Lozano vs. De Los Santos
Phil Fishing Gear Industries
Petitioner Lozano filed for damages against Adda before the MCTC in Pampanga.
Lozano is the president of KAMAJDA while Anda was the president of SAMAJODA. With
the request of the Sangguniang Bayan of Mabalacat, Lozano and Anda agreed to
CONSOLIDATE their respective associations and from a unified jeepney operators
association UMAJODA.
They agreed to elect one set of officers who shall be given the SOLE authority to
collect the daily dues from the members of the consolidated assoc.
Lozano won as president and Anda protested alleging fraud and refused to recognize
the results of the election. He also continued to collect the dues from the members of
his assoc despite demands to resist.
Anda claims that the jurisdiction was lodged with SEC. MCTC denied the motion.
RTC: Intracorporate – SEC.
ISSUE: Jurisdiction
Held: MCTC
There is no intracorporate nor partnership relation between the petitioner and priv
resp.
Dispute arose of just a plan to consolidate into a single common assoc and is still a
PROPOSAL.
Not approved by SEC and had not submitted its articles nor its officers and members.
CONSOLIDATION becomes effective not upon mere agreement but only UPON
ISSUANCE OF THE CERTIFICATE OF CONSOLIDATION OF SEC.
Consolidation must not be against the provisions of the Corpo Code.
The dispute is not among the members of the KAMAJDA or SAMAJODA but
between members of separate and distinct associations.
Sec. 5 of the PD 902-A sets forth the jurisdiction of SEC. The jurisdiction is determined
by a concurrence of two elements:
1) status or relationship of the parties- relationship must arise our of
intracorporate of partnership releations between and amoing stockholders,
members or assoc etc.
2) nature of the question that is the subject of their controversy – requires that
the dispute be INTRINSICALLY CONNECTED WITH THE REGULATION OF THE
CORPO, PARTN, ASSOC. and deal with the internal affairs of the corpo.
Corporation by estoppel is founded on principles of equity and is designed to prevent
injustice and unfairness. It applies when persons assume to form a corporation and
exercises corporate functions and enter into business relations with third persons.
Where there is no third person involved and the conflict arises only among
those assuming the form of a corporation, who therefore know that it has
not been registered, there is no corporation by estoppel.
Lim Tong Lim vs.
A partnership may be deemed to exist among parties who agree to borrow money to
pursue a business and to divide the profits or losses that may arise therefrom, even if
it is shown that they have not contributed any capital of their won to a “common
fund”.
Their contribution may be in the form of credit of industry, not necessarily cash or
fixed assets.
By being partners, they are liable fro debts incurred by or on behalf of the
partnership.
The liability for a contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person who may not have
directly transacted on its behalf but reaped benefits from that contract.
FACTS:
Chua and Yao entered into a contract for the purchase of fishing nets on behalf of
Ocean Quest Fishing Corpo from Phil Fishing Gear Industries.
C and Y claimed that they were engaged in a business with Lim Tong Lim but who was
not a signatory to the agreement.
Failed to pay thus PFGI filed collection suit against the three: Chua, Yao and Lim as
general partners because Ocean Quest is a non-existing corpo as shown by a cert
from SEC.
Lim filed for the lift of the Writ of Attachment but RTC maintained the write and
ordered the sale of the nets.
RTC: There is partnership.
There is a compromise agreement among the 3 which stated that they will have the 4
vessels sold for 5.7M including the fishing net and that this amount shall be applied in
full payment in favor of JL Holdings and Lim and that if these 4 vessels be sold higher
that 5.7M, the excess shall be divided among the three. If deficient, shall also be
divided among the 3.
RTC: Compromise Agreement silent as to the nature of their obligations but
presumption is that equal distribution of the profit and loss.
CA: Affirmed.
ISSUE: WON Lim may be regarded as a partner when the sole basis is the
Compromise Agreement and not considering the fact that he has not signed any
transaction nor met any of the rep of the Phil Fishing Gears. WON it is just a lease.
HELD: There is partnership.
It is clear in the factual findings that they have decided to engage in a fishing
business where they bought boats from the loan they got from JLim who is Lim’s
borther.
The partnership extended not only to the boats but also to the nets and the floats.
Lim is not a lessor because in effect he would like the Court to believe that he
consented to the sale of his own boats to pay the debt or Chua and Yao with the
excess of the proceeds to be divided among the three of them. No lessor would do
that.
F/B Lourdes, although under his name, is not his own but an asset of the partnership.
Not uncommon to register the properties acquired from a loan in the name of the
person the lender trusts.
Corporation by Estoppel
The doctrine may apply to the alleged corporation and to a third party. In the first
instance, the unincorporated association which represented itself to be a corporation
will be estopped from DENYING its corpo capacity in a suit against it by a third person
who RELIED ON GOOD FAITH on such representation.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence in a
suit brought against the alleged corporation.
IN SUCH CASE, all those who benefited from the transaction made by the
ostensible corporation, despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took advantage of.
ISSUE: WON Lim shall be JOINTLY liable with Chua and Yao.
Held: No, he shall be jointly liable. He has benefited from the USE OF THE NETS found
inside F/B Lourdes which is an asset of the partnership.
Under the law on estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid existence, are held
liable as general partners.
Having reaped the benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is deemed to be part of
said association and is covered by the scope of the doctrine of corporation
by estoppel.
Concurring Opinion of J. Vitug:
Partners can be held SOLIDARILY liable with the partnership specifically in these
instances:
1) where, by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership or with the authority of his co-
partners, LOSS OR INJURY is cause to any person, NOT BEING A PARTNER in
the partnership, or nay penalty incurred, the partnership is liable therefore
to the same extent as the partner so acting or omitting to act.
2) Where on partner acting within the scope of his apparent authority receives
money or property of a third person and misapplies it.
3) Where the partnership in the course of its business receives money or
property of a third person and the money or property so received is
misapplied by any partner while it is in the custody of the partnership.
International Express Travel & Tour Services vs CA
FACTS: In June 1989, Express Travel wrote a letter to the Phil Football Federation thru
the president Henry Kahn offering its services to the latter and Kahn accepted this.
The federation consisting of athletes and officials, went to the South East Asian
Games in Malaysia and other trips to other countries. Federation incurred expenses
and made two partial payments.
In Dec 1989, Kahn issued a personal check as a partial payment then no more
payment.
ET sued HK in his personal capacity and as president and impleaded the federation as
an alternative defendant.
HK: No cause of action against in his personal cap or official cap and that he did not
guarantee the payment and merely acted as an agent.
RTC: HK personally liable. No proof that the federation has a corporate existence.
CA: reversed. Juridical existence of the Fed.
ISSUE: WON the Federation is a juridical person.
CA: RA 3135 Revised Charter of the Phil Amateur Athletic Fed and PD 604: where
the fed derives its existence. These laws recognize the juridical existence of
NATIONAL SPORTS ASSOC.
SC: But the mere passage of these laws DOES NOT AUTOMATICALLY vest the
associations a CORPORATE STATUS.
RULE: The State must give its consent: in the form of a special law of a general
enabling act. These laws merely recognized the existence of national sports
associations.
Before an entity may be considered a national sports assoc, the Phil Amateur Athletic
Fed and Dept of Youth and Sports Dev must recognize them as such.
HK shall be held liable for the unpaid obligations of the unincorporated Fed.
Settled rule: Any person acting or purporting to act on behalf of a corporation which
has no valid existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed as such agent.
It cannot be held that ET is estopped because: The doctrine of corporation by
estoppel is mistakenly applied by the responded court to the petitioner. The
application of the doctrine applies to a third party only when he tries to
escape liability on a contract from which he has benefited on the irrelevant
ground of defective corporation.
ET is not trying to escape liability but is the one claiming from the contract.
Loyola Grand Villas Homeowners (SOUTH) Assoc vs. CA
Issue: Does the failure of a corporation to file its by-laws within one month from the
date of its incorporation result in its automatic dissolution?
HIGC (Guaranty Corp), a quasi-judicial body, recognized LGVHA as the SOLE
homeowners’ assoc in Loyola Grand Villas in Marikina and QC. HIGC revoked the cert
of North Assoc and South Assoc.
North is registered with HIGC and has submitted its by-laws.
Soliven inquired about the status of the LGV and he was told by the legal counsel of
HIGC that LGV has been AUTOMATICALLY dissolved because it did not submit its by-
laws and that it has been a non-user of the corporate charter because HIGC did not
receive any report on the assoc activities.
South registered wit the HIGC and filed its by-laws.
ISSUE: WON automatic dissolution because of failure to submit by-laws.
HELD: No.
Proper notice and hearing are cardinal components of due process in any democratic
institution, agency or society.
CA: The code is silent on the result of the failure to adopt and file the by-laws within
the required period. Also there is no showing that the cert of LGV has been revoked.
PD 902-A, it clear that the failure to file by-laws within the required period is only a
ground for suspension or revocation of the certificate of registration of corporations.
There must be a hearing to determine the existence of the ground and assuming that
there is such finding, the penalty is not revocation but may be only suspension of the
charter. Administrative fine only.
Hall vs Piccio
Facts: In May 1947, the Halls with resp Brown, Chapman and Abella sighed and
acknowledge in Leyte, the articles of incoraporation of the Far Estern Lumber and
Commercial Co organized to engaged in a general lumber business  general
contractors, operators and managers.
Attached in the articles are affidavit by the treasurer the number of shares of stocks
and what has been subscribed and fully paid.
After, adoption of by-laws and election of officers. In Dec 1947, filed in SEC for the
cert of incorporation.
In March 1942, resp filed for the dissolution of the FELC because it was an
unregistered partnership and that there is a bitter dissension among members.
Judge Piccio ordered for the dissolution of the company and appointed Capuciong, at
the request of the pet, as receiver of the properties.
Pet claims that it bec it is a de facto corpo, the dissolution may only be ordered in a
quo warranto proceeding. Browns and the resp are estopped from claiming that it is
not a corporation but only a partnership.
ISSUE: WON corporation or partnership
Held: Partnership.
Not having obtained the cert of incorporation, FELC may not claim corporation in
good faith. Immunity of collateral attack is granted to corporations claiming in good
faith to be a corporation under this act.
The complaining assoc have not represented to the others that they were
incorporated any more than the latter had made similar rep to them. And as nobody
was led to believe anything to his prejudice and damage, the principle of estoppel
does not apply.
This suit is not one in which the corporation is a party. This is a litigation
between the stockholders of the alleged corporation. Even the existence of
a de jure corp may be terminated in a private suit for dissolution bet SH
WITHOUT the intervention of the State.
Pau: In the present Code, the appointment of a receiver would suspend all
proceedings and would make SEC have the jurisdiction over the case.
ABC vs Standard Products
Facts: Recovery of the balance by the bank against corporation.
RTC: Bank was not able to prove corporate existence of both parties.
HELD: Gen rule: in the absence of fraud, a person who has contracted or
otherwise dealt with an association in such a ways as to recognize and in
effect admit its legal existence as a corporate body is thereby estopped to
deny its corporate existence
The defendant corp having recognized the corporate existence of the plaintiff byu
making a promissory note it its favor and making partial payments is estopped to
deny said plaintiff’s corporate existence. It is also estopped from denying its own
corpo existence.
Cranson vs. IBM
FACTS:
Cranson was asked to be an investor in a new business corporation and after he
acceded, there are other people who had formed the corporation with him. A stiock
cert evidencing his ownership of shares in the corporation was given to him. The
transactions were done as if it were a corporation and eventually Cranson was
elected president and all the dealings with IBM were conducted by him for the
corporation.
At no time did he assume personal obligation or pledge his individual credit to IBM.
But the lawyers of the corpo made an oversight of not filing the certificate of
incorporation and when claim for payment were charged against the Bureau, IBM
charged Cranson in his personal capacity.
ISSUE: Won a defectively incorporated association would warrant a charge against
officers in their personal capacity.
Held: No.
There are two doctrines which the courts use to clothe a defectively incorporated
association:
1) Doctrine of de facto corporation
Elements:
a. existence of law authorizing incorporation
b. effort in good faith to incorporate under the existing law
c. actual use or exercise of corporate powers
 2) Doctrine of estoppel: employed when the person seeking to hold the officer
personally liable has contracted or otherwise dealt with the assoc in such a
manner as to recognize and in effect admit its existence as a corporate bdy.
When there is a concurrence of the three elements necessary for the application of
the de facto corporation doctrine, there exists an entity which is a corporation de jure
against all persons BUT THE STATE. On the other hand, the estoppel theory is applied
only to the facts of each particular case and may be invoked even when there is no
corporation de facto.
IBM, having dealth with the Bureau as if it were a corporation and relied on its credit
rather than that of Cranson, is estopped to assert that the Bureau was not
incorporated at the time the typewriters were franchised.
Where one has recognized the corporate existence of an association, he is
estopped to assert the contrary with respect to claim arising out of such
dealings.
IBM estopped=Cranson not liable.
Salvatierra vs. Garlitos
Facts:
Manuela Salvatierra-owner of a parcel of land in Leyte. MS entered into a contract of
lease with the Phil Fibers Producers Co allegedly a coporation “duly organized and
existing under the laws of the Phils and represented by Refuerzo, the President.
Lease Contract:
• 10 years
• land would be planted to kenaf, ramie, or other crops suitable to the
soil
• lessor would be entit;ed to 30% of the net income accruing from the
harvest of any crop without being responsible for the cost of
production
• after every harvest, the lessee was bound to declare at the earlies
possible time the income derived and deliver the said share to the
lessor.
Not complied so MS filed with CFI for accounting, rescission and damages.
CFI: granted—render complete accounting and to deliever with legal interest.
Failure to abide by the said req, the gross income would be fixed at P4300 or a net
income of 3200 after deducting the expenses for production, 30% or 960.
SRefuerzo: should be declared null nd void with respect to him-no allegation pointing
to his personal liability. Court granted and ordered the release of properties belonging
the him.
He claims he should be exonerated because: no allegation which would hold him
liable personally, for while it was stated that he was a signatory to the lease contract,
he did so in his capacity as president of the corporation.
MS: Her failure to specify the def personal liability was due to the fact that all the
time she was under the impression that the Phil Fibers rep by resp was a duly
registered corpo as appearing in the contract but a subsequent inquiry form the SEC
proved otherwise.
ISSUE: WON SRefuerzo can be held personally liable to MS.
HELD: SRefuerzo liable.
Gen rule: a person who has contracted or dealt with an association in such a way as
to recognize its existence as a coporate body is ESTOPPED from denying the same in
an action arising out of such transaction or dealing.
EXCEPTION: Where there is fraud in the transaction.
In the present case, SR no confirmation nor denial thus, may be concluded that MS
was really made to believe that it was a corporation duly organized.
Doctrine: xxx A stockholder or member cannot be held personally liable for
any financial obligation by the corporation in excess of his unpaid
subscription.  BUT THIS RULE IS UNDERSTOOD TO REFER MERELY TO
REGISTERED CORPORATIONS and cannot be made applicable to the liability of
members of an unincorporated association.
Ration of the Doctrine: organization before the law  non-existent = has no
personality and would be incompetent as a corporation, IT CANNOT CREATE AGENTS
OR CONFER AUTHORITY ON ANOTHER TO ACT IN ITS BEHALF. It’s at their own risk.
“A person who acts as an agent without authority or without a principal is
himself regarded as the principal, possessed of all the rights and 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 such privileges and obligations and becomes
personally liable for contracts entered into or for other acts performed as such agent.
“
Fleischer vs. Botanica Nolasco
Against the BOD of BN. Fleischer prayed that said BOD be ordered to register in the
books of the corporation FIVE SHARES of its stock in the name of Fleischer and to pay
him for damages sustained from the refusal of said body to register.
Fleischer purchased said stock from original owner Manual Gonzales, fully paid.
Judge Capistrano held that article 12 of the by-laws of the corpo which gives it
(the CORPO) PREFERENTIAL RIGHT to buy its shares from retiring stockholder,
is in CONFLICT with the Corpo Law.
In March 1923 Gonzales assigned and delivered said five shares to HF. In the same
month, Dr. Miciano-sec-treasurer Offered to buy from HF the said shares at their par
value.
MG, two days after his assignment, revoked the sale and requested that the sale be
not transferred to HF. But after 6 months, MG withdrew and cancelled this request but
BN declined because the letter was in conformity of the by-laws.
ISSUE: WON art. 12 of the by-laws is in conflict with the Corpo Law.
Sec. 13 of the Corpo law which talks about the power of a orporation, states that this
section empowers a corpo to make by-laws, NOT INCONSISTENT WITH ANY EXISTING
LAW, FOR THE TRANSFERRING OF ITS STOCKS. By-law should be in harmony with the
law on the subject of transfer of stock.
SHARES OF STOCKS: personal property
The holder of shares as owner of personal prop is at liberty under said section to
dispose of them in favor of whomsoever he pleases, without any other limitation in
this respect that the general provisions of law.
Adoption of the by-law specified has made the corpo transcend the limits fixed by law.
XXX Restriction upon the traffic in stock must have their source in legislative
enactment, as the corporation itself cannot create such impediments.
BY-LAWS: intended for the protection of the corporation and prescrie regulation and
not restriction.
The corporation, in the absence of such power, cannot ordinarily inquire
into or pass upon the legality of the transaction by which it stock passes
from one person to another, nor can it take away or abridge the substantial
rights of stockholders.
Under a statute authorizing by-laws for the transfer of stock, a corporation can do no
more than prescribe an general mode of transfer on the corporate books and cannot
justify an unreasonable restriction upon the right of sale.
The only restraint by Corpo Law upon transfer of shares is found in sec 35, “No
transfer, however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificate, and
the number of shares transferred.
A by-law of a corpo which provides that transfers of stocks shall not be valid UNLESS
approved by the board of directors, while it may be enforced as a reasonable
regulation for the protection of the corporation against worthless stockholders,
cannot be made available to defeat the right of third person.
NOTE: The Corpo Code allows reasonable transfer restriction in close
corporations.
Government of the Phil vs. El Hogar
Facts:
The Phil gov’t instituted a quo warranto proceeding against EL Hogar for the purpose
of depriving it of its corporate franchise, excluding it from all corporate rights anf
privileges and effecting a final dissolution of the corpo.
March 1906-Corpo law came into effect. Sec 171 to 190 are on building and loan
association.
El Hogar-first corpo in the Phil. Under the law then, the capital of an association was
not permitted to exceed 3M but then amended to 10M.
The by-laws of the corpo states a provision that: the BOD, by vote of an absolute
majority of its members, is empowered to CANCEL SHARES AND RETURN TO THE
OWNER thereof the balance resulting from the liquidation thereof, whenever, by
reason of their conduct of any other motive, the continuation as members of the
owners of such shares is not desirable.
The govt questioned the validity because it conflicts with the Corpo Law which
declares that the BOARD SHALL NOT HAVE THE POWER TO FORCE THE SURRENDER
AND WITHRAWAL OF UNMATURED STOCK EXCEPT IN CASE OF LIQUIDATION OF THE
CORPORATION OR OF FORFEITURE OF THE STOCK FOR DELINQUENCY.
The govt asserts that because of the existence of the provision in the by-law, it
justifies its dissolution.
There is also a provision in the by-laws that the directors shall elect from amoing the
shareholder members to fill the vacancies that may occur in the BOD until the
election at the general meeting.
Another cause of action of the govt was based on the BOD’s failure to hold annual
meetings and fill vacancies.
Third cause of action is the fact the directors of El Hogar have been receiving large
compensation because the by-laws provide a 5% of the net profit shown by the
annual balance sheet to be distributed to the directors in proportion to their
attendance at meetings of the board.
Fourth cause of action: Procedures to adopt when one is elected as a BOD=P5000
pay-up of shares as security—only the rich can be BOD and the waiver to receive
loans form the corpo
ISSUE: WON El Hogar may be dissolved on such grounds.
HELD: NO. The by-law (1st) is a mere nullity and could not be enforced if the directors
attempt to do so.
In the second cause of action, unless the law or the charter of the corporation
expressly provides that an office shall become at the expiration of the term
of office for which the officer was elected, the general rule is to allow the
officier to hold over until his successor is duly qualified. MERE FAILURE OF A
CORPO TO ELECT OFFICERS DOES NOT TERMINATE THE TERM OF EXISTING
OFFICERS AND DISSOLVE THE CORPORATION.
On the third cause of action as to the compensation of the BOD=the question must
be of the validity of the measure and not the propriety and wisdom of the
measure adopted.
The power to fix the compensation they shall receive, if any, is left to the
corporation to be determined by the by-laws. The remedy is in the hands of the
stockholders.
On the fourth cause of action: The Corpo Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and the
requirement of security from them for the proper discharge of the duties of their
offce.
Stockholders of Guanzon vs Register of Deeds of Manila
Facts:
In September 1960, 5 stockholders of the F.Guanzon and Sons executed a certificate
of liquidation of the assets of the corpo because of the resolution of the SH which
they adopted dissolving the corporation.
They have distributed among themselves in propoertion to their shareholdings, as
liquidating dividends, the assets of said corporation, including real properties.
The certificate of liquidation was presented to the Register of Deeds of Mla but WAS
DENIED.
Grounds for denial:
1) number of parcels not certified to in the acknowledgement
2) fees not paid
3) documentary stamps weren’t attached to the documents
4) judgment of the court approving the dissolution and directing the disposition
of the assets of the corpo need to be presented
ISSUE: Commissioner of Land Registration=the issues hinged on WON the certificate
of liquidation merely involves a distribution on the corporation assets or a transfer or
conveyance.
If it were a conveyance, there would be a need to reflect on the certificate a
statement of the numbers of parcels of land involved in the distribution in the
acknowledgement appearing therein. Documentary stamps are more expensive if it’s
a transfer rather than distribution.
CLR held that it is a transfer or conveyance.
HELD: SC: Agree with the CLR.
A corporation is a juridical person distinct from the members composing it.
Properties registered in the name of the corporation are owned by it as an
entity separate and distinct from its members. While shares of stock
constitute personal property, they do not represent property of the
corporation. The corporation has property of its own which consists chiefly
of real estate.
The share of stock only typifies an aliquot part of the corpo property, and it only gives
the extent of the proceeds when it is distributed AND ITS HOLDER IS NOT THE OWNER
OF ANY PART OF THE CAPITAL OF THE CORPO.
When the purpose of the liquidation is to transfer the title from the corporation to the
stockholders in proportion to their shareholdings, this transfer cannot be effected
without the corresponding deed of conveyance from the corporation to stockholders.
Caram vs. CA
Facts:
The plaintiff filed a claim for the payment of the preparation of the project study and
his technical services that led to the organization of the defendant corporation. He
demands the solidary liability of the petitioners and their co-defendants.
The petitioners contend that they had no contract with the private resp and that their
position was that they are mere subsequent investors in the corporation that was
later created. Caram et al asserted that they shouldn’t be held solidary liable with the
Filipinas Orient Airways, a separate juridical entity, and with Barretto and Garcia.
ISSUE: WON the petitioners themselves are ALSO and PERSONALLY liable for such
expenses and if so to what extent (solidary or jointly?)
CA held: Yes they should be jointly and severally liable for the said amount. Not only
the defendant corporation but all other def who were involved in the preparatory
stages of the incorporation (those who caused the preparation and/or benefited from
the project study and the technical services) must be liable.
SC: Not liable.
There was no showing that the Filipinas Orient Airways was a fictitious corporation
and did not have a separate juridical personality, to justify making the petitioners, as
principal stockholders thereof responsible. Bona fide corporation=the corporation
should alone be liable for its corporate acts as duly authorized by its officers and
directors.
The Carams did not contract with the plaintiff. It is only the result of such services
that they were persuaded to invest in the proposed airline. Even if they have
benefited, there is no justification to hold them personally liable. Otherwise, all other
stockholders of the corpo including those who came in later, and regardless of the
amoung of their shareholdings, would be equally and personally liable.
(The Carams are willing to be liable but that they are only questioning total liability.
The petitioners are not liable at all, jointly or jointly and severally.
Pau: So for acts done before the incorporation, who shall be liable?
Palay Inc. vs. Clave
Facts: Presidential Executive Assistant Clave directed petitioners Palay and Onstott
(the president) to refund jointly and severally Dumpit as resolved by the National
Housing Authority because the corporation extrajudically foreclosed the parcel of land
which Dumpit contracted with them under a Contract to Sell. DP was paid,
installments were done. Par. 6 of the contract provided for an automatic foreclosure
upon default in payment of any monthly installment after the lapse of 90 days from
the expiration of the grace period, WITHOUT THE NEED OF NOTICE AND WITH
FORFEITURE OF ALL INSTALLMENTS PAID.
Dumpit (presumably) defaulted thus the foreclosure and thus the charge because he
was not even notified. He wrote after 6 yrs and asking for an update of his account
and request that his rights be assigned to Lourdes Dizon.
Long been rescinded and has already been resold.
NHA found them jointly and severally liable to refund Dumpit because the rescission
is void in the absence of any judicial or notarial demand.
ISSUES raised:
1) Is demand mandatory or may be dispensed with by stipulation?
2) May pet be held liable for the refund for the installments made?
3) Doctrine of piercing the veil of corporate fiction has application
4) Pres Exec Asst committed grave abuse of discretion
HELD:
1) Judicial action for the rescission is not necessary when it is provided in the
contract that it may be revoked and cancelled for violation of any of its
terms and conditions. BUT in the cited cases, there was at least A WRITTEN
NOTICE sent to the defaulter informing him of the rescission.
RULE: Resolution of reciprocal contracts may be made extrajudicially unless
successfully impugned in Court. If the debtor impugns, then subject to judicial
determination. Rescission is ineffective and inoperative because of the lack of
notice of resolution (UP vs Angeles)
 2) and 3) No. There is no badge of fraud on pet’s part. They had relied, albeit
mistakenly, on par 6 of its contract. There was no proof that the petitioner
used the corporation to defraud private responded.
RULE: Mere ownership by a single stockholder or by another corporation or all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality.
Disposition: Corpo is directed to refund Dumpit.
Marvel Building Corpo vs. David
Facts: (happened around 1950)
Plaintiffs brought this action as stockholders of Marvel enjoining the CIR from selling
at public auction various properties, three lands with buildings, which were under the
name of the corporation.
Seized by CIR and detained for the collection of war profits taxes assessed
against Maria Castro. Plaintiffs assert that these properties belong to the corpo and
not to Maria.
RTC: CIR failed to prove that Maria is the true owner of all the stock certificates of the
corpo. An evidence susceptible of two interpretations, the interpretation which would
deprive one of property without the due process of the law should not be made.
Sec. of Finance: considered the report of a special committee assigned to study the
war profit taxes of Mrs. Castro recommended the collection of war profits taxes and
instructed the CIR to collect the same.
ISSUE: WON the properties were owned by the corporation or by Maria? (Why does
Maria want to assert the existence of a corporation? Because of the limited liability
which shall be the shares of the relatives and not all).
HELD: Not the corpo’s but Maria’s as the true sole owner.
Evidence:
1) Endorsement in blank of the shares of stock issued in the name of the other
incorporators, and the possession thereof by Marai. All of the certificates EXCEPT that
in the name of Maria were endorsed in blank by the subscribers. (witnesses Auino as
IR examiner, Mariano as examiner, and Llamado, USec of Finance).
Plaintiffs are claiming that these endorsement could have been superimposed
however the court said that it is a mere possibility and the circumstances prove that
they were not superimposed.
2) The stockholders did not have incomes in such amounts during the time of the
organization or immediately thereto as to enable them to pay in full for their
supposed subscriptions. Proved by their tax return or the absence thereof.
There was a prima facie case that Castro had furnished all the money that the Marvel
Building Corpo had.
3) If they really wanted to prove that they paid for the subscription, they could
have just showed receipts to testify their payments. But they refused to do
so.
There was evidence that there were 25 certificates which were signed by the
president. There is evidence of the motive of Castro to evade taxes.
IF YOU ARE THE TRUE OWNERS OF THE SHARES, YOU WILL ALWAYS ASK FOR
RECEIPTS AS PROOF OF PAYMENT FOR YOUR SUBSCRIPTION.
Claparols vs CIR
Facts:
CIR ordered the petitioners Claparols et al to pay back wages and bonuses to private
respondents for its unfair labor practices which was filed by Allied Workers
Association because of the dismissal from the Claparols Steel and Nail Plant.
CIR found Mr. Claparols guilty of union busting and of having dismissed the
complainants because of their union activities.
Records show that the Claparols Steel Corporation was established on July 1, 1957
succeeding the Claparols Steel and Nail Plant which ceased operations on June 30,
1957 and that the Claparols Steel Corp stopped operations on Dec. 7, 1962.
Corp cannot reinstate the workers and that if they are entitled to back wages, only
limited to 3 months based on Sta Cecilia Sawmills vs CIR and since Claparols stopped
operations in 1962, reemployment cannot go beyond that date.
ISSUE: WON
The Claparols Steel and Nail Plant was SUCCEEDED by the Claparols Steel
Corporation. It is very clear that the latter corporation was a continuation and
successor of the first entity, and its emergence was skillfully timed to avoid the
financial liability that already attached to its predecessor, the CSNP. Both predecessor
and successor were owned and controlled by Eduardo Claparols and there was no
break in the succession.
AVOID-THE-LIABILITY scheme: very patent. 90% of the subscribed shares of stocks of
the 2nd corp was owned by the Claparols himself and ALL assets of the dissolved
Claparols Steel and Nail Plant were turned over to the emerging CSC.(Conveyance?
There must be a notarized conveyance and proof of tax payment?)
Pierce the veil of corporation. Adjunt, business conduit or alter ego, fiction of separate
and distinct corporate entities should be disregarded.
Cease et al vs. CA
Facts:
1908-one Forrest L Cease, one predecessor in interest of the parties together with 5
other American citizens organized the Tiaong Milling and Plantation Company but in
the course of its existence, Cease was able to buy out all other original incorporators
but in the name of his children Ernest, Cecilia, Teresita, Benjamin, Florence and
Bonifacia Tirante.
Charter lapsed in June 1958 but there were no showing that there was a liquidation
process. In 1959, Cease died and an extrajudicial partition of was disposed but this is
exactly the problem because two of his children wanted actual division while the
other wanted reincorporation.
Those opposing incorporated the FL Cease Plantation Co. and registed it with the SEC
but the the two sons wanted settlement of the estate and filed that the two
corporations be declared as one.
Plaintiffs wanted the properties to be placed under receivership but the defendants
filed a bond so that these properties remain in their possession.
On the eve of the expiration of the 3-year period provided by law for the liquidation of
corporations, the BOARD OF LIQUIDATORS of Tianong Milling executed an assignment
and conveyance of properties and trust agreement in favor of FL Cease as Trustee of
the Tianong Milling so that during the motion, the judge ordered that the trustee be
included as party defendant.
RTC: Divide the properties. The properties of the TMPC are also properties of the FLC
and thus the estate should be divided among the heirs. Transfer and Conveyance with
Trust Agreement is null and void. FLC is removed as trustee.
Thus the petition to the Supreme Court, on mandamus.
Petitioners argue that no evidence has been found to support the conclusion that the
registered properties of Tiaong Milling are also properties of the estate of Cease and
that for 50 years these properties were registered under Act No. 496 in the name of
Tiaong.
ISSUE: WON Cease and Tiaong just have one personality.
HELD: Yes. Evidence show that after Cease has bought out the other incorporators, it
has developed into a close corporation, Cease having the majority of stocks and
hence the control and management of its affairs.
There has been no account under the corpo name and the transactions were carried
out in the bank account of FL Cease. Thus there is truth that the corporation is only a
business conduit of the father and an extension of his personality, they are the one
and the same thing.
Assets of the corporation are also estate of FL Cease. This case would warrant the
application of the doctrine of disregarding or piercing the veil of corporate fiction.
It’s a personal venture of FL Cease. Not an evidence that the children were
subscribers or purchasers of the stocks they own. Participation is only as nominal
shareholders—gratuitous dole out of the father.
The use of the corpo personality shall only delay and ultimately deprive and defraud
the resp of their successional rights to the estate.
Delpher Trades vs. IAC
Facts: Delfin Pacheco and Pelagia Pacheco owned a land and leased it to Construction
Components Internation Inc and in their contract with the Pacheco’s, it was stipulated
that the Construction Components has the right of first refusal. The CC assigned its
rights and obligations under the contract of lease to Hydro Pipes with the signed
conformity of the Pachecos. The contract of lease and the assignment was annotated
at the back of the title.
Two years after the assignment, the Pachecos executed a deed of exchange in favor
Delpher Corporation conveying to the latter the land leased and in return acquiring
2,500 shares of stock of defendant corporation issued at no par value.
Hydro filed complaint for reconveyance in its favor under the conditions similar those
whereby Delpher acquired the property.
RTC: For Hydro. Exercise right of first refusal. Offer the same at the rate of P14.00 per
square meter, similar to what they have offered Delpher.
CA: Affirmed RTC.
Pachecos filed a motion for reconsideration alleging that there will be great injustice
in that Hydro will be allowed to buy an industrial land for 14 per sqm when its price in
the market is 300 per sqm. That there was no sale or transfer of actual ownership
thus, there is no right of first refusal to exercise, and that if they shall be allowed to
purchase the land, not under the same conditions given to Delpher.
ISSUE: WON there was contract of sale or just a deed of exchange. WON Hydro could
exercise the right of first refusal.
HELD: The Deed of Exchange cannot be considered a contract of sale. There was no
transfer of actual ownership interests.
The Pachecos merely changed their owdership from one from to another. The
ownership remained in the same hands thus, HYDRO has no basis for its claim of a
right of first refusal under the lease contract (which is in fact saying that there must
be first a purported sale before this right can be exercised?)
It was shown that the Delpher Corporation is a family corporation and that this was
organized by the children of the two Pachecos and that they transferred to the
corporation to avoid taxes. They used the scheme estate planning.
By transferring the land to Delpher and acquiring 55% of the majority of the shares of
stock, they are the ones who control the corp.Pet claim that there was no transfer of
ownership because the control remained in the Pachecos.
After incorporation, one becomes a stockholder of a corporation by subscription or by
purchasing stock directly from the corporation or from individual owners thereof.
A nor par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but only an
aliquot part of the whole number of such shares of the issuing corporation.
The holder of no-par shares may see from the certificate itself that he is
only an aliquot sharer in the assets of the corporation. But this character of
proportionate interest in not hidden beneath a false appearance of a given
sum in money, as in the case of par value shares.
The capital stock of a corporation issuing only no-par value shares is not set
forth by a stated amount of money, but instead, is expressed to be divided
into a stated number of shares, such as 1000 shares.
By removing the par value of shares, the attention of persons interested in
the financial condition of a corporation is focused upon the value of assets
and the amount of its debts.
DELPHER TRADES CORP OIS A BUSINESS CONDUIT OF THE PACHECOS AND WHAT
THEY DID WAS TO INVEST THEIR PROPERTIES AND CHANGE THE NATRE OF THEIR
OWNERSHIP FROM UNINCORPORATED FORM BY ORGANIZING DELPHER TRADES
CORPORATION TO TAKE CONTROL OF THEIR PROPERTIES AND AT THE SAME TIME
SAVE ON INHERITANCE TAXES.
Villa Rey Transit vs. Eusebio Ferrer
Facts:
Villarama was an operator of a bus transportation under Villa Rey Transit pursuant to
certificates of public convenience granted to him by the PSC which authorized to operate
32 buses in various routes from Pangasinan to Mla and vice-versa.
He sold 2 certs to Pantranco with the condition that Villarama shall not apply for 10
years for any TPU service identical or competing with Pantranco.
Three months after, Villa Rey Transit INC (CORPO) was organized and Natividad Villarama
was the treasurer and one of the incorporators and Natividad subscribed to 1,000 of its
stocks.
After a month CORPO bought 5 certs of Public convenience, 49 buses, tools and equip
from VALENTIN FERNANDO. On the day of the execution of the contract, the parties applied
to PSC for its approval with a prayer for the issuance of provisional authority in favor of the
CORPO to operate the service. PSC granted with a condition that it may be modified or
revoked by the Commission. But before PSC could make a final action on the application,
the Sheriff levied two of the five certs of public convenience pursuant to a write of
execution issued by the RTC of Pangasinan in favor of Eusebio Ferrer against VALENTIN
FERNANDO. Public bidding was executed and highest bidder is Ferrer.
FERRER SOLD the two certs to Pantranco and jointly submitted to PSC the approval of the
sale. Pantranco then prayed for provisional auth to operate the service involved in the said
certs.
TWO SALES are therefore before the PSC, FERNANDO-CORPO (VILLA REY) and FERRER-
PANTRANCO. PSC orders, during pendency and before final resolution, PANTRANCO shall be
the one to operate provisionally the services under the two certs. CORPO questioned.
Villarey filed for the annulment of the sheriff’s sale. Ferrer and Pantranco averred that the
CORPO had no valid title to the certs because the contract where they acquired the certs
from Fernando was subject to a suspensive condition—the approval of the PSC which had
not been fulfilled. Thus sheriff levy and sale, then Ferrer sale to Pantranco were valid.
Pantranco filed a third-party complaint against Mr. Jose Villarama, alleging that the
corporation and Villarama are the same and that they were disqualified from operating the
two cers because of the stipulation that Villarama shall not apply for a TPU service identical
with Pantranco for 10 years.
The decision of the RTC were: (which Pantranco questions)
a) Villarey and Jose Villarama are two distinct and separate personalities
and entities
b) Restriction in the contract between Villa Rey and Pantranco was null and
void
c) Sheriff sale was null and void
d) No damages awarded to Pantranco against Villarama
ISSUES:
a) “Shall not apply for 10 years for any TPU service identical to the buyer” valid? To
existing or only to new lines?
b) If yes, does it bind the corporation?
HELD:
Villarama and the Villa Rey Transit Inc is one and the same.
Villarama made it appear that he was not an incorporator nor a stockholder and that he did
not have a sufficient fund to invest. That it was his wife who was an incorporator with the
least subscribed shares and was elected treasurer. But the funds were managed by the
treasurer in such a way and extent that Villarama appeared to be the actual owner-
treasurer of the business without regard to the rights of the stockholder.
Evidence:
• Initial cash capitalization of the corporation was mostly financed by
Villarama. The initial 105K, the 85K of it was covered by VIllarama’s
personal check. Employees of the bank testified that the drawer of the
check was Jose Villarama himself.
• Accountant of the corpo testified that the first and second installment
for the subscriptions from the original subscribers were received but he
was directed by JV to make vouchers liquidating the sums and it was
made to appear that a part of the installment was payment to Villarama
for an equipment purchased from him and that 100,000 was loaned as
advances to the stockholders.
• There were no amount of money that had actually passed hands among
the parties involved.
• Initial months of the operation, JV purchased and paid with his personal
checks Ford trucks for the Corpo, the checks being drawn by JV.
• It appeared that JV supplied the organization’s expenses and assets and
there was no actual payment by the subscribers.
• JV used the corpo’s money and deposited them in his personal accounts
and that the corpo has paid his personal accounts.
• He even admitted that he mingled the corpo funds with his own money.
• Gasoline purchases of the corpo were made in his name and his reason
was that he wanted the corpo to benefit from the rebates that he
receives.
• No coard of Resolution allowing him to hold the corpo’s fund when he is
not treasurer and was only a part-time manager.
•
With all the foregoing evidence, he cannot just be a part-time general manager. The corpo
is his alter ego. He did not deny any of the abovementioned allegations, he just offered
excuses. Management and disposition of funds were controlled by JV and it is impossible to
segregate and identify which money belonged to whom.
Corpo law-acts and conduct of the corporation be carried out in its own corporate name
because it has its own personality. The veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.
VILLA REY TRANSIT IS AN ALTER EGO OF JV AND THAT THE RESTRICTIVE CLAUSE IN THE
CONTRACT ENTERED INTO BY THE LATTER AND PANTRANCO IS ALSO ENFORCEABLE AND
BINDING AGAINST THE CORPO.
RULE: SELLER OR PROMISSOR MAY NOT MAKE USE OF A CORPORATE ENTITY AS A
MEANS OF EVADING THE OBLIGATION OF THIS OWN COVENANT. WHERE THE
CORPORATION IS SUBSTANTIALLY THE ALTER EGO OF THE COVENANT OR TO THE
RESTRICTIVE AGREEMENT, IT CAN BE ENJOINED FROM COMPETING WITH THE
COVENANTEE.
Intention of the restriction:
To eliminate the seller as a competitor of the buyer for ten years along the lines of
operation covered by the certificate or public convenience. “APPLY” (shall not apply), was
broadly used. Prior authorization is needed before any one can operate a TPU
service, whether the service consists in a new line or an old one acquired from a
previous operator.
The seller cannot compete with the buyer and he has bound himself not to do so.
JG Summit vs. CA
Facts:
NIDC (govt corp) entered into a JVA with Kawasaki for the construction, operation and
management of the SNS (Subic Natl Shipyard) which became PHILSECO. Under the
contract, NIDC and Kawasaki shall contribute 330M for the capitalization of the
PHILSECO in the proportion of 60-40 respectively.
Contract states to grant the right of first refusal should either of them decide to sell,
assign or transfer its interest.
In the provision it states that right of the first refusal shall be given EXCEPT when the
transferee is a corporation owned or controlled by the government or by
Kawasaki affiliates.
NIDC transferred its rights to PNB and subsequently was transferred to the National
Govt pursuant to AO No. 14.
Pres Aquino established COP (comm on privatization) and APT (asset privatization
trust) to take title to and possession of, conserve, manage, and dispose of non-
performing assets of the National Govt. Trust agreement was entered into by the
National Govt and APT where the latter is the trustee in the Govt’s share in PHILSECO.
Because of a quasi-reorganization of PHILSECO to settle its huge obligation to PNB,
govt’s shareholdings increased to 97% reducing Kawasaki’s shareholdings.
In the interest of the national economy, COP and APT deemed it best to sell the
gov’t’s share to private entities.
Negotiations insued bet APT and Kawasaki and they agreed that the latter’s right to
first refusal be exchanged for the right to top by 5% the highest bid for the
said shares. Kawasaki would be entitled to name a company in which it was
a stockholder, which could exercise the RIGHT TO TOP. It elected Philayards
Holdings (PHI).
From ABSR (rules for the bidding), it was stipulated that from the moment the highest
bid becomes acceptable to the govt, Philyards shall have 30 days to top the highest
which is to top 5%.
They need to notify APT if they will exercise such right and deposit 10% of the highest
bid plus 5% within 30 days. They shall be sent a notice as a preferred bidder and
would have 90 days to pay the balance.
JG Summit bid for 2B with an acknowledgment of Kawasaki’s right to top. PHILYARDS
exercised its right to top and fully paid the balance.
JG Summit questioned the offer of PHI to top its bid on the ff grounds:
a.Kawasaki/PHI consortium was composed of Kawasaki,
mitsui, Keppel, SM Group, ICTSI, and Insular Life and this
violated the ASBR bec the last 4 companies were the
losing bidder
b. ONLY Kawasaki could exercise the right to top
c. Giving right to top to PHI constituted unwarranted
benefit to a third part
d. No right of first refusal can be exercised in a public
bidding or auction sale
e. JG Summit consortium was not estopped from
questioning the proceedings.
CA: JG is estopped from questioning because it knew from the start the right to top
granted to Kawasaki/philyards.
SC: Philseco shipyard is a public utility whose capitalization must be 60% Filipino-
owned. That the right to top granted to Kawasaki was illegal not only because it
violates the rules on competitive bidding, but more so, because it allows foreign
corporations to own more than 40% equity in the shipyard. And that even when JG
had the opportunity to review the ASBR, it cannot be estopped to question an illegal
and inequitable provision thereof.
Thus SC voided the transfer of the national gov’t share in Philseco to Philyard and
upheld the right of JG Summit.
Reconsideration was filed by Philyard to SC on three basic issues:
a. Is Philseco a public utility?
b. WON under the 1977 JVA, Kawasaki can exercise right of first refusal only up
to 40% of the total capitalization
c. WON right to top granted to Kawasaki violates the principles of competitive
bidding.
THE SC HELD: (which reverses its previous ruling)
a. Philseco is not a public utility because a shipyard is not a public utility. No
law declares it to be.
b. Nothing in the JVA prevents Kawasi from acquiring more than 40% of
PHILSECO
c. Exchange for right to top did not violate the principles of competitive bidding
JG Summit filed the case to SC en banc claiming that there was executive
interference when Camacho forwarded to Davide the case to be part of the Court’s
agenda for resolution.
HELD by SC on en banc:
a. The right to top was an express reservation. It is a well-settled rule that were such
reservation is made in an Invitation to Bid, the higest or lowest bidder, as the case
may be,
is not entitled to an award as a matter of right.
b. The right to top was a condition imposed on all bidders equally, based on APT’s
exercise of its discretion in deciding on how best to privatize the govt’s shares in
PHILSECO.
c. There is no executive interference since the memorandum was merely “noted” to
acknowledge its filing and no further legal significance.
d. The decision of the Court should be based on contract law and not on policy
considerations.
e. Right of first refusal or right to top cannot be exercised by a consortium which is
not the proper party granted such right.
f. The 60-40 arises from contract and constitution and need not be a public utility to
exercise such partition.
There is nothing in the ASBR that bars the losing bidders from joining either
the winning bidder (should the right to top is not exercised) or
Kawasaki/PHI (should it exercise its right to top as it did), to raise the
purchase price. There was no proof of fraud. The main goal of the case is to
dispose the shares of a corporation which the govt sought to privatize.
HELD by SC on Reconsideration:
a. Mutual rights of first refusal under the JVA bet Kawasaki and NIDC is valid.
Right of first refusal is a property right of PHILSECO. It is even valid to allow
PHILSECO’s equity be owned by Kawasaki by more than 40% because what
would be affected would not be the foreign corporation’s stockholder’s
ownership but the capacity of the corporation to own land—it is disqualified
to own land.
Right of first refusal pertains to the shareholders while the capacity to own
land pertains to the corporation. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will exceed
the allowed foreign equity, what the law disqualifies is the corporation from
owning land.
What was transferred was the right of first refusal (and subsequently the right to top)
as to the shares, which are immovable property, and not as to the land which
PHILSECO owns or holds, which are movable. The prohibition is only to the acquisition
of the land and not to the acquisition of the shares.
Tramat Mercantile vs. CA
Facts:
Melchor dela Cuesta doing business under Farmers Machineries sold a tractor to
Tramat Mercantile whose president is David Ong. In payment, Ong issued a check
which replaced an earlier postdated check.
Tramat sold the tractor, together with a lawn mower fabricated by it, to Nawasa.
David Ong caused a stop payment of the check when NAWASA refused to pay the
tractor and lawn mover after discovering that aside from stated defects of the lawn
mover, the engine sold by de la Cuesta was a reconditioned unit.
Dela Cuesta filed for recovery and atty’s fees. Ong answered that dela Cuesta has no
cause of action and that the questioned transaction was between Tramat and Farmers
and that they payment was stopped because the tractor had been priced as brand
new and not as a reconditioned unit.
Pau’s version: Dela Cuesta sold a tractor with a 1.3 engine to Tramat and the latter
sold this same tractor to MWSS together with a fabricated lawn mower. Tramat
caused a stop payment bec Nawasa refused to pay Tramat because it found out that
the lawn mower had defects and that the tractor’s engine was reconditioned and not
brand new. Dela Cuesta filed for recovery. The reason why the lawn mower was
defective was because Tramat fabricated it and it was shown that it had no
experience in fabricating one. It’s competitor Alpha Machinery had stopped
manufacturing the same. It was the fabrication of Tramat that was the root of all the
problems. The engine did not function not because it was reconditioned but because
it was made to do what it cannot.
RTC: ordered defendants Ong and Tramat to pay Dela Cuesta the sum with interest
and pay the atty’s fees, jointly and severally.
CA: affirmed RTC’s decision in toto.
SC held:
The contract between dela Cuesta and Tramat was ABSOLUTE SALE and not
conditional and that dela Cuesta did not violate any warranty on the sale of the
tractor.
If it was conditioned on the acceptance of MWSS then why did it issue a check in
payment of the item and even long after MWSS had complained about the defect,
why did it still draw a check to an increased amount?
But it was an error to hold Ong jointly and severally liable to dela Curste because ong
had acted not in his personal capacity but as an officer of a corporation, but as an
officer of Tramat.
Personal liability of a corporate director, trustee, or officer, along (although
not necessarily) with the corporation may so validly attach, as a rule, only
when—
a. He assents (a) to a patently unlawful act of the corporation, or (b) for bad
faith or gross negligence in directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its stockholders or other persons.
b. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written
objection thereto.
c. He agrees to hold himself personally and solidarily liable with the
corporation or
d. He is made, by a specific provision of law, to personally answer for his
corporate action (Article 144, Corpo Code and Trust Receipts Law Sec. 13).
Magsaysay-Labrador vs. CA
Facts:
Adelaida Rodriguez-Magsaysay, widow and special administratix of the late Sen.
Magsaysay, brought against Panganiban, SUBIC, FILMANBANK and the Register of
Deeds of Zambales an action.
She alleged that she and her husband acquired thru conjugal funds a parcel of land
with improvement known as Pequena Island and that after the death of her husband,
she discovered an annotation at the back of the TCT that the land was acquired thru
his husband’s separate capital.
Her husband executed an assignment to SUBIC and SUBIC executed a mortgage in
favor of FILMANBANK.
She questions the validity of the acts and alleged that these were done in an attempt
to defraud the conjugal partnership considering that the land is conjugal, her marital
consent to the annotation was not obtained, and that the change made by the
Register of Deeds of the titleholders was effected without the approval of the
Commissioner of Land Registration and that her husband executed the Deed of
Assignment by mistake, violence or intimidation. And that the assignment in favor of
SUBIC was without consideration and consequently null and void.
The sisters of the senator filed for intervention of the ground that their brother
conveyed to them ½ of his shareholdings in SUBIC and as assignees of 41% of the
total outstanding shares of such stocks, they have a substantial and legal interest in
the subject matter.
RTC: denied motion for intervention because they don’t have legal interest and that
SUBIC cannot legally entitle them to intervene because SUBIC has a personality
separate and distinct from its stockholders.
CA: did not disturb the findings of RTC.
The interest of the petitioners here are purely inchoate, at the very least, or in sheer
expectancy of a right in the management of the corporation and to share in the
profits thereofd and in the properties and assets thereof on dissolution, after payment
of the corporate debts and obligations.
The share of stock represents a proportionate or aliquot interest in the property of the
corporation but it does not vest the owner thereof with any legal right or title to any
of the property, his interest in the corporate property being equitable or beneficial in
nature. Shareholders are in no legal sense the owners of corporate property,
which is owned by the corporation as a distinct person.
The petitioners cannot claim the right to intervene on the strength of the transfer of
shares allegedly executed by the senator. The corporation did not keep books and
records. No transfer was ever recorded, much less effected as to prejudice third
parties.
The transfer must be registered in the books of the corporation to affect
third persons. The law on corporations is explicit. Sec 63 of the Corpo Code
provides:
“No transfer, however, shall be valid, except as between the 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 transfer, the number of the
certificate or certificates and the number of shares transferred.”
Pau: Senator made the assignment to subscribe to the stocks of SUBIC. But was this
recorded?
Indophil Textile Mill Workers Union vs Calica
Facts:
Indophil Textile Mill Workers Union-PTGWO is a labor organization duly registered with
DOLE and is the exclusive bargaining agent of all the rank-and-file employees of
Indophil Textile Mills Inc. Calica is the Voluntary Arbiter or the NCMB of DOLE while
Indophil is a corporation engaged in the manufacture, sale, and export of yarns or
various kinds and of materials of kindred character and its plants are in Bulacan.
The corporation and the union executed a CBA.
Indophil Acrylic Manufacturing Corp was formed and registered with SEC. Acrylic
applied for incentives with the BOI under the Omnibus Investments Code. Application
was approved on a preferred non-pioneer status.
Workers of Acrylic unionize and a CBA was executed. However, the petitioner union
claimed that the plant facilities build and set up by Acrylic should be considered as an
extension or expansion of the facilities of resp Company based on the CBA which
states that “the agreement shall apply to the company’s facilities and installations
and to any extension and expansion thereat”. In other words, they are claiming that
they are part of the Indophil agreement unit.
Pet: Both corp are engaged in the same line of business i.e. manufacture and sale of
yarns of various counts and kinds of of other materials of kindred character or nature.
Resp: Thru SolGen argues that Acrylic is not an alter ego or an adjunct or business
conduit of private resp because it has a separate business purpose.
INDOPHIL: engage in the business of manufacturing yarns of various counts and kinds
and textiles.
ACRYLIC: manufacture, buy, sell, at wholesale basis, barter, import, export and
otherwise deal in yarns of various counts and kinds.
Acrylic cannot manufacture textiles while Indophil cannot buy or import yarns.
Petitioners alleged that:
a. the two corp have their physical plants, offices and facilities in the same
compound
b. many of Indo’s machines were transferred and installed and being used in
Acrylic.
c. Services of a number of units, departments and sections are being provided
to Acrylic.
d. Employees of private resp are the same persons manning and servicing
Acrylic.
ISSUE: WON the operations in Indophil are an extension or expansion of Acrylic and
thus WON the RF employees working at Indophil Acrylic should be reorganized as part
of and/or within the scope of the bargaining unit.
HELD: They are separate corporations. CBA does not extend to Acrylic.
Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exists, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. In such cases, the corporation will be considered as a mere association
of persons. The members or stockholders or the corporation will be considered as the
corporation, that is liability will attach directly to the officers and stockholders.
In Umali vs. CA, it was emphasized that “the legal corporate entity is
disregarded only if it is sought to hold the officers and stockholders directly
liable for a corporate debt or obligation.
Jacinto vs CA
Facts:
Jacinto is the President and General Manager of Inland Industries and under the Trust
Receips, applied for a Letter of Credit and paid this loan under the Bills of Exchange
to Metropolitan Bank and Trust Co. The company failed to pay thus the charge against
him and the company to pay jointly and severally the plaintiff. In the reconsideration,
Inland chose not to join him in this appeal.
The allegation of the bank is that Inland and Jacinto are one and the same. There was
nothing in the transactions that states that he was doing the transactions in his
official capacity.
RTC: He is in fact the corporation itself. No mention that he did transactions in his
official capacity.
CA: dismissed Jacinto’s appeal. Although Jacinto asserted that the principles of
piercing the fiction of corporate entity should be applied with great caution and not
precipitately, because a dual personality by a corporation and its stockholders would
defeat the principal purpose which a corporation is formed. It is not undisputed that
Jacinto and his wife own the major shares of stocks which is 52%.
Jacinto even asserts that he is not the President of the Corporation and that there are
different officers. But in the evidence, he was the one who sighed the trust receipts
as president and manager.
ISSUE: WON the piercing of the veil was valid even when it was not alleged in the
complaint.
HELD: Yes. While on the face of the complaint, there is no specific allegation that the
corporation is a mere alter ego of petitioner, subsequent developments, from the
stipulation of facts up to the present of evidence and the examination of witnesses,
unequivocably prove that petitioner and the corporation are one of that he is the
corporation. No serious objection was heard from petitioner.
Sec. 5 or Rule 10 of Rules of Court states that when evidence is presented by one
party with the express or implied consent of the adverse party, as to issues not
alleged in the pleadings, judgment may be rendered validly as regards those issues,
which shall be considered as if they have been raised in the pleadings. There is
implied consent to the evidence thus presented when the adverse party fails to object
thereto.
Concept Builders Inc vs. NLRC
Facts:
Concept Builders Inc is a domestic corporation engaged in the construction business
and the respondents were employed as laborers, carpenters and riggers.
The resp were served individual written notices of termination of employement by pet
and igt was stated that the contracts of employment had expired and the project in
which they were hired had been completed.
But the resp found out that the corp engaged the services of sub-contractors whose
workers performed the functions of priv resp. They thus filed a complaint for illegal
dismissal, unfair labor practice and non-payment of some sums.
LA: Reinstate private resp and pay them back wages. Thus the reconsideration to
NLRC by the corpo.
NLRC: Dismissed the recon and made a finding as to the amount of the back wages.
LA issued a write of execution directing the sheriff to execute decision and partial
satisfaction of the amoung was garnished from the corp’s debtor MWSS. Said amount
was turned to NLRC cashier.
Alias writ of execution was issued by LA but the guards of the petitioner refused to let
the alias be served on the ground that the corporation no longer occupy the
premises. The corporation occupying the premises is Hydro Pipes Phil Inc (HPPI) and
not by Concept Builders.
Sheriff recommended a break-open be issued to enable him to enter petitioner’s
premises so that he could proceed with an auction sale.
The day before the scheduled auction, the vice-president Cuyegkeng filed a third-
party claim with the LA alleging that the properties sought to be levied were
properties of HPPI.
Resp filed motion for the issuance of Break-Order alleging the HPPI and Concept
Buildiers were owned by the same incorporator/stockholders. They also alleged that
the pet temporarily suspended the business operations in order to evade its legal
obligations to them.
In support of their claim against HPPI, the private resp presented copies of the GIS
which HPPI submitted to SEC.
Pet claims that HPPI and Concept are two separate corporations and are engaged in
two different kinds of businesses. HPPImanufacturing CBI construction. LA still
issued the order and ordered sheriff to proceed with the auction sale. NLRC denied
reconsideration.
ISSUE: WON the NLRC committed grave abuse of discretion despite the fact that no
evidence to prove that CBI created HPPI to evade its liability.
HELD: HPPI is liable. Conduit or alter ego of CBI.
Probative Factors of identity that will justify the application of the doctrine of
piercing the corporate veil:
1. Stock ownership by one or common ownership of both corporations
2. Identity of directors and officers
3. The manner of keeping corporate books and records
4. Methods of conducting the business
SEC explained the instrumentality rule which courts have applied in disregarding
the separate juridical personality of corporations:
The test in determining the said doctrine:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances by of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will, or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiff’s legal right.
3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate
veil. In applying the instrumentality or alter ego doctrine, the courts are concerned
with reality and not form, with how the corporation operated and the individual
defendant’s relationship to that operation.
This case cited Claparols vs CIR on the avoid-the-liability scheme 90% of the second
corp is owned by the first corp.
Twin requirements of due notice and hearing were complied with. Third-party and pet
claimants were given the opportunity to submit evidence.
Garnett v Southern Railway
Garrett is a wheel molder employed by Lenoir Car Works who claims and sues for
Workmen’s Compensation under the Federal Employer’s Liability Act because of
injuries contracted from silica dust which permeated the foundry. He contends that
since Southern Railway acquired the entire capital stock of Lenoir and so completely
dominated it that it was merely an instrumentality or subsidiary of Southern, he is
considered an employee of Southern and thus entitled under the Act mentioned for
recovery.
He cites the ff facts:
— All directors and officers of Lenoir are employees of southern
— Southern owns all stock of Lenoir except 5 shares
— All profits of Lenoir went to Southern
— Claims of Lenoir employees for accidents are handled by Southern
— Litigation against Lenoir is handled by Southern
— General accounting of Lenoir is handled by Southern
— Lenoir sold to Southern $30M of its products compared to $4.5M to
other buyers

Southern, countered with the ff facts in support of its contention that it is not the
parent of Lenoir:
— Management of Lenoir is vested in its manager, Henry Marius, who is in
the payroll of Lenoir and has no other connection with Southern except
holding and proxy voting for Southern
— Marius establishes the pricing of Lenoir products and all Lenoir sales
are the result of his business judgment
— Lenoir does not sell to Southern exclusively, and Southern does not
buy from Lenoir exclusively or substantially, and that it buys from
Lenoir just as it buys from other sellers
— Lenoir’s corporate and accounting offices are in Washington DC in a
building owned by Southern; but it is still based in Tennessee
— Lenoir is a specialty business and Southern has not in any way been in
a position to direct or supervise the operations of Lenoir
— Lenoir is a duly qualified employer under the Tennessee Workmen’s
Compensation Act and suits and claims similar to Garretts have been
covered by that law
— Lenoir maintains a separate bank account and has never intermingled
its funds with Southern
— Lenoir and Southern keep separate books and pay their own taxes
— Lenoir’s general accounting and legal is handled by its own
departments in Lenoir City
H: The Court finds the existence of two distinct companies. There is no evidence that
Southern dictated the management of Lenoir. In fact, Marius the manager was in full
control of its operations. He established prices, handled all negotiations in CBAs. It
paid local taxes, had local legal counsel, maintained Workmen’s Compensation.
Neither was Lenoir an instrumentality or subsidiary of Southern. Policy decisions and
pricing remained in the hands of Marius and was not dictated by Southern. Marius
operated the business as a going concern.
The facts do not reveal the intimacy and inseparability of control which would lead
one to believe that Southern and Lenoir are one and the same. It was also not an
agent of Southern because it was not a common carrier by railroad to make it liable
under the Federal Act. It was not an operator of a terminal, performed no switching or
transportation functions at all. It was a manufacturer and Garrett was one of its
employees.
There are certain circumstances which if present in the proper combination, would
render the subsidiary an instrumentality:
(1) parent owns all or most of the capital stock
(2) parent and subsidiary have common directors or officers
(3) parent finances the subsidiary
(4) parent subscribes to all capital stock of the subsidiary or causes its
incorporation
(5) subsidiary has grossly inadequate capital
(6) parent pays salaries and other expenses or losses of subsidiary
(7) subsidiary has substantially no business except with the parent or no assets
except those conveyed to the parent
(8) the subsidiary is described as a department in the books of the parent
(9) parent uses the property of the subsidiary
(10) directors of the subsidiary do not act independently but take orders from the
parent
(11) formal legal requirements of the subsidiary are not met
Since only two of the 11 indicia occur—the ownership of most of capital stock and
subscription by Southern to capital stock of Lenoir—Lenoir is not a subsidiary and is a
separate corporation. Thus there is no basis for the claim of Garrett with Southern
under the Federal Act
Jardine Davies Inc v JRB Realty Inc.
In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco
Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An
air conditioning system was needed for the Blanco Law Firm housed at the second
floor of the building. On March 13, 1980, the respondent's Executive Vice-President,
Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison, President of
Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders
Adaptomatic 30,000 kcal air conditioning equipment with a net total selling price of
P99,586.00.
Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each to
deliver 30,000 kcal or 120,000 BTUH were installed by Aircon. When the units with
rotary compressors were installed, they could not deliver the desired cooling
temperature. Despite several adjustments and corrective measures, the respondent
conceded that Fedders Air Conditioning USA's technology for rotary compressors for
big capacity conditioners like those installed at the Blanco Center had not yet been
perfected.
The parties thereby agreed to replace the units with reciprocating/semi-hermetic
compressors instead. In a Letter dated March 26, 1981, Aircon stated that it would be
replacing the units currently installed with new ones using rotary compressors, at the
earliest possible time. Regrettably, however, it could not specify a date when delivery
could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the
maintenance of the units, inclusive of parts and services. In October 1987, the
respondent learned, through newspaper ads, that Maxim Industrial and
Merchandising Corporation (Maxim, for short) was the new and exclusive licensee of
Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale,
installation and maintenance of Fedders air conditioners.
The respondent requested that Maxim honor the obligation of Aircon, but the latter
refused. Considering that the ten-year period of prescription was fast approaching, to
expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an
action for specific performance with damages against Aircon & Refrigeration
Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising
Corporation and petitioner Jardine Davies, Inc. The latter was impleaded as
defendant, considering that Aircon was a subsidiary of the petitioner. The trial court
ruled that Aircon was a subsidiary of the petitioner, and concluded that:
at the time it contracted with Aircon on March 13, 1980 and on the date the revised
agreement was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The
phrase "A subsidiary of Jardine Davies, Inc." was printed on Aircon's letterhead of its
March 13, 1980 contract with plaintiff as well as the Aircon's letterhead of Jardine's
Director and Senior Vice-President A.G. Morrison and Aircon's President in his March
26, 1981 letter to plaintiff confirming the revised agreement. Aircon's newspaper ads
of April 12 and 26, 1981 and a press release on August 30, 1982 also show that
defendant Jardine publicly represented Aircon to be its subsidiary.
Records from the Securities and Exchange Commission (SEC) also reveal that as per
Jardine's December 31, 1986 and 1985 Financial Statements that "The company acts
as general manager of its subsidiaries". Jardine's Consolidated Balance Sheet as of
December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning
94.35% of Aircon. Also, Aircon's reportorial General Information Sheet as of April 1980
and April 1981 filed with the SEC show that Jardine was 94.34% owner of Aircon and
that out of seven members of the Board of Directors of Aircon, four (4) are also of
Jardine. Jardine's witness, Atty. Fe delos Santos-Quiaoit admitted that defendant
Aircon, renamed Aircon & Refrigeration Industries, Inc. "is one of the subsidiaries of
Jardine Davies" and that Jardine nominated, elected, and appointed the controlling
majority of the Board of Directors and the highest officers of Aircon.
H: It is an elementary and fundamental principle of corporation law that a corporation
is an artificial being invested by law with a personality separate and distinct from its
stockholders and from other corporations to which it may be connected. While a
corporation is allowed to exist solely for a lawful purpose, the law will regard it as an
association of persons or in case of two corporations, merge them into one, when this
corporate legal entity is used as a cloak for fraud or illegality.
This is the doctrine of piercing the veil of corporate fiction which applies only when
such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime. The rationale behind piercing a corporation's identity is to
remove the barrier between the corporation from the persons comprising it to thwart
the fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities.
While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily
follow that Aircon's corporate legal existence can just be disregarded. The Court
categorically held in another case that a subsidiary has an independent and separate
juridical personality, distinct from that of its parent company; hence, any claim or suit
against the latter does not bind the former, and vice versa.
In applying the doctrine, the following requisites must be established: (1) control, not
merely majority or complete stock control; (2) such control must have been used by
the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest acts in contravention of plaintiff's legal rights;
and (3) the aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The records bear out that Aircon is a subsidiary of the petitioner only because the
latter acquired Aircon's majority of capital stock. It, however, does not exercise
complete control over Aircon; nowhere can it be gathered that the petitioner
manages the business affairs of Aircon. Indeed, no management agreement exists
between the petitioner and Aircon, and the latter is an entirely different entity from
the petitioner. In the instant case, there is no evidence that Aircon was formed or
utilized with the intention of defrauding its creditors or evading its contracts and
obligations.
There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a
manufacturing firm of air conditioners, complied with its obligation of providing two
air conditioning units for the second floor of the Blanco Center in good faith, pursuant
to its contract with the respondent. Unfortunately, the performance of the air
conditioning units did not satisfy the respondent despite several adjustments and
corrective measures.
Koppel v Yatco
(the subsidiary was so controlled by the parent that its separate identity was hardly
discernible, and became a mere alter ego of the parent and was used to evade
taxes). Koppel Industrial and Car Company is a corporation organized and existing
under the laws of the State of Pennsylvania. They are not licensed to do business in
the RP, but do business through Koppel Phils, Inc, owning 995 out of 1000 shares of
stock of the said company (the remaining 5 were owned by the 5 officers of Koppel
Phils). Koppel Phils cabled Koppel Industrial for quotation desired by a prospective
client.
Koppel Phils however quoted a higher price for the buyer than that quoted by Koppel
Industrial. Koppel Phils then cabled to ship the merchandise to Manila. Koppel Phils
received a %age of the profits realized or its share of the losses on the transactions.
Koppel also returned a sum allotted as payment of commercial broker’s tax of 4%.
Koppel Industrial demanded from Koppel Phils the sum of P64,122.51 as merchant’s
sales tax of 1 ½% of the share of Koppel Phils in the profits.
H: The Court said that the virtual control of the shareholdings of a corporation would
lead to certain legal conclusions. It could not overlook the fact that in the practical
working of corporate organizations of the class to which the two entities belonged,
the holder or holders of the controlling part of the capital stock of the corporation,
particularly where the control is determined by the virtual ownership of the totality of
the shares, dominate not only the selection of the board of directors but more often
than not, also the action of that board.
It held that applying this to the case, it cannot be conceived how the Koppel Phils
could effectively go against the policies, decisions, and desires of the American
corporation… Neither can it be conceived how the Phil corporation could avoid
following the directions of the American corporation in every other transaction where
they had both to intervene, in view of the fact that the American corporation held
99.5% of the capital stock of the Phil corporation… In so far as the sales are
concerned, Koppel Phils and Koppel Industrial are for all intents and purposes one and
the same, and the former is a mere branch, subsidiary, or agency of the latter. The ff
are facts which led to the Court to conclude the above:
— share in the profits of Koppel Phils was left to the sole, unbridled control
of Koppel Industrial
— shares of stock of Koppel Phils are all owned by Koppel Industrial
(overwhelming majority)
— Koppel Phils acted as agent and representative of Koppel Industrial
— Koppel Phils alone bore the incidental expenses for transactions, such as
cable expenses
— Koppel Phils was fully empowered to instruct banks it deals with, if
purchasers were not able to pay the bank drafts to the bank as payment
for the purchases
— Koppel Phils makes good any deficiencies by deliveries from its own
stock
The application of the piercing doctrine is not a contravention of the principle that the
corporate personality of a corporation cannot be collaterally attacked. When the
piercing doctrine is applied against a corporation in a particular case, the court does
not deny legal personality… for any and all purposes. The application of the piercing
doctrine is therefore within the ambit of the principle of res judicata that binds only
the parties to the case and only to the matters actually resolved therein.
— GR: separate personality
— Exception: cases where veil may be pierced
o There was a violation of rights or injury in all these cases where veil was
pierced
o Elements of ownership, control, mgt in the corporate entity
 Inevitable that these will exist
 All elements have to be satisfied so the corporate veil can be
pierced
 o What determines pierceability?
 Motive/intention
 Liability arising
 Injury or damage or loss
— Estate planning:
o No impediment to use corporate as vehicle for estate planning
o Corporation can be put up by a single person
o Nothing prevents an individual from funding a corporation
o To meet requirements of code, assign nominal shares to persons
o If it is money, can be used to acquire assets; still corporate-owned
o Even a 99.9% owner cannot distribute the property, only the shares
— Cease: ideal, but there was a dispute
— Marvel had no compulsory heirs
— Delpher ruling on transfer is obiter
— Just defer: use corporate as a vehicle to distribute what appears to be the estate
o But: you still have to distribute the shares (dispose or donate)
o Mechanism to ensure that once you die, corporation is dissolved
 Otherwise: Cease case
 Exit mechanism for those who want out
Liddel v CIR
(corporate entity was used to evade the payment of higher taxes)
Liddell & Co was engaged in importing and retailing cars and trucks. Frank Liddell
owned 98% of the stocks. Later Liddell Motors Inc was organized to do retailing for
Liddell & Co. Frank’s wife owned almost all of that corporation’s stocks. Since then,
Liddell & Co paid sales tax on the basis of its sales to Liddell Motors. But the CIR
considered the sales by Liddell Motors to the public as the basis for the original sales
tax.
H: The Court, agreeing with the CIR, held that Frank Liddell owned both corporations
as his wife could not have had the money to pay her subscriptions. Such fact alone
though not sufficient to warrant piercing, but under the proven facts alone, Liddel
Motors was the medium created by Liddel & Co to reduce its tax liability. A taxpayer
has the legal right to decrease, by means which the law permits, the amount of what
otherwise would be his taxes or altogether avoid them; but a dummy corporation
serving no business purposes other than as a blind, will be disregarded. A taxpayer
may gain advantage of doing business thru a corporation if he pleases, but the
revenue officers in the proper cases may disregard the separate corporate entity
where it serves but as a shield for tax evasion and treat the person who actually may
take the benefits of the transaction as the person accordingly taxable.
Mere ownership by a single stockholder or by another corporation of all or nearly all
capital stocks of the corporation is not by itself a sufficient ground for disregarding
the separate corporate personality. Substantial ownership in the capital stock of a
corporation entitling the shareholder a significant vote in the corporate affairs allows
them no standing or claims pertaining to corporate affairs. Where a corporation is a
dummy and serves no business purpose and is intended only as a blind, the
corporate fiction may be ignored.
Substantial ownership in the capital stock of a corporation entitling the SH to a
significant vote in corporate affairs allows then no standing or claims pertaining to
corporate affairs. Mere ownership by a single SH or by another corporation of all or
nearly all capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality
La Campana Coffee Factory v Kaisahan.
Tan Tong and family owned and controlled 2 corporations: one engaged in the sale of
coffee and the other in starch. Both corporations had one office, one management,
and one payroll, and the laborers of both corporations were interchangeable. The 60
members of the labor association in the coffee and starch factories demanded higher
wages addressed to La Campania Starch and Coffee Factory. La Campania Coffee
sought dismissal on the ground that the starch and coffee factory are two distinct
juridical persons.
I: W/N the Court of Industrial Relations had jurisdiction over the case
H: the Court disregarded the fiction of corporate existence and treated the two
companies as one. In alter ego cases, no pecuniary claim need be involved to allow
the courts to apply the piercing doctrine.
La Campana Coffee Factory vs Kaisahan ng mga Manggagawa sa La
Campana
Facts:
Tan Tong had been in the business of buying and selling gaugau under the tradename
La Campana Gaugau Packing in BInondo and was transferred to QC since 1932. In
1950, Tan Tong and his family as sole incorporators and stockholders, organized a
family corporation known as the La Campana Coffee Factory Co. with its office located
in the same place.
Tan Ton entered into a CBA with the PLOW union but Tan Tong’s employees later
formed their own organization know as the KMLC (see above). The members of the
union, 66 members, demanded for higher wages and more privileges and the
demand addressed to La Campana Starch and Coffee Factory which this union just
designated to the company.
CIR found that they are just one and the same. That La Campana Gaugau Packing is
just a business name. And that even when Tan Tong leased the land to his son the
manager of the coffee company, he did so only when the case was already pending,
and that the advertisements in delivery trucks states that it is just one entity and that
the employees or laborers of gaugau company receive their pay from the same
persons which are also holding the coffee factory and there is only one payroll and
they separate the payrolls only when the case was filed. One office, all trucks are
used by both companies.
It is to be noted that they questioned CIR’s jurisdiction because the number of the
Coffee factory is below 31, the jurisdictional number, however this loses it’s force
when we hold that the two companies are just one business.
A subsidiary or auxiliary corporation which is created by a parent corporation merely
as an agency for the latter may sometimes be regarded as identical with the parent
corporation, especially if the stockholders or officers of the two corporations are
substantially the same or their system of operation unified.
McArthur vs Times Printing Co
Facts:
Times Printing has Nimocks and others as promoters. Through the latter, McArthur
was contracted for his services as advertising solicitor for one year. In 1890, he was
discharged in violation of the contract, thus the filing of the complaint for damages
for break of contract.
Defenses of Time:
a. Not for any stated time but from week to week.
b. He was discharged for a good cause
He was contracted on and after October 1, when the company would be organized
but in fact it was actually organized in October 16 but the corporation has
commenced operations from October 1 when the publication of the paper was stared
by the promoters. But on April or in 6 months time, he was discharged.
The BOD never took any formal action with reference to his contract but the
shareholders, directors and officers of the corporation knew of this contract at the
time of the organization or were inform of it and none of them objected but on the
contrary, retained plaintiff in the employment of the company without other or new
contract as to his services.
ISSUE:
WON the corporation can be made liable for transactions or contracts made before its
incorporation which is inline of its projected incorporation by adoption or ratification.
HELD:
While a corporation is not bound by engagements made on its behalf by its promotres
before its organization, it may, after its organization, make such engagements its own
contracts.
The BOD’s formal action would only be necessary where there would be any similar
original contract but not a requisite in such adoption or acceptance, which may be
expressed or implied. It may be inferred from the acts or acquiescence on the part of
the corporation, or its authorized agents, as any similar original contract might be
shown.
The right of the corporation to adopt an agreement originally made by promoters
depends upon the purposes of the corporation and the nature of the agreement. The
agreement must be one which the corporation itself could make and one
which the usual agents of the company have express or implied authority to
make.
Statute of Frauds would not apply, for terms not to be performed within one year from
the making of the contract because the liability of the corporation under the
circumstances does not rest upon any principle of the law of agency but upon the
immediate and voluntary acts of the company.
The promoters act of “ratifying” in behalf of the corporation, is loosely applied
because, ratification implies an existing person, on whose behalf the contract might
have been made.
There cannot, in law be a ratification of a contract which could not have been made
binding on the ratifier at the time it ws made, because the ratifier was not then in
existence.
In this case, adoption is what ruled because adoption is the making of a contract as of
the date of the adoption and not as of some former date.
Cagayan Fishing Development Co. vs Teodoro Sandiko
Facts:
Manuel Tabora is the registered owner of four parcels of land in Linao, Aparri,
Cagayan, and he wanted to build a Fishery. He loaned from PNB P8,000 and to
guarantee, it mortgaged the said parcels of land.
In May 1930, he sold the parcels to Cagayan Fishing Development which was only in
the process of incorporation, in consideration of P1 and making the corporation
assume the mortgages in favor of PNB and Severina Buzon and that the title of the
land shall not be transferred to the company until the company has fully paid
Tabora’s indebtedness.
The articles of incorporation were filed on Oct. 22, 1930 or 5 months after the sale
and after 6 days after, the company sold the parcels of land to Sandiko for 42,000 on
the reciprocal obligation that Sandiko will shoulder the three mortgages. He executed
a promissory note that he shall be 25,300 after a year with interest and on the
promissory notes, the parcels were mortgage as security.
Sandiko defaulted, thus the action for payment. The lower court held that deed of
sale was invalid because of vice in consent and repugnancy to law.
The corporation filed a motion for reconsideration.
ISSUE: WON Sandiko should be made liable for the sale and thus should pay Cagayan
Fishing Dev’t.
HELD:
Sandiko is not made to pay the corporation because at the moment the corporation
sold the parcels of land, it was not duly incorporated, thus has not acquired juridical
existence.
Before a corporation may be said to be lawfully organized, many things have to be
done. Filing of articles of incorporation is one which in this case was not complied
with at the time of the sale. It was not even a de facto corporation at the time.
A corporation, until organized, has no being, franchises or faculties. Until organized as
authorized by the charter, there is not a corporation, nor does possess franchises or
faulties for it or others to exercise, until it requires a complete existence.
REAL ISSUE IS: Who shall be liable for transactions or operations prior to the
incorporation? Did Cagayan ratified or adopted? If yes, then shouldn’t it be deemed
valid? Supposing the corporation was not incorporated, wouldn’t the Court hold
Tabora as the one who sold the parcels thus, the sale is valid?
The contract here was entered into not only between Tabora and a non-existent
corporation but between Manuel Tabora as owner of four parcels of land on the one
hand and the same Manuel Tabora, his wife and others, as mere promoters of a
corporation on the other hand. (PAU: Which in such case, the corporation must be
adjudged as an alter ego of Manuel Tabora).
The court did not apply ratification because it would result in the commission of
injustice or fraud to the candid and unwary.
The bank, Sandiko had always regarded him as the owner of the parcels of land and
that even when a certain Jose Ventura was made to sign as president of the
corporation, he is only a signatory of the contract.
The promissory note was made payable to the corporation so that it may not be
attached by Tabora’s creditors, two of whom had obtained writs of attachment
against the land.
Since the corporation could not and did not acquire the four parcels of land,
it follows that it did not posses any resultant right to dispose of them by
sale to the defendant Sandiko.
Campos:
Could not the court have treated Tabora and the plaintiff as one and the same and
hold the sale of the land to defendant valid? Or was the sale no in fraud of creditors,
and if so void? If PNB had intervened in the action, would the result have been the
same?
Pau: The Court should have regarded Tabora and the corporation one and the same,
thus making the sale to Sandiko valid (Sale to innocent third persons). But on the
proof that the sale was made to defraud creditors, and Sadiko is still an innocent
purchase, the creditors can only file for damages. If Sadiko is not a purchaser in good
faith, then the sale is void without prejudice to filing a criminal case against Tabora
under RPC 316.
If PNB intervened, the sale wouldn’t prosper because a change of debtor must be with
the consent of the creditor. The creditor-mortgagee must consent to the sale which
will result in a change of debtor.
Builders Duntile v Dunn
WE Dunn Company manufactures machinery for making duntile, a hollow building
tile. Samuels told Gaston the agent of Dunn that he was organizing a company to
manufacture the duntiles. Samuels preferred to organize the corporation and then
make the contract for the machinery. Gaston wanted to make the contract first, then
form the corporation after. Samuels then made the contract ordering the machinery
from WE Dunn, which also provided for the free services of an experienced
serviceman (Aaron) for 5 days to insure proper installation. WE Dunn accepted the
contract, and the machinery was shipped to Samuels. Aaron the serviceman began
setting up the machinery.
Aaron set up the machinery on June 16 while the article of incorporation were filed on
June 20. The capital stock was fixed at $10,000 and Samuels paid out or assumed to
pay $5100 for the manicenery and other expenses and stock for this amount was
ordered issued by him, and other amounts of other promoters of the corporation.
It turns out that the duntiles made were so inferior in quality and practically value-
less for building purposes, because the machinery had been installed improperly by
Aaron the service guy, and had even used the wrong formula for the mixing. After
this, WE Dunn sent Terell two months after. Builders, in its own name and not
Samuels, sues WE Dunn Co. to recover on the contract made before the corporation
(Builders) was formed.
I: Can a corporation enforce or sue upon a contract made by its promoters in its
behalf and before its incorporation?
H: The case turns on the right of a corporation to sue upon a contract made in its
behalf by one of its promoters before it was organized.
A corporation has the power to adopt a contract of its promoters, and one of the
effects of this adoption is that the contract becomes that of the corporation. But the
power to adopt must only be limited to such contracts as the corporation
itself can make or is authorized to make.
In this case it was clear that the contract was made by Samuels in behalf of the
projected corporation, and after it was formed, the incorporators took over the whole
thing and ratified all that had been done in its behalf. To deny the corporation the
right to sue for damages for breach of contract and the loss it sustained by reason of
the first agent’s negligence and improper acts would be to deny it all remedy for the
breach of contract, for Samuels did not make the contract for himself, and he
personally did not sustain any damages. It was the corporation that sustained the
damages resulting from the breach.
The corporation was the real party in interest, and brought suit in its own name. The
contract, though made in the name of Samuels was, as all parties knew, made in his
name for the benefit of the corporation to be organized. He was one of the promoters
but had no intention of buying it for himself. Though there was no formal assignment
of the contract to the corporation, its action to bring suit were an adoption of the
contract.
Pau: The act of bringing an action on the contract is sufficient adoption or ratification
of that contract and this gives the corporation a cause of action.
Rizal Light v PSC and Morong Electric.
Facts:
Case involves two (2) petitions of the Rizal Light & Ice Co., Inc., (1) to review and set
aside the orders of respondent Public Service Commission cancelling and revoking the
certificate of public convenience and necessity and forfeiting the franchise of Rizal,
and (2) to review and set aside the decision of the Commission granting a certificate
of public convenience and necessity to respondent Morong Electric Co., Inc to operate
an electric light, heat and power service in the municipality of Morong, Rizal.
Petitioner opposed in writing the application of Morong Electric, alleging among other
things, that it is a holder of a certificate of public convenience to operate an electric
light, heat and power service in the same municipality of Morong, Rizal, and that the
approval of said application would not promote public convenience, but would only
cause ruinous and wasteful competition.
The Commission, in its decision dated March 13, 1963, found that there was an
absence of electric service in the municipality of Morong and that applicant Morong
Electric, a Filipino-owned corporation duly organized and existing under the laws of
the Philippines, has the financial capacity to maintain said service. The Commission
found that Morong Electric is a corporation duly organized and existing under the
laws of the Philippines, the stockholders of which are Filipino citizens, that it is
financially capable of operating an electric light, heat and power service, and that at
the time the decision was rendered there was absence of electric service in Morong,
Rizal.
While the petitioner does not dispute the need of an electric service in Morong, Rizal,
it claims, in effect, that Morong Electric should not have been granted the certificate
of public convenience and necessity because (1) it did not have a corporate
personality at the time it was granted a franchise and when it applied for said
certificate; (2) it is not financially capable of undertaking an electric service, and (3)
petitioner was rendering efficient service before its electric plant was burned, and
therefore, being a prior operator its investment should be protected and no new party
should be granted a franchise and certificate of public convenience and necessity to
operate an electric service in the same locality.
ISSUE: WON Morong Electrical was not a being when it was granted a franchise and
thus invalidate such grant.
Held:
The bulk of petitioner's arguments assailing the personality of Morong Electric dwells
on the proposition that since a franchise is a contract, at least two competent parties
are necessary to the execution thereof, and parties are not competent except when
they are in being. Hence, it is contended that until a corporation has come into being,
in this jurisdiction, by the issuance of a certificate of incorporation by the Securities
and Exchange Commission (SEC) it cannot enter into any contract as a corporation.
The certificate of incorporation of the Morong Electric was issued by the SEC on
October 17, 1962, so only from that date, not before, did it acquire juridical
personality and legal existence. Petitioner concludes that the franchise granted to
Morong Electric on May 6, 1962 when it was not yet in esse is null and void and
cannot be the subject of the Commission's consideration. On the other hand, Morong
Electric argues, and to which argument the Commission agrees, that it was a de facto
corporation at the time the franchise was granted and, as such, it was not
incapacitated to enter into any contract or to apply for and accept a franchise. Not
having been incapacitated, Morong Electric maintains that the franchise granted to it
is valid and the approval or disapproval thereof can be properly determined by the
Commission.
Petitioner's contention that Morong Electric did not yet have a legal
personality on May 6, 1962 when a municipal franchise was granted to it is
correct. The juridical personality and legal existence of Morong Electric began only
on October 17, 1962 when its certificate of incorporation was issued by the SEC.
Before that date, or pending the issuance of said certificate of incorporation, the
incorporators cannot be considered as de facto corporation. But the fact that
Morong Electric had no corporate existence on the day the franchise was
granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted
the franchise in accordance with the terms and conditions thereof.
— “The fact that a company is not completely incorporated at the time the grant is
made to it by a municipality to use the streets does not, in most jurisdictions,
affect the validity of the grant. But such grant cannot take effect until the
corporation is organized.”
— “While a franchise cannot take effect until the grantee corporation is organized,
the franchise may, nevertheless, be applied for before the company is fully
organized.”
— “An ordinance granting a privilege to a corporation is not void because the
beneficiary of the ordinance is not fully organized at the time of the introduction
of the ordinance. It is enough that organization is complete prior to the passage
and acceptance of the ordinance. The reason is that a privilege of this character
is a mere license to the corporation until it accepts the grant and complies with
its terms and conditions.”
The incorporation of Morong Electric on October 17, 1962 and its acceptance of the
franchise not only perfected a contract between the respondent municipality and
Morong Electric but also cured the deficiency pointed out by the petitioner in the
application of Morong Electric.
The conclusion herein reached regarding the validity of the franchise granted to
Morong Electric is not incompatible with the holding of this Court in Cagayan Fishing
Development Co., Inc. vs. Teodoro Sandiko, where it was held that a corporation
should have a full and complete organization and existence as an entity before it can
enter into any kind of a contract or transact any business. It should be pointed out,
however, that this Court did not say in that case that the rule is absolute or that
under no circumstances may the acts of promoters of a corporation be ratified or
accepted by the corporation if and when subsequently organized. Of course, there are
exceptions. It will be noted that American courts generally hold that a contract made
by the promoters of a corporation on its behalf may be adopted, accepted or ratified
by the corporation when organized.
— Although a franchise may be treated as a contract, the eventual incorporation
after the grant of the franchise and its acceptance thereof, as well as the efforts
made to prosecute the application not only perfected a contract but cured the
deficiency
— Cagayan rule is not absolute; a corporation once formed may adopt, ratify, or
accept a contract made by promoters in behalf of the corporation before its
incorporation
Quaker Hill v Parr.
Facts:
Parr et al while in the course of negotiations with Quaker Hill Inc, a NY corporation, for
the former to purchase nursery stock, undertook to organize a separate corporation
to be known as the Denver Memorial Nursery Inc. Two orders for nursery stock were
signed by Parr in behalf of Denver Memorial which to the knowledge of Quaker
was not yet formed. The nursery stock was then delivered to Parr and was planted
with the help of Quaker.
A substitute order was then made, with the name Mountain View Nurseries
instead of Denver Memorial, which never actually came into being. Because of
name confusion, it was subsequently called Mountain View Nurseries. Its articles were
filed but the companies never functioned as going concerns.
After Mountain View was formed, a new note and contract was submitted to
Parr et al, containing the name Mountain View as contracting party. Quaker
then referred to the company as Mountain View. Mountain View became
financially troubled, and Quaker sues Parr et al (in his personal capacity)on the
ground that the corporation was not yet formed at the time the sales contract was
made and that Parr et al as promoters should be personally liable.
Issue: WON Quaker may sue Parr et al in his personal capacity when he transacted
with him as the representative of a corporation (Mountain View and Denver Memorial)
Held:
General Rule—promoters are personally liable on their contracts, though made in
behalf of a corporation to be formed.
Exception—if the contract is made in behalf of the corporation and the other party
agrees to look to the corporation and not to the promoters for payment.
In this case, Quaker was well aware that the corporation was not yet
formed and even urged that the contract be made in the name of the to-be
formed corporation. The entire transaction contemplated the corporation as
the contracting party. Thus personal liability does not attach. There was
clearly an intent on the part of Quaker to contract with the corporation and
not with the promoters.
Campos:
What particular facts “clearly establish intent on the part of the plaintiff to contract
with the corporation and not with the individual defendants? How does this case differ
from the How case?
Old Dominion Copper Mining and Smelting Co v Bigelow.
Facts:
Action to recover secret profits made by Bigelow and Lewisohn, promoters of the Old
Dominion Copper. Bigelow and Lewisohn framed a scheme for the capitalization of Old
Dominion for $3,750,000, then sell to the corporation for $3,250,000 their property worth
$1M but having a market value of not over $2M, and then sale to the general public at par
for cash of the remaining $500,000 of stock, and all this without providing Old Dominion
with any independent board of officers to pass upon the wisdom of the purchase and
without disclosing the substance of the transaction and their extraordinary profit to the
purchasers of its stock for cash at par.
(Pau: They sold their property to themselves and assigning themselves as trustee for the
corporation while it is being formed. So the fiduciary relationship is between them as
promoters and the subsequent investors to the under construction corporation).
The court has decided that such a transaction creates a liability on the part of the
promoters to account for the secret profits to Old Dominion. The corporation seeks to
recover the secret profit made by the promoters in the sale of their own property to the
corporation, basing its claim on the general rule that a promoter cannot lawfully take
a secret profit and will be held to account for it if he does. Fundamentally the action
is to recover profits obtained by a breach of trust, as promoters have duties as fiduciaries
to the company. A promoter includes those who undertake to form a corporation and to
procure for it the rights, instrumentalities and capital by which it is to carry out the
purposes set forth in its charter and to establish it as fully able to do its business. It is now
established without exception that a promoter stands in a fiduciary relation to the
corporation which he is interested in, and that he is charged with all the duties of good
faith which attach to other trusts.
I: W/N the rule that a promoter is in a fiduciary capacity with respect to the corporation he
helped in forming is applicable in this case, and w/n the corporation is in a position to
assert his claim for secret profits.
I: W/N the promoters, who owned all of the issued stock at the time of
incorporation, with the intention to immediately issue the same to the public without
disclosure, would be liable to the corporation if a substantial portion of the stock
remains unissued, and w/n a vote of ratification of this breach would exonerate
them.
H: Notwithstanding this fiduciary relation, the promoter may sell property to the company
which he is promoting. In order that the contract may be absolutely binding, the promoter
must pursue one of 4 courses of action:
(1) provide an independent board of officers and make a full disclosure to the
corporation through the board;
(2) make a full disclosure of all material facts to each original subscriber of shares
(3) procure a ratification of the contract by vote of the shareholders of the
completely established corporation
(4) he may be himself the real subscriber of all the shares of the capital stock
contemplated as part of the promotion scheme.
In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K shares. They held
all the shares issued at the time of ratification, but not all which it was proposed to
issue as part of their promotion scheme. There is a liability of the promoter to the
corporation when further original subscribers to capital stock contemplated as an essential
part of the scheme of promotion came in after the transaction complained of, even though
that transaction is known to all the then SHs at the time—which are the promoters
themselves and their representatives.
In the present case, the whole purchase price was paid in stock, issued before any stock
was issued to the public although after a substantial public subscription. In other words, it
is the order in which the transaction is carried out, and not its substantial
nature, which makes the difference between liability and immunity of the
promoter. It is of know consequence whether in fact the dummy directors know of the
terms of sale and the breach of trust of the promoters. The point is that the directors were
selected with the purpose that they should be the mere instruments of the promoter and
they carried out the will of their masters.
If the assent of all SHs is good in one case, by the same token it should be equally good in
the other, and the breach of trust in one is equally a breach of trust in the other. The
starting point is that promoters stand in a fiduciary position toward the corporation, as well
as when as part of the scheme of promotion, uninformed SHs are expected to come in after
the wrong has been perpetrated, as when at the time there are SHs to whom no disclosure
was made.
Promoters have in their hands the creation and molding of the company, like clay in the
hands of a potter. It is not necessary to inquire how far he may be trustee also for
shareholders and associates. In the present case the inquiry relates wholly to his obligation
to the corporation. The fiduciary relation must continue until the promoter has completely
established according to his plan the being which he has undertaken to create. The
principle that one cannot rightfully sell property, belonging to him in his private
capacity, to himself in a trust capacity is universal.
The theory upon which corporations are founded is that they are entities, separate and
distinct from officers and SHs. Looking through the form of the corporation to the SHs and
treating them as the corporation is an exception to the rule that the corporation is a
separate legal entity for all purposes, even though all its stock be held by a single interest
and it be to all practical intents merely the instrument of the SH. The wrong which the
promoters did in this case was in selling property worth $1M and in the market
at most $2M for $3.25 without revealing that they were making a secret profit.
The wrong was done to the corporation. It affected all its SHs, present and
future alike. It is done directly to the corporation as an independent entity, and
thus indirectly the rights of those who are or will become SHs are affected.
In buying the promoter’ property, the directors of the corporation acted for the corporation,
as such, without regard to who were the then SHs. The wrong is not done when the
innocent public subscribes but when the sale was made to the corporation at a
grossly exaggerated price with secret profit. The occasion for complaining of this
wrong comes when the promoters issue to the public the balance of stock in order to
provide the money necessary to set the corporation on its feet.

The breach of trust is in nature of a tort, thus, renders Bigelow and Lewisohn solidarily
liable for the whole damage. Remedy is to return the secret profit.

Plaintiff even presses that it is entitled to recover the difference between the market value
of the shares received by the defendant and Lewisohn and the cost of them of the property
conveyed. But the court said that there is no finding here that such fiduciary relation
existed at the time (because this is the measure of recovery when there is a fiduciary
relationship). No finding that such relationship exised at the time Bigelow purchased the
property. Market value is the standard commonly applied where property has such value. It
is only in cases where the value of property cannot be fairly ascertained bu the application
of this test that resort is had to any other.

RP v Acoje Mining.
F: Acoje Mining requested the opening of a post office at its mining camp in Zambales
to service employees living in the camp. The Director of Posts agreed to set up the
office, provided that in the meantime that funds are not available, the company
would provide for all essential equipment and assign a responsible employee to
perform the duties of a postmaster. He also added that the company shall assume
direct responsibility for whatever pecuniary loss may be suffered by the Bureau of
Posts by reason of the dishonesty or negligence of the employee assigned. A
Resolution by the Acoje Board of Directors was passed.
The postmaster assigned, Hilario Sanchez, went on leave and never returned. It was
soon discovered that a shortage was incurred iao P13,867.24, apparently embezzled
by Sanchez. Bureau of Posts sues for the shortage. Acoje denied its liability
contending that the resolution issued by the board was ultra vires, and its liability if
any would only be that of a guarantor.
H: It should be noted that it was Acoje itself that requested for the setting up of a
post office for the convenience of its employees, which the SC held to cover a subject
which is “a reasonable and proper adjunct to the conduct of the business of Acoje
Mining.” An ultra vires act is one committed outside the object for which a
corporation is created, but there are certain corporate acts that may be performed
outside the scope of the powers expressly conferred if they are necessary to promote
the interest and welfare of the corporation.”
Even in the case of ultra vires acts which are not illegal per se, a corporation cannot
be heard to complain that it is not liable for the acts of its board, because of estoppel
by representation. The term ultra vires should be distinguished from an illegal act for
the former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be invalidated. It being merely voidable,
an ultra vires act can be enforced or validated if there are equitable grounds for
taking such action. In this case, it is fair that the resolution be upheld at least on the
ground of estoppel.
The defense of ultra vires rests on violation of trust or duty towards the stockholders,
and should not be entertained where its allowance will do greater wrong to innocent
parties dealing with the corporation. The acceptance of benefits arising from the
performance of the other party gives rise to an estoppel precluding the repudiation of
the contract.
Napocor v Vera. Sea Lion is a port and arrastre operator with a contract for
stevedoring services with NPC which had already expired. Its PPA permit for cargo
handling services at the NPC Calaca pier had expired as well. Napocor did not renew
Sea Lion’s contract for Stevedoring Services for Coal-Handling Operations at Calaca
plant, and took over its stevedoring services pursuant to a provision in its charter,
“[t[o exercise such powers and do such things as may be reasonably necessary to
carry out the business and purposes for which it was organized, or which, from time
to time, may be declared by the Board to be necessary, useful, incidental or auxiliary
to accomplish said purpose.”
Sea Lion sues, alleging that NPC had acted in bad faith and with grave abuse of
discretion in not renewing its Contract for Stevedoring Services for Coal-Handling
Operations at the Calaca plant, and in taking over its stevedoring services. Judge
Vera, acting on Sea Lion’s suit, issued a writ of preliminary injunction enjoining NPC
from further undertaking stevedoring and arrastre services in its pier located at the
Batangas Coal-Fired Thermal Power Plant at Calaca, Batangas and directing it either
to enter into a contract for stevedoring and arrastre services or to conduct a public
bidding therefor. Sea Lion was also allowed to continue stevedoring and arrastre
services at the pier.
H: In determining whether or not the act of NPC falls within the purview of the charter
which creates it, the Court must decide whether or not a logical and necessary
relation exists between the act questioned and the corporate purpose expressed in
the NPC charter. For if that act is one which is lawful in itself and not otherwise
prohibited, and is done for the purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a substantial and not in a remote and
fanciful sense, it may be fairly considered within the corporation's charter powers.
A pier located at Calaca, Batangas, which is owned by NPC, receives the various
shipments of coal which is used exclusively to fuel the Batangas Coal-Fired Thermal
Power Plant of the NPC for the generation of electric power. The stevedoring services
which involve the unloading of the coal shipments into the NPC pier for its eventual
conveyance to the power plant are incidental and indispensable to the operation of
the plant. The Court holds that NPC is empowered under its Charter to undertake
such services, it being reasonably necessary to the operation and maintenance of the
power plant.
This Court is, guided by the case of Republic of the Philippines v. Acoje Mining
Company, Inc., where the Court affirmed the rule that a corporation is not restricted
to the exercise of powers expressly conferred upon it by its charter, but has the
power to do what is reasonably necessary or proper to promote the interest or
welfare of the corporation. Whether NPC will enter into a contract for stevedoring and
arrastre services to handle its coal shipments to its pier, or undertake the services
itself, is entirely and exclusively within its corporate discretion. It does not involve a
duty the performance of which is enjoined by law. Thus, the courts cannot direct the
NPC in the exercise of this prerogative.
Madrigal & Co v Zamora.
Madrigal & Co was engaged in the management of Rizal Cement Co., Inc. and is also
its sister company, both being owned by the same or practically the same
stockholders. The Madrigal Central Office Employees Union sought for the renewal of
its collective bargaining agreement and proposed a wage increase of P200.00 a
month, an allowance of P100.00 a month, and other economic benefits. Madrigal
requested for a deferment in the negotiations.
Thereafter, Madrigal on two occasions reduced its capital stock from 765,000 shares
to 267,366 shares and from 267,366 shares to 110,085 shares by virtue of two
alleged resolutions of its stockholders, which was effected through the distribution of
the marketable securities owned by the petitioner to its stockholders in exchange for
their shares in an equivalent amount in the corporation.
The Union filed a case for ULP with the NLRC. Madrigal answered citing operational
losses. Madrigal then informed the Secretary of Labor that Rizal Cement Co., Inc.,
"from which it derives income as the General Manager or Agent" had "ceased
operating temporarily. In addition, because of the desire of the stockholders to phase
out the operations of the Madrigal & Co., Inc. due to lack of business incentives and
prospects, and in order to prevent further losses," it had to reduce its capital stock on
two occasions. The labor arbiter, having found that the petitioner "had been making
substantial profits in its operation" since 1972 through 1975, granted the wage
increase, and was affirmed by NLRC. Meanwhile Madrigal tried to terminate the
services of Union members citing retrenchment but its application was declared
illegal by DOLE. Upon appeal to OP, Ronaldo Zamora affirmed the decision of DOLE.
H: What clearly emerges from the recorded facts is that the petitioner, awash with
profits from its business operations but confronted with the demand of the union for
wage increases, decided to evade its responsibility towards the employees by a
devised capital reduction. While the reduction in capital stock created an apparent
need for retrenchment, it was, by all indications, just a mask for the purge of union
members, who, by then, had agitated for wage increases. In the face of the petitioner
company's piling profits, the unionists had the right to demand for such salary
adjustments. That the petitioner made quite handsome profits is clear from the
records. We agree with the National Labor Relations Commission that "[t]he dividends
received by the company are corporate earnings arising from corporate investment."
42
Indeed, as found by the Commission, the petitioner had entered such earnings in
its financial statements as profits, which it would not have done if they were not in
fact profits. 43
Moreover, it is incorrect to say that such profits — in the form of dividends — are
beyond the reach of the petitioner's creditors since the petitioner had received them
as compensation for its management services in favor of the companies it managed
as a shareholder thereof. As such shareholder, the dividends paid to it were its own
money, which may then be available for wage increments. It is not a case of a
corporation distributing dividends in favor of its stockholders, in which case, such
dividends would be the absolute property of the stockholders and hence, out of reach
by creditors of the corporation. Here, the petitioner was acting as stockholder itself,
and in that case, the right to a share in such dividends, by way of salary increases,
may not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital reduction efforts
were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that
it had been making profits, and consequently, to justify the mass layoff in its
employee ranks, especially of union members. They were nothing but a premature
and plain distribution of corporate assets to obviate a just sharing to labor of the vast
profits obtained by its joint efforts with capital through the years. Surely, we can
neither countenance nor condone this. It is an unfair labor practice.
Gov’t of Philippines v El Hogar.
This is a quo warranto proceeding, alleging 17 causes of action, instituted originally in
this court by the Government of the Philippine Islands on the relation of the Attorney-
General against the building and loan association known as El Hogar Filipino, for the
purpose of depriving it of its corporate franchise, excluding it from all corporate rights
and privileges, and effecting a final dissolution of said corporation. The respondent, El
Hogar Filipino, was apparently the first corporation organized in the Philippine Islands
under the provisions cited, and the association has been favored with extraordinary
success.
The articles of incorporation bear the date of December 28, 1910, at which time
capital stock in the association had been subscribed to the amount of P150,000 of
which the sum of P10,620 had been paid in. Under the law as it then stood, the
capital of the Association was not permitted to exceed P3,000,000, but by Act No.
2092, passed December 23, 1911, the statute was so amended as to permit the
capitalization of building and loan associations to the amount of ten millions. Soon
thereafter the association took advantage of this enactment by amending its articles
so as to provide that the capital should be in an amount not exceeding the then
lawful limit.
From the time of its first organization the number of shareholders has constantly
increased, with the result that on December 31, 1925, the association had 5,826
shareholders holding 125,750 shares, with a total paid-up value of P8,703,602.25.
During the period of its existence prior to the date last above-mentioned the
association paid to withdrawing stockholders the amount of P7,618,257,.72; and in
the same period it distributed in the form of dividends among its stockholders the
sum of P7,621,565.81.
I: W/N El Hogar is illegally holding title to real property in excess of 5 years, in
violation of the law that while corporations may loan funds upon real estate security,
they shall dispose of the same within 5 years after receiving title
H: the corporation has not been shown to have offended against the law in a manner
which would entail forfeiture of its charter. The evident purpose behind the law
restricting the rights of corporations with respect to the tenure of land was to prevent
the revival of the entail or other similar institution by which land could be fettered
and its alienation hampered. In the case, El Hogar had in GF disposed of the property
at the expiration of the period fixed by law. Under the circumstances the destruction
of the corporation would bring irreparable loss upon thousands of innocent
shareholders of the corporation without any corresponding benefit to the public.
I: W/N el Hogar is illegally owning and holding a business lot in excess of the
reasonable requirements and in contravention of the Corpo law that every
corporation has the power to purchase hold lease real property as reasonable and
necessary required for the transaction of the lawful business
H: The law expressly declares that corporations may acquire such real estate as is
reasonably necessary to enable them to carry out the purposes for which they were
created; and we are of the opinion that the owning of a business lot upon which to
construct and maintain its offices is reasonably necessary to a building and loan
association such as the respondent was at the time this property was acquired. A
different ruling on this point would compel important enterprises to conduct their
business exclusively in leased offices — a result which could serve no useful end but
would retard industrial growth and be inimical to the best interests of society. We are
furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired
by the respondent, it is entitled to the full beneficial use thereof. No legitimate
principle can discovered which would deny to one owner the right to enjoy his (or its)
property to the same extent that is conceded to any other owner.
I: W/N el Hogar has engaged in activities foreign to the purposes for which the
corporation was created and not reasonably necessary to its legitimate ends,
specifically: (1) the administration of the offices in the El Hogar building not used by
the respondent itself and the renting of such offices to the public; (2) the
administration and management of properties belonging to delinquent shareholders
of the association; (3) the management of some parcels of improved real estate
situated in Manila not under mortgage to it, but owned by shareholders, and has held
itself out by advertisement as prepared to do so
H: (1) The activities here criticized clearly fall within the legitimate powers of the
respondent, as shown in what we have said above relative to the second cause of
action. This matter will therefore no longer detain us. If the respondent had the power
to acquire the lot, construct the edifice and hold it beneficially, as there decided, the
beneficial administration by it of such parts of the building as are let to others must
necessarily be lawful.
(2) The case for the government supposes that the only remedy which the
respondent has in case of default on the part of its shareholders is to proceed to
enforce collection of the whole loan in the manner contemplated in section 185 of the
Corporation Law. It will be noted, however, that, according to said section, the
association may treat the whole indebtedness as due, "at the option of the board of
directors," and this remedy is not made exclusive. We see no reason to doubt the
validity of the clause giving the association the right to take over the property which
constitutes the security for the delinquent debt and to manage it with a view to the
satisfaction of the obligations due to the debtor than the immediate enforcement of
the entire obligation, and the validity of the clause allowing this course to be taken
appears to us to be not open to doubt.
(3) The practice described in the passage above quoted from the agreed facts is in
our opinion unauthorized by law. The administration of property in the manner
described is more befitting to the business of a real estate agent or trust company
than to the business of a building and loan association. The practice to which this
criticism is directed relates of course solely to the management and administration of
properties which are not mortgaged to the association. The circumstance that the
owner of the property may have been required to subscribe to one or more shares of
the association with a view to qualifying him to receive this service is of no
significance. It is a general rule of law that corporations possess only such express
powers. The management and administration of the property of the shareholders of
the corporation is not expressly authorized by law, and we are unable to see that,
upon any fair construction of the law, these activities are necessary to the exercise of
any of the granted powers. The corporation, upon the point now under the criticism,
has clearly extended itself beyond the legitimate range of its powers. But it does not
result that the dissolution of the corporation is in order, and it will merely be enjoined
from further activities of this sort.
I: W/N the royalty paid to the founder of el Hogar, Antonio Melian, as compensation
for his services rendered by him during the early stages of the organization of the
corporation, is unconscionable, excessive, and thus necessitates dissolution
H: No possible doubt exists as to the power of a corporation to contract for services
rendered and to be rendered by a promoter in connection with organizing and
maintaining the corporation. It is true that contracts with promoters must be
characterized by good faith; but could it be said with certainty, in the light of facts
existing at the time this contract was made, that the compensation therein provided
was excessive?
If the amount of the compensation now appears to be a subject of legitimate
criticism, this must be due to the extraordinary development of the association in
recent years. If the Melian contract had been clearly ultra vires — which is not
charged and is certainly untrue — its continued performance might conceivably be
enjoined in such a proceeding as this; but if the defect from which it suffers is mere
matter for an action because Melian is not a party. It is rudimentary in law that an
action to annul a contract cannot be maintained without joining both the contracting
parties as defendants. Moreover, the proper party to bring such an action is either the
corporation itself, or some shareholder who has an interest to protect.
I: W/N el Hogar had abused its franchise in issuing special shares, which is alleged to
be illegal and inconsistent with the plan and purposes of building and loan
associations,and that these are held by well-to-do people purely for investment
purposes and not by wage-earners for savings
H: The ground for supposing the issuance of the "special" shares to be unlawful is
that special shares are not mentioned in the Corporation Law as one of the forms of
security which may be issued by the association. Upon examination of the nature of
the special shares in the light of American usage, it will be found that said shares are
precisely the same kind of shares that, in some American jurisdictions, are generally
known as advance payment shares; in if close attention be paid to the language used
in the last sentence of section 178 of the Corporation Law, it will be found that special
shares where evidently created for the purpose of meeting the condition cause by the
prepayment of dues that is there permitted. The language of this provision is as
follow "payment of dues or interest may be made in advance, but the corporation
shall not allow interest on such advance payment at a greater rate than six per
centum per annum nor for a longer period than one year." In one sort of special
shares the dues are prepaid to the extent of P160 per share; in the other sort
prepayment is made in the amount of P10 per share, and the subscribers assume the
obligation to pay P10 monthly until P160 shall have been paid.
It will escape notice that the provision quoted say that interest shall not be allowed
on the advance payments at a greater rate than six per centum per annum nor for a
longer period than one year. The word "interest " as there used must be taken in its
true sense of compensation for the used of money loaned, and it not must not be
confused with the dues upon which it is contemplated that the interest may be paid.
Now, in the absence of any showing to the contrary, we infer that no interest is ever
paid by the association in any amount for the advance payments made on these
shares; and the reason is to be found in the fact that the participation of the special
shares in the earnings of the corporation, in accordance with section 188 of the
Corporation Law, sufficiently compensates the shareholder for the advance payments
made by him; and no other incentive is necessary to induce inventors to purchase the
stock.
It will be observed that the final 20 per centum of the par value of each special share
is not paid for by the shareholder with funds out of the pocket. The amount is
satisfied by applying a portion of the shareholder's participation in the annual
earnings. But as the right of every shareholder to such participation in the earnings is
undeniable, the portion thus annually applied is as much the property of the
shareholder as if it were in fact taken out of his pocket. It follows that the mission of
the special shares does not involve any violation of the principle that the shares must
be sold at par.
From what has been said it will be seen that there is express authority, even in the
very letter of the law, for the emission of advance-payment or "special" shares, and
the argument that these shares are invalid is seen to be baseless. In addition to this it
is satisfactorily demonstrated in Severino vs. El Hogar Filipino, supra, that even
assuming that the statute has not expressly authorized such shares, yet the
association has implied authority to issue them. The complaint consequently fails also
as regards the stated in the ninth cause of action.
I: W/n El Hogar is pursuing illegally a policy of depreciating, at an excessive rate at
the discretion of its Board, the value of real properties acquired by it at its sales,
thereby frustrating the right of SHs to participate annually and equally in the
earnings.
H: This count for the complaint proceeds, in our opinion, upon an erroneous notion as
to what a court may do in determining the internal policy of a business corporation. If
the criticism contained in the brief of the Attorney-General upon the practice of the
respondent association with respect to depreciation be well founded, the Legislature
should supply the remedy by defining the extent to which depreciation may be
allowed by building and loan associations. Certainly this court cannot undertake to
control the discretion of the board of directors of the association about an
administrative matter as to which they have legitimate power of action. The tenth
cause of action is therefore not well founded.
I: W/n el Hogar’s charter should be revoked because it illegally maintains excessive
reserve funds and because it pursues a policy, allegedly unlawful, of paying a straight
annual dividend of 10% regardless of losses suffered and profits made by the
corporation and in violation of the requirement s of the corpo code.
H: It is insisted in the brief of the Attorney-General that the maintenance of reserve
funds is unnecessary in the case of building and loan associations, and at any rate
the keeping of reserves is inconsistent with section 188 of the Corporation Law. Upon
careful consideration of the questions involved we find no reason to doubt the right of
the respondent to maintain these reserves. It is true that the corporation law does not
expressly grant this power, but we think it is to be implied. It is a fact of common
observation that all commercial enterprises encounter periods when earnings fall
below the average, and the prudent manager makes provision for such contingencies.
To regard all surplus as profit is to neglect one of the primary canons of good business
practice. Building and loan associations, though among the most solid of financial
institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate
are highly detrimental to any fiscal institutions, while uniformity in the payments of
dividends, continued over long periods, supplies the surest foundations of public
confidence.
Moreover, it is said that the practice of the association in declaring regularly a 10 per
cent dividend is in effect a guaranty by the association of a fixed dividend which is
contrary to the intention of the statute. The government insists upon an
interpretation of section 188 of the Corporation Law that is altogether too strict and
literal. From the fact that the statute provides that profits and losses shall be annually
apportioned among the shareholders it is argued that all earnings should be
distributed without carrying anything to the reserve. But it will be noted that it is
provided in the same section that the profits and losses shall be determined by the
board of directors: and this means that they shall exercise the usual discretion of
good businessmen in allocating a portion of the annual profits to purposes needful to
the welfare of the association. The law contemplates the distribution of earnings and
losses after other legitimate obligations have been met. Our conclusion is that the
respondent has the power to maintain the reserves criticized in the eleventh and
twelfth counts of the complaint; and at any rate, if it be supposed that the reserves
referred to have become excessive, the remedy is in the hands of the Legislature. It is
no proper function of the court to arrogate to itself the control of administrative
matters which have been confided to the discretion of the board of directors. The
causes of action under discussion must be pronounced to be without merit.
I: W/n el Hogar illegally departed from its charter because it has made loans which
were intended to be used by the borrowers for other purposes than the building of
homes. There is no statute here expressly declaring that loans may be made by these
associations solely for the purpose of building homes. On the contrary, the building of
homes is mentioned in section 171 of the Corporation Law as only one among several
ends which building and loan associations are designed to promote.
Furthermore, section 181 of the Corporation Law expressly authorities the Board of
directors of the association from time to time to fix the premium to be charged. In the
brief of the plaintiff a number of excerpts from textbooks and decisions have been
collated in which the idea is developed that the primary design of building and loan
associations should be to help poor people to procure homes of their own. This
beneficent end is undoubtedly served by these associations, and it is not to be denied
that they have been generally fostered with this end in view. But in this jurisdiction at
least the lawmaker has taken care not to limit the activities of building and loan
associations in an exclusive manner, and the exercise of the broader powers must in
the end approve itself to the business community.
I: W/n the el Hogar charter may be revoked because various loans now outstanding
have been made by the respondent to corporations and partnerships, and that these
entities have in some instances subscribed to shares in the respondent for the sole
purpose of obtaining such loans, and that some of these juridical entities became
shareholders merely for the purpose of qualifying themselves to take loans from the
association.
H: the Corporation Law declares that "any person" may become a stockholder in
building and loan associations. The word "person" appears to be here used in its
general sense, and there is nothing in the context to indicate that the expression is
used in the restricted sense of both natural and artificial persons, as indicated in
section 2 of the Administrative Code. We would not say that the word "person" or
persons," is to be taken in this broad sense in every part of the Corporation Law. For
instance, it would seem reasonable to say that the incorporators of a corporation
ought to be natural persons, although in section 6 it is said that five or more
"persons", although in section 6 it is said that five or more "persons," not exceeding
fifteen, may form a private corporation. But the context there, as well as the common
sense of the situation, suggests that natural persons are meant.
When it is said, however, in section 173, that "any person" may become a
stockholder in a building and loan association, no reason is seen why the phrase may
not be taken in its proper broad sense of either a natural or artificial person. At any
rate the question whether these loans and the attendant subscriptions were properly
made involves a consideration of the power of the subscribing corporations and
partnerships to own the stock and take the loans; and it is not alleged in the
complaint that they were without power in the premises. Of course the mere motive
with which subscriptions are made, whether to qualify the stockholders to take a loan
or for some other reason, is of no moment in determining whether the subscribers
were competent to make the contracts. The result is that we find nothing in the
allegations of the sixteenth cause of action, or in the facts developed in connection
therewith, that would justify us in granting the relief.
I: W/n el Hogar, in disposing of real estate purchased in the collection of defaulted
loans, on credit at first and then sold and mortgaged to el Hogar to secure payment
of the purchase price, had incurred several outstanding loans, and that that the
persons and entities to which said properties are sold under the condition charged are
not members or shareholders nor are they made members or shareholders of the
defendant.
H: This part of the complaint is based upon a mere technicality of bookkeeping. The
central idea involved in the discussion is the provision of the Corporation Law
requiring loans to be stockholders only and on the security of real estate and shares
in the corporation, or of shares alone. It seems to be supposed that, when the
respondent sells property acquired at its own foreclosure sales and takes a mortgage
to secure the deferred payments, the obligation of the purchaser is a true loan, and
hence prohibited.
But in requiring the respondent to sell real estate which it acquires in connection with
the collection of its loans within five years after receiving title to the same, the law
does not prescribe that the property must be sold for cash or that the purchaser shall
be a shareholder in the corporation. Such sales can of course be made upon terms
and conditions approved by the parties; and when the association takes a mortgage
to secure the deferred payments, the obligation of the purchaser cannot be fairly
described as arising out of a loan. Nor does the fact that it is carried as a loan on the
books of the respondent make it a loan on the books of the respondent make it a loan
in law. The contention of the Government under this head is untenable.
Pirovano v Dela Rama.
Under the leadership and management of Enrico Pirovano, president of Del Rama
Steamship, the company grew and progressed until it became a multi-million
corporation, the assets of which grew and increased from P240K to around P15M. He
was insured by the company for P1M. Esteban dela Rama, majority stockholder,
distributed his shares among his 5 daughters, including the NDC, to which Dela Rama
had an outstanding bonded indebtedness iao P7.5M, through a debt-equity swap
arrangement which also gave the NDC representation in the Board.
Pirovano was killed by the Japanese during the war, and a Boardres was adopted
granting to the Pirovano children the proceeds of the insurance policies taken on the
life of the late president. However, the policy had lapse because the company was
not able to pay the premiums regularly. The BoardRes authorizes the allocation of
P400K convertible into 4000 shares of stock ifo of the Pirovano children, as well as a
waiver of the preemptive rights of the former owners, the Dela Rama siblings. This
was submitted to the stockholders which duly approved the same. Harden v Benguet.

It appears, however, that Don Esteban did not realize that the dole out would actually
be giving to the Pirovano children more than what they intended to give. This was
because the value then of the shares was 3.6 times the par value thereof, thus the
donation iao P400K would amount to a total of P1.44M. Thus the voting strength of
the Pirovano children would be twice as much as that of the dela Rama sisters. The
old Resolution having been nullified, the Board adopted a new BR changing the form
of the donation from 4000 shares into a renunciation of the Company’s right and title
to the life insurance policies of Pirovano.
It also provides that the proceeds of the policy be retained by the Company as a loan
drawing interest payable to the Pirovano children whenever the company is in a
position to meet this financial obligation and after the Company settles its bonded
indebtedness ifo NDC. This was ratified by the Dela Rama stockholders. Mrs Pirovano
accepted the donation, and buys property in the US. Upon inquiry with the Sec, it was
found that the donation was illegal and thus void on the grounds that the corporation
acted ultra vires and that it could not dispose of its assets through donation. The
stockholders then voted to revoke the donation. Mrs Pirovano sued to demand the
credit owed to them by the Company.
I: w/n the donation by the corporation of the proceeds of the insurance is an ultra
vires act
H: Under the AOI of Dela Rama Steamship it is provided under (g) that the company
may invest and deal with moneys of the company not immediately required, in such a
manner as from time to time may be determined, and under (i)… to lend money or to
aid in any other manner any person association, or corporation of which any
obligation or in which any interest is held by the corporation or in the affairs of
prosperity of which the corporation has a lawful interest. The corporation was thus
given broad and almost unlimited powers to carry out the purposes for which it was
organized. The word ”deal” is broad enough to include any manner of disposition, and
thus the donation comes within the scope of this broad power. The company was in
fact very much solvent as it was able to declare and issue dividends to its
stockholders, and shows that the excess funds which were not needed by the
company which was donated to the children was justified under the AOI.
Balatoc Mining, engaged in the mining of gold, sorely needed the infusion of new
capital to resuscitate its stalled operations. The officers approached the Benguet
Mining Co, an entity also engaged in gold mining. A contract was executed, which
states that Benguet agrees to construct a milling plant for the Balatoc mine and erect
a power plant, in exchange for Balatoc Mining shares valued at P600K and the excess
in cash to compensate for the cost of the contract.
By the time of the complaint, the value of the stock of Balatoc had soared for a
nominal valuation to more than P11 per share. It was alleged by Harden of Balatoc
that the Benguet Mining Co held shares of stock in another mining corporation, the
Balatoc Mining Company, in violation of a prohibition against mining corporations
from owning stock of another mining corporation in the old Corpo law. The
shareholders of Balatoc sued Benguet Mining to annul stock certificates of Balatoc
issued ifo Benguet and to recover money earned from the transaction. TC dismissed
complaint.
H: Although the contract between the two mining companies was illegal for
contravening the old Corpo Law, the Legislature, in adopting such a provision had the
intention that public policy should be controlling in the granting of mining rights. The
violation in this case was of such a nature that it can be proceeded upon only by way
of a criminal prosecution, or by action quo warranto, which can be maintained only by
the State.
Insofar as the parties are concerned, no civil wrong had been committed between
them, and if public wrong had been committed, then the directors of Balatoc Mining
and Harden were the active inducers of that wrong. The contract has in fact been
performed on both sides, and there is no possibility of undoing what had been done.
Thus even where corporate contracts are illegal per se, when only public or
government policy or interests are at stake and no private wrong is committed, the
courts will leave the parties as they are, in accordance with their original contractual
expectations.

Under the second broad power, the corporation knew well its scope such that noone
lifted a finger to dispute its validity. The company gave the donation not only because
it was indebted to him but also because it was fit and proper to make provisions for
the children and out of a sense of gratitude.

Even assuming that the donation was ultra vires, still it cannot be invalidated or
declared legally ineffective for that reason alone, it appearing that the donation
represents not only the act of the Board but also that of the stockholders themselves
since they expressly ratified the resolution. By this ratification, the infirmity of the
corporate act, if any, has been obliterated thereby making the act perfectly valid and
enforceable, especially so if the donation is not merely executory but consummated.
The defense of ultra vires cannot be set up against completed or consummated
transactions.

An ultra vires act may either be an act performed merely outside the scope of the
powers granted to the corporation by its AOI or one which is contrary to law or
violative of any principle which would void any contract. A distinction has to be made
with respect to corporate acts which are illegal and those merely ultra vires. The
former are contrary to law, morals, public order or policy, while the latter are not void
ab initio, but merely go beyond the scope of the powers in the AOI, and which renders
the act merely voidable and thus ratifiable by the stockholders.