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I. NATURE AND FORMATION: 4. Corporation law; Corporation; Concept and nature.

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A corporation is an artificial being created by operation of law (Sec.
Definition of a corporation 2, Act No. 1459). A corporation as known to Philippine jurisprudence
is a creature without any existence until it has received the imprimatur
A corporation is an artificial being created by operation of law, having of the state acting according to law. It is logically inconceivable
the right of succession and the powers, attributes and properties therefore that it will have rights and privileges of a higher priority than
expressly authorized by law or incident to its existence. (CC, Sec. 2) that of its creator. More than that, it cannot legitimately refuse to yield
obedience to acts of its state organs, certainly not excluding the
Tri-level existence in the corporate setting judiciary. whenever called upon .to do so.

a) aggregation of assets and resources Ang Pue & Co. vs Secretary 5 scra 645 1962
b) Business Enterprise or economic unit
c) Juridical Entity 1. Partnership; To organize not absolute right.-
To organize a corporation or partnership that could claim a juridical
A. NATURE OF CORPORATIONS personality of its own and transact business as such, is not a matter of
absolute right but a privilege which may be enjoyed only under such
Corporate Attributes terms as the state may deem necessary to impose.

a) A corporation is an artificial being 2. Partnership; Only Filipinos may engage in retail business; Rep.
b) Created by operation of law Act 1180 applicable to existing partnership.-
c) With right of succession The State through Congress had the right to enact Republic Act No.
d) Only has powers, attributes and properties expressly authorized 1180 providing that only Filipinos may engage in the retail business
by law or incident to its existence and such provision was intended to apply to partnership owned by
foreigners already existing at the time of its enactment giving them the
Theories in the formation of a corporation right to continue engaging in their retail business until the expiration
of their term of life.
Tanyag vs Benguet Consolidated, 26 scra 242 1968
3. Partnership; Amendment of articles of partnership to extend term
1. Special proceedings; Principal administration and ancillary after enactment of the law.-
administration distinguished; When ancillary administration is The agreement in the articles of partnership to extend the term of its
proper; Reason.- life is not a property right and it must be deemed subject to the law
It is often necessary to have more than one administration of an estate. existing at the time when the partners came to agree regarding the
When a person dies intestate owning property in the country of his extension. In the case at bar, when the partners amended the articles
domicile as well as in a foreign country, administration is had in both of partnership, the provisions of Republic Act 1180 were already in
countries. That which is granted in the jurisdiction of decedent's last force, and there can be not the slightest doubt that the right claimed by
domicile is termed the principal administration, while any other appellants to extend the original term of their partnership to another
administration is termed the ancillary administration. five years would be in violation of the clear intent and purpose of said
Act.
2. Settlement of estate of a decedent; Ancillary
administrator; Scope of his power and authority.- Theory of concession
No one could dispute the power of an ancillary administrator to gain
control and possession of all assets of the decedent within the (Tayag v. Benguet Consolidated Inc., 26 SCRA 242 [1968])
jurisdiction of the Philippines. Such a power is inherent in his duty to
settle her estate and satisfy the claims of local creditors (Rule 84, Sec. To organize a corporation that could claim a juridical personality of
3, Rules of Court. Cf. Pavia v. De la Rosa, 8 Phil. 70; Liwanag v. its own and transact business as such, is not a matter of absolute right
Reyes, L-19159, Sept. 29, 1964; Ignacio v. Elchico, L-18937, May 16, but a privilege which may be enjoyed only under such terms as the
1967; etc.). It is a general rule universally recognized that State may deem necessary to impose (x-cf. Ang Pue & Co. v. Sec. of
administration, whether principal or ancillary, certainly extends to the Commerce and Industry, 5 SCRA 645 [1962]).
assets of a decedent found within the state or country where it was
granted, the corollary being "that an administrator appointed in one Before a corporation may acquire juridical personality, the State must
state or country has no power over property la another state or give its consent either in the form of a special law or a general enabling
country" (Leon and Ghezzi v. Manufacturers Life Ins. Co., 90 Phil. act, and the procedure and conditions provided under the law for the
459). acquisition of such juridical personality must be complied with. The
failure to comply with the statutory procedure and conditions does not
3. Settlement of estate of a decedent; Refusal of domiciliary warrant a finding that such association achieved the acquisition of a
administrator to deliver shares of stock despite judicial separate juridical personality, even when it adopts sets of constitution
order; Case at bar.- and by-laws. xInternational Express Travel & Tour Services, Inc. v.
Since, in the case at bar, there is a refusal, persistently adhered to by Court of Appeals, 343 SCRA 674 (2000).
the domiciliary administrator in New York, to deIiver the shares of
stocks of appellant corporation owned by the decedent to fee ancillary Since all corporations, big or small, must abide by the provisions of
administrator in the Philippines, there was nothing unreasonable or the Corporation Code, then even a simple family corporation cannot
arbitrary in considering them as lost and requiring the appellant to claim an exemption nor can it have rules and practices other than those
issue new certificates in lieu thereof Thereby, the task incumbent established by law. xTorres v. Court of Appeals, 278 SCRA 793
under the law on the ancillary administrator could be discharged and (1997).
his responsibility fulfilled. Any other view would result in the
compliance to a valid judicial order being made to depend on the Theory of Enterprise Entity
uncontrolled discretion of a party or entity.
(Berle, Theory of Enterprise Entity, 47 Col. L. Rev. 343 [1947])
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Our finding, in sum, is that Pres. Decree No. 1717 is an invalid
Corporations are composed of natural persons and the legal fiction of exercise of the police power, not being in conformity with the
a separate corporate personality is not a shield for the commission of traditional requirements of a lawful subject and a lawful method. The
injustice and inequity, such as the use of separate personality to avoid extinction of the mortgage and other liens and of the interest and other
the execution of the property of a sister company. xTan Boon Bee & charges pertaining to the legitimate creditors of AGRIX constitutes
Co., Inc. v. Jarencio, 163 SCRA 205 (1988). taking without due process of law, and this is compounded by the
reduction of the secured creditors to the category of unsecured
A corporation is but an association of individuals, allowed to transact creditors in violation of the equal protection clause. Moreover, the new
under an assumed corporate name, and with a distinct legal corporation, being neither owned nor controlled by the Government,
personality. In organizing itself as a collective body, it waives no should have been created only by general and not special law. And
constitutional immunities and perquisites appropriate to such a insofar as the decree also interferes with purely private agreements
body. xPhilippine Stock Exchange, Inc. v. Court of Appeals, 281 without any demonstrated connection with the public interest, there is
SCRA 232 (1997). likewise an impairment of the obligation of the contract.

Creature of the Law Feliciano vs COA GR 147402 Jan 14 2004

1. Constitution - Sec 16 Art XII consti 1. Commission on Audit; Jurisdiction; The COA’s audit
jurisdiction extends not only to government “agencies or
SECTION 16. The Congress shall not, except by general law, provide instrumentalities,” but also to “government-owned and controlled
for the formation, organization, or regulation of private corporations. corporations with original charters as well as “other government-
Government-owned or controlled corporations may be created or owned or controlled corporations” without original charters.-
established by special charters in the interest of the common good and The Constitution and existing laws mandate COA to audit all
subject to the test of economic viability. government agencies, including government-owned and controlled
corporations (“GOCCs”) with original charters. An LWD is a GOCC
NDC vs Phil Veterans bank, 192 scra 257 1990 with an original charter. x x x The COA’s audit jurisdiction extends
not only to government “agencies or instrumentalities,” but also to
1. Constitutional Law; Police Power; A legislative act based on the “government-owned and controlled corporations with original
police power requires the concurrence of a lawful subject and a lawful charters” as well as “other government-owned or controlled
method.- corporations” without original charters.
A legislative act based on the police power requires the concurrence
of a lawful subject and a lawful method. In more familiar words, a) 2. Commission on Audit; Jurisdiction; The determining factor of
the interests of the public generally, as distinguished from those of a COA’s audit jurisdiction is government ownership or control of the
particular class, should justify the interference of the state; and b) the corporation.-
means employed are reasonably necessary for the accomplishment of The determining factor of COA’s audit jurisdiction is
the purpose and not unduly oppressive upon individuals. governmentownership or control of the corporation. In Philippine
2. Constitutional Law; Police Power; Due Process; Private Veterans Bank Employees Union-NUBE v. Philippine Veterans Bank,
property cannot simply be taken by law from one person and given to the Court even ruled that the criterion of ownership and control is more
another without any compensation and any known public purpose.- important than the issue of original charter.
A mortgage lien is a property right derived from contract and so comes
under the protection of the Bill of Rights. So do interests on loans, as 3. Corporation Law; Congress cannot enact a law creating a private
well as penalties and charges, which are also vested rights once they corporation with a special charter; Since private corporations cannot
accrue. Private property cannot simply be taken by law from one have special charters, it follows that Congress can create corporations
person and given to another without compensation and any known with special charters only if such corporations are government-owned
public purpose. This is plain arbitrariness and is not permitted under or controlled.-
the Constitution. In short, Congress cannot enact a law creating a private corporation
with a special charter. Such legislation would be unconstitutional.
3. Constitutional Law; Police Power; Due Process; Impairment Private corporations may exist only under a general law. If the
Clause; While it is true that police power is superior to the impairment corporation is private, it must necessarily exist under a general law.
clause, the principle will apply only where the contract is so related to Stated differently, only corporations created under a general law can
the public welfare that it will be considered congenitally susceptible qualify as private corporations. Under existing laws, that general law
to change by the legislature in the interest of the greater number.- is the Corporation Code, except that the Cooperative Code governs the
The Court also feels that the decree impairs the obligation of the incorporation of cooperatives. The Constitution authorizes Congress
contract between AGRIX and the private respondent without to create government-owned or controlled corporations through
justification. While it is true that the police power is superior to the special charters. Since private corporations cannot have special
impairment clause, the principle will apply only where the contract is charters, it follows that Congress can create corporations with special
so related to the public welfare that it will be considered congenitally charters only if such corporations are government-owned or
susceptible to change by the legislature in the interest of the greater controlled.
number. Most present-day contracts are of that nature. But as already
observed, the contracts of loan and mortgage executed by AGRIX are 4. Corporation Law; Local Water Districts; Local Water Districts
purely private transactions and have not been shown to be affected (LWDs) are not private corporations because they are not created
with public interest. There was therefore no warrant to amend their under the Corporation Code.-
provisions and deprive the private respondent of its vested property Obviously, LWDs are not private corporations because they are not
rights. created under the Corporation Code. LWDs are not registered with the
Securities and Exchange Commission. Section 14 of the Corporation
4. Constitutional Law; Police Power; Presidential Decree No. Code states that “[A]ll corporations organized under this code shall
1717; Presidential Decree 1717 is an invalid exercise of police power, file with the Securities and Exchange Commission articles of
not being in conformity with the traditional requirements of a lawful incorporation x x x.” LWDs have no articles of incorporation, no
subject and a lawful method.- incorporators and no stockholders or members. There are no
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stockholders or members to elect the board directors of LWDs as in Private corporations are regulated by laws of general application on
the case of all corporations registered with the Securities and the subject. Partnerships and associations for private interest or
Exchange Commission. The local mayor or the provincial governor purpose are governed by the provisions of this Code concerning
appoints the directors of LWDs for a fixed term of office. partnerships.

5. Corporation Law; Local Water Districts; LWDs can validly 3. Franchise


exist only if they are government-owned or controlled.-
LWDs exist by virtue of PD 198, which constitutes their special The right conferred by the government to engage
charter. Since under the Constitution only government-owned or in a specific business or to exercise corporate powers.
controlled corporations may have special charters, LWDs can validly
exist only if they are government-owned or controlled. To claim that JRS vs Imperial Insurance 11 scra 634 1964
LWDs are private corporations with a special charter is to admit that
their existence is constitutionally infirm. 1. Corporation law; Secondary franchise; Messenger service.-
The right to operate a messenger and delivery service by virtue of a
6. Corporation Law; Local Water Districts; LWDs derive their legislative enactment is a secondary franchise.
legal existence and power from PD 198.-
Unlike private corporations, which derive their legal existence and 2. Corporation law; Secondary franchise; Subject to execution
power from the Corporation Code, LWDs derive their legal existence sale.-
and power from PD 198. A secondary franchise is subject to levy and sale on execution together
with all the property necessary for the enjoyment thereof.
7. Corporation Law; Local Water Districts; The Sangguniang
Bayan may establish a waterworks system only in accordance with the 3. Corporation law; Secondary franchise; Procedure.-
provisions of PD 198.- A secondary franchise and the property necessary for its enjoyment
The Sangguniang Bayan may establish a waterworks system only in can be sold under execution only when such sale is especially decreed
accordance with the provisions of PD 198. The Sangguniang Bayan and ordered in the judgment and it becomes effective only when such
has no power to create a corporate entity that will operate its sale is confirmed by the Court after due notice.
waterworks system. However, the Sangguniang Bayan may avail of
existing enabling laws, like PD 198, to form and incorporate a water 4. Corporation law; Secondary franchise; Effect of absence of
district, Besides, even assuming for the sake of argument that the special decree.-
Sangguniang Bayan has the power to create corporations, the LWDs Where the judgment does not contain any special decree making the
would remain government-owned or controlled corporations subject franchise of a private corporation answerable for its judgment debt,
to COA’s audit jurisdiction. The resolution of the Sangguniang Bayan the inclusion of said corporation's franchise, trade name and capital
would constitute an LWD’s special charter, making the LWD a stocks in the execution sale of its properties has no justification and
goyernment-owned and controlled corporation with an original such sale should be set aside in so far as it authorizes such levy and
charter. sale.

8. Corporation Law; Local Water Districts; The board directors Four Attributes of a corporation
and other personnel of LWDs are government employees subject to
civil service laws and anti-graft laws.- a) A corporation is an artificial being
The government owns and controls LWDs. The government organizes b) Created by operation of law
LWDs in accordance with a specific law, PD 198. There is no private c) With right of succession
party involved as co-owner in the creation of an LWD. Just prior to d) Only has powers, attributes and properties expressly authorized
the creation of LWDs, the national or local government owns and by law or incident to its existence
controls all their assets. The government controls LWDs because
under PD 198 the municipal or city mayor, or the provincial governor, **Advantages and disadvantages of the Corporate Form
appoints all the board directors of an LWD for a fixed term of six
years. The board directors of LWDs are not co-owners of the LWDs. Advantages of corporate form of business:
LWDs have no private stockholders or members. The board directors
and other personnel of LWDs are government employees subject to 1. Capacity to act as a single unit;
civil service laws and anti-graft laws. 2. Limited shareholder‟s liability;
3. Continuity in existence;
2. Civil Code Art 44, 45 4. Feasibility of greater undertaking;
5. Transferability of shares;
Art. 44. The following are juridical persons: 6. Centralized management;
7. Standardized method of organization, management and finance.
(1) The State and its political subdivisions;
Disadvantage of corporate form of business:
(2) Other corporations, institutions and entities for public interest or
purpose, created by law; their personality begins as soon as they have 1. To have valid and binding corporate act, formal proceedings,
been constituted according to law; such as board meetings are required.
2. The business transactions of a corporation is limited to the State
(3) Corporations, partnerships and associations for private interest or of its incorporation and may not act as such corporation in other
purpose to which the law grants a juridical personality, separate and jurisdiction unless it has obtained a license or authority from the
distinct from that of each shareholder, partner or member. foreign state.
3. The shareholders‟ limited liability tends to limit the credit
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding available to the corporation as a separate legal entity.
article are governed by the laws creating or recognizing them. 4. By the very nature of shares of stock which are personal
properties, transferable at will by the owners thereof, transfers of
3
share may result to uniting incompatible and conflicting the Rules of Civil Procedure, providing for service of summons by
interests. publication.-
5. The minority shareholders have practically no say in the conduct The rules provide for certain remedies in cases where personal service
of corporate affairs. could not be effected on a party. Section 14, Rule 14 of the Rules of
6. In large scale enterprises, stockholders‟ voting rights may Court provides that whenever the defendant’s “whereabouts are
become merely fictitious and theoretical because of disinterest in unknown and cannot be ascertained by diligent inquiry, service may,
management, wide-scale ownership and inaccessible place of by leave of court, be effected upon him by publication in a newspaper
meeting. of general circulation x x x.” Thus, if petitioner’s whereabouts could
7. Double taxation may be imposed on corporate income. not be ascertained after the sheriff had served the summons at her
8. Corporations are subject to governmental regulations given address, then respondent could have immediately asked the
supervision and control including submission of reportorial court for service of summons by publication on petitioner. Moreover,
requirements not otherwise imposed in other business form. as private respondent also claims that petitioner was abroad at the time
of the service of summons, this made petitioner a resident who is
The corporate entity compared with other business endeavors: temporarily out of the country. This is the exact situation contemplated
in Section 16, Rule 14 of the Rules of Civil Procedure, providing for
1. Sole Proprietorship service of summons by publication.

Mangila vs CA 435 Phil 870,886 2002 4. Actions; Attachments; An alias summons belatedly served on a
defendant cannot be deemed to cure the fatal defect in the enforcement
1. Actions; Attachments; Pleadings and Practice; A party to a suit of the writ of preliminary attachment.-
may, at any time after filing the complaint, avail of the provisional In conclusion, we hold that the alias summons belatedly served on
remedies under the Rules of Court, and, specifically, Rule 57 on petitioner cannot be deemed to have cured the fatal defect in the
preliminary attachment speaks of the grant of the remedy “at the enforcement of the writ. The trial court cannot enforce such a coercive
commencement of the action or at any time thereafter.”- process on petitioner without first obtaining jurisdiction over her
As a preliminary note, a distinction should be made between issuance person. The preliminary writ of attachment must be served after or
and implementation of the writ of attachment. It is necessary to simultaneous with the service of summons on the defendant whether
distinguish between the two to determine when jurisdiction over the by personal service, substituted service or by publication as warranted
person of the defendant should be acquired to validly implement the by the circumstances of the case. The subsequent service of summons
writ. This distinction is crucial in resolving whether there is merit in does not confer a retroactive acquisition of jurisdiction over her person
petitioner’s argument. This Court has long settled the issue of when because the law does not allow for retroactivity of a belated service.
jurisdiction over the person of the defendant should be acquired in
cases where a party resorts to provisional remedies. A party to a suit 5. Actions; Venue; A mere stipulation on the venue of an action is not
may, at any time after filing the complaint, avail of the provisional enough to preclude parties from bringing a case in other venues—the
remedies under the Rules of Court. Specifically, Rule 57 on parties must be able to show that such stipulation is exclusive; Venue
preliminary attachment speaks of the grant of the remedy “at the stipulations in a contract, while considered valid and enforceable, do
commencement of the action or at any time thereafter.” This phrase not as a rule, supersede the general rule set forth in Rule 4 of the
refers to the date of filing of the complaint which is the moment that Revised Rules of Court.-
marks “the commencement of the action.” The reference plainly is to The Rules of Court provide that parties to an action may agree in
a time before summons is served on the defendant, or even before writing on the venue on which an action should be brought. However,
summons issues. a mere stipulation on the venue of an action is not enough to preclude
parties from bringing a case in other venues. The parties must be able
2. Actions; Attachments; The grant of the provisional remedy of to show that such stipulation is exclusive. Thus, absent words that
attachment involves three stages—the issuance by the court of the show the parties’ intention to restrict the filing of a suit in a particular
order granting the application, the issuance of the writ of attachment place, courts will allow the filing of a case in any venue, as long as
pursuant to the order, and the implementation of the writ; For the jurisdictional requirements are followed. Venue stipulations in a
initial two stages, it is not necessary that jurisdiction over the person contract, while considered valid and enforceable, do not as a rule
of the defendant be first obtained, but once the implementation of the supersede the general rule set forth in Rule 4 of the Revised Rules of
writ commences, the court must have acquired jurisdiction over the Court. In the absence of qualifying or restrictive words, they should
defendant.- be considered merely as an agreement on additional forum, not as
Furthermore, we have held that the grant of the provisional remedy of limiting venue to the specified place.
attachment involves three stages: first, the court issues the order
granting the application; second, the writ of attachment issues 6. Actions; Venue; Parties; Sole Proprietorships; A sole
pursuant to the order granting the writ; and third, the writ is proprietorship does not have a separate juridical personality that could
implemented. For the initial two stages, it is not necessary that enable it to file a suit in court—there is no law authorizing sole
jurisdiction over the person of the defendant be first obtained. proprietorships to file a suit in court.-
However, once the implementation of the writ commences, the court In the instant case, it was established in the lower court that petitioner
must have acquired jurisdiction over the defendant for without such resides in San Fernando, Pampanga while private respondent resides
jurisdiction, the court has no power and authority to act in any manner in Parañaque City. However, this case was brought in Pasay City,
against the defendant. Any order issuing from the Court will not bind where the business of private respondent is found. This would have
the defendant. been permissible had private respondent’s business been a
corporation, just like the case in Sy v. Tyson Enterprises, Inc.
3. Actions; Attachments; Summons by Publication; If the However, as admitted by private respondent in her Complaint in the
defendant’s whereabouts could not be ascertained after the sheriff had lower court, her business is a sole proprietorship, and as such, does
served the summons at her given address, then plaintiff should not have a separate juridical personality that could enable it to file a
immediately ask the court for service of summons by publication on suit in court. In fact, there is no law authorizing sole proprietorships
the defendant; The condition of a resident temporarily out of the to file a suit in court. A sole proprietorship does not possess a juridical
country is the exact situation contemplated in Section 16, Rule 14 of personality separate and distinct from the personality of the owner of
the enterprise. The law merely recognizes the existence of a sole
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proprietorship as a form of business organization conducted for profit 2. PARTIES; CORPORATION AS PARTY MAY BE
by a single individual and requires its proprietor or owner to secure REPRESENTED BY ANOTHER PERSON, NATURAL OR
licenses and permits, register its business name, and pay taxes to the JUDICIAL.-
national government. The law does not vest a separate legal There is nothing against one corporation being represented by another
personality on the sole proprietorship or empower it to file or defend person, natural or juridical, in a suit in court, for the true rule is that
an action in court. "although a corporation has no power to enter into a partnership, it
may nevertheless enter into a joint venture with another where the
7. Actions; Venue; Parties; Sole Proprietorships; It is the residence nature of that venture is in line with the business authorized by its
of the proprietor which should be considered as one of the proper charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R.,
venues, not the business address of the sole proprietorship.- 1043, citing 2, Fletcher Cyc. E. 1082.)
Thus, not being vested with legal personality to file this case, the sole
proprietorship is not the plaintiff in this case but rather Loreta Guina 3. COMPLAINTS; AMENDMENT TO CONFORM TO
in her personal capacity. In fact, the complaint in the lower court EVIDENCE NOT NECESSARY TO RENDER JUDGMENT ON
acknowledges in its caption that the plaintiff and defendant are Loreta FACTS PROVED THOUGH NOT ALLEGED.-
Guina and Anita Mangila, respectively. The title of the petition before Where the facts shown entitled plaintiff to relief other than that asked
us does not state, and rightly so, Anita Mangila v. Air Swift for, no amendment to the complaint is necessary, especially where
International, but rather Anita Mangila v. Loreta Guina. Logically defendant has himself raised the point on which recovery is based, and
then, it is the residence of private respondent Guina, the proprietor the appellate court may treat the pleading as amended to conform to
with the juridical personality, which should be considered as one of the evidence, although the pleadings were not actually amended.
the proper venues for this case. All these considered, private (Citing Moran, Rules of Court, 1952 ed., 389-390.)
respondent should have filed this case either in San Fernando,
Pampanga (petitioner’s residence) or Parañaque (private respondent’s 4. LAND REGISTRATION; REOPENING OF DECREE AFTER
residence). Since private respondent (complainant below) filed this ONE YEAR, NOT ALLOWED.-
case in Pasay, we hold that the case should be dismissed on the ground A decree of registration can no longer be impunged on the ground of
of improper venue. fraud, error or lack of notice to defendant, after one year has elapsed
from the issuance and entry of the decree. Neither could the decree be
8. Actions; Venue; The objective of the rules on venue to insure a just collaterally attacked by any person claiming title to, or interest in, the
and orderly administration of justice or the impartial and evenhanded land prior to the registration proceedings, nor could title to that land
determination of every action and proceeding will not be attained if in derogation of that of plaintiff be acquired by adverse possession or
the plaintiff is given unrestricted freedom to choose where to file the prescription since adverse, notorious and continuous possession under
complaint or petition.- claim of ownership is ineffective against Torrens title and the right to
The rules on venue, like other procedural rules, are designed to insure secure possession under a decree of registration does not prescribe.
a just and orderly administration of justice or the impartial and
evenhanded determination of every action and proceeding. Obviously, 5. ACTIONS; IDENTITY OF CAUSE OF ACTION.-
this objective will not be attained if the plaintiff is given unrestricted Where one action is for the recovery of ownership and the other is for
freedom to choose where to file the complaint or petition. recovery of possession, there is no identity of cause of action.

2. Partnership Art 1768, 1772, 1775 6. ACTIONS; CLASS SUIT.-


Where the action seeks relief for each individual plaintiff and not relief
Art. 1768. The partnership has a judicial personality separate and for and on behalf of others, the action is not a class suit
distinct from that of each of the partners, even in case of failure to
comply with the requirements of Article 1772, first paragraph. 3. Joint Venture

Art. 1772. Every contract of partnership having a capital of three Aurbach vs Sanitary Wares 180 Scra 130 1989
thousand pesos or more, in money or property, shall appear in a public Primelink Properties vs Lazatin, et. al, GR 167379 June 27 2006
instrument, which must be recorded in the Office of the Securities and
Exchange Commission. Actions; Pleadings and Practice; A pleading may add as general
Failure to comply with the requirements of the preceding paragraph prayer for such further or other relief as may be deemed just and
shall not affect the liability of the partnership and the members thereof equitable—the prayer in the complaint for other reliefs equitable and
to third persons. just in the premises justifies the grant of a relief not otherwise
specifically prayed for.—We agree with petitioners that respondents
Art. 1775. Associations and societies, whose articles are kept secret did not specifically pray in their complaint below that possession of
among the members, and wherein any one of the members may the improvements on the parcels of land which they contributed to the
contract in his own name with third persons, shall have no juridical JVA be transferred to them. Respondents made a specific prayer in
personality, and shall be governed by the provisions relating to co- their complaint that, upon the rescission of the JVA, they be placed in
ownership. possession of the parcels of land subject of the agreement, and for
other “reliefs and such other remedies as are just and equitable in the
JM Tuazon vs Bolaños 95 phil 106 28 May 1954 premises.” However, the trial court was not precluded from awarding
possession of the improvements on the parcels of land to respondents
1. PARTIES; REAL PARTY IN INTEREST; ATTORNEY MAY in its decision. Section 2(c), Rule 7 of the Rules of Court provides that
BRING ACTION IN PLAINTIFF'S NAME.- a pleading shall specify the relief sought but it may add as general
Section 2, Rule 2. of the Rules of Court requires that an action be prayer for such further or other relief as may be deemed just and
brought in the name of, but not necessarily by, the real property equitable. Even without the prayer for a specific remedy, proper relief
interest. In fact the practice is for an attorney-at-law to bring the may be granted by the court if the facts alleged in the complaint and
action, that is, to file the complaint, in the name of the plaintiff. the evidence introduced so warrant. The court shall grant relief
warranted by the allegations and the proof even if no such relief is
prayed for. The prayer in the complaint for other reliefs equitable and

5
just in the premises justifies the grant of a relief not otherwise
specifically prayed for. 1. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
RlGHTS; CONSTRUCTION.-
Partnerships; Joint Venture Agreements (JVAs); A JVA is a form of The guaranties extended by the Congress of the United States to the
partnership, and as such is to be governed by the laws on Philippine Islands have been used in the same sense as like provisions
partnership.—We agree with the CA ruling that petitioner Primelink found in the United States Constitution.
and respondents entered into a joint venture as evidenced by their JVA
which, under the Court’s ruling in Aurbach, is a form of partnership, 2. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
and as such is to be governed by the laws on partnership. RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED
Same; Same; Dissolution of Partnerships; On dissolution, the STATES CONSTITUTION; DUE PROCESS OF LAW AND
partnership is not terminated but continues until the winding up of EQUAL PROTECTION OF THE LAWS; ALIENS.-
partnership affairs is completed.—When the RTC rescinded the JVA The guaranties of the Fourteenth Amendment and so of the first
on complaint of respondents based on the evidence on record that paragraph of the Philippine Bill of Rights, are universal in their
petitioners willfully and persistently committed a breach of the JVA, application to all persons within the territorial jurisdiction, without
the court thereby dissolved/cancelled the partnership. With the regard to any differences of race, color, or nationality.
rescission of the JVA on account of petitioners’ fraudulent acts, all
authority of any partner to act for the partnership is terminated except 3. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
so far as may be necessary to wind up the partnership affairs or to RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED
complete transactions begun but not yet finished. On dissolution, the STATES CONSTITUTION; DUE PROCESS OF LAW AND
partnership is not terminated but continues until the winding up of EQUAL PROTECTION OF THE LAWS; ID.-
partnership affairs is completed. Winding up means the administration The word "person" found in the Fourteenth Amendment and in the
of the assets of the partnership for the purpose of terminating the first sentence of the first paragraph of the Philippine Bill of Rights
business and discharging the obligations of the partnership. includes aliens.

Same; Same; Same; Unless otherwise agreed, the parties who have 4. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
not wrongfully dissolved the partnership have the right to wind up the RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED
partnership affairs.—The transfer of the possession of the parcels of STATES CONSTITUTION; DUE PROCESS OF LAW AND
land and the improvements thereon to respondents was only for a EQUAL PROTECTION OF THE LAWS; ID.-
specific purpose: the winding up of partnership affairs, and the Private corporations are "persons" within the scope of the guaranties
partition and distribution of the net partnership assets as provided by in so far as their property is concerned.
law. After all, Article 1836 of the New Civil Code provides that unless
otherwise agreed by the parties in their JVA, respondents have the 5. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
right to wind up the partnership affairs: Art. 1836. Unless otherwise RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED
agreed, the partners who have not wrongfully dissolved the STATES CONSTITUTION; DUE PROCESS OF LAW AND
partnership or the legal representative of the last surviving partner, not EQUAL PROTECTION OF THE LAWS; ID.-
insolvent, has the right to wind up the partnership affairs, provided, Statutes which have attempted arbitrarily to forbid aliens to engage in
however, that any partner, his legal representative or his assignee, any kind of business to earn their living have been held
upon cause shown, may obtain winding up by the court. unconstitutional, while other statutes denying certain rights to aliens
have been held constitutional.
Same; Same; Same; Until the partnership accounts are determined, it
cannot be ascertained how much any of the parties is entitled to, if at 6. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
all.—It must be stressed, too, that although respondents acquired RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED
possession of the lands and the improvements thereon, the said lands STATES CONSTITUTION; DUE PROCESS OF LAW AND
and improvements remained partnership property, subject to the rights EQUAL PROTECTION OF THE LAWS; POLICE POWER.-
and obligations of the parties, inter se, of the creditors and of third Neither the Fourteenth Amendment to the United States Constitution,
parties under Articles 1837 and 1838 of the New Civil Code, and broad and comprehensive as it is, nor any other amendment, "was
subject to the outcome of the settlement of the accounts between the designed to interfere with the power of the State, sometimes termed
parties as provided in Article 1839 of the New Civil Code, absent any its 'police power,' to prescribe regulations to promote the health, peace,
agreement of the parties in their JVA to the contrary. Until the morals, education and good order of the people, and tolegislate so as
partnership accounts are determined, it cannot be ascertained how to increase the industries of the State, develop its resources and add to
much any of the parties is entitled to, if at all. It was thus premature its wealth and prosperity. From the very necessities of society,
for petitioner Primelink to be demanding that it be indemnified for the legislation of a special character, having these objects in view, must
value of the improvements on the parcels of land owned by the joint often be had in certain districts." (Barbier vs. Connolly [1884], 113 U.
venture/partnership. Notably, the JVA of the parties does not contain S., 27; New Orleans Gas Co. vs. Louisiana Light Co. [1885], 115 U.
any provision designating any party to wind up the affairs of the S., 650.)
partnership.
7. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
4. Business Trusts Art 1441 RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED
STATES CONSTITUTION; DUE PROCESS OF LAW AND
Art. 1441. Trusts are either express or implied. Express trusts are EQUAL PROTECTION OF THE LAWS; ID.-
created by the intention of the trustor or of the parties. Implied trusts None of the provisions of the Philippine Organic Law could have had
come into being by operation of law. the effect of denying to the Government of the Philippine Islands,
acting through its Legislature, the right to exercise that most essential,
The Corporation and the Bill of Rights: insistent, and illimitable of powers, the. sovereign police power, in the
promotion of the general welfare and the public interest.
1. Equal Protection
8. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
Smith Bell vs Natividad 40 phil 136 1919 RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED
6
STATES CONSTITUTION; DUE PROCESS OF LAW AND The Act of Congress of May 28, 1895 (29 Stat. at L., 188) extended
EQUAL PROTECTION OF THE LAWS; ID.- the privileges of registry from vessels wholly owned by a citizen or
The public domain or the common property or resources of the people citizens of the United States to corporations created under the laws of
of the State may be so regulated or distributed as to limit the use to its any of the states thereof. This law made it possible for a domestic
citizens. corporation to obtain the registry or enrollment of its vessels even
though some stock of the corporation was owned by aliens.
9. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED 18. CONSTITUTIONAL LAW; COMMERCE; PHILIPPINE
STATES CONSTITUTION; DUE PROCESS OF LAW AND COASTWISE TRADE; ACT No. 2761, VALIDITY.-
EQUAL PROTECTION OF THE LAWS; ID.- The history of the different laws which have concerned the Philippine
The limitation of employment in the construction of public works by, coastwise trade is set out in the opinion. The last Act on the subject,
or for, a state or a municipality to citizens of the United States or of a No. 2761, has returned to the restrictive idea of the original Customs
State is permitted. Administrative Act which in turn was merely a reflection of the
statutory language of the first American Congress,
10. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF
RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED 19. CONSTITUTIONAL LAW; COMMERCE; PHILIPPINE
STATES CONSTITUTION; DUE PROCESS OF LAW AND COASTWISE TRADE; ID.-
EQUAL PROTECTION OF THE LAWS;ID.- Without any subterfuge, the apparent purpose of the Philippine
Our local experience and our peculiar local conditions, often of Legislature is seen to be to enact an antialien shipping act. The
controlling effect, have caused the executive branch of the 'ultimate purpose of the Legislature is to encourage Philippine ship-
Government of the Philippine Islands, always later with the sanction building.
of the judicial branch, to take a firm stand with reference to the
presence of undesirable foreigners. The Government has thus assumed 20. CONSTITUTIONAL LAW; COMMERCE; PHILIPPINE
to act for the allsufficient and primitive reasons of the benefit and COASTWISE TRADE; ID.-
protection of its own citizens and of the self-preservation and integrity The Philippine Legislature made up entirely of Filipinos, representing
of its dominion. the mandate of the Filipino people and the guardian of their rights,
acting under practically autonomous powers, and imbued with a
11. CONSTITUTIONAL LAW; PHILIPPINE BlLL OF strong sense of Philippinism, has desired for these Islands safety from
RlGHTS; FOURTEENTH AMENDMENT TO THE UNITED foreign interlopers, the use of the common property exclusively by its
STATES CONSTITUTION; DUE PROCESS OF LAW AND citizens and the citizens of the United States, and protection for the
EQUAL PROTECTION OF THE LAWS;ID.- common good of the people.
Common carriers which, in the Philippines as in the United States and
other countries, are affected with a public interest, can only be 21. CONSTITUTIONAL LAW; COMMERCE; PHILIPPINE
permitted to use the public waters, deemed a part of the national COASTWISE TRADE; ID.-
domain and open to public use, as a privilege, and under such Act No. 2761 of the Philippine Legislature, limiting' certificates of the
conditions as to the Legislature may seem wise. Philippine registry to vessels of domestic ownership vested in some
one or more of the following classes of persons: (a) citizens or native
12. CONSTITUTIONAL LAW; CONSTRUCTION; PUBLIC inhabitants of the Philippine Islands; (b) citizens of the United States
POLICY.- residing in the Philippine Islands; (c) any corporation or company
The judiciary, alive to the dictates of the national welfare, can properly composed wholly of citizens of the Philippine Islands or of the United
incline the scales of their decisions in favor of that solution which will States or both, is authorized by the Act of Congress of April 29, 1908,
most effectively promote the public policy. with its specific delegation of authority to the Government of the
Philippine Islands to regulate the transportation of merchandise and
13. CONSTI LAW; CONSTRUCTION; PRESUMPTION.- passengers between ports orplaces therein, and by the grant by the Act
All the presumption is in f avor of the constitutionality of the law, and of Congress of August 29, 1916, of general legislative power to the
without good and strong reasons a court should not attempt to nullify Philippine Legislature.
the action of the Legislature.
22. CONSTITUTIONAL LAW; COMMERCE; PHILIPPINE
14. CONSTITUTIONAL LAW; CONSTRUCTION; ID.- COASTWISE TRADE; ID.-
That is the true construction which will best carry legislative intention While the plaintiff, a corporation having alien stockholders, is entitled
into effect. to the protection afforded by the due process of law and equal
protection of the laws clause of the Philippine Bill of Rights, yet Act
15. CONSTITUTIONAL LAW; COMMERCE; UNITED No. 2761, in denying to corporations such as the plaintiff the right to
STATES COASTWISE TRADE.- register vessels in the Philippine coastwise trade, does not belong to
The power to regulate commerce, expressly delegated to the Congress that vicious species of class legislation which must always be
bythe Constitution, includes the power to nationalize ships built and condemned, but falls within authorized exceptions, notably, within the
owned in the United States by registries and enrollments, and the purview of the police power.
recording of the muniments of title of American vessels.
23. CONSTITUTIONAL LAW; COMMERCE; PHILIPPINE
16. CONSTITUTIONAL LAW; COMMERCE; ID.- COASTWISE TRADE; ID.-
Under the Acts of Congress of December 31, 1792, and February 18, Act No. 2761 does not violate the provisions of paragraph 1 of section
1793 (1 Stat. at L., 287, 305) in case of alienation to a foreigner, all 3 of the Act of Congress of August 29, 1916, providing "that no law
the privileges of an American bottom were ipso facto forfeited. No shall be enacted in said Islands which shall deprive any person of life,
vessel in which a foreigner was directly or indirectly interested could liberty, or property without due process of law, or deny to any person
lawfully be registered as a vessel of the United States. therein the equal protection of the laws.”

17. CONSTITUTIONAL LAW; COMMERCE; ID.- 24. CONSTITUTIONAL LAW; COMMERCE; PHILIPPINE
COASTWISE TRADE; ID.-
7
Act No. 2761 is held to be valid and constitutional. General search warrants are outlawed because they place the sanctity
of the domicile and the privacy of communication and correspondence
2. Unreasonable search and seizure at the mercy of the whims, caprice or passion of peace officers.
6. Constitutional Law; Provision of Revised Rules of Court.-
Corporations are protected by the constitutional guarantee against To prevent the issuance of general warrants, the Supreme Court
unreasonable searches and seizures, but that the officers of a amended the Old Rules of Court by providing in the Revised Rules of
corporation from which documents, papers and things were seized Court that "no search warrant shall issue for more than one specific
have no cause of action to assail the legality of the seizures, regardless offense”.
of the amount of shares of stock or of the interest of each of them in
said corporation, and whatever the offices they hold therein may be, 7. Constitutional Law; Warrants not describing particularly the
because the corporation has a personality distinct and separate from things to be seized.-
those of said officers. The legality of a seizure can be contested only Search warrants authorizing the seizure of books of accounts and
by the party whose rights have been impaired thereby; and the records "showing all the business transactions" of certain persons,
objection to an unlawful search is purely personal and cannot be regardless of whether the transactions were legal or illegal, contravene
availed of by such officers of the corporation who interpose it for their the explicit command of the Bill of Rights that the things to be seized
personal interests. xStonehill v. Diokno, 20 SCRA 383 (1967). should be particularly described and defeat its major objective of
eliminating general warrants.
A corporation is but an association of individuals under an assumed
name and with a distinct legal entity. In organizing itself as a collective 8. Constitutional Law; Evidence; Abandonment of Moncado
body it waives no constitutional immunities appropriate for such body. ruling; Illegally seized documents are not admissible in evidence.-
Its property cannot be taken without compensation; can only be The Moncado ruling, that illegally seized documents, papers and
proceeded against by due process of law; and is protected against things are admissible in evidence, must be abandoned. The exclusion
unlawful discrimination. xBache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA of such evidence is the only practical means of enforcing the
823, 837 (1971), quoting fromxHale v. Henkel, 201 U.S. 43, 50 L.Ed. constitutional injunction against unreasonable searches and seizures.
652. The non-exclusionary rule is contrary to the letter and spirit of the
prohibition against unreasonable searches and seizures. If there is
Stonehill vs Diokno 20 scra 283 1967 competent evidence to establish probable cause of the commission of
a given crime by the party against whom the warrant is intended, then
1.Constitutional Law; Search warrants; Corporations; Only party there is no reason why the applicant should not comply with the
affected may contest legality of seizure effected by search warrants.- constitutional requirements If he has no such evidence, then it is not
Officers of certain corporations, from which documents, papers and possible for the judge to find that there is a probable cause, and, hence,
things were seized by means of search warrants, have no cause of no justifica- tion for the issuance of the warrant. The only possible
action to assail the legality of the seizures because said corporations explanation for the issuance in that case is the necessity of fishing for
have personalities distinct and separate from those of said officers. evidence of the commission of a crime. Such a fishing expedition is
The legality of a seizure can be contested only by the party whose indicative of the absence of evidence to establish a probable cause.
rights have been impaired thereby. The objection to an unlawful
search is purely personal and cannot be availed of by third parties. 9. Constitutional Law; Search and Seizure; Lack of standard of
petitioners cannot affect illegality of search and seizure.-
2. Constitutional Law; Evidence; When illegally seized evidence is That the petitioners have no legal standing to ask for the suppression
admissible.- of the papers, things, and effects seized from places other than their
Officers of certain corporations cannot validly object to the use in residences, cannot in any manner affect, alter, or otherwise modify the
evidence against them of the documents, papers and things seized intrinsic nullity of the search warrants and the intrinsic illegality of the
from the offices and premises of the corporations since the right to searches and seizures made thereunder. Whether or not petitioners
object to their admission in evidence belongs exclusively to the possess legal standing, the said warrants are void and remain void, and
corporations, to which the seized effects belong, and may not be the searches and seizures were illegal and remain illegal. No inference
invoked by the corporate officers in proceedings against them in their can be drawn from the words of the Constitution that "legal standing",
individual capacity. or the lack of it, is a determinant of the nullity or validity of a Search
warrant or of the lawfulness or illegality of a search or seizure.
3. Constitutional Law; Requisites for issuing search warrants.-
The Constitution provides that no warrant shall issue but upon 10. Constitutional Law; Provision on search and seizure is derived
probable cause, to be determined by the judge, and that the warrant from Federal Constitution.-
shall particularly describe the things to be seized. Our constitutional provision on searches and seizures was derived
almost verbatim from the Fourth Amendment to the United States
4. Constitutional Law; General search warrants.- Constitution. In the many years of judicial construction and
Search warrants, issued upon applications stating that the natural and interpretation of the said constitutional provision, our courts have
juridical persons therein named had committed a violation of Central invariably regarded as doctrinal the pronouncements made on the
Bank laws, tariff and customs laws, Tax Code and Revised Penal Code Fourth Amendment by federal courts, especially the Federal Supreme
do not satisfy the constitutional requirements because no specific Court and the Federal Circuit Courts of Appeals. The U.S. doctrines
offense had been alleged in said applications. It was impossible for the and pertinent cases on standing to move for the suppression or return
judges, who issued the warrants, to have found the existence of of documents, papers and effects, which are the fruits of an unlawful
probable cause, which presupposes the introduction of competent search and seizure, may be summarized as follows: (a) ownership of
proof that the party against whom it is sought has performed particular documents, papers, and effects gives "standing"; (b) ownership and/or
acts or committed specific omissions in violation of a specific penal control or possession—actual or constructive—of premises searched
provision. gives "standing"; and (c) the "aggrieved person" doctrine where the
search warrant and the sworn application for search warrant are
5. Constitutional Law; Why general warrants are outlawed.- "primarily" directed solely and exclusively 'against the "aggrieved
person", gives "standing". An examination of the search warrants in
this case will readily show that, excepting three, all were directed
8
against the petitioners personally. In some of them, the petitioners to personally examine the complainant and his witnesses that the
were named personally, followed by the designation, "The President question of how much time would be consumed by the judge in
and/or General Manager" of the particular corporation. The three examining them came up before the Convention. The reading of the
warrants excepted named three corporate defendants. But the stenographic notes to respondent judge did not constitute sufficient
"office/house/warehouse/premises" mentioned in the said three compliance with the constitutional mandate and the rule; for by that
warrants were also the same "office/house/warehouse/premises" manner respondent judge did not have opportunity to observe the
declared to be owned by or under the control of the petitioners in all demeanor of the complainant and his witness, and to propound initial
the other search warrants directed against the petitioners and/or "the and follow-up questions which the judicial mind, on account of its
President and/or General Manager" of the particular corporation. The training, was in the best position to conceive. These were important in
searches and seizures were to be made, and were actually made, in the arriving at a sound inference on the all-important question of whether
"office/house/warehouse/premises" owned by or under the control of or not there was probable cause.
the petitioners.
Same; Same; Search warrant to issue for one specific offense.—The
11. Constitutional Law; Ownership of properties seized entitles Supreme Court deemed it fit to amend Section 3 of Rule 122 of the
petitioners to bring motion to return and suppress and gives them former Rules of Court by providing in its counterpart, under the
standing as persons aggrieved by unlawful search and seizure.- Revised Rules of Court, that “a search warrant shall not issue but upon
Ownership of the properties seized alone entitles the petitioners to probable cause in connection with one specific offense.” Not satisfied
bring a motion to return and suppress, and gives them standing as with this qualification, the Supreme Court added thereto a paragraph,
persons aggrieved by an unlawful search and seizure regardless of directing that “no search warrant shall issue for more than one specific
their location at the time of seizure. Under the constitutional provision offense.”
against unlawful searches and seizures, a person places himself or his
property within a constitutionally protected area, be it his home or his Same; Same; Particular description of things to be seized.—Under
office, his hotel room or his automobile. Art. 111, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of the
Revised Rules of Court, the warrant should particularly describe the
12. Constitutional Law; Control of premises searched gives things to be seized.
"standing".-
Independent of ownership or other personal interest in the records and Same; Seizure; Seizure of records pertaining to all business
documents seized, the petitioners have standing to move for return and transactions not a particular description.—The warrants authorized the
suppression by virtue of their proprietary or leasehold interest in many search for and seizure of records pertaining to all business
of the premises searched. These proprietary and leasehold interests transactions of petitioners herein, regardless of whether the
have been sufficiently set forth in their motion for reconsideration and transactions were legal or illegal. The warrants sanctioned the seizure
need not be recounted here. It has never been held that a person with of all records of the petitioners and corporations, whatever their
requisite interest in the premises searched must own the property nature, thus openly contravening the explicit command of the Bill of
seized in order to have standing in a motion to return and suppress. Rights—that the things to be seized be particularly described —as
well as tending to defeat its major objective; the elimination of general
Bache & Co. Vs Ruiz 37 Scra 823 1971 warrants.

Remedial law; Search warrant; Procedure for the issuance Same; Same; Purpose of particular description of things to be
warrant; Examination of the complainant and witnesses by the judge seized.—A search warrant should particularly describe the place to be
himself.—The examination of the complainant and the witnesses he searched and the things to be seized. The evident purpose and intent
may produce, required by Art. 111, Sec. 1, par. 3, of the Constitution, of this requirement is to limit the things to be seized to those, and only
and Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be those, particularly described in the search warrant—to leave the
conducted by the judge himself and net by others. The implementing officers of the law with no discretion regarding what articles they shall
rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic seize, to the end that “unreasonable searches and seizures may not be
and candid, for it requires the judge, before issuing a search warrant, made,—that abuses may not be committed.
to personally examine on oath or affirmation the complainant and any
witnesses he may produce. Personal examination by the judge of the Same; Same; Where there is a particular description of things to be
complainant and his witnesses is necessary to enable him to determine seized.—A search warrant may be said to particularly describe the
the existence or non-existence of a probable cause, pursuant to Art. things to be seized when the description therein is as specific as the
111, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the circumstances will ordinarily allow; or when the description expresses
Revised Rules of Court, both of which prohibit the issuance of a conclusion of fact—not of law—by which the warrant officer may
warrants except “upon probable cause.” The determination of whether be guided in making the search and seizure; or when the things
or not a probable cause exists calls for the exercise of judgment after described are limited to those which bear direct relation to the offense
a judicial appraisal of facts and should not be allowed to be delegated for which the warrant is being issued. If the articles desired to be
in the absence of any rule to the contrary. seized have any direct relation to an offense committed, the applicant
must necessarily have some evidence, other than those articles, to
Same; Same; Deposition taken by Deputy Clerk of Court does not prove the said offense; and the articles subject of search and seizure
comply with constitutional mandate.—The participation of should come in handy merely to strengthen such evidence.
respondent Judge in the proceedings which led to the issuance of
Search Warrant No. 2-M-70 was thus limited to listening to the Special civil action; Certiorari; When motion for reconsideration is
stenographer’s reading of her notes, to a few words of warning against not a prerequisite to the institution of petition for certiorari.—When
the commission of perjury, and to administering the oath to the the questions raised before the Supreme Court are the same as those
complainant and his witness. This cannot be considered as a personal which were squarely raised in and passed upon by the court below, the
examination. If there was an examination at all of the complainant and filing of a motion for reconsideration in said court before certiorari
his witness, it was the one conducted by the Deputy Clerk of Court. can be instituted in the Supreme Court is no longer a prerequisite. The
But the Constitution and the rules required a personal examination by rule requiring the filing of a motion for reconsideration before an
the judge. It was precisely on account of the intention of the delegates application for a writ of certiorari can be entertained was never
to the Constitutional Convention to make it a duty of the issuing judge intended to be applied without considering the circumstances. The rule
9
does not apply where, the deprivation of petitioners’ fundamental right 3. Constitutional Law; Right against self-incrimination has no
to due process taints the proceeding against them in the court below application to juridical persons and the constitutional safeguard
not only with irregularity but also with nullity. against unreasonable searches and seizures finds no application to the
Remedial law; Search and seizures; Right of corporation against case at bar either.+
unreasonable searches and seizures.—A corporation is entitled to
immunity against unreasonable searches and seizures. A corporation 2. Classification of corporation, sec 3 & 4
is, after all, but an association of individuals under an assumed name
and with a distinct legal entity. In organizing itself as a collective body Sec. 3. Classes of corporations. - Corporations formed or organized
it waives no constitutional immunities appropriate to such body. Its under this Code may be stock or non-stock corporations. Corporations
property cannot be taken without compensation. It can only be which have capital stock divided into shares and are authorized to
proceeded against by due process of law, and is protected against distribute to the holders of such shares dividends or allotments of the
unlawful discrimination. surplus profits on the basis of the shares held are stock corporations.
All other corporations are non-stock corporations.
Same; Same; Who can contest legality of seizure.—It is well settled
that the legality of a seizure can be contested only by the party whose Sec. 4. Corporations created by special laws or charters. -
rights have been impaired thereby, and that the objection to an Corporations created by special laws or charters shall be governed
unlawful search and seizure is purely personal and cannot be availed primarily by the provisions of the special law or charter creating them
of by third parties. Consequently, petitioners herein may not validly or applicable to them, supplemented by the provisions of this Code,
object to the use in evidence against them of the documents, papers insofar as they are applicable.
and things seized from the offices and premises of the corporations,
since the right to object belongs exclusively to the corporations, to A. In relation to the State:
whom the seized effects belong, and may not be invoked by the
corporate officers in proceedings against them in their individual Public
capacity.
Public corporations – those created, formed or organized for political
3. Self-Incrimination or governmental purposes with political powers to be exercised for
purposes connected with the public good in the administration of civil
“It is elementary that the right against self-incrimination has no government.
application to juridical persons.” Bataan Shipyard & Engineering Co
v. PCGG, 150 SCRA 181, 234-235 (1987). Private
While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not follow Private corporations – those formed for some private purpose, benefit,
that a corporation, vested with special privileges and franchises may aim or end.
refuse to show its hand when charged with an abuse of such
privilege. xHale v. Henkel, 201 U.S. 43 (1906); xWilson v. United National Coal Co. Vs CIR 46 phil 583 ( 1924 )
States, 221 U.S. 361 (1911); xUnited States v. White, 322 U.S. 694
(1944). 1. THE NATIONAL COAL COMPANY, A PRIVATE
CORPORATION; SUBJECT TO THE PAYMENT OF INTERNAL
Bataan Shipyard vs PCGG 150 scra 181 1987 REVENUE UNDER THE PROVISIONS OF SECTION 1496 OF
THE ADMINISTRATIVE CODE.-
1. Constitutional Law; Executive Orders Nos. 1 and 2 issued to The National Coal Company is a private corporation. The fact that the
implement a constitutional mandate, valid and constitutional- Government happens to be a stockholder therein does not make it a
The impugned executive orders are avowedly meant to carry out the public corporation. It is subject to all the provisions of the Corporation
explicit command of the Provisional Constitution, ordained by Law in so far as they are not inconsistent with Act No. 2705. As a
Proclamation No. 3, that the President—in the exercise of legislative private corporation, it has no greater rights, powers, or privileges than
power which she was authorized to continue to wield "(u)ntil a any other corporation which might be organized for the same purpose
legislature is elected and convened under a new Constitution"—"shall under the Corporation Law. It was not the intention of the legislature
give priority to measures to achieve the mandate of the people," to give it a preference, or right, or privilege over other legitimate
among others to (r)ecover ill-gotten properties amassed by the leaders private corporations in the mining of coal. The law made no provision
and supporters of the previous regime and protect the interest of the for its occupation and operation of coal-bearing lands, to the exclusion
people through orders of sequestration or freezing of assets or of other persons or corporations, under proper permission. The
accounts.” National Coal Company being a private corporation, neither the lessee
nor the owner of the lands upon which it mined coal for the year in
2. Constitutional Law; Executive orders not bill of attainder.- question, is subject to the payment of the internal revenue duty
Neither will this Court sustain the theory that the executive orders in provided for in section 1496 of the Administrative Code.
question are a bill of attainder. "A bill of attainder is a legislative act
which inflicts punishment without judicial trial." "Its essence is the Philippine Society vs COA GR 169752 ( 2007 )
substitution of a legislative for a judicial determination of guilt." In
the first place, nothing in the executive orders can be reasonably Same; Same; Cases where statutes can be given retroactive effect.—
construed as a determination or declaration of guilt. On the contrary, Statutes can be given retroactive effect in the following cases: (1)
the executive orders, inclusive of Executive Order No. 14, make it when the law itself so expressly provides; (2) in case of remedial
perfectly clear that any judgment of guilt in the amassing or statutes; (3) in case of curative statutes; (4) in case of laws interpreting
acquisition of "ill-gotten wealth" is to be handed down by a judicial others; and (5) in case of laws creating new rights.
tribunal, in this case, the Sandiganbayan, upon complaint filed and
prosecuted by the PCGG. In the second place, no punishment is Corporation Law; Amendments introduced by C.A. No. 148 made it
inflicted by the executive orders, as the merest glance at their clear that the petitioner was a private corporation and not an agency
provisions will immediately make apparent. In no sense, therefore, of the government.—The amendments introduced by C.A. No. 148
may the executive orders be regarded as a bill of attainder. made it clear that the petitioner was a private corporation and not an
10
agency of the government. This was evident in Executive Order No.
63, issued by then President of the Philippines Manuel L. Quezon, Quasi Public
declaring that the revocation of the powers of the petitioner to appoint
agents with powers of arrest “corrected a serious defect” in one of the Feliciano, supra
laws existing in the statute books. GR 175352, July 15 2009 and resolution of January 18, 2011

Same; A reading of petitioner’s charter shows that it is not subject to 1. Corporation Law; Philippine National Red Cross; A closer look
control or supervision by any agency of the State, unlike government- at the nature of the Philippine National Red Cross (PNRC) would
owned and -controlled corporations.—A reading of petitioner’s show that there is none like it not just in terms of structure, but also in
charter shows that it is not subject to control or supervision by any terms of history, public service and official status.-
agency of the State, unlike government-owned and -controlled —The passage of several laws relating to the PNRC’s corporate
corporations. No government representative sits on the board of existence notwithstanding the effectivity of the constitutional
trustees of the petitioner. Like all private corporations, the successors proscription on the creation of private corporations by law, is a
of its members are determined voluntarily and solely by the petitioner recognition that the PNRC is not strictly in the nature of a private
in accordance with its by-laws, and may exercise those powers corporation contemplated by the aforesaid constitutional ban. A closer
generally accorded to private corporations, such as the powers to hold look at the nature of the PNRC would show that there is none like it
property, to sue and be sued, to use a common seal, and so forth. It not just in terms of structure, but also in terms of history, public
may adopt by-laws for its internal operations: the petitioner shall be service and official status accorded to it by the State and the
managed or operated by its officers “in accordance with its by-laws in international community. There is merit in PNRC’s contention that its
force.” structure is sui generis.

Same; Fact that employees of the petitioner are registered and covered 2. Same; Same; Same; View that the special status of the Philippine
by the Social Security System at the latter’s initiative, and not through National Red Cross (PNRC) under international humanitarian law
the Government Service Insurance System which should be the case justifies the special manner of its creation.-
if the employees are considered government employees is another —The special status of the PNRC under international humanitarian
indication of petitioner’s nature as a private entity.—The employees law justifies the special manner of its creation. The State itself
of the petitioner are registered and covered by the Social Security committed the PNRC’s formation to the community of nations, and no
System at the latter’s initiative, and not through the Government less than an act of Congress should be deemed sufficient compliance
Service Insurance System, which should be the case if the employees with such an obligation. To require the PNRC to incorporate under the
are considered government employees. This is another indication of general law is to disregard its unique standing under international
petitioner’s nature as a private entity. conventions. It also ignores the very basic premise for the PNRC’s
creation.
Same; Fact that a certain juridical entity is impressed with public
interest does not, by that circumstance alone, make the entity a public 3. Same; Same; Same; View that the Constitution does not preclude
corporation, inasmuch as a corporation may be private though its the creation of corporations that may neither be classified as private
charter contains provisions of a public character incorporated solely nor governmental.-
for the public good.—The respondents contend that the petitioner is a —The Constitution does not preclude the creation of corporations that
“body politic” because its primary purpose is to secure the protection may neither be classified as private nor governmental. Sec. 7, Article
and welfare of animals which, in turn, redounds to the public good. XIV of the 1935 Constitution, which was carried over in subsequent
This argument, is, at best, specious. The fact that a certain juridical versions of the fundamental law, does not prohibit Congress from
entity is impressed with public interest does not, by that circumstance creating other types of organizations that may not fall strictly within
alone, make the entity a public corporation, inasmuch as a corporation the terms of what is deemed a private or government corporation. The
may be private although its charter contains provisions of a public Constitution simply provides that Congress cannot create private
character, incorporated solely for the public good. This class of corporations, except by general law, unless such corporations are
corporations may be considered quasi-public corporations, which are owned or controlled by the government. It does not forbid Congress
private corporations that render public service, supply public wants, from creating organizations that do not belong to these two general
or pursue other eleemosynary objectives. While purposely organized types.
for the gain or benefit of its members, they are required by law to
discharge functions for the public benefit. Examples of these 4. Same; Same; Same; View that the Philippine National Red Cross
corporations are utility, railroad, warehouse, telegraph, telephone, (PNRC) cannot be classified as either a purely private or government
water supply corporations and transportation companies. It must be entity.-
stressed that a quasi-public corporation is a species of private —The PNRC cannot be classified as either a purely private or
corporations, but the qualifying factor is the type of service the former government entity. It is a hybrid organization that derives certain
renders to the public: if it performs a public service, then it becomes a peculiarities from international humanitarian law. For this reason, its
quasi-public corporation. organizational character does not fit the parameters provided by either
the Corporation Code or Administrative Code. It is a sui generis entity
Same; The true criterion to determine whether a corporation is public that draws its nature from the Geneva Conventions, the Statutes of the
or private is found in the totality of the relation of the corporation to Movement and the law creating it.
the State.—The true criterion, therefore, to determine whether a
corporation is public or private is found in the totality of the relation 5. Same; Same; Same; View that the Philippine National Red Cross
of the corporation to the State. If the corporation is created by the State (PNRC) cannot be regarded as a government corporation or
as the latter’s own agency or instrumentality to help it in carrying out instrumentality.-
its governmental functions, then that corporation is considered public; —The PNRC cannot also be regarded as a government corporation or
otherwise, it is private. Applying the above test, provinces, chartered instrumentality. To begin with, it is not owned or controlled by the
cities, and barangays can best exemplify public corporations. They are government or part of the government machinery. The conditions for
created by the State as its own device and agency for the its recognition as a National Society also militate against its
accomplishment of parts of its own public works. classification as a government entity.

11
6. Same; Same; Same; View that the Philippine National Red Cross 12. Corporation Law; Philippine National Red
(PNRC) was not established by private individuals for profit or gain, Cross; Constitutional Law; View that the creation of the Philippine
but by the State itself pursuant to the objectives of international National Red Cross (PNRC) through a special charter is violative of
humanitarian law.- the constitutional proscription against the creation of private
—The State organized the PNRC to assist it in discharging its corporations by special law.-
commitments under the Geneva Conventions as an “auxiliary of the —Since the PNRC is a private corporation, the creation of the PNRC
public authorities in the humanitarian field.” It was not established by through a special charter is violative of the constitutional proscription
private individuals for profit or gain, but by the State itself pursuant to against the creation of private corporations by special law. The
the objectives of international humanitarian law. creation of the PNRC by special charter on 22 March 1947 through
RA 95 contravenes Section 7, Article XIV of the 1935 Constitution,
7. Corporation Law; Philippine National Red as amended, which reads: SEC. 7. The Congress shall not, except by
Cross; Constitutional Law; View that when Congress created the general law, provide for the formation, organization, or regulation of
Philippine National Red Cross (PNRC), it did not intend to form either private corporations, unless such corporations are owned or controlled
a private or government-owned corporation with the usual powers and by the Government or any subdivision or instrumentality thereof.
attributes that such entities might possess.-
—The PNRC’s creation derived primarily from the Geneva 13. Same; Same; The Philippine National Red Cross (PNRC) has
Conventions. When Congress created the PNRC, it did not intend to responded to almost all national disasters since 1947, and is widely
form either a private or government-owned corporation with the usual known to provide a substantial portion of the country’s blood
powers and attributes that such entities might possess. Rather, it set requirements.-
out to form an organization that would be responsive to the —It bears emphasizing that the PNRC has responded to almost all
requirements of the Geneva Conventions. national disasters since 1947, and is widely known to provide a
8. Same; Same; Same; View that the Philippine National Red Cross substantial portion of the country’s blood requirements. Its
(PNRC) could either choose to remain unincorporated or it could humanitarian work is unparalleled. The Court should not shake its
incorporate under the Corporation Code.- existence to the core in an untimely and drastic manner that would not
—The PNRC could either choose to remain unincorporated or it could only have negative consequences to those who depend on it in times
adopt its own articles of incorporation and by-laws and incorporate of disaster and armed hostilities but also have adverse effects on the
under the Corporation Code and register with the Securities and image of the Philippines in the international community. The sections
Exchange Commission if it wants to be a private corporation. of the PNRC Charter that were declared void must therefore stay.

9. Same; Same; Same; View that the Philippine National Red Cross 14. Same; Same; The sui generis character of Philippine National
(PNRC) cannot claim that it is sui generis just because it is a private Red Cross (PNRC) requires us to approach controversies involving
organization performing certain public or governmental functions.- the PNRC on a case-to-case basis.-
—All private charitable organizations are doing public service or —Although it is neither a subdivision, agency, or instrumentality of
activities that also constitute governmental functions. Hence, the the government, nor a government-owned or controlled corporation or
PNRC cannot claim that it is sui generis just because it is a private a subsidiary thereof, as succinctly explained in the Decision of July
organization performing certain public or governmental functions. 15, 2009, so much so that respondent, under the Decision, was
That the PNRC is rendering public service does not exempt it from the correctly allowed to hold his position as Chairman thereof
constitutional prohibition against the creation of a private corporation concurrently while he served as a Senator, such a conclusion does not
through a special law since the PNRC is, admittedly, still a private ipso facto imply that the PNRC is a “private corporation” within the
organization. The express prohibition against the creation of private contemplation of the provision of the Constitution, that must be
corporations by special charter under Section 16, Article XII of the organized under the Corporation Code. As correctly mentioned by
1987 Constitution cannot be disregarded just because a private Justice Roberto A. Abad, the sui generis character of PNRC requires
corporation claims to be sui generis. The constitutional prohibition us to approach controversies involving the PNRC on a case-to-case
admits of no exception. basis.

10. Same; Same; Same; View that President Marcos could not issue
decrees or orders contrary to the provisions of the Constitution.- B. As to place of incorporation
—Even if the PNRC derived its existence from PD 1264, still the
constitutional prohibition will apply. President Marcos issued PD Domestic
1264 on 5 December 1977 during martial law period when the
President assumed extensive legislative power. Such assumption of Foreign ( sec 123 corp code )
legislative power did not place President Marcos above the
Constitution. President Marcos could not issue decrees or orders Sec. 123. Definition and rights of foreign corporations. - For the
contrary to the provisions of the Constitution. The exercise of purposes of this Code, a foreign corporation is one formed, organized
legislative power by President Marcos under martial law must still be or existing under any laws other than those of the Philippines and
in accordance with the Constitution because legislative power cannot whose laws allow Filipino citizens and corporations to do business in
be exercised in violation of the Constitution from which legislative its own country or state. It shall have the right to transact business in
power draws its existence. the Philippines after it shall have obtained a license to transact
business in this country in accordance with this Code and a certificate
11. Same; Same; Same; View that there is no prescription to declare of authority from the appropriate government agency.
a law unconstitutional.-
—The fact that the constitutionality of RA 95 has not been questioned C. As to nationality ( Sec 140 )
for more than sixty (60) years does not mean that it could no longer be
declared unconstitutional. One is not estopped from assailing the Sec. 140. Stock ownership in certain corporations. - Pursuant to the
validity of a law just because such law has been relied upon in the past duties specified by Article XIV of the Constitution, the National
and all that time has not been attacked as unconstitutional. Indeed, Economic and Development Authority shall, from time to time, make
there is no prescription to declare a law unconstitutional. a determination of whether the corporate vehicle has been used by any
corporation or by business or industry to frustrate the provisions
12
thereof or of applicable laws, and shall submit to the Batasang (section 1 [7], Article III), since land tenure is by no means
Pambansa, whenever deemed necessary, a report of its findings, indispensable to the free exercise and enjoyment of religious
including recommendations for their prevention or correction. profession or worship; or that one may not worship the Deity
Maximum limits may be set by the Batasang Pambansa for according to the dictates of his own conscience unless upon land held
stockholdings in corporations declared by it to be vested with a public in fee simple.
interest pursuant to the provisions of this section, belonging to
individuals or groups of individuals related to each other by
consanguinity or affinity or by close business interests, or whenever it 2. Public Utilities - sec 11 Art XII Consti
is necessary to achieve national objectives, prevent illegal monopolies
or combinations in restraint or trade, or to implement national Section 11. No franchise, certificate, or any other form of
economic policies declared in laws, rules and regulations designed to authorization for the operation of a public utility shall be granted
promote the general welfare and foster economic development. except to citizens of the Philippines or to corporations or associations
In recommending to the Batasang Pambansa corporations, business or organized under the laws of the Philippines, at least sixty per centum
industries to be declared vested with a public interest and in of whose capital is owned by such citizens; nor shall such franchise,
formulating proposals for limitations on stock ownership, the National certificate, or authorization be exclusive in character or for a longer
Economic and Development Authority shall consider the type and period than fifty years. Neither shall any such franchise or right be
nature of the industry, the size of the enterprise, the economies of granted except under the condition that it shall be subject to
scale, the geographic location, the extent of Filipino ownership, the amendment, alteration, or repeal by the Congress when the common
labor intensity of the activity, the export potential, as well as other good so requires. The State shall encourage equity participation in
factors which are germane to the realization and promotion of business public utilities by the general public. The participation of foreign
and industry. investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the
Test - executive and managing officers of such corporation or association
must be citizens of the Philippines.
Place of Incorporation control
People vs quasha 93 phil 333 ( 1953 )
1. Incorporation test – Determined by the state of incorporation,
regardless of the nationality of the stockholders. 1. Falsification; False Naration for not revealing a Certain Fact, not
Principal place of business Punishable if There is no Legal Obligation to Disclose the Truth.-
—It is essential to the commission of this crime that the perversion of
2. Domiciliary test – Determined by the principal place of business of truth in a narration of facts must be made with the wrongful intent of
the corporation. injuring a third person and even if such wrongful intent is proven, still
the untruthful statement will not constitute criminal falsification if
Investment test there is no legal obligation on the part of the narrator to disclose the
truth. (U. S. vs. Reyes, 1 Phil., 341; U. S. vs. Lopez, 15 Phil., 515.)
1. Exploitation of natural resources Wrongful intent to injure a third person and obligation on the part of
Register of Deeds vs Ung Sui Temple 97 Phil 58 1955. the narrator to disclose the truth are thus essential to , conviction for
the crime of falsification under articles 171 (4) and 172 (1) of the
1. CONSTITUTIONAL LAW; RlGHT TO ACQUIRE LANDS Revised Penal Code.
LlMITED TO FlLIPINO CITIZENS; ACT 271 REPEALED BY
SECTION 5, ARTICLE XIII, OF THE CONSTITUTION.- 2. Id.; Id.; Id.; Duty of Revealing the Ownership of the Capital of a
The provisions of Act No. 271 of the old Philippine Commission Corporation.-
which allow all religious associations, of whatever sort or —If the Constitution does not prohibit the mere formation of a public
denomination, whether incorporated in the Philippines or in the name utility corporation with alien capital, then how could the accused be
of other country, to hold land in the Philippines for religious purposes, charged with having wrongfully intended to circumvent that
must be deemed repealed by the absolute terms of section 5, Article fundamental law by not disclosing in the articles of incorporation that
XIII, of the Constitution, which limit the acquisition of land in the one of the incorporators, a Filipino, was a mere trustee of his American
Philippines to its citizens, or to corporations or associations at least co-incorporators and that for that reason the subscribed capital stock
sixty per centum of the capital stock of which is owned by such of the corporation was wholly American? For the mere formation of
citizens, adopted after the enactment of said Act No. 271. the corporation such disclosure was not essential, and the Corporation
Law does not require it. The accused was, therefore, under no
2. CONSTITUTIONAL LAW; RlGHT TO ACQUIRE LANDS obligation to make it. In the absence of such obligation and of the
LlMITED TO FlLIPINO CITIZENS; DEED OF DONATION alleged wrongful intent on the part of the accused, he cannot legally
EXECUTED BY A FILIPINO CITIZEN IN FAVOR OF A be convicted of the crime of falsification for having allegedly
FOREIGN RELIGIOUS ORGANIZATION CAN NOT BE perverted the truth in a narration of facts.
REGISTERED.-
In view of the provisions of sections 1 and 5 of Article XIII of the 3. Mass media sec 11 (1) Art XVI consti
Constitution and the decision of the Supreme Court in the case of
Krivenko vs. The Register of Deeds of Manila, 44 Off. Gaz., 1211, a Section 11.
deed of donation of a parcel of land executed by a Filipino citizen in 1. The ownership and management of mass media shall be
favor of a religious organization. limited to citizens of the Philippines, or to corporations,
cooperatives or associations, wholly-owned and managed
3. CONSTITUTIONAL LAW; RlGHT TO ACQUIRE LANDS by such citizens.
LlMITED TO FlLIPINO CITIZENS; REFUSAL OF REGISTER The Congress shall regulate or prohibit monopolies in
OF DEEDS TO REGISTER DEED OF DONATION IS NOT commercial mass media when the public interest so
VlOLATIVE OF FREEDOM OF RELIGION CLAUSE.- requires. No combinations in restraint of trade or unfair
The refusal of the Register of Deeds to register said deed of donation competition therein shall be allowed.
is not violative of the freedom of religion clause of the Constitution
13
4.a Advertising Industry Sec 11 (2) art XVI Consti Sec. 116. Religious societies. - Any religious society or religious
order, or any diocese, synod, or district organization of any religious
1. The advertising industry is impressed with public interest, denomination, sect or church, unless forbidden by the constitution,
and shall be regulated by law for the protection of rules, regulations, or discipline of the religious denomination, sect or
consumers and the promotion of the general welfare. church of which it is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a meeting called for
Only Filipino citizens or corporations or associations at least the purpose of at least two-thirds (2/3) of its membership, incorporate
seventy per centum of the capital of which is owned by such for the administration of its temporalities or for the management of its
citizens shall be allowed to engage in the advertising affairs, properties and estate by filing with the Securities and
industry. Exchange Commission, articles of incorporation verified by the
affidavit of the presiding elder, secretary, or clerk or other member of
The participation of foreign investors in the governing body such religious society or religious order, or diocese, synod, or district
of entities in such industry shall be limited to their organization of the religious denomination, sect or church, setting
proportionate share in the capital thereof, and all the forth the following:
executive and managing officers of such entities must be
citizens of the Philippines. 1. That the religious society or religious order, or diocese, synod, or
district organization is a religious organization of a religious
5. War time test ( A.K.A Control Test ) denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their
Filipinas Compania vs Christern 89 phil 744 1952 written consent or have voted to incorporate, at a duly convened
meeting of the body;
3. Control test – Determined by the nationality of the controlling
stockholders or members. This test is applied in times of war. 3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is not
6.a Grandfather rule forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church
4. Grandfather rule – Nationality is attributed to the percentage of of which it forms a part;
equity in the corporation used in nationalized or partly nationalized
area. 4. That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its
D. As to purpose of incorporation affairs, properties and estate;

Municipal 5. The place where the principal office of the corporation is to be


established and located, which place must be within the Philippines;
Public corporations – those created, formed or organized for political and
or governmental purposes with political powers to be exercised for
purposes connected with the public good in the administration of civil 6. The names, nationalities, and residences of the trustees elected by
government. the religious society or religious order, or the diocese, synod, or
district organization to serve for the first year or such other period as
Quasi-public corporations – private corporations which have accepted may be prescribed by the laws of the religious society or religious
from the State the grant of a franchise or contract involving the order, or of the diocese, synod, or district organization, the board of
performance of public duties (public service corporations). trustees to be not less than five (5) nor more than fifteen (15).

Religous ( Sec 109, 116 Corp Code ) Educational ( Sec 106 and 108 Corp ) ( Sec 25 BP232 )

Ecclesiastical (religious societies or corporation sole) and Lay Sec. 106. Incorporation. - Educational corporations shall be
(eleemosynary or civil): governed by special laws and by the general provisions of this Code.

Ecclesiastical or religious corporations – those composed exclusively Sec. 108. Board of trustees. - Trustees of educational institutions
of ecclesiastics organized for spiritual purposes or for administering organized as non-stock corporations shall not be less than five (5) nor
properties held for religious ones. They are further classified as more than fifteen (15): Provided, however, That the number of trustees
religious societies or corporation sole. shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-
Lay corporations – those established for the purposes other than laws, the board of trustees of incorporated schools, colleges, or other
religion. They are further classified as eleemosynary or civil. institutions of learning shall, as soon as organized, so classify
Eleemosynary corporations are created for charitable and benevolent themselves that the term of office of one-fifth (1/5) of their number
purposes. Civil corporations are organized not for the purpose of shall expire every year. Trustees thereafter elected to fill vacancies,
public charity but for the benefit, pecuniary or otherwise, of its occurring before the expiration of a particular term, shall hold office
members. only for the unexpired period. Trustees elected thereafter to fill
vacancies caused by expiration of term shall hold office for five (5)
Sec. 109. Classes of religious corporations. - Religious corporations years. A majority of the trustees shall constitute a quorum for the
may be incorporated by one or more persons. Such corporations may transaction of business. The powers and authority of trustees shall be
be classified into corporations sole and religious societies. defined in the by-laws.
Religious corporations shall be governed by this Chapter and by the For institutions organized as stock corporations, the number and term
general provisions on non-stock corporations insofar as they may be of directors shall be governed by the provisions on stock corporations.
applicable.
Section 25. Establishment of Schools - All schools shall be
established in accordance with law. The establishment of new national
14
schools and the conversion of existing schools from elementary to rabbi or presiding elder shall become a corporation sole and all
national secondary or tertiary schools shall be by law: Provided, That temporalities, estate and properties of the religious denomination, sect
any private school proposed to be established must incorporate as an or church theretofore administered or managed by him as such chief
non-stock educational corporation in accordance with the provisions archbishop, bishop, priest, minister, rabbi or presiding elder shall be
of the Corporation Code of the Philippines. This requirement to held in trust by him as a corporation sole, for the use, purpose, behalf
incorporate may be waived in the case of family-administered pre- and sole benefit of his religious denomination, sect or church,
school institutions. including hospitals, schools, colleges, orphan asylums, parsonages
Government assistance to such schools for educational programs shall and cemeteries thereof. (n)
be used exclusively for that purpose.
Charitable, Scientific or vocational Sec. 113. Acquisition and alienation of property. - Any corporation
Business Corporation sole may purchase and hold real estate and personal property for its
church, charitable, benevolent or educational purposes, and may
E. As to number of members receive bequests or gifts for such purposes. Such corporation may sell
or mortgage real property held by it by obtaining an order for that
Aggregate Corporation purpose from the Court of First Instance of the province where the
Aggregate corporations are those composed of a number of property is situated upon proof made to the satisfaction of the court
individuals vested with corporate powers. Except the corporation sole, that notice of the application for leave to sell or mortgage has been
these are corporations registered under the corporation code consisting given by publication or otherwise in such manner and for such time as
of not less than 5 incorporators. said court may have directed, and that it is to the interest of the
corporation that leave to sell or mortgage should be granted. The
Corporation Sole ( Sec 110 to 115 Corp Code ) application for leave to sell or mortgage must be made by petition,
duly verified, by the chief archbishop, bishop, priest, minister, rabbi
Sec. 110. Corporation sole. - For the purpose of administering and or presiding elder acting as corporation sole, and may be opposed by
managing, as trustee, the affairs, property and temporalities of any any member of the religious denomination, sect or church represented
religious denomination, sect or church, a corporation sole may be by the corporation sole: Provided, That in cases where the rules,
formed by the chief archbishop, bishop, priest, minister, rabbi or other regulations and discipline of the religious denomination, sect or
presiding elder of such religious denomination, sect or church. (154a) church, religious society or order concerned represented by such
corporation sole regulate the method of acquiring, holding, selling and
Sec. 111. Articles of incorporation. - In order to become a mortgaging real estate and personal property, such rules, regulations
corporation sole, the chief archbishop, bishop, priest, minister, rabbi and discipline shall control, and the intervention of the courts shall not
or presiding elder of any religious denomination, sect or church must be necessary. (159a)
file with the Securities and Exchange Commission articles of
incorporation setting forth the following: Sec. 114. Filling of vacancies. - The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a
1. That he is the chief archbishop, bishop, priest, minister, rabbi or corporation sole shall become the corporation sole on their accession
presiding elder of his religious denomination, sect or church and to office and shall be permitted to transact business as such on the
that he desires to become a corporation sole; filing with the Securities and Exchange Commission of a copy of their
2. That the rules, regulations and discipline of his religious commission, certificate of election, or letters of appointment, duly
denomination, sect or church are not inconsistent with his certified by any notary public.
becoming a corporation sole and do not forbid it; During any vacancy in the office of chief archbishop, bishop, priest,
3. That as such chief archbishop, bishop, priest, minister, rabbi or minister, rabbi or presiding elder of any religious denomination, sect
presiding elder, he is charged with the administration of the or church incorporated as a corporation sole, the person or persons
temporalities and the management of the affairs, estate and authorized and empowered by the rules, regulations or discipline of
properties of his religious denomination, sect or church within his the religious denomination, sect or church represented by the
territorial jurisdiction, describing such territorial jurisdiction; corporation sole to administer the temporalities and manage the
4. The manner in which any vacancy occurring in the office of chief affairs, estate and properties of the corporation sole during the vacancy
archbishop, bishop, priest, minister, rabbi of presiding elder is shall exercise all the powers and authority of the corporation sole
required to be filled, according to the rules, regulations or during such vacancy. (158a)
discipline of the religious denomination, sect or church to which
he belongs; and Sec. 115. Dissolution. - A corporation sole may be dissolved and its
5. The place where the principal office of the corporation sole is to affairs settled voluntarily by submitting to the Securities and
be established and located, which place must be within the Exchange Commission a verified declaration of dissolution.
Philippines.
The declaration of dissolution shall set forth:
The articles of incorporation may include any other provision not
contrary to law for the regulation of the affairs of the corporation. (n) 1. The name of the corporation;
2. The reason for dissolution and winding up;
Sec. 112. Submission of the articles of incorporation. - The articles 3. The authorization for the dissolution of the corporation by the
of incorporation must be verified, before filing, by affidavit or particular religious denomination, sect or church;
affirmation of the chief archbishop, bishop, priest, minister, rabbi or 4. The names and addresses of the persons who are to supervise the
presiding elder, as the case may be, and accompanied by a copy of the winding up of the affairs of the corporation.
commission, certificate of election or letter of appointment of such
chief archbishop, bishop, priest, minister, rabbi or presiding elder, Upon approval of such declaration of dissolution by the Securities and
duly certified to be correct by any notary public. Exchange Commission, the corporation shall cease to carry on its
From and after the filing with the Securities and Exchange operations except for the purpose of winding up its affairs.
Commission of the said articles of incorporation, verified by affidavit
or affirmation, and accompanied by the documents mentioned in the Roman Catholic Administrator vs LRC 102 Phil 596 ( 1957 )
preceding paragraph, such chief archbishop, bishop, priest, minister,
15
1. CORPORATION SOLE; COMPONENTS AND PURPOSE The corporation sole by reason of their peculiar constitution and form
OF; POWER TO HOLD AND TRANSMIT CHURCH of operation have no designed owner of its temporalities, although by
PROPERTIES TO His SUCCESSOR IN OFFICE.- the terms of the law it can be safely implied that they ordinarily hold
A corporation sole is a special form of corporation usually associated them in trust for the benefit of the Roman Catholic faithful of their
with the clergy * * * designed to facilitate the exercise of the functions respective locality or diocese. They can not be considered as aliens
of ownership of the church which was regarded as the property owner because they have no nationality at all. In determining, therefore,
(I Bouvier's Law Dictionary, p. 682-683). It consists of one person whether the constitutional provision requiring 60 per centum Filipino
only, and his successors (who will always be one at a time), in some capital is applicable to corporations sole, the nationality of the
particular station, who are incorporated by law in order to give them constituents of the diocese, and not the nationality of the actual
some legal capacities and advantages particularly that of perpetuity incumbent of the parish, must be taken into consideration. In the
which in their natural persons they could not have. * * * (Reid vs. present case, even if the question of nationality be considered, the
Barry, 93 Fla. 849 112 So. 846). Through this legal fiction, church aforesaid constitutional requirement is fully met and satisfied,
properties acquired by the incumbent of a corporation sole pass, by considering that the corporation sole in question is composed of an
operation of law, upon his death not to his personal heirs but to his overwhelming majority of Filipinos.
successor in office. A corporation sole, therefore, is created not only
to administer the temporalities of the church or religious society where Republic vs Villanueva 114 scra 875 ( 1982 )
he belongs, but also to hold and transmit the same to his successor in
said office. Corporations; Land Registration; Constitutional Law; A religious
corporation sole, which has no nationality, like the Iglesia ni Cnsto
2. CORPORATION SOLE; PERSONALITY OF, SEPARATE AND cannot acquire lands beyond the limits prescribed by the
DISTINCT FROM THAT OF ROMAN PONTIFF.- Constitution.—As correctly contended by the Solicitor General, the
Although a branch of the Universal Roman Catholic Apostolic Iglesia Ni Cristo, as a corporation sole or a juridical person, is
Church, every Roman Catholic Church in different countries, if it disqualified to acquire or hold alienable lands of the public domain,
exercises its mission and is lawfully incorporated in accordance with like the two lots in question, because of the constitutional prohibition
the laws of the country where it is located, is considered an entity or already mentioned and because the said church is not entitled to avail
person with all the rights and privileges granted to such artificial being itself of the benefits of section 48(b) which applies only to Filipino
under the laws of that country, separate and distinct from the citizens or natural persons. A corporation sole (an “unhappy freak of
personality of the Roman Pontiff or the Holy See, without prejudice English law”) has no nationality (Roman Catholic Apostolic Adm. of
to its religious relations with the latter which are governed by the Dayao, Inc. vs. Land Registration Commission, 102 Phil. 596. See
Cannon Law or their rules and regulations. Register of Deeds vs. Ung Siu Si Temple, 97 Phil. 58 and sec, 49 of
the Public Land Law).
3. CORPORATION SOLE; POWER AND QUALIFICATION TO Same; Same; Same; Same.—The contention in the comments, of the
PURCHASE IN ITS NAME PRIVATE LANDS; 60 PER CENTUM Iglesia Ni Cristo (its lawyer did not file any brief) that the two lots are
FILIPINO CAPITAL REQUIREMENT NOT INTENDED TO private lands, following the rule laid down in Susi vs. Razon and
CORPORATION SOLE.- Director of Lands, 48 Phil. 424, is not correct. What was considered
Under the circumstances of the present case, it is safe to state that even private land in the Susi case was a parcel of land possessed by a
before the establishment of the Philippine Commonwealth and of the Filipino citizen since time immemorial as in Cariño vs. Insular
Republic of the Philippines every corporation sole then organized and Government, 212 U.S. 449, 53 L. ed 594, 41 Phil. 935 and 7 Phil. 132.
registered had by express provision of law (Corporation Law, Public The lots sought to be registered in this case do not fall within that
Act No. 1459) the necessary power and qualification to purchase in its category. They are still public lands. A land registration proceeding
name private lands located in the territory in which it exercised its under section 48(b) “presupposes that the land is public” (Mindanao
functions or ministry and for which it was created, independently of vs. Director of Lands, L-19535, July 10, 1967, 20 SCRA 641, 644).
the nationality of its incumbent unique and single member and head, Land Registration; A petition for confirmation of title presupposes
the bishop of the diocese. It can be also maintained without fear of that the land pertains to the State.—In Uy Un vs. Perez, 71 Phil. 508,
being gainsaid that the Roman Catholic Apostolic Church in the it was noted that the right of an occupant of public agricultural land to
Philippines has no nationality and that the framers of the Constitution obtain a confirmation of his title under section 48(b) of the Public
did not have in mind the religious corporation sole when they provided Land Law is a “derecho dominical incoativo” and that before the
that 60 per centum of the capital thereof be owned by Filipino citizens. issuance of the certificate of title the occupant is not in the juridical
Thus, if this constitutional provision were not intended for corporation sense the true owner of the land since it still pertains to the State.
sole, it is obvious that this could not be regulated or restricted by said
provision. F. As to existence of shares ( sec 3 and 5 of corp code )

4. CORPORATION SOLE; CONSTITUTION REQUIREMENT Sec. 3. Classes of corporations. - Corporations formed or organized
LIMITED TO OWNERSHIP NOT TO CONTROL.- under this Code may be stock or non-stock corporations. Corporations
Both the Corporation Law and the Canon Law are explicit in their which have capital stock divided into shares and are authorized to
provisions that a corporation sole or "ordinary" is not the owner of the distribute to the holders of such shares dividends or allotments of the
properties that he may acquire but merely the administrator thereof surplus profits on the basis of the shares held are stock corporations.
and holds the same in trust for the church to which the corporation is All other corporations are non-stock corporations.
an organized and constituent part. Being mere administrator of the
temporalities or properties titled in his name, the constitutional Sec. 5. Corporators and incorporators, stockholders and
provision requiring 60 per centum Filipino ownership is not members. - Corporators are those who compose a corporation,
applicable. The said constitutional provision is limited by its terms to whether as stockholders or as members. Incorporators are those
ownership alone and does not extend stockholders or members mentioned in the articles of incorporation as
originally forming and composing the corporation and who are
5. CORPORATION SOLE; CORPORATION SOLE WITHOUT signatories thereof.
NATIONALITY; NATIONALITY OF CONSTITUENTS Corporators in a stock corporation are called stockholders or
DETERMINES WHETHER CONSTITUTIONAL REQUIREMENT shareholders. Corporators in a non-stock corporation are called
is APPLICABLE.- members.
16
that the Club is not engaged in the business of an operator of bar and
Stock restaurant.

Requisites in order to be classified as stock corporations: G. As to relationship of management and control

1. That they have a capital stock divided into shares; and Holding company
2. That they have authorized to distribute dividends or allotments
of surplus profits to its stockholders on the basis of the shares Holding companies have been defined as corporations that confine
held by each of them. their activities to owning stock in, and supervising management of
other companies. A holding company usually owns a controlling
Non Stock ( sec 87 and 88 Corp code ) interest ( More than 50% of the voting stock ) in the companies whose
stocks it holds, thus it controls the latter by the power and authority to
Non-Stock corporations primarily exist for purposes other than for elect management. As may be differentiated from investment
profit, it does not follow that they cannot make profit as an incident to companies which are active in the sale or purchase of shares of stock
their operations. But a significant distinction between stock and non- or securities, parent or holding companies have a passive portfolio and
stock corporations is that profits obtained by the latter cannot be hold the securities merely for purposes of control and management.
distributed as dividends but are used merely for the furtherance of their
purpose. Affiliate Company

Sec. 87. Definition. - For the purposes of this Code, a non-stock Affiliate are those corporations which are subject to common control
corporation is one where no part of its income is distributable as and operated as part of a system. They are sometimes called “sister
dividends to its members, trustees, or officers, subject to the companies” since the stockholdings of a corporation is not substantial
provisions of this Code on dissolution: Provided, That any profit enough to control the former.
which a non-stock corporation may obtain as an incident to its
operations shall, whenever necessary or proper, be used for the Parent and subsidiary Company
furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title. There is a parent or holding company when one corporation controls
The provisions governing stock corporation, when pertinent, shall be another corporation, or when one corporation controls several other
applicable to non-stock corporations, except as may be covered by corporations known as its subsidiaries.
specific provisions of this Title. (n)
Subsidiary corporations are those which another corporation (i.e.
Sec. 88. Purposes. - Non-stock corporations may be formed or parent) owns at least a majority of the shares, and thus have control.
organized for charitable, religious, educational, professional, cultural, In effect, it is a corporation under the control of another corporation
fraternal, literary, scientific, social, civic service, or similar purposes, which is the holding company.
like trade, industry, agricultural and like chambers, or any
combination thereof, subject to the special provisions of this Title H. Close Corporation
governing particular classes of non-stock corporations.
Close corporations – those whose shares of stock are held by limited
CIR vs Club Filipino 5 scra 321 ( 1962 ) number of persons

1. Taxation; Percentage Tax; Bar and Restaurant; When operator Definition ( Sec 96 )
not engaged in business.-
The liability for fixed and percentage taxes as provided by Sections Sec. 96. Definition and applicability of Title. - A close corporation,
182, 183 and 191 of the Tax Code does not ipso facto attach by mere within the meaning of this Code, is one whose articles of incorporation
reason of the operation of a bar and restaurant. For the liability to provide that: (1) All the corporation's issued stock of all classes,
attach, the operator thereof must be engaged in the business as a exclusive of treasury shares, shall be held of record by not more than
barkeeper and restaurateur. a specified number of persons, not exceeding twenty (20); (2) all the
issued stock of all classes shall be subject to one or more specified
2. Taxation; Words and Phrases; "Business", meaning of.- restrictions on transfer permitted by this Title; and (3) The corporation
The plain and ordinary meaning of business is restricted to activities shall not list in any stock exchange or make any public offering of any
or affairs where profit is the purpose or livelihood is the motive, and of its stock of any class. Notwithstanding the foregoing, a corporation
the term business when used without qualification, should be shall not be deemed a close corporation when at least two-thirds (2/3)
construed in its plain and ordinary meaning, restricted to activities for of its voting stock or voting rights is owned or controlled by another
profit or livelihood. corporation which is not a close corporation within the meaning of this
Code.
3. Taxation; Club Filipino, Inc. de Cebu; Not engaged in bar and
restaurant.- Any corporation may be incorporated as a close corporation, except
The Club Filipino, Inc. de Cebu was organized to develop and mining or oil companies, stock exchanges, banks, insurance
cultivate sports of all class and denomination, for the healthful companies, public utilities, educational institutions and corporations
recreation and entertainment of its stockholders and members; that declared to be vested with public interest in accordance with the
upon its dissolution, its remaining assets, after paying debts shall be provisions of this Code.
donated to a charitable Philippine Institution in Cebu; that it is The provisions of this Title shall primarily govern close corporations:
operated mainly with funds derived from membership fees and dues; Provided, That the provisions of other Titles of this Code shall apply
that the Club's bar and restaurant catered only to its members and their suppletorily except insofar as this Title otherwise provides.
guests; that there was in fact no cash dividend distribution to its
stockholders and that whatever was derived on retail from its bar and Articles of Incorporation Requirements - Sec 97
restaurant was used to defray its overall overhead expenses and to
improve its golf course (cost-plus-expenses-basis), it stands to reason
17
Sec. 97. Articles of incorporation. - The articles of incorporation of Sec. 99. Effects of issuance or transfer of stock in breach of
a close corporation may provide: qualifying conditions. -

1. For a classification of shares or rights and the qualifications for 1. If stock of a close corporation is issued or transferred to any
owning or holding the same and restrictions on their transfers as person who is not entitled under any provision of the articles of
may be stated therein, subject to the provisions of the following incorporation to be a holder of record of its stock, and if the
section; certificate for such stock conspicuously shows the qualifications
2. For a classification of directors into one or more classes, each of of the persons entitled to be holders of record thereof, such person
whom may be voted for and elected solely by a particular class of is conclusively presumed to have notice of the fact of his
stock; and ineligibility to be a stockholder.
3. For a greater quorum or voting requirements in meetings of 2. If the articles of incorporation of a close corporation states the
stockholders or directors than those provided in this Code. number of persons, not exceeding twenty (20), who are entitled to
be holders of record of its stock, and if the certificate for such
The articles of incorporation of a close corporation may provide that stock conspicuously states such number, and if the issuance or
the business of the corporation shall be managed by the stockholders transfer of stock to any person would cause the stock to be held
of the corporation rather than by a board of directors. So long as this by more than such number of persons, the person to whom such
provision continues in effect: stock is issued or transferred is conclusively presumed to have
1. No meeting of stockholders need be called to elect directors; notice of this fact.
2. Unless the context clearly requires otherwise, the stockholders of 3. If a stock certificate of any close corporation conspicuously shows
the corporation shall be deemed to be directors for the purpose of a restriction on transfer of stock of the corporation, the transferee
applying the provisions of this Code; and of the stock is conclusively presumed to have notice of the fact
3. The stockholders of the corporation shall be subject to all that he has acquired stock in violation of the restriction, if such
liabilities of directors. acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has
The articles of incorporation may likewise provide that all officers or been issued or transferred has, or is conclusively presumed under
employees or that specified officers or employees shall be elected or this section to have, notice either (a) that he is a person not eligible
appointed by the stockholders, instead of by the board of directors. to be a holder of stock of the corporation, or (b) that transfer of
stock to him would cause the stock of the corporation to be held
Pre-emptive rights - Sec 102 by more than the number of persons permitted by its articles of
incorporation to hold stock of the corporation, or (c) that the
Preemptive right.A shareholder's privilege to purchase newly issued transfer of stock is in violation of a restriction on transfer of stock,
stock — before the shares are offered to the public — in an amount the corporation may, at its option, refuse to register the transfer of
proportionate to the shareholder's current holdings in order to prevent stock in the name of the transferee.
dilution of the shareholder's ownership interest. 5. The provisions of subsection (4) shall not applicable if the transfer
of stock, though contrary to subsections (1), (2) of (3), has been
Sec. 102. Pre-emptive right in close corporations. - The pre- consented to by all the stockholders of the close corporation, or if
emptive right of stockholders in close corporations shall extend to all the close corporation has amended its articles of incorporation in
stock to be issued, including reissuance of treasury shares, whether for accordance with this Title.
money, property or personal services, or in payment of corporate 6. The term "transfer", as used in this section, is not limited to a
debts, unless the articles of incorporation provide otherwise. transfer for value.
7. The provisions of this section shall not impair any right which the
Amendment Sec 103 transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.
Sec. 103. Amendment of articles of incorporation. - Any
amendment to the articles of incorporation which seeks to delete or Agreement by SH - sec 100
remove any provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or voting requirement Sec. 100. Agreements by stockholders. -
stated in said articles of incorporation shall not be valid or effective 1. Agreements by and among stockholders executed before the
unless approved by the affirmative vote of at least two-thirds (2/3) of formation and organization of a close corporation, signed by all
the outstanding capital stock, whether with or without voting rights, stockholders, shall survive the incorporation of such corporation
or of such greater proportion of shares as may be specifically provided and shall continue to be valid and binding between and among
in the articles of incorporation for amending, deleting or removing any such stockholders, if such be their intent, to the extent that such
of the aforesaid provisions, at a meeting duly called for the purpose. agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are
Restriction on Transfer of Shares - sec 98,99 contained, except those required by this Title to be embodied in
said articles of incorporation.
Sec. 98. Validity of restrictions on transfer of shares. - Restrictions 2. An agreement between two or more stockholders, if in writing and
on the right to transfer shares must appear in the articles of signed by the parties thereto, may provide that in exercising any
incorporation and in the by-laws as well as in the certificate of stock; voting rights, the shares held by them shall be voted as therein
otherwise, the same shall not be binding on any purchaser thereof in provided, or as they may agree, or as determined in accordance
good faith. Said restrictions shall not be more onerous than granting with a procedure agreed upon by them.
the existing stockholders or the corporation the option to purchase the 3. No provision in any written agreement signed by the stockholders,
shares of the transferring stockholder with such reasonable terms, relating to any phase of the corporate affairs, shall be invalidated
conditions or period stated therein. If upon the expiration of said as between the parties on the ground that its effect is to make them
period, the existing stockholders or the corporation fails to exercise partners among themselves.
the option to purchase, the transferring stockholder may sell his shares 4. A written agreement among some or all of the stockholders in a
to any third person. close corporation shall not be invalidated on the ground that it so
relates to the conduct of the business and affairs of the corporation
18
as to restrict or interfere with the discretion or powers of the board 3. Civil Law; Sale; The mere execution of the deed of sale in a public
of directors: Provided, That such agreement shall impose on the document is equivalent to the delivery of the property; Prior physical
stockholders who are parties thereto the liabilities for managerial delivery or possession not legally required.-
acts imposed by this Code on directors. Under the aforementioned article, the mere execution of the deed of
5. To the extent that the stockholders are actively engaged in the sale in a public document is equivalent to the delivery of the property.
management or operation of the business and affairs of a close x x x x x x Therefore, prior physical delivery or possession is not
corporation, the stockholders shall be held to strict fiduciary duties legally required since the execution of the Deed of Sale is deemed
to each other and among themselves. Said stockholders shall be equivalent to delivery.
personally liable for corporate torts unless the corporation has
obtained reasonably adequate liability insurance. Deadlocks Sec 104

No Necessity of Board - sec 101 Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the
articles of incorporation or by-laws or agreement of stockholders of a
Sec. 101. When board meeting is unnecessary or improperly close corporation, if the directors or stockholders are so divided
held. - Unless the by-laws provide otherwise, any action by the respecting the management of the corporation's business and affairs
directors of a close corporation without a meeting shall nevertheless that the votes required for any corporate action cannot be obtained,
be deemed valid if: with the consequence that the business and affairs of the corporation
1. Before or after such action is taken, written consent thereto is can no longer be conducted to the advantage of the stockholders
signed by all the directors; or generally, the Securities and Exchange Commission, upon written
2. All the stockholders have actual or implied knowledge of the petition by any stockholder, shall have the power to arbitrate the
action and make no prompt objection thereto in writing; or dispute. In the exercise of such power, the Commission shall have
3. The directors are accustomed to take informal action with the authority to make such order as it deems appropriate, including an
express or implied acquiescence of all the stockholders; or order: (1) canceling or altering any provision contained in the articles
4. All the directors have express or implied knowledge of the action of incorporation, by-laws, or any stockholder's agreement; (2)
in question and none of them makes prompt objection thereto in canceling, altering or enjoining any resolution or act of the corporation
writing. or its board of directors, stockholders, or officers; (3) directing or
prohibiting any act of the corporation or its board of directors,
If a director's meeting is held without proper call or notice, an action stockholders, officers, or other persons party to the action; (4)
taken therein within the corporate powers is deemed ratified by a requiring the purchase at their fair value of shares of any stockholder,
director who failed to attend, unless he promptly files his written either by the corporation regardless of the availability of unrestricted
objection with the secretary of the corporation after having knowledge retained earnings in its books, or by the other stockholders; (5)
thereof. appointing a provisional director; (6) dissolving the corporation; or (7)
granting such other relief as the circumstances may warrant.
Dulay enterprise, Incs. vs CA GR 91889 1993 A provisional director shall be an impartial person who is neither a
stockholder nor a creditor of the corporation or of any subsidiary or
1. Corporation Law; Petitioner corporation is classified as a close affiliate of the corporation, and whose further qualifications, if any,
corporation and consequently a board resolution authorizing the sale may be determined by the Commission. A provisional director is not
or mortgage of the subject property is not necessary to bind the a receiver of the corporation and does not have the title and powers of
Corporation for the action of its President.- a custodian or receiver. A provisional director shall have all the rights
In the instant case, petitioner corporation is classified as a close and powers of a duly elected director of the corporation, including the
corporation and consequently a board resolution authorizing the sale right to notice of and to vote at meetings of directors, until such time
or mortgage of the subject property is not necessary to bind the as he shall be removed by order of the Commission or by all the
corporation for the action of its president. At any rate, a corporate stockholders. His compensation shall be determined by agreement
action taken at a board meeting without proper call or notice in a close between him and the corporation subject to approval of the
corporation is deemed ratified by the absent director unless the latter Commission, which may fix his compensation in the absence of
promptly files his written objection with the secretary of the agreement or in the event of disagreement between the provisional
corporation after having knowledge of the meeting which, in this case, director and the corporation.
petitioner Virgilio Dulay failed to do.
Withdrawal and Dissolution - sec 105
2. Corporation Law; Piercing the veil of corporate fiction; When
the corporation is used merely as an alter ego or business conduit of a Sec. 105. Withdrawal of stockholder or dissolution of
person, the law will regard the corporation as the act of that person.- corporation. - In addition and without prejudice to other rights and
It is relevant to note that although a corporation is an entity which has remedies available to a stockholder under this Title, any stockholder
a personality distinct and separate from its individual stockholders or of a close corporation may, for any reason, compel the said
members, the veil of corporate fiction may be pierced when it is used corporation to purchase his shares at their fair value, which shall not
to defeat public convenience, justify wrong, protect fraud or defend be less than their par or issued value, when the corporation has
crime. The privilege of being treated as an entity distinct and separate sufficient assets in its books to cover its debts and liabilities exclusive
from its stockholders or members is therefore confined to its of capital stock: Provided, That any stockholder of a close corporation
legitimate uses and is subject to certain limitations to prevent the may, by written petition to the Securities and Exchange Commission,
commission of fraud or other illegal or unfair act. When the compel the dissolution of such corporation whenever any of acts of
corporation is used merely as an alter ego or business conduit of a the directors, officers or those in control of the corporation is illegal,
person, the law will regard the corporation as the act of that person. or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the
The Supreme Court had repeatedly disregarded the separate corporation or any stockholder, or whenever corporate assets are being
personality of the corporation where the corporate entity was used to misapplied or wasted.
annul a valid contract executed by one of its members.
Financing Corp vs Teodoro 93 phil 678

19
1. Corporations ; Involuntarily Dissolution ; Petition Therefore by all of the other subscribers consent to the revocation, or unless the
Minonrity Stockholders.- incorporation of said corporation fails to materialize within said period
—Although as a rule minority stock- holders of a corporation may not or within a longer period as may be stipulated in the contract of
ask for its dissolution in a private suit and such action should be subscription: Provided, That no pre-incorporation subscription may be
brought by the Govern- ment through its legal officer in a quo revoked after the submission of the articles of incorporation to the
warranto case at their instance and request, there might be exceptional Securities and Exchange Commission. (n)
cases wherein the intervention of the State, for one reason or another,
cannot be obtained, as when the State, is not interested because the Cagayan Fishing Development vs Sandiko 65 phil 223 1937
complaint is strictly a matter between the stockholders and does not
involve, in the opinion of the legal officer of the Government, any of 1. CORPORATIONS; TRANSFER MADE TO A NON-
the acts or omissions warranting quo warranto proceedings in which EXISTENT CORPORATION; JURIDICAL CAPACITY TO
minority stockholders are entitled to have such dissolution. When such ENTER INTO A CONTRACT.-
action or private suit is brought by them, the trial court has jurisdiction The transfer made by T to the C, F. D. Co,, Inc., was effected on May
and may or may not grant the prayer, depending upon the facts and 31, 1930 and the actual incorporation of said company was effected
circumstances attending it. (Hall et al. vs. Judge Piccio, 47 Off. Gaz., later on October 22, 1930. In other words, the transfer wasmade almost
supp. 12, p. 200.) five months before the incorporation of the company. Unquestionably,
a duly organized corporation has the power to purchase and hold such
2. Id.; Id; Receiver for Corporation "Pendente Lite".- real property as the purposes for which such corporation was formed
—Action having been properly brought and the trial court having may permit and for this purpose may enter into such contracts as may
entertained the same, it is within the power of said court upon proper be necessary. But before a corporation may be said to be lawfully
showing to appoint a receiver pendente lite for the corporation. organized, many things have to be done. Among other things, the law
Although the appointment of a receiver upon application of the requires the filing of articles of incorporation. Although there is a
minority stockholders is a power to be exercised with great caution, presumption that all the requirements of law have been complied with
nevertheless it should be exercised when necessary in order not to in the case before us it can not be denied that the plaintiff was not yet
entirely ignore and disregard the rights of said minority stockholders, incorporated when it entered into the contract of sale. The contract
especially when said minority stockholders are unable to obtain itself referred to the plaintiff as "una sociedad en vías de
redress and protection of their rights within the corporation itself. incorporación." It was not even a de facto corporation at the time. Not
(Angeles vs. Santos, 64 Phil., 697.) being in legal existence then, it did not possess juridical capacity to
enter into the contract.
B. Formation of the Corporation:
2. CORPORATIONS; TRANSFER MADE TO A NON-
Stages in the life of a corporation: EXISTENT CORPORATION; ID.-
Corporations are creatures of the law, and can only come into
1. Creation existence in the manner prescribed by law. General laws authorizing
2. Reorganization or quasi-reorganization the formation of corporations are general offers to any persons who
3. Dissolution and winding up may bring themselves within their provisions; and if conditions
precedent are prescribed in the statute, or certain acts are required to
Steps in creation: be done, they are terms of the offer, and must be complied with
1. Promotional stage substantially before legal corporate existence can be acquired. That a
2. Process of incorporation corporation should have a full and complete organization and
3. Organization and commencement of business existence as an entity before it can enter into any kind' of a contract or
transact any business, would seem to be self-evident.
A. Organizing the Corporation
3. CORPORATIONS; TRANSFER MADE TO A NON-
Promoters ( Sec 2(r) BP 178, Sec 60, 61 Corp Code ) EXISTENT CORPORATION; ID.-
A corporation, until organized, has no life and, therefore, no faculties.
(r) "Promoter" includes (1) any person who, acting alone or in It is, as it were, a child in ventre sa mere. This is not saying that under
conjunction with one or more other persons, directly or indirectly, no circumstances may the acts of promoters of a corporation be
takes initiative in founding and organizing the business or enterprise ratified by the corporation if and when subsequently organized. There
of an issuer; or (2) any person who, in connection with the founding are, of course, exceptions, but under the peculiar facts and
and organizing of the business of an issuer, directly or indirectly, circumstances of the present case the doctrine of ratification should
receives in consideration of services or property or both services or not be extended because to do so would result in injustice or fraud to
property ten (10%) per centum or more of any class of securities of the candid and unwary.
the issuer or ten (10%) per centum or more of the proceeds from the
sale of any class of such securities. However, a person who receives Rizal Light & Ice Co. vs Municipality 25 scra 285 1968
such securities or proceeds either solely as underwriting commissions
or solely as consideration of property shall not be deemed a promoter 1. Public Service Commission; Hearing; Delegation of authority
within the meaning of this paragraph if such person does not otherwise to hear a, case; Who may be authorized to hear and investigate a
take part in founding and organizing the enterprise. case filed before it; Effect of failure to interpose objection to illegal
delegation of authority to hear; Case at bar.-
Sec. 60. Subscription contract. - Any contract for the acquisition of The Public Service Commission can only authorize a division chief to
unissued stock in an existing corporation or a corporation still to be hear and investigate a case filed before it if he is a lawyer (Sec. 32,
formed shall be deemed a subscription within the meaning of this par. 2, Commonwealth Act No. 146, as amended). Objection to the
Title, notwithstanding the fact that the parties refer to it as a purchase delegation of authority to hear a case filed before the Commission and
or some other contract. (n) to receive the evidence in connection therewith is a procedural, not a
Sec. 61. Pre-incorporation subscription. - A subscription for shares jurisdictional point, and is waived by failure to interpose timely the
of stock of a corporation still to be formed shall be irrevocable for a objection and the case had been decided by the Commission. Since
period of at least six (6) months from the date of subscription, unless petitioner in the case at bar has never raised any objection to the
20
authority of Mr. Pedro Talavera (a division chief—but not a lawyer) 1. Corporation Law; A bona fide corporation should alone be liable
to conduct the hearing before the Commission, it should be deemed to for its corporate acts duly authorized by its officers and directors.-
have waived such procedural defect, and petitioner's claim that the Significantly, there was no showing that the Filipinas Orient Airways
Commission acted without or in excess of jurisdiction in so was a fictitious corporation and did not have a separate juridical
authorizing Mr. Talavera should be dismissed. personality, to justify making the petitioners, as principal stockholders
thereof, responsible for its obligations. As a bona fide corporation, the
2. Public Service Commission; Review of decision of the Public Filipinas Orient Airways should alone be liable for its corporate acts
Service Commission; Function of Supreme Court in reviewing a as duly authorized by its officers and directors.
decision of the Public Service Commission.-
Settled is the rule that in reviewing the decision of the Public Service 2. Corporation Law; Contracts; Liability of
Commission the Supreme Court is not required to examine the proof stockholders; Petitioners cannot be held personally liable for the
de novo and determine for itself whether or not the preponderance of compensation claimed by private respondent for services performed
evidence really justifies the decision. The only function of this Court by him in the organization of the corporation since petitioners did not
is to determine whether or not there is evidence before the contract such services.-
Commission upon which its decision might reasonably be based. The In the light of these circumstances, we hold that the petitioners cannot
Supreme Court will not substitute its descretion for that of the be held personally liable for the compensation claimed by the private
Commission on questions of fact and will not interfere in the latter's respondent for the services performed by him in the organization of
decision unless it clearly appears that there is no evidence to support the corporation. To repeat, the petitioners did not contract such
it (citing cases). The evidence that should be made the basis of the services, It was only the results of such services that Barretto and
Supreme Court's determination should be only those presented in the Garcia presented to them and which persuaded them to invest in the
case before the Commission. proposed airline. The most that can be said is that they benefited from
such services, but that surely is no justification to hold them personally
3. Public Service Commission; "Protection-of-investment liable therefor. Otherwise, all the other stockholders of the
rule"; When not applicable; Paramount consideration in the corporation, including those who came in later, and regardless of the
grant of certificate of public convenience; To whom duty to protect amount of their shareholdings, would be equally and personally liable
investment of a public utility operator refers.- also with the petitioners for the claims of the private respondent.
The "protection-of-investment rule" was enunciated in Batangas
Transportation Co. v. Orlanes. 52 Phil. 455, in this wise: Subscription Contracts - Sec 60, 72 of Corp Code

4. Same; Cancellation and revocation of certificate of public Sec. 60. Subscription contract. - Any contract for the acquisition of
convenience; Circumstances that warranted the imposition of both a unissued stock in an existing corporation or a corporation still to be
fine and a revocation of certificate of public convenience.- formed shall be deemed a subscription within the meaning of this
Section 16 (n) of Commonwealth Act No. 146, as amended, confers Title, notwithstanding the fact that the parties refer to it as a purchase
upon the Commission ample power and discretion to order the or some other contract. (n)
cancellation and revocation of any certificate of public convenience
issued to an operator who has violated, or has willfully and Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not
contumaciously refused to comply with, any order, rule or regulation fully paid which are not delinquent shall have all the rights of a
of the Commission or any provision of law. What matters is that there stockholder. (n)
is evidence to support the action of the Commission. Where the
evidence shows: (a) a contumacious refusal of the petitioner since Trillana vs Quezon College, 93 phil 383
1954 to comply with the directives, rules and regulations of the
Commission; (b) a violation of the conditions of the certificate of 1. Obligations and Contracts Stock Subscription; Offer and
public convenience; and (c) municipality to comply with commitment Acceptance, Facultative Condition,-
as shown by inadequate service, such circumstances warranted the —As the appellant offered its stock for subscription on the term stated
action of the Commission in not merely imposing a fine but in in a form letter, and D. C. applied for subscription fixing her own plan
revoking altogether petitioner's certificate. of payment, the relation, in the absence of acceptance by the appellant
of the counter offer of D.C., had not ripened into an enforceable
5. Same; Requisites for the grant of certificate of public convenience.- contract. There was imperative need for express acceptance on
Before any certificate of public convenience may be granted, three appellant's part, because the proposal of D. C. to pay the value of the
requisites must be complied with, namely: (1) the applicant must be a subscription after she had harvested fish, was a condition obviously
citizen of the Philippines or of the United States, or a corporation or dependent upon her sole will and, therefore, facultative in nature,
co-partnership, association or jointstock company constituted and rendering the obligation void under article 1115 of the old Civil Code.
organized under the laws of the Philippines, sixty per centum at least
of the stock or paid-up capital of which belongs entirely to citizens of 1. Purchase agreement
the Philippines or of the United States; (2) the applicant must be Bayla vs Silang Traffic, Co., 73 Phil 557 1942
financially capable of undertaking the proposed service and meeting
the responsibilities incident to its operation; and (3) the applicant must 1. Corporations; Distinction between Subscription to Capital Stock
prove that the operation of the public service proposed and the and Contract of Sale of Shares of Stock.-
authorization to do business will promote the public interest in a —Eight years after the corporation was organized, it entered into an
proper and suitable manner. "agreement for instalment sale" of its shares of stock with various
individuals. After the latter had paid several instalments on account of
6. Same; Efficacy of a franchise.- the purchase price agreed upon, and upon default in the payment of
A franchise takes effect upon its approval by the Public Service the succeeding intalment, the board of directors of the corporation
Commission (Almendras v. Ramos, 90 Phil. 231). passed a resolution authorizing the refund of the amounts paid and the
reversion of the shares of stock to the corporation. Held: That such
Caram, Jr. vs CA 151 scra 372 1987 resolution is valid because the contract was not one of subscription but
of purchase and sale. In some particulars, the rules governing
subscriptions and and sales of shares are different. For instance, the
21
provisions of our Corporation Law regarding calls for unpaid A corporation has no legal capacity to release a subscriber to its capital
subscriptions and assessment of stock (sections 37-60) do not apply to stock from the obligation to pay for his shares; and any agreement to
a purchase of stock. Likewise the rule that the corporation has no legal this effect is invalid.
capacity to release an original subscriber to its capital stock from the
obligation to pay for his shares, is inapplicable to a contract of PNB vs Bitulok sawmill, Inc., 23 scra 1366
purchase of shares.
1. Corporation law; Subscription; An assignee in insolvency can
2. Obligations and Contracts; Necessity of Demand upon Default as maintain an action upon any unpaid stock subscription in order to
Requisite to Forfeiture.+ realize assets for the payment of its debts.-
It is an established doctrine that subscriptions to the capital of a
3. Id.; Id.- corporation constitute a fund to which creditors have a right to look
—Whether a particular contract is a subscription or a sale of stock is for satisfaction of their claims and that the assignee in insolvency can
a matter of construction and depends upon its terms and the intention maintain an action upon any unpaid stock subscription in order to
of the parties. In Salmon, Dexter & Co. vs. Unson, 47 Phil. 649, it was realize assets for the payment of its debts (Phil. Trust Co. v. Rivera,
held that a subscription to stock in an existing corporation is, as 44 Phil. 469).
between the subscriber and the corporation, simply a contract of
purchase and sale. A subscription, properly speaking, is the mutual 2. Corporation law; A corporation has no power to release an
agreement of the subscribers to take and pay for the stock of a original subscriber from paying for his shares; Exception.-
corporation, while a purchase is an independent agreement between A corporation has no power to release an original subscriber to its
the individual and the corporation to buy shares of stock from it at a capital stock from the obligation of paying for his shares, without a
stipulated price. valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and
2. Pre-Incorporation Subscription Sec 61 under the conditions prescribed by the statute or the charter or the
articles of incorporation (Velasco v. Poizat, 37 Phil. 802).
Sec. 61. Pre-incorporation subscription. - A subscription for shares
of stock of a corporation still to be formed shall be irrevocable for a 3. Constitutional law; Executive Department; A Chief Executive
period of at least six (6) months from the date of subscription, unless has na prerogative of suspending the operation of any statute, or any
all of the other subscribers consent to the revocation, or unless the of its terms.-
incorporation of said corporation fails to materialize within said period It is a well-settled principle that with all the vast powers lodged in the
or within a longer period as may be stipulated in the contract of Chief Executive, he is still devoid of the prerogative of suspending the
subscription: Provided, That no pre-incorporation subscription may be operation of any statute or any of its terms. The power of suspending
revoked after the submission of the articles of incorporation to the the laws, or the execution of the laws, ought never to be exercised but
Securities and Exchange Commission. (n) by the legislature, or by authority derived from it, to be exercised in
such particular cases only as the legislature shall expressly provide
Offer theory for. Nor could it be otherwise considering that the Constitution
specifically enjoins the President to see to it that all laws be faithfully
Contract Theory executed.

3.Release from Subscription obligation B. Formalities in Organizing


Velasco vs poizat 37 phil 802
a. Generally
1. CORPORATIONS; SUBSCRIPTION TO CAPITAL STOCK.-
A stock subscription is a contract between the corporation and the Govt of the PI vs Manila Railroad, 103 Phil 757 1929 ( di ko
subscriber, and courts will enforce it for or against either. No express makita case )
promise to pay is necessary to make the subscriber liable. MANUELA T. VDA. DE SALVATIERRA, petitioner, vs. HON.
LORENZO C. GARLITOS
2. CORPORATIONS; REMEDIES FOR ENFORCEMENT OF
SUBSCRIPTION FOR STOCK.- 1. PLEADING AND PRACTICE; PETITION FOR
The corporation has two remedies against the subscriber to the RELIEF; WHEN TO FILE PETITION.-
corporate shares, namely (1) to sell the stock for the account of the Rule 38, Section 3, of the Rules of Court treats of 2 periods within
delinquent subscriber, and (2) to bring a legal action against him for which a petition for relief may be filed. The petition must be filed
the amount due. within 60 days after the petitioner learns of the judgment and not more
than 6 months after the judgment or order was rendered, both of which
3. CORPORATIONS; ACTION TO RECOVER STOCK must be satisfied.
SUBSCRIPTION.-
The provisions of sections 38 to 48, inclusive, of the Corporation Law 2. CORPORATION LAW; LlABILITY OF PERSON DEALING
are applicable only where the directors of a corporation intend to WITH ASSOCIATION AS A CORPORATE BODY; WHEN
subject the stock of the delinquent subscriber to sale in order to enforce ESTOPPEL MAY NOT BE INVOKED.-
payment of the subscription. They have no application in case a legal While as a general rule, a person who deals with an association in such
action is brought to recover upon the stock subscription. a way to recognize its existence as a corporate body is estopped from
denying the same in an action arising out of such transaction, yet this
4. CORPORATIONS; INSOLVENCY OF CORPORATION.- doctrine may not be held to be applicable where fraud takes a part in
When insolvency supervenes upon a corporation and the court the said transaction. In the instant case, on plaintiff's charge that she
assumes jurisdiction to wind it up, unpaid stock subscriptions become was unaware of the fact that the defendant corporation had no juridical
payable on demand, and are at once recoverable in an action instituted personality, its president gave no confirmation or denial of the same
by the assignee in insolvency. and the circumstance surrounding the execution of the contract lead to
the inescapable conclusion that plaintiff was really made to believe
5. CORPORATIONS; RELEASE OF SUBSCRIBER.- that such corporation was duly organized in accordance with law.
22
duly signed and acknowledged by all of the incorporators, containing
3. CORPORATION LAW; LIABILITY OF MEMBERS WHO substantially the following matters, except as otherwise prescribed by
ACT AS AGENTS OF AN UNINCORPORATED ASSOCIATION.- this Code or by special law:
A corporation when registered has a juridical personality separate and 1. The name of the corporation;
distinct from its component members or stockholders and officers, 2. The specific purpose or purposes for which the corporation is
such that a corporation cannot be held liable for the personal being incorporated. Where a corporation has more than one stated
indebtedness of a stockholder even if he should be its president purpose, the articles of incorporation shall state which is the
(Walter A. Smith Co. vs. Ford, SC-G. R. No. 42420) and conversely, primary purpose and which is/are he secondary purpose or
a stockholder cannot be held personally liable for any financial purposes: Provided, That a non-stock corporation may not include
obligation by the corporation in excess of his unpaid subscription. But a purpose which would change or contradict its nature as such;
this rule is understood to refer merely to registered corporations and 3. The place where the principal office of the corporation is to be
cannot be made applicable to the liability of members of an located, which must be within the Philippines;
unincorporated association. The reason behind this doctrine is 4. The term for which the corporation is to exist;
obvious—an unincorporated association has no personality and would 5. The names, nationalities and residences of the incorporators;
be incompetent to act and appropriate for itself the power and 6. The number of directors or trustees, which shall not be less than
attributes of a corporation as provided by law, it cannot create agents five (5) nor more than fifteen (15);
or confer authority on another to act in its behalf; thus, those who act 7. The names, nationalities and residences of persons who shall act
or purport to act as its representatives or agents do so without authority as directors or trustees until the first regular directors or trustees
and at their own risk. And as it is an elementary principle of law that are duly elected and qualified in accordance with this Code;
a person who acts as an agent without authority or without a principal 8. If it be a stock corporation, the amount of its authorized capital
is himself regarded as the principal, possessed of all the right and stock in lawful money of the Philippines, the number of shares
subject to all the liabilities of a principal, a person acting or purporting into which it is divided, and in case the share are par value shares,
to act on behalf of a corporation which has no valid existence assumes the par value of each, the names, nationalities and residences of
such privileges and obligations and becomes personally liable for the original subscribers, and the amount subscribed and paid by
contracts entered into or for other acts performed as such agent (Fay each on his subscription, and if some or all of the shares are
vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial without par value, such fact must be stated;
Laws of the Philippines, Fifth Ed., p. 689-690). 9. If it be a non-stock corporation, the amount of its capital, the
names, nationalities and residences of the contributors and the
Rural Bank of Salinas vs CA 210 scra 510 1992 amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the
1. Corporation Law; Securities and Exchange incorporators may deem necessary and convenient.
Commission; Section 5 (b) of P.D. No. 902-A grants to the SEC the
original and exclusive jurisdiction to hear and decide cases involving The Securities and Exchange Commission shall not accept the articles
intracorporate controversies; Intracorporate controversy defined.- of incorporation of any stock corporation unless accompanied by a
Section 5 (b) of P.D. No. 902-A grants to the SEC the original and sworn statement of the Treasurer elected by the subscribers showing
exclusive jurisdiction to hear and decide cases involving that at least twenty-five (25%) percent of the authorized capital stock
intracorporate controversies. An intracorporate controversy has been of the corporation has been subscribed, and at least twenty-five (25%)
defined as one which arises between a stockholder and the of the total subscription has been fully paid to him in actual cash
corporation. There is no distinction, qualification, nor any exception and/or in property the fair valuation of which is equal to at least
whatsoever. twenty-five (25%) percent of the said subscription, such paid-up
capital being not less than five thousand (P5,000.00) pesos.
2. Corporation Law; A corporation cannot create restrictions in
stock transfer.- Sec. 15. Forms of Articles of Incorporation. - Unless otherwise
A corporation, either by its board, its by-laws, or the act of its officers, prescribed by special law, articles of incorporation of all domestic
cannot create restrictions in stock transfers. corporations shall comply substantially with the following form:

3. Corporation Law; The right of a transferee/assignee to have stocks As to corporate name - sec 18
transferred to his name an inherent right.-
The right of a transferee/ assignee to have stocks transferred to his Sec. 18. Corporate name. - No corporate name may be allowed by
name is an inherent right flowing from his ownership of the stocks. the Securities and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing
4. Corporation Law; Corporation’s obligation to register is corporation or to any other name already protected by law or is
ministerial.- patently deceptive, confusing or contrary to existing laws. When a
The corporation’s obligation to register is ministerial. “In transferring change in the corporate name is approved, the Commission shall issue
stock, the secretary of a corporation acts in purely ministerial capacity, an amended certificate of incorporation under the amended name.
and does not try to decide the question of ownership.” “The duty of
the corporation to transfer is a ministerial one and if it refuses to make Red line Transit vs Rural Transit, 60 Phil 549 1934
such transaction without good cause, it may be compelled to do so by
mandamus.” 1. PUBLIC SERVICE ; AUTHORITY OP PUBLIC SERVICE
COMMISSION TO AUTHORIZE A CORPORATION TO ASSUME
B. Articles of Incorporation THE NAME OF ANOTHER.-
There is no law that empowers the Public Service Commission or any
1.Procedure and Documentary Requirements court in this jurisdiction to authorize one corporation to assume the
as to contents and forms - sec 14,15 name of another corporation as a trade name. Both the Rural Transit
Company, Ltd., and the Bachrach Motor Co., Inc., are Philippine
Sec. 14. Contents of the articles of incorporation. - All corporations corporations and the very law of their creation and continued existence
organized under this code shall file with the Securities and Exchange requires each to adopt and certify a distinctive name.
Commission articles of incorporation in any of the official languages 2. PUBLIC SERVICE ; CHANGE OP CORPORATION'S NAME.-
23
The incorporators "constitute a body politic and corporate under the manufacture, dyeing and selling of fabrics of all kinds in which the
name stated in the certificate." (Section 11, Act No. 1459, as latter had been engaged for more than a decade ahead of the
amended.) A corporation has the power "of succession by its corporate petitioner.-
name." (Section 13, ttrid.) The name of a corporation is therefore The corporate names in question are not identical, but they are
essential to its existence. It cannot change its name except in the indisputably so similar that even under the test of “reasonable care and
manner provided by the statute. By that name alone is it authorized to observation as the public generally are capable of using and may be
transact business. expected to exercise” invoked by appellant We are apprehensive
confusion will usually arise, considering that under the second
3. PUBLIC SERVICE ; ID.- amendment of its articles of incorporation of August 14, 1964,
The law gives a corporation no express or implied authority to assume appellant included among its primary purposes the “manufacturing,
another name that is unappropriated; still less that of another dyeing, finishing and selling of fabrics of all kinds” in which
corporation, which is expressly set apart for it and protected by the respondent had been engaged for more than a decade ahead of
law. If any corporation could assume at pleasure as an unregistered petitioner. Factually, the Commission found existence of such
trade name the name of another corporation, this practice would result confusion, and there is evidence to support its conclusion. Since
in confusion and open the door to frauds and evasions and difficulties respondent is not claiming damages in this proceeding, it is, of course
of administration and supervision. immaterial whether or not appellant has acted in good faith, but We
cannot perceive why of all names, it had to choose a name already
4. PUBLIC SERVICE ; POLICY OP THE LAW.- being used by another firm engaged in practically the same business
The policy of the law as expressed in our corporation statute and the for more than a decade enjoying well earned patronage and goodwill,
Code of Commerce is clearly against such a practice. (Cf. Scarsdale when there are so many other appropriate names it could possibly
Pub. Co.Colonial Press vs. Carter, 116 New York Supplement, 731; adopt without arousing any suspicion as to its motive and, more
Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois [Appellate importantly, any degree of confusion in the mind of the public which
Courts], 428, 434.) could mislead even its own customers, existing or prospective.

Philippine Insurance vs Hartigan, 34 scra 252 1970 Ang mga kaanib sa Iglesia ng Dios kay kristo hesus vs Iglesia ng
Diyos kay kristo hesus, GR 137592, 21 December 2001
1. Corporation law; Corporations; Change of name; Corporation
may change its name.- 1. Legal Ethics; Attorneys; Due Process; The negligence of counsel
There is nothing in Section 18 of the Corporation Law which prohibits binds the client, except where the reckless or gross negligence of the
a corporation from changing its name. The inference is clear that such counsel deprives the client of due process of law.-
a change is allowed, for if the legislature had intended to enjoin As a general rule, the negligence of counsel binds the client. This is
corporations from changing names, it would have expressly stated so based on the rule that any act performed by a lawyer within the scope
in this section or in any other provision of the law. of his general or implied authority is regarded as an act of his client.
An exception to the foregoing is where the reckless or gross
2. Corporation law; Corporations; Change of name; How change negligence of the counsel deprives the client of due process of law.
of name may be effected.- Said exception, however, does not obtain in the present case.
A corporation may change its name by merely amending its charter in
the manner prescribed by law. 2. Corporation Law; Actions; Prescription; The failure of a party
to raise prescription before the Securities and Exchange Commission
3. Corporation law; Corporations; Change of name; Change of can only be construed as a waiver of that defense.-
name does not dissolve corporation.- Likewise, the issue of prescription, which petitioner raised for the first
The change of name of a corporation does not result in its dissolution. time on appeal to the Court of Appeals, is untenable. Its failure to raise
The changing of the name of a corporation is no more the creation of prescription before the SEC can only be construed as a waiver of that
a corporation than the changing of the name of a natural person is the defense. At any rate, the SEC has the authority to de-register at all
begetting of a natural person. The act, in both cases, would seem to be times and under all circumstances corporate names which in its
what the language which we use to designate it imports—a change of estimation are likely to spawn confusion. It is the duty of the SEC to
name and not a change of being. prevent confusion in the use of corporate names not only for the
4. Corporation law; Corporations; Change of name; When change protection of the corporations involved but more so for the protection
of corporate name is effective.- of the public.
The approval by the stockholders of the amendment of the articles of
incorporation changing the corporate name does not automatically 3. Corporation Law; Corporate Names; Parties organizing a
change the name of the corporation as of that date. To be effective, corporation must choose a name at their peril.-
Section 18 of the Corporation Law requires that a copy of the articles Parties organizing a corporation must choose a name at their peril; and
of incorporation as amended, duly certified to be correct by the the use of a name similar to one adopted by another corporation,
president and the secretary of the corporation and a majority of the whether a business or a nonprofit organization, if misleading or likely
board of directors or trustees, shall be filed with the Securities to injure in the exercise of its corporate functions, regardless of intent,
Exchange Commissioner and it is only from the time of such filing, may be prevented by the corporation having a prior right, by a suit for
that the corporation shall have the same powers and it and the injunction against the new corporation to prevent the use of the name.
members and stockholders thereof shall thereafter be subject to the
same liabilities as if such amendment had been embraced in the 4. Corporation Law; Corporate Names; Words and Phrases; The
original articles of incorporation. additional words in a corporation’s name—“Ang Mga Kaanib” and
“Sa Bansang Pilipinas, Inc.”—which are merely descriptive of and
Universal Mills vs Universal Textile, 78 scra 62 1977 also referring to the members, or kaanib, of a preexisting corporation
who are likewise residing in the Philippines, can hardly serve as an
1. Securities and Exchange Commission; Business Names; The effective differentiating medium necessary to avoid confusion or
business names “Universal Mills Corporation” and “Universal Textile difficulty in distinguishing the former from the latter.-
Mills, Inc.” though not identical are so similar as to cause confusion The additional words “Ang Mga Kaanib” and “Sa Bansang Pilipinas,
to the general public, particularly where the former included the Inc.” in petitioner’s name are, as correctly observed by the SEC,
24
merely descriptive of and also referring to the members, or kaanib, of The residence of a corporation is the place where its principal office
respondent who are likewise residing in the Philippines. These words is established. It can be sued in that place, not in the place where its
can hardly serve as an effective differentiating medium necessary to branch office is located.
avoid confusion or difficulty in distinguishing petitioner from 2. Actions; Venue; Venue of a tort action against a, corporation in
respondent. This is especially so, since both petitioner and respondent inferior court.-
corporations are using the same acronym—H.S.K.; not to mention the Where the action filed against a corpo- ration in the inferior court is
fact that both are espousing religious beliefs and operating in the same based on tort, it should be filed in the place where the corporation has
place. Parenthetically, it is well to mention that the acronym H.S.K. its principal office, not in the place where it has its branch office. To
used by petitioner stands for “Haligi at Saligan ng Katotohanan.” allow an action against a corporation to be instituted in any place
where a corporate entity has its branch offices would create confusion
5. Corporation Law; Corporate Names; Words and Phrases; The and work untold inconvenience to the corporation.
only difference between the corporate names of petitioner and
respondent are the words “Saligan” and “Suhay,” which words are 3. Actions; provision, “may be served with summons”, applies.-
synonymous—both mean ground, foundation or support.- The phrase “may be served with summons” in section 1, Rule 4 of the
Significantly, the only difference between the corporate names of Revised Rules of Court does not apply when the defendant resides in
petitioner and respondent are the words SALIGAN and SUHAY. the Philippines, for, in such a case, he may be sued only in the
These words are synonymous—both mean ground, foundation or municipality of his residence, regardless of the place where he may be
support. Hence, this case is on all fours with Universal Mills found and served with summons.
Corporation v. Universal Textile Mills, Inc., where the Court ruled
that the corporate names Universal Mills Corporation and Universal 4. Actions; Plaintiff may not choose venue of action.-
Textile Mills, Inc., are undisputably so similar that even under the test The laying of the venue of an action is not left to plaintiff’s caprice
of “reasonable care and observation” confusion may arise. because the matter is regulated by the Rules of Court.

6. Corporation Law; Corporate Names; Freedom of 4. As to Corporate term - sec 11


Religion; Ordering a religious society or corporation to change its
corporate name is not a violation of its constitutionally guaranteed Sec. 11. Corporate term. - A corporation shall exist for a period not
right to religious freedom.- exceeding fifty (50) years from the date of incorporation unless sooner
We need not belabor the fourth issue raised by petitioner. Certainly, dissolved or unless said period is extended. The corporate term as
ordering petitioner to change its corporate name is not a violation of originally stated in the articles of incorporation may be extended for
its constitutionally guaranteed right to religious freedom. In so doing, periods not exceeding fifty (50) years in any single instance by an
the SEC merely compelled petitioner to abide by one of the SEC amendment of the articles of incorporation, in accordance with this
guidelines in the approval of partnership and corporate names, namely Code; Provided, That no extension can be made earlier than five (5)
its undertaking to manifest its willingness to change its corporate years prior to the original or subsequent expiry date(s) unless there are
name in the event another person, firm, or entity has acquired a prior justifiable reasons for an earlier extension as may be determined by
right to the use of the said firm name or one deceptively or confusingly the Securities and Exchange Commission.
similar to it.
Alhambra Cigar & cigarette vs SEC 25 scra 29 1968
2. As to purpose - sec 14(2)
1. Treaties; Treaty on the Validity of Academic Degrees and the
2. The specific purpose or purposes for which the corporation is being Exercise of the Professions between the Republic of the Philippines
incorporated. Where a corporation has more than one stated purpose, and the Spanish State; Privileges granted therein subject to laws and
the articles of incorporation shall state which is the primary purpose regulations of the contracting state.-
and which is/are he secondary purpose or purposes: Provided, That a Pursuant to the provisions of the Treaty on the Validity of the
non-stock corporation may not include a purpose which would change Academic Degrees and the Exercise of the Professions between the
or contradict its nature as such; Republic of the Philippines and the Spanish State dated March 4, 1949
and ratified on May 19, 1949, the privileges granted therein are made
Uy siuliong vs Director, 40 Phil 514 1919 expressly subject to the laws and regulations of the Contracting State
in whose territory it is desired to exercise the professions. However,
MANDAMUS TO REQUIRE THE DIRECTOR OF COMMERCE the laws of this country, particularly, R.A. No. 2882, otherwise known
AND INDUSTRY TO FILE AND REGISTER ARTICLES OF as the Medical Act of 1959, in connection with Sections 2, 9, and 16
INCORPORATION UPON PAYMENT OF THE LAWFUL thereof, which have the force of law, require that before anyone can
FEES.—Held: That under the laws of the Philippine Islands, a practice the medical profession in the Philippines he must first
corporation may be organized for "mercantile purposes" and to engage successfully pass the required Board examinations.
in such incidental business as may be necessary and advisable to give
effect to, and aid in, the successful operation and conduct of the 2. Parties; Real parties in interest; Philippine Medical Association
principal business; that all of the power and authority included in the may prosecute case at bar.-
articles of incorporation of Siuliong & Co., Inc., were only incidental The Philippine Medical Association has sufficient interest in the
to the' principal purpose of its proposed incorporation, to wit: outcome of the case at bar to clothe it with the requisite standing to
"mercantile business." institute this action and prosecute the same to the end.

3. As to principal office - sec 14 (3) 3. Administrative procedure; Administrative remedies must be


exhausted before resorting to the courts; Exceptions.-
3. The place where the principal office of the corporation is to be The rule requiring exhaustion of administrative remedies is
located, which must be within the Philippines; concededly subject to exceptions, among which are cases involving
only questions of law, or when jurisdiction is in issue; or the action
Clavecilla vs Antillon 19 scra 379 1967 complained of bears the approval of a department secretary, as the
disputed resolution, which was approved by the Executive Secretary
1. Corporation Law; Domicile of a corporation.- "by authority of the President".
25
4. That the percentage of ownership of the capital stock to be owned
Benguet Consolidated vs Pined 98 Phil 711 1956 by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution.
1. CORPORATION LAW; PROHIBITION AGAINST
EXTENSION OF CORPORATE EXISTENCE BY AMENDMENT No articles of incorporation or amendment to articles of incorporation
OF THE ORIGINAL ARTICLES, APPLICABLE TO of banks, banking and quasi-banking institutions, building and loan
“SOCIEDADES ANONIMAS."- associations, trust companies and other financial intermediaries,
The prohibition contained in section 18 of Act No. 1459, against insurance companies, public utilities, educational institutions, and
extending the period of corporate existence by amendment of the other corporations governed by special laws shall be accepted or
original articles, was intended to apply, and does apply, to sociedades approved by the Commission unless accompanied by a favorable
anonimas, already formed, organized and existing at the time of the recommendation of the appropriate government agency to the effect
effectivity of the Corporation Law (Act 1459) in 1906. that such articles or amendment is in accordance with law.

2. CORPORATION LAW; PROHIBITION VALID AND Asuncion vs De Yriate, 28 Phil 67 1914


IMPAIRS NO VESTED RIGHTS.-
The aforesaid statutory prohibition is valid and impairs no vested 1. CORPORATION LAW; POWERS AND DUTIES OF CHIEF
rights or constitutional inhibition where no agreement to extend the OF DlVISION OF ARCHIVES, EXECUTIVE BUREAU.-
original period of corporate life was perfected before the enactment of The chief of the division of archives, for and on behalf of the division,
the Corporation Law. has authority under the Corporation Law (Act No. 1459) to determine
the sufficiency of the form of articles of incorporation offered for
5. As to number and residency of Incorporators - sec 10 registration with the division.

Sec. 10. Number and qualifications of incorporators. - Any number 2. CORPORATION LAW; ID.-
of natural persons not less than five (5) but not more than fifteen (15), The chief of the division of archives, on behalf of the division, has also
all of legal age and a majority of whom are residents of the Philippines, the power and duty to determine from the articles of incorporation
may form a private corporation for any lawful purpose or purposes. presented for registration the lawfulness of the purposes of the
Each of the incorporators of s stock corporation must own or be a proposed corporation and whether or not those purposes bring the
subscriber to at least one (1) share of the capital stock of the proposed corporation within the purview of the law authorizing
corporation. corporations for given purposes.

6. As to minimum capitalization sec 12 3. CORPORATION LAW; MANDAMUS TO COMPEL HIM TO


PERFORM DUTIES.-
Sec. 12. Minimum capital stock required of stock corporations. - registration of articles of incorporation, are purely ministerial and not
Stock corporations incorporated under this Code shall not be required discretional; and mandamus will lie to compel him to perform his
to have any minimum authorized capital stock except as otherwise duties under the Corporation Law if, in violation of law, he refuse to
specifically provided for by special law, and subject to the provisions perform them.
of the following section.
4.CORPORATION
7. As to subscription and paid-up requirements sec 13 LAW; MUNICIPALITIES; ORGANIZATION OF BARRIO INTO
SEPARATE CORPORATION.-
Sec. 13. Amount of capital stock to be subscribed and paid for the When articles of incorporation presented for registration show that the
purposes of incorporation. - At least twenty-five percent (25%) of object of incorporators is to organize a pueblo or barrio of a given
the authorized capital stock as stated in the articles of incorporation municipality into a separate corporation for the purpose of taking
must be subscribed at the time of incorporation, and at least twenty- possession and having control of all municipal property within the
five (25%) per cent of the total subscription must be paid upon pueblo or barrio so incorporated, and administer it exclusively for the
subscription, the balance to be payable on a date or dates fixed in the benefit of the residents of that pueblo or barrio, said articles of
contract of subscription without need of call, or in the absence of a incorporation show upon their face that the object of the incorporation
fixed date or dates, upon call for payment by the board of directors: is unlawful in that it seeks to deprive the municipality in which the
Provided, however, That in no case shall the paid-up capital be less pueblo or barrio is situated of its property and its citizens of the right
than five Thousand (P5,000.00) pesos. of enjoying the same and would, if permitted, disrupt and destroy the
government of the municipalities of the Islands and abrogate the laws
8. Grounds for disapproval sec 17 relating- to the formation and government of municipalities.

Sec. 17. Grounds when articles of incorporation or amendment 9. Commencement of corporate existence sec 19
may be rejected or disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation or disapprove any Sec. 19. Commencement of corporate existence. - A private
amendment thereto if the same is not in compliance with the corporation formed or organized under this Code commences to have
requirements of this Code: Provided, That the Commission shall give corporate existence and juridical personality and is deemed
the incorporators a reasonable time within which to correct or modify incorporated from the date the Securities and Exchange Commission
the objectionable portions of the articles or amendment. The following issues a certificate of incorporation under its official seal; and
are grounds for such rejection or disapproval: thereupon the incorporators, stockholders/members and their
1. That the articles of incorporation or any amendment thereto is not successors shall constitute a body politic and corporate under the name
substantially in accordance with the form prescribed herein; stated in the articles of incorporation for the period of time mentioned
2. That the purpose or purposes of the corporation are patently therein, unless said period is extended or the corporation is sooner
unconstitutional, illegal, immoral, or contrary to government rules dissolved in accordance with law.
and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital C. By-Laws
stock subscribed and/or paid if false;
26
Loyola grand Villas vs CA GR 117188 1997 August 07 Same; Same; Same; Due Process; There can be no automatic
corporate dissolution simply because the incorporators failed to abide
Corporation Law; Statutory Construction; Words and by the required filing of by-laws—the incorporators must be given the
Phrases;Ordinarily, the word “must” connotes an imperative act or chance to explain their neglect or omission and to remedy the same.—
operates to impose a duty which may be enforced—it is synonymous Even under the foregoing express grant of power and authority, there
with “ought” which connotes compulsion or mandatoriness though the can be no automatic corporate dissolution simply because the
word “must” in a statute, like “shall,” is not always imperative and incorporators failed to abide by the required filing of by-laws
may be consistent with an exercise of discretion.—As correctly embodied in Section 46 of the Corporation Code. There is no outright
postulated by the petitioner, interpretation of this provision of law “demise” of corporate existence. Proper notice and hearing are
begins with the determination of the meaning and import of the word cardinal components of due process in any democratic institution,
“must” in this section. Ordinarily, the word “must” connotes an agency or society. In other words, the incorporators must be given the
imperative act or operates to impose a duty which may be enforced. It chance to explain their neglect or omission and remedy the same.
is synonymous with “ought” which connotes compulsion or
mandatoriness. However, the word “must” in a statute, like “shall,” is Same; Same; Same; Presidential Decree 902-A; Statutes in
not always imperative. It may be consistent with an exercise of Materia; Securities and Exchange Commission; The failure of the
discretion. In this jurisdiction, the tendency has been to interpret Corporation Code to provide for the consequences of the non-filing of
“shall” as the context or a reasonable construction of the statute in by-laws on time has been rectified by P.D. No. 902-A; Every statute
which it is used demands or requires. This is equally true as regards must be so construed and harmonized with other statutes as to form a
the word “must.” Thus, if the language of a statute considered as a uniform system of jurisprudence.—Although the Corporation Code
whole and with due regard to its nature and object reveals that the requires the filing of by-laws, it does not expressly provide for the
legislature intended to use the words “shall” and “must” to be consequences of the non-filing of the same within the period provided
directory, they should be given that meaning. for in Section 46. However, such omission has been rectified by
Presidential Decree No. 902-A, the pertinent provisions on the
Same; Same; By-Laws; The legislative deliberations demonstrate jurisdiction of the Securities and Exchange Commission of which
that automatic corporate dissolution for failure to file the bylaws on state: * * * That the failure to file by-laws is not provided for by the
time was never the intention of the legislature.—This exchange of Corporation Code but in another law is of no moment. P.D. No. 902-
views demonstrates clearly that automatic corporate dissolution for A, which took effect immediately after its promulgation on March 11,
failure to file the by-laws on time was never the intention of the 1976, is very much apposite to the Code. Accordingly, the provisions
legislature. Moreover, even without resorting to the records of abovequoted supply the law governing the situation in the case at bar,
deliberations of the Batasang Pambansa, the law itself provides the inasmuch as the Corporation Code and P.D. No. 902-A are statutes
answer to the issue propounded by petitioner. in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized with
Same; Same; Same; Taken as a whole and under the principle that other statutes as to form a uniform system of jurisprudence.
the best interpreter of a statute is the statute itself (optima statuli
interpretatix est ipsum statutum), Section 46 of the Corporation Code Same; By-Laws; Failure to file the by-laws within the period required
reveals the legislative intent to attach a directory, and not mandatory, by law by no means tolls the automatic dissolution of a corporation.—
meaning for the word “must” in the first sentence thereof.—Taken as As the “rules and regulations or private laws enacted by the
a whole and under the principle that the best interpreter of a statute is corporation to regulate, govern and control its own actions, affairs and
the statute itself (optima statuti interpretatix est ipsum statutum), concerns and its stockholders or members and directors and officers
Section 46 aforequoted reveals the legislative intent to attach a with relation thereto and among themselves in their relation to it,” by-
directory, and not mandatory, meaning for the word “must” in the first laws are indispensable to corporations in this jurisdiction. These may
sentence thereof. Note should be taken of the second paragraph of the not be essential to corporate birth but certainly, these are required by
law which allows the filing of the by-laws even prior to incorporation. law for an orderly governance and management of corporations.
This provision in the same section of the Code rules out mandatory Nonetheless, failure to file them within the period required by law by
compliance with the requirement of filing the by-laws “within one (1) no means tolls the automatic dissolution of a corporation.
month after receipt of official notice of the issuance of its certificate
of incorporation by the Securities and Exchange Commission.” It Same; Administrative Law; Subdivisions; Home Insurance and
necessarily follows that failure to file the by-laws within that period Guaranty Corporation; Jurisdiction; With respect to homeowners
does not imply the “demise” of the corporation. associations, the HIGC shall exercise all the powers, authorities and
responsibilities that are vested on the Securities and Exchange
Same; Same; Same; By-laws may be necessary for the “government” Commission.—That the corporation involved herein is under the
of the corporation but these are subordinate to the articles of supervision of the HIGC does not alter the result of this case. The
incorporation as well as to the Corporation Code and related HIGC has taken over the specialized functions of the former Home
statutes.—By-laws may be necessary for the “government” of the Financing Corporation by virtue of Executive Order No. 90 dated
corporation but these are subordinate to the articles of incorporation December 17, 1986. With respect to homeowners associations, the
as well as to the Corporation Code and related statutes. There are in HIGC shall “exercise all the powers, authorities and responsibilities
fact cases where by-laws are unnecessary to corporate existence or to that are vested on the Securities and Exchange Commission x x x, the
the valid exercise of corporate powers, thus: “In the absence of charter provision of Act 1459, as amended by P.D. 902-A, to the contrary
or statutory provisions to the contrary, by-laws are not necessary either notwithstanding.”
to the existence of a corporation or to the valid exercise of the powers
conferred upon it, certainly in all cases where the charter sufficiently
provides for the government of the body; and even where the PMI Colleges vs NLRC GR 121466 1997 August 15
governing statute in express terms confers upon the corporation the
power to adopt by-laws, the failure to exercise the power will be Same; Same; Corporation Law; By-Laws; Since by-laws operate
ascribed to mere nonaction which will not render void any acts of the merely as internal rules among the stockholders, they cannot affect or
corporation which would otherwise be valid.” (Italics supplied.) prejudice third persons who deal with the corporation, unless they
have knowledge of the same.—Neither can we concede that such
contract would be invalid just because the signatory thereon was not
27
the Chairman of the Board which allegedly violated petitioner’s must be made in the same or in a separate instrument. In the latter case,
bylaws. Since by-laws operate merely as internal rules among the the donor shall be notified of the acceptance in an authentic form and
stockholders, they cannot affect or prejudice third persons who deal such step must be noted in both instruments. Non-compliance with this
with the corporation, unless they have knowledge of the same. No requirement renders the donation null and void. Since undeniably the
proof appears on record that private respondent ever knew anything deed of assignment dated March 8, 1975 in question, shows that there
about the provisions of said by-laws. In fact, petitioner itself merely was no acceptance of the donation in the same and in a separate
asserts the same without even bothering to attach a copy or excerpt document, the said deed of assignment is thus void ab initio and of no
thereof to show that there is such a provision. How can it now expect force and effect.
the Labor Arbiter and the NLRC to believe it? That this allegation has
never been denied by private respondent does not necessarily signify China banking vs CA GR 117604
admission of its existence because technicalities of law and procedure
and the rules obtaining in the courts of law do not strictly apply to Securities and Exchange Commission; Actions; Jurisdiction; The
proceedings of this nature. better policy in determining which body has jurisdiction over a case
would be to consider not only the status of relationship of the parties
Pena vs CA 193 scra 7117 1991 but also the nature of the question that is the subject of their
controversy.—The basic issue we must first hurdle is which body has
Corporation Law; By-laws; Quorum; Three (3) out of five (5) jurisdiction over the controversy, the regular courts or the SEC. P.D.
members of the board of directors present in the special meeting of No. 902-A conferred upon the SEC the following pertinent powers: *
respondent PAMBUSCO do not constitute a quorum to validly * * The aforecited law was expounded upon in Viray v. CA and in the
transact business. Section 4 of its amended by-laws requires at least recent cases of Mainland Construction Co., Inc. v.
four (4) members present to constitute a quorum in a special meeting Movilla and Bernardo v. CA, thus: . . . . The better policy in
of its board of directors.—The by-laws of a corporation are its own determining which body has jurisdiction over a case would be to
private laws which substantially have the same effect as the laws of consider not only the status or relationship of the parties but also the
the corporation. They are in effect, written, into the charter. In this nature of the question that is the subject of their controversy.
sense they become part of the fundamental law of the corporation with Same; Same; Same; Corporation Law; The purchase of a share or
which the corporation and its directors and officers must comply. membership certificate at public auction by a party (and the issuance
Apparently, only three (3) out of five (5) members of the board of to it of the corresponding Certificate of Sale) transfers ownership of
directors of respondent PAMBUSCO convened on November 19, the same to the latter and thus entitle it to have the said share registered
1974 by virtue of a prior notice of a special meeting. There was no in its name as a member.—As to the first query, there is no question
quorum to validly transact business since, under Section 4 of the that the purchase of the subject share or membership certificate at
amended by-laws hereinabove reproduced, at least four (4) members public auction by petitioner (and the issuance to it of the
must be present to constitute a quorum in a special meeting of the corresponding Certificate of Sale) transferred ownership of the same
board of directors of respondent PAMBUSCO. to the latter and thus entitled petitioner to have the said share registered
in its name as a member of VGCCI. It is readily observed that VGCCI
Same; Board of Directors; Only persons who own at least one (1) did not assail the transfer directly and has in fact, in its letter of 27
share in their own right may qualify to be directors of a corporation.— September 1974, expressly recognized the pledge agreement executed
As a matter of fact, the three (3) alleged directors who attended the by the original owner, Calapatia, in favor of petitioner and has even
special meeting on November 19,1974 were not listed as directors of noted said agreement in its corporate books. In addition, Calapatia, the
respondent PAMBUSCO in the latest general information sheet of original owner of the subject share, has not contested the said transfer.
respondent PAMBUSCO filed with the SEC dated 18 March 1951. By virtue of the afore-mentioned sale, petitioner became a bona
Similarly, the latest list of stockholders of respondent PAMBUSCO fidestockholder of VGCCI and, therefore, the conflict that arose
on file with the SEC does not show that the said alleged directors were between petitioner and VGCCI aptly exemplifies an intra-corporate
among the stockholders of respondent PAMBUSCO. Under Section controversy between a corporation and its stockholder under Sec. 5(b)
30 of the then applicable Corporation Law, only persons who own at of P.D. 902-A.
least one (1) share in their own right may qualify to be directors of a
corporation. Further, under Section 28 1/2 ofthe said law, the sale or Same; Same; Same; Same; By-Laws; The proper interpretation and
disposition of all and/or substantially all properties of the corporation application of a corporation’s by-laws is a subject which irrefutably
requires, in addition to a proper board resolution, the affirmative votes calls for the special competence of the SEC.—An important
of the stockholders holding at least two-thirds (2/3) of the voting consideration, moreover, is the nature of the controversy between
power in the corporation in a meeting duly called for that purpose. No petitioner and private respondent corporation. VGCCI claims a prior
doubt, the questioned resolution was not confirmed at a subsequent right over the subject share anchored mainly on Sec. 3, Art. VIII of its
stockholders meeting duly called for the purpose by the affirmative by-laws which provides that “after a member shall have been posted
votes of the stockholders holding at least two-thirds (2/3) of the voting as delinquent, the Board may order his/her/its share sold to satisfy the
power in the corporation. The same requirement is found in Section claims of the Club . . .” It is pursuant to this provision that VGCCI
40 of the present Corporation Code. also sold the subject share at public auction, of which it was the highest
bidder. VGCCI caps its argument by asserting that its corporate by-
Same;Deed of Assignment; Civil Law; Donation; Liberality as a laws should prevail. The bone of contention, thus, is the proper
consideration in the deed of assignment of the respondent interpretation and application of VGCCI’s aforequoted bylaws, a
PAMBUSCO in favor of its former corporate officer for services subject which irrefutably calls for the special competence of the SEC.
rendered is not just an ordinary deed of assignment but a donation.—
Respondent court, in upholding the questioned deed of assignment, Same; Same; Same; Estoppel; The plaintiff who files a complaint
which appears to be without any consideration at all, held that the with one court which has no jurisdiction over it is not estopped from
consideration thereof is the liberality of the respondent PAMBUSCO filing the same complaint later with the competent court.—In Zamora
in favor of its former corporate officer, respondent Enriquez, for v. Court of Appeals, this Court, through Mr. Justice Isagani A. Cruz,
services rendered. Assuming this to be so, then as correctly argued by declared that: It follows that as a rule the filing of a complaint with
petitioner, it is not just an ordinary, deed of assignment, but is in fact one court which has no jurisdiction over it does not prevent the
a donation. Under Article 725 of the Civil Code, in order to be valid, plaintiff from filing the same complaint later with the competent court.
such a donation must be made in a public document and the acceptance
28
The plaintiff is not estopped from doing so simply because it made a different in character from a pawn ticket and to reiterate, petitioner
mistake before in the choice of the proper forum. . . . was never informed of Calapatia’s unpaid accounts and the restrictive
Appeals; Procedural Rules; Remand of Cases; The remand of the case provisions in VGCCI’s by-laws.
or of an issue to the lower court for further reception of evidence is
not necessary where the Supreme Court is in position to resolve the Same; Same; The term “unpaid claim” in Sec. 63 of the Corporation
dispute based on the records before it and particularly where the ends Code refers to “any unpaid claim arising from unpaid subscription,
of justice would not be subserved by the remand thereof.—Applicable and not to any indebtedness which a subscriber or stockholder may
to this case is the principle succinctly enunciated in the case of Heirs owe the corporation arising from any other transaction,” such as
of Crisanta Y. Gabriel-Almoradie v. Court of monthly dues.—Finally, Sec. 63 of the Corporation Code which
Appeals, citing Escudero v. Dulay and The Roman Catholic provides that “no shares of stock against which the corporation holds
Archbishop of Manila v. Court of Appeals: In the interest of the public any unpaid claim shall be transferable in the books of the corporation”
and for the expeditious administration of justice the issue on cannot be utilized by VGCCI. The term “unpaid claim” refers to “any
infringement shall be resolved by the court considering that this case unpaid claim arising from unpaid subscription, and not to any
has dragged on for years and has gone from one forum to another. It indebtedness which a subscriber or stockholder may owe the
is a rule of procedure for the Supreme Court to strive to settle the entire corporation arising from any other transaction.” In the case at bar, the
controversy in a single proceeding leaving no root or branch to bear subscription for the share in question has been fully paid as evidenced
the seeds of future litigation. No useful purpose will be served if a case by the issuance of Membership Certificate No. 1219. What Calapatia
or the determination of an issue in a case is remanded to the trial court owed the corporation were merely the monthly dues. Hence, the
only to have its decision raised again to the Court of Appeals and from aforequoted provision does not apply.
there to the Supreme Court. We have laid down the rule that the
remand of the case or of an issue to the lower court for further Adoption Procedure sec 46
reception of evidence is not necessary where the Court is in position
to resolve the dispute based on the records before it and particularly Sec. 46. Adoption of by-laws. - Every corporation formed under this
where the ends of justice would not be subserved by the remand Code must, within one (1) month after receipt of official notice of the
thereof. Moreover, the Supreme Court is clothed with ample authority issuance of its certificate of incorporation by the Securities and
to review matters, even those not raised on appeal if it finds that their Exchange Commission, adopt a code of by-laws for its government
consideration is necessary in arriving at a just disposition of the case. not inconsistent with this Code. For the adoption of by-laws by the
Loans; Pledge; The contracting parties to a pledge agreement may corporation the affirmative vote of the stockholders representing at
stipulate that the said pledge will also stand as security for any future least a majority of the outstanding capital stock, or of at least a
advancements (or renewals thereof) that the pledgor may procure from majority of the members in case of non-stock corporations, shall be
the pledgee.—VGCCI assails the validity of the pledge agreement necessary. The by-laws shall be signed by the stockholders or
executed by Calapatia in petitioner’s favor. It contendsthat the same members voting for them and shall be kept in the principal office of
was null and void for lack of consideration because the pledge the corporation, subject to the inspection of the stockholders or
agreement was entered into on 21 August 1974 but the loan or members during office hours. A copy thereof, duly certified to by a
promissory note which it secured was obtained by Calapatia much majority of the directors or trustees countersigned by the secretary of
later or only on 3 August 1983. VGCCI’s contention is unmeritorious. the corporation, shall be filed with the Securities and Exchange
A careful perusal of the pledge agreement will readily reveal that the Commission which shall be attached to the original articles of
contracting parties explicitly stipulated therein that the said pledge incorporation.
will also stand as security for any future advancements (or renewals Notwithstanding the provisions of the preceding paragraph, by-laws
thereof) that Calapatia (the pledgor) may procure from petitioner. may be adopted and filed prior to incorporation; in such case, such by-
laws shall be approved and signed by all the incorporators and
Corporation Law; By-Laws; In order to be bound, a third party must submitted to the Securities and Exchange Commission, together with
have acquired knowledge of the pertinent by-laws at the time the the articles of incorporation.
transaction or agreement between said third person and the
shareholder was entered into.—In order to be bound, the third party In all cases, by-laws shall be effective only upon the issuance by the
must have acquired knowledge of the pertinent by—laws at the time Securities and Exchange Commission of a certification that the by-
the transaction or agreement between said third party and the laws are not inconsistent with this Code.
shareholder was entered into, in this case, at the time the pledge
agreement was executed. VGCCI could have easily informed The Securities and Exchange Commission shall not accept for filing
petitioner of its by-laws when it sent notice formally recognizing the by-laws or any amendment thereto of any bank, banking
petitioner as pledgee of one of its shares registered in Calapatia’s institution, building and loan association, trust company, insurance
name. Petitioner’s belated notice of said by-laws at the time of company, public utility, educational institution or other special
foreclosure will not suffice. corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that such
Same; Words and Phrases; A membership share is quite different in by-laws or amendments are in accordance with law.
character from a pawn ticket.—Similarly, VGCCI’s contention that
petitioner is duty-bound to know its by-laws because of Art. 2099 of Contents sec 47
the Civil Code which stipulates that the creditor must take care of the
thing pledged with the diligence of a good father of a family, fails to Sec. 47. Contents of by-laws. - Subject to the provisions of the
convince. The case of Cruz & Serrano v. Chua A. H. Lee, is clearly Constitution, this Code, other special laws, and the articles of
not applicable: In applying this provision to the situation before us it incorporation, a private corporation may provide in its by-laws for:
must be borne in mind that the ordinary pawn ticket is a document by 1. The time, place and manner of calling and conducting regular or
virtue of which the property in the thing pledged passes from hand to special meetings of the directors or trustees;
hand by mere delivery of the ticket; and the contract of the pledge is, 2. The time and manner of calling and conducting regular or special
therefore, absolvable to bearer. It results that one who takes a pawn meetings of the stockholders or members;
ticket in pledge acquires domination over the pledge; and it is the 3. The required quorum in meetings of stockholders or members and
holder who must renew the pledge, if it is to be kept alive. It is quite the manner of voting therein;
obvious from the aforequoted case that a membership share is quite 4. The form for proxies of stockholders and members and the manner
29
of voting them; Corporation Law; Corporate Officers; Piercing the Veil of
5. The qualifications, duties and compensation of directors or trustees, Corporate Fiction; Instances when personal civil liability can also be
officers and employees; said to lawfully attach to a corporate director, trustee or officer.-
6. The time for holding the annual election of directors of trustees and In Tramat Mercantile, Inc. vs. Court of Appeals, the Court has collated
the mode or manner of giving notice thereof; the settled instances when, without necessarily piercing the veil of
7. The manner of election or appointment and the term of office of all corporate fiction, personal civil liability can also be said to lawfully
officers other than directors or trustees; attach to a corporate director, trustee or officer; to wit: When—“(1)
8. The penalties for violation of the by-laws; He assents (a) to a patently unlawful act of the corporation, or (b) for
9. In the case of stock corporations, the manner of issuing stock bad faith or gross negligence in directing its affairs, or (c) for conflict
certificates; and of interest, resulting in damages to the corporation, its stockholders or
10. Such other matters as may be necessary for the proper or other persons; “(2) He consents to the issuance of watered stocks or
convenient transaction of its corporate business and affairs. who, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto; “(3) He agrees to
Amendments sec 48 hold himself personally and solidarily liable with the corporation; or
“(4) He is made, by a specific provision of law, to personally answer
Sec. 48. Amendments to by-laws. - The board of directors or trustees, for his corporate action.”
by a majority vote thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the members of a Corporation Law; Corporate Officers; Piercing the Veil of
non-stock corporation, at a regular or special meeting duly called for Corporate Fiction; The basic rule is still that which can be deduced
the purpose, may amend or repeal any by-laws or adopt new by-laws. from the Court’s pronouncement in Sunio v. National Labor Relations
The owners of two-thirds (2/3) of the outstanding capital stock or two- Commission, i.e., that mere ownership by a single stock-holder or by
thirds (2/3) of the members in a non-stock corporation may delegate another corporation of all or nearly all of the capital stock of a
to the board of directors or trustees the power to amend or repeal any corporation is not of itself sufficient ground for disregarding the
by-laws or adopt new by-laws: Provided, That any power delegated to separate corporate personality.-
the board of directors or trustees to amend or repeal any by-laws or The basic rule is still that which can be deduced from the Court’s
adopt new by-laws shall be considered as revoked whenever pronouncement in Sunio v. National Labor Relations Commission,
stockholders owning or representing a majority of the outstanding 127 SCRA 390, thus: “It is basic that a corporation is invested by law
capital stock or a majority of the members in non-stock corporations, with a personality separate and distinct from those of the persons
shall so vote at a regular or special meeting. composing it as well as from that of any other legal entity to which it
Whenever any amendment or new by-laws are adopted, such may be related. Mere ownership by a single stockholder or by another
amendment or new by-laws shall be attached to the original by-laws corporation of all or nearly all of the capital stock of a corporation is
in the office of the corporation, and a copy thereof, duly certified under not of itself sufficient ground for disregarding the separate corporate
oath by the corporate secretary and a majority of the directors or personality. Petitioner Sunio, therefore, should not have been made
trustees, shall be filed with the Securities and Exchange Commission personally answerable for the payment of private respondents’ back
the same to be attached to the original articles of incorporation and salaries.” The Court, to be sure, did appear to have deviated somewhat
original by-laws. in Gudez vs. NLRC; however, it should be clear from our recent
pronouncement in Mam Realty Development Corporation and Manuel
The amended or new by-laws shall only be effective upon the issuance Centeno vs. NLRC that the Sunio doctrine still prevails.
by the Securities and Exchange Commission of a certification that the
same are not inconsistent with this Code. Stockholders of F.Guanzon vs Register 6 scra 373 1962

C. RECOGNITION AND DISREGARD OF Corporations; Liquidation and distribution of assets for transfer
CORPORATENESS: to stockholders; Certificate of liquidation in the nature of transfer
or conveyance.—Where the purpose of the liquidation, as well as the
1. Separate Juridical Personality distribution of the assets of the corporation, is to transfer their title
from the corporation to the stockholders in proportion to their
Santos vs NLRC GR 101699 13 march 1996 shareholdings, that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the
Corporation Law; Corporate Officers; Piercing the Veil of stockholders, and the certificate should be considered as one in the
Corporate Fiction; A corporation is a juridical entity with legal nature of a transfer or conveyance.
personality separate and distinct from those acting for and in its behalf
and, in general, from the people comprising it—obligations incurred
by the corporation, acting through its directors, officers and Manila Gas vs CIR 62 Phil 895 1936
employees, are its sole liabilities.-
A corporation is a juridical entity with legal personality separate and 1. CONSTITUTIONAL LAW; CONSTITUTIONALITY OF
distinct from those acting for and in its behalf and, in general, from STATUTE; TlME OF RAISING QUESTION.-
the people comprising it. The rule is that obligations incurred by the Where neither in the pleadings, the decision of the trial court, nor the
corporation, acting through its directors, officers and employees, are assignment of errors, was the question of the validity of an act raised,
its sole liabilities. Nevertheless, being a mere fiction of law, peculiar and no jurisdictional issue being involved, it is not the duty of the
situations or valid grounds can exist to warrant, albeit done sparingly, Supreme Court to pass on the constitutional question.
the disregard of its independent being and the lifting of the corporate
veil. As a rule, this situation might arise when a corporation is used to 2. CONSTITUTIONAL LAW; CONSTITUTIONALITY OF
evade a just and due obligation or to justify a wrong, to shield or STATUTE; ACT No. 3761, VALIDITY.-
perpetrate fraud, to carry out similar other unjustifiable aims or Quære as to whether or not Act No. 3761 is valid.
intentions, or as a subterfuge to commit injustice and so circumvent
the law. 3. CONSTITUTIONAL LAW; TAXATION; OBLIGATION OF
CONTRACTS.-

30
A corporation has a personality distinct from that of its stockholders, immediate character that the intervenor will either gain or lose by the
enabling the taxing power to reach the latter when they receive direct legal operation and effect of the judgment. Otherwise, if persons
dividends from the corporation. Dividends of a domestic corporation not parties of the action could be allowed to intervene, proceedings
which are paid and delivered in cash to foreign corporations as will become unnecessarily complicated, expensive and interminable.
stockholders are subject to the payment of the income tax, the And this is not the policy of the law.
exemption clause in the charter of the corporation notwithstanding.
(Philippine Telephone and Telegraph Co. vs. Collector of Internal Remedial Law; Civil
Revenue [1933], 58 Phil., 639.) Procedure; Intervention; Interpretation; Meaning of the words
“an interest in the subject.”-
4. CONSTITUTIONAL LAW; TAXATION; DUE PROCESS OF The words “an interest in the subject” mean a direct interest in the
LAW; SITUS.- cause of action as pleaded, and which would put the intervenor in a
No state may tax anything not within its jurisdiction without violating legal position to litigate a fact alleged in the complaint, without the
the due process clause of the constitution. The taxing power of a state establishment of which plaintiff could not recover.
does not extend beyond its territorial limits, but within such limits it
may tax persons, property, income, or business. Remedial Law; Civil Procedure; Intervention; Interest ofmovants
5. ID; TAXATION; DUE PROCESS OF LAW; ID. ;- in the case at bar is indirect, contingent, conjectural, and purely
If an interest in property is taxed, the situs of either the property or inchoate.-
interest must be found within the state. If an income is taxed, the Here, the interest, if it exists at all, of petitioners-movants is indirect,
recipient thereof must have a domicile within the state or the property contingent, remote, conjectural, consequential and collateral. At the
or business out of which the income issues must be situated within the very least, their interest is purely inchoate, or in sheer expectancy of a
state so that the income may be said to have a situs therein. right in the management of the corporation and to share in the profits
thereof and in the properties and assets thereof on dissolution, after
6. ID; TAXATION; DUE PROCESS OF LAW; ID.- payment of the corporate debts and obligations.
Personal property may be separated from its owner, and he may be
taxed on its account at the place where the property is although it is Remedial Law; Civil Procedure; Intervention; Corporations; A
not the place of his own domicile and even though he is not a citizen share of stock in a corporation does not vest the owner thereof with
or resident of the state which imposes the tax. But debts owing by any legal right or title to any of the property.-
corporations are obligations of the debtors, and only possess value in While a share of stock represents a proportionate or aliquot interest in
the hands of the creditors. 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
7. ID; TAXATION; DUE PROCESS OF LAW; CASE AT BAR.- corporate property being equitable or beneficial in nature.
Held: That the Collector of Internal Revenue was justified in Shareholders are in no legal sense the owners of corporate property,
withholding income taxes on dividends and interest on bonds and which is owned by the corporation as a distinct legal person.
other indebtedness paid by a resident Corporation to non-resident
corporations. Remedial Law; Civil
Procedure; Intervention; Corporations; That movant’s interest
Magsaysay Labrador vs CA 180 scra 266 1989 which may be protected in a separate proceeding is a factor to be
considered in allowing or disallowing a motion for intervention.-
Remedial Law; Civil Procedure; Intervention; Requirement before We cannot give credit to such averment. As earlier stated, that the
a party can intervene in a pending action; Petitioners have no legal movant’s interest may be protected in a separate proceeding is a factor
interest in the subject matter in the litigation.- to be considered in allowing or disallowing a motion for intervention.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of
Court, this Court affirms the respondent court’s holding that Remedial Law; Civil
petitioners herein have no legal interest in the subject matter in Procedure; Intervention; Corporations; Transfer of shares in a
litigation so as to entitle them to intervene in the proceedings below. corporation must be registered in the books of the corporation to affect
In the case of Batama Farmers’ Cooperative Marketing Association, third persons.-
Inc. v. Rosal, we held: “As clearly stated in Section 2 of Rule 12 of The factual findings of the trial court are clear on this point. The
the Rules of Court, to be permitted to intervene in a pending action, petitioners cannot claim the right to intervene on the strength of the
the party must have a legal interest in the matter in litigation, or in the transfer of shares allegedly executed by the late Senator. The
success of either of the parties or an interest against both, or he must corporation did not keep books and records. Perforce, no transfer was
be so situated as to be adversely affected by a distribution or other ever recorded, much less effected as to prejudice third parties. The
disposition of the property in the custody of the court or an officer transfer must be registered in the books of the corporation to affect
thereof.” third persons. The law on corporations is explicit. Section 63 of the
Corporation Code provides, thus: “No transfer, however, shall be valid
Remedial Law; Civil Procedure; Intervention; Requirements to except as between the parties, until the transfer is recorded in the
allow intervention.- books of the corporation showing the names of the parties to the
To allow intervention, [a] it must be shown that the movant has legal transaction, the date of the transfer, the number of the certificate or
interest in the matter in litigation, or otherwise qualified; and [b] certificates and the number of shares transferred.”
consideration must be given as to whether the adjudication of the
rights of the original parties may be delayed or prejudiced, or whether Good earth vs CA 194 scra 544 1991
the intervenor’s rights may be protected in a separate proceeding or
not. Both requirements must concur as the first is not more important 1. Corporation Law; A corporation has a personality distinct and
than the second. separate from its individual stockholders or members.-
A corporation has a personality distinct and separate from its
Remedial Law; Civil Procedure; Intervention; Nature of interest individual stockholders or members. Being an officer or stockholder
which entitles a person to intervene in a suit between other parties.- of a corporation does not make one’s property also of the corporation,
The interest which entitles a person to intervene in a suit between other and vice-versa, for they are separate entities (Traders Royal Bank v.
parties must be in the matter in litigation and of such direct and CA, G.R. No. 78412, September 26, 1989; Cruz v. Dalisay, 152 SCRA
31
482). Shareowners are in no legal sense the owners of corporate
property (or credits) which is owned by the corporation as a distinct 1. COURTS; JURISDICTION ; PROHIBITION.+
legal person. 2. COURTS; ID.-
A mere "understanding" as to the distribution of cases for trial does
2. Corporation Law; The corporate debt or credit is not the debt or not deprive the district judge of the jurisdiction conferred upon him by
credit of the stockholder nor is the stockholder’s debt or credit that of law.
the corporation.-
As a consequence of the separate juridical personality of a corporation, 3. COURTS; APPOINTMENT OF ACTING FISCAL.-
the corporate debt or credit is not the debt or credit of the stockholder, When a regular provincial fiscal fails to discharge any of the duties of
nor is the stockholder’s debt or credit that of the corporation. his position, the judge of the Court of First Instance of the province
may
3. Civil Law; Obligation; There is a disputable presumption that
money paid by one to the other was due to the latter.- 4. COURTS; TITLE TO, OFFICE "DE JURE" OR "DE FACTO;"
Contrary to the Regional Trial Court’s premise that it was incumbent "QUO WARRANTO."-
upon respondent corporation to prove that the amount was delivered The title to the office of a judge, whether de jure or de facto, can only
to the Roces brothers in the payment of the loan in the latter’s favor, be determined in a proceeding of the nature of quo warranto and
the delivery of the amount to and the receipt thereof by the Roces cannot be tested by prohibition.
brothers in their names raises the presumption that the said amount
was due to them. There is a disputable presumption that money paid 5. COURTS; USURPER.-
by one to the other was due to the latter (Sec. 5(f), Rule 131, Rules of A de facto judge is one who exercises the duty of a judicial office
Court). It is for GEE and Lim Ka Ping to prove otherwise. In other under color of an appointment or election thereto. He differs, on the
words, it is for the latter to prove that the payments made were for the one hand, from a mere usurper who undertakes to act officially without
satisfaction of their judgment debt and not vice versa. any color of right, and on the other hand, from a judge de jure, who is
in all respects legally appointed and qualified and whose term of office
4. Civil Law; Obligation; When the existence of a debt is fully has not expired.
established by the evidence the burden of proving that it has been
extinguished by payment devolves upon the debtor who offers such a 6. COURTS; JUDGE HOLDING OVER AFTER CONCLUSION
defense to the claim of the plaintiff creditor.- OF HIS TERM.-
It has been an established rule that when the existence of a debt is fully In the absence of any constitutional or statutory regulation on the
established by the evidence (which has been done in this case), the subject, the general rule is that an incumbent of an office will hold
burden of proving that it has been extinguished by payment devolves over after the conclusion of his term until the election and qualification
upon the debtor who offers such a defense to the claim of the plaintiff of his successor.
creditor (herein respondent corporation) (Chua Chienco v. Vargas, 11
Phil. 219; Ramos v. Ledesma, 12 Phil. 656; Pinon v. De Osorio, 30 7. COURTS; JUDGE "DE FACTO."-
Phil. 365). For indeed, it is well-entrenched in Our jurisprudence that A judge who is holding over in good faith and whose successor has
each party in a case must prove his own affirmative allegations by the not' been appointed, is a judge de facto.
degree of evidence required by law.
8. COURTS; VALIDITY OF OFFICIAL ACTS OF "DE FACTO"
2. Defective incorporation JUDGE.-
The official acts of a de facto judge are as valid for all purposes as
those of a de jure judge so far as the public or third persons who are
A. De Jure interested therein are concerned. The rule applies both to civil and
criminal matters.
De jure corporations – juridical entities created or organized in strict
or substantial compliance with the statutory requirements of 9. "DE FACTO" OFFICER; TITLE CANNOT BE QUESTIONED
incorporation and whose right to exist as such cannot be successfully IN PROHI-BITION PROCEEDINGS.-
attacked even by the State in a quo warranto proceeding. The title of a de facto officer cannot be indirectly questioned in a
proceeding to obtain a writ of prohibition to prevent him from doing
B. De Facto - sec 20 official acts.

De facto corporations – those which exist by virtue of an irregularity ii. Requisites


or defect in the organization or constitution or from some other
omission to comply with the conditions precedent by which 1. There is a valid statute under which a corporation with some of
corporations de jure are created, but there was colorable compliance the purposes in question can be formed ( or according to some,
with the requirements of the law under which they might be lawfully an apparently valid statute );
incorporated for the purposes and powers assumed, and user of the 2. An attempt, in good faith, to form a corporation according to the
rights claimed to be conferred by law. requirements of law, which goes far enough to amount to a
“colorable complience” with the law;
Sec. 20. De facto corporations. - The due incorporation of any 3. A user of corporate powers, the transaction of business in some
corporation claiming in good faith to be a corporation under this Code, way as if it were a corporation;
and its right to exercise corporate powers, shall not be inquired into 4. Good faith in claiming to be and doing business as a corporation.
collaterally in any private suit to which such corporation may be a
party. Such inquiry may be made by the Solicitor General in a quo Fernandez vs Cueva 21 scra 1095 1967
warranto proceeding.
1. Labor; Recovery of unauthorized salary deduction; Prescription
i. Rationale for the doctrine of action.-
Where the claim of plaintiff represented the sum total of unauthorized
Tayko vs Capistrano 53 phil 866 deductions from his salaries and withheld commissions under Section
32
10, paragraph (f) of Republic Act No. 602, then, under Section 17 of anonimas, already formed, organized and existing at the time of the
the same law, the action to recover the same must be filed within three effectivity of the Corporation Law (Act 1459) in 1906.
years after the cause of action accrued.
2. CORPORATION LAW; PROHIBITION VALID AND
2. Labor; When cause of action accrues; Case at bar.- IMPAIRS NO VESTED RIGHTS.-
Considering that the amounts withheld by defendant, though actually The aforesaid statutory prohibition is valid and impairs no vested
deductions from plaintiff’s salaries and unpaid commissions, were, rights or constitutional inhibition where no agreement to extend the
however, constituted as a bond or a deposit to answer for any liability original period of corporate life was perfected before the enactment of
that he might incur in connection with the goods handled by him, the the Corporation Law
right of plaintiff to commence an action for the return or refund of the
amounts representing such bond or deposit accrued only when the 3. Corporation by estoppel sec 21
same was no longer needed, which was on October, 1959 when
plaintiff was separated from the service. Corporations by estoppel – those which are so defectively formed as
not to be either de jure or de facto corporations but which are
3. Labor; Judicial demand; Case at bar.- considered as corporations in relation only to those who cannot deny
It is true that the claim filed by plaintiff with the regional office of the their corporate existence due to their agreement, admission or conduct
Department of Labor is not a judicial demand in the strict sense of the
term judicial demand” because the same was not instituted in a court Sec. 21. Corporation by estoppel. - All persons who assume to act as
of justice. Judicial notice, however, should be taken that on December a corporation knowing it to be without authority to do so shall be liable
10, 1956, Reorganization Plan No. 20-A was promulgated pursuant to as general partners for all debts, liabilities and damages incurred or
Republic Act No. 997, and under Section 25 of said reorganization arising as a result thereof: Provided, however, That when any such
plan each regional office of the Department of Labor was vested with ostensible corporation is sued on any transaction entered by it as a
original and exclusive jurisdiction over all cases affecting all money corporation or on any tort committed by it as such, it shall not be
claims arising from violations of labor standards on working allowed to use as a defense its lack of corporate personality.
conditions such as unpaid wages, underpayment, overtime and
separation pay, etc., to the exclusion of courts. Under the On who assumes an obligation to an ostensible corporation as such,
circumstances, the filing by plaintiff of his claim before the regional cannot resist performance thereof on the ground that there was in fact
office of the Department of Labor, which at that time was the only no corporation.
agency empowered to take cognizance of his claim, had the attributes
of a judicial demand for the purpose of interrupting the running of the Rationale for the doctrine
period of prescription.
Asia Banking vs Standard Products 46 Phil 144 1924
4. Executive orders; Unconstitutional executive orders; Effect.-
Where it appears that the plaintiff had filed his claim before Regional 1. CORPORATION; CORPORATE EXISTENCE, ESTOPPEL
Office No. 4 of the Department of Labor on July 26, 1960 in FROM DENYING.-
accordance with the provisions of Section 25 Of Reorganization Plan In the absence of fraud, a person who has contracted or dealt with an
No. 20-A, which was then in force, the fact that Section 25 of association in such a way as to recognize and in effect admit its legal
Reorganization Plan No. 20-A was subsequently declared existence as a corporate body is thereby estopped to deny its corporate
unconstitutional should not be counted against plaintiff in the present existence in an action leading out of or involving such contract or
case because the actual existence of a statute prior to declaration of its dealing, unless the existence is attacked for causes which have arisen
nullity is an operative fact, and may have consequences which cannot since making the contract or other dealing relied on as an estoppel.
justly be ignored.
2. CORPORATION; EVIDENCE.-
Hall vs Piccio 86 Phil 603 1950 The defendant having recognized the corporate existence of the
plaintiff by making a promissory note in its favor and making partial
1. CORPORATION "DE FACTO"; DISSOLUTION BY SUIT payments on the same, and the defendant having held itself out as a
OF STOCKHOLDERS; JURISDICTION OF COURT.- corporation and being therefore estopped from denying its own
An entity whose certificate of incorporation had not been obtained corporate existence, it is unnecessary for the plaintiff to present other
may be terminated in a private suit for its dissolution between evidence of the corporate existence of either of the parties.
stockholders, without 'the intervention of the state. The question as to
the right of minority stockholders to sue for dissolution does not affect Vda. De Salvaatierraa vs Garlitos 103 Phil 757 1958
the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal by the aggrieved party at the proper time. 1. PLEADING AND PRACTICE; PETITION FOR
RELIEF; WHEN TO FILE PETITION.-
2. CORPORATION "DE FACTO"; RIGHTS OF.- Rule 38, Section 3, of the Rules of Court treats of 2 periods within
Persons acting as corporation may not claim rights of "de facto" which a petition for relief may be filed. The petition must be filed
corporation if they have not obtained certificate of incorporation. within 60 days after the petitioner learns of the judgment and not more
than 6 months after the judgment or order was rendered, both of which
Benguet Consolidated vs Pineda 98 Phil 711 1956 must be satisfied.
2. CORPORATION LAW; LlABILITY OF PERSON DEALING
1. CORPORATION LAW; PROHIBITION AGAINST WITH ASSOCIATION AS A CORPORATE BODY; WHEN
EXTENSION OF CORPORATE EXISTENCE BY AMENDMENT ESTOPPEL MAY NOT BE INVOKED.-
OF THE ORIGINAL ARTICLES, APPLICABLE TO While as a general rule, a person who deals with an association in such
“SOCIEDADES ANONIMAS."- a way to recognize its existence as a corporate body is estopped from
The prohibition contained in section 18 of Act No. 1459, against denying the same in an action arising out of such transaction, yet this
extending the period of corporate existence by amendment of the doctrine may not be held to be applicable where fraud takes a part in
original articles, was intended to apply, and does apply, to sociedades the said transaction. In the instant case, on plaintiff's charge that she
was unaware of the fact that the defendant corporation had no juridical
33
personality, its president gave no confirmation or denial of the same The “due process” clause of the Constitution is designed to secure
and the circumstance surrounding the execution of the contract lead to justice as a living reality, not to sacrifice it by paying undue homage
the inescapable conclusion that plaintiff was really made to believe to formality. For substance must prevail over form.
that such corporation was duly organized in accordance with law.
Lim vs Philippine Fishing Gear GR 136448 1999
3. CORPORATION LAW; LIABILITY OF MEMBERS WHO
ACT AS AGENTS OF AN UNINCORPORATED ASSOCIATION.- 1. Partnerships; A partnership may be deemed to exist among parties
A corporation when registered has a juridical personality separate and who agree to borrow money to pursue a business and to divide the
distinct from its component members or stockholders and officers, profits or losses that may arise therefrom, even if it is shown that they
such that a corporation cannot be held liable for the personal have not contributed any capital of their own to a “common fund,” as
indebtedness of a stockholder even if he should be its president their contribution to such fund could be an intangible like credit or
(Walter A. Smith Co. vs. Ford, SC-G. R. No. 42420) and conversely, industry.-
a stockholder cannot be held personally liable for any financial From the factual findings of both lower courts, it is clear that Chua,
obligation by the corporation in excess of his unpaid subscription. But Yao and Lim had decided to engage in a fishing business, which they
this rule is understood to refer merely to registered corporations and started by buying boats worth P3.35 million, financed by a loan
cannot be made applicable to the liability of members of an secured from Jesus Lim who was petitioner’s brother. In their
unincorporated association. The reason behind this doctrine is Compromise Agreement, they subsequently revealed their intention to
obvious—an unincorporated association has no personality and would pay the loan with the proceeds of the sale of the boats, and to divide
be incompetent to act and appropriate for itself the power and equally among them the excess or loss. These boats, the purchase and
attributes of a corporation as provided by law, it cannot create agents the repair of which were financed with borrowed money, fell under
or confer authority on another to act in its behalf; thus, those who act the term “common fund” under Article 1767. The contribution to such
or purport to act as its representatives or agents do so without authority fund need not be cash or fixed assets; it could be an intangible like
and at their own risk. And as it is an elementary principle of law that credit or industry. That the parties agreed that any loss or profit from
a person who acts as an agent without authority or without a principal the sale and operation of the boats would be divided equally among
is himself regarded as the principal, possessed of all the right and them also shows that they had indeed formed a partnership.
subject to all the liabilities of a principal, a person acting or purporting
to act on behalf of a corporation which has no valid existence assumes 2. Partnerships; Appeals; Petitions for Review; Pleadings and
such privileges and obligations and becomes personally liable for Practice; Under Rule 45, a petition for review should involve only
contracts entered into or for other acts performed as such agent (Fay questions of law, and a petitioner, in assailing the factual findings of
vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial the two lower courts, effectively goes beyond the bounds of a petition
Laws of the Philippines, Fifth Ed., p. 689-690). for review.-
We stress that under Rule 45, a petition for review like the present case
Albert vs University Publishing 13 scra 84 1965 should involve only questions of law. Thus, the foregoing factual
findings of the RTC and the CA are binding on this Court, absent any
1. Corporations; Principle of corporation by estoppel; Not cogent proof that the present action is embraced by one of the
invokable by one who misrepresented corporation as duly organized exceptions to the rule. In assailing the factual findings of the two lower
against his victim.- courts, petitioner effectively goes beyond the bounds of a petition for
One who has induced another to act upon his wilful misrepresentation review under Rule 45.
that a corporation was duly organized and existing under the law,
cannot thereafter set up against his victim the principle of corporation 3. Partnerships; Appeals; Petitions for Review; A proper
by estoppel. adjudication of claimants’ rights mandates that courts must review and
thoroughly appraise all relevant facts.-
2. Corporations; Person acting for corporation with no valid A proper adjudication of claimants’ rights mandates that courts must
existence is personally liable for contracts entered into as such agent.- review and thoroughly appraise all relevant facts. Both lower courts
A person acting or purporting to act on behalf of a corporation which have done so and have found, correctly, a preexisting partnership
has no valid existence assumes such privileges and obligations and among the parties. In implying that the lower courts have decided on
becomes personally liable for contracts entered into or for other acts the basis of one piece of document alone, petitioner fails to appreciate
performed as such agent. that the CA and the RTC delved into the history of the document and
explored all the possible consequential combinations in harmony with
3. Parties to Action; Suit against corporation with no valid existence; law, logic and fairness. Verily, the two lower courts’ factual findings
Real defendant is person who has control of its proceedings.- mentioned above nullified petitioner’s argument that the existence of
In a suit against a corporation with no valid existence the person who a partnership was based only on the Compromise Agreement.
had and exercised the rights to control the proceedings, to make
defense, to adduce and cross-examine witnesses, and to appeal from a 4. Partnerships; Loans; It is not uncommon to register the properties
decision, is the real defendant, and .the enforcement of a judgment acquired from a loan in the name of the person the lender trusts.-
against the corporation upon him is substantial observance of due Verily, as found by the lower courts, petitioner entered into a business
process of law. agreement with Chua and Yao, in which debts were undertaken in
order to finance the acquisition and the upgrading of the vessels which
4. Parties to Action; Real party in interest; Person who acted as would be used in their fishing business. The sale of the boats, as well
representative of non-existent principal and who reaped benefits from as the division among the three of the balance remaining after the
its contracts.- payment of their loans, proves beyond cavil that F/B Lourdes, though
A person who acted as representative of a non-existent principal, who registered in his name, was not his own property but an asset of the
reaped the benefits resulting from a contract entered into by him as partnership. It is not uncommon to register the properties acquired
such, and who violated its terms, thereby precipitating a suit, is the from a loan in the name of the person the lender trusts, who in this
real party to the contract sued upon. case is the petitioner himself. After all, he is the brother of the creditor,
Jesus Lim.
5. Due Process of Law; Purpose is to secure justice and not to
sacrifice it by technicalities.-
34
5. Partnerships; Corporation Law; Estoppel; Corporation by entered into by persons with whom he previously had an existing
Estoppel Doctrine; Agency; Those who act or purport to act as the relationship, he is deemed to be part of said association and is covered
representatives or agents of an ostensible corporate entity who is by the scope of the doctrine of corporation by estoppel. We reiterate
proven to be legally inexistent do so without authority and at their own the ruling of the Court in Alonso v. Villamor: “A litigation is not a
risk.- game of technicalities in which one, more deeply schooled and skilled
Even if the ostensible corporate entity is proven to be legally in the subtle art of movement and position, entraps and destroys the
nonexistent, a party may be estopped from denying its corporate other. It is, rather, a contest in which each contending party fully and
existence. “The reason behind this doctrine is obvious—an fairly lays before the court the facts in issue and then, brushing aside
unincorporated association has no personality and would be as wholly trivial and indecisive all imperfections of form and
incompetent to act and appropriate for itself the power and attributes technicalities of procedure, asks that justice be done upon the merits.
of a corporation as provided by law; it cannot create agents or confer Lawsuits, unlike duels, are not to be won by a rapier’s thrust.
authority on another to act in its behalf; thus, those who act or purport Technicality, when it deserts its proper office as an aid to justice and
to act as its representatives or agents do so without authority and at becomes its great hindrance and chief enemy, deserves scant
their own risk. And as it is an elementary principle of law that a person consideration from courts. There should be no vested rights in
who acts as an agent without authority or without a principal is himself technicalities.”
regarded as the principal, possessed of all the right and subject to all
the liabilities of a principal, a person acting or purporting to act on 3. Piercing the veil of corporate fiction
behalf of a corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable for contracts Umali vs CA 189 scra 529 1990
entered into or for other acts performed as such agent.”
1. Courts; Rule that findings of fact of appellate court, final and
6. Partnerships; Corporation Law; Estoppel; Corporation by conclusive.-
Estoppel Doctrine; The doctrine of corporation by estoppel may At the outset, it will be noted that petitioners submission under the
apply to the alleged corporation and to a third party; An first assigned error hinges purely on questions of fact. Respondent
unincorporated association, which represents itself to be a corporation, Court of Appeals made several findings to the effect that the
will be estopped from denying its corporate capacity in a suit against questioned documents are valid and binding upon the parties, that
it by a third person who relies in good faith on such representation.- there was no fraud employed by private respondents in the execution
The doctrine of corporation by estoppel may apply to the alleged thereof, and that, contrary to petitioners’ allegation, the evidence on
corporation and to a third party. In the first instance, an unincorporated record reveals that petitioners had every intention to be bound by their
association, which represented itself to be a corporation, will be undertakings in the various transactions had with private respondents.
estopped from denying its corporate capacity in a suit against it by a It is a general rule in this jurisdiction that findings of fact of said
third person who relied in good faith on such representation. It cannot appellate court are final and conclusive and, thus, binding on this
allege lack of personality to be sued to evade its responsibility for a Court in the absence of sufficient and convincing proof,inter alia, that
contract it entered into and by virtue of which it received advantages the former acted with grave abuse of discretion. Under the
and benefits. circumstances, we find no compelling reason to deviate from this
long-standing jurisprudential pronouncement.
7. Partnerships; Corporation Law; Estoppel; Corporation by
Estoppel Doctrine; A third party who, knowing an association to be 2. Courts; Civil Law; Contracts; Absolute simulation renders the
unincorporated, nonetheless treated it as a corporation and received contract null and void, when the parties do not intend to be bound by
benefits from it, may be barred from denying its corporate existence the same.-
in a suit brought against the alleged corporation.- There is absolute simulation, which renders the contract null and void,
A third party who, knowing an association to be unincorporated, when the parties do not intend to be bound at all by the same. The
nonetheless treated it as a corporation and received benefits from it, basic characteristic of this type of simulation of contract is the fact that
may be barred from denying its corporate existence in a suit brought the apparent contract is not really desired or intended to either produce
against the alleged corporation. In such case, all those who benefited legal effects or in any way alter the juridical situation of the parties.
from the transaction made by the ostensible corporation, despite The subsequent act of Rivera in receiving and making use of the
knowledge of its legal defects, may be held liable for contracts they tractor subject matter of the Sales Agreement and Chattel Mortgage,
impliedly assented to or took advantage of. and the simultaneous issuance of a surety bond in favor of Bormaheco,
concomitant with the execution of the Agreement of Counter-
8. Partnerships; Corporation Law; Estoppel; Corporation by Guaranty with Chattel/Real Estate Mortgage, conduce to the
Estoppel Doctrine; Under the law on estoppel, those acting on behalf conclusion that petitioners had every intention to be bound by these
of a corporation and those benefited by it, knowing it to be without contracts. The occurrence of these series of transactions between
valid existence, are held liable as general partners.- petitioners and private respondents is a strong indication that the
It is difficult to disagree with the RTC and the CA that Lim, Chua and parties actually intended, or at least expected, to exact fulfillment of
Yao decided to form a corporation. Although it was never legally their respective obligations from one another.
formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of it. 3. Courts; Civil Law; To set aside a document solemnly executed,
Clearly, under the law on estoppel, those acting on behalf of a proof of fraud must be clear.-
corporation and those benefited by it, knowing it to be without valid Neither will an allegation of fraud prosper in this case where
existence, are held liable as general partners. petitioners failed to show that they were induced to enter into a
contract through the insidious words and machinations of private
9. Partnerships; Corporation Law; Estoppel; Corporation by respondents without which the former would not have executed such
Estoppel Doctrine; A person who has reaped the benefits of a contract. To set aside a document solemnly executed and voluntarily
contract entered into by persons with whom he previously had an delivered, the proof of fraud must be clear and convincing. We are not
existing relationship is deemed to be part of said association and is persuaded that such quantum of proof exists in the case at bar.
covered by the scope of the doctrine of corporation by estoppel.-
Technically, it is true that petitioner did not directly act on behalf of
the corporation. However, having reaped the benefits of the contract
35
4. Courts; Civil Law; Corporation; Piercing the veil of corporate agreement was to deliver them C. I. F. Hongkong, the contract of sale
entities, not proper remedy when the corporation employed fraud in being consensual—perfected by mere consent—(Civil Code, article
the foreclosure proceedings.- 1445; 10 Manresa, 4th ed., p. 11), the location of the property and the
Under the doctrine of piercing the veil of corporate entity, when valid place of delivery did not matter in the question of where the agreement
grounds therefore exist, the legal fiction that a corporation is an entity was perfected.
with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will 4. OBLIGATIONS AND CONTRACTS; SALE; PERFECTION
be considered as a mere association of persons. The members or OF, WHEN EXECUTED THROUGH CORRESPONDENCE.-
stockholders of the corporation will be considered as the corporation Contracts executed through correspondence are completed from the
that is, liability will attach directly to the officers and stockholders. time an answer is made accepting the proposition or the conditions by
The doctrine applies when the corporate fiction is used to defeat public which the latter may be modified.
convenience, justify wrong, protect fraud, or defend crime, or when it
is made as a shield to confuse the legitimate issues, or where a 5. STATUTORY CONSTRUCTION; INTERPRETATION BY
corporation is the mere alter ego or business conduit of a person, or OFFICERS OF ADMINISTRATIVE BRANCHES NOT
where the corporation is so organized and controlled and its affairs are BlNDING ON COURTS; "STARE DECISIS"; CASE AT BAR.-
so conducted as to make it merely an instrumentality, agency, conduit The ruling of the Secretary of Finance, Exhibit M, was not binding
or adjunct of another corporation. In the case at bar, petitioners seek upon the trial court, much less upon this tribunal, since the duty and
to pierce the veil of corporate entity of Bormaheco, ICP and PM Parts, power of interpreting the laws is primarily a function of the judiciary.
alleging that these corporations employed fraud in causing the Plaintiff cannot be excused from abiding by this legal principle, nor
foreclosure and subsequent sale of the real properties belonging to can it properly be heard to say that it relied on the Secretary's ruling
petitioners. While we do not discount the possibility of the existence and that, therefore, the courts should not now apply an interpretation
of fraud in the foreclosure proceedings, neither are we inclined to at variance therewith. The rule of stare decisis is undoubtedly entitled
apply the doctrine invoked by petitioners in granting the relief sought. to more respect in the construction of statutes than the interpretations
It is our considered opinion that piercing the veil of corporate entity is given by officers of the administrative branches of the government,
not the proper remedy in order that the foreclosure proceeding may be even those entrusted with the administration of particular laws; and
declared a nullity under the circumstances obtaining in the case at bar. yet in Philippine Trust Co. and Smith, Bell Co. vs. Mitchell (59 Phil.,
30), this court refused to follow its own doctrine laid down in a former
5. Courts; Civil Law; Corporation; Surety; Extent of surety’s case, saying: "More important than anything else is that the court
liability, determined only by the clause of the contract of suretyship.- should be right."
It is basic that liability on a bond is contractual in nature and is
ordinarily restricted to the obligation expressly assumed therein. We Tantongco vs Kaisahan 106 Phil 199 1959
have repeatedly held that the extent of a surety’s liability is determined
only by the clause of the contract of suretyship as well as the 1. CORPORATIONS; DlSTINCT PERSONALITY OF A
conditions stated in the bond. It cannot be extended by implication CORPORATION; JURIS-DICTION OF COURT OF
beyond the terms of the contract. Fundamental likewise is the rule that, INDUSTRIAL RELATIONS NOT AFFECTED BY DEATH OF
except where required by the provisions of the contract, a demand or OWNER.-
notice of default is not required to fix the surety’s liability. Hence, The death of an owner and manager of a corporation, against which
where the contract of suretyship stipulates that notice of the principal’s cases are pending in the Court of Industrial Relations, does not deprive
default be given to the surety, generally the failure to comply with the the latter of its jurisdiction over the same. The party in those cases
condition will prevent recovery from the surety. There are certain being the corporation and not the owner or manager personally, the
instances, however, when failure to comply with the condition will not claims of the laborers therein, which are merely incidental to their
extinguish the surety’s liability, such as a failure to give notice of demands for reinstatement for having been unjustly dismissed, and for
slight defaults, which are waived by the obligee; or on mere suspicion better working conditions, are not the claims contemplated by law to
of possible default; or where, if a default exists, there is excuse or be submitted before the administrator of the estate of a deceased
provision in the suretyship contract exempting the surety for liability person.
therefor, or where the surety already has knowledge or is chargeable
with knowledge of the default. 2. CORPORATIONS; EXISTENCE AND
OPERATION; ESTOPPEL.-
Koppel ( Phil ) vs Yatco 77 Phil 496 1946 Having admitted the existence and operation of the two entities in a
complaint filed for injunction by the said entities and on two other
1. CORPORATIONS; DISREGARD OF CORPORATE FICTION.- occasions, petitioner, who is stockholder, director, treasurer and
A corporation will be looked upon as a legal entity as a general rule, manager of said entities, is now estopped from denying the existence
and until sufficient reason to the contrary appears; but, when the of the same.
notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the 3. COURT OF INDUSTRIAL RELATIONS; POWER TO
corporation as an association of persons. ENFORCE ORDERS; CONTEMPT.-
Petitioner's contention that after he ceased to be administrator of the
2. CORPORATIONS; CONTROL BY ANOTHER estate of the deceased owner and manager of the entities in question,
CORPORATION.- he cannot now be compelled to comply with the order of the Court of
The corporate entity is disregarded where it is so organized and Industrial Relations to appear in the contempt proceedings instituted
controlled, and its affairs are so conducted, as to make it merely an against him, is untenable. The jurisdiction and authority of said court
instrumentality, agency, conduit or adjunct of another corporation. as to compliance with and violations of its orders are clearly defined
in section 6 of Commonwealth Act No. 143.
3. OBLIGATIONS AND CONTRACTS; SALE; PERFECTION
OF CONSENSUAL CONTRACT; LOCATION OF PROPERTY Robledo vs NLRC 238 scra 52 1994
AND PLACE OF DELIVERY IMMATERIAL; CASE AT BAR.-
While it is true that when the contract was perfected in the Philippines 1. Labor Law; Contracts; Unless expressly assumed labor contracts
the pair of AtlasDiesel Marine Engines were in Sweden and the are not enforceable against the transferee of an enterprise.-
36
Indeed, the rule is settled that unless expressly assumed labor contracts purchase price before all the impediments to the final consummation
are not enforceable against the transferee of an enterprise. The reason of the sale had been removed.
for this is that labor contracts are in personam. Consequently, it has
been held that claims for backwages earned from the former employer ID.; DECEIT IN ITS EXECUTION.—A vendor could not be
cannot be filed against the new owners of an enterprise. Nor is the new considered to have been deceived into signing a deed of sale of real
operator of a business liable for claims for retirement pay of estate, where the circumstances show (1) that she is intelligent and
employees. well educated and had been managing her affairs; (2) that she had an
able attorney who was assisting her in a lawsuit; and (3) that she has a
2. Corporation Law; Piercing the Veil of Corporate son who is a leading citizen and a business man and knew the English
Entity; Piercing the veil of corporate entity means looking through language very well if she did not. If she signed the deed of sale without
the corporate form to the individual stockholders composing it.- being apprised of its import, it can hardly be conceived that she did
The doctrine of piercing the veil of corporate entity is used whenever not have her attorney or her son, who took active part in the
a court finds that the corporate fiction is being used to defeat public negotiations, read it to her afterwards.
convenience, justify wrong, protect fraud, or defend crime, or to
confuse legitimate issues, or that a corporation is the mere alter ego or CORPORATIONS; CORPORATE ENTITY.—The fiction of
business conduit of a person or where the corporation is so organized corporate entity of a corporation, which has long been organized and
and controlled and its affairs are so conducted as to make it merely an has engaged in real estate business, will not be disregarded apart from
instrumentality, agency, conduit or adjunct of another corporation. It the members of the corporation, where the corporate entity was not
is apparent, therefore, that the doctrine has no application to this case used to circumvent the law or perpetrate deception and the disregard
where the purpose is not to hold the individual stockholders liable for of the technicality would pave the way for the evasion of a legitimate
the obligations of the corporation but, on the contrary, to hold the and binding commitment. "The courts will not ignore the corporate
corporation liable for the obligations of a stockholder or stockholders. entity in order to further the perpetration of a fraud." (18 C. J. S., 381.)
Piercing the veil of corporate entity means looking through the
corporate form to the individual stockholders composing it. Here there PRINCIPAL AND AGENT; AGENT, DEFINED; CIVIL CODE,
is no reason to pierce the veil of corporate entity because there is no ARTICLE 1459.—An agent, in the sense used in article 1459 of the
question that petitioners’ claims, assuming them to be valid, are the Civil Code, is one who accepts another's representation to perform in
personal liability of the late Felipe Bacani. It is immaterial that he was his name certain acts of more or less transcendancy. (10 Manresa, 46th
also a stockholder of BASEC. ed., 100.)

3. Labor Law; Money Claims; Remedial Law; Money claims ID.; ID.; ID.—The ban of paragraph 2 of article 1459 connotes the
against an estate must be filed in accordance with Sec. 5 of Rule 86.- idea of trust and confidence; and so, where the relationship does not
Now, the claims of petitioners are actually money claims against the involve considerations of good faith and integrity, the prohibition
estate of Felipe Bacani. They must be filed against his estate in should not, and does not apply. To come under the prohibition, the
accordance with sec. 5 of Rule 86 which provides in part: SEC. 5. agent must be in a fiduciary relation with his principal.
Claims which must be filed under the notice. If not filed, barred;
exceptions.—All claims for money against the decedent, arising from ID.; ID.; ID.—A person who acts as a go-between or middleman
contract, express or implied, whether the same be due, not due, or between the vendor and the vendee, bringing them together to make
contingent, all claims for funeral expenses and expenses for the last the contract themselves, without any power or discretion whatsoever
sickness of the decedent, and judgment for money against the which he could abuse to his advantage and to the owner's prejudice, is
decedent, must be filed within the time limited in the notice; otherwise not an agent within the meaning of article 1459 of the Civil Code.
they are barred forever, except that they may be set forth as
counterclaims in any action that the executor or administrator may
bring against the claimants… ATTORNEY AND CLIENT; CIVIL CODE, ARTICLE 1459.—
Attorneys are only prohibited f rom buying their client's property
4. Labor Law; Money Claims; Under Art. 110 of the Labor Code, 'which is the subject of litigation (Art. 1459, No. 5, Spanish Civil
money claims of laborers enjoy preference over claims of other Code). Where the questioned sale of the property of the client was
creditors in case of bankruptcy or liquidation of the employer’s effected before the subject thereof became involved in the present
business.- action, the prohibition does not lie.
The rationale for the rule is that upon the death of the defendant, a
testate or intestate proceeding shall be instituted in the proper court BANKS AND BANKING; CERTIFICATION OF
wherein all his creditors must appear and file their claims which shall CHECK; DEPOSIT DURING JAPANESE OCCUPATION
be paid proportionately out of the property left by the deceased. The NULLITY OF, UNDER EXECUTIVE ORDER No. 49.—Under
objective is to avoid duplicity of procedure. Hence the ordinary banking laws and practice, by the certification "the funds represented
actions must be taken out from the ordinary courts. Under Art. 110 of by the check were transferred from the credit of the maker to that of
the Labor Code, money claims of laborers enjoy preference over the payee or holder, and, for all intents and purposes, the latter became
claims of other creditors in case of bankruptcy or liquidation of the the depositor of the drawee bank with rights and duties of one in such
employer’s business. relation"; the transfer of the corresponding funds from the credit of the
depositor to that of the payee had to be coextensive with the life of the
a. Fraud cases checks, which in this case was 90 days. If the checks were not
presented for payment within that period, they became invalid and the
Gregorio Araneta, Inc. vs Tuazon 91 Phil 786 1952 funds were automatically restored to the credit of the drawer though
not as a current deposit but as special deposit. Where the checks were
CONTRACTS; SALE; MORTGAGE.—The proviso in a contract never collected and the account against which they were drawn was
of sale of real estate that 10 per cent of the purchase price should not used or claimed, and since that account "was opened during the
1. be paid only after the mortgage on the property should Japanese occupation and in Japanese currency," the checks "became
have been cancelled, is not onerous or unusual. It was not onerous or obsolete -as the account subject thereto is considered null and void in
unusual for the vendee to withhold a relatively small portion of the accordance with Executive Order No. 49 of the President of the
Philippines."
37
OBLIGATIONS AND CONTRACTS; PAYMENT BY CHECK, 1. Civil Law; Contracts; Contract to sell real estate subdivision lots
WHICH WERE LOST OR DESTROYED.—The stipulation that on installment; Rescission; Notice to defaulting lot buyer in his
the seller "shall not hold the vendee responsible for any loss of these payments, indispensable; Judicial action for rescission of contract to
checks," which were to be void if not presented for payment at the sell not necessary where contract provides for its revocation and
Bank within 90 days from date of acceptance," was unconscionable, cancellation for violation of any of its terms and conditions, provided
void and unenforceable in so far as the said stipulation would stretch written notice is sent to defaulter informing him of the rescission.-
the vendor's liability for those checks beyond 90 days. It was not in Well settled is the role, as held in previous jurisprudence, that judicial
accord with law, equity or good conscience to hold a party responsible action for the rescission of a contract is not necessary where the
for something he or she had no access to and could not make use of contract provides that it may be revoked and cancelled for violation of
but which was under the absolute control and disposition of the other any of its terms and conditions. However, even in the cited cases, there
party. was at least a written notice sent to the defaulter informing him of the
rescission. As stressed in University of the Philippines vs. Walfrido de
SALE; LOSS OF THE FUNDS REPRESENTED BY CHECKS los Angeles the act of a party in treating a contract as cancelled should
IN PAYMENT; TIME FOR PAYMENT.—In adjudging the he made known to the other.
vendee to be the party to shoulder the loss of the amount of the check
issued in payment of the obligation, and ordering the vendee to pay 2. Civil Law; Contracts; Extrajudicial rescission has legal effect,
the amount to the vendor, the judgment was not intended to be in the unless the other party impugns it.-
nature of an extension of time of payment. This was reiterated in Zulueta vs. Mariano where we held that
extrajudicial rescission has legal effect where the other party does not
CONTRACTS AND OBLIGATIONS; RESCISSION; CASUAL oppose it. Where it is objected to, a judicial determination of the issue
BREACH OF CONTRACT.—"The general rule is that recission is still necessary. In other words, resolution of reciprocal contracts
will not be permitted for a slight or casual breach of the contract, but may be made extra judicially unless successfully impugned in Court.
only for such breaches as are so substantial and fundamental as to If the debtor impugns the declaration, it shall be subject to judicial
defeat the object of the parties." (Song Fo & determination.
Co. vs.HawaiianPhilippine Co., 47 Phil., 821, 827.)
3. Civil Law; Contracts; Waiver of notices; Contract of
ID.; INTEREST, SUSPENSION OF THE RUNNING OF, adhesion; Waiver of right of defaulting lot buyer to be notified of
ALTHOUGH DEBT HAS NOT BEEN PAID.—The matter of the rescission of contract must be certain and unequivocal and
suspension of the running of interest on the loan is governed by intelligently made; Contracts to sell by real estate developers are
principles which regard reality rather than technicality, substance contracts of adhesion; Public policy to protect buyers of real estate on
rather than form. Good faith of the offeror or ability to make good the installment payments against onerous and oppressive conditions such
offer should in simple justice excuse the debtor from paying interest as waiver of notice.-
after the offer was rejected. A debtor cannot be considered delinquent The contention that private respondent had waived his right to be
who offered checks backed by sufficient deposit or ready to pay cash notified under paragraph 6 of the contract is neither meritorious
if the creditor chose that means of payment. Technical defects of the because it was a contract of adhesion, a standard form of petitioner
offer cannot be adduced to destroy its effects when the objection to corporation, and private respondent had no freedom to stipulate. A
accept the payment was based on entirely different grounds. Thus, waiver must be certain and unequivocal, and intelligently made; such
although the defective consignation made by the debtor did not waiver follows only where liberty of choice has been fully accorded.
discharge the mortgage debt, the running of interest on the loan is Moreover, it is a matter of public policy to protect buyers of real estate
suspended by the offer and tender of payment. on installment payments against onerous and oppressive conditions.
Waiver of notice is one such onerous and oppressive condition to
ID. ; DEBT MORATORIUM.—The mortgagor is not entitled to buyers of real estate on installment payments.
suspension of payment under the debt moratorium law or orders
because the bulk of the debt was a pre-war obligation and the 4. Civil Law; Contracts; Refund of installments to lot buyer, proper,
moratorium order as to such obligation has been repealed except where property of defaulting lot buyer already sold to a third person
where the debtor has suffered war damage and has filed claim for it. and absent evidence that other lots are still available.-
Moreover, the debtor herself caused her creditor to be brought into this As a consequence of the resolution by petitioners, rights to the lot
case which resulted in the filing of the cross-claim to foreclose the should be restored to private respondent or the same should be
mortgage. replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no
Palacio vs Fely Transportation Co., 5 scra 1011 1962 evidence on record that other lots are still available, private respondent
is entitled to the refund of installments paid plus interest at the legal
1. Corporations; Subsidiary Civil Liability for Damages; Fiction rate of 12% computed from the date of the institution of the action. It
of corporate entity not to be used to evade liability.- would be most inequitable if petitioners were to be allowed to retain
Where the main purpose in forming the corporation was to evade one's private respondent’s payments and at the same time appropriate the
subsidiary liability for damages, in a criminal case, the corporation proceeds of the second sale to another.
may not be heard to say that it has a personality separate and distinct
from its members, because to allow it to do so would be to sanction 5. Civil Law; Corporation Law; General rule that a corporation may
the use of the fiction of corporate entity as a shield to further an end not be made to answer for acts or liabilities of its stockholders or those
subversive of justice. (La Campana Coffee Factory, et al. vs.Kaisahan of legal entities to which it may be connected and vice versa;
ng mga Manggagawa, etc., et al., L-5677, May 25, 1953). The Exceptions to rule that veil of corporate fiction may not be pierced.-
Supreme Court can even substitute the real party in interest in place of It is basic that a Corporation is invested by law with a personality
the defendant corporation in order to avoid multiplicity of suits and separate and distinct from those of the persons composing it as well as
thereby save the parties unnecessary expenses and delay (Alonso from that of any other legal entity to which it may be related. As a
vs.Villamor, 16 Phil. 315). general rule, a corporation may not be made to answer for acts or
liabilities of its stockholders or those of the legal entities to which it
Palay, Inc. vs Clave 124 scra 636 1983 may be connected and vice versa. However, the veil of corporate
38
fiction may be pierced when it is used as a shield to further an end 1. Corporation Law; A corporation is bestowed judicial
subversive of justice; or for purposes that could not have been personality separate and distinct from its stockholders; When the
intended by the law that created it; or to defeat public convenience, judicial personality of the corporation is used to defeat public
justify wrong, protect fraud, or defend crime; or to perpetuate fraud or convenience, justify wrong, protect fraud or defend crime, the
confuse legitimate issues; or to circumvent the law or perpetuate corporation shall be considered as mere association of persons and its
deception; or as an alter ego, adjunct or business conduit for the sole responsible officers and/or stockholders shall be held individually
benefit of the stockholders. liable.-
Under the law a corporation is bestowed juridical personality, separate
6. Civil Law; Corporation Law; Absence of badges of fraud of and distinct from its stockholders [Civil Code, Art. 44; Corporation
subdivision owner when it rescinded a contract to sell extrajudicially Code, sec. 2]. But when the juridical personality of the corporation is
and sold the property to a third person.- used to defeat public convenience, justify wrong, protect fraud or
We find no badges of fraud on petitioners’ part. They had literally defend crime, the corporation shall be considered as a mere
relied, albeit mistakenly, on paragraph 6 (supra) of its contract with association of persons, and its responsible officers and/or stockholders
private respondent when it rescinded the contract to sell extrajudicially shall be held individually liable. For the same reasons, a corporation
and had sold it to a third person. shall be liable for the obligations of a stockholder, or a corporation and
its successor-in-interest shall be considered as one and the liability of
7. Civil Law; Corporation Law; President of real estate corporation the former shall attach to the latter.
cannot be held personally liable where he appears to be controlling
stockholder absent sufficient proof that he used the corporation to 2. Corporation Law; A corporation is bestowed judicial
defraud defaulting lot buyer; Mere ownership by a single stockholder personality separate and distinct from its stockholders; To
or by another corporation of all or nearly all capital stock of disregard the separate judicial personality of a corporation, the wrong
corporation not sufficient ground for disregarding corporate doing must be clearly and convincingly established.-
personality; Case at bar.- But for the separate juridical personality of a corporation to be
In this case, petitioner Onstott was made liable because he was then disregarded, the wrongdoing must be clearly and convincingly
the President of the corporation and he appeared to be the controlling established. It cannot be presumed.
stockholder. No sufficient proof exists on record that said petitioner
used the corporation to defraud private respondent. He cannot, 3. Corporation Law; A corporation is bestowed judicial
therefore, be made personally liable just because he “appears to be the personality separate and distinct from its
controlling stockholder”. Mere ownership by a single stockholder or stockholders; Substantial identity of the incorporators of the two
by another corporation of all or nearly all of the capital stock of a corporations does not necessarily imply fraud.-
corporation is not of itself sufficient ground for disregarding the Likewise, substantial identity of the incorporators of the two
separate corporate personality. corporations does not necessarily imply fraud.

Pabalan vs NLRC 184 scra 495 1990 4. Labor Law; POEA; A judgment against a recruiter should initially
be enforced against the cash and surety bonds filed with the POEA.-
1. Remedial Law; Summons; Labor Law; When petitioners filed At this juncture, the Court finds it appropriate to point out that a
their opposition and supplemental position papers, summons were judgment against a recruiter should initially be enforced against the
served and there was no deprivation of due process.- cash and surety bonds filed with the POEA.
The Court finds these grounds to be devoid of merit. As the record
shows while originally it was PIF which was impleaded as respondent 5. Labor Law; POEA; The obligations guaranteed by the bonds are
before the labor arbiter, petitioners also appeared in their behalf continuing.-
through counsel. Thereafter when the supplemental position paper was Quite evidently, these bonds do not answer for a single specific
filed by complainants, petitioners were impleaded as respondents to liability, but for all sorts of liabilities of the recruiter to the worker and
which they filed an opposition inasmuch as they filed their own to the POEA. Moreover, the obligations guaranteed by the bonds are
supplemental position papers. They were therefore properly served continuing. Thus, the bonds are subject to replenishment when they
with summons and they were not deprived of due process. are garnished, and failure to replenish shall cause the suspension or
cancellation of the recruiter’s license [Rule II, sec. 19]. Furthermore,
2. Remedial Law; Summons; Ownership by single stockholder, not a cash bond shall be refunded to a recruiter who surrenders his license
a ground for disregarding the separate corporate personality.- only upon posting of a surety bond of similar amount valid for three
The settled rule is that the corporation is vested by law with a (3) years [Rule II, sec. 20]. All these, to ensure recovery from the
personality separate and distinct from the persons composing it, recruiter.
including its officers as well as from that of any other legal entity to
which it may be related. Thus, a company manager acting in good faith Villia Rey Transit vs Ferrer 25 scra 845 1968
within the scope of his authority in terminating the services of certain
employees cannot be held personally liable for damages. Mere 1. Evidence; Admissibility of secondary evidence when original is in
ownership by a single stockholder or by another corporation of all or adverse party's custody; Requisites of.-
nearly all capital stocks of the corporation is not by itself sufficient Section 5 of Rule 130 of the Rules of Court provides for the requisites
ground for disregarding the separate corporate personality. for the admissibility of secondary evidence when the original is in the
custody of the adverse party, thus: (1) opponent's possession of the
3. Remedial Law; Summons; Corporations; Officers of a original; (2) reasonable notice to opponent to produce the original; (3)
corporation are not liable for their official acts, unless they exceeded satisfactory proof of its existence; and (4) failure or refusal of
authority.- opponent to produce the original in court. Regarding the f irst element,
As a general rule, officers of a corporation are not personally liable for it is not necessary for a party seeking to introduce secondary evidence
their official acts unless it is shown that they have exceeded their to show that the original is in the actual possession of his adversary. It
authority. is enough that the circumstances are such as to indicate that the writing
is in his possession or under his control. Neither is it required that the
Del Rosario vs NLRC 187 scra 777 1990 party entitled to the custody of the instrument should, on being notified

39
to produce it, admit having it in his possession. The party calling for same manner as the firm had previously done, the corporation is bound
such evidence may introduce a copy thereof as in the case of loss. by the contract which the firm made with A.

2. Corporation law; Corporation separate and distinct from members WHEN CONTRACT BY INDIVIDUAL BINDS
thereof; Piercing the corporate veil, when necessary.- CORPORATION.—Where a contract is made with A by W in his
The doctrine that a corporation is a legal entity distinct and separate own name, and W is the owner of all of the capital stock of the
from the members and stockholders who compose it is recognized and corporation, and the corporation deals with A as its agent under the
respected in all cases which are within reason and the law. When the contract, the contract which W made with A becomes a contract
fiction is urged as a means of perpetrating a fraud or an illegal act or between A and the corporation, and the corporation is bound by the
as a vehicle for the evasion of an existing obligation, the contract.
circumvention of statutes, the achievement or perfection of a
monopoly or generally the perpetration of knavery or crime, the veil IN THE ABSENCE OF FRAUD "CREDITORS' COMMITTEE"
with which the law covers and isolates the corporation from the OF INSOLVENT CORPORATION CANNOT RESCIND
members or stockholders who compose it will be lifted to allow for its CONTRACT OF CORPORATION.—Where a corporation
consideration merely as an aggregation of individuals. becomes insolvent, and its affairs were placed in the hands of a
"creditors' committee," the "committee" is bound by any valid contract
3. Contracts; Validity of stipulations in restraint of trade.- made between A and the corporation, and, in the absence of fraud, the
The 10-year restrictive clause in the contract between Villarama and "creditors' committee" has no power to rescind the contract.
Pantranco while in the nature of an agreement suppressing
competition, is nevertheless reasonable and not harmful or obnoxious La Campana Coffee vs Kaisahan 93 Phil 160 1953
to public interest. The disputed stipulation is only incidental to the
main agreement which is that of sale, the restraint is only partial: first, 1. Industrial Disputes; Two Factors Operating under One
in scope, it refers only to application for TPU by the seller in Management; Effect of One of Them Bieng a Registered
competition with the lines sold to the buyer; second, in duration, it is Corporation.-
only for ten (10) years; and, third, with respect to situs or territory, the —C Coffee Factory, Inc., and C Gaugau Packing are operating as one
restraint is only along the lines covered by the certif icates sold. It does business though with two trade names. The owner of the latter is T ;
not appear that the ultimate result of the clause or stipulation would and the former, though an incorporated business, is in reality owned
leave solely to Pantranco the right to operate along the lines in exclusively by and his family. The two factories had but one office,
question, thereby establishing a monopoly. The main purpose of the one management and one payroll until July 17, the day the case was
restraint is to protect for a limited time the business of the buyer. The certified to the Court of Industrial Relations, when the person who was
rule is that a contract in restraint of trade is valid provided there is a discharging the office of cashier for both branches of the business
limitation upon either time or place. began preparing separate payrolls for the two. And the laborers of the
gaugau factory and the coffee factory were interchangeable, that is,
4. Contracts; Purchaser in good faith; Rule of caveat emptor.- the laborers from the gaugau factory were sometimes transferred to
The 10-year prohibition upon Villarama is not against his application the coffee factory and vice-versa. Held: The attempt to make the two
f or, or purchase of, certif icates of public convenience, but merely the factories appear as two separate businesses, when in reality they are
operation of TPU along the lines covered by the certificates sold by but one, is but a device to defeat the ends of the law (the Act governing
him to Pantranco. Consequently, the sale between Fernando and the capital and labor relations) and should not be permitted to prevail.
Corporation is valid, such that the rightful ownership of the disputed Although the coffee factory is a corporation and, by legal fiction, an
certificates still belongs to the plaintiff being the purchaser in good entity existing separate and apart from the persons composing it, that
faith and for value thereof. In view of the rule of caveat emptor, what is, T and his family, it is settled that this fiction of law, which has been
was acquired by Ferrer in the sheriff's sale was only the right which introduced as a matter of convenience and to subserve the ends of
Fernando had in the certificates of public convenience on the day of justice cannot be invoked to further an end subversive of that purpose.
the sale. Of the same principle is the provision of Article 1544. of the (13 Am. Jur., 160-162; Annotation 1 A. L. R. 612, s. 34 A. L. R. 599.):
Civil Code, that "If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person who may 2. Id.; Jurisidictional once Acquired not Lost Even if Permit of Labor
have first taken possession thereof in good faith. if it should be Union id Suspended.-
movable property." —Once the Court of Industrial Relations has duly acquired
jurisdiction over a case, such jurisdiction is not lost even after the
B. Alter Ego Cases Department of Labor has suspended the permit of the petitioning labor
union.
Arnold vs Willets and Paterson, Ltd., 44 Phil 634 1923
3. Id; Jurisdictional Number of Laborers Required for a Labor to Sue
CONSTRUCTION OF CONTRACT.—Where A entered into a in Their Behalf.-
written contract with the firm of W & P by which he was employed as —Although the coffee factory has only 14 laborers and only five of
agent of the firm for a period of five years, and a dispute arose between these are members of the labor union, yet as the gaugau factory has
them as to the compensation which A should receive for his services, more than the jurisdiction number (31) required by law and the two
and A wrote a letter, known in the record as Exhibit B, which clearly factories are operating under one single management, the industrial
defined and specified the compensation which he was to receive, to court has jurisdiction to try the case as against C Coffee Factory, Inc.
which one member of the firm gave his "conforme," A's compensation
for his services is measured and controlled by Exhibit B. Yutivo Sons Hardware vs CTA 1 scra 160 1961

WHEN CONTRACT WITH FIRM BINDS CORPORATION.— Corporations; Piercing the veil of corporate fiction.—A
Where A entered upon the discharge of his duties under a contract with corporation is an entity separate and distinct from its stockholders and
the firm of W & P, and the firm organized a corporation, which took from other corporations to which it may be connected. However, when
over all of its assets and continued to conduct the business of the firm the notion of legal entity is used to defeat public convenience, justify
as a corporation and which dealt with and treated A as its agent, in the wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons, or, in the case of two
40
corporations, merge them into one. When the corporation is the
mere alter ego or business conduit of a person, it may be disregarded. Court of Tax Appeals; Decisions.—The issue of whether the
decision of the Tax Court was concurred in by at least two judges
Same; Taxation; Sales tax; Tax evasion.—A corporation cannot be becomes academic in view of the elevation of the case to the Supreme
said to have been organized as a tax evasion device when there was no Court.
tax to evade. Liddell & Co. vs Collector 2 scra 632 1961

Same; Evidence; Fraudulent tax evasion.—The intention to Judges; Disqualification; Participation in prior proceedings as
minimize taxes, when used in the context of fraud, must be proven by administrative official.—The mere participation of a judge in prior
clear and convincing evidence amounting to more than mere proceeding relating to the subject in the capacity of an administrative
preponderance. It cannot be justified by mere speculation. This is official does not disqualify him from acting as judge.
because fraud is never lightly to be presumed.
Court of Tax Appeals; Decision signed after 30 days from
Same; Fraud; Evidence on fraud.—Fraud is never imputed and the submission of case, valid.—The requirement that cases brought
courts never sustain findings of fraud upon circumstances which, at before the Tax Court shall be decided within 30 days after the
most, create only suspicion. submission thereof for decision is merely directory. Hence, decisions
Same; Concept of tax cvasion.—Tax evasion connotes fraud through signed after the lapse of said period are valid.
the use of pretenses and forbidden devices to lessen or defeat taxes.
Corporation Law; When corporate form may be ignored.—Where
Same; Tax avoidance.—A taxpayer has the legal right to decrease a corporation is a dummy and serves no business purpose and is
the amount of what otherwise would be his taxes or altogether avoid intended only as a blind, the corporate form may be ignored.
them by means which the law permits. Any legal means used by the
taxpayer to reduce taxes are all right. Therefore, a man may perform Taxation; Sales Tax; When taxpayer may not deny tax liability.—
an act that he honestly believes to be sufficient to exempt him from A taxpayer may not deny tax liability on the ground that the sales were
taxes. He does not incur fraud thereby even if the act is thereafter made through another and distinct corporation when it is proved that
found to be insufficient. the latter is virtually owned by the former or that they are practically
one and the same corporation.
Same.—Mere understatement of tax in itself does not prove fraud.
Same; Surcharge when not imposable.—Where, as in the case at
Same; Where two corporations were treated as one for tax bar, the sales made by the taxpayer to the corporation had been
purposes.—Where it appears that SM was a mere subsidiary, embodied in proper documents subject to inspection by the tax
instrumentality or department of Yutivo, the Tax Court correctly authorities, the return filed on the basis of such sales and not on those
disregarded the alleged separate corporate personality of SM in order to the public, cannot be said a false return and subject the taxpayer to
to arrive at the true tax liability of Yutivo. a surcharge. But penalty for late payment should be imposed.

Taxation: Sales tax; Prescription.—Deficiency sales taxes for 1947 Same; Deficiency sales tax, how computed.—Deficiency sales tax
to 1949, which were assessed on November 7, 1950, were assessed should be based on the selling price to the public after deducting the
within the five-year period prescribed in section 331 of the Tax Code. tax paid on the original sales.
The deficiency sales tax for 1950, which was assessed on December
16, 1954, was likewise assessed within the five-year period. Ramirez Telephone vs Bank America 29 scra 191

Same; When the taxpayer is estopped to invoke prescription.— 1. Corporation law; Corporate personality; When corporate
Estoppel has been employed to prevent the application of the statute personality may be disregarded; Where defendant stockholder holds
of limitations against the government in certain instances in which the 75% of the stock of the corporation together with his wife.-
taxpayer has taken some affirmative action to prevent the collection While respect for the corporate personality as such is the general rule,
of the tax within the statutory period. It is generally held that a the veil of corporate fiction may be pierced and the funds of the
taxpayer is estopped to repudiate waivers of the statute of limitations corporation may be garnished to satisfy the debts of a principal
upon which the government relied. Where the taxpayer made several stockholder, to administer the ends of justice.
requests for reinvestigation of a tax assessment, it may be considered
to have waived the defense of presCription. 2. Remedial law; Appeal from Court of Appeals to Supreme Court;
Findings of fact of Court of Appeals.-
Same; Fraud surcharge.—Where no element of fraud is present, the Factual findings of the Court of Appeals are not subject to review in
imposition of the 50% surcharge on the deficiency sales tax is appealed cases to ,the Supreme Court.
improper. The circumstance that the sales made by the taxpayer's
subsidiary should be considered as sales of the taxpayer 'does not Guatson International vs NLRC GR 100322 1994
necessarily establish fraud nor the willful filing of a false or fraudulent
return. 1. Labor Law; Illegal Dismissal; An employee who is forced to
resign is considered to have been illegally dismissed.-
Same; Gross selling price does not include the sales tax billed as a The issue therefore, boils down to the question of whether Jolly
separate item.—lf a manufacturer, producer, or importer, in fixing Almoradie was indeed illegally dismissed by being forced to resign in
the gross selling price of an article sold by him, has included an the manner narrated by him. From a synthesis of the evidence on
amount intended to cover the sales tax in the gross selling price of the record, we fully agree with the finding of the NLRC that Jolly
articles, the sales tax should be based on the gross selling price less Almoradie’s resignation was NOT voluntary. The NLRC did not err
the amount intended to cover the tax, if the same is billed as a separate in disregarding the conclusions reached by the Labor Arbiter because
item. Unless billed to the purchaser as a separate item in the invoice, the latter’s findings are not supported by substantial evidence.
the amounts intended to cover the sales tax shall be considered as part
of the gross selling price of the articles sold, and deduction thereof 2. Labor Law; Illegal Dismissal; An employer’s threat that he will
will not be allowed. file charges against an employee and that he has a very good lawyer
41
could constitute force or coercion that vitiates the free will of said 1. Corporation Law; Doctrine of Piercing the Veil of Corporate
employee in writing his resignation letter.- Fiction; The separate and distinct personality of a corporation is
We do not agree with petitioners’ proposition that Mr. Ocier’s mere merely a fiction created by law for convenience and to promote
utterances of the words “I will file charges against you,” and “I have justice; When the notion of separate juridical personality is used to
a very good lawyer,” do not constitute force or coercion as to vitiate defeat public convenience, justify wrong, protect fraud or defend
the free will of Almoradie in writing his resignation letter. crime, or is used as a device to defeat the labor laws, this separate
Intimidation may vitiate consent when the following requisites are personality of the corporation may be disregarded or the veil of
present: 1) that the intimidation caused the consent to be given; 2) that corporate fiction pierced.-
the threatened act be unjust or unlawful; 3) that the threat be real or It is a fundamental principle of corporation law that a corporation is
serious, there being evident disproportion between the evil and the an entity separate and distinct from its stockholders and from other
resistance which all man can offer, leading to the choice of doing that corporations to which it may be connected. But, this separate and
act which is forced on the person to do as the lesser evil; and 4) that it distinct personality of a corporation is merely a fiction created by law
produces a well-grounded fear from the fact that the person from for convenience and to promote justice. So, when the notion of
whom it comes has the necessary means or ability to inflict the separate juridical personality is used to defeat public convenience,
threatened injury to his person or property. justify wrong, protect fraud or defend crime, or is used as a device to
defeat the labor laws, this separate personality of the corporation may
3. Labor Law; Illegal Dismissal; Corporations; Piercing the Veil be disregarded or the veil of corporate fiction pierced. This is true
of Corporate Fiction; When valid ground exists, the legal fiction that likewise when the corporation is merely an adjunct, a business conduit
a corporation is an entity with a juridical personality separate and or an alter ego of another corporation.
distinct from its members or stockholders may be disregarded.-
Anent NLRC’s grant of separation pay and backwages to private 2. Corporation Law; Some probative factors of identity that will
respondent Jolly M. Almoradie, petition- ers argue that the companies, justify the application of the doctrine of piercing the corporate veil.-
Guatson Travel Company, Philac and Merex have separate and The conditions under which the juridical entity may be disregarded
distinct legal personalities such that the two latter companies should vary according to the peculiar facts and circumstances of each case.
not be held liable, assuming, for the sake of argument that private No hard and fast rule can be accurately laid down, but certainly, there
respondent was illegally dismissed. We uphold the NLRC. The three are some probative factors of identity that will justify the application
companies are owned by one family, such that majority of the officers of the doctrine of piercing the corporate veil, to wit: “1. Stock
of these companies are the same. The companies are located in one ownership by one or common ownership of both corporations. 2.
building and use the same messengerial service. Moreover, there was Identity of directors and officers. 3. The manner of keeping corporate
no showing that private respondent was paid separation pay when he books and records. 4. Methods of conducting the business.”
was absorbed by Philac upon closure of Merex; nor was there evidence
that he resigned from Philac when he transferred to Guatson Travel. 3. Corporation Law; “Instrumentality Rule,” Explained.-
Under the doctrine of piercing the veil of corporate fiction, when valid The SEC en banc explained the “instrumentality rule” which the courts
ground exists, the legal fiction that a corporation is an entity with a have applied in disregarding the separate juridical personality of
juridical personality separate and distinct from its members or corporations as follows: “Where one corporation is so organized and
stockholders may be disregarded. We have applied this doctrine in the controlled and its affairs are conducted so that it is, in fact, a mere
case of “Philippine Scout Veterans Security and Investigation Agency instrumentality or adjunct of the other, the fiction of the corporate
(PSVSIA), et al. v. The Hon. Secretary of Labor,” G.R. No. 92357, entity of the ‘instrumentality’ may be disregarded. The control
July 21, 1993. necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies and practices that the
4. Labor Law; Illegal Dismissal; Reinstatement; Separation pay controlled corporation has, so to speak, no separate mind, will or
awarded in lieu of reinstatement since employee did not pray for the existence of its own, and is but a conduit for its principal. It must be
latter relief, and also because the relationship between the parties had kept in mind that the control must be shown to have been exercised at
become strained as to preclude a harmonious working relationship.- the time the acts complained of took place. Moreover, the control and
Where there is a finding of illegal dismissal, the employee is entitled breach of duty must proximately cause the injury or unjust loss for
to both reinstatement and award of backwages from the time the which the complaint is made.”
compensation was withheld, in this case in 1988, up to a maximum of
three years, applying the Mercury Drug Rule. Reinstatement, 4. Corporation Law; Test in determining the applicability of the
however, will not be required not only for the reason that it was not doctrine of piercing the veil of corporate fiction.-
prayed for by the respondent, but also because the relationship The test in determining the applicability of the doctrine of piercing the
between Almoradie and Ocier had become strained as to preclude a veil of corporate fiction is as follows: “1. Control, not mere majority
harmonious working relationship. In lieu of reinstatement, separation or complete stock control, but complete domination, not only of
pay is awarded. As the term suggests, separation pay is the amount finances but of policy and business practice in respect to the
that an employee receives at the time of his severance from the service transaction attacked so that the corporate entity as to this transaction
and is designed to provide the employee with the wherewithal during had at the time no separate mind, will or existence of its own; 2. Such
the period that he is looking for another employment. control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
5. Labor Law; Illegal Dismissal; Reinstatement; Separation pay duty, or dishonest and unjust act in contravention of plaintiff’s legal
computed at the rate of one month’s pay for every year of service, to rights; and 3. The aforesaid control and breach of duty must
include the three-year period wherein backwages are awarded.- proximately cause the injury or unjust loss complained of. The
However the award of separation pay should be, as we have absence of any one of these elements prevents ‘piercing the corporate
consistently ruled, equivalent to one (1) month for every year of veil.’ In applying the ‘instrumentality’ or ‘alter ego’ doctrine, the
service, instead of one-half (1/2) month as awarded by the NLRC. In courts are concerned with reality and not form, with how the
the computation of separation pay, the three (3) year period wherein corporation operated and the individual defendant’s relationship to
backwages are awarded, must be included. that operation.”

Concept Builders, Inc. vs NLRC GR 108734 1996

42
5. Corporation Law; The question of whether a corporation is a mere appeal from the award of the Referee, within fifteen days from notice,
alter ego, a mere sheet or paper corporation, a sham or a subterfuge is to the Commission; a petition for reconsideration of the latter’s
purely one of fact.- resolution, if adverse, to the Commission en banc; and within ten days
Thus, the question of whether a corporation is a mere alter ego, a mere from receipt of an unfavorable decision by the latter, an appeal to this
sheet or paper corporation, a sham or a subterfuge is purely one of Court. As petitioner had not utilized these remedies available to it,
fact. Certiorari will not lie, it being prematurely filed.

6. Labor Law; Writs of Execution; Sheriffs; Pleadings and 5. Labor Law; Workmen’s Compensation; Certiorari; Exceptions
Practice; Should the losing party, his agent or representative, refuse to the rule on non-exhaustion not present in case at bar.-
or prohibit the Sheriff or his representative entry to the place where Although this rule admits of exceptions, as where public welfare and
the property subject of execution is located or kept, the judgment the advancement of public policy so dictate, the broader interests of
creditor may apply to the NLRC or the Labor Arbiter concerned for a justice so require, or where the Orders complained of were found to
break-open order.- be completely null and void, or that the appeal was not considered the
In view of the failure of the sheriff, in the case at bar, to effect a levy appropriate remedy, the case at bar does not fall within any of these
upon the property subject of the execution, private respondents had no exceptions.
other recourse but to apply for a break-open order after the third-party
claim of HPPI was dismissed for lack of merit by the NLRC. This is AD Santos vs Vasquez 22 scra 1156 1968
in consonance with Section 3, Rule VII of the NLRC Manual of
Execution of Judgment which provides that: “Should the losing party, 1. Workmen's Compensation Act; Notice of controversion; Effect
his agent or representative, refuse or prohibit the Sheriff or his of failure to file.-
representative entry to the place where the property subject of Where the employer knew of the employee's illness, the failure of the
execution is located or kept, the judgment creditor may apply to the employer to file with the Commission notice of controversion is a
Commission or Labor Arbiter concerned for a break-open order.” waiver of the defense that the claim for compensation was not .filed
within the statutory period and a forfeiture of the employer's right to
C. Equity Cases controvert the claim. Constructively, such failure is an admission that
TESCO vs WCC 104 scra 354 1981 the claim is compensable.

1. Labor Law; Workmen’s Compensation; Lack of 2. Corporation law; Juridical personality; Piercing the corpo-rate
employeremployee relationship.- veil.-
To start with, a few basic principles should be re-stated: the existence When the veil of corporate fiction is made as a shield to perpetrate a
of employer-employee relationship is the jurisdictional foundation for fraud and/or confuse legitimate issues, the same should be pierced.
recovery of compensation under the Workmen’s Compensation Law.
The lack of employer-employee relationship, however, is a matter of 4. Due Process
defense that the employer should properly raise in the proceedings McConnel vs CA 1 scra 723 91961
below. The determination of this relationship involves a finding of
fact, which is conclusive and binding and not subject to review by this Obligations; Contracts; Corporations; When stockholders are liable
Court. for obligations contracted by the corporation.— Whenever the
corporate entity is being used as an alter ego orbusiness conduit for
2. Labor Law; Workmen’s Compensation; Corporation the sole benefit of the stockholders, or to defeat public convenience,
Law; Piercing the veil in compensation cases.- justify wrong, protect fraud. or defend crime, the individual
Petitioner even admitted that TESCO and UMACOR are sister stockholders may be held liable for the obligations contracted by the
companies operating under one single management and housed in the corporation.
same building. Although respect for the corporate personality as such, Actions; Parties; Jurisdiction; Suit to enforce- judgment against non-
is the general rule, there are exceptions. In appropriate cases, the veil parties.—-In the case at bar, the trial court has jurisdiction over the
of corporate fiction may be pierced as when the same is made as a instant suit which is not an action to enforce a judgment within five
shield to confuse the legitimate issues. (5) years from its rendition, but an action to have non-parties to that
judgment held responsible for its payment.
3. Labor Law; Workmen’s Compensation; Factual questions
cannot be raised for the first time on appeal to the Supreme Court.- Emilio cano Enterprises vs CIR, 13 SCRA 291
While, indeed, jurisdiction cannot be conferred by acts or omission of 1965
the parties, TESCO’s denial at this stage that it is the employer of the
deceased is obviously an afterthought, a devise to defeat the law and 1. Corporations; Separate legal personality from members
evade its obligations. This denial also constitutes a change of theory disregarded when used as shield to subvert justice.-
on appeal which is not allowed in this jurisdiction. Moreover, issues The legal fiction that a corporation has a personality separate and
not raised before the Workmen’s Compensation Commission cannot distinct from its members or stockholders cannot be invoked if its
be raised for the first time on appeal. For that matter, a factual question purpose is to use it as a shield to further an end subversive of justice,
may not be raised for the first time on appeal to the Supreme Court. especially where the corporation is a closed family corporation.
2. Corporations; Suit against corporate officers in their official
4. Labor Law; Workmen’s Compensation; Certiorari; Non- capacity considered as suit against corporation.-
exhaustion of administrative remedies makes the certiorari filed as Where the defendants are sued not in their private capacity but as
premature.- president and manager, respectively, of the corporation of which they
This Certiorari proceeding must also be held to have been prematurely were officers, their connection with the case must be deemed to be
brought. Before a petition for Certiorari can be instituted, all remedies impressed with the representation of the corporation, and verily, the
available in the trial Court must be exhausted first. Certiorari cannot order against them is in effect against the corporation.
be resorted to when the remedy of appeal is present. What is sought to
be annulled is the award made by the Referee. However, TESCO did NAMARCO vs Associated Finance Co. Inc., 19 scra 962
not pursue the remedies available to it under Rules 23, 24 and 25 of
the Rules of the Workmen’s Compensation Commission, namely, an
43
1. Corporation; Stockholders; When stockholder is guilty of fraud that petitioner and the corporation are one or that he is the corporation.
in dealing with another corporation.- No serious objection was heard from petitioner.
A stockholder is guilty of fraud where, through false representation,
he succeeded in inducing another corporation to enter into an Arcilla vs CA 215 scra 120 1986
exchange agreement with the corporation he represented and over
whose business he had absolute control and where it further appears 1. Remedial Law; Civil Procedure; An entity which was not made a
that said stockholder had full knowledge of the fact that his party in the main case and which did not seek to intervene has no
corporation was in no position to comply with the obligation which he personality to seek a review of the public respondent’s Amended
had caused it to assume. Decision under Rule 45 of the Rules of Court.-
The grant of affirmative relief based on the first assigned error would
2. Corporation; When corporate fiction may be disregarded; really redound to the benefit of an entity which was not made a party
Stockholder’s liability for corporation’s obligations.- in the main case and which did not seek to intervene therein.
Said stockholder can not seek refuge behind the general principle that Therefore, it has no personality to seek a review of the public
a corporation has a personality distinct and separate from that of its respondent’s Amended Decision under Rule 45 of the Rules of Court.
stockholders and that the latter are not personally liable for the Only the original parties to the main case may do so.
corporate obligations. The court is justified in piercing the veil of
corporate fiction and in holding said stockholder solidarily liable with 2. Remedial Law; Civil Procedure; Defenses and objections other
the corporation for the sums of money adjudged in favor of the than the failure to state a cause of action and lack of jurisdiction not
aggrieved corporation. When the corporation is the mere alter ego of pleaded either in a motion to dismiss or in the answer are deemed
a person, the corporate fiction may be disregarded; the same being true waived.-
when the corporation is controlled, and its affairs are so conducted as Moreover, petitioner neglected to set up in his Answer the defense that
to make it merely an instrumentality, agency or conduit of another. he is not personally liable to the private respondent because the
“vales” were corporate obligations of Csar Marine Resources, Inc.. Of
Jacinto vs CA 198 scra 211 1992 course, that defense would have been inconsistent with his
volunteered admission that the KKK loan–—which resulted in the
1. Corporation Law; Veil of corporate fiction may be pierced when procurement of the proforma invoice from the private respondent–—
made as a shield to perpetuate fraud and/or confuse legitimate issues.- was for his benefit. In any case, the failure to set it up as an affirmative
The conflicting statements by defendant Jacinto place in extreme defense amounted to a waiver thereof. Section 2, Rule 9 of the Rules
doubt his credibility anent his alleged participation in said transactions of Court expressly provides that defenses and objections, other than
and We are thus persuaded to agree with the findings of the lower the failure to state a cause of action and lack of jurisdiction, not
court that the latter (Roberto Jacinto) was practically the corporation pleaded either in a motion to dismiss or in the answer are deemed
itself. Indeed, a painstaking examination of the records show that there waived. Petitioner, as a lawyer, knows or is supposed to know this
is no clear-cut delimitation between the personality of Roberto Jacinto rule.
as an individual and the personality of Inland Industries, Inc. as a
corporation. The circumstances aforestated lead Us to conclude that 3. Remedial Law; Civil Procedure; Corporation Law; Piercing the
the corporate veil that en-shrouds defendant Inland Industries, Inc. veil of corporate fiction; Even if the obligation was incurred in the
could be validly pierced, and a host of cases decided by our High Court name of the corporation, the petitioner would still be personally liable
is supportive of this view. Thus it held that ‘when the veil of corporate therefore because for all legal intents and purposes, he and the
fiction is made as a shield to perpetuate fraud and/or confuse corporation are one and the same.-
legitimate issues, the same should be pierced.’ (Republic vs. Razon, Moreover, by no stretch of even the most fertile imagination may one
20 SCRA 234; A.D. Santos, Inc. vs. Vasquez, 22 SCRA 1156; Emilio be able to conclude that the challenged Amended Decision directed
Cano Enterprises, Inc. vs. Court of Appeals, 13 SCRA 290). Almost Csar Marine Resources, Inc. to pay the amounts adjudged. By its clear
in the same vein is the dictum enunciated by the same court in the case and unequivocal language, it is the petitioner who was declared liable
of Commissioner of Internal Revenue vs. Norton Harrison Co., (11 therefor and consequently made to pay. That the latter was ordered to
SCRA 714), that ‘Where a corporation is merely an adjunct, business do so as president of the corporation would not free him from the
conduit or alter ego, the fiction of separate and distinct corporate entity responsibility of paying the due amount simply because according to
should be disregarded.’ him, he had ceased to be corporate president; such conclusion stems
from the fact that the public respondent, in resolving his motion for
2. Corporation Law; Remedial Law; Evidence; Judgment may be clarificatory judgment, pierced the veil of corporate fiction and cast
validly rendered on issues not alleged in the pleadings if evidence aside the contention that both he and the corporation have separate and
thereto is presented with the express or implied consent of the adverse distinct personalities. In short, even if We are to assume arguendo that
party.- the obligation was incurred in the name of the corporation, the
Pursuant thereto, “when evidence is presented by one party, with the petitioner would still be personally liable therefor because for all legal
express or implied consent of the adverse party, as to issues not alleged intents and purposes, he and the corporation are one and the same.
in the pleadings, judgment may be rendered validly as regards those Csar Marine Resources, Inc. is nothing more than his business conduit
issues, which shall be considered as if they have been raised in the and alter ego. The fiction of a separate juridical personality conferred
pleadings. There is implied consent to the evidence thus presented upon such corporation by law should be disregarded.
when the adverse party fails to object thereto.”
AC Ransom Labor Union vs NLRC 142 scra 269
3. Corporation Law; Remedial Law; Evidence; No serious
objection on the part of petitioner when respondent Metropolitan Bank 1. Labor Law; Illegal Dismissal; Backwages; Liability for
and Trust Company sought to prove that petitioner and the corporation payment of backwages by an employer corporation; Officer of a
are one or that he is the corporation.- corporation, acting in the interest of a corporation, is presumed to be
While on the face of the complaint there is no specific allegation that the employer.-
the corporation is a mere alter ego of petitioner, subsequent Since RANSOM is an artificial person, it must have an officer who
developments, from the stipulation of facts up to the presentation of can be presumed to be the employer, being the “person acting in the
evidence and the examination of witnesses, unequivocably show that interest of (the) employer” RANSOM. The corporation, only in the
respondent Metropolitan Bank and Trust Company sought to prove technical sense, is the employer.
44
2. Labor Law; Illegal Dismissal; Backwages; Liability for 2. Labor Law; Employee-employer relationship; Determination of
payment of backwages by an employer corporation; Responsible the existence of employee-employer relationship is a factual finding
officer of an employer corporation can be held personally and which this Court will not disturb or reverse in the absence of a showing
criminally liable for non-payment of back wages to workers.- of grave abuse of discretion.-
The responsible officer of an employer corporation can be held At any rate, the determination of the existence of em- ployee-employer
personally, not to say even criminally, liable for non-payment of back relations is a factual finding which this Court will not disturb or
wages. reverse in the absence of a showing of grave abuse of discretion. We
do not see such justification here. On the contrary, the ascertainment
3. Labor Law; Illegal Dismissal; Backwages; Liability for of the employment status of the private respondent was made on the
payment of backwages by an employer corporation; Reason for basis of the criteria consistently employed by the Court in the
policy of the law to hold an employer corporation liable for determination of the employee-employer relationship. We find from
payment of backwages; Case at bar.- the record that all these test have been satisfied.
If the policy of the law were otherwise, the corporation employer can
have devious ways for evading payment of back wages. In the instant 3. Labor Law; Benefits; Contention of Sweet Lines that separation
case, it would appear that RANSOM, in 1969, foreseeing the pay and back wages are inconsistent with each other not well-taken.-
possibility or probability of payment of back wages to the 22 strikers, Finally, we hold that the contention of Sweet Lines that separation pay
organized ROSARIO to replace RANSOM, with the latter to be and back wages are inconsistent with each other is not well-taken.
eventually phased out if the 22 strikers win their case. RANSOM Separation pay is granted where reinstatement is no longer advisable
actually ceased operations on May 1, 1973, after the December 19, because of strained relations between the employee and the employer.
1972 Decision of the Court of Industrial Relations was promulgated Back wages represent compensation that should have been earned but
against RANSOM. were not collected because of the unjust dismissal. The bases for
computing the two are different, the first being usually the length of
4. Labor Law; Illegal Dismissal; Backwages; Liability for the employee’ service and the second the actual period when he was
payment of backwages by an employer corporation; Absent unlawfully prevented from working.
definite proof as to the identity of an officer or officers of the
corporation directly liable for failure to pay backwages, the De Guzman vs NLRC 211 scra 723 1992
responsible officer is the president of the corporation jointly and
severally with other presidents of the same corporation.- 1. Labor Law; Damages; Allegations; Corporation Law; A mere
The record does not clearly identify “the officer or officers” of general manager cannot be held solidarily liable with the corporation
RANSOM directly responsible for failure to pay the back wages of the for unpaid labor claims.-
22 strikers. In the absence of definite proof in that regard, we believe The aforecited cases will not apply to the instant case, however,
it should be presumed that the responsible officer is the President of because the persons who were there made personally liable for the
the corporation who can be deemed the chief operation officer thereof. employees’ claims were stockholders-officers of the respondent
Thus, in RA 602, criminal responsibility is with the “Manager or in corporation. In the case at bar, the petitioner, while admittedly the
his default, the person acting as such.” In RANSOM, the President highest ranking local representative of AMAL in the Philippines, is
appears to be the Manager. (e) Considering that non-payment of the nevertheless not a stockholder and much less a member of the board
back wages of the 22 strikers has been a continuing situation, it is our of directors or an officer thereof.
opinion that the personal liability of the RANSOM President, at the
time the back wages were ordered to be paid should also be a 2. Labor Law; Damages; Allegations; Corporation Law; Same.-
continuing joint and several personal liabilities of all who may have As such, the petitioner cannot be held directly responsible for the
thereafter succeeded to the office of president; otherwise, the 22 decision to close the business that resulted in his separation and that
strikers may be deprived of their rights by the election of a president of the private respondents. That decision came directly and
without leviable assets. exclusively from AMAL. The petitioner’s participation was limited to
the enforcement of this decision in line with his duties as general
Lim vs NLRC 171 scra 328 1989 manager of the company. Even in a normal situation, in fact, he would
not be liable, as a managerial employee of AMAL, for the monetary
1. Labor Law; Employee-employer relationship; Claim that claims of its employees. There should be no question that the private
Calsado was only an independent contractor over whom Sweet Lines respondents’ recourse for such claims cannot be against the petitioner
had no control belied by the documents submitted by the former.- but against AMAL and AMAL alone.
We hold that the employee-employer relations between Calsado and
Sweet Lines have been sufficiently established. The following 3. Labor Law; Damages; Allegations; Corporation Law; A
documents submitted by the former and not controverted by the latter general manager who appropriated to himself the assets of his
should belie the claim that Calsado was only an independent employer-corporation to pay his claims against the latter after it
contractor over whom Sweet Lines had no control. There is in the folded-up without reserving a portion to pay the claims of other
above exhibits a consistent and categorical recognition of Calsado as employees acts in bad faith and liable for damages.-
an employee of petitioner Sweet Lines. Indeed, its notarized It is not disputed that the petitioner in the case at bar had his own
certification that Calsado was its bona fide employee is irrefutable. claims against AMAL and consequently had some proportionate right
The petitioner cannot now argue that the grant to her of the 13th month over its assets. However, this right ceased to exist when, knowing fully
pay and even the differential pay was a mere accommodation like the well that the private respondents had similarly valid claims, he took
car plan (which, for that matter, is a benefit usually extended only to advantage of his position as general manager and applied AMAL’s
employees). If it is true that Sweet Lines had no control over her and assets in payment exclusively of his own claims.
left her free to determine her work schedule, there would have been
no reason at all for its approval of her application for sick leave from 4. Labor Law; Damages; Allegations; Same.-
March 7, 1985 to April 3, 1985. The termination letter itself, which Applying these provisions, we hold that although the petitioner cannot
was signed by the other petitioner as Vice President of Sweet Lines, be made solidarily liable with AMAL for the monetary demand of its
said she was “entitled” to certain payments as a result of the cessation employees, he is nevertheless directly liable to them for his
of her “employment with Sweet Lines, Inc.”
45
questionable conduct in attempting to deprive them of their just share existing Philippine energy program “shall include a policy direction
in the assets of AMAL. towards deregulation of the power and energy industry.”

5. Damages; Obligations; Judgment; Pleading and 3. Constitutional Law; Commercial Law; Republic Act 8180 was
Practice; Moral damages can be awarded even if not prayed for and struck down because, as crafted, three key provisions plainly
even where no actual damages are established where a party acted in encouraged the continued existence if not the proliferation of the
bad faith.- constitutionally proscribed evils of monopoly and restraint of trade.-
It is settled that the court can grant the relief warranted by the The Court respects the legislative finding that deregulation is the
allegation and the proof even if it is not specifically sought by the policy answer to the problems. It bears stressing that R.A. 8180 was
injured party. In the case at bar, while the private respondents did not declared invalid not because deregulation is unconstitutional. The law
categorically pray for damages, they did allege that the petitioner, was struck down because, as crafted, three key provisions plainly
taking advantage of his position as general manager, had appropriated encouraged the continued existence if not the proliferation of the
the properties of AMAL in payment of his own claims against the constitutionally proscribed evils of monopoly and restraint of trade.
company. That was averment enough of the injury they suffered as a
result of the petitioner’s bad faith. The fact that no actual or 4. Constitutional Law; Commercial Law; The present petition
compensatory damages was proven before the trial court does not lacks a factual foundation specifically highlighting the need to declare
adversely affect the private respondents’ right to recover moral the challenged provision unconstitutional.-
damages. We have held that moral damages may be awarded in the In sharp contrast, the present petition lacks a factual foundation
cases referred to in the chapter on Human Relations of the Civil Code specifically highlighting the need to declare the challenged provision
(Articles 19-36) without need of proof that the wrongful act unconstitutional. There is a dearth of relevant, reliable, and substantial
complained of had caused any physical injury upon the complainant. evidence to support petitioner’s theory that price control must
continue even as Government is trying its best to get out of regulating
6. Damages; Obligations; Judgment; Pleading and the oil industry. The facts of the petition are, in the main, a general
Practice; Award of exemplary damages when moral damages dissertation on the evils of monopoly.
awarded.-
When moral damages are awarded, exemplary damages may also be 5. Constitutional Law; Commercial Law; Deregulation means the
decreed. Exemplary damages are imposed by way of example or lifting of control, governance and direction through rule or regulation.-
correction for the public good, in addition to moral, temperate, Deregulation means the lifting of control, governance and direction
liquidated or compensatory damages. According to the Code through rule or regulation. It means that the regulated industry is freed
Commission, “exemplary damages are required by public policy, for from the controls, guidance, and restrictions to which it used to be
wanton acts must be suppressed. They are an antidote so that the subjected. The use of the word “partial” to qualify deregulation is
poison of wickedness may not run through the body politic.” These sugar-coating.
damages are legally assessible against him.
6. Constitutional Law; Policies and acts of the political departments
7. Damages; Obligations; Judgment; Pleading and of government may be voided by the Court on either of two grounds.-
Practice; Appeal; Supreme Court may fix damages without remand Doctrinally, policies and acts of the political departments of
of case to labor arbiter.- government may be voided by this Court on either of two grounds—
We agree that, strictly speaking, the determination of the amount infringement of the Constitution or grave abuse of discretion. An
thereof would require a remand to the Labor Arbiter. However, infringement may be proven by demonstrating that the words of the
inasmuch as the private respondents were separated in 1986 and this law directly contradict a provision of the fundamental law, or by
case has been pending since then, the interests of justice demand the presenting proof that the law authorizes or enables the respondents to
direct resolution of this motion in this proceeding. violate the Constitution.

5.Anti-Trust Issues 7. Constitutional Law; Deregulation policy per se is not contrary to


Garcia vs Executive Secretary GR 132451 1999 the Constitution.-
A close perusal of the assailed Section 19 of RA 8479 and Section 19
1. Constitutional Law; Commercial Law; Definition of of Article XII of the Constitution does not readily reveal their
Monopoly; Where two or three or a few companies act in concert to irreconcilability. Indeed, even petitioner admits that the deregulation
control market prices and resultant profits, the monopoly is called an policy per se is not contrary to the Constitution. Neither could it be
oligopoly or cartel.- successfully argued that the implementation of such policy within the
The simplest form of monopoly exists when there is only one seller or five-month phase-in period is per se anathema to our fundamental law.
producer of a product or service for which there are no substitutes. In It is his imperative task therefore to adduce before the Court factual
its more complex form, monopoly is defined as the joint acquisition and legal bases to demonstrate clearly and cogently the
or maintenance by members of a conspiracy, formed for that purpose, unconstitutionality of the acts of Congress and the President in
of the power to control and dominate trade and commerce in a adopting and implementing full deregulation of petroleum prices at
commodity to such an extent that they are able, as a group, to exclude this time.
actual or potential competitors from the field, accompanied with the
intention and purpose to exercise such power. Where two or three or 8. Constitutional Law; Court cannot inquire into the wisdom or
a few companies act in concert to control market prices and resultant expediency of the acts of the executive or the legislative department,
profits, the monopoly is called an oligopoly or cartel. It is a unless there is a clear showing of constitutional infirmity or grave
combination in restraint of trade. abuse of discretion amounting to lack or excess of jurisdiction;
Meaning of Grave Abuse of Discretion.-
2. Constitutional Law; Commercial Law; The deregulation of the It is basic to our form of government that the Court cannot inquire into
oil industry is a policy determination of the highest order.- the wisdom or expediency of the acts of the executive or the legislative
It bears reiterating at the outset that the deregulation of the oil industry department, unless there is a clear showing of constitutional infirmity
is a policy determination of the highest order. It is unquestionably a or grave abuse of discretion amounting to lack or excess of
priority program of Government. The Department of Energy Act of jurisdiction. “By grave abuse of discretion is meant such capricious
1992 expressly mandates that the development and updating of the and whimsical exercise of judgment as is equivalent to lack of
46
jurisdiction. Mere abuse of discretion is not enough. It must be grave 1. Those expressly granted or authorized by law inclusive of the
abuse of discretion, as when the power is exercised in an arbitrary or corporate charter or articles of incorporation
despotic manner by reason of passion or personal hostility, and must 2. Those impliedly granted as are essential or reasonably necessary to
be so patent and so gross as to amount to an evasion of a positive duty the carrying out of the express powers
or to a virtual refusal to perform the duty enjoined or to act at all in 3. Those that are incidental to its existence.
contemplation of law.” These jurisprudential elements of arbitrariness,
despotism, passion and hostility have not been shown to exist under Powers expressly granted:
the present circumstances.
1. Power to sue and be sued (Sec. 36)
9. Constitutional Law; Court is not called upon to rule on the wisdom 2. Power of succession (Sec. 36)
of the law or to repeal it or modify it if found impractical.- 3. Power to adopt and use a corporate seal (Sec. 36) 4. Power to amend
Now in the present petition, Garcia insists on his old plea for a return its articles of incorporation (Sec. 36)
only to partial deregulation of the downstream oil industry, wherein 5. Power to adopt, amend or repeal by-laws (Sec. 36) 6. Power to issue
the main features of deregulation would be permitted but the retail or sell stocks/ to admit members (Sec. 36)
prices of oil products would still be regulated through an Automatic 7. Power to acquire or alienate real or personal property (Sec. 36)
Pricing Mechanism. However, I find his contentions to be lacking 8. Power to enter into merger or consolidation (Sec. 36)
legal basis, even if his proposal appears to be expedient, or even 9. Power to make reasonable donations (Sec. 36)
beneficial, especially to the poor. As the Court said in Tañada vs. 10. Power to establish pension, retirement, and other plans (Sec. 36)
Tuvera, “[T]his Court is not called upon to rule on the wisdom of the 11. Power to extend or shorten corporate term (Sec. 37)
law or to repeal it or modify it if we find it impractical. That is not our 12. Power to increase or decrease capital stock (Sec. 38)
function. That function belongs to the legislator. Our task is merely to 13. Power to incur, create or increase bonded indebtedness (Sec. 38)
interpret and apply the law as conceived and approved by the political 14. Power to deny pre-emptive right (Sec. 39)
departments of the government in accordance with the prescribed 15. Power to sell or dispose corporate assets (Sec. 40) 16. Power to
procedure.” acquire own shares (Sec. 41)
17. Power to invest corporate funds in another corporation or business
10. Constitutional Law; A suspension of a valid statute must rest or for any other purpose (Sec. 42)
upon legislative action, it may not be effected solely by a judicial act; 18. Power to declare dividends (Sec. 43)
Under our system of government, policy issues are within the domain 19. Power to enter into management contract (Sec. 44)
of the political branches of government and of the people themselves
as the repository of all state powers.- 1. Sources of Corporate Powers
To heed the petitioner’s prayer, this Court would have to legislate, a
power granted only to Congress. The operation of a statute may be Corporate Powers and Capacity - Art 42
duly suspended only by authority of the legislature. Indeed, a
suspension of a valid statute must rest upon legislative action; it may Sec. 42. Power to invest corporate funds in another corporation or
not be effected solely by a judicial act. Clearly it is a policy decision business or for any other purpose. - Subject to the provisions of this
of the legislative and executive departments in whose turf we must not Code, a private corporation may invest its funds in any other
tread, under the principle of separation of powers. The term “political corporation or business or for any purpose other than the primary
question” connotes what it means in ordinary parlance, namely, a purpose for which it was organized when approved by a majority of
question of policy. It refers to “those questions which, under the the board of directors or trustees and ratified by the stockholders
Constitution, are to be decided by the people in their sovereign representing at least two-thirds (2/3) of the outstanding capital stock,
capacity, or in regard to which full discretionary authority has been or by at least two thirds (2/3) of the members in the case of non-stock
delegated to the legislative or executive branch of the government.” It corporations, at a stockholder's or member's meeting duly called for
is concerned with issues dependent upon the wisdom, not legality, of the purpose. Written notice of the proposed investment and the time
a particular measure. The judiciary does not directly settle policy and place of the meeting shall be addressed to each stockholder or
issues. Under our system of government, policy issues are within the member at his place of residence as shown on the books of the
domain of the political branches of government and of the people corporation and deposited to the addressee in the post office with
themselves as the repository of all state powers. postage prepaid, or served personally: Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code:
11. Constitutional Law; Every law has in its favor the presumption Provided, however, That where the investment by the corporation is
of constitutionality; Infringement upon constitutional rights must be reasonably necessary to accomplish its primary purpose as stated in
proved and established persuasively to invalidate a provision of a law, the articles of incorporation, the approval of the stockholders or
if not the entire law itself.- members shall not be necessary.
Well-established is the principle that every law has in its favor the
presumption of constitutionality.To declare a law unconstitutional, the 1.Express Powers - sec 36
repugnancy of that law to the Constitution must be clear and
unequivocal. But we recognize that even if a law is aimed at the Sec. 36. Corporate powers and capacity. - Every corporation
attainment of some public good, still its provisions cannot infringe incorporated under this Code has the power and capacity:
upon constitutional rights. That infringement, however, must be 1. To sue and be sued in its corporate name;
proved and established persuasively to invalidate a provision of a law, 2. Of succession by its corporate name for the period of time stated in
if not the entire law itself. the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
Standard Oil Co. vs US 221 U.S. 1 1910 4. To amend its articles of incorporation in accordance with the
provisions of this Code;
D. Corporate Powers 5. To adopt by-laws, not contrary to law, morals, or public policy, and
to amend or repeal the same in accordance with this Code;
Classification of corporate authority: 6. In case of stock corporations, to issue or sell stocks to subscribers
and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to
47
the corporation if it be a non-stock corporation; such requirement cannot be imposed on artificial persons, like
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, corporations, for the simple reason that they cannot personally do the
mortgage and otherwise deal with such real and personal property, task themselves. As already stated, corporations act only through their
including securities and bonds of other corporations, as the transaction officers and duly authorized agents. In fact, physical actions, like the
of the lawful business of the corporation may reasonably and signing and the delivery of documents, may be performed, on behalf
necessarily require, subject to the limitations prescribed by law and of the corporate entity, only by specifically authorized individuals.
the Constitution;
8. To enter into merger or consolidation with other corporations as 3. Actions; Pleadings and Practice; Forum-Shopping; Circular 28-
provided in this Code; 91 was prescribed by the Supreme Court to prohibit and penalize the
9. To make reasonable donations, including those for the public evils of forum-shopping.-
welfare or for hospital, charitable, cultural, scientific, civic, or similar Circular 28-91 was prescribed by the Supreme Court to prohibit and
purposes: Provided, That no corporation, domestic or foreign, shall penalize the evils of forum shopping. We see no circumvention of this
give donations in aid of any political party or candidate or for purposes rationale if the certificate was signed by the corporation’s specifically
of partisan political activity; authorized counsel, who had personal knowledge of the mat- ters
10. To establish pension, retirement, and other plans for the benefit of required in the Circular. In Bernardo v. NLRC, we explained that a
its directors, trustees, officers and employees; and literal interpretation of the Circular should be avoided, if doing so
11. To exercise such other powers as may be essential or necessary to would subvert its very rationale.
carry out its purpose or purposes as stated in the articles of
incorporation. 4. Actions; Pleadings and Practice; Forum-Shopping; Technical
rules of procedure should be used to promote, not frustrate, justice.-
2.Implied Powers - sec 36(11) We stress that technical rules of procedure should be used to promote,
not frustrate, justice. While the swift unclogging of court dockets is a
11. To exercise such other powers as may be essential or laudable objective, the granting of substantial justice is an even more
necessary to carry out its purpose or purposes as stated in the urgent ideal.
articles of incorporation
2.Power to extend or shorten corporate Term sec 37 and 81(1)
3.Incidental Powers - sec 2 Corp Code
Sec. 37. Power to extend or shorten corporate term. - A private
Sec. 2. Corporation defined. - A corporation is an artificial being corporation may extend or shorten its term as stated in the articles of
created by operation of law, having the right of succession and the incorporation when approved by a majority vote of the board of
powers, attributes and properties expressly authorized by law or directors or trustees and ratified at a meeting by the stockholders
incident to its existence. representing at least two-thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the members in case of non-stock
B. Specified Powers corporations. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member
1. Power to sue and be sued sec 36(1) 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
1. To sue and be sued in its corporate name;2. Of succession by its served personally: Provided, That in case of extension of corporate
corporate name for the period of time stated in the articles of term, any dissenting stockholder may exercise his appraisal right
incorporation and the certificate of incorporation; under the conditions provided in this code.

BS Savings Bank vs Sia GR 131214 2000 Sec. 81. Instances of appraisal right.- Any stockholder of a
corporation shall have the right to dissent and demand payment of the
1. Corporation Law; Contracts; All acts within the powers of a fair value of his shares in the following instances:
corporation may be performed by agents of its selection; except so far
as limitations or restrictions imposed by special charter, by-law, or 1. In case any amendment to the articles of incorporation has the effect
statutory provisions.- of changing or restricting the rights of any stockholder or class of
A corporation, such as the petitioner, has no powers except those shares, or of authorizing preferences in any respect superior to those
expressly conferred on it by the Corporation Code and those that are of outstanding shares of any class, or of extending or shortening the
implied by or are incidental to its existence. In turn, a corporation term of corporate existence;
exercises said powers through its board of directors and/or its duly
authorized officers and agents. Physical acts, like the signing of 3.Power to increase or decrease capital stock sec 38 and 16
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 Sec. 38. Power to increase or decrease capital stock; incur, create
of directors. “All acts within the powers of a corporation may be or increase bonded indebtedness. - No corporation shall increase or
performed by agents of its selection; and, except so far as limitations decrease its capital stock or incur, create or increase any bonded
or restrictions which may be imposed by special charter, by-law, or indebtedness unless approved by a majority vote of the board of
statutory provisions, the same general principles of law which govern directors and, at a stockholder's meeting duly called for the purpose,
the relation of agency for a natural person govern the officer or agent two-thirds (2/3) of the outstanding capital stock shall favor the
of a corporation, of whatever status or rank, in respect to his power to increase or diminution of the capital stock, or the incurring, creating
act for the corporation; and agents once appointed, or members acting or increasing of any bonded indebtedness. Written notice of the
in their stead, are subject to the same rules, liabilities and incapacities proposed increase or diminution of the capital stock or of the
as are agents of individuals and private persons.” incurring, creating, or increasing of any bonded indebtedness and of
the time and place of the stockholder's meeting at which the proposed
2. Corporation Law; Contracts; Corporations act only through their increase or diminution of the capital stock or the incurring or
officers and duly authorized agents.- increasing of any bonded indebtedness is to be considered, must be
In the case of natural persons, Circular 28-91 requires the parties addressed to each stockholder at his place of residence as shown on
themselves to sign the certificate of non-forum shopping. However,
48
the books of the corporation and deposited to the addressee in the post changes made, and a copy thereof duly certified under oath by the
office with postage prepaid, or served personally. corporate secretary and a majority of the directors or trustees stating
A certificate in duplicate must be signed by a majority of the directors the fact that said amendment or amendments have been duly approved
of the corporation and countersigned by the chairman and the secretary by the required vote of the stockholders or members, shall be
of the stockholders' meeting, setting forth: submitted to the Securities and Exchange Commission.
(1) That the requirements of this section have been complied with; The amendments shall take effect upon their approval by the Securities
(2) The amount of the increase or diminution of the capital stock; and Exchange Commission or from the date of filing with the said
(3) If an increase of the capital stock, the amount of capital stock or Commission if not acted upon within six (6) months from the date of
number of shares of no-par stock thereof actually subscribed, the filing for a cause not attributable to the corporation.
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each, Madrigal & Co. vs Zamora, 151 scra 355 1987
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 1. Evidence; Findings of administrative agencies are accorded not
allotted to each stock-holder if such increase is for the purpose of only respect but even finality.-
making effective stock dividend therefor authorized; As a general rule, the findings of administrative agencies are accorded
(4) Any bonded indebtedness to be incurred, created or increased; not only respect but even finality. This is especially true with respect
(5) The actual indebtedness of the corporation on the day of the to the Department of Labor, which performs not only a statutory
meeting; function but carries out a Constitutional mandate as well. Our
(6) The amount of stock represented at the meeting; and jurisdiction, as a rule, is confined to cases of grave abuse of discretion.
(7) The vote authorizing the increase or diminution of the capital But for certiorari to lie, there must be such arbitrary and whimsical
stock, or the incurring, creating or increasing of any bonded exercise of power, or that discretion was exercised despotically.
indebtedness.
2. Labor Law; Dividends received by the company are corporate
Any increase or decrease in the capital stock or the incurring, creating earnings arising from corporate investment.-
or increasing of any bonded indebtedness shall require prior approval The petitioner would, however, have us believe that it in fact sustained
of the Securities and Exchange Commission. losses. Whatever profits it earned, so it claims were in the nature of
dividends “declared on its shareholdings in other companies in the
One of the duplicate certificates shall be kept on file in the office of earning of which the employees had no participation whatsoever.”
the corporation and the other shall be filed with the Securities and “Cash dividends,” according to it, “are the absolute property of the
Exchange Commission and attached to the original articles of stockholders and cannot be made available for disposition if only to
incorporation. From and after approval by the Securities and meet the employees’ economic demands.” There is no merit in this
Exchange Commission and the issuance by the Commission of its contention. We agree with the National Labor Relations Commission
certificate of filing, the capital stock shall stand increased or decreased that “[t]he dividends received by the company are corporate earnings
and the incurring, creating or increasing of any bonded indebtedness arising from corporate investment.” Indeed, as found by the
authorized, as the certificate of filing may declare: Provided, That the Commission, the petitioner had entered such earnings in its financial
Securities and Exchange Commission shall not accept for filing any statements as profits, which it would not have done if they were not in
certificate of increase of capital stock unless accompanied by the fact profits. Moreover, it is incorrect to say that such profits—in the
sworn statement of the treasurer of the corporation lawfully holding form of dividends—are beyond the reach of the petitioner’s creditors
office at the time of the filing of the certificate, showing that at least since the petitioner had received them as compensation for its
twenty-five (25%) percent of such increased capital stock has been management services in favor of the companies it managed as a
subscribed and that at least twenty-five (25%) percent of the amount shareholder thereof. As such shareholder. the dividends paid to it were
subscribed has been paid either in actual cash to the corporation or that its own money, which may then be available for wage increments. It
there has been transferred to the corporation property the valuation of is not a case of a corporation distributing dividends in favor of its
which is equal to twenty-five (25%) percent of the subscription: stockholders, in which case, such dividends would be the absolute
Provided, further, That no decrease of the capital stock shall be property of the stockholders and hence, out of reach by creditors of
approved by the Commission if its effect shall prejudice the rights of the corporation. Here, the petitioner was acting as stockholder itself,
corporate creditors. and in that case, the right to a share in such dividends, by way of salary
Non-stock corporations may incur or create bonded indebtedness, or increases, may not be denied its employees.
increase the same, with the approval by a majority vote of the board
of trustees and of at least two-thirds (2/3) of the members in a meeting 3. Labor Law; Unfair Labor Practice; Reduction of capital to evade
duly called for the purpose. employees demand for salary adjustments, mass lay-off of employees
Bonds issued by a corporation shall be registered with the Securities under the guise of retrenchment policy constitute unfair labor
and Exchange Commission, which shall have the authority to practice.-
determine the sufficiency of the terms thereof. Accordingly, this court is convinced that the petitioner’s capital
reduction efforts were, to begin with, a subterfuge, a deception as it
Sec. 16. Amendment of Articles of Incorporation. - Unless were, to camouflage the fact that it had been making profits, and
otherwise prescribed by this Code or by special law, and for legitimate consequently, to justify the mass lay off in its employee ranks,
purposes, any provision or matter stated in the articles of incorporation especially of union members. They were nothing but a premature and
may be amended by a majority vote of the board of directors or plain distribution of corporate assets to obviate a just sharing to labor
trustees and the vote or written assent of the stockholders representing of the vast profits obtained by its joint efforts with capital through the
at least two-thirds (2/3) of the outstanding capital stock, without years. Surely, we can neither countenance nor condone this. It is an
prejudice to the appraisal right of dissenting stockholders in unfair labor practice. As we observed in People’s Bank and Trust
accordance with the provisions of this Code, or the vote or written Company v. People’s Bank and Trust Co. Employees Union: xxx xxx
assent of at least two-thirds (2/3) of the members if it be a non-stock xxx As has been held by this Court in Insular Lumber Company vs.
corporation. CA, et al., L-23875, August 29, 1969, 29 SCRA 371, retrenchment
The original and amended articles together shall contain all provisions can only be availed of if the company is losing or meeting financial
required by law to be set out in the articles of incorporation. Such reverses in its operation, which certainly is not the case at bar.
articles, as amended shall be indicated by underscoring the change or Undisputed is the fact, that the Bank “at no time incurred losses.” As
49
a matter of fact. “the net earnings of the Bank would be in the average quorum to validly transact business since, under Section 4 of the
of P2,000,000.00 a year from 1960 to 1969 and, during this period of amended by-laws hereinabove reproduced, at least four (4) members
nine (9) years, the Bank continuously declared dividends to its must be present to constitute a quorum in a special meeting of the
stockholders.” Thus the mass layoff or dismissal of the 65 employees board of directors of respondent PAMBUSCO.
under the guise of retrenchment policy of the Bank is a lame excuse
and a veritable smoke-screen of its scheme to bust the Union and thus Same; Board of Directors; Only persons who own at least one (1)
unduly disturb the employment tenure of the employees concerned, share in their own right may qualify to be directors of a corporation.—
which act is certainly an unfair labor practice. As a matter of fact, the three (3) alleged directors who attended the
special meeting on November 19,1974 were not listed as directors of
4. Power to sell, dispose, lease or encumber assets sec 40 respondent PAMBUSCO in the latest general information sheet of
respondent PAMBUSCO filed with the SEC dated 18 March 1951.
Sec. 40. Sale or other disposition of assets. - Subject to the Similarly, the latest list of stockholders of respondent PAMBUSCO
provisions of existing laws on illegal combinations and monopolies, a on file with the SEC does not show that the said alleged directors were
corporation may, by a majority vote of its board of directors or among the stockholders of respondent PAMBUSCO. Under Section
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose 30 of the then applicable Corporation Law, only persons who own at
of all or substantially all of its property and assets, including its least one (1) share in their own right may qualify to be directors of a
goodwill, upon such terms and conditions and for such consideration, corporation. Further, under Section 28 1/2 ofthe said law, the sale or
which may be money, stocks, bonds or other instruments for the disposition of all and/or substantially all properties of the corporation
payment of money or other property or consideration, as its board of requires, in addition to a proper board resolution, the affirmative votes
directors or trustees may deem expedient, when authorized by the vote of the stockholders holding at least two-thirds (2/3) of the voting
of the stockholders representing at least two-thirds (2/3) of the power in the corporation in a meeting duly called for that purpose. No
outstanding capital stock, or in case of non-stock corporation, by the doubt, the questioned resolution was not confirmed at a subsequent
vote of at least to two-thirds (2/3) of the members, in a stockholder's stockholders meeting duly called for the purpose by the affirmative
or member's meeting duly called for the purpose. Written notice of the votes of the stockholders holding at least two-thirds (2/3) of the voting
proposed action and of the time and place of the meeting shall be power in the corporation. The same requirement is found in Section
addressed to each stockholder or member at his place of residence as 40 of the present Corporation Code.
shown on the books of the corporation and deposited to the addressee
in the post office with postage prepaid, or served personally: Provided, Same; Deed of Assignment; Civil Law; Donation; Liberality as a
That any dissenting stockholder may exercise his appraisal right under consideration in the deed of assignment of the respondent
the conditions provided in this Code. PAMBUSCO in favor of its former corporate officer for services
A sale or other disposition shall be deemed to cover substantially all rendered is not just an ordinary deed of assignment but a donation.—
the corporate property and assets if thereby the corporation would be Respondent court, in upholding the questioned deed of assignment,
rendered incapable of continuing the business or accomplishing the which appears to be without any consideration at all, held that the
purpose for which it was incorporated. consideration thereof is the liberality of the respondent PAMBUSCO
in favor of its former corporate officer, respondent Enriquez, for
After such authorization or approval by the stockholders or members, services rendered. Assuming this to be so, then as correctly argued by
the board of directors or trustees may, nevertheless, in its discretion, petitioner, it is not just an ordinary, deed of assignment, but is in fact
abandon such sale, lease, exchange, mortgage, pledge or other a donation. Under Article 725 of the Civil Code, in order to be valid,
disposition of property and assets, subject to the rights of third parties such a donation must be made in a public document and the acceptance
under any contract relating thereto, without further action or approval must be made in the same or in a separate instrument. In the latter case,
by the stockholders or members. the donor shall be notified of the acceptance in an authentic form and
Nothing in this section is intended to restrict the power of any such step must be noted in both instruments. Non-compliance with this
corporation, without the authorization by the stockholders or requirement renders the donation null and void. Since undeniably the
members, to sell, lease, exchange, mortgage, pledge or otherwise deed of assignment dated March 8, 1975 in question, shows that there
dispose of any of its property and assets if the same is necessary in the was no acceptance of the donation in the same and in a separate
usual and regular course of business of said corporation or if the document, the said deed of assignment is thus void ab initio and of no
proceeds of the sale or other disposition of such property and assets be force and effect.
appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting Islamic Directorate vs CA GR 117897 14 May 1997
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any 1. Actions; Judgments; Res Judicata; Bar by Prior
transaction authorized by this section. Judgment; Conclusiveness of Judgment; Words and
Phrases; Section 49, Rule 39 of the Revised Rules of Court lays down
Pena vs CA 193 scra 717 1991 the dual aspects of res judicata in actions in personam.-
Section 49, Rule 39 of the Revised Rules of Court lays down the dual
Corporation Law; By-laws; Quorum; Three (3) out of five (5) aspects of res judicata in actions in personam, to wit: “Effect of
members of the board of directors present in the special meeting of judgment.—The effect of a judgment or final order rendered by a court
respondent PAMBUSCO do not constitute a quorum to validly or judge of the Philippines, having jurisdiction to pronounce the
transact business. Section 4 of its amended by-laws requires at least judgment or order, may be as follows: xxx xxx xxx (b) In other cases
four (4) members present to constitute a quorum in a special meeting the judgment or order is, with respect to the matter directly adjudged
of its board of directors.—The by-laws of a corporation are its own or as to any other matter that could have been raised in relation thereto,
private laws which substantially have the same effect as the laws of conclusive between the parties and their successors in interest by title
the corporation. They are in effect, written, into the charter. In this subsequent to the commencement of the action or special proceeding,
sense they become part of the fundamental law of the corporation with litigating for the same thing and under the same title and in the same
which the corporation and its directors and officers must comply. capacity; (c) In any other litigation between the same parties or their
Apparently, only three (3) out of five (5) members of the board of succes sors in interest, that only is deemed to have been adjudged in a
directors of respondent PAMBUSCO convened on November 19, former judgment which appears upon its face to have been so
1974 by virtue of a prior notice of a special meeting. There was no adjudged, or which was actually and necessarily included therein or
50
necessary thereto.” Section 49(b) enunciates the first concept of res reason that it was not duly represented by a legitimate Board of
judicata known as “bar by prior judgment,” whereas , Section 49(c) is Trustees in that case. As a necessary consequence, Civil Case No. Q-
referred to as “conclusiveness of judgment.” 90-6937, a case for Specific Performance with Damages, a mere action
in personam , did not become final and executory insofar as the true
2. Actions; Judgments; Res Judicata; Bar by Prior IDP is concerned since petitioner corporation, for want of legitimate
Judgment; Conclusiveness of Judgment; Words and representation, was effectively deprived of its day in court in said case.
Phrases; There is “bar by former judgment” when, between the first Res inter alios judicatae nullum aliis praejudicium faciunt. Matters
case where the judgment was rendered, and the second case where the adjudged in a cause do not prejudice those who were not parties to it.
judgment is invoked, there is identity of parties, subject matter and Elsewise put, no person (natural or juridical) shall be affected by a
cause of action while there is “conclusiveness of judgment” where proceeding to which he is a stranger.
there is only identity of parties but there is no identity of cause of
action, the judgment being conclusive in the second case only as to 5. Actions; Judgments; Res Judicata; Bar by Prior
those matters actually and directly controverted and determined, and Judgment; Conclusiveness of Judgment; While it is true that the
not as to matters merely involved therein.- principle of res judicata is a fundamental component of our judicial
There is “bar by former judgment” when, between the first case where system, it should be disregarded if its rigid application would involve
the judgment was rendered, and the s econd case where such judgment the sacrifice of justice to technicality.-
is invoked, there is identity of parties, subject matter and cause of In any case, while it is true that the principle of res judicata is a
action. When the three identities are present, the judgment on the fundamental component of our judicial system, it should be
merits rendered in the first constitutes an absolute bar to the disregarded if its rigid application would involve the sacrifice of
subsequent action. But where between the first case wherein judgment justice to technicality.
is rendered and the second case wherein such judgment is invoked,
there is only identity of parties but there is no identity of cause of 6. Corporation Law; Jurisdiction; Securities and Exchange
action, the judgment is conclusive in the s econd case, only as to those Commission; The SEC has the unquestionable authority to pass upon
matters actually and directly controverted and determined, and not as the issue as to who among the different contending groups is the
to matters merely involved therein. This is what is termed legitimate governing board of a corporate body.-
“conclusiveness of judgment.” There can be no question as to the authority of the SEC to pass upon
the issue as to who among the different contending groups is the
3. Actions; Judgments; Res Judicata; Bar by Prior legitimate Board of Trustees of the IDP since this is a matter properly
Judgment; Conclusiveness of Judgment;Intervention; A party-in- falling within the original and exclusive jurisdiction of the SEC by
intervention cannot be considered a principal in a prior case for virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:
purposes of applying the principle of res judicata since the contrary “Section 3. The Commission shall have absolute jurisdiction,
goes against the true import of the action of intervention as a m ere supervision and control over all corporations, partnerships or
subsidiary proceeding without an independent life apart from the associations , who are the grantees of primary franchises and/or a
principal action as well as the intrinsic character of the intervenor as a license or permit issued by the government to operate in the
mere subordinate party in the main case whose right may be said to be Philippines x x x x x x.” x x x x x x x x x Section 5. In addition to the
only in aid of the right of the original party.- regulatory and adjudicative functions of the Securities and Exchange
Neither of these concepts of res judicata find relevant application in Commission over corpora ti ons , partnerships and other forms of
the case at bench. While there may be identity of subject matter (IDP associations registered with it as expressly granted under existing laws
property) in both cases, there is no identity of parties. The principal and decrees, it shall have original and exclusive jurisdiction to hear
parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as and decide cases involving: x x x x x x x x x c) Controversies in the
petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, selection or appointment of directors, trustees, officers, or managers
as represented by the 1971 Board of Trustees or the Tamano Group, of such corporations, partnerships or associations. x x x.”
was only made an ancillary party in G.R. No. 107751 as intervenor. It
was never originally a principal party thereto. it must be noted that 7. Corporation Law; Contracts; Sales; Where a corporate body
intervention is not an independent action, but is merely collateral, never gave its consent, thru a legitimate governing board, to a deed of
accessory, or ancillary to the principal action. It is just an interlocutory absolute sale, the subject sale is void and produces no effect
proceeding dependent on or subsidiary to the case between the original whatsoever.-
parties. Indeed, The IDP-Tamano Group cannot be considered a Premises considered, all acts carried out by the Carpizo Board,
principal party in G.R. No. 107751 for purposes of applying the particularly the sale of the Tandang Sora property, allegedly in the
principle of res judicata since the contrary goes against the true import name of the IDP, have to be struck down for having been done without
of the action of intervention as a mere subsidiary proceeding without the consent of the IDP thru a legitimate Board of Trustees. Article
an independent life apart from the principal action as well as the 1318 of the New Civil Code lays down the essential requisites of
intrinsic character of the intervenor as a mere subordinate party in the contracts: “There is no contract unless the following requisites concur:
main case whose right may be said to be only in aid of the right of the (1) Consent of the contracting parties; (2) Object certain which is the
original party. It is only in the present case, actually, where the IDP- subject matter of the contract; (3) Cause of the obligation which is
Tamano Group became a principal party, as petitioner, with the Iglesia established.” All these elements must be present to constitute a valid
Ni Cristo, as private res pondent. Clearly, there is no identity of parties contract. For, where even one is absent, the contract is void. As
in both cases. succinctly put by Tolentino, consent is essential for the existence of a
contract, and where it is wanting, the contract is non-existent. In this
4. Actions; Judgments; Res Judicata; Bar by Prior case, the IDP, owner of the subject parcels of land, never gave its
Judgment; Conclusiveness of Judgment;Corporation Law; A consent, thru a legitimate Board of Trustees, to the disputed Deed of
juridical person can not be considered essentially a formal party to a Absolute Sale executed in favor of INC. This is, therefore, a case not
case where it was not duly represented by its legitimate governing only of vitiated consent, but one where consent on the part of one of
board.- the supposed contracting parties is totally wanting. Ineluctably, the
In this connection, although it is true that Civil Case No. Q-90-6937, subject sale is void and produces no effect whatsoever.
which gave rise to G.R. No. 107751, was entitled, “Iglesia Ni Kristo,
Plaintiff v. Islamic Directorate of the Philippines, Defendant,” the IDP 8. Corporation Law; Contracts; Sales; For the sale of the only
can not be considered essentially a formal party thereto for the simple property of a corporation to be valid, the majority vote of the
51
legitimate board, concurred in by the vote of at least 2/3 of the bona Corporation Law; No stockholders’ meeting or approval is
fide m embers of the corporation, should be obtained.- necessary for issuance of unsubscribed portion of capital stock.—As
The Tandang Sora property, it appears from the records, constitutes aptly stated by the Securities and Exchange Commission in its
the only property of the IDP. Hence, its sale to a third-party is a sale decision: x x x the questioned issuance of the unsubscribed portion of
or disposition of all the corporate property and assets of I DP falling the capital stock worth P110,980.00 is not invalid even if assuming
squarely within the contemplation of the foregoing section. For the that it was made without notice to the stockholders as claimed by
sale to be valid, the m a jorit y vot e of the legitimate Board of petitioner. The power to issue shares of stocks in a corporation is
Trustees, concurred in by the vote of at least 2/3 of the bona fide lodged in the board of directors and no stockholders’ meeting is
members of the corporation should have been obtained. These twin necessary to consider it because additional issuance of shares of stocks
requirements were not met as the Carpizo Group which voted to sell does not need approval of the stockholders. The by-laws of the
the Tandang Sora property was a fake Board of Trustees , and those corporation itself states that ‘the Board of Trustees shall, in
whose names and s ignatures were affixed by the Carpizo Group accordance with law, provide for the issue and transfer of shares of
together with the sham Board Resolution authorizing the negotiation stock of the Institute and shall prescribe the form of the certificate of
for the sale were, from all indications, not bona fide members of the stock of the Institute’ (Art. V, Sec. 1).
IDP as they were ma de to appear to be. Apparently, there are only
fifteen (15) official members of the petitioner corporation including Same; A stockholder enjoys no pre-emptive right to buy unissued
the eight (8) members of the Board of Trustees. shares of originally authorized capital stock.—“Petitioner bewails the
fact that in view of the lack of notice to him of such subsequent
9. Corporation Law; Contracts; Sales; Securities and Exchange issuance, he was not able to exercise his right of pre-emption over the
Commission; Remand of Cases; No end of substantial justice will be unissued shares. However, the general rule is that pre-emptive right is
served if the Supreme Court reverses the SEC’s conclusion and recognized only with respect to new issue of shares, and not with
remand the case to the regular courts for further litigation over an issue respect to additional issues of originally authorized shares. This is on
which is already determinable based on what is in the records.- the theory that when a corporation at its inception offers its first shares,
The resolution of the question as to whether or not the SEC had it is presumed to have offered all of those which it is authorized to
jurisdiction to declare the subject sale null and void is rendered moot issue. An original subscriber is deemed to have taken his shares
and academic by the inherent nullity of the highly dubious sale due to knowing that they form a definite proportionate part of the whole
lack of consent of the I DP, owner of the subject property. No end of number of authorized shares. When the shares left unsubscribed are
substantial justice will be served if we revers e the SEC’s conclusion later reoffered, he cannot therefore claim a dilution of interest.
on the matter, and remand the case to the regular courts for further (Campos and Lopez-Campos Selected Notes and Cases on
litigation over an issue which is already determinable based on what Corporation Law, p. 855, citing Yasik V. Wachtel, 25 Del. Ch. 247,
we have in the records. 17A. 2d 308 (1941).” (pp. 33-34, Rollo)

10. Land Titles; Under the Torrens System of Registration, the Same; Administrative Law; Findings of fact of an administrative
minimum requirement for one to be a good faith buyer for value is that tribunal, i.e., stockholders were notified of the cannot be deemed to
the vendee at least sees the owner’s duplicate copy of the title and have waived his pre-emptive right to buy additional shares of stock,
relies upon the same.- are binding on courts.—Well-settled is the rule that the findings of
Furthermore, the Court observes that the INC bought the questioned facts of administrative bodies will not be interfered with by the courts
property from the Carpizo Group without even seeing the owner’s in the absence of grave abuse of discretion on the part of said agencies,
duplicate copy of the titles covering the property. This is very strange or unless the aforementioned findings are not supported by substantial
considering that the subject lot is a large piece of real property in evidence. (Gokongwei, Jr. vs. SEC, 97 SCRA 78). In a long string of
Quezon City worth millions , and that under the Torrens System of cases, the Supreme Court has consistently adhered to the rule that
Registration, the minimum requirement for one to be a good faith decisions of administrative officers are not to be disturbed by the
buyer for value is that the vendee at least sees the owner’s duplicate courts except when the former have acted without or in excess of their
copy of the title and relies upon the same. The private respondent, jurisdiction or with grave abuse of discretion (Sichangco vs. Board of
presumably knowledgeable on the aforesaid workings of the Torrens Commissioners of Immigration, 94 SCRA 61).
System, did not take heed of this and nevertheless went through with
the sale with undue haste. The unexplained eagerness of INC to buy 6. Power to purchase own shares sec 41
this valuable piece of land in Quezon City without even being
presented with the owner’s copy of the titles casts very serious doubt Sec. 41. Power to acquire own shares. - A stock corporation shall
on the rightfulness of its position as vendee in the transaction. have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the
5. Power to Deny pre-emptive rights sec 39 following cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be purchased or
Sec. 39. Power to deny pre-emptive right. - All stockholders of a acquired:
stock corporation shall enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class, in proportion to their 1. To eliminate fractional shares arising out of stock dividends;
respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre- 2. To collect or compromise an indebtedness to the corporation,
emptive right shall not extend to shares to be issued in compliance arising out of unpaid subscription, in a delinquency sale, and to
with laws requiring stock offerings or minimum stock ownership by purchase delinquent shares sold during said sale; and
the public; or to shares to be issued in good faith with the approval of
the stockholders representing two-thirds (2/3) of the outstanding 3. To pay dissenting or withdrawing stockholders entitled to payment
capital stock, in exchange for property needed for corporate purposes for their shares under the provisions of this Code.
or in payment of a previously contracted debt.
Phil Trust vs Rivera 44 Phil 469 1923
Datu vs SEC 123 scra 722
1. CORPORATIONS; DIMINUTION OF CAPITAL.-

52
A corporation has no power to release an original subscriber to its Provided, however, That where the investment by the corporation is
capital stock from the obligation of paying for his shares, without a reasonably necessary to accomplish its primary purpose as stated in
valuable consideration. for such release; and as against creditors a the articles of incorporation, the approval of the stockholders or
reduction of the capital stock can take place only in the manner and members shall not be necessary.
under the conditions prescribed by law.
Dela Rama vs Ma-ao Sugar Central 7 scra 247 1969
Boman Enviromental vs CA 167 scra 540 1988
8. Power to enter into management contract sec 44
1. Corporation Law; Jurisdiction of the SEC; Intra-corporate
Controversy; A suit filed by a stockholder against the corporation to Sec. 44. Power to enter into management contract. - No
enforce the latter's promissory note or to compel the corporation to corporation shall conclude a management contract with another
pay for his shareholdings is cognizable by the SEC alone.- corporation unless such contract shall have been approved by the
Fajilan's suit against the corporation to enforce the latter's promissory board of directors and by stockholders owning at least the majority of
note or compel the corporation to pay for his shareholdings is the outstanding capital stock, or by at least a majority of the members
cognizable by the SEC alone which shall determine whether such in the case of a non-stock corporation, of both the managing and the
payment will not constitute a distribution of corporate assets to a managed corporation, at a meeting duly called for the purpose:
stockholder in preference over creditors of the corporation. The SEC Provided, That (1) where a stockholder or stockholders representing
has exclusive supervision, control and regulatory jurisdiction to the same interest of both the managing and the managed corporations
investigate whether the corporation has unrestricted retained earnings own or control more than one-third (1/3) of the total outstanding
to cover the payment for the shares, and whether the purchase is for a capital stock entitled to vote of the managing corporation; or (2) where
legitimate corporate purpose as provided in Sections 41 and 122 of the a majority of the members of the board of directors of the managing
Corporation Code. corporation also constitute a majority of the members of the board of
directors of the managed corporation, then the management contract
2. Corporation Law; Corporations; Trust Fund Doctrine; There must be approved by the stockholders of the managed corporation
can be no distribution of assets among stockholders without first owning at least two-thirds (2/3) of the total outstanding capital stock
paying the corporate creditors.- entitled to vote, or by at least two-thirds (2/3) of the members in the
The requirement of unrestricted retained earnings to cover the shares case of a non-stock corporation. No management contract shall be
is based on the trust fund doctrine which means that the capital stock, entered into for a period longer than five years for any one term.
property and other assets of a corporation are regarded as equity in The provisions of the next preceding paragraph shall apply to any
trust for the payment of corporate creditors. The reason is that contract whereby a corporation undertakes to manage or operate all or
creditors of a corporation are preferred over the stockholders in the substantially all of the business of another corporation, whether such
distribution of corporate assets. There can be no distribution of assets contracts are called service contracts, operating agreements or
among the stockholders without first paying corporate creditors. otherwise: Provided, however, That such service contracts or
Hence, any disposition of corporate funds to the prejudice of creditors operating agreements which relate to the exploration, development,
is null and void. "Creditors of a corporation have the right to assume exploitation or utilization of natural resources may be entered into for
that so long as there are outstanding debts and liabilities, the board of such periods as may be provided by the pertinent laws or regulations
directors will not use the assets of the corporation to purchase its own
stock ..." (Steinberg vs. Velasco, 52 Phil. 953.) 9. Power to make donations sec 36(9)

3. Contracts, Interpretation of; Provisions of existing laws are 9. To make reasonable donations, including those for the public
deemed incorporated in a valid contract without the parties' making welfare or for hospital, charitable, cultural, scientific, civic, or similar
express reference to it.- purposes: Provided, That no corporation, domestic or foreign, shall
These provisions of the Corporation Code should be deemed written give donations in aid of any political party or candidate or for purposes
into the agreement between the corporation and the stockholders even of partisan political activity;
if there is no express reference to them in the promissory note. The
principle is well settled that an existing law enters into and forms part 10. Power to provide gratuities to employees sec 36(10)
of a valid contract without need for the parties' expressly making
reference to it (Lakas ng Manggagawang Makabayan vs. Abiera, 36 10. To establish pension, retirement, and other plans for the benefit of
SCRA 437). its directors, trustees, officers and employees;

7.Power to invest corporate funds in another corporation or Lopez Realty vs Fontecha GR 76801 11 August 1995
business or for any other purpose sec 42
1. Actions; Pleadings and Practice; Appeals; It is well settled that
Sec. 42. Power to invest corporate funds in another corporation or questions not raised in the lower courts cannot be raised for the first
business or for any other purpose. - Subject to the provisions of this time on appeal.-
Code, a private corporation may invest its funds in any other Indeed, it would be offensive to the basic rules of fair play and justice
corporation or business or for any purpose other than the primary to allow petitioners to raise questions which have not been passed
purpose for which it was organized when approved by a majority of upon by the labor arbiter and the public respondent NLRC. It is well
the board of directors or trustees and ratified by the stockholders settled that questions not raised in the lower courts cannot be raised
representing at least two-thirds (2/3) of the outstanding capital stock, for the first time on appeal. Hence, petitioners may not invoke any
or by at least two thirds (2/3) of the members in the case of non-stock other ground, other than those it specified at the labor arbiter level, to
corporations, at a stockholder's or member's meeting duly called for impugn the validity of the subject resolutions.
the purpose. Written notice of the proposed investment and the time
and place of the meeting shall be addressed to each stockholder or 2. Corporation Law; A corporation, through its board of directors,
member at his place of residence as shown on the books of the should act in the manner and within the formalities, if any, prescribed
corporation and deposited to the addressee in the post office with by its charter or by the general law.-
postage prepaid, or served personally: Provided, That any dissenting The general rule is that a corporation, through its board of directors,
stockholder shall have appraisal right as provided in this Code: should act in the manner and within the formalities, if any, prescribed
53
by its charter or by the general law. Thus, directors must act as a body Sec. 44. Power to enter into management contract. - No
in a meeting called pursuant to the law or the corporation’s by-laws, corporation shall conclude a management contract with another
otherwise, any action taken therein may be questioned by any corporation unless such contract shall have been approved by the
objecting director or shareholder. board of directors and by stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the members
3. Corporation Law; An action of the board of directors during a in the case of a non-stock corporation, of both the managing and the
meeting, which was illegal for lack of notice, may be ratified either managed corporation, at a meeting duly called for the purpose:
expressly, by the action of the directors in subsequent legal meeting, Provided, That (1) where a stockholder or stockholders representing
or impliedly, by the corporation’s subsequent course of conduct.- the same interest of both the managing and the managed corporations
Be that as it may, jurisprudence tells us that an action of the board of own or control more than one-third (1/3) of the total outstanding
directors during a meeting, which was illegal for lack of notice, may capital stock entitled to vote of the managing corporation; or (2) where
be ratified either expressly, by the action of the directors in subsequent a majority of the members of the board of directors of the managing
legal meeting, or impliedly, by the corporation’s subsequent course of corporation also constitute a majority of the members of the board of
conduct. directors of the managed corporation, then the management contract
must be approved by the stockholders of the managed corporation
4. Corporation Law; “Ultra Vires” Acts; Words and Phrases; In owning at least two-thirds (2/3) of the total outstanding capital stock
legal parlance, “ultra vires” act refers to one which is not within the entitled to vote, or by at least two-thirds (2/3) of the members in the
corporate powers conferred by the Corporation Code or articles of case of a non-stock corporation. No management contract shall be
incorporation or not necessary or incidental in the exercise of the entered into for a period longer than five years for any one term.
powers so conferred.- The provisions of the next preceding paragraph shall apply to any
Assuming,arguendo, that there was no notice given to Asuncion Lopez contract whereby a corporation undertakes to manage or operate all or
Gonzales during the special meetings held on August 17, 1981 and substantially all of the business of another corporation, whether such
September 1, 1981, it is erroneous to state that the resolutions passed contracts are called service contracts, operating agreements or
by the board during the said meetings were ultra vires. In legal otherwise: Provided, however, That such service contracts or
parlance, “ultra vires” act refers to one which is not within the operating agreements which relate to the exploration, development,
corporate powers conferred by the Corporation Code or articles of exploitation or utilization of natural resources may be entered into for
incorporation or not necessary or incidental in the exercise of the such periods as may be provided by the pertinent laws or regulations
powers so conferred.
Tuason & Co. vs Bolaños 95 Phil 906
5. Corporation Law; “Ultra Vires” Acts; Providing gratuity pay for
its employees is one of the express powers of the corporation under 1. PARTIES; REAL PARTY IN INTEREST; ATTORNEY MAY
the Corporation Code.- BRING ACTION IN PLAINTIFF'S NAME.-
The assailed resolutions before us cover a subject which concerns the Section 2, Rule 2. of the Rules of Court requires that an action be
benefit and welfare of the company’s employees. To stress, providing brought in the name of, but not necessarily by, the real property
gratuity pay for its employees is one of the express powers of the interest. In fact the practice is for an attorney-at-law to bring the
corporation under the Corporation Code, hence, petitioners cannot action, that is, to file the complaint, in the name of the plaintiff.
invoke the doctrine of ultra vires to avoid any liability arising from the
issuance of the subject resolutions. 2. PARTIES; CORPORATION AS PARTY MAY BE
REPRESENTED BY ANOTHER PERSON, NATURAL OR
6. Corporation Law; Section 28 1/2 of the Corporation Law (now JUDICIAL.-
Section 40 of the Corporation Code) requiring authorization of the There is nothing against one corporation being represented by another
stockholders of record for action taken by the board of directors person, natural or juridical, in a suit in court, for the true rule is that
applies to the sale, lease, exchange or disposition of all or substantially "although a corporation has no power to enter into a partnership, it
all of the corporation’s assets.- may nevertheless enter into a joint venture with another where the
Petitioners try to convince us that the subject resolutions had no force nature of that venture is in line with the business authorized by its
and effect in view of the non-approval thereof during the Annual charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R.,
Stockholders’ Meeting held on March 1, 1982. To strengthen their 1043, citing 2, Fletcher Cyc. E. 1082.)
position, petitioners cite section 28 1/2 of the Corporation Law
(Section 40 of the Corporation Code). We are not persuaded. The cited 3. COMPLAINTS; AMENDMENT TO CONFORM TO
provision is not applicable to the case at bench as it refers to the sale, EVIDENCE NOT NECESSARY TO RENDER JUDGMENT ON
lease, exchange or disposition of all or substantially all of the FACTS PROVED THOUGH NOT ALLEGED.-
corporation’s assets, including its goodwill. In such a case, the action Where the facts shown entitled plaintiff to relief other than that asked
taken by the board of directors requires the authorization of the for, no amendment to the complaint is necessary, especially where
stockholders on record. defendant has himself raised the point on which recovery is based, and
the appellate court may treat the pleading as amended to conform to
7. Corporation Law; Where the stockholders of petitioner, except for the evidence, although the pleadings were not actually amended.
one, also sit as members of the board of directors, it will be illogical (Citing Moran, Rules of Court, 1952 ed., 389-390.)
and superfluous to require the stockholders’ approval of certain
resolutions adopted by the board of directors.- 4. LAND REGISTRATION; REOPENING OF DECREE AFTER
It will be observed that, except for Arturo Lopez, the stockholders of ONE YEAR, NOT ALLOWED.-
petitioner corporation also sit as members of the board of directors. A decree of registration can no longer be impunged on the ground of
Under the circumstances in field, it will be illogical and superfluous fraud, error or lack of notice to defendant, after one year has elapsed
to require the stockholders’ approval of the subject resolutions. Thus, from the issuance and entry of the decree. Neither could the decree be
even without the stockholders’ approval of the subject resolutions, collaterally attacked by any person claiming title to, or interest in, the
petitioners are still liable to pay private respondents’ gratuity pay. land prior to the registration proceedings, nor could title to that land
in derogation of that of plaintiff be acquired by adverse possession or
11. Power to enter into a joint venture sec 44 prescription since adverse, notorious and continuous possession under

54
claim of ownership is ineffective against Torrens title and the right to Except in the cases of statutory forms or solemn agreements, it is the
secure possession under a decree of registration does not prescribe. assent and concurrence of the parties, and not the setting down of its
terms, that constitutes a binding contract.
5. ACTIONS; IDENTITY OF CAUSE OF ACTION.-
Where one action is for the recovery of ownership and the other is for 4. Corporations; Exercise of charter powers; Test to be applied.-
recovery of possession, there is no identity of cause of action. "It is a question, therefore, in each case, of the logical relation of the
act to the corporate purpose expressed in the charter. If that act is one
6. ACTIONS; CLASS SUIT.- which is lawful in itself, and not otherwise prohibited, is done for the
Where the action seeks relief for each individual plaintiff and not relief purpose of serving corporate ends, and is reasonably tributary to the
for and on behalf of others, the action is not a class suit. promotion of those ends, in a substantial, and not in a remote and
fanciful, sense, it may fairly be considered within charter powers. The
2.Ultra Vires Act - sec 45 test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to
Ultra-vires acts – are those that can not be executed or performed by the express powers and reasonably necessary to their exercise. If so,
a corporation because they are not within its express, inherent or the corporation has the power to do it; otherwise, not." (Fletcher Cyc.
implied powers as defined by its charter or articles of incorporation. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)

Consequences of ultra-vires acts: 5. Corporations; Exercise of charter powers; Question on probable


1. On the corporation itself – the proper forum may suspend or revoke, losses or decrease in profits not reviewable by courts.-
after proper notice and hearing, the franchise or certificate of Whether or not a valid and binding resolution passed by the board of
registration of the corporation for serious misrepresentation as to what directors, will cause losses or decrease the profits of the corporation,
the corporation can do or is doing to the great damage or prejudice of may not be reviewed by the courts.
the general public.
2. On the rights of the stockholders – a stockholder may either an
individual or derivative suit to enjoin a threatened ultra-vires act or C. Cases
contract. Pirovano vs De La Rama Streamship 96 Phil 335 1954
3. On the immediate parties – (a) if the contract is fully executed on
both sides, the contract is effective; (b) if the contract is executory on 1. CORPORATIONS; DONATIONS; DONATION GlVEN "OUT
both sides, neither party can maintain an action for its non- OF GRATITUDE FOR SERVICES RENDERED" Is
performance; and (c) if the contract is executory on one side only, and REMUNERATIVE.-
has been fully performed on the other, the party who has received the A donation given by the corporation to the minor children of its late
benefits is estopped to set up that the contract is ultra-vires. president because he "was to a large extent responsible for the rapid
and very successful development and expansion of the activities of
Sec. 45. Ultra vires acts of corporations. - No corporation under this this company" is remunerative in nature in contemplation of law.
Code shall possess or exercise any corporate powers except those
conferred by this Code or by its articles of incorporation and except 2. CORPORATIONS; DONATIONS; PERFECTED DONATION
such as are necessary or incidental to the exercise of the powers so CAN ONLY BE RESCINDED ON LEGAL GROUNDS.-
conferred. Where the donation made by the corporation has not only been granted
in several resolutions duly adopted by its board of directors but also it
a. Types of Ultra Vires Acts has been formally ratified by its stockholders, with the concurrence of
its only creditor, and accepted by the donee, the donation -has reached
1. Acts done beyond the powers of the corporation (through BOD); the stage of perfection which is valid and binding upon the corporation
2. Ultra vires acts by corporate officers;and and as such cannot be rescinded unless there exist legal grounds for
3. Acts or contracts which are per se illegal as being contrary to law. doing so.

b. Test to Determine Ultra Vires 3. CORPORATIONS; DONATIONS; DONATION


Montelibano vs Bacolod-Murcia 5 scra 36 1962 DISTINGUISHED FROM GRATUITY.-
While a donation may technically be different from a gratuity, in
1. Sugar Centrals; Milling Contracts; Concessions given by central substance they are the same. They are even similar to a pension. Thus,
to planters, if retracted, will constitute fraud; Case at Bar.- it was said that "A pension is a gratuity only when it is granted for
Since there is no rational explanation for the company's assenting to services previously rendered, and which at the time they were
the further concessions asked by the planters before the contracts were rendered gave rise to no legal obligation." (Words and Phrases,
signed, except as further inducement for the planters to agree to the Permanent Edition, p. 675; O'Dea vs. Cóók, 169 Pac., 306, 176 Cal.,
extension of the contract period, to allow the company now to retract 659.)
such concessions would be to sanction a fraud upon the planters who
relied on such additional stipulations. 4. CORPORATIONS; POWERS OF A CORPORATION; ACTS
PERFORMED WITHIN THE POWERS GRANTED ARE NOT
2. Contracts; Novation; Modification before a bargain not novation "ULTRA VIRES".-
in law.- Where the corporation was given broad and almost unlimited powers
There can be no novation unless two distinct and successive binding to carry out the purposes for which it was organized among them, to
contracts take place, with the later one designed to replace the aid in any other manner any person in the affairs and prosperity of
preceding convention. Modifications introduced before a bargain whom it has a lawful interest, a donation made to the heirs of its late
becomes obligatory can in no sense constitute novation in law. president in recognition of the valuable services rendered by the latter
which had immensely contributed to its growth, comes within this
3. Contracts; Assent and concurrence of parties necessary to perfect broad grant of power and can not be considered an ultra vires act.
a contract; Setting down of terms not important except in certain
cases.- 5. CORPORATIONS; POWERS OF A
CORPORATION; "ULTRA VIRES" ILLEGAL ACTS
55
DISTINGUISHED; EFFECT OF RATIFICATION BY 3. Same; Same; Ultra vires act distinguished from illegal
STOCKHOLDERS.- act; Enforcement of ultra vires act on the ground of estoppel.-
Illegal acts of a corporation contemplate the doing of an act which is —An illegal act is void and cannot be validated, while an ultra vires
contrary to law, morals, or public order, or contravene some rules of act is merely voidable and can be enforced by performance, ratifi-
public policy or public duty, and are, like similar transactions between cation or estoppel, or on equitable grounds. In the present case the
individuals, void. They can not serve as basis of a court action, nor validity of the resolution of the Board of Directors of the corporation
acquire validity by performance, ratification, or estoppel. On the other accepting full responsibility in connection with funds to be received
hand, ultra vires acts or those which are not illegal and void ab initio by its postmaster, should be upheld on the ground of estoppel.
but are merely within the scope of the article of incorporation, are
merely voidable and may become binding and enforceable when Crisologo Jose vs CA 177 scra 594 1989
ratified by the stockholders.
Negotiable Instruments Law; Corporations; Rule that an
6. CORPORATIONS; POWERS OF A accommodation party liable on the instrument to a holder for value
CORPORATION; "ULTRA VIRES" ACTS; RATIFICATION BY does not apply to corporations which are accommodation parties;
STOCKHOLDERS OF "ULTRA VIRES" ACTS CURES Reasons.—The aforequoted provision of the Negotiable Instruments
INFIRMITY.- Law which holds an accommodation party liable on the instrument to
The ratification by the stockholders of an ultra vires act which is not a holder for value, although such holder at the time of taking the
illegal cures the infirmity of the corporate act and makes it perfectly instrument knew him to be only an accommodation party, does not
valid and enforceable, specially so if it is not merely executory but include nor apply to corporations which are accommodation parties.
executed and consummated and no creditors are prejudiced thereby. This is because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of
7. ATTORNEY'S FEES; WHEN MAY BE AWARDED AS another is ultra vires. Hence, one who has taken the instrument with
DAMAGES.- knowledge of the accommodation nature thereof cannot recover
When the defendant's act or omission has compelled the plaintiff to against a corporation where it is only an accommodation party. If the
litigate with third persons or to incur expenses to protect his interest, form of the instrument, or the nature of the transaction, is such as to
attorney's fees may be awarded as damages (Article 2208, paragraph charge the indorsee with knowledge that the issue or indorsement of
2, of the new Civil Code). the instrument by the corporation is for the accommodation of another,
he cannot recover against the corporation thereon.
Luneta Motors vs AD Santos 5 scra 809 1962
Same; Same; Same; Same; Exception; An officer or agent of a
1. Corporations; Power to purchase and deal with personal or real corporation shall have the power to execute or indorse a negotiable
property; Purpose of the corporation to be considered.- paper in the name of the corporation for accommodation only if
Under Section 13(5) of the Corporation Law, a corporation created specifically authorized to do so; Personal liability of signatories in the
thereunder may purchase, hold and otherwise deal in such real and instrument.—By way of exception, an officer or agent of a corporation
personal property as the purpose for which the corporation was formed shall have the power to execute or indorse a negotiable paper in the
may permit, and the transaction of its lawful business may reasonably name of the corporation for the accommodation of a third person only
and necessarily require. A corporation authorized under its articles of if specifically authorized to do so. Corollarily, corporate officers, such
incorporation to operate and otherwise deal in automobiles and as the president and vice-president, have no power to execute for mere
automobile accessories and to engage in the transportation of persons accommodation a negotiable instrument of the corporation for their
by water, may not engage in the business of land transportation, which individual debts or transactions arising from or in relation to matters
is an entirely different line of business, and, for this reason, may not in which the corporation has no legitimate concern. Since such
acquire any certificate of public convenience to operate a taxicab accommodation paper cannot thus be enforced against the corporation,
service, because such acquisition would be without purpose and would especially since it is not involved in any aspect of the corporate
have no necessary connection with the corporation's legitimate business or operations, the inescapable conclusion in law and in logic
business. is that the signatories thereof shall be personally liable therefor, as well
as the consequences arising from their acts in connection therewith.
Republic vs Acoje Mining 3 scra 361 1963
Same; Same; Same; Same; Consignation; Payment; Remedy of
1. Corporations; Ultra vires act defined; When corporate acts may consignation, proper; Case at bar; Effects of consignation.—We
be performed outside the scope of powers expressly conferred.- interpose the caveat,however, that by holding that the remedy of
—While as a rule an ultra vires act is one committed outside the object consignation is proper under the given circumstances, we do not
for which a corporation is created as defined by the law of its thereby rule that all the operative facts for consignation which would
organization and therefore beyond the powers conferred upon it by produce the effect of payment are present in this case. Those are
law (19 C.J.S., Section 965, p. 419), there are however certain factual issues that are not clear in the records before us and which are
corporate acts that may be performed outside of the scope of the for the Regional Trial Court of Quezon City to ascertain in Civil Case
powers expressly conferred if they are necessary to promote the No. Q-33160, for which reason it has advisedly been directed by
interest or welfare of the corporation, such as the establishment, in the respondent court to give due course to the complaint for consignation,
case at bar, of a local post office in a mining camp which is far and which would be subject to such issues or claims as may be raised
removed from the postal facilities or means of communications by defendant and the counterclaim filed therein which is hereby
accorded to- people living in a city or municipality. ordered similarly revived.

2. Same; Assumption of responsibility; Responsibility in present Checks; B.P. 22; Presumptive rule to determine whether or not there
case that of principal and not that of guarantor.- was insufficiency of funds in or credit with the drawee bank.—These
—That the responsibility of the defendant corporation is not just that are aside the considerations that the disputed period involved in the
of a guarantor but of a principal is clear from the resolution of its criminal case is only a presumptive rule, juris tantum at that, to
Board of Directors in which the corporation assumed “full determine whether or not there was knowledge of insufficiency of
responsibility for all cash received by the Postmaster”. funds in or credit with the drawee bank; that payment of civil liability
is not a mode for extinguishment of criminal liability; and that the
56
requisite quantum of evidence in the two types of cases are not the surety bonds and that she had apparently “the means to pay her
same. obligation to the Bank, as shown by the fact that she has been granted
several sugar crop loans of the total value of almost P80,000.00 for the
agricultural years from 1952 to 1956”, there was no reasonable basis
Harden vs Benguet Consolidated 58 Phil 1140 1948 for the Board of Directors of petitioner to have rejected the lease
agreement because of a measly sum of P200.00.
1. CORPORATIONS; MlNING
CORPORATION; PROHIBITION AGAINST OWNING 2. Sugar quota; Banks and Banking; Chattel
INTEREST IN OTHER MINING CORPORATION; RIGHT OF Mortgage; Torts; Assignments; The Philippine National Bank, as
ACTION.- assignee of lease of sugar quota allotment, should show that degree of
Inasmuch as the Corporation Law contains, in section 190 (A), care, precaution, and vigilance which circumstances demand in
provisions fully penalizing the violation of subsection 5 of sec- tion approving or disapproving a lease of sugar quota, otherwise it will be
13 of Act No. 1459,—which prohibits the acquisition by one mining liable for damages on account of tort.-
corporation of any interest in another,—and inasmuch as these While petitioner had the ultimate authority of approving or
provisions have been enacted in the exercise of the general police disapproving the proposed lease since the quota was mortgaged to the
powers of the Government, it results that, where one mining bank, the latter certainly cannot escape its responsibility of observing,
corporation acquires a prohibited interest in another such corporation, for the protection of the interest of private respondents, that degree of
the shareholders of the latter cannot maintain an action to annul the care, precaution and vigilance which the circumstances justly demand
contract by which such interest was acquired. The remedy must be in approving or disapproving the lease of said sugar quota. The law
sought in a criminal proceeding or quo warranto action, under section makes it imperative that every person “must in the exercise of his
190 (A), instituted by the Government. Until thus assailed in a direct rights and in the performance of his duties, act with justice, give
proceeding the contract by which the interest was acquired will be everyone his due, and observe honesty and good faith.” This petitioner
treated as valid, as between the parties. failed to do. Certainly, it knew that the agricultural year was about to
expire, that by its disapproval of the lease private respondents would
D. Ratification of Ultra Vires Acts be unable to utilize the sugar quota in question. In failing to observe
Carlos vs Mindoro Sugar 57 Phil 343 1932 the reasonable degree of care and vigilance which the surrounding
circumstances reasonably impose, petitioner is consequently liable for
1. Contracts; Deed of Trust.- the damages caused on private respondents. Under Article 21 of the
—The Mindoro Sugar Company issued certain bonds and assigned New Civil Code, “any person who wilfully causes loss or injury to
them to the Philippine Trust Company, which guaranteed them. Held: another in a manner that is contrary to morals, good customs or public
That in the interpretation of the instrument the acts of the parties policy shall compensate the latter for the damage.” The afore-cited
performed at the same time and subsequently thereto must be taken provisions on human relations were intended to expand the concept of
into account, and accordingly the document held to be a deed of torts in this jurisdiction by granting adequate legal remedy for the
transfer. untold number of moral wrongs which is impossible for human
foresight to specifically provide in the statutes.
2. Corporations; Power to Guarantee Bonds Issued by Another
Corporation.- 3. Torts; Corporation Law; Corporations can be liable in same
—In view of the facts proved in this case, it is held: That the Philippine manner as natural persons, for tort-
Trust Company was empowered to guarantee the bonds of the A corporation is civilly liable in the same manner as natural persons
Mindoro S'ugar Company which it acquired, and is therefore obliged for torts, because “generally speaking, the rules governing the liability
to redeem the four bonds held by the appellant, and which have of a principal or master for a tort committed by an agent or servant are
become due by reason of a violation of the conditions. the same whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or artificial
3. Liability for Torts or Crimes person. All of the authorities agree that a principal or master is liable
a. For Torts for every tort which he expressly directs or authorizes, and this is just
PNB vs CA 83 scra 237 1978 as true of a corporation as of a natural person.

1. Sugar quota; Banks and Banking; Chattel


Mortgage; Torts; Circumstances which show that the Philippine b. Criminal Liability
National Bank acted unreasonably in raising the price of the lease of People vs Tan Boon Kong 54 Phil 607 1930
sugar quota allotment from P2.80 to P3.00 per picul.-
As observed by the trial court, time is of the essence in the approval 1. CORPORATIONS; LlABILITY OF OFFICERS AND
of the lease of sugar quota allotments, since the same must be utilized AGENTS.-
during the milling season, because any allotment which is not filled A Corporation can act only through its officers and agents, and where
during such milling season may be reallocated by the Sugar Quota the business itself involves a violation of the law, the correct rule is
Administration to other holders of allotments. There was no proof that that all who participate in it are liable.
there was any other person at that time willing to lease the sugar quota 2. CORPORATIONS; CRIMINAL LIABILITY.-
allotment of private respondents for a price higher than P2.80 per The manager of a corporation who fails to make true return of the
picul. “The fact that there were isolated transactions wherein the corporation's receipts and sales in violation of sections 1458 and 2723
consideration for the lease was P3.00 a picul”, according to the trial of the Administrative Code, may be held criminally liable.
court, “does not necessarily mean that there are always ready takers
for said price.” The unreasonableness of the position adopted by the Sia vs People 121 scra 655 1983
petitioner’s Board of Directors is shown by the fact that the difference
between the amount of P2.80 per picul offered by Tuazon and the Criminal Law; Corporation Law; An officer of a corporation can
P3.00 per picul demanded by the Board amounted only to a total sum be held criminally liable for acts or omissions done in behalf of the
of P200.00. Considering that all the accounts of Rita Gueco Tapnio corporation only where the law directly requires the corporation to do
with the Bank were secured by chattel mortgage on standing crops, an act in a given manner.—The case cited by the Court of Appeals in
assignment of leasehold rights and interests on her properties, and support of its stand—Tan Boon Kong case, supra—may however not
57
be squarely applicable to the instant case in that the corporation was Same; Same; Same; Same.—We consider the view that the trust
directly required by law to do an act in a given manner, and the same receipt arrangement gives rise only to civil liability as the more
law makes the person who fails to perform the act in the prescribed feasible, before the promulgation of P.D. 115. The transaction being
manner expressly liable criminally. The performance of the act is an contractual, the intent of the parties should govern. Since the trust
obligation directly imposed by the law on the corporation. Since it is receipt has, by its nature, to be executed upon the arrival of the goods
a responsible officer or officers of the corporation who actually imported, and acquires legal standing as such receipt only upon
perform the act for the corporation, they must of necessity be the ones acceptance by the “entrustee,” the trust receipt transaction itself, the
to assume the criminal liability; otherwise this liability as created by antecedent acts consisting of the application of the L/C, the approval
the law would be illusory, and the deterrent effect of the law, negated. of the L/C and the making of the marginal deposit and the effective
importation of the goods, all through the efforts of the importer who
Same; Same; In the absence of a law making a corporate officer liable has to find his supplier, arrange for the payment and shipment of the
for a criminal offense committed by the corporation, the existence of imported goods—all these circumstances would negate any intent of
criminal liability of the former may not be said to be beyond doubt. subjecting the importer to criminal prosecution, which could possibly
The intention of the parties must be ascertained in such a situation to give rise to a case of imprisonment for non-payment of a debt. The
determine if criminal liability was intended to result.—In the present parties, therefore, are deemed to have consciously entered into a
case, a distinction is to be found with the Tan Boon Kong case in that purely commercial transaction that could give rise only to civil
the act alleged to be a crime is not in the performance of an act directly liability, never to subject the “entrustee” to criminal prosecution.
ordained by law to be performed by the corporation. The act is Unlike, for instance, when several pieces of jewelry are received by a
imposed by agreement of parties, as a practice observed in the usual person from the owner for sale in commission, and the former
pursuit of a business or a commercial transaction. The of-fense may misappropriates for his personal use and benefit, either the jewelries
arise, if at all, from the peculiar terms and condition agreed upon by or the proceeds of the sale, instead of returning them to the owner as
the parties to the transaction, not by direct provision of the law. The is his obligation, the bank is not in the same concept as the jewelry
intention of the parties, therefore, is a factor determinant of whether a owner with full power of disposition of the goods, which the bank does
crime was committed or whether a civil obligation alone was intended not have, for the bank has previously extended a loan which the L/C
by the parties. With this explanation, the distinction adverted to represents to the importer, and by that loan, the importer should be the
between the Tan Boon Kong case and the case at bar should come out real owner of the goods. If under the trust receipt the bank is made to
clear and meaningful. In the absence of a express provision of law appear as the owner, it was but an artificial expedient, more of a legal
making the petitioner liable for the criminal offense committed by the fiction than fact, for if it were really so, it could dispose of the goods
corporation of which he is a president as in fact there is no such in any manner it wants, which it cannot do, just to give consistency
provisions in the Revised Penal Code under which petitioner is being with the purpose of the trust receipt of giving a stronger security for
prosecuted, the existence of a criminal liability on his part may not be the loan obtained by the importer. To consider the bank as the true
said to be beyond any doubt. In all criminal prosecutions, the existence owner from the inception of the transaction would be to disregard the
of criminal liability for which the accused is made answerable must loan feature thereof, a feature totally absent in the case of the
be clear and certain. The maxim that all doubts must be resolved in transaction between the jewel-owner and his agent.
favor of the accused is always of compelling force in the prosecution
of offenses. This Court has thus far not ruled on the criminal liability Same; Same; Same; Contracts; The facts of this case show that the
of an officer of a corporation signing in behalf of said corporation a execution of the trust receipt was intended merely to afford stronger
trust receipt of the same nature as that involved herein. In the case of security for the loan evidenced by the letter of credit.—There is,
Samo vs. People, L-17603-04, May 31, 1962, the accused was not moreover, one circumstance appearing on record, the significance of
clearly shown to be acting other than in his own behalf, not in behalf which should be properly evaluated. As stated in petitioner’s brief
of a corporation. (page 2), not denied by the People, “before the Continental Bank
approved the application for a letter of credit (Exhibit ‘D’),
Same; Same; Banks; Violation of trust receipt provisions, as in the subsequently covered by the trust receipt, the Continental Bank
non-payment to the bank of the net value of imported merchandise, examined the financial capabilities of the applicant, Metal
does not constitute estafa under Art. 315 (1-[2]) of the R.P.C. which Manufacturing Company of the Philippines because that was the
P.D. 115 now seeks to punish expressly.—The next question is bank’s standard procedure (Testimony of Mr. Ernesto Garlit, Asst.
whether the violation of a trust receipt constitutes estafa under Art. Manager of the Foreign Department, Continental Bank, t.s.n., August
315 (l-[2]) of the Revised Penal Code, as also raised by the petitioner. 30, 1965). The Continental Bank did not examine the financial
We now entertain grave doubts, in the light of the promulgation of capabilities of therein petitioner, Jose O. Sia, in connection with the
P.D. 115 providing for the regulation of trust receipts transaction, same letter of credit. (Ibid).” From this fact, it would appear as
which is a very comprehensive piece of legislation, and includes an positively established that the intention of the parties in entering into
express provision that if the violation or offense is committed by a the “trust receipt” agreement is merely to afford a stronger security for
corporation, partnership, association or other juridical entities the the loan evidenced by the letter of credit, may be not as an ordinary
penalty provided for in this Decree shall be imposed upon the pledge as observed in P.N.B. vs. Viuda e Hijos de Angel Jose, et al.,
directors, officers, employees or other officials or persons therein 63 Phil. 814, citing In re Dunlap C (206 Fed. 726) but neither as a
responsible for the offense, without prejudice to civil liabilities arising transaction falling under Article 315-1 (b) of the Revised Penal Code
from the criminal offense. The question that suggests itself is, giving rise to criminal liability, as previously explained and
therefore, whether the provisions of the Revised Penal Code, Article demonstrated.
315, par. 1 (b) are not adequate to justify the punishment of the act Same; Same; Same; Same; The President of a corporation cannot be
made punishable by P.D. 115, that the necessity was felt for the held liable for estafa under Art. 315 of the R.P.C. on account of the
promulgation of the decree. To answer this question, it is imperative corporation’s violation of the terms of the trust receipt which speaks
to make an in-depth analysis of the conditions usually embodied in a exclusively of the corporation’s liability.—It is worthy of note that the
trust receipt to test their legal sufficiency to constitute the basis for civil liability imposed by the trust receipt is exclusively on the Metal
holding the violation of said conditions as estafa under Article 315 of Company. Speaking of such liability alone, as one arising from the
the Revised Penal Code which P.D. 115 now seeks to punish contract, as distinguished from the civil liability arising out of a crime,
expressly. the petitioner was never intended to be equally liable as the
corporation. Without being made so liable personally as the
corporation is, there would then be no basis for holding him criminally
58
liable, for any violation of the trust receipt. This is made clearly so
upon consideration of the fact that in the violation of the trust 3. Civil Law; Contracts; Acceptance of an Offer; Words and
agreement and in the absence of positive evidence to the contrary, only Phrases; The acceptance of an offer must be unqualified and absolute,
the corporation benefited, not the petitioner personally, yet, the i.e., it “must be identical in all respects with that of the offer so as to
allegation of the information is to the effect that the misappropriation produce consent or meeting of the minds.”-
or conversion was for the personal use and benefit of the petitioner, ABS-CBN’s reliance in Limketkai Sons Milling, Inc. v. Court of
with respect to which there is variance between the allegation and the Appeals and Villonco Realty Company v. Bormaheco, Inc., is
evidence. misplaced. In these cases, it was held that an acceptance may contain
Same; Same; Same; Same; Inasmuch as the Bank had full knowledge a request for certain changes in the terms of the offer and yet be a
that the imported goods still will have to be manufactured before they binding acceptance as long as “it is clear that the meaning of the
could be sold, no estafa for non-payment to the bank of the acceptance is positively and unequivocally to accept the offer, whether
manufactured goods sold can be said to have been committed as the such request is granted or not.” This ruling was, however, reversed in
“authority to sell” expressed in the trust receipt cannot be definitely the resolution of 29 March 1996, which ruled that the acceptance of
said to cover the sale of the finished products. P.D. 115, on the other an offer must be unqualified and absolute, i.e., it “must be identical in
hand, covers such a situation.—It is also worthy of note that while the all respects with that of the offer so as to produce consent or meeting
trust receipt speaks of authority to sell, the fact is undisputed that the of the minds.”
imported goods were to be manufactured into finished products first
before they could be sold, as the Bank had full knowledge of. This fact 4. Commercial Law; Corporation Code; Board of
is, however, not embodied in the trust agreement, thus impressing on Directors; Under the Corporation Code, unless otherwise provided by
the trust receipt vagueness and ambiguity which should not be the said Code, corporate powers, such as the power to enter into contracts,
basis for criminal prosecution, in the event of a violation of the terms are exercised by the Board of Directors. However, the Board may
of the trust receipt. Again, P.D. 115 has express provision relative to delegate such powers to either an executive committee or officials or
the “manufacture or process of the good with the purpose of ultimate contracted managers.-
sale,” as a distinct condition from that of “to sell the goods or procure Under the Corporation Code, unless otherwise provided by said Code,
their sale” (Section 4, (1). Note that what is embodied in the receipt in corporate powers, such as the power to enter into contracts, are
question is the sale of imported goods, the manufacture thereof not exercised by the Board of Directors. However, the Board may delegate
having been mentioned. The requirement in criminal prosecution, that such powers to either an executive committee or officials or contracted
there must be strict harmony, not variance, between the allegation and managers. The delegation, except for the executive committee, must
the evidence, may therefore, not be said to have been satisfied in the be for specific purposes. Delegation to officers makes the latter agents
instant case. of the corporation; accordingly, the general rules of agency as to the
binding effects of their acts would apply. For such officers to be
C. Moral Damages deemed fully clothed by the corporation to exercise a power of the
ABS-CBN vs CA GR 128690 January 1999 Board, the latter must specially authorize them to do so. That Del
Rosario did not have the authority to accept ABS-CBN’s counter-offer
1. Civil Law; Contracts; A contract is a meeting of minds between was best evidenced by his submission of the draft contract to VIVA’s
two persons whereby one binds himself to give something or to render Board of Directors for the latter’s approval. In any event, there was
some service to another for a consideration.- between Del Rosario and Lopez III no meeting of minds.
The first issue should be resolved against ABS-CBN. A contract is a
meeting of minds between two persons whereby one binds himself to 5. Civil Law; Contracts; Damages; Except as provided by law or by
give something or to render some service to another for a stipulation, one is entitled to compensation for actual damages only
consideration. There is no contract unless the following requisites for such pecuniary loss suffered by him as he has duly proved.-
concur: (1) consent of the contracting parties; (2) object certain which We find for ABS-CBN on the issue of damages. We shall first take up
is the subject of the contract; and (3) cause of the obligation, which is actual damages. Chapter 2, Title XVIII, Book IV of the Civil Code is
established. A contract undergoes three stages: (a) preparation, the specific law on actual or compensatory damages. Except as
conception, or generation, which is the period of negotiation and provided by law or by stipulation, one is entitled to compensation for
bargaining, ending at the moment of agreement of the parties; (b) actual damages only for such pecuniary loss suffered by him as he has
perfection or birth of the contract, which is the moment when the duly proved. The indemnification shall comprehend not only the value
parties come to agree on the terms of the contract; and (c) of the loss suffered, but also that of the profits that the obligee failed
consummation or death, which is the fulfillment or performance of the to obtain. In contracts and quasi-contracts the damages which may be
terms agreed upon in the contract. awarded are dependent on whether the obligor acted with good faith
or otherwise. In case of good faith, the damages recoverable are those
2. Civil Law; Contracts; Contracts that are consensual in nature are which are the natural and probable consequences of the breach of the
perfected upon mere meeting of the minds. Once there is concurrence obligation and which the parties have foreseen or could have
between the offer and the acceptance upon the subject matter, reasonably foreseen at the time of the constitution of the obligation. If
consideration, and terms of payment a contract is produced.- the obligor acted with fraud, bad faith, malice, or wanton attitude, he
Contracts that are consensual in nature are perfected upon mere shall be responsible for all damages which may be reasonably
meeting of the minds. Once there is concurrence between the offer and attributed to the non-performance of the obligation. In crimes and
the acceptance upon the subject matter, consideration, and terms of quasi-delicts, the defendant shall be liable for all damages which are
payment a contract is produced. The offer must be certain. To convert the natural and probable consequences of the act or omission
the offer into a contract, the acceptance must be absolute and must not complained of, whether or not such damages have been foreseen or
qualify the terms of the offer; it must be plain, unequivocal, could have reasonably been foreseen by the defendant.
unconditional, and without variance of any sort from the proposal. A
qualified acceptance, or one that involves a new proposal, constitutes 6. Civil Law; Contracts; Damages; Actual damages may likewise
a counter-offer and is a rejection of the original offer. Consequently, be recovered for loss or impairment of earning capacity in cases of
when something is desired which is not exactly what is proposed in temporary or permanent personal injury, or for injury to the plaintiff’s
the offer, such acceptance is not sufficient to generate consent because business standing or commercial credit.-
any modification or variation from the terms of the offer annuls the Actual damages may likewise be recovered for loss or impairment of
offer. earning capacity in cases of temporary or permanent personal injury,
59
or for injury to the plaintiff’s business standing or commercial credit.
The claim of RBS for actual damages did not arise from contract, 11. Civil Law; Contracts; Damages; The basic law on exemplary
quasi-contract, delict, or quasidelict. It arose from the fact of filing of damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil
the complaint despite ABS-CBN’s alleged knowledge of lack of cause Code.-
of action. The basic law on exemplary damages is Section 5, Chapter 3, Title
XVIII, Book IV of the Civil Code. These are imposed by way of
7. Civil Law; Contracts; Damages; In cases where a writ of example or correction for the public good, in addition to moral,
preliminary injunction is issued, the damages which the defendant temperate, liquidated, or compensatory damages. They are
may suffer by reason of the writ are recoverable from the injunctive recoverable in criminal cases as part of the civil liability when the
bond.- crime was committed with one or more aggravating circumstances; in
It may further be observed that in cases where a writ of preliminary quasi-delicts, if the defendant acted with gross negligence; and in
injunction is issued, the damages which the defendant may suffer by contracts and quasicontracts, if the defendant acted in a wanton,
reason of the writ are recoverable from the injunctive bond. In this fraudulent, reckless, oppressive, or malevolent manner.
case, ABS-CBN had not yet filed the required bond; as a matter of 12. Civil Law; Contracts; Damages; Bad Faith; Malice or bad faith
fact, it asked for reduction of the bond and even went to the Court of is at the core of Articles 19, 20, and 21. Malice or bad faith implies a
Ap- peals to challenge the order on the matter. Clearly then, it was not conscious and intentional design to do a wrongful act for a dishonest
necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be purpose or moral obliquity. Such must be substantiated by evidence.-
held responsible for the premium RBS paid for the counterbond. It may be reiterated that the claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict. Hence, the
8. Civil Law; Contracts; Damages; The general rule is that claims for moral and exemplary damages can only be based on
attorney’s fees cannot be recovered as part of damages because of the Articles 19, 20, and 21 of the Civil Code. The elements of abuse of
policy that no premium should be placed on the right to litigate.- right under Article 19 are the following: (1) the existence of a legal
As regards attorney’s fees, the law is clear that in the absence of right or duty, (2) which is exercised in bad faith, and (3) for the sole
stipulation, attorney’s fees may be recovered as actual or intent of preju-dicing or injuring another. Article 20 speaks of the
compensatory damages under any of the circumstances provided for general sanction for all other provisions of law which do not especially
in Article 2208 of the Civil Code. The general rule is that attorney’s provide for their own sanction; while Article 21 deals with acts contra
fees cannot be recovered as part of damages because of the policy that bonus mores, and has the following elements: (1) there is an act which
no premium should be placed on the right to litigate. They are not to is legal, (2) but which is contrary to morals, good custom, public order,
be awarded every time a party wins a suit. The power of the court to or public policy, and (3) and it is done with intent to injure. Verily
award attorney’s fees under Article 2208 demands factual, legal, and then, malice or bad faith is at the core of Articles 19, 20, and 21.
equitable justification. Even when a claimant is compelled to litigate Malice or bad faith implies a conscious and intentional design to do a
with third persons or to incur expenses to protect his rights, still wrongful act for a dishonest purpose or moral obliquity. Such must be
attorney’s fees may not be awarded where no sufficient showing of substantiated by evidence.
bad faith could be reflected in a party’s persistence in a case other than
an erroneous conviction of the righteousness of his cause. 13. Civil Law; Contracts; Damages; The adverse result of an action
does not per se make the action wrongful and subject the actor to
9. Civil Law; Contracts; Damages; Moral damages are in the damages, for the law could not have meant to impose a penalty on the
category of an award designed to compensate the claimant for actual right to litigate. If damages result from a person’s exercise of a right,
injury suffered and not to impose a penalty on the wrongdoer.- it is damnum absque injuria.-
Moral damages are in the category of an award designed to There is no adequate proof that ABS-CBN was inspired by malice or
compensate the claimant for actual injury suffered and not to impose bad faith. It was honestly convinced of the merits of its cause after it
a penalty on the wrongdoer. The award is not meant to enrich the had undergone serious negotiations culminating in its formal
complainant at the expense of the defendant, but to enable the injured submission of a draft contract. Settled is the rule that the adverse result
party to obtain means, diversion, or amusements that will serve to of an action does not per se make the action wrongful and subject the
obviate the moral suffering he has undergone. It is aimed at the actor to damages, for the law could not have meant to impose a penalty
restoration, within the limits of the possible, of the spiritual status quo on the right to litigate. If damages result from a person’s exercise of a
ante, and should be proportionate to the suffering inflicted. Trial courts right, it is damnum absque injuria.
must then guard against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity to avoid Filipinas Broadcasting vs AMEC-BCCM GR 141994 2005
suspicion that it was due to passion, prejudice, or corruption on the
part of the trial court. 1. Constitutional Law; Freedom of Expression; Libel; Broadcast
Industry; Radio host’s remarks such as “greed for money on the
10. Civil Law; Contracts; Damages; The award of moral damages part of AMEC’s administrators”; “AMEC is a dumping ground,
cannot be granted in favor of a corporation because, being an artificial garbage of x x x moral and physical misfits”; and AMEC students
person and having existence only in legal contemplation, it has no who graduate “will be liabilities rather than assets” of the society are
feelings, no emotions, no senses. It cannot, therefore, experience libelous per se.-
physical suffering and mental anguish, which can be experienced only —A libel is a public and malicious imputation of a crime, or of a vice
by one having a nervous system.- or defect, real or imaginary, or any act or omission, condition, status,
The award of moral damages cannot be granted in favor of a or circumstance tending to cause the dishonor, discredit, or contempt
corporation because, being an artificial person and having existence of a natural or juridical person, or to blacken the memory of one who
only in legal contemplation, it has no feelings, no emotions, no senses. is dead. There is no question that the broadcasts were made public and
It cannot, therefore, experience physical suffering and mental anguish, imputed to AMEC defects or circumstances tending to cause it
which can be experienced only by one having a nervous system. The dishonor, discredit and contempt. Rima and Alegre’s remarks such as
statement in People v. Manero and Mambulao Lumber Co. v. PNB “greed for money on the part of AMEC’s administrators”; “AMEC is
that a corporation may recover moral damages if it “has a good a dumping ground, garbage of x x x moral and physical misfits”; and
reputation that is debased, resulting in social humiliation” is an obiter AMEC students who graduate “will be liabilities rather than assets” of
dictum. On this score alone the award for damages must be set aside, the society are libelous per se. Taken as a whole, the broadcasts
since RBS is a corporation.
60
suggest that AMEC is a money-making institution where physically 5. Same; Same; Same; Same; If the comments made by media
and morally unfit teachers abound. practitioners are an expression of opinion based on established facts,
it is immaterial that the opinion happens to be mistaken, as long as it
2. Same; Same; Same; Same; Hosts of documentary or public might reasonably be inferred from the facts.-
affairs programs should present the public issues “free from inaccurate —True, AMEC is a private learning institution whose business of
and misleading information.”- educating students is “genuinely imbued with public interest.” The
—Every defamatory imputation is presumed malicious. Rima and welfare of the youth in general and AMEC’s students in particular is
Alegre failed to show adequately their good intention and justifiable a matter which the public has the right to know. Thus, similar to the
motive in airing the supposed gripes of the students. As hosts of a newspaper articles in Borjal, the subject broadcasts dealt with matters
documentary or public affairs program, Rima and Alegre should have of public interest. However, unlike in Borjal, the questioned
presented the public issues “free from inaccurate and misleading broadcasts are not based on established facts. The record supports the
information.” Hearing the students’ alleged complaints a month before following findings of the trial court: x x x Had the comments been an
the exposé, they had sufficient time to verify their sources and expression of opinion based on established facts, it is immaterial that
information. However, Rima and Alegre hardly made a thorough the opinion happens to be mistaken, as long as it might reasonably be
investigation of the students’ alleged gripes. Neither did they inquire inferred from the facts. However, the comments of Rima and Alegre
about nor confirm thepurported irregularities in AMEC from the were not backed up by facts. Therefore, the broadcasts are not
Department of Education, Culture and Sports. Alegre testified that he privileged and remain libelous per se.
merely went to AMEC to verify his report from an alleged AMEC
official who refused to disclose any information. Alegre simply relied 6. Same; Same; Same; Same; Radio Code of the Kapisanan ng
on the words of the students “because they were many and not because mga Broadkaster sa Pilipinas, Ink.;The Radio Code lays down the
there is proof that what they are saying is true.” This plainly shows code of ethical conduct governing practitioners in the radio
Rima and Alegre’s reckless disregard of whether their report was true broadcast industry; The public has a right to expect and demand that
or not radio broadcast practitioners live up to the code of conduct of their
profession, just like other professionals, and a professional code of
3. Same; Same; Same; Same; Privilege of Neutral conduct provides the standards for determining whether a person has
Reportage; Words and Phrases; Under the principle of neutral acted justly, honestly and with good faith in the exercise of his rights
reportage, a republisher who accurately and disinterestedly and performance of his duties as required by Article 19 of the Civil
reports certain defamatory statements against public figures is Code.-
shielded from liability, regardless of the republisher’s subjective —The broadcasts fail to meet the standards prescribed in the Radio
awareness of the truth or falsity of the accusation; The privilege of Code, which lays down the code of ethical conduct governing
neutral reportage applies where the defamed person is a public figure practitioners in the radio broadcast industry. The Radio Code is a
who is involved in an existing controversy, and a party to that voluntary code of conduct imposed by the radio broadcast industry on
controversy makes the defamatory statement.- its own members. The Radio Code is a public warranty by the radio
—Contrary to FBNI’s claim, the broadcasts were not “the result of broadcast industry that radio broadcast practitioners are sub-ject to a
straight reporting.” Significantly, some courts in the United States code by which their conduct are measured for lapses, liability and
apply the privilege of “neutral reportage” in libel cases involving sanctions. The public has a right to expect and demand that radio
matters of public interest or public figures. Under this privilege, a broadcast practitioners live up to the code of conduct of their
republisher who accurately and disinterestedly reports certain profession, just like other professionals. A professional code of
defamatory statements made against public figures is shielded from conduct provides the standards for determining whether a person has
liability, regardless of the republisher’s subjective awareness of the acted justly, honestly and with good faith in the exercise of his rights
truth or falsity of the accusation. Rima and Alegre cannot invoke the and performance of his duties as required by Article 19 of the Civil
privilege of neutral reportage because unfounded comments abound Code. A professional code of conduct also provides the standards for
in the broadcasts. Moreover, there is no existing controversy involving determining whether a person who willfully causes loss or injury to
AMEC when the broadcasts were made. The privilege of neutral another has acted in a manner contrary to morals or good customs
reportage applies where the defamed person is a public figure who is under Article 21 of the Civil Code.
involved in an existing controversy, and a party to that controversy
makes the defamatory statement. 7. Libel; Damages; Corporations; Obiter Dictum; The Court’s
statement in Mambulao Lumber Co. v. PNB, 22 SCRA 359 (1968),
4. Same; Same; Same; Same; Doctrine of Fair Comment; Under that “a corporation may have a good reputation which, if besmirched,
the doctrine of fair comment, fair commentaries on matters of public may also be a ground for the award of moral damages” is an obiter
interest are privileged and constitute a valid defense in an action for dictum.-
libel or slander.- —A juridical person is generally not entitled to moral damages
—FBNI’s reliance on Borjal is misplaced. In Borjal, the Court because, unlike a natural person, it cannot experience physical
elucidated on the “doctrine of fair comment,” thus: [F]air suffering or such sentiments as wounded feelings, serious anxiety,
commentaries on matters of public interest are privileged and mental anguish or moral shock. The Court of Appeals cites Mambulao
constitute a valid defense in an action for libel or slander. The doctrine Lumber Co. v. PNB, et al. to justify the award of moral damages.
of fair comment means that while in general every discreditable However, the Court’s statement in Mambulao that “a corporation may
imputation publicly made is deemed false, because every man is have a good reputation which, if besmirched, may also be a ground for
presumed innocent until his guilt is judicially proved, and every false the award of moral damages” is an obiter dictum.
imputation is deemed malicious, nevertheless, when the discredit-able
imputation is directed against a public person in his public capacity, it 8. Same; Same; Same; Since Article 2219(7) of the Civil Code does
is not necessarily actionable. In order that such discreditable not qualify whether the plaintiff is a natural or juridical person, a
imputation to a public official may be actionable, it must either be a juridical person such as a corporation may validly complain for libel
false allegation of fact or a comment based on a false supposition. If or any other form of defamation and claim for moral damages.-
the comment is an expression of opinion, based on established facts, — AMEC’s claim for moral damages falls under item 7 of Article
then it is immaterial that the opinion happens to be mistaken, as long 2219 of the Civil Code. This provision expressly authorizes the
as it might reasonably be inferred from the facts. (Emphasis supplied) recovery of moral damages in cases of libel, slander or any other form
of defamation. Article 2219(7) does not qualify whether the plaintiff
61
is a natural or juridical person. Therefore, a juridical person such as a their work at that time. There was likewise no showing that FBNI did
corporation can validly complain for libel or any other form of not authorize and ratify the defamatory broadcasts.
defamation and claim for moral damages.
12. Same; Same; The radio operator’s alleged constant reminder to
9. Same; Same; Where the broadcast is libelous per se, the law its broadcasters to “observe truth, fairness and objectivity and to
implies damages, in which case, evidence of an honest mistake or the refrain from using libelous and indecent language” is not enough to
want of character or reputation of the party libeled goes only in prove due diligence in the supervision of its broadcasters.-
mitigation of damages.- —There is insufficient evidence on record that FBNI exercised due
—Where the broadcast is libelous per se, the law implies damages. In diligence in the selection and supervision of its employees,
such a case, evidence of an honest mistake orthe want of character or particularly Rima and Alegre. FBNI merely showed that it exercised
reputation of the party libeled goes only in mitigation of damages. diligence in the selection of its broadcasters without introducing any
Neither in such a case is the plaintiff required to introduce evidence of evidence to prove that it observed the same diligence in the
actual damages as a condition precedent to the recovery of some supervision of Rima and Alegre. FBNI did not show how it exercised
damages. In this case, the broadcasts are libelous per se. Thus, AMEC diligence in supervising its broadcasters. FBNI’s alleged constant
is entitled to moral damages. However, we find the award of P300,000 reminder to its broadcasters to “observe truth, fairness and objectivity
moral damages unreasonable. The record shows that even though the and to refrain from using libelous and indecent language” is not
broadcasts were libelous per se, AMEC has not suffered any enough to prove due diligence in the supervision of its broadcasters.
substantial or material damage to its reputation. Therefore, we reduce Adequate training of the broadcasters on the industry’s code of
the award of moral damages from P300,000 to P150,000. conduct, sufficient information on libel laws, and continuous
evaluation of the broadcasters’ performance are but a few of the many
10. Attorney’s Fees; The power of the court to award attorney’s fees ways of showing diligence in the supervision of broadcasters.
under Article 2208 of the Civil Code demands factual, legal and
equitable justification, without which the award is a conclusion 13. Same; Same; Membership in the Kapisanan ng mga Broadkaster
without a premise, its basis being improperly left to speculation and sa Pilipinas, while voluntary, indicates the broadcaster’s strong
conjecture.- commitment to observe the broadcast industry’s rules and
—The award of attorney’s fees is not proper because AMEC failed to regulations.-
justify satisfactorily its claim for attorney’s fees. AMEC did not —FBNI claims that it “has taken all the precaution in the selection of
adduce evidence to warrant the award of attorney’s fees. Moreover, Rima and Alegre as broadcasters, bearing in mind their
both the trial and appellate courts failed to explicitly state in their qualifications.” However, no clear and convincing evidence shows
respective decisions the rationale for the award of attorney’s fees. In that Rima and Alegre underwent FBNI’s “regimented process” of
Inter-Asia Investment Industries, Inc. v. Court of Appeals, we held application. Furthermore, FBNI admits that Rima and Alegre had
that: [I]t is an accepted doctrine that the award thereof as an item of deficiencies in their KBP accreditation, which is one of FBNI’s
damages is the exception rather than the rule, and counsel’s fees are requirements before it hires a broadcaster. Significantly, membership
not to be awarded every time a party wins a suit. The power of the in the KBP, while voluntary, indicates the broadcaster’s strong
court to award attorney’s fees under Article 2208 of the Civil Code commitment to observe the broadcast industry’s rules and regulations.
demands factual, legal and equitable justification, without which the Clearly, these circumstances show FBNI’s lack of diligence in
award is a conclusion without a premise, its basis being improperly selecting and supervising Rima and Alegre. Hence, FBNI is solidarily
left to speculation and conjecture. In all events, the court must liable to pay damages together with Rima and Alegre.
explicitly state in the text of the decision, and not only in the decretal
portion thereof, the legal reason for the award of attorney’s fees.
(Emphasis supplied)

11. Torts; Damages; Broadcast Industry; Joint tort feasors are all III. FINANCIAL STRUCTURE
the persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or A. DEBT SECURITIES
who approve of it after it is done, if done for their benefit; The Generally - Lirag Textile Mills, Inc., vs SSS GR No.L-33205 1987
corporation which operates the radio station, and who is the employer
of the radio hosts, is solidarily liable to pay for damages arising from Authority to issue Debt Securities:
libelous broadcasts.-
—The basis of the present action is a tort. Joint tort feasors are jointly Power to Incur, create or increase bonded indebtedness - sec 38
and severally liable for the tort which theycommit. Joint tort feasors
are all the persons who command, instigate, promote, encourage, Section 38. Power to increase or decrease capital stock; incur, create
advise, countenance, cooperate in, aid or abet the commission of a tort, or increase bonded indebtedness. - No corporation shall increase or
or who approve of it after it is done, if done for their benefit. Thus, decrease its capital stock or incur, create or increase any bonded
AMEC correctly anchored its cause of action against FBNI on Articles indebtedness unless approved by a majority vote of the board of
2176 and 2180 of the Civil Code. As operator of DZRC-AM and directors and, at a stockholder's meeting duly called for the purpose,
employer of Rima and Alegre, FBNI is solidarily liable to pay for two-thirds (2/3) of the outstanding capital stock shall favor the
damages arising from the libelous broadcasts. As stated by the Court increase or diminution of the capital stock, or the incurring, creating
of Appeals, “recovery for defamatory statements published by radio or increasing of any bonded indebtedness. Written notice of the
or television may be had from the owner of the station, a licensee, the proposed increase or diminution of the capital stock or of the
operator of the station, or a person who procures, or participates in, incurring, creating, or increasing of any bonded indebtedness and of
the making of the defamatory statements.” An employer and employee the time and place of the stockholder's meeting at which the proposed
are solidarily liable for a defamatory statement by the employee within increase or diminution of the capital stock or the incurring or
the course and scope of his or her employment, at least when the increasing of any bonded indebtedness is to be considered, must be
employer authorizes or ratifies the defamation. In this case, Rima and addressed to each stockholder at his place of residence as shown on
Alegre were clearly performing their official duties as hosts of FBNI’s the books of the corporation and deposited to the addressee in the post
radio program Exposé when they aired the broadcasts. FBNI neither office with postage prepaid, or served personally.
alleged nor proved that Rima and Alegre went beyond the scope of
62
A certificate in duplicate must be signed by a majority of the directors Income Bond is a type of debt security in which only the face
of the corporation and countersigned by the chairman and the secretary value of the bondis promised to be paid to the investor, with any
of the stockholders' meeting, setting forth: coupon payments being paid only if the issuing company has enough
(1) That the requirements of this section have been complied with; earnings to pay for the coupon payment.
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or Convertible Bond is a type of bondthat the holder can convert
number of shares of no-par stock thereof actually subscribed, the into a specified number of shares of common stock in the issuing
names, nationalities and residences of the persons subscribing, the company or cash of equal value.
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, Callable Bond is a type of bond (debt security) that allows the
or the amount of capital stock or number of shares of no-par stock issuer of the bond to retain the privilege of redeeming the bond at
allotted to each stock-holder if such increase is for the purpose of some point before the bond reaches its date of maturity.
making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased; B. EQUITY SHARES
(5) The actual indebtedness of the corporation on the day of the Generally - Garcia vs Lim Chiu Sing, 59 Phil 562
meeting;
(6) The amount of stock represented at the meeting; and 1. EXCEPTION TO A RULING; EFFECT OF FAILURE TO FlLE
(7) The vote authorizing the increase or diminution of the capital EXCEPTION.-
stock, or the incurring, creating or increasing of any bonded Failure. to file an exception to a ruling made in open court denying a
indebtedness. motion for the, inclusion of a party as defendant deprives the
petitioner, upon appeal, of the right to raise the question whether or
Any increase or decrease in the capital stock or the incurring, creating not such denial was proper or improper.
or increasing of any bonded indebtedness shall require prior approval 2. ID. ; COMPENSATION OF CREDITS.-
of the Securities and Exchange Commission. A stockholder's indebtedness to a banking corporation cannot be
compensated with the amount of his shares in the same institution,
One of the duplicate certificates shall be kept on file in the office of there being no relation of creditor and debtor with regard to such
the corporation and the other shall be filed with the Securities and shares.
Exchange Commission and attached to the original articles of 3. CONTRACT; STIPULATION AS TO COSTS AND
incorporation. From and after approval by the Securities and ATTORNEY'S FEES.-
Exchange Commission and the issuance by the Commission of its The percentage stipulated in a contract, for costs and attorney's fees
certificate of filing, the capital stock shall stand increased or decreased for the collection of an indebtedness, includes judicial costs.
and the incurring, creating or increasing of any bonded indebtedness
authorized, as the certificate of filing may declare: Provided, That the Issuance of Shares:
Securities and Exchange Commission shall not accept for filing any Certificate of stock sec 63
certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding Section 63. Certificate of stock and transfer of shares. - The capital
office at the time of the filing of the certificate, showing that at least stock of stock corporations shall be divided into shares for which
twenty-five (25%) percent of such increased capital stock has been certificates signed by the president or vice president, countersigned by
subscribed and that at least twenty-five (25%) percent of the amount the secretary or assistant secretary, and sealed with the seal of the
subscribed has been paid either in actual cash to the corporation or that corporation shall be issued in accordance with the by-laws. Shares of
there has been transferred to the corporation property the valuation of stock so issued are personal property and may be transferred by
which is equal to twenty-five (25%) percent of the subscription: delivery of the certificate or certificates indorsed by the owner or his
Provided, further, That no decrease of the capital stock shall be attorney-in-fact or other person legally authorized to make the
approved by the Commission if its effect shall prejudice the rights of transfer. No transfer, however, shall be valid, except as between the
corporate creditors. parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the
Non-stock corporations may incur or create bonded indebtedness, or transfer, the number of the certificate or certificates and the number of
increase the same, with the approval by a majority vote of the board shares transferred. No shares of stock against which the corporation
of trustees and of at least two-thirds (2/3) of the members in a meeting holds any unpaid claim shall be transferable in the books of the
duly called for the purpose. corporation.

Bonds issued by a corporation shall be registered with the Securities PreEmptive Rights sec 39
and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof. Section 39. Power to deny pre-emptive right. - All stockholders of a
stock corporation shall enjoy pre-emptive right to subscribe to all
Types of Debt Securities issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles of
Unsecured Bonds are not secured by a specific asset, but rather incorporation or an amendment thereto: Provided, That such pre-
by "the full faith and credit" of the issuer. In other words, the investor emptive right shall not extend to shares to be issued in compliance
has the issuer's promise to repay but has no claim on specific with laws requiring stock offerings or minimum stock ownership by
collateral. the public; or to shares to be issued in good faith with the approval of
the stockholders representing twothirds (2/3) of the outstanding
Secured Bond is a type of bond that is secured by the issuer's capital stock, in exchange for property needed for corporate purposes
pledge of a specific asset, which is a form of collateral on the loan. In or in payment of a previously contracted debt.
the event of a default, thebond issuer passes title of the asset onto the
bondholders. POWER TO DENY PRE-EMPTIVE RIGHTS

63
Pre-emptive right – is a right granted by law to all existing conferred upon it by the articles of incorporation or the by-laws, or in
stockholders of a stock corporation to subscribe to all issues or the absence thereof, by the stockholders representing at least a
disposition of shares of any class, in proportion to their respective majority of the outstanding capital stock at a meeting duly called for
stockholdings, subject only to the limitations imposed under Sec. 39. the purpose.

The basis for the grant of this right is the preservation, unimpaired National Exchange vs Dexter 51 Phil 601
and undiluted, of the old stockholders‟ relative and proportionate
voting strength and control, that is, the existing ratio of their 1. CORPORATIONS; STOCK SUBSCRIPTIONS; SPECIAL
proprietary interest and voting power in the corporation. STIPULATION.-
A special stipulation contained in a subscription to corporate stock
All stockholders of a stock corporation shall enjoy pre-emptive right which, if valid, would lessen the capital of the company and relieve
to subscribe to all issues or disposition of shares of any class, in the subscriber from liability to be sued upon the subscription is illegal.
proportion to their respective shareholdings, unless such right is 2. CORPORATIONS; STOCK SUBSCRIPTIONS; PAYMENT
denied by the articles of incorporation or an amendment thereto. FOR SHARES; LEGAL PROVISIONS IN FORCE IN PHILIPPINE
Exceptions: ISLANDS.-
1. Shares to be issued in compliance with laws requiring stock In section 74 of the Organic Act of July 1, 1902, as well as in section
offerings or minimum stock ownership by the public; or 28 of the Jones Law of August 29, 1916, it is declared that all
2. Shares to be issued in good faith with the approval of the franchises granted by the Government of the Philippine Islands shall
stockholders representing two-thirds (2/3) of the outstanding capital forbid the issuance of stock except in exchange for actual cash or for
stock, in exchange for property needed for corporate purposes or in property at a f air valuation equal to the par value of the stock. Pursuant
payment of a previously contracted debt. to this provision the Philippine Commission inserted in section 16 of
the Corporation Law of March 1, 1906, a provision declaring that no
The exceptions do not apply to stockholders of a close corporation. corporation shall issue stock except in exchange for actual cash paid
to the corporation or for property actually received by it at a fair
The right may be lost by waiver, expressly or impliedly by inability valuation equal to the par value of the stock.
or failure to exercise it after having been notified. 3. CORPORATIONS; STOCK SUBSCRIPTIONS; STIPULATION
FOR PAYMENT OF SUBSCRIPTION FROM DIVIDENDS.-
The pre-emptive right covers all issues or disposition of share of any Under the provisions above cited, a stipulation in a stock subscription
class. It includes new share issued pursuant to an increase in capital to the effect that the subscription shall be payable from the first
stock, unissued shares which form part of the original capital stock dividends to be paid on the shares is unlawful in so far as it purports
and treasury shares to relieve the subscriber f rom liability to be sued; and the subscriber
is liable for the par value of the stock to the same extent as if such
stipulation had not been inserted in the contract.
Consideration sec 62 4. CORPORATIONS; STOCK SUBSCRIPTIONS; SHARES
SUBSCRIBED AFTER INCORPORATION EFFECTED.-
Section 62. Consideration for stocks. - Stocks shall not be issued for a The law in force in the Philippine Islands makes no distinction, in
consideration less than the par or issued price thereof. Consideration respect to -the liability of the subscriber, between shares subscribed
for the issuance of stock may be any or a combination of any two or before incorporation is effected and shares subscribed thereafter. All
more of the following: subscribers alike are bound to pay full par value in cash or its
equivalent, and any attempt to discriminate in favor of one subscriber
1. Actual cash paid to the corporation; by relieving him of this liability wholly or in part is forbidden.
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful Par Value
purposes at a fair valuation equal to the par or issued value of the stock
issued; Par value shares – those whose value are fixed in the articles of
3. Labor performed for or services actually rendered to the incorporation.
corporation;
4. Previously incurred indebtedness of the corporation; Par value shares cannot be issued nor sold by the corporation at less
5. Amounts transferred from unrestricted retained earnings to stated than par.
capital; and
6. Outstanding shares exchanged for stocks in the event of No Par Value
reclassification or conversion.
No par value shares – those whose issued price are not stated in the
Where the consideration is other than actual cash, or consists of certificate of stock but which may be fixed in the articles of
intangible property such as patents of copyrights, the valuation thereof incorporation, or by the board of directors when so authorized by the
shall initially be determined by the incorporators or the board of said articles or by the by-laws, or in the absence thereof, by the
directors, subject to approval by the Securities and Exchange stockholders themselves.
Commission.
Limitations of no par value shares:
Shares of stock shall not be issued in exchange for promissory notes 1. Such shares, once issued, are deemed fully paid and thus, non
or future service. assessable;
2. The consideration for its issuance should not be less than P5.00;
The same considerations provided for in this section, insofar as they 3. The entire consideration for its issuance constitutes capital, hence,
may be applicable, may be used for the issuance of bonds by the not available for dividend declaration;
corporation. 4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance
The issued price of no-par value shares may be fixed in the articles of companies, public utilities and building and loan associations.
incorporation or by the board of directors pursuant to authority
64
Advantages to the issuance of no par value shares: findings of the Appellate Court. (See Director of Lands vs. Zartiga, L-
1. Flexibility in price; 46068-69, September 30, 1982, 117 SCRA 346, 355).
2. Evasion of the danger of liability upon watered stock; and 2. Evidence; Admissions of liability by a party may be given in
3. Disappearance of personal liability on the part of the holder thereof evidence against it.-
for unpaid subscription. Section 22, Rule 130 of the Rules of Court provides that the act,
declaration or omission of a party as to a relevant fact may be given in
Payment of the Balance of the Subscription sec 66, 67 evidence against him “as admissions of a par-ty.” The admissions of
Bax are supported by the documentary evidence. It is noteworthy that
Section 66. Interest on unpaid subscriptions. - Subscribers for stock all the invoices, with delivery receipts, were presented in evidence by
shall pay to the corporation interest on all unpaid subscriptions from Keller, Exhibits KK-1 to KK- 277-a and N to N-149-a, together with
the date of subscription, if so required by, and at the rate of interest a tabulation thereof, Exhibit KK, covering the period from October
fixed in the by-laws. If no rate of interest is fixed in the by-laws, such 15, 1969 to January 22, 1971. Victor A. Mayo. Keller’s finance
rate shall be deemed to be the legal rate. (37) manager, submitted a statement of account showing that COB Group
Marketing owed Keller P184,509.60 as of July 31, 1971 (Exh. JJ).
Section 67. Payment of balance of subscription. - Subject to the That amount is reflected in the customer’s ledger, Exhibit M.
provisions of the contract of subscription, the board of directors of any 3. Evidence; Pleadings and Practice; It is error for the courts below to
stock corporation may at any time declare due and payable to the conclude that the defendants overpaid the plaintiff where one of them
corporation unpaid subscriptions to the capital stock and may collect was declared in default and the other did not allege any overpayment
the same or such percentage thereof, in either case with accrued in his answer.-
interest, if any, as it may deem necessary. Payment of any unpaid The statement of the Appellate Court that COB Group Marketing
subscription or any percentage thereof, together with the interest alleged in its answer that it overpaid Keller P100,596.72 is manifestly
accrued, if any, shall be made on the date specified in the contract of erroneous first, because COB Group Marketing did not file any
subscription or on the date stated in the call made by the board. Failure answer, having been declared in default, and second, because Bax and
to pay on such date shall render the entire balance due and payable and the other stockholders, who filed an answer, did not allege any
shall make the stockholder liable for interest at the legal rate on such overpayment. As already stated, even before they filed their answer,
balance, unless a different rate of interest is provided in the bylaws, Bax admitted that COB Group Marketing owed Keller around
computed from such date until full payment. If within thirty (30) days P179,000 (Exh. I).
from the said date no payment is made, all stocks covered by said 4. Evidence; Pleadings and Practice; Same.-
subscription shall thereupon become delinquent and shall be subject The lower courts not only allowed Bax to nullify his admissions as to
to sale as hereinafter provided, unless the board of directors orders the liability of COB Group Marketing but they also erroneously
otherwise. (38) rendered judgment in its favor in the amount of its supposed
overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the fact
Lingayen Gulf vs Baltazar 93 Phil 404 that COB Group Marketing was declared in default and did not file
any counterclaim for the supposed overpayment.
1. Corporations; Stock Subscriptions; Plublication Required of Call 5. Evidence; Alleged failure of plaintiff to thresh out COB Group
for Payment of Unpaid Subscriptions; Rule Different azs to Insolvent Marketing, Inc.’s liability to the former has no factual basis and is
Corporations.- contradicted by the documentary evidence.-
—If the corporation involved is insolvent, all unpaid stock The lower courts harped on Keller’s alleged failure to thresh out with
subscription, become payable on demand and are immediately representatives of COB Group Marketing their “diverse statements of
recoverable in an action instituted by the assignee.. :But when the credits and payments”. This contention has no factual basis. In Exhibit
corporation is a solvent concern, the law requires that notice of any J, quoted above, it is stated by Bax and Keller’s Oefeli that “discussion
call for the payment of unpaid subscription should be made not only (was) held on May 8, 1971”.
personally but also by publication. (Act 1459, section 40 as amended.) 6. Evidence; An alleged reconciliation statement made long after the
2. Id.; Salaries of Officers.- case was filed is not credible.-
—The by-laws of the corporation are silent as to the salary of the That means that there was a conference on the COB Group
President. While resolutions of the incorporators and stockholders Marketing’s liability. Bax in that discussion did not present his
provide salaries for the general manager, secretary-treasurer and other reconciliation statements to show overpayment. His Exhibits 7 and 8
employees, there was no provision for the President's salary. On the were an afterthought. He presented them long after the case was filed.
other hand, other resolutions provide for per diems to be paid to the The petitioner regards them as “fabricated”.
President and the directors for each meeting attended. Held: This leads 7. Evidence; Failure to protest correctness of statement of account
to the conclusion that the President and the board of directors were deemed admission of liability as therein reflected.-
expected to serve without salary, and that the per diems paid to them Bax admitted that Keller sent his company monthly statements of
were sufficient compensation for their services. accounts (20-21 tsn, September 2, 1976) but he could not produce any
formal protest against the supposed inaccuracy of the said statements
Liability for unpaid subscriptions (22). He lamely explained that he would have to dig up his company’s
records for the formal protest (23-24). He did not make any written
Unpaid subscriptions are not due and payable until a call is made by demand for reconciliation of accounts (27-28).
the corporation for payment. (Apocada vs. NLRC) 8. Corporation Law; Actions; Stockholders maybe sued by a
corporate cre ditor to the extent of their unpaid subscriptions.-
Keller vs COB Group 141 Scra 86 As to the liability of the stockholders, it is settled that a stockholder is
personally liable for the financial obligations of a corporation to the
1. Evidence; Appeal; Supreme Court not bound by factual findings of extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos, 103
lower court which are contradicted by the evidence.- Phil. 757, 763; 18 CJS 1311-2).
A review of the record shows that Judge Tamayo acted under a 9. Actions; Evidence; Pleadings; Where claim alleged in the
misapprehension of facts and his findings are contradicted by the complaint was P182,994.60 only, the fact that the evidence shows
evidence. The Ap-pellate Court adopted the findings of Judge defen-dants’ liability to be more than that will not justify a higher
Tamayo. This is a case where this Court is not bound by the factual award.-

65
While the evidence shows that the amount due from COB Group Section 70. Court action to recover unpaid subscription. - Nothing in
Marketing is P184,509.60 as of July 31, 1971 or P186,354.70 as of this Code shall prevent the corporation from collecting by action in a
August 31, 1971 (Exh. JJ), the amount prayed for in Keller’s court of proper jurisdiction the amount due on any unpaid
complaint is P182,994.60 as of July 31, 1971 (18-19 Record on subscription, with accrued interest, costs and expenses. (49a)
Appeal). This latter amount should be the one awarded to Keller
because a judgment entered against a party in default cannot exceed Section 71. Effect of delinquency. - No delinquent stock shall be voted
the amount prayed for (Sec. 5, Rule 18, Rules of Court). for or be entitled to vote or to representation at any stockholder's
10. Mortgages; After 90 days from finality of judgment and the meeting, nor shall the holder thereof be entitled to any of the rights of
monetary award remains unpaid, foreclosure of mortgage collaterals a stockholder except the right to dividends in accordance with the
shall follow.- provisions of this Code, until and unless he pays the amount due on
If after ninety (90) days from notice of the finality of the judgment in his subscription with accrued interest, and the costs and expenses of
this case the judgment against COB Group Marketing has not been advertisement, if any.
satisfied fully, then the mortgages executed by Manahan and Lorenzo
should be foreclosed and the proceeds of the sales applied to the Phil trust vs Rivera 44 Phil 469
obligation of COB Group Marketing. Said mortgage obligations
should bear six percent legal interest per annum after the expiration of 1. CORPORATIONS; DIMINUTION OF CAPITAL.-
the said 90-day period. A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a
Deliquency Subscription sec 68 - 71 valuable consideration. for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and
Section 68. Delinquency sale. - The board of directors may, by under the conditions prescribed by law.
resolution, order the sale of delinquent stock and shall specifically
state the amount due on each subscription plus all accrued interest, and Miranda vs Tarlac Rice Mill 57 phil 619
the date, time and place of the sale which shall not be less than thirty
(30) days nor more than sixty (60) days from the date the stocks 1. Corporations; Payment of Subscriptions to Capital Stock.-
become delinquent. —Section 38 of the Corporation Law provides that the board of
directors of every corporation may at any time declare due and payable
Notice of said sale, with a copy of the resolution, shall be sent to every to the corporation unpaid subscriptions to the capital stock and may
delinquent stockholder either personally or by registered mail. The collect the same with interest accrued thereon or such percentage of
same shall furthermore be published once a week for two (2) said unpaid subscriptions as it may deem necessary.
consecutive weeks in a newspaper of general circulation in the 2. Id.; Id.; Action to Recover Amount Paid in to the Corporation.-
province or city where the principal office of the corporation is —This is not an action by the corporation to recover on a subscription
located. agreement, but an action by the administratrix of a stockholder to
recover what was paid in to the corporation by the stockholder. Neither
Unless the delinquent stockholder pays to the corporation, on or before the fact that the corporation has ceased to do business, nor the fact that
the date specified for the sale of the delinquent stock, the balance due the other stockholders have not been required to pay for their shares,
on his subscription, plus accrued interest, costs of advertisement and in accordance with their subscription agreement, would justify an
expenses of sale, or unless the board of directors otherwise orders, said order requiring the corporation to return to the plaintiff the amount
delinquent stock shall be sold at public auction to such bidder who paid by the stockholder.
shall offer to pay the full amount of the balance on the subscription 3. Id.; A Stock Subscription is a Contract.-
together with accrued interest, costs of advertisement and expenses of —A stock subscription is a contract between the corporation and the
sale, for the smallest number of shares or fraction of a share. The stock subscriber, and courts will enforce it for or against either. A
so purchased shall be transferred to such purchaser in the books of the corporation has no legal capacity to release a subscriber to its capital
corporation and a certificate for such stock shall be issued in his favor. stock from the obligation to pay for his shares, and any agreement to
The remaining shares, if any, shall be credited in favor of the this effect is invalid. (Velasco vs. Poizat, 37 Phil., 802.)
delinquent stockholder who shall likewise be entitled to the issuance
of a certificate of stock covering such shares. De Silva vs Aboitiz 44 Phil 755

Should there be no bidder at the public auction who offers to pay the 1. CORPORATION LAW; PAYMENT OF UNPAID
full amount of the balance on the subscription together with accrued SUBSCRIPTION.-
interest, costs of advertisement and expenses of sale, for the smallest The defendant corporation being an artificial entity created by virtue
number of shares or fraction of a share, the corporation may, subject of the Corporation Law, Act No. 1459, and the plaintiff having f ailed
to the provisions of this Code, bid for the same, and the total amount to pay a part of his subscription, the board of directors not only made
due shall be credited as paid in full in the books of the corporation. use of its discretionary power granted by section 2 of said Act in
Title to all the shares of stock covered by the subscription shall be declaring his subscription due and his shares delinquent, and ordering
vested in the corporation as treasury shares and may be disposed of by the sale thereof, as their value was not paid by him, but far from
said corporation in accordance with the provisions of this Code. (39a- violating the provision of sec tion 46 of the by-laws Of the corporation
46a) in not applying a part of the profits obtained by the corporation upon
the payment of said subscription, it complied with said provision,
Section 69. When sale may be questioned. - No action to recover which expressly prohibits the payment of dividends to a shareholder
delinquent stock sold can be sustained upon the ground of irregularity whose subscription was not fully paid up.
or defect in the notice of sale, or in the sale itself of the delinquent
stock, unless the party seeking to maintain such action first pays or Fun Cun vs Summers 44 Phil 705
tenders to the party holding the stock the sum for which the same was
sold, with interest from the date of sale at the legal rate; and no such 1. BANKING CORPORATION; SHARES OF STOCK; LIEN OF
action shall be maintained unless it is commenced by the filing of a CORPORATION UPON THE SAME.-
complaint within six (6) months from the date of sale. (47a) A banking corporation has no lien upon its own stock for the
indebtedness of the stockholders even when the by-laws provide that
66
the shares shall be transferable only upon the books of the corporation to be alienated, is essential for the protection of both the corporation
and that no such transfer shall be made if the holder of the shares is and its stockholders (Smallwood vs. Moretti, 128 So. 2d 628).
indebted to the corporation.
2. BANKING CORPORATION; SHARES OF STOCK; EFFECT OF Trust Fund Doctrine sec 43 and 122
PART PAYMENT OF SUBSCRIPTION;SPECIAL AGREEMENT.-
In the absence of special agreement to the contrary, a subscriber for a Trust fund doctrine – treating the capital of the corporation, inclusive
certain number of shares of stock does not, upon payment of one-half of the unpaid portion of subscriptions to said capital, as a “trust fund”
of the subscription price, become entitled to the issuance of certificates which the creditors have a right to look up to for the satisfaction of
for one-half the number of shares subscribed for; the subscriber's right their claims.
consists only in an equity entitling him to a certificate for the total
number of shares subscribed for by him upon payment of the Failure or refusal of the corporation, through its board of directors to
remaining portion of the subscription price. enforce or collect payment of unpaid subscription will not prevent the
3. BANKING CORPORATION; SHARES OF creditors or the receiver of the corporation to institute a court action to
STOCK; ASSIGNMENT OF EQUITY.- collect the unpaid portion thereof (trust fund doctrine).
An equity in shares of stock may be assigned, the assignment
becoming effective as between the parties and as to third parties with Section 43. Power to declare dividends. - The board of directors of a
notice. stock corporation may declare dividends out of the unrestricted
4. BANKING CORPORATION; SHARES OF STOCK; PRIORITY retained earnings which shall be payable in cash, in property, or in
OF LIEN.- stock to all stockholders on the basis of outstanding stock held by
An attachment levied upon assigned rights or interests in an action them: Provided, That any cash dividends due on delinquent stock shall
against the assignor after the attaching creditor has received notice of first be applied to the unpaid balance on the subscription plus costs
the assignment creates no lien as against the assignee. and expenses, while stock dividends shall be withheld from the
5. BANKING CORPORATION; SHARES OF STOCK; CHATTEL delinquent stockholder until his unpaid subscription is fully paid:
MORTGAGE.- Provided, further, That no stock dividend shall be issued without the
Whether in this jurisdiction an equity in shares of stock may properly approval of stockholders representing not less than two-thirds (2/3) of
be made the subject of a chattel mortgage, quære, but such chattel the outstanding capital stock at a regular or special meeting duly called
mortgage will at least operate as a conditional equitable assignment. for the purpose. (16a)

Nava vs Peers Marketing 74 Scra 65 Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock,
1. Corporations; The Code of By-laws of a corporation may include except: (1) when justified by definite corporate expansion projects or
rules governing transfer of shares.- programs approved by the board of directors; or (2) when the
The corporation can include in its by-laws rules, not inconsistent with corporation is prohibited under any loan agreement with any financial
law, governing the transfer of its shares of stock. institution or creditor, whether local or foreign, from declaring
2. Corporations; Shares of stock of a corporation may be transferred dividends without its/his consent, and such consent has not yet been
by delivery of the stock certificate properly indorsed.- secured; or (3) when it can be clearly shown that such retention is
As prescribed in section 35, shares of stock may be transferred by necessary under special circumstances obtaining in the corporation,
delivery to the transferee of the certificate properly indorsed. “Title such as when there is need for special reserve for probable
may be vested in the transferee by delivery of the certificate with a contingencies. (n)
written assignment or indorsement thereof” (18 C.J.S. 928). There
should be compliance with the mode of transfer prescribed by law (18 Section 122. Corporate liquidation. - Every corporation whose charter
C.J.S. 930). expires by its own limitation or is annulled by forfeiture or otherwise,
3. Corporations; A stock subscription is a subsisting liability and the or whose corporate existence for other purposes is terminated in any
corporation has a right to demand payment thereof.- other manner, shall nevertheless be continued as a body corporate for
A stock subscription is a subsisting liability from the time the three (3) years after the time when it would have been so dissolved,
subscription is made. The subscriber is as much bound to pay his for the purpose of prosecuting and defending suits by or against it and
subscription as he would be to pay any other debt. The right of the enabling it to settle and close its affairs, to dispose of and convey its
corporation to demand payment is no less incontestable. property and to distribute its assets, but not for the purpose of
4. Corporations; Corporation cannot release subscriber from payment continuing the business for which it was established.
of Ins obligation without the unanimous consent of stockholders.-
A corporal ion cannot release an original subscriber from paying for At any time during said three (3) years, the corporation is authorized
his shares without a valuable consideration or without the unanimous and empowered to convey all of its property to trustees for the benefit
consent of the stockholders. of stockholders, members, creditors, and other persons in interest.
5. Corporations; Where 110 stock certificate was issued to original From and after any such conveyance by the corporation of its property
subscriber representing that portion of his subscription which he paid in trust for the benefit of its stockholders, members, creditors and
for, the assignment of said subscriber’s corporate share is effective others in interest, all interest which the corporation had in the property
only between the parties to the transaction and the transferee cannot terminates, the legal interest vests in the trustees, and the beneficial
demand from the corporation the issuance of certificates of stock interest in the stockholders, members, creditors or other persons in
representing the paid subscribed shares.- interest.
Under the facts of the case, there is no clear legal duty on the part of
the officers of the corporation to register the twenty shares in Nava’s Upon the winding up of the corporate affairs, any asset distributable
name. Hence, there is no cause of action for mandamus, x x x As to any creditor or stockholder or member who is unknown or cannot
already stressed, in this case no stock certificate was issued to Po. be found shall be escheated to the city or municipality where such
Without the stock certificate, which is the evidence of ownership of assets are located.
corporate stock, the assignment of corporate shares is effective only
between the parties to the transaction (Davis vs. Wachter, 140 So. Except by decrease of capital stock and as otherwise allowed by this
361). The delivery of the stock certificate, which represents the shares Code, no corporation shall distribute any of its assets or property

67
except upon lawful dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a) Preferred Shares

Classes of Shares
Classification of Shares sec 6 Preferred stock – a stock that gives the holder a preference over the
holder of common stocks with respect to the payment of dividends
Section 6. Classification of shares. - The shares of stock of stock and/or with respect to distribution of capital upon liquidation.
corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights, Limitations on preferred stock:
privileges or restrictions as may be stated in the articles of 1. Must be issued with a stated par value; and
incorporation: Provided, That no share may be deprived of voting 2. The preferences must be stated in the articles of incorporation and
rights except those classified and issued as "preferred" or in the certificate of stock, otherwise, each share shall be, in all respect,
"redeemable" shares, unless otherwise provided in this Code: equal to every other share.
Provided, further, That there shall always be a class or series of shares
which have complete voting rights. Any or all of the shares or series The guarantee to preference as to dividends does not create a relation
of shares may have a par value or have no par value as may be of debtor and creditor between the corporation and the holders of such
provided for in the articles of incorporation: Provided, however, That stock. The board has the discretion to determine whether or not to
banks, trust companies, insurance companies, public utilities, and declare dividends.
building and loan associations shall not be permitted to issue no-par
value shares of stock. Preferred shares are presumed to be non-participating.

Preferred shares of stock issued by any corporation may be given Participating preferred shares – the holders thereof are still given the
preference in the distribution of the assets of the corporation in case right to participate with the common stockholders in dividends beyond
of liquidation and in the distribution of dividends, or such other their stated preference.
preferences as may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided, That preferred Cumulative preferred share – those that entitle the owner thereof to
shares of stock may be issued only with a stated par value. The board payment not only of current dividends but also back dividends not
of directors, where authorized in the articles of incorporation, may fix previously paid whether or not, during the past years, dividends were
the terms and conditions of preferred shares of stock or any series declared or paid.
thereof: Provided, That such terms and conditions shall be effective
upon the filing of a certificate thereof with the Securities and In absence of express stipulation, preferred shares are presumed to be
Exchange Commission. non-cumulative.

Shares of capital stock issued without par value shall be deemed fully Non-cumulative preferred shares – those which grant the holders of
paid and non-assessable and the holder of such shares shall not be such shares only to the payment of current dividends but not back
liable to the corporation or to its creditors in respect thereto: Provided; dividends, when and if dividends are paid, to the extent agreed upon
That shares without par value may not be issued for a consideration before any other stockholders are paid the same.
less than the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for its no-par Types of non-cumulative preferred shares:
value shares shall be treated as capital and shall not be available for 1. Discretionary dividend type – gives the holder of such shares the
distribution as dividends. right to have dividends paid thereon in a particular year depending on
the judgment or discretion of the board of directors.
A corporation may, furthermore, classify its shares for the purpose of 2. Mandatory if earned type – impose a positive duty on directors to
insuring compliance with constitutional or legal requirements. declare dividends every year when profits are earned.
3. Earned cumulative or dividend credit – gives the holder thereof the
Except as otherwise provided in the articles of incorporation and stated right to arrears in dividends if there were profits earned during the
in the certificate of stock, each share shall be equal in all respects to previous years but dividends were not declared.
every other share.
Unless the right to vote is clearly withheld, a preferred stockholder has
Where the articles of incorporation provide for non-voting shares in the right to vote.
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters: Preference upon liquidation must be clearly indicated otherwise they
shall be placed on equal footing with other shares.
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws; Founder’s Shares sec 7
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property; Section 7. Founders' shares. - Founders' shares classified as such in the
4. Incurring, creating or increasing bonded indebtedness; articles of incorporation may be given certain rights and privileges not
5. Increase or decrease of capital stock; enjoyed by the owners of other stocks, provided that where the
6. Merger or consolidation of the corporation with another corporation exclusive right to vote and be voted for in the election of directors is
or other corporations; granted, it must be for a limited period not to exceed five (5) years
7. Investment of corporate funds in another corporation or business in subject to the approval of the Securities and Exchange Commission.
accordance with this Code; and The five-year period shall commence from the date of the aforesaid
8. Dissolution of the corporation. approval by the Securities and Exchange Commission.

Except as provided in the immediately preceding paragraph, the vote Redeemable Shares sec 8
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
68
Redeemable shares may be issued by the corporation when expressly Redeemable shares, on the other hand, are shares usually preferred,
so provided in the articles of incorporation. which by their terms are redeemable at a fixed date, or at the option of
either issuing corporation, or the stockholder, or both at a certain
They may be purchased or taken up by the corporation upon the redemption price. A redemption by the corporation of its stock is, in a
expiration of a fixed period, regardless of the existence of unrestricted sense, a repurchase of it for cancellation. The present Code allows
retained earnings in the books of the corporation, and upon such other redemption of shares even if there are no unrestricted retained earnings
terms and conditions as may be stated in the articles of incorporation, on the books of the corporation. This is a new provision which in effect
which terms and conditions must also be stated in the certificate of qualifies the general rule that the corporation cannot purchase its own
stock representing said shares. shares except out of current retained earnings. However, while
redeemable shares may be redeemed regardless of the existence of
Section 8. Redeemable shares. - Redeemable shares may be issued by unrestricted retained earnings, this is subject to the condition that the
the corporation when expressly so provided in the articles of corporation has, after such redemption, assets in its books to cover
incorporation. They may be purchased or taken up by the corporation debts and liabilities inclusive of capital stock. Redemption, therefore,
upon the expiration of a fixed period, regardless of the existence of may not be made where the corporation is insolvent or if such
unrestricted retained earnings in the books of the corporation, and redemption will cause insolvency or inability of the corporation to
upon such other terms and conditions as may be stated in the articles meet its debts as they mature.
of incorporation, which terms and conditions must also be stated in the 4. Corporation Law; Shares of Stock; Preferred Shares of
certificate of stock representing said shares. Stock; Redeemable Shares; Statutory Construction; It is settled
doctrine in statutory construction that the word “may” denotes
Republic Planters Bank vs Hon. Agana GR 51765 1997 discretion, and cannot be construed as having a mandatory effect.-
What respondent judge failed to recognize was that while the stock
1. Corporation Law; Shares of Stock; Preferred Shares of certificate does allow redemption, the option to do so was clearly
Stock; Words and Phrases; A preferred share of stock is one which vested in the petitioner bank. The redemption therefore is clearly the
entitles the holder thereof to certain preferences over the holders of type known as “optional.” Thus, except as otherwise provided in the
common stock.- stock certificate, the redemption rests entirely with the corporation and
Before passing upon the merits of this petition, it may be pertinent to the stockholder is without right to either compel or refuse the
provide an overview on the nature of preferred shares and the redemption of its stock. Furthermore, the terms and conditions set
redemption thereof, considering that these issues lie at the heart of the forth therein use the word “may.” It is a settled doctrine in statutory
dispute. A preferred share of stock, on one hand, is one which entitles construction that the word “may” denotes discretion, and cannot be
the holder thereof to certain preferences over the holders of common construed as having a mandatory effect. We fail to see how respondent
stock. The preferences are designed to induce persons to subscribe for judge can ignore what, in his words, are the “very wordings of the
shares of a corporation. Preferred shares take a multiplicity of forms. terms and conditions in said stock certificates” and construe what is
The most common forms may be classi- fied into two: (1) preferred clearly a mere option to be his legal basis for compelling the petitioner
shares as to assets; and (2) preferred shares as to dividends. The former to redeem the shares in question.
is a share which gives the holder thereof preference in the distribution 5. Corporation Law; Shares of Stock; Preferred Shares of
of the assets of the corporation in case of liquidation; the latter is a Stock; Redeemable Shares; Banks and Banking; A directive issued by
share the holder of which is entitled to receive dividends on said share the Central Bank Governor obviously meant to preserve the status quo
to the extent agreed upon before any dividends at all are paid to the and to prevent the financial ruin of a banking institution, limiting the
holders of common stock. There is no guaranty, however, that the exercise of a right granted by law to a corporate entity, may be
share will receive any dividends. considered as an exercise of police power.-
2. Corporation Law; Shares of Stock; Preferred Shares of The redemption of said shares cannot be allowed. As pointed out by
Stock; Preferences granted to preferred stockholders do not give them the petitioner, the Central Bank made a finding that said petitioner has
a lien upon the property of the corporation nor make them creditors of been suffering from chronic reserve deficiency, and that such finding
the corporation, the right of the former being always subordinate to resulted in a directive, issued on January 31, 1973 by then Gov. G.S.
the latter; Shareholders, both common and preferred, are considered Licaros of the Central Bank, to the President and Acting Chairman of
risk takers who invest capital in the business and who can look only the Board of the petitioner bank prohibiting the latter from redeeming
to what is left after corporate debts and liabilities are fully paid.- any preferred share, on the ground that said redemption would reduce
Thus, the declaration of dividends is dependent upon the availability the assets of the Bank to the prejudice of its depositors and creditors.
of surplus profit or unrestricted retained earnings, as the case may be. Redemption of preferred shares was prohibited for a just and valid
Preferences granted to preferred stockholders, moreover, do not give reason. The directive issued by the Central Bank Governor was
them a lien upon the property of the corporation nor make them obviously meant to preserve the status quo, and to prevent the financial
creditors of the corporation, the right of the former being always ruin of a banking institution that would have resulted in adverse
subordinate to the latter. Dividends are thus payable only when there repercussions, not only to its depositors and creditors, but also to the
are profits earned by the corporation and as a general rule, even if there banking industry as a whole. The directive, in limiting the exercise of
are existing profits, the board of directors has the discretion to a right granted by law to a corporate entity, may thus be considered as
determine whether or not dividends are to be declared. Shareholders, an exercise of police power. The respondent judge insists that the
both common and preferred, are considered risk takers who invest directive constitutes an impairment of the obligation of contracts. It
capital in the business and who can look only to what is left after has, however, been settled that the Constitutional guaranty of non-
corporate debts and liabilities are fully paid. impairment of obligations of contract is limited by the exercise of the
3. Corporation Law; Shares of Stock; Preferred Shares of police power of the state, the reason being that public welfare is
Stock; Redeemable Shares; Words and Phrases; Redeemable shares superior to private rights.
are shares usually preferred, which by their terms are redeemable at a 6. Corporation Law; Shares of Stock; Preferred Shares of
fixed date, or at the option of either issuing corporation, or the Stock; “Interest bearing stocks,” on which the corporation agrees
stockholder, or both at a certain redemption price; Redemption may absolutely to pay interest before dividends are paid to common
not be made where the corporation is insolvent or if such redemption stockholders, is legal only when construed as requiring payment of
will cause insolvency or inability of the corporation to meet its debts interest as dividends from net earnings or surplus only.-
as they mature.- Both Sec. 16 of the Corporation Law and Sec. 43 of the present
Corporation Code prohibit the issuance of any stock dividend without
69
the approval of stockholders, representing not less than two-thirds 2. Same; Same; Where corporate earnings are used to purchase
(2/3) of the outstanding capital stock at a regular or special meeting outstanding stock treated as treasury stock as a technical, but
duly called for the purpose. These provisions underscore the fact that prohibited device, to avoid effects of income taxation, distribution of
payment of dividends to a stockholder is not a matter of right but a said corporate earnings in the form of stock dividends will subject
matter of consensus. Furthermore, “interest bearing stocks,” on which stockholders receiving them to income tax.-
the corporation agrees absolutely to pay interest before dividends are The declaration of MANTRASCO’s alleged treasury stock dividends
paid to common stockholders, is legal only when construed as in favor of the former, brings, however, into clear focus the ultimate
requiring payment of interest as dividends from net earnings or surplus purpose which the parties to the trust instrument aimed to realize: to
only. Clearly, the respondent judge, in compelling the petitioner to make the respondents the sole owners of Reese’s interest in
redeem the shares in question and to pay the corresponding dividends, MANTRASCO by utilizing the periodic earnings of that company and
committed grave abuse of discretion amounting to lack or excess of its subsidiaries to directly subsidize their purchase of the said interests,
jurisdiction in ignoring both the terms and conditions specified in the and by making it appear outwardly, through the formal declaration of
stock certificate, as well as the clear mandate of the law. non-existent stock dividends in the treasury, that they have not
7. Action; Prescription; A right of action that is founded upon a received any income from those firms when, in fact, by that
written contract prescribes in ten (10) years.- declaration they secured to themselves the means to turn around as full
Anent the issue of prescription, this Court so holds that the claim of owners of Reese’s shares. In other words, the respondents, using the
private respondent is already barred by prescription as well as laches. trust instrument as a convenient technical device, bestowed unto
Art. 1144 of the New Civil Code provides that a right of action that is themselves the full worth and value of Reese’s corporate holdings
founded upon a written contract prescribes in ten (10) years. The with the use of the very earnings of the companies. Such package
letter-demand made by the private respondents to the petitioner was device, obviously not designed to carry out the usual stock dividend
made only on January 5, 1979, or almost eighteen years after receipt purpose of corporate expansion re-investment, e.g., the acquisition of
of the written contract in the form of the stock certificate. As noted additional facilities and other capital budget items, but exclusively for
earlier, this letter-demand, significantly, was not formally offered in expanding the capital base of the respondents in MANTRASCO,
evidence, nor were any other evidence of demand presented. cannot be allowed to deflect the respondents’ responsibilities toward
Therefore, we conclude that the only time the private respondents saw our income tax laws. The conclusion is thus ineluctable that whenever
it fit to assert their rights, if any, to the preferred shares of stock, was the companies involved herein parted with a portion of their earnings
after the lapse of almost eighteen years. The same clearly indicates “to buy” the corporate holdings of Reese, they were in ultimate effect
that the right of the private respondents to any relief under the law has and result making a distribution of such earnings to the respondents.
already prescribed. All these amounts are consequently subject to income tax as being, in
8. Action; Laches; Defined; Words and Phrases.- truth and in fact, a flow of cash benefits to the respondents.
Moreover, the claim of the private respondents is also barred by 3. Same; Same; Where corporate earnings are used to buy out a
laches. Laches has been defined as the failure or neglect, for an majority stockholder’s shares therein over a period of years, the
unreasonable length of time, to do that which by exercising due income tax burden on the beneficiaries of such plan shall correspond
diligence could or should have been done earlier; it is negligence or to the annual corporate disbursement.-
omission to assert a right within a reasonable time, warranting a We are of the opinion, however, that the Commissioner erred in
presumption that the party entitled to assert it either has abandoned it assessing the respondents the total acquisition cost (P7,973,860) of the
or declined to assert it. alleged treasury stock dividends in one lump sum. The records shows
that the earnings of MANTRASCO over a period of years were used
Treasury Shares sec 9 to gradually wipe out the holdings therein of Reese. Consequently,
those earnings, which we hold, under the facts disclosed in the case at
Treasury shares are shares of stock which have been issued and fully bar, as in effect having been distributed to the respondents, should be
paid for, but subsequently reacquired by the issuing corporation by taxed for each of the corresponding years when payments were made
purchase, redemption, donation or through some other lawful means. to Reese’s estate on account of his 24,700 shares. With regard to
Such shares may again be disposed of for a reasonable price fixed by payments made with MANTRASCO earnings in 1958 and the years
the board of directors. before, while indeed those earnings were utilized in those years to
gradually pay off the value of Reese’s holdings in MANTRASCO,
Treasury shares may again be issued for a price less than par. there is no evidence from which it can be inferred that prior to the
passage of the stockholders’ resolution of December 22, 1958 the
Treasury shares have no voting and dividend rights. Such rights are contributed equity of each of the respondents rose correspondingly. It
only granted to outstanding shares of stock. (CIR vs. Manning) was only by virtue of the authority contained in the said resolution that
the respondents actually, albeit illegally, appropriated and partitioned
Section 9. Treasury shares. - Treasury shares are shares of stock which among themselves the stockholders’ equity representing Reese’s
have been issued and fully paid for, but subsequently reacquired by interests in MANTRASCO. As those payments accrued in favor of the
the issuing corporation by purchase, redemption, donation or through respondents in 1958 they are and should be liable, for income tax
some other lawful means. Such shares may again be disposed of for a purposes, to the extent of the aggregate amount paid, from 1955 to
reasonable price fixed by the board of directors. 1958, by MANTRASCO to buy off Reese’s shares.
4. Same; Same; Income tax law indifferent as to source of income
Commissioner vs Manning 66 scra 14 liable to tax.-
The fact that the resolution authorizing the distribution of the said
1. Same; Same; A stock dividend cannot be declared out of earnings is null and void is of no moment. Under the National Internal
outstanding stock in the guise of treasury stock dividend, but only Revenue Code, income tax is assessed on income received from any
from retained earnings.- property, activity or service that produces income. The Tax Code
Such being the true nature of the 24,700 shares, their declaration as stands as an indifferent, neutral party on the matter of where the
treasury stock dividend in 1958 was a complete nullity and plainly income comes from.
violative of public policy. A stock dividend, being one payable in 5. Corporation law; Taxations; Meaning and scope of treasury shares.-
capital stock, cannot be declared out of outstanding corporate stock, Although authorities may differ on the exact legal and accounting
but only from retained earnings. status of so-called “treasury shares,” they are more or less in
agreement that treasury shares are stocks issued and fully paid for and
70
re-acquired by the corporation either by purchase, donation, forfeiture 3. Present and future creditors are deprived of corporate assets for the
or other means. Treasury shares are therefore issued shares, but being protection of their interest.
in the treasury they do not have the status of outstanding shares.
Consequently, although a treasury share, not having been retired by Two theories advanced as the basis for the liability on water stocks:
the corporation re-acquiring it, may be reissued or sold again, such
share, as long as it is held by the corporation as a treasury share, 1. Trust fund doctrine – treating the capital of the corporation,
participates neither in dividends, because dividends cannot be inclusive of the unpaid portion of subscriptions to said capital, as a
declared by the corporation to itself, nor in the meetings of the “trust fund” which the creditors have a right to look up to for the
corporation as voting stock, for otherwise equal distribution of voting satisfaction of their claims.
powers among stockholders will be effectively lost and the directors 2. Fraud or misrepresentation theory – liability is based on the false
will be able to perpetuate their control of the corporation, though it representation made by the corporation and the stockholder concerned
still represents a paid-for interest in the property of the corporation. to the creditors that the true par value or issued price of the shared has
The foregoing essential features of a treasury stock are lacking in the been paid or promised to be paid full.
questioned shares. Thus, (a) under paragraph 4(c) of the trust
agreement, the trustees were authorized to vote all stock standing in Effects of issuance of watered stock:
their names x x x; (b) under paragraph 4(d), “Any and all dividends 1. As to the corporation – when a corporation is guilty of ultra-vires
paid on said shares after the death of the OWNER shall be subject to acts which constitute an injury to or fraud upon the public, or which
the provisions of this Agreement;” (c) under paragraph 5(b) the will tend to injure or defraud the public, the State may institute a quo-
amount of retained earnings to be declared as dividends was made warranto proceeding to forfeit its charter for the misuse or abuse of its
subject to the approval of the trustees of the 24,700 shares; x x x. The franchise.
manifest intention of the parties to the trust agreement was, in sum and 2. As between the corporation and the subscriber – the subscription is
substance, to treat the 24,700 shares of Reese as absolutely void; the subscriber is liable to pay the full par or issued value thereof,
outstanding shares of Reese’s estate until they were fully paid. to render it valid and effective.
3. As to the consenting stockholders – they are estopped from raising
Watered Stocks sec 65 any objection thereto.
4. As to dissenting stockholder – in view of the dilution of their
Section 65. Liability of directors for watered stocks. - Any director or proportionate interest in the corporation, they may compel the
officer of a corporation consenting to the issuance of stocks for a payment of the “water” in the stock solidarily against the responsible
consideration less than its par or issued value or for a consideration in and consenting directors and officers inclusive of the holder of the
any form other than cash, valued in excess of its fair value, or who, watered stock.
having knowledge thereof, does not forthwith express his objection in 5. As to creditors – they may enforce payment of the difference in the
writing and file the same with the corporate secretary, shall be price, or the water in the stock, solidary against the responsible
solidarily, liable with the stockholder concerned to the corporation and directors/officers and the stockholders concerned.
its creditors for the difference between the fair value received at the 6. As against transferees of the watered stock – his right is the same as
time of issuance of the stock and the par or issued value of the same. that of his transferor. If however, a certificate of stock has been issued
and duly indorsed to a bona fide purchaser, without knowledge, actual
Watered stock – one which is issued by the corporation as fully paid- or constructive, the latter cannot be held liable, at least as against the
up shares when in fact the whole amount of the value thereof has not corporation, since he took the shares on reliance of the
been paid. misrepresentation made by the corporation that the stock certificate is
valid and subsisting. This is because a corporation is prohibited from
Directors or officers shall be solidarily liable with the stockholder issuing certificates of stock until the full value of the subscriptions
concerned to the corporation and its creditors for the difference have been paid and could not, therefore, deny the validity of the stock
between the fair value received at the time of issuance of the stock and certificate it issued as against a purchaser in good faith.
the par or issued value of the same for the following acts:
Subscribers for stock shall pay to the corporation interest on all unpaid
1. Consenting to the issuance of watered stocks; or subscriptions from the date of subscription, if so required by, and at
2. Having knowledge thereof, failing to forthwith express his the rate of interest fixed in the by-laws. If no rate of interest is fixed in
objection in writing and file the same with the corporate secretary. the by-laws, such rate shall be deemed to be the legal rate.

All creditors, whether prior or subsequent to the issuance of watered Quasi-Reorganization sec 38
stock may enforce payment of such water.
Section 38. Power to increase or decrease capital stock; incur, create
Ways in which watered stocks may be issued: or increase bonded indebtedness. - No corporation shall increase or
1. For a monetary consideration less than its par or issued value; decrease its capital stock or incur, create or increase any bonded
2. For a consideration in property, tangible or intangible, valued in indebtedness unless approved by a majority vote of the board of
excess of its fair market value; directors and, at a stockholder's meeting duly called for the purpose,
3. Gratuitously or under an agreement that nothing shall be paid at all; two-thirds (2/3) of the outstanding capital stock shall favor the
or increase or diminution of the capital stock, or the incurring, creating
4. In the guise of stock dividends when there are no surplus profits of or increasing of any bonded indebtedness. Written notice of the
the corporation. proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of
Evil effects of stock watering: the time and place of the stockholder's meeting at which the proposed
increase or diminution of the capital stock or the incurring or
1. The corporation is deprived of its capital thereby hurting its business increasing of any bonded indebtedness is to be considered, must be
prospects, financial capability and responsibility; addressed to each stockholder at his place of residence as shown on
2. Stockholders who paid their subscriptions in full, or promised to the books of the corporation and deposited to the addressee in the post
pay the same, are injured and prejudiced by the reduction of their office with postage prepaid, or served personally.
proportionate interest in the corporation; and
71
A certificate in duplicate must be signed by a majority of the directors 4. Prior written notice of the proposed action must be made stating
of the corporation and countersigned by the chairman and the secretary the time and place of meeting addressed to each stockholder or
of the stockholders' meeting, setting forth: member at his place of residence, either by mail or personal service;
5. A certificate in duplicate must be signed by a majority of the
(1) That the requirements of this section have been complied with; directors of the corporation, countersigned by the chairman and the
(2) The amount of the increase or diminution of the capital stock; secretary of the stockholder‟s meeting, setting forth the matters
(3) If an increase of the capital stock, the amount of capital stock or contained in subsection 1 to 7 of Sec. 38;
number of shares of no-par stock thereof actually subscribed, the 6. In case of increase in capital stock, 25% of such increased capital
names, nationalities and residences of the persons subscribing, the must be subscribed and that at least 25% of the amount subscribed
amount of capital stock or number of no-par stock subscribed by each, must be paid either in cash or property;
and the amount paid by each on his subscription in cash or property, 7. In case of decrease in capital stock, the same must not prejudice
or the amount of capital stock or number of shares of no-par stock the right of the creditors;
allotted to each stock-holder if such increase is for the purpose of 8. Filing of the certificate of increase and amended articles with the
making effective stock dividend therefor authorized; SEC; and
(4) Any bonded indebtedness to be incurred, created or increased; 9. Approval thereof by the SEC.
(5) The actual indebtedness of the corporation on the day of the
meeting; 3 ways of increasing the capital stock:
(6) The amount of stock represented at the meeting; and 1. Increasing the par value of the existing number of shared without
(7) The vote authorizing the increase or diminution of the capital increasing the number of shares;
stock, or the incurring, creating or increasing of any bonded 2. Increasing the number of existing shares without increasing the
indebtedness. par value thereof; and
3. Increasing the number of existing shares and at the same time
Any increase or decrease in the capital stock or the incurring, creating increasing the par value of the shares.
or increasing of any bonded indebtedness shall require prior approval
of the Securities and Exchange Commission. Existence of unissued or unsubscribed share out of the original
capital stock will not prohibit the increase of capital stock.
One of the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities and Reasons for decreasing capital stock:
Exchange Commission and attached to the original articles of 1. To reduce or wipe out existing deficit where no creditors would
incorporation. From and after approval by the Securities and thereby be affected;
Exchange Commission and the issuance by the Commission of its 2. When capital is more than what is necessary to procreate the
certificate of filing, the capital stock shall stand increased or decreased business or reduction of capital surplus; or
and the incurring, creating or increasing of any bonded indebtedness 3. To write down the value of its fixed assets to reflect the present
authorized, as the certificate of filing may declare: Provided, That the actual value in case where there is a decline in the value of the fixed
Securities and Exchange Commission shall not accept for filing any assets of the corporation.
certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding A corporation has no power to release an original subscriber to its
office at the time of the filing of the certificate, showing that at least capital stock from the obligation of paying for his shares, without a
twenty-five (25%) percent of such increased capital stock has been valuable consideration for such release; and as against creditors a
subscribed and that at least twenty-five (25%) percent of the amount reduction of the capital stock can take place only in the manner and
subscribed has been paid either in actual cash to the corporation or that under the conditions prescribed by law. Moreover, strict compliance
there has been transferred to the corporation property the valuation of with the statutory regulations is necessary. (Philippine Trust
which is equal to twenty-five (25%) percent of the subscription: Company vs. Rivera)
Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of A reduction of capital stock may not be used as a subterfuge, a
corporate creditors. deception as it were, to camouflage the fact that a corporation has
been making profits to obviate a just sharing to labor. (Madrigal &
Non-stock corporations may incur or create bonded indebtedness, or Co. vs. Zamora)
increase the same, with the approval by a majority vote of the board
of trustees and of at least two-thirds (2/3) of the members in a meeting A corporation which has the power to borrow or raise money, to
duly called for the purpose. contract for labor or services, or otherwise contract a debt has the
implied power to issue bonds in payment or as a security provided it
Bonds issued by a corporation shall be registered with the Securities violates no prohibition or restriction in its charter or any other
and Exchange Commission, which shall have the authority to statutes.
determine the sufficiency of the terms thereof. (17a)
Corporate bonds must be registered and approved by the SEC before
Reduction of Capital Stock they are issued.

POWER TO INCREASE/DECREASE CAPITAL; INCUR, **Stock Splits


CREATE OR INCREASE BONDED INDEBTEDNESS
Requirements and procedure: Dividends and Other Distributions
1. Approval by the majority vote of the board of directors or trustees;
2. Ratification by the stockholders representing at least 2/3 of the Dividends – are corporate profits set aside, declared and ordered by
outstanding capital stock or 2/3 of the members in case of non-stock the Board of Directors to be paid to the stockholders.
corporations;
3. The ratification must be at a meeting duly called for that purpose; Dividends can only be declared out of unrestricted retained earnings.

72
Unrestricted retained earnings – undistributed earnings of a first be applied to the unpaid balance on the subscription plus costs
corporation which have not been allocated for any managerial, and expenses, while stock dividends shall be withheld from the
contractual or legal purpose and which are free for distribution to the delinquent stockholder until his unpaid subscription is fully paid:
stockholders as dividends. Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of
Types of dividends: the outstanding capital stock at a regular or special meeting duly called
1. Cash dividend – those that are payable in lawful money. for the purpose. (16a)
2. Property dividend – those that take form of bonds, notes, evidences
of indebtedness or stock in other corporations. Stock corporations are prohibited from retaining surplus profits in
3. Stock dividends – refer to the corporation‟s shares of stock. excess of one hundred (100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate expansion projects or
Rules on dividends due on delinquent stock: programs approved by the board of directors; or (2) when the
1. Cash dividend – first applied to the unpaid balance on subscription corporation is prohibited under any loan agreement with any financial
costs and expenses. institution or creditor, whether local or foreign, from declaring
2. Stock dividend – withheld until subscription is fully paid. 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
General rule: Stock corporations are prohibited from retaining surplus necessary under special circumstances obtaining in the corporation,
profits in excess of 100% of their paid-in capital stock. such as when there is need for special reserve for probable
contingencies. (n)
Exceptions:
1. When justified by definite corporate expansion projects or programs Delinquent stocks are entitled to the right to dividends (any cash
approved by the board of directors; or dividends due on delinquent stockholders shall first be applied to the
2. When the corporation is prohibited under any loan agreement with unpaid balance on his subscription plus cost and expenses, while stock
any financial institution or creditor, whether local or foreign, from dividends shall be withheld until his unpaid subscription is paid in
declaring dividends without its/his consent, and such consent has not full).
yet been secured; or
3. When it can be clearly shown that such retention is necessary under Types of Dividends and Other Distributions
special circumstances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies. Types of dividends:
1. Cash dividend – those that are payable in lawful money.
General rule: The board of directors exercise exclusive authority in 2. Property dividend – those that take form of bonds, notes, evidences
declaring dividends. of indebtedness or stock in other corporations.
Exception: In declaring stock dividends, the approval of the 3. Stock dividends – refer to the corporation‟s shares of stock.
stockholders representing at least 2/3 of the outstanding capital stock
is required.
Nielsen & Co. vs Lepanto Consolidated 26 scra 540 1968
The judgment of the board of directors in the matter of declaring 1. Pleading and practice; Appeal; Change of theory on appeal not
dividends is conclusive except when they act in bad faith, or for a allowable.-
dishonest purpose or act fraudulently, oppressively, unreasonably or It is the rule, and the settled doctrine, that a party cannot change his
unjustly or abuse of discretion can be shown so as to impair the rights theory on appeal—that is, that a party cannot raise in the appellate
of the complaining stockholders to their just proportion of corporate court any question of law or of fact that was not raised in the court
profits. below or which was not within the issue made by the parties in their
pleadings (Sec. 19, Rule 49, old Rules of Court; Sec. 18 of Revised
The essential test of bad faith is to determine if the policy of the Rules of Court; Hautea v. Magallon, L-20345, Nov. 28, 1964;
directors is dictated by their personal interest rather than the corporate Northern Motors, Inc. v. Prince Line, L-13884, Feb. 29, 1960;
welfare. American Express Co. v. Natividad, 46 Phil. 207; Agoncillo v. Javier,
38 Phil. 424; Molina v. Somes, 24 Phil. 49).
The right of the stockholders to be paid dividends vest as soon as they 2. Civil Law; Contracts; "Agency" and "lease of service" compared
have been lawfully and finally declared by the Board of Directors. and distinguished.-
In both agency and lease of services one of the parties binds himself
No revocation of dividend may be had unless it has not been officially to render some service to the other party. Agency, however, is
communicated to the stockholders or is in the form of stock dividends distinguished from lease of work or services in that the basis of agency
which is revocable at any time prior to distribution. is representation, while in the lease of work or services the basis is
employment. The lessor of services does not represent his employer,
Stock dividends cannot be issued to a person who is not a stockholder. while the agent represents his principal. Agency is a preparatory
(Neilson & Co., Inc. vs. Lepanto Consolidated Mining Co.) contract, as agency "does not stop with the agency because the purpose
is to enter into other contracts." The most characteristic feature of an
Directors are not liable for declaration of dividend contrary to law, agency relationship is the agent's power to bring about business
unless attended with bad faith, gross negligence or willful and relations between his principal and third persons. "The agent is
knowing assent. (Ladia) destined to execute juridical acts (creation, modification or extinction
of relations with .third parties). Lease of services contemplate only
Right to Dividends sec 43 material (non-juridical) acts." (Reyes Puno, An Outline of Philippine
Civil Law, Vol. V, p. 277).
Section 43. Power to declare dividends. - The board of directors of a 3. Civil Law; Obligations and contracts; Moratorium law; Republic
stock corporation may declare dividends out of the unrestricted Act No. 342 not applicable to debts contracted during the war.-
retained earnings which shall be payable in cash, in property, or in Republic Act No. 342 does not apply to debts contracted during the
stock to all stockholders on the basis of outstanding stock held by war and did not lift the moratorium in relation thereto (Uy v. Kalaw
them: Provided, That any cash dividends due on delinquent stock shall Katigbak, L-1830, Dec. 31, 1949; Sison v. Mirasol, L-4711, Oct. 3,
73
1952; Compañia Maritima v. Court of Appeals, L-14949, May 30, Legal Restrictions on Dividends and Other Distributions
1960). Said Rep. Act No. 342, however, modified Executive Order
No. 32 as to pre-war debts, making the protection available only to Declaration and Payment of Dividends
debtors who had war damage claims (Sison v. Mirasol, L-4711, Oct. CIR vs CA GR 108576
3, 1952, cited in Abraham, et al. v. Intestate Estate of Ysmael, et al., 1. Taxation; Courts; Court of Tax Appeals; The findings of facts of a
L-16741, Jan. 31, 1962). special court (CTA) exercising particular expertise on the subject of
4. Corporation law; Shares of stock; Consideration for which shares tax, generally binds the Supreme Court.-
of stock may be issued; A share of stock coming from stock dividends We must emphasize that the application of Sec. 83(b) depends on the
declared cannot be issued to one who is not a stockholder of a special factual circumstances of each case. The findings of facts of a
corporation.- special court (CTA) exercising particular expertise on the subject of
From the provision of Section 16 of the Corporation Law, the tax, generally binds this Court, considering that it is substantially
consideration for which shares of stock may be issued are: (1) cash; similar to the findings of the CA which is the final arbiter of questions
(2) property; and (3) undistributed profits. Shares of stock are given of facts. The issue in this case does not only deal with facts but
the special name "stock dividends" only if they are issued in lieu of whether the law applies to a particular set of facts. Moreover, this
undistributed profits. If shares of stocks are issued in exchange of cash Court is not necessarily bound by the lower courts’ conclusions of law
or property then those shares do not fall under the category of "stock drawn from such facts.
dividends". A corporation may legally issue shares of stock in 2. Taxation; Withholding Tax System; Tax Amnesty; A person
consideration of services rendered to it by a person not a stockholder, assessed for deficiency withholding tax under Sections 53 and 54 of
or in payment of its indebtedness. It is the shares of stock ,that are the 1939 Tax Code is being held liable in its capacity as a withholding
originally issued by the corporation and forming part of the capital that agent and not in its personality as a taxpayer.-
can be exchanged for cash or services rendered, or property; that is, if May the withholding agent, in such capacity, be deemed a taxpayer
the corporation has original shares of stock unsold or unsubscribed, for it to avail of the amnesty? An income taxpayer covers all persons
either coming from the original capitalization or f rom the increased who derive taxable income. ANSCOR was assessed by petitioner for
capitalization. Those shares of stock may be issued to a person who is deficiency withholding tax under Sections 53 and 54 of the 1939 Code.
not a stockholder, or to a person already a stockholder in exchange for As such, it is being held liable in its capacity as a withholding agent
services rendered or for cash or property. But a share of stock coming and not in its personality as a taxpayer.
from stock dividends declared cannot be issued to one who is not a 3. Taxation; Withholding Tax System; Tax Amnesty; The
stockholder of a corporation. withholding agent is merely a tax collector, not a taxpayer and is not
5. Corporation law; "Stock dividend"; "Dividend"; Concept and protected by the amnesty under Presidential Decree 67.-
nature- In the operation of the withholding tax system, the withholding agent
A "stock dividend" is any dividend payable in shares of stock of the is the payor, a separate entity acting no more than an agent of the
corporation declaring or authorizing such dividend. It is, as what the government for the collection of the tax in order to ensure its
term itself implies, a distribution of the shares of stock of the payments; the payer is the taxpayer—he is the person subject to tax
corporation among the stockholders as dividends. A stock dividend of impose by law; and the payee is the taxing authority. In other words,
a corporation is a dividend paid in shares of stock instead of cash, and the withholding agent is merely a tax collector, not a taxpayer. Under
is properly payable only out of surplus profits (Sec. 16, Corporation the withholding system, however, the agent-payor becomes a payee
Law). So, a stock dividend is actually two things: (1) a dividend, and by fiction of law. His (agent) liability is direct and independent from
(2) the enforced use of the dividend money to purchase additional the taxpayer, because the income tax is still imposed on and due from
shares of stock at par. (Words and Phrases, p. 270). When a the latter. The agent is not liable for the tax as no wealth flowed into
corporation issues stock dividends, it shows that the corporation's him—he earned no income. The Tax Code only makes the agent
accumulated profits have been capitalized instead of distributed to the personally liable for the tax arising from the breach of its legal duty to
stockholders or retained as surplus available f or distribution, in withhold as distinguished from its duty to pay tax since: “the
money or kind, should opportunity offer. Far from being a realization government’s cause of action against the withholding agent is not for
of profits for the stockholder, it tends rather ,to postpone said the collection of income tax, but for the enforcement of the
realization, in ,that the fund represented by the new stock has been withholding provision of Section 53 of the Tax Code, compliance with
transferred from surplus to assets and no longer available for actual which is imposed on the withholding agent and not upon the
distribution (Fisher v. Trinidad, 43 Phil. 973). Thus, it is apparent that taxpayer.” Not being a taxpayer, a withholding agent, like ANSCOR
stock dividends are issued only to stockholders. This is so because in this transaction, is not protected by the amnesty under the decree.
only stockholders are entitled to dividends. They are the only ones 4. Taxation; Withholding Tax System; Tax Amnesty; Statutory
who have a right to a proportional share in that part of the surplus Construction; Tax amnesty, much like a tax exemption, is never
which is declared as dividends. A stock dividend really adds nothing favored nor presumed in law and if granted by a statute, the terms of
to the interest of the stockholder; the proportional interest of each the amnesty like that of a tax exemption must be construed strictly
stockholder remains the same (Towne v. Eisner, 62 L. Ed. 372). If a against the taxpayer and liberally in favor of the taxing authority.-
stockholder is deprived of his stock dividends—and this happens if the Codal provisions on withholding tax are mandatory and must be
shares of stock f orming part of the stock dividends are issued to a complied with by the withholding agent. The taxpayer should not
nonstockholder—then the proportion of the stockholder's interest answer for the non-performance by the withholding agent of its legal
changes radically. Stock dividends are civil fruits of the original duty to withhold unless there is collusion or bad faith. The former
investment, and to the owners of the shares belong the civil fruits (Art. could not be deemed to have evaded the tax had the withholding agent
441, Civil Code). The term "dividend" both in the technical sense and performed its duty. This could be the situation for which the amnesty
its ordinary acceptation, is that part or portion of the profits of the decree was intended. Thus, to curtail tax evasion and give tax evaders
enterprise which the corporation, by its governing agents, sets apart a chance to reform, it was deemed administratively feasible to grant
for ratable division among the holders of the capital stock. It means tax amnesty in certain instances. In addition, a “tax amnesty, much
the fund actually set aside, and declared by the directors of the like a tax exemption, is never favored nor presumed in law and if
corporation as a dividend, and duly ordered by the directory, or by the granted by a statute, the terms of the amnesty like that of a tax
stockholders, at a corporate meeting, to be divided or distributed exemption must be construed strictly against the taxpayer and liberally
among the stockholders according to their respective interests (7 in favor of the taxing authority.” The rule on strictissimi juris equally
Thompson on Corporations 134135) applies. So that, any doubt in the application of an amnesty law/decree
should be resolved in favor of the taxing authority.
74
5. Taxation; Corporation Law; Stock Dividends; Stock dividends, 8. Taxation; Corporation Law; Stock Dividends; Requisites for
strictly speaking, represent capital and do not constitute income to its Application of Exempting Clause of Section 83(b) of the 1939 Tax
recipient—in a loose sense, stock dividends issued by the corporation, Code.-
are considered unrealized gain, and cannot be subjected to income tax For the exempting clause of Section 83(b) to apply, it is indispensable
until that gain has been realized.- that: (a) there is redemption or cancellation; (b) the transaction
Having been derived from a foreign law, resort to the jurisprudence of involves stock dividends; and (c) the “time and manner” of the
its origin may shed light. Under the US Revenue Code, this provision transaction makes it “essentially equivalent to a distribution of taxable
originally referred to “stock dividends” only, without any exception. dividends.” Of these, the most important is the third.
Stock dividends, strictly speaking, represent capital and do not 9. Taxation; Corporation Law; Stock Dividends; Words and
constitute income to its recipient. So that the mere issuance thereof is Phrases; “Redemption of Stocks,” Explained.-
not yet subject to income tax as they are nothing but an “enrichment Redemption is repurchase, a reacquisition of stock by a corporation
through increase in value of capital investment.” As capital, the stock which issued the stock in exchange for property, whether or not the
dividends postpone the realization of profits because the “fund acquired stock is cancelled, retired or held in the treasury. Essentially,
represented by the new stock has been transferred from surplus to the corporation gets back some of its stock, distributes cash or property
capital and no longer available for actual distribution.” Income in tax to the shareholder in payment for the stock, and continues in business
law is “an amount of money coming to a person within a specified as before. The redemption of stock dividends previously issued is used
time, whether as payment for services, interest, or profit from as a veil for the constructive distribution of cash dividends. In the
investment.” It means cash or its equivalent. It is gain derived and instant case, there is no dispute that ANSCOR redeemed shares of
severed from capital, from labor or from both combined—so that to stocks from a stockholder (Don Andres) twice (28,000 and 80,000
tax a stock dividend would be to tax a capital increase rather than the common shares). But where did the shares redeemed come from? If
income. In a loose sense, stock dividends issued by the corporation, its source is the original capital subscriptions upon establishment of
are considered unrealized gain, and cannot be subjected to income tax the corporation or from initial capital investment in an existing
until that gain has been realized. Before the realization, stock enterprise, its redemption to the concurrent value of acquisition may
dividends are nothing but a representation of an interest in the not invite the application of Sec. 83(b) under the 1939 Tax Code, as it
corporate properties. As capital, it is not yet subject to income tax. It is not income but a mere return of capital. On the contrary, if the
should be noted that capital and income are different. Capital is wealth redeemed shares are from stock dividend declarations other than as
or fund; whereas income is profit or gain or the flow of wealth. The initial capital investment, the proceeds of the redemption is additional
determining factor for the imposition of income tax is whether any wealth, for it is not merely a return of capital but a gain thereon.
gain or profit was derived from a transaction. 10. Taxation; Corporation Law; Stock Dividends; Words and
6. Taxation; Corporation Law; Stock Dividends; Depending on the Phrases; Trust Fund Doctrine; In the absence of evidence to the
circumstances, the proceeds of redemption of stock dividends are contrary, the Tax Code presumes that every distribution of corporate
essentially distribution of cash dividends, which when paid becomes property, in whole or in part, is made out of corporate profits, such as
the absolute property of the stockholder, who, having realized gain stock dividends; Under the trust fund doctrine, the capital stock,
from that redemption, cannot escape income tax.- property and other assets of the corporation are regarded as equity in
Although redemption and cancellation are generally considered trust for the payment of the corporate creditors.-
capital transactions, as such, they are not subject to tax. However, it It is not the stock dividends but the proceeds of its redemption that
does not necessarily mean that a shareholder may not realize a taxable may be deemed as taxable dividends. Here, it is undisputed that at the
gain from such transactions. Simply put, depending on the time of the last redemption, the original common shares owned by the
circumstances, the proceeds of redemption of stock dividends are estate were only 25,247.5. This means that from the total of 108,000
essentially distribution of cash dividends, which when paid becomes shares redeemed from the estate, the balance of 82,752.5 (108,000 less
the absolute property of the stockholder. Thereafter, the latter becomes 25,247.5) must have come from stock dividends. Besides, in the
the exclusive owner thereof and can exercise the freedom of choice. absence of evidence to the contrary, the Tax Code presumes that every
Having realized gain from that redemption, the income earner cannot distribution of corporate property, in whole or in part, is made out of
escape income tax. corporate profits, such as stock dividends. The capital cannot be
7. Taxation; Corporation Law; Stock Dividends; Criteria in distributed in the form of redemption of stock dividends without
Determining Whether Amount Distributed in the Redemption of Stock violating the trust fund doctrine—wherein the capital stock, property
Dividends Should be Treated as Equivalent of “Taxable Dividend.”- and other assets of the corporation are regarded as equity in trust for
As qualified by the phrase “such time and in such manner,” the the payment of the corporate creditors. Once capital, it is always
exception was not intended to characterize as taxable dividend every capital. That doctrine was intended for the protection of corporate
distribution of earnings arising from the redemption of stock creditors.
dividends. So that, whether the amount distributed in the redemption 11. Taxation; Corporation Law; Stock Dividends; Words and
should be treated as the equivalent of a “taxable dividend” is a Phrases; Net Effect Test; The time alone that lapsed from the issuance
question of fact, which is determinable on “the basis of the particular to the redemption is not a sufficient indicator to determine taxability—
facts of the transaction in question.” No decisive test can be used to it is necessary to determine the “net effect” of the transaction between
determine the application of the exemption under Section 83(b). The the shareholder-income taxpayer and the acquiring (redeeming)
use of the words “such manner” and “essentially equivalent” negative corporation; The “net effect” test is not evidence or testimony to be
any idea that a weighted formula can resolve a crucial issue—Should considered—it is rather an inference to be drawn or a conclusion to be
the distribution be treated as taxable dividend. On this aspect, reached.-
American courts developed certain recognized criteria, which includes With respect to the third requisite, ANSCOR redeemed stock
the following: 1) the presence or absence of real business purpose, 2) dividends issued just 2 to 3 years earlier. The time alone that lapsed
the amount of earnings and profits available for the declaration of a from the issuance to the redemption is not a sufficient indicator to
regular dividend and the corporation’s past record with respect to the determine taxability. It is a must to consider the factual circumstances
declaration of dividends, 3) the effect of the distribution as compared as to the manner of both the issuance and the redemption. The “time”
with the declaration of regular dividend, 4) the lapse of time between element is a factor to show a device to evade tax and the scheme of
issuance and redemption, 5) the presence of a substantial surplus and cancelling or redeeming the same shares is a method usually adopted
a generous supply of cash which invites suspicion as does a meager to accomplish the end sought. Was this transaction used as a
policy in relation both to current earnings and accumulated surplus. “continuing plan,” “device” or “artifice” to evade payment of tax? It
is necessary to determine the “net effect” of the transaction between
75
the share-holder-income taxpayer and the acquiring (redeeming) “redeemed shares have been issued by a corporation bona fide” bears
corporation. The “net effect” test is not evidence or testimony to be no relevance in determining the non-taxability of the proceeds of
considered; it is rather an inference to be drawn or a conclusion to be redemption. ANSCOR, relying heavily and applying said cases,
reached. It is also important to know whether the issuance of stock argued that so long as the redemption is supported by valid corporate
dividends was dictated by legitimate business reasons, the presence of purposes the proceeds are not subject to tax. The adoption by the
which might negate a tax evasion plan. courts below of such argument is misleading if not misplaced. A
12. Taxation; Corporation Law; Stock Dividends; The issuance of review of the cited American cases shows that the presence or absence
stock dividends and its subsequent redemption must be separate, of “genuine business purposes” may be material with respect to the
distinct, and not related, for the redemption to be considered a issuance or declaration of stock dividends but not on its subsequent
legitimate tax scheme.- redemption. The issuance and the redemption of stocks are two
The issuance of stock dividends and its subsequent redemption must different transactions. Although the existence of legitimate corporate
be separate, distinct, and not related, for the redemption to be purposes may justify a corporation's acquisition of its own shares
considered a legitimate tax scheme. Redemption cannot be used as a under Section 41 of the Corporation Code, such purposes cannot
cloak to distribute corporate earnings. Otherwise, the apparent excuse the stock-holder from the effects of taxation arising from the
intention to avoid tax becomes doubtful as the intention to evade redemption. If the issuance of stock dividends is part of a tax evasion
becomes manifest. It has been ruled that: “[A]n operation with no plan and thus, without legitimate business reasons, the redemption
business or corporate purpose—is a mere devise which put on the form becomes suspicious which may call for the application of the
of a corporate reorganization as a disguise for concealing its real exempting clause. The substance of the whole transaction, not its
character, and the sole object and accomplishment of which was the form, usually controls the tax consequences.
consummation of a preconceived plan, not to reorganize a business or 17. Taxation; Corporation Law; Stock Dividends; Although a
any part of a business, but to transfer a parcel of corporate shares to a corporation under certain exceptions, has the prerogative when to
stockholder.” issue dividends, yet when no cash dividends was issued for about three
13. Taxation; Corporation Law; Stock Dividends; It is the “net effect decades, this circumstance negates the legitimacy of the corporation’s
rather than the motives and plans of the taxpayer or his corporation” alleged purposes of authorizing redemption to reduce foreign
that is the fundamental guide in administering Sec. 83(b).- exchange remittance in case cash dividends are declared.-
ANSCOR invoked two reasons to justify the redemptions—(1) the The Board Resolutions authorizing the redemptions state only one
alleged “filipinization” program and (2) the reduction of foreign purpose—reduction of foreign exchange remittances in case cash
exchange remittances in case cash dividends are declared. The Court dividends are declared. Not even this purpose can be given credence.
is not concerned with the wisdom of these purposes but on their Records show that despite the existence of enormous corporate profits
relevance to the whole transaction which can be inferred from the no cash dividend was ever declared by ANSCOR from 1945 until the
outcome thereof. Again, it is the “net effect rather than the motives BIR started making assessments in the early 1970’s. Although a
and plans of the taxpayer or his corporation” that is the fundamental corporation under certain exceptions, has the prerogative when to
guide in administering Sec. 83(b). This tax provision is aimed at the issue dividends, yet when no cash dividends was issued for about three
result. It also applies even if at the time of the issuance of the stock decades, this circumstance negates the legitimacy of ANSCOR’s
dividend, there was no intention to redeem it as a means of distributing alleged purposes.
profit or avoiding tax on dividends. 18. Taxation; Corporation Law; Stock Dividends; A “taxable
14. Taxation; Corporation Law; Stock Dividends; The existence of dividend” under Section 83(b) is part of the “entire income” subject to
legitimate business purposes in support of the redemption of stock tax under Section 22 in relation to Section 21 of the 1939 Tax Code.-
dividends is immaterial in income taxation—it has no relevance in After considering the manner and the circumstances by which the
determining “dividend equivalence.”- issuance and redemption of stock dividends were made, there is no
The existence of legitimate business purposes in support of the other conclusion but that the proceeds thereof are essentially
redemption of stock dividends is immaterial in income taxation. It has considered equivalent to a distribution of taxable dividends. As
no relevance in determining “dividend equivalence.” Such purposes “taxable dividend” under Section 83(b), it is part of the “entire
may be material only upon the issuance of the stock dividends. The income” subject to tax under Section 22 in relation to Section 21 of
test of taxability under the exempting clause, when it provides “such the 1939 Code. Moreover, under Section 29(a) of said Code, dividends
time and manner” as would make the redemption “essentially are included in “gross income.” As income, it is subject to income tax
equivalent to the distribution of a taxable dividend,” is whether the which is required to be withheld at source. The 1997 Tax Code may
redemption resulted into a flow of wealth. If no wealth is realized from have altered the situation but it does not change this disposition.
the redemption, there may not be a dividend equivalence treatment. In 19. Taxation; Corporation Law; Common and Preferred Stocks; The
the metaphor of Eisner v. Macomber, income is not deemed “realized” exchange of common stocks with preferred stocks, or preferred for
until the fruit has fallen or been plucked from the tree. common or a combination of either for both, may not produce a
15. Taxation; Corporation Law; Stock Dividends; Elements in the recognized gain or loss, so long as the provisions of Section 83(b) is
Imposition of Income Tax.- not applicable.-
The three elements in the imposition of income tax are: (1) there must Exchange is an act of taking or giving one thing for another involving
be gain or profit, (2) that the gain or profit is realized or received, reciprocal transfer and is generally considered as a taxable transaction.
actually or constructively, and (3) it is not exempted by law or treaty The exchange of common stocks with preferred stocks, or preferred
from income tax. Any business purpose as to why or how the income for common or a combination of either for both, may not produce a
was earned by the taxpayer is not a requirement. Income tax is recognized gain or loss, so long as the provisions of Section 83(b) is
assessed on income received from any property, activity or service that not applicable. This is true in a trade between two (2) persons as well
produces the income because the Tax Code stands as an indifferent as a trade between a stockholder and a corporation. In general, this
neutral party on the matter of where income comes from. trade must be parts of merger, transfer to controlled corporation,
16. Taxation; Corporation Law; Stock Dividends; The issuance and corporate acquisitions or corporate reorganizations. No taxable gain
the redemption of stocks are two different transactions; The substance or loss may be recognized on exchange of property, stock or securities
of the whole transaction, not its form, usually controls the tax related to reorganizations.
consequences.- 20. Taxation; Corporation Law; Common and Preferred
The ruling in the American cases cited and relied upon by ANSCOR Stocks; Words and Phrases; Doctrine of Equality of Shares; A
that “the redeemed shares are the equivalent of dividend only if the common stock represents the residual ownership interest in the
shares were not issued for genuine business purposes,” or the corporation, a basic class of stock ordinarily and usually issued
76
without extraordinary rights or privileges and entitles the shareholder If a stockholder, in a stock corporation subscribes to a certain number
to a pro rata division of profits; Preferred stocks are those which entitle of shares of stock, and makes partial payments for which he is issued
the shareholder to some priority on dividends and asset distribution; certificates of stock, he is entitled to vote the latter, notwithstanding
Under the doctrine of equality of shares, all stocks issued by the the fact that he has not paid the balance of his subscription which has
corporation are presumed equal with the same privileges and been called for payment or declared delinquent.
liabilities, provided that the Articles of Incorporation is silent on such 2. Corporations; Previous payments applied to capital may not later be
differences.- applied to interest on unpaid balance of subscription.-
Reclassification of shares does not always bring any substantial If a stockholder subscribes to a certain number of shares of stock and
alteration in the subscriber’s proportional interest. But the exchange is makes partial payment only, which is applied to corresponding stocks
different—there would be a shifting of the balance of stock features, issued to him, but is declared delinquent as to the rest, with interest, it
like priority in dividend declarations or absence of voting rights. Yet is held that previous payments on account of the capital, may not be
neither the reclassification nor exchange per se, yields realize income first applied to interest, thus diminishing the voting power of the
for tax purposes. A common stock represents the residual ownership snares of stock already paid. In other words, if the entire subscribed
interest in the corporation. It is a basic class of stock ordinarily and shares of stock are not paid, the paid shares of stock may not be
usually issued without extraordinary rights or privileges and entitles deprived of the right to vote, until the entire subscribed shares of stock
the shareholder to a pro rata division of profits. Preferred stocks are are fully paid, including interest.
those which entitle the shareholder to some priority on dividends and 3. Estoppel; Cannot be based on acts prohibited by law.-
asset distribution. Both shares are part of the corporation’s capital Estoppel cannot be predicated on acts which are prohibited by law or
stock. Both stockholders are no different from ordinary investors who are against public policy.
take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to share in the Joint Ownership Sec 56
profits and losses of the enterprise. Moreover, under the doctrine of
equality of shares—all stocks issued by the corporation are presumed Section 56. Voting in case of joint ownership of stock. - In case of
equal with the same privileges and liabilities, provided that the shares of stock owned jointly by two or more persons, in order to vote
Articles of Incorporation is silent on such differences. the same, the consent of all the co-owners shall be necessary, unless
there is a written proxy, signed by all the co-owners, authorizing one
Liability for Improper Dividends and Distributions or some of them or any other person to vote such share or shares:
Steinberg vs Velasco 52 Phil 953 1929 Provided, That when the shares are owned in an "and/or" capacity by
the holders thereof, any one of the joint owners can vote said shares
WHAT CREDITORS MAY ASSUME.—The creditors of a or appoint a proxy therefor. (
corporation have the right to assume that so long as there are debts and
liabilities, the board of directors of the corporation will not use its Pledgor, Mortgagor and Administrators Sec 55
assets to purchase its own stock or to declare dividends to its
stockholders when the corporation is insolvent. Section 55. Right to vote of pledgors, mortgagors, and administrators.
- In case of pledged or mortgaged shares in stock corporations, the
DUTIES OF DIRECTORS.—The directors of a corporation are bound pledgor or mortgagor shall have the right to attend and vote at
to care for its property and manage its affairs in good faith, and for a meetings of stockholders, unless the pledgee or mortgagee is expressly
violation of their duties resulting in waste of its assets or injury to its given by the pledgor or mortgagor such right in writing which is
property, they are liable to account the same as any other trustee. recorded on the appropriate corporate books. (n)

LIABILITY OF DIRECTORS.—If the directors of a corporation do Executors, administrators, receivers, and other legal representatives
acts clearly beyond their power, by reason of which a loss ensued, or duly appointed by the court may attend and vote in behalf of the
dispose of its property without authority, they will be required to make stockholders or members without need of any written proxy.
good the loss out of their private estate.
Pooling Agreements
IGNORANCE IS NO DEFENSE.—A director of a corporation is
bound to exercise ordinary skill and judgment and cannot excuse his Control and Board Discretion sec 100
negligence or unlawf ul acts on the ground of ignorance or
inexperience. Section 100. Agreements by stockholders. -

Transfer of Investment Securities 1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
Any security or its derivatives the sale or transfer of which, by law, is stockholders, shall survive the incorporation of such corporation and
under the supervision and regulation of the Office of the Insurance shall continue to be valid and binding between and among such
Commission, HLURB, or BIR. stockholders, if such be their intent, to the extent that such agreements
are not inconsistent with the articles of incorporation, irrespective of
Ownership of Securities where the provisions of such agreements are contained, except those
Right to Issuance sec 64 required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and
Section 64. Issuance of stock certificates. - No certificate of stock shall signed by the parties thereto, may provide that in exercising any voting
be issued to a subscriber until the full amount of his subscription rights, the shares held by them shall be voted as therein provided, or
together with interest and expenses (in case of delinquent shares), if as they may agree, or as determined in accordance with a procedure
any is due, has been paid. agreed upon by them.
3. No provision in any written agreement signed by the stockholders,
Baltazar vs Lingayen Gulf 14 scra 522 relating to any phase of the corporate affairs, shall be invalidated as
1. Corporations; Stockholder’s right to vote issued stocks although between the parties on the ground that its effect is to make them
balance of subscription unpaid.- partners among themselves.

77
4. A written agreement among some or all of the stockholders in a allowed to operate in the Philippines unless he secures a license from
close corporation shall not be invalidated on the ground that it so the Securities and Exchange Commission and pays a fee as may be
relates to the conduct of the business and affairs of the corporation as fixed by the Commission, which shall be renewable annually:
to restrict or interfere with the discretion or powers of the board of Provided, That a stock corporation is not precluded from performing
directors: Provided, That such agreement shall impose on the or making transfer of its own stocks, in which case all the rules and
stockholders who are parties thereto the liabilities for managerial acts regulations imposed on stock transfer agents, except the payment of a
imposed by this Code on directors. license fee herein provided, shall be applicable. (51a and 32a; P.B. No.
5. To the extent that the stockholders are actively engaged in the 268.)
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to Chua Guan vs Samahang magsasaka 62 Phil 472
each other and among themselves. Said stockholders shall be
personally liable for corporate torts unless the corporation has 1. CORPORATIONS; MORTGAGE OF SHARES OF STOCK.-
obtained reasonably adequate liability insurance. The registration of the chattel mortgage in the office of the corporation
was not necessary and had no legal effect. (Monserrat vs. Ceron, 58
Stock and Transfer Book sec 74 Phil., 469.) The long mooted question as to whether or not shares of a
corporation could be hypothecated by placing a chattel mortgage on
Section 74. Books to be kept; stock transfer agent. - Every corporation the certificate representing such shares we now regard as settled by
shall keep and carefully preserve at its principal office a record of all the case above cited of Monserrat vs. Ceron.
business transactions and minutes of all meetings of stockholders or 2. CORPORATIONS; ID; SITUS OF SHARES.-
members, or of the board of directors or trustees, in which shall be set It is a common but not accurate generalization that the situs of shares
forth in detail the time and place of holding the meeting, how of stock is at the domicile of the owner. The term situs is not one of
authorized, the notice given, whether the meeting was regular or fixed or invariable meaning or usage. The situs of shares of stock for
special, if special its object, those present and absent, and every act some purposes may be at the domicile of the owner and for others at
done or ordered done at the meeting. Upon the demand of any director, the domicile of the corporation; and even elsewhere. (Cf. Vidal vs.
trustee, stockholder or member, the time when any director, trustee, South American Securities Co., 276 Fed., 855; Black Eagle Min. Co.
stockholder or member entered or left the meeting must be noted in vs. Conroy, 94 Okla., 199; 221 Pac., 425; Norrie vs. Kansas City
the minutes; and on a similar demand, the yeas and nays must be taken Southern Ry. Co., 7 Fed. [2d], 158.)
on any motion or proposition, and a record thereof carefully made. 3. ID; ID; ID; DOMICILE.-
The protest of any director, trustee, stockholder or member on any It is a general rule that for purposes of execution, attachment and
action or proposed action must be recorded in full on his demand. garnishment, it is not the domicile of the owner of a certificate but the
domicile of the corporation which is decisive. (Fletcher, Cyclopedia
The records of all business transactions of the corporation and the of the Law of Private Corporations, vol. 11, paragraph 5106; Cf.
minutes of any meetings shall be open to inspection by any director, sections 430 and 450, Code of Civil Procedure.)
trustee, stockholder or member of the corporation at reasonable hours 4. ID; ID; ID; ACT No. 1508, SECTION 4, CONSTRUED.-
on business days and he may demand, in writing, for a copy of By analogy with the foregoing and considering the ownership of
excerpts from said records or minutes, at his expense. shares in a corporation as property distinct from the certificates which
are merely the evidence of such ownership, it is a reasonable
Any officer or agent of the corporation who shall refuse to allow any construction of section 4 of Act No. 1508 to hold that the property in
director, trustees, stockholder or member of the corporation to the shares may be deemed to be situated in the province in which the
examine and copy excerpts from its records or minutes, in accordance corporation has its principal office or place of business. If this
with the provisions of this Code, shall be liable to such director, province is also the province of the owner's domicile, a single
trustee, stockholder or member for damages, and in addition, shall be registration is sufficient. If not, the chattel mortgage should be
guilty of an offense which shall be punishable under Section 144 of registered both at the owner's domicile and in the province where the
this Code: Provided, That if such refusal is made pursuant to a corporation has itsprincipal office or place of business. In these sense
resolution or order of the board of directors or trustees, the liability the property mortgaged is not the certificate but the participation and
under this section for such action shall be imposed upon the directors share of the owner in the assets of the corporation.
or trustees who voted for such refusal: and Provided, further, That it 5. ID; ID; ASSIGNMENT AND DELIVERY OF CERTIFICATE.-
shall be a defense to any action under this section that the person The only safe way to accomplish the hypothecation of shares of stock
demanding to examine and copy excerpts from the corporation's of a Philippine corporation is for the creditor to insist on the
records and minutes has improperly used any information secured assignment and delivery of the certificate and to obtain the transfer of
through any prior examination of the records or minutes of such the legal title to him on the books of the corporation by the
corporation or of any other corporation, or was not acting in good faith cancellation of the certificate and the issuance of a new one to him.
or for a legitimate purpose in making his demand. 6. ID; ID; ACT No. 1459, SECTION 35, CONSTRUED.-
Section 35 of the Corporation Law (Act No. 1459) enacts that shares
Stock corporations must also keep a book to be known as the "stock of stock "may be transferred by delivery of the certificate endorsed by
and transfer book", in which must be kept a record of all stocks in the the owner or his attorney in fact or other person legally authorized to
names of the stockholders alphabetically arranged; the installments make the transfer." The use of the verb "may" does not exclude the
paid and unpaid on all stock for which subscription has been made, possibility that a transfer may be made in a different manner, thus
and the date of payment of any installment; a statement of every leaving the creditor in an insecure position even though he has the
alienation, sale or transfer of stock made, the date thereof, and by and certificate in his possession. The shares still standing in the name of
to whom made; and such other entries as the by-laws may prescribe. the debtor on the books of the corporation will be liable to seizure by
The stock and transfer book shall be kept in the principal office of the attachment or levy on execution at the instance of other creditors. (Cf.
corporation or in the office of its stock transfer agent and shall be open Uy Piaoco vs. McMicking, 10 Phil., 286, and Uson vs. Diosomito, 61
for inspection by any director or stockholder of the corporation at Phil., 535.) This unsatisfactory state of our law is well known to the
reasonable hours on business days. bench and bar. (Cf. Fisher, The Philippine Law of Stock Corporations,
pages 163-168.)
No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be Monserat vs Ceran 58 Phil 469
78
attorney-in-fact or other person legally authorized to make the
1. CORPORATIONS; TRANSFER OF POSSESSION AND transfer. No transfer, however, shall be valid, except as between the
OWNERSHIP OF SHARES OF STOCK; NOTATION OF parties, until the transfer is recorded in the books of the corporation
MORTGAGE ON SHARES OF STOCK.- showing the names of the parties to the transaction, the date of the
Inasmuch as section 35 of the Corporation Law does not require the transfer, the number of the certificate or certificates and the number of
notation upon the books of a corporation of transactions relating to its shares transferred.
shares, except the transfer of the possession and ownership thereof, as
a necessary requisite to the validity of such transfer, the .notation upon No shares of stock against which the corporation holds any unpaid
the said books of the corporation of a chattel mortgage constituted on claim shall be transferable in the books of the corporation. (35)
such shares is not necessary to its validity.
RESTRICTIONS AND PREFERENCES ON TRANSFER OF
Lost or Destroyed Certificates sec 73 SHARES

Section 73. Lost or destroyed certificates. - The following procedure General rule: Corporations may or may not provide for restrictions and
shall be followed for the issuance by a corporation of new certificates preferences regarding the transfer, sale or assignment of shares in the
of stock in lieu of those which have been lost, stolen or destroyed: articles of incorporation. It is discretionary.

1. The registered owner of a certificate of stock in a corporation or his Exception: Close corporations are required to subject their shares to
legal representative shall file with the corporation an affidavit in specified restrictions as required in Sec. 96.
triplicate setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of shares General rule: Restrictions or preferences must be contained in the
represented by such certificate, the serial number of the certificate and articles of incorporation and in all stock certificates to be issued by the
the name of the corporation which issued the same. He shall also corporation.
submit such other information and evidence which he may deem Exception: In close corporations, such restrictions and preferences
necessary; must also be embodied in the by-laws.

2. After verifying the affidavit and other information and evidence NO TRANSFER CLAUSE
with the books of the corporation, said corporation shall publish a
notice in a newspaper of general circulation published in the place No transfer of stock or interest which will reduce the ownership of
where the corporation has its principal office, once a week for three Filipino citizens to less than the required percentage of the capital
(3) consecutive weeks at the expense of the registered owner of the stock as provided by existing laws shall be allowed or permitted to be
certificate of stock which has been lost, stolen or destroyed. The notice recorded in the books of the corporation and this restriction shall be
shall state the name of said corporation, the name of the registered indicated in all of the stock certificates to be issued by the corporation.
owner and the serial number of said certificate, and the number of
shares represented by such certificate, and that after the expiration of GROUNDS FOR DISAPPROVAL
one (1) year from the date of the last publication, if no contest has been
presented to said corporation regarding said certificate of stock, the Only substantial and not strict compliance is required.
right to make such contest shall be barred and said corporation shall
cancel in its books the certificate of stock which has been lost, stolen Grounds for disapproval:
or destroyed and issue in lieu thereof new certificate of stock, unless 1. The articles of incorporation or any amendment thereto is not
the registered owner files a bond or other security in lieu thereof as substantially in accordance with the form prescribed;
may be required, effective for a period of one (1) year, for such amount 2. The purpose or purposes of the corporation are patently
and in such form and with such sureties as may be satisfactory to the unconstitutional, illegal, immoral, or contrary to government rules and
board of directors, in which case a new certificate may be issued even regulations;
before the expiration of the one (1) year period provided herein: 3. The Treasurer‟s Affidavit concerning the amount of capital stock
Provided, That if a contest has been presented to said corporation or if subscribed and/or paid is false;
an action is pending in court regarding the ownership of said 4. The percentage of ownership of the capital stock to be owned by
certificate of stock which has been lost, stolen or destroyed, the citizens of the Philippines has not been complied with as required by
issuance of the new certificate of stock in lieu thereof shall be existing laws or the Constitution,
suspended until the final decision by the court regarding the ownership 5. The articles of incorporation of corporations subject to government
of said certificate of stock which has been lost, stolen or destroyed. supervision are not accompanied by a favorable recommendation from
the appropriate government agency.
Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any The grounds are not exclusive.
corporation which shall have issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the procedure above-described. Uson vs Diosomito 61 Phil 535
(R.A. 201a)
1. CORPORATIONS; UNREGISTERED TRANSFER OF SHARES
Transfer of Securities OF STOCK-
Transfer of Shareholding sec 63 The right of the owner of the shares of stock of a Philippine
corporation to transfer the same by delivery of the certificate, whether
Section 63. Certificate of stock and transfer of shares. - The capital it be regarded as statutory or common law right, is limited and
stock of stock corporations shall be divided into shares for which restricted by the express provision that "no transfer, however, shall be
certificates signed by the president or vice president, countersigned by valid, except as between the parties, until the transfer is entered and
the secretary or assistant secretary, and sealed with the seal of the noted upon the books of the corporation." Therefore, an attachment
corporation shall be issued in accordance with the by-laws. Shares of lien prevails over a prior unregistered bona, fide stock transfer.
stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his Escano vs Filipinas Mining 74 Phil 711
79
obligation on the part of the corporation to recognize such rights as it
1. Corporations; Recording of Transfer of Unissued Shares Heldi in is mandated by law to recognize arises.
Escrow; Section 35 of Corporation Law.- 2. Corporation Law; Corporation Code; Shares of Stock; Transfer of
—Held: Section 35 of the Corporation Law, which requires the Shares; Registration;Mandamus; A corporate secretary may not be
registration of transfers of shares of stock upon the books of the compelled to issue stock certificates without such registration.-
corporation as a condition precedent to their validity against the In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that
corporation and third parties, is also applicable to unissued shares held a mere indorsement by the supposed owners of the stock, in the
by the corporation in escrow. absence of express instructions from them, cannot be the basis of an
2. Id.; Id.; Laches in Enforcement of Levy.- action for mandamus and that the rights of the parties have to be
—We find no factual basis for the alleged laches and abandonment. threshed out in an ordinary action. That Hager and Rivera involved
The trial court found that the secretary of the defendant Filipinas petitions for mandamus to compel the registration of the transfer,
Mining Corporation had repeatedly promised the plaintiff that he while this case is one for issuance of stock, is of no moment. It has
would notify the latter as soon as the escrow shares pertaining to been made clear, thus far, that before a transferee may ask for the
Silverio Salvosa were released so that he (plaintiff) might take the issuance of stock certificates, he must first cause the registration of the
proper action for the execution of his judgment. The Filipinas Mining transfer and thereby enjoy the status of a stockholder insofar as the
Corporation having advised the sheriff that it was holding the escrow corporation is concerned. A corporate secretary may not be compelled
shares of the judgment debtor Silverio Salvosa, the plaintiff as to register transfers of shares on the basis merely of an indorsement of
execution creditor had the right to wait for the release or issuance of stock certificates. With more reason, in our view, a corporate secretary
said shares before having the same sold at public auction, so long as may not be compelled to issue stock certificates without such
the period of five years within which to execute his judgment had not registration.
yet lapsed. Moreover, the judgment itself provided "that the escrow 3. Corporation Law; Corporation Code; Shares of Stock; Transfer of
shares shall be transferred and delivered to the plaintiff only after they Shares; Registration;Mandamus; Where the corporate secretary is
have been released by the company," it is stated in the stipulation of under no clear legal duty to issue stock certificates because of the
facts that it was only after the Filipinas Mining Corporation had issued petitioner’s failure to record earlier the transfer of shares, one of the
the escrow shares in favor of the Standard Investment of the elements of the cause of action for mandamus is clearly missing.-
Philippines that the plaintiff Antonio Escano came to know that Jose The test of sufficiency of the facts alleged in a petition is whether or
P. Bengzon and the Standard Investment of the Philippines had not, admitting the facts alleged, the court could render a valid
acquired Silverio Salvosa's rights to the shares in question. judgment thereon in accordance with the prayer of the petition. This
3. Id.; Attachment of Shares of Stock.- test would not be satisfied if, as in this case, not all the elements of a
—Under section 432 of the Code of Civil Procedure (now section 8 of cause of action are alleged in the complaint. Where the corporate
Rule 59), the Filipinas Mining Corporation became liable to the secretary is under no clear legal duty to issue stock certificates because
plaintiff for the shares of stock mentioned in its return to the sheriff of of the petitioner’s failure to record earlier the transfer of shares, one
July 29, 1937, wherein it informed the latter in response to the notice of the elements of the cause of action for mandamus is clearly missing.
of garnishment "that according to its books said Silverio Salvosa was 4. Corporation Law; Corporation Code; Shares of Stock; Transfer of
the registered owner of 1,000 active shares evidenced by certificate of Shares; Issuance of Stock Certificate; One may own shares of
stock No. 235 and about 21,338 unissued shares held in escrow by the corporate stock without possessing a stock certificate.-
defendant Filipinas Mining Corporation." That petitioner was under no obligation to request for the registration
of the transfer is not in issue. It has no pertinence in this controversy.
Ponce vs Alsons Cement GR 139802 2002 One may own shares of corporate stock without possessing a stock
certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion
1. Corporation Law; Corporation Code; Shares of Stock; Transfer of to declare that a certificate of stock is not necessary to render one a
Shares; Registration; Pursuant to the Corporation Code, a transfer of stockholder in a corporation. But a certificate of stock is the tangible
shares of stock not recorded in the stock and transfer book of the evidence of the stock itself and of the various interests therein. The
corporation is non-existent as far as the corporation is concerned.- certificate is the evidence of the holder’ interest and status in the
The Corporation Code states that: SEC. 63. Certificate of stock and corporation, his ownership of the share represented thereby. The
transfer of shares.—The capital stock of stock corporations shall be certificate is in law, so to speak, an equivalent of such ownership. It
divided into shares for which certificates signed by the president or expresses the contract between the corporation and the stockholder,
vice-president, countersigned by the secretary or assistant secretary, but it is not essential to the existence of a share in stock or the creation
and sealed with the seal of the corporation shall be issued in of the relation of shareholder to the corporation. In fact, it rests on the
accordance with the by-laws. Shares of stock so issued are personal will of the stockholder whether he wants to be issued stock certificates,
property and may be transferred by delivery of the certificate or and a stockholder may opt not to be issued a certificate.
certificates indorsed by the owner or his attorney-in-fact or other 5. Corporation Law; Corporation Code; Shares of Stock; Transfer of
person legally authorized to make the transfer. No transfer, however, Shares; Issuance of Stock Certificate; The law does not prescribe a
shall be valid, except as between the parties, until the transfer is period within which the registration should be effected.-
recorded in the books of the corporation so as to show the names of In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466
the parties to the transaction, the date of the transfer, the number of (1958), we held that considering that the law does not prescribe a
the certificate or certificates and the number of shares transferred. No period within which the registration should be effected, the action to
shares of stock against which the corporation holds any unpaid claim enforce the right does not accrue until there has been a demand and a
shall be transferable in the books of the corporation. Pursuant to the refusal concerning the transfer.
foregoing provision, a transfer of shares of stock not recorded in the
stock and transfer book of the corporation is non-existent as far as the Tan vs SEC GR 95696 1992
corporation is concerned. As between the corporation on the one hand,
and its shareholders and third persons on the other, the corporation Statutory construction; Remedial law statutes construed liberally; Use
looks only to its books for the purpose of determining who its of word “may”.—Contrary to the understanding of the petitioner with
shareholders are. It is only when the transfer has been recorded in the respect to the use of the word “may”, in the case of Shauf v. Court of
stock and transfer book that a corporation may rightfully regard the Appeals, (191 SCRA 713, 27 November 1990), this Court held, that
transferee as one of its stockholders. From this time, the consequent “Remedial law statutes are to be construed liberally.” The term ‘may’
as used in adjective rules, is only permissive and not mandatory.
80
Corporations; Transfer of shares of stock; Delivery not mandatory but other, the corporation looks only to its books for the purpose of
there was delivery in case at bar.—Moreover, it is safe to infer from determining who its shareholders are, so that a mere indorsee of a
the facts deduced in the instant case that, there was already delivery of certificate of stock, claiming to be the owner, will not necessarily be
the unendorsed Stock Certificate No. 2, which is essential to the recognized as such by the corporation and its officers, in the absence
issuance of Stock Certificate Nos. 6 and 8 to Angel S. Tan and of express instructions of the registered owner to make such transfer
petitioner Alfonso S. Tan, respectively. What led to the problem was to the indorsee, or a power of attorney authorizing such transfer.
the return of the cancelled certificate (No. 2) to Alfonso S. Tan for his
endorsement and his deliberate non-endorsement. For all intents and Batong Buhay vs CA 147 scra 4
purposes, however, since this was already cancelled which
cancellation was also reported to the respondent Commission, there 1. Mercantile Law; Corporations; Shares of
was no necessity for the same certificate to be endorsed by the stocks; Damages; Unrealizedprofits that may accrue from sale of the
petitioner. All the acts required for the transferee to exercise its rights shares of stocks had petitioner transferred legal title to the respondent,
over the acquired stocks were attendant and even the corporation was merely speculative; Speculative damages cannot be recovered-
protected from other parties, considering that said transfer was earlier The stipulation of facts of the parties does not at all show that private
recorded or registered in the corporate stock and transfer book. respondent intended to sell, or would sell or would have sold the
Same; Nature and function of certificate of stock.—A certificate of stocks in question on specified dates. While it is true that shares of
stock is not necessary to render one a stockholder in a corporation. stock may go up or down in value (as in fact the concerned shares here
Nevertheless, a certificate of stock is the paper representative or really rose from fifteen (15) centavos to twenty three or twenty four
tangible evidence of the stock itself and of the various interests therein. (23/24) centavos per share and then fell to about two (2) centavos per
The certificate is not stock in the corporation but is merely evidence share, still whatever profits could have been made are purely
of the holder’s interest and status in the corporation, his ownership of SPECULATIVE, for it was difficult to predict with any decree of
the share represented thereby, but is not in law the equivalent of such certainty the rise and fall in the value of the shares. Thus this Court
ownership. It expresses the contract between the corporation and the has ruled that speculative damages cannot be recovered. It is easy to
stockholder, but it is not essential to the existence of a share in stock say now that had private respondent gained legal title to the shares, it
or the creation of the relation of shareholder to the corporation. (13 could have sold the same and reaped a profit of P5.624.95 but it could
Am. Jur. 2d, 769) not do so because of petitioner’s refusal to transfer the stocks in the
Same; Same.—In Philippine jurisprudence, a certificate of stock is not former’s name at the time demand was made, but then it is also true
a negotiable instrument. “Although it is sometime regarded as quasi- that human nature, being what it is, private respondent’s officials
negotiable, in the sense that it may be transferred by endorsement, could also have refused to sell and instead wait for expected further
coupled with delivery, it is well-settled that it is non-negotiable, increases in value.
because the holder thereof takes it without prejudice to such rights or
defenses as the registered owner/s or transferor’s creditor may have Won vs Wack Wack Golf Club 104 Phil 466
under the law, except insofar as such rights or defenses are subject to
the limitations imposed by the principles governing estoppel.” (De los 1. Interpleader; Interpleader under section 120 of the Code of Civil
Santos vs. McGrath, 96 Phil. 577) Procedure; Purpose of.-
Same; Transfer of shares of stock.—To follow the argument put up by The action of interpleader, under section 120 of the Code of Civil
petitioner which was upheld by the Cebu SEC Extension Office Procedure, is a remedy whereby a person who has personal property
Hearing Officer, Felix Chan, that the cancellation of Stock Certificate in his possession, or an obligation to render wholly or partially,
Nos. 2 and 8 was null and void for lack of delivery of the cancelled without claiming any right to either, comes to court and asks that the
“mother” Certificate No. 2 whose endorsement was deliberately persons who claim the said personal property or who consider
withheld by petitioner, is to prescribe certain restrictions on the themselves entitled to demand compliance with the obligation, be
transfer of stock in violation of the corporation law itself as the only required to litigate among themselves in order to determine finally
law governing transfer of stocks. While Section 47(a) grants to stock who is entitled to one or the other thing. The remedy is afforded to
corporations the authority to determine in the by-laws “the manner of protect a person not against double liability but against double
issuing certificates” of shares of stock, however, the power to regulate vexation in respect of one liability.
is not the power to prohibit, or to impose unreasonable restrictions of 2. Interpleader; Interpleader under section 120 of the Code of Civil
the right of stockholders to transfer their shares. Procedure; Difference between interpleader under the Code of Civil
Procedure and under the Rules of Court.-
Remedy if Transfer is Refused The procedure under the Rules of Court is the same as that under the
Hager vs Bryan 19 Phil 138 Code of Civil Procedure except that under the former the remedy of
interpleader is available regardless of the nature of the subject-matter
1. CORPORATION; TRANSFER OF SHARES OF of the controversy, whereas under the latter an interpleader suit is
STOCK; MANDAMUS.- proper only if the subject-matter of the controversy is personal
Upon the application of the registered owner of shares of stock in a property or relates to the performance of an obligation.
corporation organized under the provisions of Act No. 1459, 3. Interpleader; Stakeholder should file action of interpleader within
mandamus will lie to compel the secretary of the corporation to reasonable time after dispute has arisen without waiting to be sued by
transfer them upon the books of the corporation, where it appears: claimants; Reason.-
2. CORPORATION; TRANSFER OF SHARES OF STOCK; DUTY A stakeholder should use reasonable diligence to hale the contending
TO PROVIDE FOR TRANSFERS.- claimants to court. He need not await actual institution of independent
Impliedly, if not expressly, section 52 of Act No. 1459 imposes the suits against him before filing a bill of interpleader. He should file an
duty upon a corporation organized under that Act, and upon the officer action of interpleader within a reasonable time after a dispute has
in charge of the books of the corporation, to provide for the entryand arisen without waiting to be sued by either of the contending
noting upon the books of the corporation of lawful transfers of stock, claimants. Otherwise, he may be barred by laches or undue delay. But
where the entry of such transfers is lawfully demanded. where he acts with reasonable diligence in view of the environmental
3. CORPORATION; TRANSFER OF SHARES OF circumstances, the remedy is not barred.
STOCK; RIGHTS OF INDORSEE OF SHARES OF STOCK.- 4. Interpleader; Where stakeholder files action of interpleader after
As a general rule, and especially under the above-cited statute, as judgment has been rendered against him in favor of one of claimants,
between the corporation on the one hand and its shareholders on the action deemed too late; Reason.-
81
A stakeholder’s action of interpleader is too late when filed after well as of the individual parties to the contract and is reasonable as to
judgment has been rendered against him in favor of one of the time, the suspension is legal.
contending claimants, especially where he had notice of the
conflicting claims prior to the rendition of the judgment and neglected Fleishcher vs Botica Nolasco 47 Phil 583
the opportunity to implead the adverse claimants in the suit where
judgment was entered. This must be so, because once judgment is 1. CORPORATIONS; CORPORATE STOCK; RlGHT OF
obtained against him by one claimant he becomes liable to the latter. CORPORATIONS TO IMPOSE A LIMITATION ON TRANSFERS
5. Interpleader; Party who files action of interpleader should show that OF STOCK.-
he has not been made independently liable to any of the claimants.- A stock corporation in adopting by-laws governing the transfer of
Before a person will be deemed to be in a position to ask for an order shares of stock should take into consideration the specific provisions
of interpleader, he must be prepared to show, among other of the Corporation Law. The by-laws of corporations should be made
prerequisites, that he has not become independently liable to any of to harmonize with the provisions of the Corporation Law. By-laws
the claimants. must not be inconsistent with the provisions of the Corporation Law.
6. Interpleader; Where stakeholder defends a suit by one claimant and By-laws of a corporation are valid if they are reasonable and
allows it to proceed to judgment against him, action of interpleader calculated to carry into effect the objects of the corporation provided
deemed too late.- they are not contradictory to the general policy of the laws of the land.
If a stakeholder defends a suit filed by one of the adverse claimants Under a statute authorizing by-laws for the transfer of stock of a
and allows said suit to proceed to final judgment against him, he corporation, it can do no more than prescribe a general mode of
cannot later on have that part of the litigation repeated in an transfer on the corporate books and cannot justify an unreasonable
interpleader suit. restriction upon the right to sell. The shares of stock of a corporation
7. Interpleader; A successful litigant cannot later be impleaded by his are personal property and the holder thereof may transfer the same
defeated adversary in action of interpleader and compelled to prove without unreasonable restrictions.
his claim anew against other adverse claimants.- 2. CORPORATIONS; TRANSFER OF SHARES OF STOCK.-
A successful litigant cannot later be impleaded by his defeated The power to enact by-laws restraining the sale and transfer of stock
adversary in an interpleader suit and compelled to prove his claim must be found in the governing statute or charter. Restrictions upon
anew against other adverse claimants, as that would in effect be a the traffic in stock must have their source in legislative enactments, as
collateral attack upon the judgment. the corporation itself cannot create such impediments. By-laws of a
corporation are intended merely for the protection of the corporation,
Validity of Restrictions and prescribe regulations and not restrictions; they are always subject
Lambert vs Fox 26 Phil 588 to the charter of the corporation. The corporation, in the absence of
such a power, cannot ordinarily inquire into or pass upon the legality
CONTRACTS; CONSTRUCTION AND ENFORCEMENT.— of the transaction by which its stock passes from one person to
Contracts should be enforced as they read. The first duty of courts in another, nor can it question the consideration upon which a sale is
enforcing contracts is to give attention to the words thereof. If from based. A by-law of a corporation cannot take away or abridge the
the words the meaning is plain, the contract should be enforced substantial rights of stockholders. Courts will carefully scrutinize any
according to its words. attempt on the part of a corporation to impose restrictions or
limitations upon the right of stockholders to sell and assign their stock.
ID.; ID.—It is to be presumed that persons mean what they say; and Restrictions cannot be imposed upon a stockholder by a by-law
interpretation and construction should not be resorted to when the without statutory or charter authority. The owner of corporate stock
English used is plain. Plain words should not be discarded or twisted has the same uncontrollable right to sell or alienate, which attaches to
or given fanciful or unusual signification, even though such strained the ownership of any other species of property.
signification seems to be in the interests of justice or to be necessary
to prevent hardship. Padgett vs Babcock and Templeton 59 Phil 232

ID.; ID.; ENFORCEMENT OF PENALTY.—In this jurisdiction 1. SHARES OF CAPITAL STOCK; ILLEGAL RESTRICTION
contracts are enforced as they read; and parties who are competent to IMPOSED THEREON.-
contract may make such agreements within the limitations of the law The restriction consisting in the word "nontransferable" appearing on
and public policy as they desire, and the courts will enforce them the twelve (12) certificates, Exhibits F to F-11, is illegal on the ground
according to their terms. A penalty imposed for the breach of a that it constitutes an undue limitation of the right of ownership and is
contract not to sell shares of stock for one year will be enforced if the in restraint of trade. It should, therefore, be eliminated.
agreement is broken, no matter whether the person seeking to enforce 2. SHARES OF CAPITAL STOCK; OBLIGATION TO
the penalty has suffered damages or not. PURCHASE.-
There is no existing law nor authority in support of the plaintiff's claim
ID.; ID.; ID.—The only case in which the courts are authorized to to the effect that the defendants are obliged to purchase his shares at
intervene for the reduction of a penalty stipulated in a contract is when par value plus the interest demanded thereon. In this respect it is
the principal obligation has been partly or irregularly fulfilled and the hereby held that there has been no such contract, either express or
court can see that the party demanding the penalty has received the implied, between the plaintiff and the defendants.
benefits of such part or irregular performance. In such case the court 3. SHARES OF CAPITAL STOCK; NON-EXISTENT OR
is authorized to reduce the penalty to the extent of the benefits received IMAGINARY OBLIGATION.-
by the party seeking to enforce the penalty. In the absence of a similar contractual obligation and a legal provision
applicable thereto, it is logical -to conclude that it would be unjust and
ID.; ID.; ID.—In enforcing a contract which provides a penalty in case unreasonable to compel the said defendants to comply with a non-
of breach, the party enforcing the penalty is entitled to recover the sum existent or imaginary obligation. Whereupon, the judgment originally
stipulated without proving damages. rendered to that effect is untenable and should be set aside.

ID.; SUSPENSION OF RIGHT TO SELL, CORPORATE STOCK.— Forged Transfers


Where the suspension of the right to sell stock in a corporation has a Sta Maria vs Hongkong and Shanghai 89 Phil 780
beneficial purpose and results in the protection of the corporation as
82
1. CORPORATIONS; STOCK CERTIFICATES; J and return to her the certificate outright. A mere claim of ownership
INDORSEMENT IN BLANK; STREET CERTIFICATE.- does not establish the fact of ownership.
The certificate of stock in question was made out in the name of W, a 5. CORPORATIONS; STOCK CERTIFICATES; POSSESSION OF
broker, duly indorsed in blank by him and delivered to S for valuable CERTIFICATE is THE MOST THAT STOCKHOLDER CAN
consideration paid by the latter. Then S delivered it, as it was, to C, CLAIM.-
another broker, to comply with the latter's requirement that S deposit The most that S could claim is the return to her of the said certificate
something on account if she wanted to buy shares of another mining of stock (Howison vs. Mechanics Sav. Bank, 183 Atl., p. 697). The
corporation. C thereafter delivered to a bank the said certificate duly defendant bank having expressed its willingness from the very
indorsed to said bank pursuant to a letter of hypothecationexecuted by beginning to compromise the case by delivering to S the new
C in favor of said bank. The said certificate was delivered to the bank certificate of stock issued to the bank by the issuing corporation in lieu
in the ordinary course of business, together with many other securities, of the original, the defendant bank should be ordered to deliver to S
and at the time it was delivered the bank had no knowledge that the the said new certificate of stock.
shares represented by the certificate belonged to S for it was in the
form of a street certificate transferable by mere delivery. Held: S could De los Santos vs Republic 96 Phil 577
have asked the corporation that had issued said certificate to cancel it
and issue another in lieu thereof in her name to apprise the holder that 1. CORPORATION LAW; SHARES OF STOCK; NATURE AND
she was the owner of said certificate. This she failed to do, and instead TRANSFER OF; EFFECT OF UNREGISTERED TRANSFER.-
she delivered said certificate to C indorsed in blank, thereby clothing Shares of stock are personal property and may be transferred by
the latter with apparent title to the shares represented by said endorsement of the corresponding stock certificate, coupled with its
certificate including apparent authority to negotiate it. This was the delivery. How
proximate cause of the damage suffered by her. She is, therefore, 2. CORPORATION LAW; SHARES OF STOCK; QUASI-
estopped from claiming further title to or interest therein as against a NEGOTIABILITY AND NON-NEGOTIABILITY OF SHARES OF
bona fide pledgee or transferee thereof. A bona fide pledgee or STOCK.-
transferee of a stock from the apparent owner is not chargeable with Although shares of stock are sometimes regarded as quasi-negotiable,
knowledge of the limitations placed on it by the real owner, or of any in the sense that they may be transferred endorsement, coupled with
secret agreement relating to the use which might be made -of the stock delivery, they are non-negotiable, because the holder thereof takes
by the holder (12 Fletcher, Corporations, section 5562, p. 521). them without prejudice to such rights or defenses as the registered
"Where one of two innocent parties must suffer by reason of a owner or creditor may have under the law, except insofar as such
wrongful or unauthorized act, the loss must fall on the one who first rights or defenses are subject to the limitations imposed by the
trusted the wrongdoer and put in his hands the means of inflicting such principles governing estoppel.
loss". (Id.) 3. CORPORATION LAW; SHARES OF
2. CORPORATIONS; STOCK CERTIFICATES; J STOCK; STOCKHOLDERS; RIGHTS OF REGISTERED
INDORSEMENT IN BLANK; STREET CERTIFICATE.- STOCKHOLDERS SUPERIOR TO THAT OF PURCHASER ON
The certificate of stock in question was issued in the name of W, a NOTICE OF FACTS INDICATING NEED OF INQUIRING INTO
broker, who indorsed it in blank, the bank would still have been REGULARLY OF SALES.-
justified in believing the previous indorsement being therefore Where the plaintiffs were, at the time of the alleged sales in their favor
guaranteed by the last indorser, Held: This certificate is what is known of the shares stock in question, aware of sufficient facts to put them
as street certificate. Upon its face, the holder was entitled to demand on notice of the need of inquiring into the regularity of the transactions
its transfer to his name from the issuing corporation. The bank is not and the title of the opposed vendors, they can not validly claim, against
obligated to look beyond the certificate to ascertain the ownership of the registered stockholder, the status of purchasers in good faith.
the stock at the time he received it from C, it having been given 4. CORPORATION LAW; ID; STOCKHOLDERS; PRINCIPAL OF
pursuant to a letter of hypothecation. Even if said certificate had been REGISTERED OWNER ENJOYS SAME RIGHTS OF
in the name of S but indorsed in blank, the bank would still have been REGISTERED STOCKHOLDER.-
justified in believing that C had title thereto. It is a well-known The principal or beneficiary of the registered owner of shares of stock
practice that a certificate of stock, indorsed in blank, is deemed quasi is entitled to invoke such rights as the registered stockholders may
negotiable, and as such the transferee thereof is justified in believing have under the law.
that it belongs to the holder and transferer (Reyman vs. Hamilton
National Bank, 266 SW 1043; 12 Fletcher, Corporations, pp. 521-524; Non-transferability of Membership in a Non-Stock Corporation
525-527; McNeil vs. Tenth National Bank, 7 Am. Rep., 341). sec 90
3. CORPORATIONS; STOCK CERTIFICATES; NOTATIONS IN
HANDWRITING ON CERTIFICATE.- Section 90. Non-transferability of membership. - Membership in a
The fact that, on the right margin of the said certificate, the name of S non-stock corporation and all rights arising therefrom are personal and
appeared written, granting it to be true, cannot be considered sufficient nontransferable, unless the articles of incorporation or the by-laws
reason to indicate that its owner was S, considering that said certificate otherwise provide.
was indorsed in blank by W, in whose name it had been issued,
indorsement which was guaranteed by C's indorsement in blank and General rule: Membership in a non-stock corporation and all rights
was transferred in due course by the latter to the Bank under a letter arising therefrom are personal and non-transferable.
of hypothecation. Said indicium could at best give the impression that Exception: The articles of incorporation or the by-laws provide
S was the original holder of the certificate. otherwise.
4. CORPORATIONS; STOCK CERTIFICATES; CLAIMS OF
OWNERSHIP ADVERSE TO WHAT APPEARS ON III. MANAGEMENT STRUCTURE
CERTIFICATE.-
Even assuming that S had really approached the proper official of the A. Corporate Governance
Bank demanding the return of the certificate or its value, such an
incident would merely show that S has an adverse claim to the Powers of the Board or Trustees sec 23
ownership of said certificate of stock, but that would not necessarily
place the bank in a position to inquire as to the real basis of her claim, Section 23. The board of directors or trustees. - Unless otherwise
nor would it place the bank in the obligation to recognize her claim provided in this Code, the corporate powers of all corporations formed
83
under this Code shall be exercised, all business conducted and all 5. Corporation Law; Remedial Law; Civil Procedure; Joinder of
property of such corporations controlled and held by the board of Parties; Misjoinder of parties not a ground for dismissal of action.-
directors or trustees to be elected from among the holders of stocks, or At any rate, it is yet too early in the proceedings since the issues have
where there is no stock, from among the members of the corporation, not been joined. Besides, misjoinder of parties is not a ground to
who shall hold office for one (1) year until their successors are elected dismiss an action.
and qualified. (28a)
Gokongwei vs SEC 89 Scra 336 1979
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director, which share shall stand in his 1. Supreme Court; Judgments; Securities and Exchange
name on the books of the corporation. Any director who ceases to be Commission; Corporation Law; Supreme Court always strives to
the owner of at least one (1) share of the capital stock of the settle a legal controversy in a single proceeding.-
corporation of which he is a director shall thereby cease to be a xxx In the case at bar, there are facts which cannot be denied, viz.: that
director. Trustees of non-stock corporations must be members thereof. the amended by-laws were adopted by the Board of Directors of the
A majority of the directors or trustees of all corporations organized San Miguel Corporation in the exercise of the power delegated by the
under this Code must be residents of the Philippines. stockholders ostensibly pursuant to section 22 of the Corporation Law;
that in a special meeting on February 10, 1977 held specially for that
Gamboa vs Victoriano 90 Scra 40 1979 purpose, the amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the Hongkong
1. Corporation Law; Remedial Law; Civil Procedure; Order denying Brewery and Distillery, a beer manufacturing company in Hongkong,
motion to dismiss complaint is an interlocutory order not subject of was made by the San Miguel Corporation in 1948; and that in the
petition for certiorari.- stockholders’ annual meeting held in 1972 and 1977, all foreign
The questioned order denying the petitioners’ motion to dismiss the investments and operations of San Miguel Corporation were ratified
complaint is merely interlocutory and cannot be the subject of a by the stockholders.
petition for certiorari. The proper procedure to be followed in such a 2. Corporation Law; While reasonableness of a by-law is a legal
case is to continue with the trial of the case on the merits and, if the question, where reasonableness of a by-law provision is one in which
decision is adverse, to reiterate the issue on appeal It would be a breach reasonable minds may differ a court will not be justified in subsisting
of orderly procedure to allow a party to come before this Court every its judgment for those authorized to make the by-laws.-
time an order is issued with which he does not agree. The validity or reasonableness of a by-law of a corporation is purely a
2. Compromise Agreement; No waiver of cause of action by parties question of law. Whether the by-law is in conflict with the law of the
by entering into compromise agreement where there is express provi- land, or with the charter of the corporation, or is in a legal sense
sion to the contrary.- unreasonable and therefore unlawful is a question of law. This rule is
As found by the respondent judge, the petitioners have not waived subject, however, to the limitation that where the reasonableness of a
their cause of action against the petitioners by entering into a by-law is a mere matter of judgment, and one upon which reasonable
compromise agreement with the other defendants in view of the minds must necessarily differ, a court would not be warranted in
express provision of the compromise agreement that the same “shall substituting its judgment instead of the judgment of those who are
not in any way constitute or be considered a waiver or abandonment authorized to make by-laws and who have exercised their authority.
of any claim or cause of action against the other defendants.” There is 3. Corporation Law; Under the Corporation Law a corporation is
also no estoppel because there is nothing in the agreement which could authorized to prescribe the qualification of its directors.-
be construed as an affirmative admission by the plaintiff of the validity In this jurisdiction, under Section 21 of the Corporation Law, a
of the resolution of the defendants which is now sought to be judicially corporation may prescribed in its by-laws “the qualifications, duties
declared null and void. The foregoing circumstances and the fact that and compensation of directors, officers and employees ***.” This
no consideration was mentioned in the agreement for the transfer of must necessarily refer to a qualification in addition to that specified by
rights to the said shares of stock to the plaintiffs are sufficient to show section 30 of the Corporation Law, which provides that “every director
that the agreement was merely an admission by the defendants Ramon must own in his right at least one share of the capital stock of the stock
de la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi of the corporation of which he is a director * * *.”
validity of the claim of the plaintiffs. 4. Corporation Law; Stockholder has no vested right to be elected as
3. Corporation Law; Board of Directors; Contracts; Courts cannot stockholder.-
control discretion of board of directors about administrative matters; Any person “who buys stock in a corporation does so with the
Contracts intra vires entered into by board of directors binding upon knowledge that its affairs are dominated by a majority of the
the corporation and courts will not interfere; Exception.- stockholders and that he implied contracts that the will of the majority
The wellknown rule is that courts cannot undertake to control the shall govern in all matters within the limits of the act of incorporation
discretion of the board of directors about administrative matters as to and lawfully enacted by-laws and not forbidden by law.” To this
which they have legitimate power of action, and contracts intra vires extent, therefore, the stockholder may be considered to have “parted
entered into by the board of directors are binding upon the corporation with his personal right or privilege to regulate the disposition of his
and courts will not interfere unless such contracts are so property which he has invested in the capital stock of the corporation
unconscionable and oppressive as to amount to a wanton destruction and surrendered it to the will of the majority or his fellow
of the rights of the minority. incorporators. **** It can not therefore be justly said that the contract,
4. Corporation Law; Derivative Suit; When derivative suit should be express or implied, between the corporation and the stockholders is
instituted.- infringed *** by any act of the former which is authorized by a
An individual stockholder is permitted to institute a derivative suit on majority, ***.”
behalf of the corporation wherein he holds stock in order to protect or 5. Corporation Law; A director stands in a fiduciary relation to the
vindicate corporate rights, whenever the officials of the corporation competition and its stockholders. The disqualification of a competition
refuse to sue, or are the ones to be sued or hold the control of the from being elected to the board of directors is a reasonable exercise of
corporation. In such actions, the suing stockholder is regarded as a corporate authority.-
nominal party, with the corporation as the real party in interest. In the Although in the strict and technical sense, directors of a private
case at bar, however, the plaintiffs are alleging and vindicating their corporation are not regarded as trustees, there cannot be any doubt that
own individual interests or prejudice, and not that of the corporation. their character is that of a fiduciary insofar as the corporation for the

84
collective benefit of the stockholders, “they occupy a fiduciary ambit of the disqualification. Sound principles of public policy and
relation, and in these sense the relation is one of trust.” management, therefore, support the view that a by-law which
6. Corporation Law; Same.- disqualifies a competitor from election to the Board of Directors of
It is obviously to prevent the creation of an opportunity for an officer another corporation is valid and reasonable.
or director of San Miguel Corporation, who is also the officer or owner 12. Corporation Law; Petitioner is not ipso facto disqualified to run on
of competing corporation, from taking advantage of the information SMC director. He must be given full opportunity by the SEC to show
which he acquires as director to promote his individual or corporate that he is not covered by the disqualification.-
interests to the prejudice of San Miguel Corporation and its While We here sustain the validity of the amended by-laws, it does
stockholders, that the questioned amendment of the by-laws was not follow as a necessary consequence that petitioner is ipso facto
made. Certainly, where two corporations are competitive in a disqualified. Consonant with the requirement of due process, there
substantial sense, it would seem improbable, if not impossible, for the must be due hearing at which the petitioner must be given the fullest
director, if he were to discharge effectively his duty, to satisfy his opportunity to show that he is not covered by the disqualification. As
loyalty to both corporations and place the performance of his corporate trustees of the corporation and of the stockholders, it is the
duties above his personal concerns. responsibility of directors to act with fairness to the stockholders.
7. Corporation Law; Same.- Pursuant to this obligation and to remove any suspicion that this power
Sound principles of corporate management counsel against sharing may be utilized by the incumbent members of the Board to perpetuate
sensitive information with a director whose fiduciary duty to loyalty themselves in power, any decision of the Board to disqualify a
may well require that he disclose this information to a competitive candidate for the Board of Directors should be reviewed by the
rival. These dangers are enhanced considerably where the common Securities and Exchange Commission en banc and its decision shall
director such as the petitioner is a controlling stockholder of two of be final unless reversed by this Court on certiorari.
the competing corporations. It would seem manifest that in such 13. Corporation Law; Every stockholder has the right to inspect
situations, the director has an economic incentive to appropriate for corporate books and records.-
the benefit of his own corporation the corporate plans and policies of The stockholder’s right of inspection of the corporation’s books and
the corporation where he sits as director. records is based upon their ownership of the assets and property of the
8. Corporation Law; Another reason for upholding a by-law provision corporation. It is, therefore, an incident of ownership of the corporate
that forbids a competitor to be elected as corporate director are the property, whether this ownership or interest be termed an equitable
laws prohibiting cartels.- ownership, a beneficial ownership, or a quasi-ownership. This right is
There is another important consideration in determining whether or predicated upon the necessity of selfprotection. It is generally held by
not the amended by-laws are reasonable. The Constitution and the law majority of the courts that where the right is granted by statute to the
prohibit combinations in restraint of trade or unfair competition. Thus, stockholder, it is given to him as such and must be exercised by him
Section 2 of Article XIV of the Constitution provides: “That State with respect to his interest as a stockholder and for some purpose
shall regulate or prohibit private monopolies when the public interest germane thereto or in the interest of the corporation. In other words,
so requires. No combinations in restraint of trade or unfair competition the inspection has to germane to the petitioner’s interest as a
shall be allowed.” stockholder, and has to be proper and lawful in character and not
9. Corporation Law; Same.- inimical to the interest of the corporation.
Basically, these anti-trust laws or laws against monopolies or 14. Corporation Law; The right of stockholder to inspect corporate
combinations in restraint of trade are aimed at raising levels of books extends to a wholly-owned subsidiary.-
competition by improving the consumers’ effectiveness as the final In the case at bar, considering that the foreign subsidiary is wholly
arbiter in free markets. These laws are designed to preserve free and owned by respondent San Miguel Corporation and, therefore, under
unfettered competition as the rule of trade. “It rests on the premise that its control, it would be more in accord with equity, good faith and fair
the unrestrained interaction of competitive forces will yield the best dealing to construe the statutory right of petitioner as stockholder to
allocation of our economic resources, the lowest prices and the highest inspect the books and records of the corporation as extending to books
quality ***.” They operate to forestall concentration of economic and records of such wholly owned subsidiary which are in respondent
power. The law against monopolies and combinations in restraint of corporation’s possession and control.
trade is aimed at contracts and combinations that, by reason of the 15. Corporation Law; Purely ultra vires corporate acts of corporate
inherent nature of the contemplated acts, prejudice the public interest officers to invest corporate funds in another business or corporation,
by unduly restraining competition or unduly obstructing the course of i.e., acts not contrary to law, morals, public order as public policy, may
trade. be ratified by the stockholders holding 2/3 of the voting power.-
10. Corporation Law; Election of petitioner as San Miguel Assuming arguendo that the Board of Directors of San Miguel
Corporation Director may run counter to the prohibition contained in Corporation had no authority to make the assailed investment, there is
Section 13(5) of Corporation Law on investments in corporations no question that a corporation, like an individual, may ratify and
engaged in agriculture.- thereby render binding upon it the originally unauthorized acts of its
Finally, considering that both Robina and SMC are, to a certain extent, officers or other agents. This is true because the questioned investment
engaged in agriculture, then the election of petitioner to the Board of is neither contrary to law, morals, public order or public policy. It is a
SMC may constitute a violation of the prohibition contained in Section corporate transaction or contract which is within the corporate powers,
13(5) of the Corporation Law. Said section provides in part that “any but which is defective from a purported failure to observe in its
stockholder of more than one corporation organized for the purpose of execution the requirement of the law that the investment must be
engaging in agriculture may hold his stock in such corporations solely authorized by the affirmative vote of the stockholders holding
for investment and not for the purpose of bringing about or attempting twothirds of the voting power. This requirement is for the benefit of
to bring about a combination to exercise control of such corporations. the stockholders. The stockholders for whose benefit the requirement
***.” was enacted may, therefore, ratify the investment and its ratification
11. Corporation Law; The by-law amendment of SMC applies equally by said stockholders obliterates any defect which it may have had at
to all and does not discriminate against petitioner only.- the outset. “Mere ultra vires acts”, said this Court in Pirovano, “or
However, the by-law, by its terms, applies to all stockholders. The those which are not illegal and void ab initio, but are not merely within
equal protection clause of the Constitution requires only that the by- the scope of the articles of incorporation, are merely voidable and may
laws operate equally upon all persons of a class. Besides, before become binding and enforceable when ratified by the stockholders.”
petitioner can be declared ineligible to run for director, there must be 16. Corporation Law; Judgment; The doctrine of the law of the case.-
hearing and evidence must be submitted to bring his case within the
85
We hold on our part that the doctrine of the law of the case invoked that the amended by-laws in question are invalid. Indeed, it is one
by Mr. Justice Barredo has no applicability for the following reasons: thing to say that dismissal of the case is not doctrinal and entirely
a) Our jurisprudence is quite clear that this doctrine may be invoked another thing to maintain that such dismissal leaves the issue
only where there has been a final and conclusive determination of an unsettled.
issue in the first case later invoked as the law of the case. 21. Corporation Law; Judgment; Where petitioner can no longer
17. Corporation Law; Judgment; When doctrine of the law of the case revive the issue validity of the amended by-laws.-
not applicable.- I reiterate, therefore, that as between the parties herein, the issue of
The doctrine of the law of the case, therefore, has no applicability validity of the challenged bylaws is already settled. From which it
whatsoever herein insofar as the question of the validity or invalidity follows that the same are already enforceable insofar as they are
of the amended by-laws is concerned. The Court’s judgment of April concerned. Petitioner Gokongwei may not hereafter act on the
11, 1979 clearly shows that the voting on this question inconclusive assumption that he can revive the issue of validity whether in the
with six against four Justices and two other Justices (the Chief Justice Securities Exchange Commission, in this Court or in any other forum,
and Mr. Justice Fernando) expressly reserving their votes thereon, and unless he proceeds on the basis of a factual milieu different from the
Mr. Justice Aquino while taking no part in effect likewise expressly setting of this case. Not even the Securities and Exchange Commission
reserved his vote thereon. No final aad conclusive determination could may pass on such question anymore at the instance of herein petitioner
be reached on the issue and pursuant to the provisions of Rule 56, or anyone acting in his stead or on his behalf. The vote of four justices
section 11, since this special civil action originally commenced in this to remand the case thereto cannot alter the situation.
Court, the action was simply dismissed with the result that no law of 22. Corporation Law; Judgment; Where Court has not found merit in
the case was laid down insofar as the issue of the validity or invalidity the claim that the amended by-laws in question are valid.-
of the questioned by-laws is con- cerned, and the relief sought herein I concur in Justice Barredo’s statement that the dismissal (for lack of
by petitioner that this Court bypass the SEC which has yet to hear and necessary votes) of the petition to the extent that “it assails the validity
determine the same issue pending before it below and that this Court of the amended by-laws,” is the law of the case at bar, which means in
itself directly resolve the said issue stands denied. effect that as far and only in so far as the parties and the Securities and
18. Corporation Law; Judgment; Constitutional Law; Due Exchange Commission are concerned, the Court has not found merit
Process; When procedural due process was not observed.- in the claim that the amended by-laws in question are valid.
The entire Court, therefore, recognized that petitioner had not been 23. Corporation Law; Judgment; Term and meaning of “farming.”-
given procedural due process by the SMC board on the matter of his This is my view, even as I am for a restrictive interpretation of Section
disqualification and that he was entitled to a “new and proper hearing”. 13(5) of the Philippine Corporation Law, under which I would limit
It stands to reason that in such hearing, petitioner could raise not only the scope of the provision to corporations engaged in agriculture, but
questions of fact but questions of law, particularly questions of law only as the word “agriculture” refers to its more limited meaning as
affecting the investing public and their right to representation on the distinguish- ed from its general and broad connotation. The term
board as provided by law—not to mention that as borne out by the fact would then mean “farming” or raising the natural products of the soil,
that no restriction whatsoever appears in the Court’s decision, it was such as by cultivation, in the acquisition of agricultural land such as
never contemplated that petitioner was to be limited questions of fact by homestead, before the patent may be issued.
and could not raise the fundamental question of law bearing on the 24. Corporation Law; Judgment; Poultry raising or piggery is
invalidity of the questioned amended by-laws at such hearing before included in the term “agriculture.”-
the SMC board. Furthermore, it was expressly provided unanimously It is my opinion that under the public land statute, the development of
in the Court’s decision that the SMC board’s decision on the a certain portion of the land applied for a specified in the law as a
disqualification of petitioner (“assuming the board of directors of San condition precedent before the applicant may obtain a patent, is
Miguel Corporation should, after the proper hearing, disqualify him” cultivation, not let us say, poultry raising or piggery, which may be
as qualified in Mr. Justice Barredo’s own separate opinion, at page 2) included in the term “Agriculture” in its broad sense. For under
shall be appealable to respondent Securities and Exchange Section 13(5) of the Philippine Corporation Law, construed not in the
Commission “deliberating and acting en banc” and “ultimately to this strict way as I believe it should because the provision is in derogation
Court.” of property rights, the petitioner in this case would be disqualified
19. Corporation Law; Judgment; Reservation of the vote of the Chief from becoming an officer of either the San Miguel Corporation or his
Justice.- own supposedly agricultural corporations.
As expressly stated in the Chief Justice’s reservation of his vote, the
matter of the question of the applicability of the said section 13(5) to Must act as a body sec 25
petitioner would be heard by this Court at the appropriate time after
the proceedings below (and necessarily the question of the validity of Section 25. Corporate officers, quorum. - Immediately after their
the amended by-laws would be taken up anew and the Court would at election, the directors of a corporation must formally organize by the
that time be able to reach a final and conclusive vote). election of a president, who shall be a director, a treasurer who may or
20. Corporation Law; Judgment; Validity of the amended by-laws.- may not be a director, a secretary who shall be a resident and citizen
The six votes cast by Justices Makasiar, Antonio, Santos, Abad of the Philippines, and such other officers as may be provided for in
Santos, De Castro and this writer in favor of validity of the amended the by-laws. Any two (2) or more positions may be held concurrently
by-laws in question, with only four members of this Court, namely, by the same person, except that no one shall act as president and
Justices Teehankee, Concepcion Jr., Fernandez and Guerrero opining secretary or as president and treasurer at the same time.
otherwise, and with Chief Justice Castro and Justice Fernando
reserving their votes thereon and Justice Aquino and Melencio Herrera The directors or trustees and officers to be elected shall perform the
not voting, thereby resulting in the dismissal of the petition “insofar duties enjoined on them by law and the by-laws of the corporation.
as it assails the validity of the amended by-laws . . . . for lack of Unless the articles of incorporation or the by-laws provide for a greater
necessary votes”, has no other legal consequence than that it is the law majority, a majority of the number of directors or trustees as fixed in
of the case far as the parties herein are concerned, albeit the majority the articles of incorporation shall constitute a quorum for the
opinion of six against four Justices is not doctrinal in the sense that it transaction of corporate business, and every decision of at least a
cannot be cited as necessarily a precedent for subsequent cases. This majority of the directors or trustees present at a meeting at which there
means that petitioner Gokongwei and the respondents, including the is a quorum shall be valid as a corporate act, except for the election of
Securities and Exchange Commission, are bound by the foregoing officers which shall require the vote of a majority of all the members
result, namely, that the Court en banc has not found merit in the claim of the board.
86
in the usual course of business. Where similar acts have been approved
Directors or trustees cannot attend or vote by proxy at board by the directors as a matter of general practice, custom, and policy, the
meetings. general manager may bind the company without formal authorization
of the board of directors. (Board of liquidators vs. Kalaw)
General rule: the quorum requirement for a valid board meeting is the
majority of the number of the directors or trustees as fixed in the Lack of repudiation, acquiescence and acceptance of benefits are
articles of incorporation. equivalent to an implied ratification by the Board of Directors and
Exception: The articles of incorporation or the by-laws may provide binds the corporation even without formal resolution passed and
for a greater majority. recorded. (Buenaseda vs. Bowen & Co., Inc.)

General rule: To have a valid corporate act, the decision of at least a Express ratification: through formal board action.
majority of the directors or trustees present at a meeting at which there Implied ratification:
is a quorum is required. 1. Silence or acquiescence;
Exception: The election of corporate officers requires the vote of a 2. Acceptance and/or retention of benefits; or
majority of all the members. 3. By recognition or adoption.

General rule: Individual directors cannot bind the corporation by their Islamic directorate vs CA GR 117897 14 May 1997
individual acts.
Exceptions: 1. Actions; Judgments; Res Judicata; Bar by Prior
1. By delegation of authority; Judgment; Conclusiveness of Judgment; Words and Phrases; Section
2. Where expressly conferred; or 49, Rule 39 of the Revised Rules of Court lays down the dual aspects
3. Where the officer or agent is clothed with actual or apparent of res judicata in actions in personam.-
authority. Section 49, Rule 39 of the Revised Rules of Court lays down the dual
aspects of res judicata in actions in personam, to wit: “Effect of
Although an officer or agent acts without, or in excess of, his actual judgment.—The effect of a judgment or final order rendered by a court
authority if he acts within the scope of an apparent authority with or judge of the Philippines, having jurisdiction to pronounce the
which the corporation has clothed him by holding him out or judgment or order, may be as follows: xxx xxx xxx (b) In other cases
permitting him to appear as having such authority, the corporation is the judgment or order is, with respect to the matter directly adjudged
bound thereby in favor of a person who deals with him in good faith or as to any other matter that could have been raised in relation thereto,
in reliance on such apparent authority, as where an officer is allowed conclusive between the parties and their successors in interest by title
to exercise a particular authority with respect to the business, or a subsequent to the commencement of the action or special proceeding,
particular branch of it, continuously and publicly, for a considerable litigating for the same thing and under the same title and in the same
time. Also, if a private corporation intentionally or negligently clothes capacity; (c) In any other litigation between the same parties or their
its officers or agents with apparent power to perform acts for it, the succes sors in interest, that only is deemed to have been adjudged in a
corporation will be estopped to deny that such apparent authority is former judgment which appears upon its face to have been so
real, as to innocent third persons dealing in good faith with such adjudged, or which was actually and necessarily included therein or
officers or agents. This apparent authority may result from (1) the necessary thereto.” Section 49(b) enunciates the first concept of res
general manner by which the corporation holds out an officer or agent judicata known as “bar by prior judgment,” whereas , Section 49(c) is
as having power to act or, in other words, the apparent authority with referred to as “conclusiveness of judgment.”
which it clothes him to act in general, or (2) the acquiescence in his 2. Actions; Judgments; Res Judicata; Bar by Prior
acts of a particular nature, with actual or constructive knowledge Judgment; Conclusiveness of Judgment; Words and Phrases; There is
thereof, whether within or without the scope of his ordinary powers. “bar by former judgment” when, between the first case where the
(Yao Ka Sin Trading vs. CA) judgment was rendered, and the second case where the judgment is
invoked, there is identity of parties, subject matter and cause of action
Any action of the board without a meeting and without the required while there is “conclusiveness of judgment” where there is only
voting and quorum requirement will not bind the corporation unless identity of parties but there is no identity of cause of action, the
subsequently ratified, expressly or impliedly. (Lopez vs. Fontecha) judgment being conclusive in the second case only as to those matters
actually and directly controverted and determined, and not as to
Where a general business manager of a corporation is clothed with matters merely involved therein.-
apparent authority to borrow money and the amount borrowed does There is “bar by former judgment” when, between the first case where
not exceed the ordinary requirements of the business, the authority is the judgment was rendered, and the s econd case where such judgment
implied and that the corporation is bound. (Pua Casim & Co. vs. is invoked, there is identity of parties, subject matter and cause of
Neumark and Co.) action. When the three identities are present, the judgment on the
merits rendered in the first constitutes an absolute bar to the
An invalid contract may be validated by the ratification only of the subsequent action. But where between the first case wherein judgment
board of directors; the president has no authority to ratify such is rendered and the second case wherein such judgment is invoked,
contract. (Yu Chuck vs. Kong Li Po) there is only identity of parties but there is no identity of cause of
action, the judgment is conclusive in the s econd case, only as to those
Silence coupled with acceptance of benefits constitutes a binding matters actually and directly controverted and determined, and not as
ratification. (Francisco vs. GSIS) to matters merely involved therein. This is what is termed
“conclusiveness of judgment.”
A corporate officer entrusted with the general management and 3. Actions; Judgments; Res Judicata; Bar by Prior
control of its business, has implied authority to make any contract or Judgment; Conclusiveness of Judgment;Intervention; A party-in-
do any other act which is necessary or appropriate to the conduct of intervention cannot be considered a principal in a prior case for
the ordinary business of the corporation. As such officer, he may, purposes of applying the principle of res judicata since the contrary
without any special authority from the Board of Directors, perform all goes against the true import of the action of intervention as a m ere
acts of an ordinary nature, which by usage or necessity are incident to subsidiary proceeding without an independent life apart from the
his office, and may bind the corporation by contracts in matters arising principal action as well as the intrinsic character of the intervenor as a
87
mere subordinate party in the main case whose right may be said to be and decrees, it shall have original and exclusive jurisdiction to hear
only in aid of the right of the original party.- and decide cases involving: x x x x x x x x x c) Controversies in the
Neither of these concepts of res judicata find relevant application in selection or appointment of directors, trustees, officers, or managers
the case at bench. While there may be identity of subject matter (IDP of such corporations, partnerships or associations. x x x.”
property) in both cases, there is no identity of parties. The principal 7. Corporation Law; Contracts; Sales; Where a corporate body never
parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as gave its consent, thru a legitimate governing board, to a deed of
petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, absolute sale, the subject sale is void and produces no effect
as represented by the 1971 Board of Trustees or the Tamano Group, whatsoever.-
was only made an ancillary party in G.R. No. 107751 as intervenor. It Premises considered, all acts carried out by the Carpizo Board,
was never originally a principal party thereto. it must be noted that particularly the sale of the Tandang Sora property, allegedly in the
intervention is not an independent action, but is merely collateral, name of the IDP, have to be struck down for having been done without
accessory, or ancillary to the principal action. It is just an interlocutory the consent of the IDP thru a legitimate Board of Trustees. Article
proceeding dependent on or subsidiary to the case between the original 1318 of the New Civil Code lays down the essential requisites of
parties. Indeed, The IDP-Tamano Group cannot be considered a contracts: “There is no contract unless the following requisites concur:
principal party in G.R. No. 107751 for purposes of applying the (1) Consent of the contracting parties; (2) Object certain which is the
principle of res judicata since the contrary goes against the true import subject matter of the contract; (3) Cause of the obligation which is
of the action of intervention as a mere subsidiary proceeding without established.” All these elements must be present to constitute a valid
an independent life apart from the principal action as well as the contract. For, where even one is absent, the contract is void. As
intrinsic character of the intervenor as a mere subordinate party in the succinctly put by Tolentino, consent is essential for the existence of a
main case whose right may be said to be only in aid of the right of the contract, and where it is wanting, the contract is non-existent. In this
original party. It is only in the present case, actually, where the IDP- case, the IDP, owner of the subject parcels of land, never gave its
Tamano Group became a principal party, as petitioner, with the Iglesia consent, thru a legitimate Board of Trustees, to the disputed Deed of
Ni Cristo, as private res pondent. Clearly, there is no identity of parties Absolute Sale executed in favor of INC. This is, therefore, a case not
in both cases. only of vitiated consent, but one where consent on the part of one of
4. Actions; Judgments; Res Judicata; Bar by Prior the supposed contracting parties is totally wanting. Ineluctably, the
Judgment; Conclusiveness of Judgment;Corporation Law; A juridical subject sale is void and produces no effect whatsoever.
person can not be considered essentially a formal party to a case where 8. Corporation Law; Contracts; Sales; For the sale of the only
it was not duly represented by its legitimate governing board.- property of a corporation to be valid, the majority vote of the
In this connection, although it is true that Civil Case No. Q-90-6937, legitimate board, concurred in by the vote of at least 2/3 of the bona
which gave rise to G.R. No. 107751, was entitled, “Iglesia Ni Kristo, fide m embers of the corporation, should be obtained.-
Plaintiff v. Islamic Directorate of the Philippines, Defendant,” the IDP The Tandang Sora property, it appears from the records, constitutes
can not be considered essentially a formal party thereto for the simple the only property of the IDP. Hence, its sale to a third-party is a sale
reason that it was not duly represented by a legitimate Board of or disposition of all the corporate property and assets of I DP falling
Trustees in that case. As a necessary consequence, Civil Case No. Q- squarely within the contemplation of the foregoing section. For the
90-6937, a case for Specific Performance with Damages, a mere action sale to be valid, the m a jorit y vot e of the legitimate Board of
in personam , did not become final and executory insofar as the true Trustees, concurred in by the vote of at least 2/3 of the bona fide
IDP is concerned since petitioner corporation, for want of legitimate members of the corporation should have been obtained. These twin
representation, was effectively deprived of its day in court in said case. requirements were not met as the Carpizo Group which voted to sell
Res inter alios judicatae nullum aliis praejudicium faciunt. Matters the Tandang Sora property was a fake Board of Trustees , and those
adjudged in a cause do not prejudice those who were not parties to it. whose names and s ignatures were affixed by the Carpizo Group
Elsewise put, no person (natural or juridical) shall be affected by a together with the sham Board Resolution authorizing the negotiation
proceeding to which he is a stranger. for the sale were, from all indications, not bona fide members of the
5. Actions; Judgments; Res Judicata; Bar by Prior IDP as they were ma de to appear to be. Apparently, there are only
Judgment; Conclusiveness of Judgment; While it is true that the fifteen (15) official members of the petitioner corporation including
principle of res judicata is a fundamental component of our judicial the eight (8) members of the Board of Trustees.
system, it should be disregarded if its rigid application would involve 9. Corporation Law; Contracts; Sales; Securities and Exchange
the sacrifice of justice to technicality.- Commission; Remand of Cases; No end of substantial justice will be
In any case, while it is true that the principle of res judicata is a served if the Supreme Court reverses the SEC’s conclusion and
fundamental component of our judicial system, it should be remand the case to the regular courts for further litigation over an issue
disregarded if its rigid application would involve the sacrifice of which is already determinable based on what is in the records.-
justice to technicality. The resolution of the question as to whether or not the SEC had
6. Corporation Law; Jurisdiction; Securities and Exchange jurisdiction to declare the subject sale null and void is rendered moot
Commission; The SEC has the unquestionable authority to pass upon and academic by the inherent nullity of the highly dubious sale due to
the issue as to who among the different contending groups is the lack of consent of the I DP, owner of the subject property. No end of
legitimate governing board of a corporate body.- substantial justice will be served if we revers e the SEC’s conclusion
There can be no question as to the authority of the SEC to pass upon on the matter, and remand the case to the regular courts for further
the issue as to who among the different contending groups is the litigation over an issue which is already determinable based on what
legitimate Board of Trustees of the IDP since this is a matter properly we have in the records.
falling within the original and exclusive jurisdiction of the SEC by 10. Land Titles; Under the Torrens System of Registration, the
virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A: minimum requirement for one to be a good faith buyer for value is that
“Section 3. The Commission shall have absolute jurisdiction, the vendee at least sees the owner’s duplicate copy of the title and
supervision and control over all corporations, partnerships or relies upon the same.-
associations , who are the grantees of primary franchises and/or a Furthermore, the Court observes that the INC bought the questioned
license or permit issued by the government to operate in the property from the Carpizo Group without even seeing the owner’s
Philippines x x x x x x.” x x x x x x x x x Section 5. In addition to the duplicate copy of the titles covering the property. This is very strange
regulatory and adjudicative functions of the Securities and Exchange considering that the subject lot is a large piece of real property in
Commission over corpora ti ons , partnerships and other forms of Quezon City worth millions , and that under the Torrens System of
associations registered with it as expressly granted under existing laws Registration, the minimum requirement for one to be a good faith
88
buyer for value is that the vendee at least sees the owner’s duplicate direct "such disposi- tion of its assets as justice requires, and may
copy of the title and relies upon the same. The private respondent, appoint a receiver to collect such assets and pay the debts of the
presumably knowledgeable on the aforesaid workings of the Torrens corporation"; (2) under Section 77 of the Corporation Law, whereby a
System, did not take heed of this and nevertheless went through with corporation whose corporate existence is terminated, "shall
the sale with undue haste. The unexplained eagerness of INC to buy nevertheless be continued as a body corporate for three years after the
this valuable piece of land in Quezon City without even being time when it would have been so dissolved, for the purpose of
presented with the owner’s copy of the titles casts very serious doubt prosecuting and defending suits by or against it and of enabling it
on the rightfulness of its position as vendee in the transaction. gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of
Ramirez vs Orientalist 38 Phil 634 1918 continuing the business for which it was established"; and (3) under
Section 78 of the Corporation Law, by virtue of which the corporation,
1. PLEADING; DUE EXECUTION OF within the three-year period just mentioned, "is authorized and
CONTRACT; AUTHORITY OF OFFICER TO BIND empowered to convey all of its property to trustees for the benefit of
CORPORATION.- members, stockholders, creditors, and others interested,"
Where the name of a corporation is signed to the document which is 3. Board of Liquidators; Trustee for government.-
the basis of an action, the failure By Executive Order No. 372, the government, the sole stockholder,
2. PLEADING; CORPORATIONS; WANT OF AUTHORITY IN abolished the National Coconut Corporation (NACOCO) and placed
AGENT AS SPECIAL DEFENSE.- its assets in the hands of the Board of Liquidators. The Board thus
Where a corporation seeks to evade liability on a contract on the became the trustee on behalf of the government. It was an express
ground of lack of authority on the part of the person who assumed to trust. The legal interest became vested in the trustee, the Board of
act for it, such defense should be specially pleaded. Liquidators. The beneficial interest remained with the sole
3. PLEADING; AMENDMENTS.- stockholder, the government. The Board took the place of the
While immaterial variances between allegations in the pleadings and dissolved government corporations after the expiration of the statutory
the proof adduced at the hearing may be disregarded, it is, three-year period for the liquidation of their affairs.
nevertheless, still true that relief can be granted only upon matter 4. Board of Liquidators; No term for life of Board.-
which is put in issue by the pleadings; and if the proof varies No time limit has been tacked to the existence of the Board of
materially from the allegations, the pleadings may, upon the Liquidators and its function of closing the affairs of various
application of the party interested, be amended in order to bring them government corporations. Its term of life is not fixed.
into conformity with the facts proved. 5. Board of Liquidators; Right of Board of Liquidators to proceed as
4. PLEADING; SPECIAL DEFENSE.- partyplaintiff; Case at bar.-
The rule above stated applies equally to a special defense stated in the At no time had the government withdrawn the property. or the
answer as to the plaintiff's cause of action. authority to continue the present suit, from the Board of Liquidators.
5. CORPORATIONS; CONTRACTS; POWER OF Hence, the Board can prosecute this case to its final conclusion. The
BOARD; RATIFICATION.- provisions of Section 78 of the Corporation Law, the third method of
The power to make corporate contracts resides primarily in the winding up corporate affairs, find application. The Board has
company's board of directors; but the board may ratify an personality to proceed as party-plaintiff in this case.
unauthorized contract made by an officer of the corporation. 6. Settlement of decedent's estate; Actions; Actions that
Ratification in this case is held to have occurred when the board, with survive; Executors and administrators.-
knowledge that the contract had been made, adopted a resolution The actions that survive against a decedent's executors or
recognizing the existence of the contract and directing that steps be administrators are: (1) actions to recover real and personal property
taken to enable the corporation to utilize its benefits. from the estate; (2) actions to enforce a lien thereon; and (3) actions
6. CORPORATIONS; CONTRACTS; ACTION OF to recover damages for an injury to person or property. A suit to
STOCKHOLDERS.- recover damages, based on the alleged tortious acts of the manager of
Where a corporate contract has been effected with the approval of the a government corporation, survives. It is not a mere money claim that
board of directors, a resolution adopted at a meeting of stockholders is extinguished upon the death of a party.
refusing to recognize the contract or repudiating it is without effect. 7. Corporations; Implied authority of corporate officer to enter into
7. CONTRACTS; SURETY; PAROL EVIDENCE TO SHOW contracts.-
CHARACTER IN WHIGH PARTY IS BOUND.- A corporate officer, entrusted with the general management and
The written contract which was the subject of this action contained the control of its business, has implied authority to make any contract or
corporate name signed at the lower right-hand corner of the contract, do any other act which is necessary or appropriate to the conduct of
in the manner usual with a party signing in the character of principal the ordinary business of the corporation. As such officer, he may,
obligor. The name of another individual was signed somewhat below without any special authority from the Board of Directors, perform all
and to the left of the corporate signature, after the customary manner acts of an ordinary nature, which by usage or necessity are incident to
of those who sign in a subsidiary capacity; but no words were written his office, and may bind the corporation by contracts in matters arising
to indicate clearly whether this individual signed as a principal obligor in the usual course of business.
or as surety 8. Corporations; Where similar acts of manager were approved by
directors.-
Board of Liquidators vs Kalaw 20 Scra 987 1967 Where similar acts have been approved by the directors as a matter of
general practice, custom, and policy, the general manager may bind
1. Courts; Judgment; Appeals.- the company without formal authorization of the board of directors. In
An appellate court may base its decision of affirmance of the judgment varying language, existence of such authority is established by proof
below on a point or points ignored by the trial court on which said of the course of business, the usages and practices of the company and
court was in error. by the knowledge which the board of directors has, or must be
2. Corporations; Three methods of winding up corporate affairs.- presumed to have, of acts and doings of its subordinates in and about
Accepted in this jurisdiction are three methods by which a corporation the affairs of the corporation. Where the practice of the corporation
may wind up its affairs: (1) under Section 3, Rule 104, of the Rules of has been to allow its general manager to negotiate and execute
Court (which superseded Section 66 of the Corporation Law), contracts in its copra trading activities for and in Nacoco's behalf
whereby, upon voluntary dissolution of a corporation, the court may without prior board approval, and the board itself, by its acts and
89
through acquiescence, practically laid aside the by-law requirement of
prior approval, the contracts of the general manager, under the given Section 35. Executive committee. - The by-laws of a corporation may
circumstances, are valid corporate acts. create an executive committee, composed of not less than three
9. Corporations; Ratification by corporation of unauthorized contract members of the board, to be appointed by the board. Said committee
of its officers.- may act, by majority vote of all its members, on such specific matters
Ratification by a corporation of an unauthorized act or contract by its within the competence of the board, as may be delegated to it in the
officers or others relates back to the time of the act or contract ratified by-laws or on a majority vote of the board, except with respect to: (1)
and is equivalent to original authority. The corporation and the other approval of any action for which shareholders' approval is also
party to the transaction are in precisely the same position as if the act required; (2) the filing of vacancies in the board; (3) the amendment
or contract had been authorized at the time. The adoption or ratif or repeal of by-laws or the adoption of new by-laws; (4) the
ication of a contract by a corporation is nothing more nor less than the amendment or repeal of any resolution of the board which by its
making of an original contract. The theory of corporate ratification is express terms is not so amendable or repealable; and (5) a distribution
predicated on the right of a corporation to contract, and any ratification of cash dividends to the shareholders.
or adoption is equivalent to a grant of prior authority.
10. Contracts; Bad faith.- An executive committee may be created when authorized by the by-
Bad faith does not simply connote bad judgment or negligence; it laws.
imports a dishonest purpose or some moral obliquity and conscious
doing of wrong; it means breach of a known duty through some motive General rule: The executive committee may act, by majority vote of
or interest or ill-will; it partakes of the nature of fraud. all its members, on such specific matters within the competence of the
11. Damages; Damnum absque injuria.- board, as may be delegated to it in the by-laws or on a majority vote
The present case is one of damnum absque injuria. Conjunction of of the board.
damage and wrong is here absent. There cannot be an actionable Exceptions:
wrong if either one or the other is wanting. 1. Approval of any action for which shareholders' approval is also
required;
Acuna vs Batac Producers 20 Scra 562 1967 2. The filling of vacancies in the board;
3. The amendment or repeal of by-laws or the adoption of new by-
1. Attachment; Dissolution of writ of attachment for lack of cause of laws;
action.- 4. The amendment or repeal of any resolution of the board which by
A court has the authority to dissolve a writ of preliminary attachment, its express terms is not so amendable or repealable; and
either upon a counterbond or on the ground that it was improperly or 5. A distribution of cash dividends to the shareholders.
irregularly issued. Where the dissolution of the writ of preliminary
attachment was based on the court's finding of lack of action, the fact ROLE OF SHAREHOLDERS
that the dismissal of the complaint was set aside by the Supreme Court Right to Vote and Attend Meetings sec 89
on appeal does not imply that the dissolution of the writ was done
without or in excess of the respondent court's jurisdiction or with grave Section 89. Right to vote. - The right of the members of any class or
abuse of discretion. classes to vote may be limited, broadened or denied to the extent
2. Attachment; Effect of lifting of attachment.- specified in the articles of incorporation or the by-laws. Unless so
The legal effect of the discharge of the writ of preliminary attachment limited, broadened or denied, each member, regardless of class, shall
is the extinguishment of the lien on the attached properties, rendering be entitled to one vote.
them free of such encumbrance. The subsequent order directing the
release of the attached properties to the defendants was practically a Unless otherwise provided in the articles of incorporation or the by-
ministerial auto, intended to carry out the preexisting order laws, a member may vote by proxy in accordance with the provisions
discharging the attachment. Trial courts have jurisdiction to issue of this Code. (n)
orders of this nature. Hence, even if the order directing the release of
the attached properties to the defendants was issued after the approval Voting by mail or other similar means by members of non-stock
of the record on appeal, its validity cannot be assailed on the ground corporations may be authorized by the by-laws of non-stock
that it was issued outside or in excess of the court's jurisdiction. corporations with the approval of, and under such conditions which
may be prescribed by, the Securities and Exchange Commission.
Harden vs Benguet Consolidated 58 phil 1140 1948
Price vs Martin 58 Phil 707
1. CORPORATIONS; MlNING CORPORATION; PROHIBITION
AGAINST OWNING INTEREST IN OTHER MINING 1. SHARES OF STOCK; PARTICIPATION IN STOCKHOLDERS'
CORPORATION; RIGHT OF ACTION.- MEETING; TRANSFER OF SHARES.-
Inasmuch as the Corporation Law contains, in section 190 (A), Plaintiffs contend that the transference on the books of the S. D. Co.
provisions fully penalizing the violation of subsection 5 of sec- tion of 97 shares of stock in the name of Mrs, W. was fraudulent and
13 of Act No. 1459,—which prohibits the acquisition by one mining illegal. The evidence of record, however, under all the circumstances
corporation of any interest in another,—and inasmuch as these of the case, fails to demonstrate the allegation of fraud, and the court
provisions have been enacted in the exercise of the general police believes that she acted in good faith and in the honest belief that she
powers of the Government, it results that, where one mining had not only a legal right but a duty to participate in the stockholders'
corporation acquires a prohibited interest in another such corporation, meeting.
the shareholders of the latter cannot maintain an action to annul the 2. SHARES OF STOCK; PARTICIPATION IN STOCKHOLDERS'
contract by which such interest was acquired. The remedy must be MEETING; ID.-
sought in a criminal proceeding or quo warranto action, under section Until challenged in a proper proceeding, a stockholder according to
190 (A), instituted by the Government. Until thus assailed in a direct the books of the company has a right to participate in any meeting, and
proceeding the contract by which the interest was acquired will be in the absence of fraud the action of thestockholders' meeting cannot
treated as valid, as between the parties be collaterally attacked on account of such participation.
3. SHARES OF STOCK; PARTICIPATION IN STOCKHOLDERS'
Executive Committee Sec 35 MEETING; ID.-
90
"A person who has purchased stock, and who desires to be recognized Commission if not acted upon within six (6) months from the date of
as a stockholder, for the purpose of voting, must secure such a standing filing for a cause not attributable to the corporation.
by having the transfer recorded upon the books. If the transfer is not
duly made upon request, he has, as his remedy, to compel it to be General rule: Amendment of the articles of incorporation is a matter
made." (Morrill vs. Little Falls, Mfg. Co., 53 Minn., 371.) of right (Note: procedure differs for special amendments)
4. MORTGAGE; CONSIDERATION.- Exception: Corporations created by special law
A morgtage given to cover past advancement of funds executed upon
the advice of competent attorneys and to avoid litigation is not made Any amendment to the articles of incorporation which seeks to:
without consideration. 1. Delete or remove any provision required by Title XV of the Code
to be contained in the articles of incorporation, or
Instances 2. Reduce a quorum or voting requirement stated in said articles of
Election of Directors and Trustees sec 24 incorporation,
must be approved by the affirmative vote of at least 2/3 of the
Section 24. Election of directors or trustees. - At all elections of outstanding capital stock, whether with or without voting rights, or of
directors or trustees, there must be present, either in person or by such greater proportion of shares as may be specifically provided in
representative authorized to act by written proxy, the owners of a the articles of incorporation for amending, deleting or removing any
majority of the outstanding capital stock, or if there be no capital stock, of the aforesaid provisions, at a meeting duly called for the purpose.
a majority of the members entitled to vote. The election must be by
ballot if requested by any voting stockholder or member. In stock Steps to be followed for an effective amendment of the articles of
corporations, every stockholder entitled to vote shall have the right to incorporation:
vote in person or by proxy the number of shares of stock standing, at 1. Resolution by at least a majority of the board of directors or trustees.
the time fixed in the bylaws, in his own name on the stock books of 2. Vote or written assent of the stockholders representing at least 2/3
the corporation, or where the by-laws are silent, at the time of the of the outstanding capital stock or 2/3 of the members in case of non-
election; and said stockholder may vote such number of shares for as stock corporation.
many persons as there are directors to be elected or he may cumulate 3. Submission and filing of the amendments with the SEC as follows:
said shares and give one candidate as many votes as the number of
directors to be elected multiplied by the number of his shares shall a. The original and amender articles together shall contain all
equal, or he may distribute them on the same principle among as many the provisions required by law to be set out in the articles of
candidates as he shall see fit: Provided, That the total number of votes incorporation. Such articles, as amended, shall be indicated by
cast by him shall not exceed the number of shares owned by him as underscoring the change or changes made.
shown in the books of the corporation multiplied by the whole number
of directors to be elected: Provided, however, That no delinquent stock b. A copy thereof, duly certified under oath by the corporate
shall be voted. Unless otherwise provided in the articles of secretary and a majority of the directors or trustees stating the fact that
incorporation or in the by-laws, members of corporations which have such amendments have been duly approved by the required vote of the
no capital stock may cast as many votes as there are trustees to be stockholders or members.
elected but may not cast more than one vote for one candidate. c. Favorable recommendation of the appropriate government
Candidates receiving the highest number of votes shall be declared agency concerned in the case where the corporation is under its
elected. Any meeting of the stockholders or members called for an supervision.
election may adjourn from day to day or from time to time but not sine
die or indefinitely if, for any reason, no election is held, or if there are Time when the amendments shall take effect:
not present or represented by proxy, at the meeting, the owners of a 1. Upon approval of the SEC; or
majority of the outstanding capital stock, or if there be no capital stock, 2. From the date of filing with the SEC if not acted upon with 6 months
a majority of the member entitled to vote. from the date of filing for a cause not attributable to the corporation.
(Note: not applicable to special amendments)
Amendment of AOI sec 16
Special amendments:
Section 16. Amendment of Articles of Incorporation. - Unless 1. Extension or shortening of corporate term (Sec. 37)
otherwise prescribed by this Code or by special law, and for legitimate 2. Increase or decrease of capital stock (Sec. 38)
purposes, any provision or matter stated in the articles of incorporation 3. Incurring, creating or increasing bonded indebtedness (Sec. 38)
may be amended by a majority vote of the board of directors or
trustees and the vote or written assent of the stockholders representing PROVISIONS SUBJECT TO AMENDMENT
at least two-thirds (2/3) of the outstanding capital stock, without Matters which are fait accompli are not subject to change.
prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written A change in the name of the corporation does not affect the identity of
assent of at least two-thirds (2/3) of the members if it be a non-stock the corporation, nor in any way affect the rights, privileges, or
corporation. obligations previously acquired or incurred by it. (Philippine First
Insurance Co. vs. Hartigan)
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such Investment in another business sec 42
articles, as amended shall be indicated by underscoring the change or
changes made, and a copy thereof duly certified under oath by the Section 42. Power to invest corporate funds in another corporation or
corporate secretary and a majority of the directors or trustees stating business or for any other purpose. - Subject to the provisions of this
the fact that said amendment or amendments have been duly approved Code, a private corporation may invest its funds in any other
by the required vote of the stockholders or members, shall be corporation or business or for any purpose other than the primary
submitted to the Securities and Exchange Commission. purpose for which it was organized when approved by a majority of
the board of directors or trustees and ratified by the stockholders
The amendments shall take effect upon their approval by the Securities representing at least two-thirds (2/3) of the outstanding capital stock,
and Exchange Commission or from the date of filing with the said or by at least two thirds (2/3) of the members in the case of non-stock
91
corporations, at a stockholder's or member's meeting duly called for of the members in the case of non-stock corporations shall be
the purpose. Written notice of the proposed investment and the time necessary for the approval of such plan. Any dissenting stockholder in
and place of the meeting shall be addressed to each stockholder or stock corporations may exercise his appraisal right in accordance with
member at his place of residence as shown on the books of the the Code: Provided, That if after the approval by the stockholders of
corporation and deposited to the addressee in the post office with such plan, the board of directors decides to abandon the plan, the
postage prepaid, or served personally: Provided, That any dissenting appraisal right shall be extinguished.
stockholder shall have appraisal right as provided in this Code:
Provided, however, That where the investment by the corporation is Any amendment to the plan of merger or consolidation may be made,
reasonably necessary to accomplish its primary purpose as stated in provided such amendment is approved by majority vote of the
the articles of incorporation, the approval of the stockholders or respective boards of directors or trustees of all the constituent
members shall not be necessary. corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
Dela Rama vs Ma-ao Sugar 27 scra 247 or of two-thirds (2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment, shall be
1. Corporation Law; Investment of corporate funds in another considered as the agreement of merger or consolidation.
corporation; When not violative of Section ½ of the Corporation Law.-
Plaintiffs-appellants contend that the investment of corporate funds by Increase and Decrease of Capital Stock sec 38
defendants-appellants in another corporation constitutes a violation of
section ½ of the Corporation Law. The Supreme Court held that “such Section 38. Power to increase or decrease capital stock; incur, create
an act, if done pursuance of the corporate purpose, does not need the or increase bonded indebtedness. - No corporation shall increase or
approval of the stock- holders; but when the purchase of shares of decrease its capital stock or incur, create or increase any bonded
another corporation is done solely for investment and not to indebtedness unless approved by a majority vote of the board of
accomplish the purpose of its incorporation, the vote of approval of directors and, at a stockholder's meeting duly called for the purpose,
the stockholders is necessary,” and further states that “when purpose two-thirds (2/3) of the outstanding capital stock shall favor the
or purposes as stated in its articles of incorporation, the approval of increase or diminution of the capital stock, or the incurring, creating
the stockholders is not necessary.” (Guevara, Philippine Corp. Law, or increasing of any bonded indebtedness. Written notice of the
1967 ed., p. 89). proposed increase or diminution of the capital stock or of the
2. Counterclaims; Dismissal; When justified.- incurring, creating, or increasing of any bonded indebtedness and of
The defendant’s counterclaim on the allegation that the complaint of the time and place of the stockholder's meeting at which the proposed
plaintiff was premature, improper, malicious and that the language is increase or diminution of the capital stock or the incurring or
unnecessarily vituperative, abusive and insulting cannot be sustained increasing of any bonded indebtedness is to be considered, must be
in the case at bar. On the contrary, the lower court found otherwise, as addressed to each stockholder at his place of residence as shown on
could be gleaned from the decision. With respect to the allegation that the books of the corporation and deposited to the addressee in the post
the complaint was abusive and insulting, there is no finding that office with postage prepaid, or served personally.
plaintiff had been actuated by bad faith, nor is there anything in the
complaint essentially libelous especially as the rule is that allegations A certificate in duplicate must be signed by a majority of the directors
in pleadings where relevant, are privileged even though they may not of the corporation and countersigned by the chairman and the secretary
be clearly proved afterwards. of the stockholders' meeting, setting forth:
3. Corporation Law; Investment of corporation for other corporations (1) That the requirements of this section have been complied with;
not similar with its business; Deemed proper by Section 17½ of the (2) The amount of the increase or diminution of the capital stock;
Corporation Law.- (3) If an increase of the capital stock, the amount of capital stock or
The lower court’s order refraining the appellant corporation from number of shares of no-par stock thereof actually subscribed, the
making investment in other companies whose purpose is not names, nationalities and residences of the persons subscribing, the
connected with the sugar central business should be reversed. This is amount of capital stock or number of no-par stock subscribed by each,
because section 17½ of the Corporation Law allows a corporation to and the amount paid by each on his subscription in cash or property,
“invest its funds in any other corporation or business, or for any or the amount of capital stock or number of shares of no-par stock
purpose other than the main purpose for which it was organized,” allotted to each stock-holder if such increase is for the purpose of
provided that its board of directors has been so authorized by the making effective stock dividend therefor authorized;
affirmative vote of stockholders holding shares entitling” them to (4) Any bonded indebtedness to be incurred, created or increased;
exercise at least two-thirds of the voting power. (5) The actual indebtedness of the corporation on the day of the
meeting;
Gokongwei vs SEC 89 Scra 336 1979 ( CIted Above ) (6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital
Merger and consolidation sec 77 stock, or the incurring, creating or increasing of any bonded
indebtedness.
Section 77. Stockholder's or member's approval. - Upon approval by
majority vote of each of the board of directors or trustees of the Any increase or decrease in the capital stock or the incurring, creating
constituent corporations of the plan of merger or consolidation, the or increasing of any bonded indebtedness shall require prior approval
same shall be submitted for approval by the stockholders or members of the Securities and Exchange Commission.
of each of such corporations at separate corporate meetings duly called
for the purpose. Notice of such meetings shall be given to all One of the duplicate certificates shall be kept on file in the office of
stockholders or members of the respective corporations, at least two the corporation and the other shall be filed with the Securities and
(2) weeks prior to the date of the meeting, either personally or by Exchange Commission and attached to the original articles of
registered mail. Said notice shall state the purpose of the meeting and incorporation. From and after approval by the Securities and
shall include a copy or a summary of the plan of merger or Exchange Commission and the issuance by the Commission of its
consolidation. The affirmative vote of stockholders representing at certificate of filing, the capital stock shall stand increased or decreased
least two-thirds (2/3) of the outstanding capital stock of each and the incurring, creating or increasing of any bonded indebtedness
corporation in the case of stock corporations or at least two-thirds (2/3) authorized, as the certificate of filing may declare: Provided, That the
92
Securities and Exchange Commission shall not accept for filing any except: (1) when justified by definite corporate expansion projects or
certificate of increase of capital stock unless accompanied by the programs approved by the board of directors; or (2) when the
sworn statement of the treasurer of the corporation lawfully holding corporation is prohibited under any loan agreement with any financial
office at the time of the filing of the certificate, showing that at least institution or creditor, whether local or foreign, from declaring
twenty-five (25%) percent of such increased capital stock has been dividends without its/his consent, and such consent has not yet been
subscribed and that at least twenty-five (25%) percent of the amount secured; or (3) when it can be clearly shown that such retention is
subscribed has been paid either in actual cash to the corporation or that necessary under special circumstances obtaining in the corporation,
there has been transferred to the corporation property the valuation of such as when there is need for special reserve for probable
which is equal to twenty-five (25%) percent of the subscription: contingencies. (n)
Provided, further, That no decrease of the capital stock shall be
approved by the Commission if its effect shall prejudice the rights of Management Contracts sec 44
corporate creditors.
Section 44. Power to enter into management contract. - No corporation
Non-stock corporations may incur or create bonded indebtedness, or shall conclude a management contract with another corporation unless
increase the same, with the approval by a majority vote of the board such contract shall have been approved by the board of directors and
of trustees and of at least two-thirds (2/3) of the members in a meeting by stockholders owning at least the majority of the outstanding capital
duly called for the purpose. stock, or by at least a majority of the members in the case of a non-
stock corporation, of both the managing and the managed corporation,
Bonds issued by a corporation shall be registered with the Securities at a meeting duly called for the purpose: Provided, That (1) where a
and Exchange Commission, which shall have the authority to stockholder or stockholders representing the same interest of both the
determine the sufficiency of the terms thereof. managing and the managed corporations own or control more than
one-third (1/3) of the total outstanding capital stock entitled to vote of
Adoption, amendment, and Repeal of By-laws sec 48 the managing corporation; or (2) where a majority of the members of
the board of directors of the managing corporation also constitute a
Section 48. Amendments to by-laws. - The board of directors or majority of the members of the board of directors of the managed
trustees, by a majority vote thereof, and the owners of at least a corporation, then the management contract must be approved by the
majority of the outstanding capital stock, or at least a majority of the stockholders of the managed corporation owning at least two-thirds
members of a non-stock corporation, at a regular or special meeting (2/3) of the total outstanding capital stock entitled to vote, or by at
duly called for the purpose, may amend or repeal any by-laws or adopt least two-thirds (2/3) of the members in the case of a non-stock
new by-laws. The owners of two-thirds (2/3) of the outstanding capital corporation. No management contract shall be entered into for a period
stock or two-thirds (2/3) of the members in a non-stock corporation longer than five years for any one term.
may delegate to the board of directors or trustees the power to amend
or repeal any by-laws or adopt new by-laws: Provided, That any power The provisions of the next preceding paragraph shall apply to any
delegated to the board of directors or trustees to amend or repeal any contract whereby a corporation undertakes to manage or operate all or
by-laws or adopt new by-laws shall be considered as revoked substantially all of the business of another corporation, whether such
whenever stockholders owning or representing a majority of the contracts are called service contracts, operating agreements or
outstanding capital stock or a majority of the members in non-stock otherwise: Provided, however, That such service contracts or
corporations, shall so vote at a regular or special meeting. operating agreements which relate to the expl