising out of stock dividends; (Sec. 40, RCC)
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale and to
purchase delinquent shares sold during said sale; (Ibid.)
3. To pay dissenting or withdrawing stockholders; (Ibid.)
4. To acquire treasury shares; (Sec. 9, RCC)
5. To acquire redeemable shares; (Sec. 8, RCC)
6. To effect a decrease of capital stock; (Sec. 37, RCC) and
7. In close corporations, when there is a deadlock in the management of the business, the SEC may order the purchase at their
fair value of the shares of any stockholder by a corporation (Sec. 103(1)(d), RCC)

RULE IN ACQUISITION OF OWN SHARES

GR: The corporation may only acquire its own stocks if there are unrestricted retained earnings (URE).
XPNs: (Re-Do-L-D)
1. Redemption of redeemable shares;
2. Donation of shares to the corporation;
3. Levy/garnishment of shares to satisfy the judgment in favor of the corporation;
4. Conveyance of shares to the corporation in payment of a Debt. (Divina, 2020)

UNRESTRICTED RETAINED EARNINGS (URE)

Unrestricted Retained Earnings represent the amount of accumulated profits and gains realized out of the normal and
continuous operations of the company after deducting therefrom distributions of stockholders and transfers to capital stock or
other accounts, and which are:
1. Not appropriated by its BOD for corporate expansion projects or programs;
2. Not covered by a restriction for dividend declaration under a loan agreement; and
3. Not required to be retained under special circumstances obtaining in the corporation such as when there is a need for a
special reserve for probable circumstances. (SEC Circular No. 11, Series of 2008)

GUIDELINES FOR ACQUISITION OF OWN SHARES

1. The capital of the corporation must not be impaired. There shall be URE’s to purchase the shares.
2. Legitimate or proper corporate objective is advanced.
3. Condition of the corporate affairs warrants it.
4. Transaction is designed and carried out in good faith.
5. Interest of creditors is not impaired, that is, the same is not violative of the trust fund doctrine. (Sec. 41, SEC Opinions, 12
Oct. 1992, 11 Sept. 1985, and 11 Apr. 1994)

TRUST FUND DOCTRINE

The requirement of unrestricted retained earnings to cover the share is based on the trust fund doctrine which means that the
capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors.
The reason is that the creditors of a corporation are preferred over the stockholders in the distribution of corporate assets.
(Boman Environmental Development Corp v. CA, G.R. No. 77860, 22 Nov. 1988)

POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS

Corporation may pursue the business/es as indicated in its Articles of Incorporation under its primary and secondary purposes.
However, if the business is listed under secondary purpose, the corporation must follow the procedure under Sec. 41.

Statutory Requirements for Investing in another Corporation, Business, or Purpose other than Primary Purpose (1995, 1996
BAR)
1. Approval by the majority vote of the BOD or BOT;
2. Ratification by stockholders representing at least 2/3 of the OCS or by at least 2/3 of the members in case of non-stock
corporations;
3. Ratification must be made at a meeting duly called for the purpose; and
4. Notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member
at the place of residence as shown in the books of the corporation and deposited to the addressee in the post office with
postage prepaid, served personally, or sent electronically in accordance with the rules and regulations of the Commission on
the use of electronic data message, when allowed by the bylaws or done with the consent of the stockholders. (Sec. 41, RCC)
NOTE: Any dissenting stockholder shall have appraisal right as provided in the RCC. Ratification of stockholders is not needed
where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the AOI.

POWER TO DECLARE DIVIDENDS

Dividends are corporate profits allocated, lawfully declared, and ordered by the directors to be paid proportionately to the
stockholders in the form of cash, property, or stocks. (Divina, 2021)

Q: Are profits the same as dividends?

A: Profits are the sources of dividends. Profits are dividends only when they have been set aside for distribution to stockholders
under the conditions specified by law. Profits belong to the corporation while dividends once declared, belong to the
stockholder. (Divina, 2021) (2005 BAR)

REQUIREMENTS FOR THE DECLARATION OF DIVIDENDS

1. Existence of URE’s. (Unrestricted Retained Earnings)
2. Resolution of the board.
NOTE: In case stock dividend is to be declared, an additional requirement of:
1. A vote representing 2/3 of outstanding capital stock. (Sec. 42, RCC)
2. A corporation must have also a sufficient number of authorized unissued shares for distribution to stockholders or
should apply for an increase of authorized capital stock.

Q: During the annual stockholders meeting, Riza, a stockholder proposed that a part of the corporation’s unreserved earned
surplus be capitalized, and stock dividends be distributed to the stockholders, arguing that as owners of the company, the
stockholders, by a majority vote, can do anything. As chairman of the meeting, how would you rule on the motion to declare
stock dividends? (1991, 2001 BAR)

A: As the chairman of the meeting, I would rule against the motion considering that a declaration of stock dividends should
initially be taken by the BOD and thereafter to be concurred in by the vote of the stockholders representing 2/3 of the
outstanding capital stock. (Sec. 42, RCC) The stockholders cannot compel the corporation to declare dividends as the
determination thereof rests with the sound discretion of the board.

FORM OF DIVIDENDS
1. Cash;
2. Stock; and
3. Property.

CASH DIVIDENDS VS. STOCK DIVIDENDS

DIFFERENCES CASH DIVIDENDS STOCK DIVIDENDS
As to Where it Forms Part Part of general fund. Part of capital.
As to Cash Outlay Results in cash outlay. No cash outlay.
As to Levy by Corporate Not subject to levy by corporate creditors. Once issued, can be levied by creditors of the
Creditors corporate stockholder because they are part of
 corporate asset.
Declared by the board with the concurrence of
Declared only by the board of directors at its
As to how Approvals the stockholders representing at least 2/3 of
discretion. (majority of the quorum only, not
Needed the outstanding capital stock at a
majority of all the board)
regular/special meeting.
As to Effect on Corporate
Does not increase the corporate capital Corporate capital is increased.
Capital
As to whether Declaration Its declaration creates a debt from the
No debt is created by its declaration.
creates Debt corporation to each of its stockholders.
If received by individual: subject to
Not subject to tax Whether received by
As to Taxability tax; If received by corporation: not subject
individual or a corporation.
to tax.
Can be revoked despite announcement but
As to Revocation Cannot be revoked after announcement.
before issuance.
As to Application on Unpaid Applied to the unpaid balance if delinquent Can be withheld until payment of unpaid
Balance shares. balance if delinquent shares.

NOTE: Declaration of cash dividends may not be revoked since, upon declaration, a creditor-debtor relationship is established
between the stockholder and the corporation. Hence, the debtor-corporation is bound to make good its obligation to the
creditor stockholder to pay the cash dividends. Stock dividends may be revoked even after declaration but prior to the actual
issuance of shares because what consummates stock dividend is not the declaration but the share issuance. (Divina, 2022)

Q: From what funds are cash and stock dividends sourced? Explain why. (2005 BAR)

A: Dividends either cash or stock dividend must be declared out of unrestricted retained earnings because of the Trust Fund
Doctrine. The Trust Fund Doctrine provides that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have the right to look for the satisfaction of their claims. (Ong v. Tiu, G.R. No. 144476, 18 Apr. 2003) Thus, dividends
must never impair the subscribed capital stock.

Q: Can the board be compelled to declare dividends every year?

A: NO. Declaration of dividends is discretionary upon the board. Dividends are payable only when there are profits earned by the
corporation and as a general rule, even if there are existing profits, the Board of Directors has the discretion to determine
whether or not dividends are declared. (Republic Planters Bank v. Agana, G.R. No. 51765, 03 Mar. 1997)

PROHIBITION IMPOSED BY LAW ON URES OF A STOCK CORPORATION

GR: Stock corporations are prohibited from retaining surplus profits in excess of 100% percent of their paid-in capital stock.
XPNs: (2001 BAR)
1. When justified by definite corporate expansion projects or programs approved by the board of directors;
2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable contingencies. (Sec. 42, RCC)

Q: May dividends be paid out of the paid-in capital?

A: Additional Paid-In Capital Stock shall neither be declared as dividend nor shall it be reclassified to absorb deficiency except
through an organizational restructuring duly approved by the SEC. (Divina, 2021)

WRONGFUL OR ILLEGAL DECLARATION OF DIVIDENDS

The Board of Directors is liable in case of wrongful or illegal declaration of dividends. The stockholders should return the
dividends to the corporation based on the principle of solutio indebiti.

PERSONS ENTITLED TO RECEIVE DIVIDENDS

Dividends are payable to the stockholders of record as of the date of the declaration of dividends or holders of record on a
certain future date, as the case may be, unless the parties have agreed otherwise. (Cojuangco and Prime Holdings, Inc., v.
Sandiganbayan G.R. No. 183278, 24 Apr. 2009)
TRANSFERS OF SHARES UNRECORDED IN THE BOOKS OF THE CORPORATION
Transfer of shares which is not recorded in the books of the corporation is valid only as between the parties, hence, the
transferor has the right to dividends as against the corporation without notice of transfer, but it serves as trustee of the real
owner of the dividends, subject to the contract between the transferor and transferee as to who is entitled to receive the
dividends. (Ibid.)

RECEIPT OF DIVIDENDS IN CASE OF MORTGAGED OR PLEDGED SHARES

GR: The mortgagor or the pledgor has the right to receive the dividends.
XPN: When the mortgagor or pledgor defaults and the mortgagee or pledgee acquires the pledged stocks and the transfer is
recorded in the books of the corporation, the mortgagee or pledgee is entitled to receive the dividends.

Q: May stock dividends be issued to a person who is not a stockholder in payment of services rendered?
A: NO. Only stockholders are entitled to payment of stock dividends. (Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., G.R.
No. L-217601, 17 Dec. 1966)

DISTINCTION BETWEEN DISTRIBUTION IN LIQUIDATION AND ORDINARY DIVIDEND

If the distribution is in the nature of a recurring return on stock, it is an ordinary dividend. However, if the corporation is really
winding up its business or recapitalizing and narrowing its activities, the distribution may properly be treated as incomplete or
partial liquidation and as payment by the corporation to the stockholder for his stock or as return of the capital invested by him.
(Wise & Co., Inc. v. Meer, G.R. No. 48231, 30 June 1947)

POWER TO ENTER INTO MANAGEMENT CONTRACT

Management Contract is any contract whereby a corporation undertakes to manage or operate all or substantially all of the
business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise. (Sec.
43, RCC)
NOTE: Sec. 43 refers only to a management contract with another corporation. Hence, it does not apply to management
contracts entered into by a corporation with natural persons.

REQUIREMENTS FOR VALIDITY OF MANAGEMENT CONTRACT

1. The contract must be approved by at least majority of the BOD or BOT of both managing and managed corporation;
2. The contract must be approved by the stockholders owning at least the majority of the OCS, or members in case of a non-
stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose;
3. The contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the OCS entitled to
vote or 2/3 of the members when:
a. Stockholders representing the same interest in both of the managing and the managed corporation own or control
more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation (Interlocking
Stockholders);
b. Majority of the members of the BOD of the managing corporation also constitute a majority of the BOD of the
managed corporation. (Interlocking Directors)
4. No management contract shall be entered into for a period longer than five (5) years for any one (1) term except for service
contracts or operating agreements which relate to the exploration, development, exploitation, or utilization of natural
resources may be entered into for such periods as may be provided by the pertinent laws or regulations. (Sec. 43, RCC)

Q: ABC Management Inc. presented to the DEF Mining Co, the draft of its proposed Management Contract. As an incentive,
ABC included in the terms of compensation that ABC would be entitled to 10% of any stock dividend which DEF may declare
during the lifetime of the Management Contract. Would you approve of such provision? If not, what would you suggest as an
alternative? (1991 BAR)
5.
A: NO. I would not approve of a proposed stipulation in the management contract that the managing corporation, as an
additional compensation to it, should be entitled to 10% of any stock dividend that may be declared. Stockholders are the only
ones entitled to receive stock dividends. (Nielson & Co., Inc. v. Lepanto Consolidated Mining, G.R. No. L-21601, 17 Dec. 1966)

I would add that the unsubscribed capital stock of a corporation may only be issued for cash or property or for services already
rendered constituting a demandable debt. (Sec. 61, RCC) As an alternative, I would suggest that the managing corporation should
instead be given a net profit participation and, if it later so desires, to then convert the amount that may be due thereby to
equity or shares of stock at no less than the par value thereof.

DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION

A subscription is one, entire, and indivisible whole contract. This indivisibility of subscription is absolute as Sec. 63 of the RCC
speaks no exception. The purpose of the doctrine is to prevent the partial disposition of a subscription, which is not fully paid,
because if it is permitted and the stockholder subsequently becomes delinquent in the payment of his subscription, the
corporation may not be able to sell as many of his subscribed shares as would be necessary to cover the total amount from him
pursuant to Sec. 67 of the RCC. (Divina, 2021)

DOCTRINE OF EQUALITY OF SHARES

Under the doctrine of equality of shares, all stocks issued by the corporation are presumed equal with the same privileges and
liabilities, provided that the Articles of Incorporation is silent on such differences. (CIR v. CA, G.R. No. 108576, 20 Jan. 1999)

In considering the proposed dividend distribution system, the entitlement of certain kinds of stocks to preferences and benefits
must be clearly and expressly stated in the articles of incorporation of BFDC. (SEC Opinion No. 10-20)

ULTRA VIRES DOCTRINE

No corporation shall possess or exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (Sec. 44, RCC)

ULTRA VIRES ACT

An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization
and therefore beyond the power conferred upon it by law. (Atrium Management Corporation v. CA, G.R. No. 109491, 28 Feb.
2001)

Unlike illegal acts which contemplate the doing of an act that is contrary to law, morals, or public policy or public duty, and are
void, ultra vires acts are not illegal and void ab initio but are not merely within the scope of the articles of incorporation. They are
merely voidable and may become binding and enforceable when ratified by the stockholders. (Maria Clara Pirovana, et al. v. the
De La Rama Steamship Co., G.R. No. L-5377, 29 Dec. 1954)

TYPES OF ULTRA VIRES ACTS

1. Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation;
2. Acts entered into on behalf of the corporation by persons who have no corporate authority or exceeded the scope of their
authority; and
3. Acts or contracts which are per se illegal as being contrary to law. (Divina, 2020)

Q: When is there an ultra vires act on the part of (a) the corporation; (b) the board of directors; and (c) the corporate officers?
(2009 BAR)

A:
a. Corporation – Under Sec. 45 (now Sec. 44, RCC) of the Corporation Code, no corporation shall possess or exercise any
corporate power except those conferred by the Code or by its AOI and except such as are necessary or incidental to the
exercise of the powers so conferred. When a corporation does an act or engages in an activity which is outside of its express,
implied, or incidental powers set out in its AOI, the act is deemed to be ultra vires.
b. Board of Directors – When the Board engages in an activity or enters into a contract without the ratificatory vote of the
stockholders in those instances where the Corporation Code so requires such ratificatory vote, such as when the corporation
is made to invest in another corporation or engage in a business which is not in pursuit of its primary purpose, the board
resolution not ratified by stockholders owning or representing at least 2/3 of the outstanding capital stock would make the
transaction void, as being ultra vires.
c. Corporate Officers – When a corporate officer enters into a contract on behalf of the corporation without having been so
expressly or impliedly authorized by the Board of Directors, even when the act or contract falls within the corporation’s
express, implied or incidental power, then the unauthorized act of the corporate officer is deemed to be ultra vires.

ULTRA VIRES ACTS BY REASON OF LACK OF AUTHORITY VS. ULTRA VIRES ACTS BY REASON OF ILLEGALITY (ILLEGAL ACTS)
DIFFERENCES ULTRA VIRES ACT ILLEGAL ACTS
Not necessarily unlawful, but outside Unlawful; against law, morals, public policy, and
Lawfulness
the powers of the corporation. public order.
 Merely voidable and may be enforced by
Enforceability Void; cannot be validated.
performance, ratification, or estoppel.
Ratification Can be ratified. Cannot be ratified.
Can bind the parties if wholly or partly
Binding Effect Cannot bind the parties.
executed.

ACTS THAT DO NOT COMPLY WITH FORMALITIES VS. UNAUTHORIZED ACTS

ACTS THAT DO NOT COMPLY WITH FORMALITIES UNAUTHORIZED ACTS
The act may be within the powers of the corporation but not
If certain procedures or formalities are prescribed in the AOI
within the powers of the particular officer. The latter is
or bylaws and the same are not complied with, the resulting
sometimes referred to as ultra vires act of the officer. The
act is not an ultra vires act of the corporation.
law on agency applies.

Q: The board of directors of Lopez Realty, Inc. passed a resolution providing gratuity pay for its employees in a special meeting
called for the purpose. At the time, however, Asuncion (a member of the board), was still out of the country. Asuncion
assailed the validity of the said board resolution contending that the same was ultra vires on the ground that she was not duly
notified of the special meeting in which it was passed. Is the disputed board resolution ultra vires as urged by Asuncion?

A: NO. The assailed resolution covers a subject which concerns the benefit and welfare of the company’s employees. To stress,
providing gratuity pay for its employees is one of the express powers of the corporation under the Corporation Code, hence,
Asuncion cannot invoke the doctrine of ultra vires to avoid any liability arising from the issuance of the subject resolution. (Lopez
Realty, Inc. v. Fontecha, G.R. No. 76801, 11 Aug. 1995)

Q: Sea Lion International Port Terminal Services, Inc. filed a complaint for prohibition and mandamus against National Power
Corporation (NPC) and Philippine Ports Authority (PPA), wherein Sea Lion alleged that NPC had acted in bad faith and with
grave abuse of discretion in not renewing its contract for stevedoring services for coal-handling operations at NPC's plant, and
in taking over its stevedoring services. NPC seeks to annul the order of the RTC in issuing a writ of preliminary injunction which
enjoined NPC from further undertaking stevedoring and arrastre services in its pier and directing it either to enter into a
contract for stevedoring and arrastre services or to conduct a public bidding therefor. Does NPC have the power to undertake
stevedoring and arrastre services in its pier?

A: YES. NPC has the power to undertake stevedoring and arrastre services. To carry out the national policy of total electrification
of the country, the NPC was created and empowered not only to construct, operate and maintain power plants, reservoirs,
transmission lines, and other works, but also to exercise such powers and do such things as may be reasonably necessary to carry
out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to accomplish said purpose. If that act is one which is lawful in itself and not otherwise
prohibited and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a
substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers. The rule is
that a corporation is not restricted to the exercise of powers expressly conferred upon it by its charter but has the power to do
what is reasonably necessary or proper to promote the interest or welfare of the corporation. The stevedoring services which
involve the unloading of the coal shipments into the NPC pier for its eventual conveyance to the power plant are incidental and
indispensable to the operation of the plant. (NPC v. Vera, et al., G.R. No. 83558, 27 Feb. 1989)

INSTANCES WHEN THE ACTS OF OFFICERS BIND THE CORPORATION (P-R-A-DA)

1. If it is Provided in the By-laws;
2. When the act was Ratified;
3. If Authorized by the board; or
4. Under the Doctrine of Apparent Authority

DOCTRINE OF APPARENT AUTHORITY (2015 BAR)

If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds
him out to the public possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agent’s authority. Its existence may be ascertained through:
1. The general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the
apparent authority to act in general, with which it clothes him; or
2. The acquiescence in his acts of a particular nature, with actual or constructive notice thereof, within or beyond the scope of
his ordinary powers. It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other
 parties. It is not the quantity of similar acts which establishes apparent authority but the vesting of a corporate officer with
the power to bind the corporation. (Advance Paper Corp. v. Arma Traders Corp., G.R. No. 176897, 11 Dec. 2013)

Q: The Spouses Macam opened Savings Account Allied Bank-Pasong Tamo (AB-PT) Branch. The Spouses Macam were able to
make withdrawals in the total amount of P490,000.00, leaving a balance of P1.1 Million in their savings account with AB-PT.
Caña, head of branch, instructed the bank teller to debit specific amounts from different accounts. Mamalayan, the Branch
Operating Officer, learned of the debiting of the three accounts. Caña instructed Mamalayan to book the amount of P20.3
Million under "Accounts Receivable" corresponding to the unrecovered amount from the P46 Million which had been earlier
transferred to various deposit accounts. Angela Barcelona, Region Head, Retail Banking Group for Allied Bank's South Metro
Manila Branches, ordered the debit of the remaining P1.1 Million from the account of the Spouses Macam which resulted in
the closure thereof. The Sps. Macam learned of the closure after they were unable to withdraw from their account. Hence, the
Sps. Macam filed the complaint for Damages. Is Allied Bank liable?

A: YES. All banks are charged with extraordinary diligence in the handling and care of their deposits as well as the highest degree
of diligence in the selection and supervision of its employees. The authority of a corporate officer or agent in dealing with third
persons may be actual or apparent. The apparent authority to act for and to bind a corporation may be presumed from acts of
recognition in other instances, wherein the power was exercised without any objection from its board or shareholders. Caña's act
of approving the P46 Million fund transfer and the subsequent transfers to different accounts in various branches of Allied Bank
leading to the P1,590,000.00 transfer to the account of the Spouses Mario Macam all appear to have been clothed with
authority. Indeed, the subsequent transfers were approved by several Branch Heads. Apparent authority is derived not merely
from practice. Its existence may be ascertained through:
1. The general manner in which the corporation holds out an officer or agent as having the power to act, or in other words,
the apparent authority to act in general, with which it clothes him; or
2. the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the
scope of his ordinary powers. (Allied Banking Corporation v. Spouses Macam, G.R. No. 200635, 01 Feb. 2021, J.
Hernando)

APPARENT AUTHORITY IS DETERMINED BY ACTS OF PRINCIPAL, NOT BY ACTS OF AGENT

The Doctrine of Apparent Authority is determined by the acts of the principal and not by the acts of the agent. As applied to
corporations, the doctrine of apparent authority provides that “a corporation is estopped from denying the officer's authority if it
knowingly permits such officer to act within the scope of an apparent authority, and it holds him out to the public as possessing
the power to do those acts.” (Agro Food and Processing Corp. v. Vitarich Corp., G.R. No. 217454, 11 Jan. 2021)

WHEN CORPORATION IS ESTOPPED TO DENY RATIFICATION OF ACTS ENTERED BY OFFICERS OR AGENTS

Generally, when the corporation has knowledge that its officers or agents exceed their power, it must promptly disaffirm the
contract or act, and allow the other party or third person to act in the belief that it was authorized or has been ratified.
Otherwise, if it acquiesces, with knowledge of the facts, or if it fails to disaffirm, ratification will be implied. (Premiere
Development Bank v. CA, G.R. No. 159352, 14 Apr. 2004)

So settled is the precept that ratification can be made by the corporate board either expressly or impliedly. Implied ratification
may take various forms - like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance
and retention of benefits flowing therefrom. (MWSS v. CA, G.R. No. 126000, 07 Oct. 1998)

CONSEQUENCES OF ULTRA VIRES ACTS

These are the effects for the specific acts:
1. If the contract is executed on both sides – the courts will not set aside or interfere to deprive either party of what has been
acquired under them.
2. If the contract is executory on both sides – it will not be enforced at the suit of either party, because their enforcement is
not required by any equitable principles and will be contrary to public policy.
3. If the contract is executed on one side, and executory on the other – courts in some jurisdictions, although not in all, will
enforce in favor of the party who has executed the same on his part against the other party who has received and retained
the benefits on the ground that equitable principles and outweighing considerations of public policy require that the latter
should not be permitted, while retaining the benefits of the contract, to escape liability on the ground that it was ultra vires.
4. Contracts, whether wholly executory or executed on one side, apparently authorized, but in fact, ultra vires because they
are made for a purpose not within the scope of the business of the corporation, the ultra vires purpose being unknown to
the other party – enforceable against the corporation. (Divina, 2020)
REMEDIES IN CASE OF ULTRA VIRES ACTS
If the act is yet to be done, the remedy is one of injunction to enjoin the performance or continued performance of the ultra vires
act. If the act has already been performed, a stockholder may file a derivative suit on behalf of the corporation to set aside the
ultra vires act. (Divina, 2020)

Q: X Corp., whose business purpose is to manufacture and sell vehicles, invested its funds in Y Corp., an investment firm,
through a resolution of its Board of Directors. The investment grew tremendously on account of Y Corp.'s excellent business
judgment. But a minority stockholder in X Corp. assails the investment as ultra vires. Is he right and, if so, what is the status of
the investment? (2011 BAR)

A: YES. It is an ultra vires act of its Board of Directors but voidable only, subject to stockholders’ ratification.

Q: Which of the following corporate acts is valid, void, or voidable?

a. XL Foods Corporation, which is engaged in the fast-food business, entered into a contract with its President, Jose Cruz
whereby the latter would supply the corporation with its meat and poultry requirements.
A: VOIDABLE – A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of
such corporation (Sec. 31, RCC). Such contract can be ratified by the vote of the stockholders representing at least two-thirds of
the outstanding capital stock in a meeting called for the purpose: Provided, that full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the
circumstances.

b. The Board of Directors of XL Foods Corporation declared and paid cash dividends without approval of the stockholders.
A: VALID – Approval of the stockholders is not required in declaring cash dividends.

c. XL Foods Corporation guaranteed the loan of its sister company XL Meat Products, Inc. (2002 BAR)
A: VOIDABLE – This is an ultra vires act on part of XL Foods Corporation and is not one of the powers provided for in Sec. 35 of
the RCC. It can be ratified provided it is not illegal per se but merely beyond the powers of the corporation by the approval of the
majority of the board and vote of the stockholders representing at least two thirds of the outstanding capital stock. Where the
contract or act is not illegal per se but merely beyond the power of the corporation, the same is merely voidable and may be
enforced by performance, ratification, or estoppels, or on equitable especially if no creditors are prejudiced thereby and no
rights of the state or the public are involved. (Fletcher, p.585; Republic v. Acoje Mining Co., Inc., G.R. No. L-18062, 28 Feb. 1963)

TRUST FUND DOCTRINE

The trust fund doctrine provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors
have a right to look for the satisfaction of their claims. (Ong v. Tiu, G.R. Nos. 144476 and 144629, 08 Apr 2003)

In a sense, they have to be unimpaired for the protection of creditors. These cover the entire consideration received for the
issuance of no par value shares or the aggregate amount for the par value shares issued by the corporation. (Divina, 2020)

Trust fund doctrine is not limited to the stockholders’ subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts. All assets and property belonging to the corporation held in trust for the benefit of creditors that
were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by
the creditor in satisfaction of its claim. (Halley v. Printwell, Inc., G.R. No. 157549, 30 May 2011)

EFFECTS OF THE TRUST FUND DOCTRINE

1. Dividends must never impair the subscribed capital stock; (NTC v. CA, G.R. No. 127937, 28 July 1999)
2. Subscription commitments cannot be condoned or remitted; (Ibid.)
3. GR: The corporation cannot buy its own shares using the subscribed capital as the consideration therefor. (Ibid.)
XPNs:
a. Redeemable shares may be acquired even without surplus profit for as long as it will not result to the insolvency of the
Corporation; (Republic Planters Bank v. Hon. Agana, G.R. No. 51765, 03 Mar. 1997)
b. In a close corporation, a stockholder may demand the payment of the fair value of shares regardless of existence of
retained earnings for as long as it will not result to the insolvency of the corporation; (Sec. 104, RCC)
c. In case of a close corporation, if the directors or stockholders are so divided on the management of the corporation’s
business and affairs that the votes required for a corporate action cannot be obtained, with the consequence that the
business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the
 SEC, upon written petition by any stockholder, may require the purchase at their fair value of shares of any stockholder,
either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other
stockholders. (Sec. 103(d), RCC)
4. Rescission of a subscription agreement is not allowed since it will effectively result in the unauthorized distribution of the
capital assets and property of the corporation. (Ong v. Tiu, G.R. No. 144476, 08 Apr. 2003)

EXCEPTIONS TO THE TRUST FUND DOCTRINE

The Code allows distribution of corporate capital only in the instances of:
1. Amendment of the AOI to reduce authorized capital stock;
2. Purchase of redeemable shares by the corporation regardless of existence of unrestricted retained earnings; or
3. Dissolution and eventual liquidation of the corporation.

WHEN CREDITOR IS ALLOWED TO MAINTAIN AN ACTION UPON UNPAID SUBSCRIPTIONS

A corporate creditor cannot immediately invoke the trust fund doctrine to proceed against unpaid subscriptions of stockholders
of the debtor corporation except in these two (2) instances when the creditor is allowed to maintain an action upon any unpaid
subscriptions based on the trust fund doctrine:
1. Where the debtor corporation released the subscriber to its capital stock from the obligation of paying for their shares, in
whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors; and
2. Where the debtor corporation is insolvent or has been dissolved without providing for the payment of its creditors. (Enano-
Bote v. Alvarez, G.R. No. 223572, 10 Nov. 2020)