Corporation Law: The Revised Corporation Code of the Philippines - Sec 2

THE REVISED CORPORATION CODE  OF THE PHILIPPINES  

Republic Act No. 11232 

TITLE I - GENERAL PROVISIONS 

Definitions and Classifications 

SECTION 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

1. Definition and Concept.

  • Chief Justice Marshall of the United States Supreme Court described a corporation as "an artificial being, invisible, intangible and existing only in contemplation of law."
  • A collection of many individuals united into one body, under a special denomination, having perpetual succession under an artificial form, and vested by policy of law with the capacity of acting in several respect as an individual, according to the design of the institution or the powers conferred upon it either at the time of its creation or any subsequent period.
2. Attributes of Corporation

  • It is an artificial being; 
  • It is created by operation of law; 
  • It has the right of succession; and 
  • It has the powers, attributes, and properties expressly authorized by law or incident to its existence. 
3. Juridical Personality. 
  • A corporation is a being; 
  • It is a separate juridical entity. 
  • A corporation is one of the juridical persons as provided for under Article 44 of the New Civil Code. 
    • Article 44: The following are juridical persons: (2) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member.
  • As a juridical entity, the corporation has rights and obligations under existing laws.
  • For example, "when an entity has no separate juridical personality, it has no legal capacity to sue. 
    • Section 2, Rule 3, Rules of Court: Only natural or juridical persons or entities authorized by law may be parties in a civil action...
4. Theories on a Corporation's Existence
  • Concession Theory
    • A corporation owes its life to the State and its birth is purely dependent on the State’s will.
  • Genossenchaft Theory 
    • A corporation is a creature without any existence until it has received the imprimatur of the State according to law.
  • Realist Theory
    • Views the corporation as a group whose activities are such as to require separate legal recognition with many attributes of a natural person. 
  • Enterprise Theory
    • Stresses the underlying commercial enterprise without emphasis on entity-aggregate distinctions of the components.
  • Symbol Theory
    • A corporation is a symbol for the aggregate of the associates in their group personalities.
5. Franchises
  • Special privilege conferred by the governmental authority, and which does not belong to citizens of the country generally as a matter of common right. 
  • A corporation is granted by the State the right to exist by virtue of a primary franchise.
  • They are divisible into:
    • Corporate/General franchises
      • franchise to exist as a corporation; 
      • vested in the individuals who compose the corporation and cannot be conveyed in the absence of legislative authority to do so.
    • Special/Secondary franchises
      • certain rights and privileges conferred upon existing corporation 
        • Ex: right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires
      • vested in the corporation itself and may ordinarily be conveyed or mortgaged under a  general power of the corporation to dispose of its property
        • Ex: 
          • issued by SEC to companies that issue securities
          • franchises issued to public utilities
  • The right to be and act as a corporation is not a natural/civil right. 
    • Such right as well as the right to enjoy the immunities and privileges resulting from incorporation constitute a franchise and a corporation.
    •  A corporation may not be created except by or under a special authority of the State.
  • A corporation is created by operation of law when it is: 
    • Granted a franchise through special law; or 
    • Organized under a general law.
      • Revised Corporation Code of the Philippines
5.01. Creation by Special Law
  • Constitution provides that only government-owned and controlled corporations (GOCCs) are the private corporations that may be created by special law.
  • Special laws may also recognize that certain entities may acquire juridical personality without directly conferring corporate status automatically by the mere passage of the law.
    • Ex: 
      • A special law, without directly creating national sports associations, recognized the existence of the said national sports associations and provided for the manner by which these entities may acquire juridical personality.
      • Local Water Districts (LWD) that are considered government-owned corporations with special charters since they are created pursuant to Presidential Decree No. 198.
Problems:
Q: Petitioner J. R. Da Silva, is the President of the J.R.S. Business Corporation (JRS), an establishment duly franchised by the Congress of the Philippines, to conduct a messenger and delivery express service. On July 12, 1961, the respondent Imperial Insurance, Inc. (Imperial), presented with the CFI of Manila a complaint (Civ. Case No. 47520), for sum of money against JRS. 
After JRS submitted its answer, Imperial and JRS entered into a compromise agreement whereby JRS admitted its liability. However, the judgment obligation was not paid by JRS. A writ of execution was issued by the CFI and the following properties were sold at the execution sale: "whole capital stocks of the defendants J.R.S. Business Corporation, the business (corporate) name, right of operation, the whole assets, furniture, and equipment, the total liabilities, and Net Worth, books of accounts, etc." 
Was the sale of the (1) secondary franchise, (2) corporate name, and (3) the shares of stock valid? 
A: NO. The sale was not valid. The right to operate a messenger and express delivery service, by virtue of a legislative enactment, is admittedly a secondary franchise (Republic Act No. 3260, entitled "An Act granting the J.R.S. Business Corporation a franchise to conduct a messenger and express service") and, as such, under our corporation law, is subject to levy and sale on execution together and including all the property necessary for the enjoyment thereof. 
The law, however, indicates the procedure under which the same (secondary franchise and the properties necessary for its enjoyment) may be sold under execution. Said franchise can be sold under execution, when such sale is especially decreed and ordered in the judgment and it becomes effective only when the sale is confirmed by the Court after due notice (Section 56, Corporation Law). The compromise agreement and the judgment based thereon do not contain any special decree or order making the franchise answerable for the judgment debt. 
The same thing may be stated with respect to corporate name of JRS and its capital stock. A corporate name and capital stock are necessarily included in the enjoyment of the franchise. Like that of a franchise, the law mandates that property necessary for the enjoyment of said franchise, can only be sold to satisfy a judgment debt if the decision especially so provides. 
No such directive appears in the decision. Moreover, a trade name or business name cannot be sold separately from the franchise, and the capital stock of JRS or any other corporation, for that matter, represents the interest and is the property of stockholders in the corporation, who can only be deprived thereof in the manner provided by law. It, therefore, results that the inclusion of the franchise, the trade name and/or business name and the capital stock of JRS in the execution sale has no justification.

Q: ldonah Slade Perkins, who died on March 27, 1960 in New York City, left among other properties, two stock certificates covering 33,002 shares of Benguet Consolidated, Inc., the certificates being in the possession of the County Trust Company of New York, which, is the domiciliary administrator of the estate of the deceased. On August 12, 1960, Prospero Sanidad instituted ancillary administration proceedings in the Court of First Instance (CFI) of Manila; Lazaro A. Marquez was appointed ancillary administrator but was later substituted by Renato D. Tayag. On January 27, 1964, the CFI of Manila ordered the domiciliary administrator, County Trust Company, to "produce and deposit" the stock certificates with the ancillary administrator or with the Clerk of Court. The domiciliary administrator did not comply with the order, and so upon motion of the ancillary administrator, the Court (1) considered as lost for all purposes in connection with the administration and liquidation of the Philippine estate of ldonah Slade Perkins the stock certificates covering the 33,002 shares of stock standing in her name in the books of the Benguet Consolidated, Inc. (Benguet), (2) ordered said certificates cancelled, and (3) directed Benguet to issue new certificates in lieu of the ones deemed lost, the same to be delivered by Benguet to either the incumbent ancillary administrator or to the Probate Division of the Court. 
Benguet questioned the order invoking, among others, one of the provisions of its by-laws which would set forth the procedure to be followed in case of a lost, stolen or destroyed stock certificate which provides that in the event of a contest or the pendency of an action regarding ownership of-such certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates would await the "final decision by [a] court regarding the ownership [thereof]." Did Benguet validly rely on the by-laws provision?
A: NO. Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. Assuming that a contrariety exists between the above by-law and the command of a court decree, the latter is to be followed. The view adopted by Benguet is fraught with implications at war with the basic postulates of corporate theory. It is undeniable premise that, "a corporation is an artificial being created by operation of law ... " 
"A corporation  as known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary, whenever called upon to do so."

6. Contract Theory
Incorporation is deemed to involve contracts:
  • among the members
    • Incorporation is a contract among those who compose the corporation and their contract is governed and evidenced by the Articles of Incorporation. 
  • between the members and the corporation, and 
    • There is also a contract between the corporation and its stockholders or members.
    • Stockholders and members cannot disregard the provisions of the Articles of Incorporation and By-laws of the corporation. 
    • The corporation cannot disregard the rights of the shareholders or members provided for in the Articles of Incorporation and By-laws.
  • between the members or the corporation and the State.
    • The corporation is entitled to the right against impairment of contracts because of the contract between the State and the corporation.
    • The State cannot likewise take the life of the corporation without due process.
7. Right of Succession/Perpetual Succession
  • The continuous existence which enables a corporation to manage its affairs and hold property without the necessity of perpetual conveyances, for purposes of transmitting it.
  • A corporation continues to exist even if there is a change in those who compose it.
    • Death of a shareholder will not affect corporation’s existence.
    • A shift in the composition of the shareholders a corporation would not affect its existence and continuity. 
    • The juridical entity remains and "the corporation continues to be the employer of its people and continues to be liable for the payment of their just claims."
  • It does not always imply corporate immortality but rather a continuity of existence irrespective of that of its components.
    • Section 11 of the RCCP: A corporation shall have perpetual existence unless its Articles of Incorporation provides otherwise.
    • The maximum corporate term of fifty (50) years imposed under Section 11 of the Corporation Code was deleted in the RCCP. 
    • Previously, the term of a corporation is 50 years, subject to further extension. While the limitation on the corporate term was removed by the RCCP, the corporation may still opt for a fixed term. In such a case, the corporation still enjoys the right of succession during its fixed term.
8. Doctrine of Separate Personality
  • A corporation has a personality separate and distinct from its members. 
    • Article 44 specifies corporations as among those considered as Juridical persons with juridical personality, separate, and distinct from that of each shareholder or member. Hence, corporations have separate properties, rights and obligations. 
      • For instance, rights can be enforced for and against the corporation and the filing of a complaint against the stockholder is not ipso facto a complaint against the corporation.
    • Article 44: The personality of juridical entities begins as soon as they have been constituted according to law. 
    • Article 45: Private corporations are regulated by laws of general application on the subject. 
    • Article 46: Juridical persons may acquire and possess property of all kinds as well as incur obligations and bring civil or criminal actions in conformity with the laws and regulations of their organization. 
  • The RCCP added a new type of corporation the One Person Corporation. 
    • One Person Corporation (OPC) is a corporation with a single stockholder, who may be a natural person, a trust, or an estate. 
    • The separateness of its personality is present even if a corporation is a One Person Corporation.
  • There is only one juridical personality even if the corporation maintains different places of business. 
    • A branch office does not have separate legal personality. 
    • A branch office has no legal capacity to maintain a separate action in court.
9. Separate Properties
  • The properties of the corporation are not properties of its shareholders, members or officers.
    • A stockholder cannot sell, transfer, mortgage or encumber properties of the corporation without proper authority.
    • Physical acts like the offering of the property of the corporation for sale, or the acceptance of a counter-offer of a prospective buyer of the property of the corporation can be performed by the corporation only through officers or agents duly authorized for the purpose by corporate by-laws or by specific acts of the board of directors. 
  • The properties of the shareholders, members or officers of the corporation are not the properties of the corporation.
    • An action filed by a corporation to recover the properties of its shareholders or members should be dismissed for failure to state a cause of action because the corporation is not the real party in interest.
  • The properties of the stockholders are not part of the properties of judicially declared insolvent corporation.
  • Properties belonging to a corporation cannot be attached to satisfy the debt of a stockholder.
9.01 Nature of Stockholders' Interest in Corporate Properties
    • The interest of the shareholder in the properties of the corporation is indirect, contingent, and inchoate. 
      • The interest of the shareholder on a particular property becomes actual direct and existing only upon liquidation of the assets of the corporation and the same property is assigned to the shareholder concerned. 
      Problems:
      Q: E Corporation is the registered owner of a parcel of land. 
      F Corporation was able to obtain possession of the parcel of land. 
      Later, a case was filed by E Corporation against F Corporation and a writ of possession was issued against F Corporation ordering the latter to turn over the parcel of land to E Corporation. Before the enforcement of the writ of possession, F Corporation acquired the substantial and controlling shares of stocks of E Corporation. F Corporation refused to turn over the parcel of land claiming that its acquisition of the controlling shares is a supervening event that justifies the non-enforcement of the writ of possession. 
      Is the position of F Corporation tenable? 
      A: NO. The position is not tenable. The acquisition by F Corporation of the controlling shares in E Corporation does not create a substantial change in the rights or relations of the parties that would entitle F Corporation to possession of the property of E Corporation. The rights, including the right of possession, over the properties of E Corporation belong to the latter. F Corporation as shareholder is not entitled to possession of the property because its right is only inchoate.

      Q: RITCHIE Corporation owns a beach resort with several cottages. Ed, the President of RITCHIE Corporation, occupied one of the cottages for residential purposes. After Ed's term 
      expired, RITCHIE wanted to recover possession of the cottage. Ed refused to surrender the cottage contending that as a stockholder and former president, he has a right to possess 
      and enjoy the properties of the corporation. Is Ed's contention correct? Explain. 
      A: NO. Ed's contention is not correct. Ed is not the owner of the properties of the corporation. As shareholder, his interest over the properties of RITCHIE Corporation is merely inchoate. 
      RITCHIE Corporation has a personality separate and distinct from its shareholders and the properties of the corporation are not the properties of the shareholders. Hence, as the owner, only the corporation has the right to enjoy and possess its properties.

      Q: Nine individuals formed a private corporation pursuant to the provisions of the Corporation Code of the Philippines. Incorporator S was elected director and president - general manager. Part of his emolument is a Ford Expedition, which the corporation owns. After a few years, S lost his corporate position, but he refused to return the motor vehicle claiming that as a stockholder with substantial equity share, he owns that portion of the corporate assets now in his possession. Is the contention of S valid?
      A: NO. The contention of S is not valid. S is not the owner of the properties of the corporation. As shareholder, his interest over the properties of the corporation is merely inchoate. The 
      corporation has a personality separate and distinct from its shareholders and the properties of the corporation are not the properties of the shareholders. Hence, as the owner, only the corporation has the right to enjoy and possess its properties. 

      10. Separate Obligations
      • The obligations of the corporation are not the obligations of its shareholders and members and officers and vice versa.
      • General Rule: The directors and officers are not personally liable for the obligations of the corporation.
      • Exception: Section 30 of the RCCP:
        • Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. 
      • Stockholders or officers are also not liable for the contractual obligations of the corporation. 
        • In contracts, consent by a corporation through its representatives is not consent of the representatives, personally.
        • However, there are instances when the officers or stockholders voluntarily make themselves personally liable. 
          • Ex: Surety agreements
      • A stockholder cannot condone an obligation of a third person to the corporation. The right pertains to the corporation alone.
      • On BP22 cases: The corporate officer cannot be held liable for the value of the checks because it was clear that they were issued for the obligations of the corporation.
        • The corporation remains liable for the checks especially since no evidence was presented that the debts covered by the checks have been paid.
      11. Limited Liability Rule
      • A stockholder is personally liable for the financial obligations of the corporation to the extent of his unpaid subscription.
      • While stockholders are generally not liable, the stockholders may be liable if they have not or have not fully paid the subscription price.
      • The limited liability rule applies even if the corporation is the result of a joint venture agreement.
        • "By choosing to adopt a corporate entity as the medium to pursue the joint venture enterprise, the parties (stockholders) to the joint venture are bound by corporate law principles under which the entity must operate. Among these principles is the limited liability doctrine. The use of a joint venture corporation allows the co-venturers to take full advantage of the limited liability feature of the corporate vehicle which is not present in a formal partnership arrangement."
      11.01 Reason for the Limited Liability Rule
      1. Investment in shares is encouraged because the task of evaluating equity investment is greatly simplified considering that the low-probability even of insolvency and the financial condition of other investors can already be ignored;
      2. Investment in risky ventures is encouraged;
      3. Banks and other financial intermediaries who are considered experts are encouraged to closely monitor corporate debtors more closely
      • Shares also become more fungible, because the value of shares is determined by the present value of the income stream generated by the corporation’s assets; the identity and wealth of the other shareholders are irrelevant. This would be more beneficial to investors, because they wouldn’t be required to spend more to analyze market prices of shares, because shares may already be considered homogenous commodities.
      11.02 Remedy
      • The stockholders who are sought to be made liable for their unpaid subscription should be impleaded. 
      • If the stockholders are not impleaded as defendants, a separate action should be filed against them to enforce any judgment obligation. 
      11.03 Limited Liability in OPC. 
      • For the limited liability rule to apply in the case of an OPC, the RCCP imposes upon the sole shareholder claiming limited liability the "burden of affirmatively showing that the corporation was adequately financed."
      • If there is noncompliance with this requirement, the sole shareholder shall be jointly and severally liable for the debts and other liabilities of the OPC.
      12. Separate Acts
      • The acts of the stockholders do not bind the corporation unless they are properly authorized. 
        • Their powers and duties pertain to them respectively and not to each other.
        • If the stockholders, officers and directors are disqualified from performing certain acts, the corporation is not necessarily disqualified and vice versa. 
      • It is well settled that an individual cannot enter into a contract with himself but a corporation has the same freedom of contracting with its stockholders that it has of contracting with any other person. 
      • Ordinarily, the corporation is not the agent of the stockholders and does not act or hold property as agent for them.
        • Thus, a non-stock corporation may file an action in the name of its members only if it can prove that the members indeed authorized the corporation to institute the action for and in behalf of such members. 
        • The mere fact that the non-stock corporation was organized for the purpose of advancing the interests and welfare of its member does not necessarily mean that the corporation has the authority to represent its members in legal proceedings, including an arbitration proceeding.
      • A stockholder is also not an agent of the corporation and he becomes an agent only if he was duly appointed as such. A stockholder may even be an employee of the corporation.
      13. Separate Personality in Court Actions
      • The stockholders are not parties to an action by or against the corporation alone; conversely, a corporation is not a party to an action just because the stockholders are.
      • The corporation may even sue the stockholders and the latter may sue the corporation. The corporation may also be a co-defendant in the same case. 
        • Even if the corporation and stockholders are co-defendants in an action, summons served on the corporation does not bind the stockholders who must personally be served. 
      • The filing of a case against shareholders is not ipso facto a complaint against the corporation and failure to implead these corporations as defendants and merely annexing a list of such corporations to the complaints is a violation of their right to due process for it would in effect be disregarding their distinct and separate personality without a hearing.
      14. Doctrine of Piercing the Veil of Corporate Fiction 
      • The corporation's separate juridical personality may be disregarded when there is an abuse of the corporate form. 
        • Whenever the doctrine applies, the principal and the conduit will be treated as one; the controlled corporation will be deemed to have, "so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal."
        • If applicable, "the corporation is merely an aggregation of persons whose liabilities must be treated as one with the corporation."
        • The conduit corporation will then be solidarily liable with the principal.
      • For example, corporate personality may be disregarded when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime.
        • Also, where the corporation whether stock or non-stock, is a mere alter ego or business conduit of a natural person or persons, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation, then its distinct personality may be ignored. 
        • In circumstances, the courts will treat the corporation as a mere aggrupation of persons and the liability will directly attach to them.
        • The legal fiction of a separate corporate personality in those cited instances, for reasons of public policy and in the interest of justice, will be justifiably set aside.
      • Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality.
        • Thus, mere ownership of 70% of the outstanding capital stock does not justify the disregard of the separate corporate personality.
      • The similarity of business of two corporations does not warrant the disregard of the corporate veil.
        • The mere fact that the businesses of the two entities are interrelated is not a justification for disregarding the separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights
      • Even the overlapping of incorporators and stockholders of two or more corporations will not necessarily justify the piercing of the veil of corporate fiction. Much more has to be proven.
        • In another case, it was explained that the existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction.
        • Hence, the mere fact that two corporations have the same president is not sufficient to pierce the veil of corporate fiction of the two corporations.
      14.01 Piercing the Veil in OPC.
      • By express, provision of the RCCP, the doctrine of piercing the veil of corporate fiction applies with equal force to a One Person Corporation. 
      • As noted earlier, the limited liability rule applies to a One Person Corporation provided that the sole shareholder claiming limited liability has the ''burden of affirmatively showing that the corporation was adequately financed." 
      • The sole shareholder shall be jointly and severally liable for the debts and other liabilities of the OPC if his OPC is not adequately financed. 
      • If the OPC is not adequately financed, there is no evident intent to treat the OPC as a separate entity. Such financial inadequacy is an indication that the OPC is being treated as just a conduit of the OPC. 
      14.02 Theory of Enterprise Entity
      • An influential alternative account of the Doctrine of Piercing the Veil of Corporate Fiction is the so-called "Theory of Enterprise Entity." 
      • This theory was offered as a unifying dominant principle to systematize the doctrines and rules pertaining to corporations including the Doctrine of Piercing the Veil of Corporate Fiction, the rules on incorporation, and even as an alternative justification for liability for pre-incorporation promoter's contracts.
      • It provides that where a corporate entity is defective, or otherwise challenged, its existence, extent, and consequences may be determined by the actual existence and extent and operations of the underlying enterprise, which by these very qualities acquires an entity of its own, recognized by law.
      14.03 Classifications
      The doctrine of piercing the veil of corporate fiction may be applied in at least three basic areas with which the law covers and isolates the corporation from any other legal entity to which it may be related: 
      1. Cases where public convenience may be defeated, as when the corporate fiction is used as vehicle for the evasion of an existing obligation; 
      2. Fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 
      3. Alter Ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
      Kinds.
      • Traditional Veil-Piercing Action: 
        • A court disregards the existence of the corporate entity so a claimant can reach the assets of a corporate insider.
      • Reverse Piercing Action: 
        • The plaintiff seeks to reach the assets of a corporation to satisfy claims against a corporate insider.
        • It makes the corporation liable for the debt of the shareholders.
        • There are two (2) types of Reverse Piercing:
          • Outsider reverse piercing
            • It occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially controlled by the defendant.
          • Insider reverse piercing
            • The controlling members will attempt to ignore the corporate fiction in order to take advantage of a benefit available to the corporation, such as an interest in a lawsuit or protection of personal assets.
      Three variants:
      • The Instrumentality Doctrine
        • Three-Pronged Control Test
        • Three factors must be present: (CFP) 
          • Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 
          • Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of the statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and 
          • The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. (The absence of any of these elements will prevent the piercing the corporate veil.) 
      • The Identity Doctrine
        • If the plaintiff can show that there was such a unity of interest and ownership that the independence of the corporation had in effect ceased or had never begun, and adherence to the fiction of separate identity would serve only to defeat justice and equity, the Doctrine of Piercing the Veil of Corporate Fiction may apply.
      • The Alter Ego Doctrine
        •  It must be shown that there is unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist and that if the acts are treated as those of the corporation alone, an inequitable result will follow.
        • Where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fiction.
      14.04 Fraud
      • There is fraud if there is deception that would lead an ordinarily prudent person into error after taking the circumstances into account.
      • The doctrine may be applied if the government may be deprived of taxes. 
        • A taxpayer may gain advantage of doing business through a corporation but the separate corporate entity may be disregarded where it serves but as a shield for tax evasion and treat the person who actually take the benefits of the transactions as the person taxable. 
      14.05 Alter Ego
      • There is such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist.
      • It is not necessary in Alter Ego cases that the corporation was organized or operated to commit fraud. 
      • There is no need for an allegation or a finding of specific fraud in the organization or operation of the corporation. 
      • The "wrong'' consists only of the injustice that will result if the veil of corporate fiction is not pierced considering the relationship between the corporation and the owner.
      14.06 Totality of Circumstances Test
      • An alternative approach is to focus on a set of circumstances or factors that serve as indicia of the applicability of the doctrine of piercing the veil of corporate fiction. 
      • What is important is the totality of the circumstances and each case must be decided on its own set of facts.
      • Even under the Three-Pronged Control Test, the unique circumstances of each case are material in establishing the presence of the three factors under such test.
      • Certain circumstances that may indicate the applicability of the Doctrine of Piercing the Corporate Veil, although it is not required that all of the circumstances must concur:
      1. commingling of funds and other assets of the corporation with those of individual shareholders;
      2. diversion of the corporation's funds or assets to non-corporate (to the personal uses of the corporation's shareholders); 
      3. failure to maintain the corporate formalities necessary for the issuance of or subscription to the corporation's stock, such as formal approval of the stock issue by the board of directors;
      4. an individual shareholder representing to persons outside the corporation that he or she is personally liable for the debts or other obligations of the corporation;
      5. failure to maintain corporate minutes or adequate corporate records;
      6. identical equitable ownership in two entities; 
      7. identity of the directors and officers of two entities who are responsible for supervision and management (a partnership or sole proprietorship and a corporation owned and managed by the same parties);
      8. failure to adequately capitalize a corporation for the reasonable risks of corporate undertaking;
      9. absence of separately held corporate assets;
      10. use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect of the business of an individual or another corporation; 
      11. sole ownership of all the stock by one individual or members of a single family;
      12. use of the same office or business location by the corporation and its individual shareholder(s); 
      13. employment of the same employees or attorney by the corporation and its shareholder(s);
      14. concealment or misrepresentation of the identity of the ownership, management or financial interests in the corporation, and concealment of personal business activities of the shareholders (sole shareholders do not reveal the association with a corporation, which makes loans to them without adequate security);
      15. disregard of legal formalities and failure to maintain proper arm's length relationship among activities;
      16. use of a corporate entity as a conduit to procure labor, services or merchandise for another person or entity;
      17. diversion of corporate assets from the corporation by or to a stockholder or other person or entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to concentrate the assets in one and the liabilities in another; 
      18. contracting by the corporation with another person with the intent to avoid the risk of nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge to illegal transactions;
      14.07 Probative Factors
      • Probative factors must be established in Fraud cases and Alter Ego cases.
      • There is no hard and fast rule that can be accurately laid down, but certainly, there are some probative factors that will justify the application of doctrine of piercing the corporate veil, to wit: 
        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.
      14.08 Subsidiary
      • A subsidiary means a corporation more than 50% of the voting stock of which is owned or controlled directly or indirectly through one or more intermediaries by another corporation, which thereby become a parent company.
      • One of the instances when the Alter Ego doctrine is invoked is when there is a parent company-subsidiary company relationship. 
      • General Rule: If used for legitimate functions, a subsidiary's separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. 
      • Exception: When the subsidiary is a mere instrumentality or alter ego of the parent corporation (Alter Ego Doctrine), the Doctrine of Piercing the Corporate Veil will apply.
      • The circumstances which are useful in the determination of whether a subsidiary is but a mere instrumentality or alter ego of the parent-corporation are:
        1. The parent corporation owns all or most of the capital stock of the subsidiary;
        2. The parent and subsidiary corporations have common directors or officers; 
        3. The parent corporation finances the subsidiary; 
        4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;
        5. The subsidiary has grossly inadequate capital;
        6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;
        7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation;
        8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own; 
        9. The parent corporation uses the property of the subsidiary as its own;
        10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary, but take their orders from the parent corporation; and
        11. The formal legal requirements of the subsidiary are not observed.

      14.09 Traditional Case: The Corporation is Obligor
      • Traditional Piercing cases
        • Courts will disregard the separate personality to make corporate insiders liable for corporate obligations
      • Reverse Piercing
        • The corporation can be made liable for the obligations of the stockholders or corporate insider
          • Outsider Reverse Piercing
            • where piercing is at the instance of a third person
          • Insider Reverse Piercing
            • where a person who is part of the corporation, like a stockholder, will be the one to ask for the court to pierce the corporate veil
        • In the same manner, the doctrine may also be invoked when a new corporation may be ruled to be a mere continuation of an old corporation that has stopped operation.
      14.10 Corporation as Plaintiff Obligee
      • The Doctrine of Piercing the Corporate Veil was allowed in favor of a claimant corporation that sought to enforce a mortgage obligation.
      • The mortgage was sustained even if the obligations secured by such mortgage were incurred by the President himself and before the mortgagee corporation was organized. This was because the mortgagee corporation was deemed as the alter ego of the President.
      • The author disagrees with the ruling in this case. He explains that the Doctrine of Piercing the Corporate Veil seeks to prevent inequity and injustice. Hence, if a mortgage debt pertained to an individual, a corporation cannot enforce such debt using the doctrine. 
      14.11 Judicial Function
      Q:  Who may pierce the corporate veil? 
      1. Courts; and
      2. Administrative Tribunals (like the NLRC)
      Courts should be concerned with reality and not form, with how the corporation was operated and the individual components' relationship to that operation.

      14.12 Jurisdiction Over the Alter Ego
      • Even if a corporation is not impleaded in the main case and yet was so named in a writ of execution to satisfy a court judgment against its directors or officers, it is vulnerable to the piercing of its corporate veil.
      • A corporation not impleaded in a suit cannot be subject to the court's process of piercing the veil of its corporate fiction. 
      • The Court requires that the corporation or person that is sought to be made liable must be impleaded stating that the implication is two-fold: 
        1. The court must first acquire jurisdiction over the corporation or corporations involved before its or their separate personalities are disregarded; and 
        2. The doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly brought under the authority of the court by way of service of summons or what passes as such service.
      • The requirements of due process is not violated if the person who is sought to be made liable was not expressly impleaded or was not part of the original parties in the complaint. 
        • Court may order the inclusion of another corporation as a “necessary party” under the Rules of Court.
      • If the Doctrine of Piercing the Corporate Veil is successfully invoked, the conduit/“principal”/alter ego/liable officers who is/are not original party/parties can be deemed to have participated in the proceedings because of the complete dominance of the corporation.
        • There is no need to file another case just to invoke the doctrine.
        • If the personalities of the persons and entities are merged into one, then both already participated in the trial on the merits although only one was impleaded.
      14.14 Doctrine of Piercing the Veil of Corporate Fiction and Limited Liability Rule
      • If the Doctrine of Piercing the Veil of Corporate Fiction is applied,  then the entire obligation of the corporation may be enforced against a stockholder thereof even beyond the extent of the latter's unpaid subscription to the corporation, while under the Limited Liability Rule only the unpaid subscription price is due from the stockholder for application to the corporation's debts/obligations.
      • Mr. C is the creditor of Corporation X in the amount of P200,000.00 and Corporation X does not have any asset to pay for the obligation to Mr. C. Mr. A has 200 shares with par value of P100.00 per share registered in his own name in Corporation X and has paid only half of the subscription price (at par value) or P10,000.00 leaving a balance of P10,000.00. 
        • In the application of the doctrine of piercing the veil of corporate fiction on the ground that Mr. A is fraudulently using Corporation X as a conduit, Mr. C who invokes the same doctrine must show circumstances that prove that there is fraud and that Corporation X is just a conduit of Mr. A. If Mr. C satisfies the burden of proof, then he can recover the entire amount of P200,000.00 from Mr. A because the personality of Corporation X is pierced and Mr. A will be considered the person who committed fraud through a conduit. In cases where the Doctrine of Piercing the Veil of Corporation Fiction is applied the conduit corporation and the principal (whether the principal is another corporation or a natural person) are jointly and severally liable for the entire obligation.
        • if the Limited Liability Rule is to be applied in the same example, Mr. C need not show circumstances or probative factors that show fraud or illegality. If Corporation X cannot pay and Mr. C wants to recover, all that is needed is for Mr. C to prove that there is an unpaid portion of the subscription price. In such a case, Mr. A is liable only up to the extent of his investment, meaning for the unpaid subscription price of P10,000.00. 
      • To make out a prima facie case in a suit against stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that the stockholders have not in good faith paid the par value of the stocks of the corporation. 
      15. Group of Companies
      • Refers to corporations that are financially related to one another as parent corporations, subsidiaries, and affiliates. 
      • A “group of companies” has no personality separate and distinct from each of the components corporations. 
        • The filing of a petition for insolvency of a member of the group and a Stay Order issued therein should not benefit the other m members.
      • Financial Rehabilitation and Insolvency Act of 2010 +  Rules of Procedure on Corporate Rehabilitation: A Group of Companies may jointly file a petition for rehabilitation when one or more of its constituent corporations foresee the impossibility of meeting debts when they respectively fall due.
      • The present rules therefore allow corporations who are members of the group of companies the unilateral right to disregard their separate personalities on the sole consideration that the financial distress would likely adversely affect the financial condition and/or operations of the other member companies of the group and/or the participation of the other member companies of the group.
      • The filing of actions against all members of the group of companies should be allowed even if the obligation was incurred by only one of the constituents.
      15.01 Associated Enterprises or Related Parties
      • Two or more enterprises are associated if one participates directly or indirectly in the management, control, or capital of the other; or if the same persons participate directly or indirectly in the management, control, or capital of the enterprises. 
      • Control refers to any kind of control, direct or indirect, whether or not legally enforceable, and however exercisable or exercised.
      15.02 Single Economic Unit Rule 
      • Entities that control, are controlled by, or are under common control with another entity or entities have common economic interests, and are not otherwise able to decide or act independently of each other, shall not be considered competitors. 
      • Control refers to the ability to substantially influence or direct the actions or decisions of an entity, whether by contract, agency or otherwise.
      • Ultimate parent entity is the juridical entity that, directly or indirectly, controls a party to the transaction, and is not controlled by any other entity.
        • Control is presumed to exist under the Philippine Competition Act when the parent owns directly or indirectly, through subsidiaries, more than one half (1/2) of the voting power of an entity, unless in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control. 
        • Control also exists even when an entity owns one half (1/2) or less of the voting power of another entity when: 
          1. There is power over more than one half (1/2) of the voting rights by virtue of an agreement with investors;
          2. There is power to direct or govern the financial and operating policies of the entity under a statute or agreement;
          3. There is power to appoint or remove the majority of the members of the board of directors or equivalent governing body;
          4. There is power to cast the majority votes at meetings of the board of directors or equivalent governing body;
          5. There exists ownership over or the right to use all or a significant part of the assets of the entity; or 
          6.  There exists rights or contracts which confer decisive influence on the decisions of the entity.
      Problems
      Q: What is a one-man corporation? Do such corporations enjoy the attributes of corporations? What should be done to assure this? 
      A: A one-man corporation is a corporation where all the outstanding shares belong to one person. Although there may be other incorporators or directors, the same persons hold shares only as nominee of the person who actually owns the shares. Thus, a corporation functions for the benefit of one individual, who controls the corporation. It is commonly called a one-man corporation.
      Under the RCCP, a one-man corporation may in the form of a One-Person Corporation. A one-man corporation enjoys the attributes of corporations. However, it is a precondition that a certificate of incorporation is issued by the SEC. However, in order to avoid the operation of the doctrine of piercing the veil of corporate fiction, the corporate business and properties of the corporation should be kept separate from the properties and business of the person who owns the shares. The corporation should not be treated as a mere conduit; otherwise, the attribute that the personality of the corporation is separate may be disregarded.
      Specifically with respect to One-Person Corporation, the attributes of the are also present but the rules on the doctrine of piercing the veil of corporation fiction also applies.

      Q: Marulas Creative Technology, Inc., an e-business enterprise engaged in the manufacture of computer multi-media accessories, rents an office and store space at a commercial building owned by X. Being a start-up company, Marulas enjoyed some leniency in its rent payment; but after three years, lessor X put a stop to it and asked Marulas' president and general manager, Y, who is. a stockholder, to pay back rentals amounting to P100,000.00 or to vacate the premises at the end of the month. Marulas neither paid its debt nor vacated the premises. X sued Marulas and Y for collection of the unpaid rentals, plus interests and cost of litigation. Will the suit prosper against Marulas? Against Y?
      A: Yes, with respect to Marulas but no, with respect to Y. The suit against Marulas will prosper because it is the party to the contract. Marulas is an artificial being with a corporate personality separate and distinct from its officers and stockholders. As such artificial being, it is the lessee of the office and store space and X is the lessor. Hence, if Marulas did not perform its obligations as a lessee, it is liable to the lessor X. The obligation to pay the rentals for the office and store space is the obligation of Marulas, as part of its corporate liabilities and expenses. 
      The suit against Y will not prosper because Marulas has a personality separate and distinct from its officers and stockholders. Y, as president, general manager and stockholder of Marulas is therefore not liable for the obligations of the corporation if he merely acted for and in behalf thereof. Generally, corporate officers are not obliged to shoulder the liability of the corporation.

      Q: Ronald Sham doing business under the name of SHAMRON Machineries (SHAMRON) sold to Turtle Mercantile (TURTLE) a diesel tractor. In payment, Turtle's President and Manager Dick Seldon issued a check for P50,000.00 in favor of SHAMRON. A week after, TURTLE sold the tractor to Briccio Industries (BRICCIO) for P60,000.00. BRICCIO discovered that the engine of the tractor was reconditioned so he refused to pay TURTLE. As a result, Dick Seldon ordered "stop payment" of the check issued to SHAMRON. SHAMRON sued TURTLE and Dick Seldon. SHAMRON obtained a favorable judgment holding co-defendants TURTLE and Dick Seldon jointly and severally liable. Comment on the decision of the trial court. Discuss fully.
       A: The decision of the trial court holding Dick Seldon liable is erroneous. The President and General Manager of TURTLE cannot as a rule be held jointly and severally liable with Turtle Mercantile. Seldon was merely acting in his capacity as corporate officer when he issued the check to SHAMRON and when he stopped payment thereof. The corporation has a personality separate and distinct from its officers, hence, the obligations of the corporation are not the obligations of the officer even if the same officer represented the corporation in the transaction.

      Q: C Steel and Nail Co., Inc., owned by X, had financial obligations to its employees. C ceased operation, and was immediately succeeded on the next day by, and all its assets were turned over to, the E Steel Corporation, 90% of the subscribed shares of which were also owned by X. May the E Steel Corporation be held liable for the financial obligation of the C Steel and Nail Co., Inc. to its employees? Decide and give reasons. A: Yes. It is submitted that E Steel Corporation may be held liable under the doctrine of piercing the veil of corporate fiction. It appears that E Corporation is a continuation of C Steel and Nail Co., Inc. The given circumstances indicate that E Steel Corporation is being used only as a protective shield of a corporation to evade the financial obligation of its predecessor-corporation to its employees. While generally transfer of the assets of the corporation will not make the transferee liable, the other circumstances in the present case (such as ownership by X of the shares of C and E) justify the piercing of the corporate veil.

      Q: Tantalus Corporation, of which 97% of the issued outstanding shares of stock were owned by Roger Mano, had financial obligations to its employees by way of unpaid wages and allowances. Tantalus Corporation was dissolved by shortening its corporate life and all its assets turned over to Suceso Corporation, of which 95% of the subscribed shares were held by Roger Mano and his wife. Then, Tantalus Corporation ceased to operate. May the employees of Tantalus Corporation proceed against the Suceso Corporation to recover their unpaid claims? Discuss. 
       A: Yes. The employees of Tantalus may proceed against Suceso who may be held liable under the doctrine of piercing the veil of corporate fiction. It appears that Suceso is a mere continuation of Tantalus. The given circumstances indicate that Suceso is being used only as a protective shield to evade the financial obligation of its predecessor-corporation to its employees. While generally transfer of the assets of the corporation will not make the transferee liable, the other circumstances present in the case justify the piercing of the corporate veil. 

      Q: Mr. Pablo, a rich merchant in his early forties, was a defendant in a lawsuit, which could subject him to substantial damages. A year before the court rendered judgment, Mr. Pablo sought his lawyer's advice on how to plan his estate to avoid taxes. His lawyer suggested that he should form a corporation, with himself, his wife and his children (all students and still unemployed) as stockholders, and then, transfer all his assets and liabilities to this corporation. Mr. Pablo followed the recommendation of his lawyer. One year later, the court rendered judgment against Mr. Pablo and the plaintiff sought to enforce this judgment. The sheriff, however, could not locate any property in the name of Mr. Pablo and therefore returned the writ of execution unsatisfied. What remedy, if any, is available to the plaintiff? 
      A: The plaintiff can ask the court to pierce the veil of corporate fiction and make the corporation liable for the judgment obligation. It is true that a family corporation may be organized to pursue an estate tax planning. However, the factual setting indicates the existence of a lawsuit that could subject Mr. Pablo to a substantial amount of damages. It would thus be difficult for Mr. Pablo to convincingly assert that the incorporation of the family corporation was intended merely as a case of "estate tax planning".

      Q: Eva owns 90% of the shares of the capital stock of CK Corporation. On one occasion, CK Corporation, represented by Eva as the President and General Manager, executed a contract to sell a subdivision lot in favor of Ed. For failure of CK Corporation to develop the subdivision, Ed filed an action for rescission and damages against CK Corporation and Eva. Will the action prosper? Explain. 
       A: Yes, the action may prosper against CK Corporation but not against Eva. The liabilities of CK Corporation are not the liabilities of its officers because the corporation has a legal personality separate and distinct from that of its officers and shareholders. The fact that Eva owns 90% of the capital stock of CK Corporation is not of itself sufficient justification to invoke the doctrine of piercing the veil of corporation fiction. There must be a showing of fraud, malice or bad faith. 

      16. Artificial Being
      •  Although a corporation is treated as a separate person, that doesn’t mean that it has a physical existence γƒΌ its existence is artificial.
      • In a case, a plaintiff corporation cited the rule that execution pending appeal may be granted if the plaintiff is already of advanced age and in danger of extinction. The Supreme Court rejected the applicability of this rule, because the juridical existence of a corporation cannot be compared to a natural person.
      • The artificial nature of the personality of the corporation likewise affects its entitlement to certain rights. The nature of the personality of the corporation touches the issue of nationality, domicile, criminal liability, tort liability, and availability of constitutional rights. These matters will be discussed hereunder.
      17. Primary Rules of Attribution
      • There are rules that may be applied in determining if an action or omission of a natural person or knowledge acquired by one person can be attributed to the corporation. 
      • Due to the artificial nature of the existence of corporations, corporations can perform physical acts or commit omissions only though natural persons.
      • Primary Rules of Attribution: The action of the Board of Directors will be treated as an action of the corporation.
      • Section 22: The Board shall exercise the corporate powers of the corporation.
      • Acts of officers and employees may, in proper cases, be attributed to the corporation. 
      18. Attribution of Knowledge
      • Consistent with Primary Rules of Attribution, notice to the Board of Directors should also be deemed notice to the corporation. 
      • Knowledge of facts acquired or possessed by an officer or agent of the corporation, in the course of his employment and in relation to matter within the scope of his authority, is notice to the corporation. 
      • Law or rules may identify the officer or employee to whom notice should be given. 
        • Ex: summons in civil cases may only be effected to the following: 
          • President
          • General Manager
          • Corporate Secretary
          • Treasurer
          • In-House Counsel.
        • This list is exclusive. 
      • Even if knowledge or even an act is properly attributed to the corporation, it does not follow that all the stockholders are deemed to have knowledge of the same fact or act. 
        • “Absent any proof that the individual respondents were notified of the stockholders’ meeting or that they were present during the meeting, the respondents could not have been informed of the transaction.”
      19. Nationality and Citizenship. 
      • A corporation cannot be considered a citizen, as the term “citizen” is understood in political law. In the political law sense, citizenship is limited to natural persons because by the very essence of the duty of allegiance to the state and the exercise of political rights, only natural persons are capable of performing said acts. 
      Two Tests Applied in Determining if a Corporation is Foreign or Domestic:
      • The Aggregate/Control Test
        • Requires looking into the nationality, domicile or residence of the individuals who control the corporation
      • The Entity Test/Place of Incorporation Test
        • which looks to the nation where the corporation was incorporated.
      19.01 Place of Incorporation Test.
      • The sovereignty by which a corporation was created, under whose laws it was organized, determines its national character, and the fact that some of its incorporators were residents and citizens of a foreign country does not change this rule.
      19.02 Wartime Control Test. 
      • The place of incorporation may be disregarded in times of war. 
      • Courts will look into the nationality of the controlling stockholders in wartime. If the controlling stockholders are citizens of the enemy state then the corporation will also be deemed a public enemy corporation.
      19.03 Investment Test: Voting Control Test and Beneficial Ownership Test. 

      • The incorporation test is also not the only test in relation to nationalization laws where the law limits foreign ownership to a certain percentage of the outstanding capital in certain activities or businesses. 
      • For investment purposes, there are cases when the Constitution and laws limit the percentage of equity participation of foreigners.
        • In public utilities, the Constitution limits foreign equity to 40%, "the legal and beneficial ownership of 60% of the outstanding capital stock must rest in the hands of Filipinos in accordance with the constitutional mandate."
        • The term "capital" refers only to shares of stock entitled to vote in the election of directors. However, the requirement is in conjunction with the Incorporation Test because the Constitution requires that the corporation be organized in the Philippines. 
        • The requirement of at least 60% Filipino ownership "must apply separately to voting shares and to the total outstanding shares of stock." 
      Supreme Court ruled that "both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether the corporation is a 'Philippine National'.
      • In other words, "full beneficial ownership of the stocks, coupled with voting rights is essential." 
      • There is a pairing of concepts of "beneficial ownership" and the "situs of control."
      19.04. Control Test and Grandfather Rule.

      Control Test: 
      • Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.
      • This test can be applied when a law makes an activity partly nationalized. 
      • The question involved is the nationality of the entity that owns shares in the nationalized activity.
      • Foreign Investment Act:
        • A corporation shall be a "Philippine National" if it is:
          • a corporation organized under Philippine laws of which 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino Citizens; or 
          • a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of capital stock entitled to vote belongs to Filipinos.
      Grandfather Rule: 
      • When in the mind of the Court there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may apply the 'Grandfather Rule.
      • It is a supplement to the Control Test so that the Constitutional requirement can be given effect.
      • It is a method of determining the nationality of a corporation, which in turn is owned by another corporation by breaking down the equity structure of the shareholders of the corporation that owns the other. 
      • The percentage of Filipino equity in the corporation is computed by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder.
      • The percentage of shares held by the second corporation in the first is multiplied by the latter's own Filipino equity and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation.
      • By way of exception, the Grandfather Rule applies if the share of Filipinos in a shareholder corporation is less than 60%. As noted earlier, the qualification in the DOJ and SEC opinion is to the effect that if the percentage of Filipino ownership in the shareholder-corporation or partnership is less than 60%, only the number of shares corresponding to such. 
        19.05. No Nationality for Corporation Sole. 
        • One exceptional  situation where the Supreme Court ruled that a corporation has no nationality is the case of a Corporation Sole. 
        • The case involved the Roman Catholic Church but the ruling can also be applied to other corporations sole. 
        • The Supreme Court categorically declared that "the Roman Catholic Apostolic Church in the Philippines has no nationality and that the framers of the Constitution" did not have in mind the religious corporations sole when they provided the 60% requirement.
        Q: Petitioner is a corporation sole organized and existing in accordance with Philippine laws, with Msgr. Trudeau, a Canadian citizen, as actual incumbent. It presented for registration a deed of sale to the Register of Deeds of Cebu who denied it for lack of proof that at least 60% of the capital property or assets of the corporation sole is owned or controlled by Filipino citizens. Was the action of the Register of Deeds correct? Give reasons for your answers. 
        A: No. The action of the Register of Deeds was not correct. The requirement of at least 60% Filipino ownership of the capital was never intended to apply to a corporation sole, because the same corporation is only the administrator of the properties of the corporation sole and it is well settled that it has no nationality. (1978 Bar) 

        Q: Global KL Malaysia (GLOBAL), a 100% Malaysian-owned corporation, desires to build a hotel beach resort in the Samal Island, Davao City, to take advantage of the increased traffic of tourists and boost the tourism industry of the Philippines. 
        a. Assuming that GLOBAL has US$100 Million to invest in a hotel beach resort in the Philippines, may it be allowed to acquire the land on which to build the resort? If so, under what terms and conditions may GLOBAL acquire the land? Discuss fully.
        b. May GLOBAL be allowed to manage the hotel beach resort? Explain. 
        c. May GLOBAL be allowed to operate restaurants within the hotel beach resort? Explain. 
        A: 
        a. NO. GLOBAL may not be allowed to acquire the land on which to build the resort. The Constitution limits land ownership to Filipinos and corporations with Filipino ownership of not less than 60% of the outstanding capital. The equity participation of foreigners in a corporation that will own land is therefore limited to 40%. In this case, GLOBAL is 100% Malaysian-owned. However, GLOBAL can lease a parcel of land. The 40% limit on foreign equity applies only to ownership of land and not to temporary use thereof like a contract of lease. 
        b. YES. GLOBAL can manage the hotel beach resort. Management of a resort is not a nationalized activity; hence the law does not prohibit a foreign corporation from managing a resort in the country. 
        c. YES. GLOBAL may be allowed to operate restaurants within the beach resort. While operation of a restaurant business is cnsidered retail trade, a corporation will not be considered engaged in retail business if the restaurant is a mere adjunct of the operation of the resort which is an activity that is not wholly or partly nationalized.

        Q: What is the nationality of a corporation organized and incorporated under the laws of a foreign country but owned 100% by Filipinos? 
        A: The corporation is a Philippine National under Section 3 of Republic Act No. 7042 for purposes of applying our investment laws provided that at least 60% of the directors are Filipinos. In addition, applying the control test of corporate nationality, a corporation organized and incorporated under foreign laws but entirely owned by Filipinos is a Philippine national. Note, however, that the corporation is not a domestic corporation under the Incorporation Test embodied in the Corporation Code (now the RCCP) because the corporation is one organized in another country. (1998 Bar) 

        20. Residence. 
        • A corporation may be considered a resident of a particular country or place for different purposes. 
          • For instance, a foreign corporation can be considered a resident of the Philippines for tax purposes. 
          • On the other hand, domestic corporations may be a resident of a particular region, city or municipality for purposes of applying the procedural rules on venue or in the application of certain doctrines like the doctrine of forum non conveniens. 
        • A corporation has no residence in the same sense in which the term is applied to a natural person. 
          • This is precisely the reason why it was ruled that for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the Articles of Incorporation. 
        • For purposes of venue of cases, the term "residence" is synonymous with "domicile."
        • However, in relation to foreign corporations, corporations may have a residence (i.e., the place where they operate and transact  business) separate from their domicile (i.e., the State of their formation or organization) "and (that) they may be considered by other states as residents only for limited and exclusive purposes."
        21. Tort Liability. 
        • A corporation is civilly liable in the same manner as a natural person for torts, because generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. 
        • All of the authorities agree that a principal or master is liable for every tort that he/she/it expressly directs or authorizes, and this is just as true of a corporation as of a natural person. 
        • A corporation is liable, therefore, whenever a tortious act is committed by an officer or agent under express direction or authority from the stockholders or members acting as a body, or generally, from the directors as the governing body.
        • The liability of corporations may either be:
          • vicarious personal obligation
            • Quasi-delict, Article 2180 of the New Civil Code
            • Delict, Article 102 of the Revised Penal Code,
          • direct personal obligation
            • Fault or Negligence, Article 2176 of the New Civil Code
          • may arise out of different sources of obligation
            • Ex: contract when board of directors sanctioned the breach
        21. Doctrine of Corporate Responsibility. 
        • The negligence will no longer be imputed but is considered the negligence of the corporate entity itself with which the injured party has a special relationship.
        • Liability may be imposed on other corporations that have special relationship with or owe affirmative duties to the injured party.
          • Ex: Hospital, School
        • The defense of diligence in the selection and supervision of the employee is not available if the claim is based on direct corporate responsibility. 
        22. Right to Moral Damages.
        • General Rule: The award of moral damages cannot be granted in favor of a corporation, because being an artificial being and having existence only in legal contemplation, it has no feelings, no emotions, and no senses. 
          • It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system.
        • Exception: A corporation can be an offended party in a defamation case and it can recover moral damages under Article 2219(7) of the Civil Code. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person.
          • As when the corporation has a reputation that is debased, resulting in its humiliation in the business realm.
        Q: In the complaint filed by XYZ Corporation, its President alleged that he suffered mental anguish, fright, social humiliation and serious anxiety as a result of tortious acts of ABC Corporation. In its counterclaim, ABC Corporation claimed to have suffered moral damages due to besmirched reputation or goodwill. May XYZ Corporation recover moral damages based on the allegations in the complaint? 
        A: NO. As a rule, corporations are not entitled to recover moral damages. The only exception is with respect to moral damages arising from  libel. In addition, even assuming for the sake of argument that a corporation can recover moral damages, it cannot also recover damages in the present case because the President and not the corporation suffered the damages. A corporation is separate and distinct from the officers who compose it. (1978 Bar)  

        23. Constitutional Rights.
        • Applicable:
          1. A corporation is a person, in proper cases, within the due process and equal protection clauses of the Constitution. 
          2. Its properties cannot also be taken for public use without just compensation.
          3. Congress cannot likewise pass a law that impairs the obligations of contracts entered into by a corporation. 
          4. A corporation is entitled to the right against unreasonable searches and seizure.
        • Not Applicable:
          1. A purely personal right like the right against self-incrimination cannot be utilized by or on behalf of the corporation.
          2. A corporation cannot claim liberty of abode and travel. 
          3. Even the right to exist that is included in the term "liberty" is not the same as the right enjoyed by natural persons because the life of a corporation is a mere concession of the State.
          4. Corporations do not enjoy the same level of privacy as natural persons. 
        24. Criminal Liability.
        • Corporations are now criminally liable under the RCCP. 
        • The RCCP now provides that if the offender is a corporation, the penalty may, at the discretion of the court, be imposed upon such corporation and/or upon its directors, trustees, stockholders, members, officers, or employees responsible for the violation of the provisions of the RCCP or indispensable to its commission. 
        • Offenses mala in se where intent is indispensable cannot be committed by a corporation because the existence or presence of criminal intent assumes the existence of a will which only a natural person may have. Offenses mala prohibita, which may be committed simply by committing the act prohibited, may be committed by a corporation.
        • The intent of the legislators who enacted the RCCP is clear with respect to criminal responsibility. They want to instill corporate and civic responsibility, which include imposition of "corporate criminal liability and penalties for graft and corruption.
          • Senator Franklin Drilon explained that: "criminals hide behind the separate personality given to corporations. Shareholders have little incentive to be vigilant because the corporation itself is not subject to criminal liability."
          • "In compliance therefore with our obligations under the United Nations Convention Against Corruption, or the UNCAC, to prevent the use of the corporation as a vehicle for committing crimes, we hereby seek to impose corporate criminal liability and penalties for graft and corruption. Aside from having to pay hefty fines, the corporation may also suffer revocation of its registration."
        • Accordingly, the penalty of payment of fine can be imposed on the corporation itself under Section 171 of the RCCP.
        • The criminal liability of the corporation is likewise expressed in the following provisions of the RCCP:
          • Failure to comply with the (i) cease and desist order of the SEC on the use of a corporate name that is not distinguishable, already protected by law, or contrary to law, rules and regulations and (ii) SEC order to remove all signages, marks, advertisements, labels, prints and other effects bearing such corporate name;
          • The unjustified failure or refusal by the corporation, or by those responsible for keeping and maintaining corporate records, to comply with Sections 45, 73, 92, 128, 1 77 and other pertinent rules and provisions of the RCCP on inspection and reproduction of records;
          • A corporation that conducts its business through fraud shall be punished with a fine;
          • A corporation used for fraud, or for committing or concealing graft and corrupt practices as defined under pertinent statutes, shall be liable for a fine; and
          • A corporation that appoints an intermediary who engages in graft and corrupt practices for the corporation's benefit or interest shall be punished with a fine.
        • However, corporations are still not criminally liable under the Revised Penal Code. Corporations cannot be made criminally liable for a felony because intent is required in felonies.
        • Batas Pambansa Blg. 22 or Anti-Bouncing Checks Law: Where the check is drawn by a corporation, company or entity, the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act.
        • Republic Act No. 10667 or the Philippine Competition Act: When the entities involved are juridical persons, the penalty of imprisonment shall be imposed on its officers, directors, or employees holding managerial positions, who are knowingly and willfully responsible for such violation.
        24.01 Contempt Cases.
        •  Corporations may be punished for contempt. 
        • A corporation and those who are officially responsible for the conduct of its affairs may be punished for contempt when they disobey judgments, decrees, or orders of a court made in a case within its jurisdiction.
        • The liability is present even if the contempt case involved is in the nature of a criminal case.
        • Section 17 of the RCCP provides that the SEC may hold a corporation and its responsible directors and officers in contempt if the corporation fails to comply with the SEC's order.
          • to immediately cease and desist from using a particular corporate name and to register a new name; and 
          • to remove all visible signages, marks, advertisements, labels, prints and other effects bearing the disallowed name.
        25. Theory of Special or Limited Capacities. 
        • The fourth attribute of the corporation, that is, that it has the powers, attributes and properties expressly authorized by law or incident to its existence, refers to what is known as the Theory of Special Capacities. 
        • It is the law that gives the powers of the corporation and the corporation cannot exercise powers that are not so given. 
        • The powers of the corporation are only those that are expressly provided for by law, implied powers, and incidental powers. 
        Theory of General Capacities 
        • A corporation may exercise any and all powers that may be exercised by natural persons.


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