Corporation Law: Midterm Case Doctrine

In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

(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; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

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

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

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

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.

This Court has declared that "mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality." This Court has likewise ruled that the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations."


It is elementary that the right against self-incrimination has no application to juridical persons.

The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It received certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve right in the legislature to investigate its contracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises may refuse to show its hand when charged with an abuse of such privileges.

The constitutional safeguard against unreasonable searches and seizures finds no application to the case at bar either. There has been no search undertaken by any agent or representative of the PCGG, and of course no seizure on the occasion thereof.


Noell Whessoe, Inc. v. Independent Testing Consultants, Inc., G.R. No. 199851,
Topic: Right to Moral Damage

A corporation is not a natural person. It is a creation of legal fiction and "has no feelings, no emotions, no senses." A corporation is incapable of fright, anxiety, shock, humiliation, and physical or mental suffering. "Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life." A corporation, not having a nervous system or a human body, does not experience physical suffering, mental anguish, embarrassment, or wounded feelings. Thus, a corporation cannot be awarded moral damages.

There is no standing doctrine that corporations are, as a matter of right, entitled to moral damages. The existing rule is that moral damages are not awarded to a corporation since it is incapable of feelings or mental anguish. Exceptions, if any, only apply pro hac vice.


Topic: Sui Generis

Government instrumentalities are agencies of the national government that, by reason of some "special function or jurisdiction" they perform or exercise, are allotted "operational autonomy" and are "not integrated within the department framework." Subsumed under the rubric "government instrumentality" are the following entities:
1. regulatory agencies,
2. chartered institutions,
3. government corporate entities or government instrumentalities with corporate powers (GCE/GICP), and
4. GOCCs

The Administrative Code defines a GOCC:

Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) per cent of its capital stock.

The MECO cannot be any other instrumentality because it was, as mentioned earlier, merely incorporated under the Corporation Code.

It is evident, from the peculiar circumstances surrounding its incorporation, that the MECO was not intended to operate as any other ordinary corporation. And it is not. Despite its private origins, and perhaps deliberately so, the MECO was "entrusted" by the government with the "delicate and precarious" responsibility of pursuing "unofficial" relations with the people of a foreign land whose government the Philippines is bound not to recognize. The intricacy involved in such undertaking is the possibility that, at any given time in fulfilling the purposes for which it was incorporated, the MECO may find itself engaged in dealings or activities that can directly contradict the Philippines’ commitment to the One China policy of the PROC. Such a scenario can only truly be avoided if the executive department exercises some form of oversight, no matter how limited, over the operations of this otherwise private entity.

Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared with other private corporations. From its over-reaching corporate objectives, its special duty and authority to exercise certain consular functions, up to the oversight by the executive department over its operations—all the while maintaining its legal status as a non-governmental entity—the MECO is, for all intents and purposes, sui generis.


League of Cities of the Philippines v. Commission on Elections, 571 SCRA 263
Topic: Special Law, GOCC

Section 16, Article XII of the Constitution prohibiting Congress from creating private corporations except by a general law. Section 16 of Article XII provides:

The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. 

Thus, Congress must prescribe all the criteria for the "formation, organization, or regulation" of private corporations in a general law applicable to all without discrimination. Congress cannot create a private corporation through a special law or charter.


Rivera v. United Laboratories, Inc., 586 SCRA 269

While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the 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.

To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly. It cannot be presumed.


Heirs of Fe Tan Uy v. International Exchange Bank, 690 SCRA 519

A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.

Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.

To justify the piercing of the corporate veil which requires that the negligence of the officer must be so gross that it could amount to bad faith and must be established by clear and convincing evidence.

Gross negligence is one that is characterized by the lack of the slightest care, acting or failing to act in a situation where there is a duty to act, wilfully and intentionally with a conscious indifference to the consequences insofar as other persons may be affected.

While the conditions for the disregard of the juridical entity may vary, the following are some 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, and
(4) Methods of conducting the business.


Concept Builders, Inc. v. National Labor Relations Commission, et al., 257 SCRA 149
Topic: Piercing the Veil of Corporate Fiction

The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the 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.

The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the "instrumentality" may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of instances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

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 rights; and

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.

A party whose corporation is vulnerable to piercing of its corporate veil cannot argue violation of due process.


Philippine National Bank v. Ritratto Group, Inc., et al., 362 SCRA 216
Topic: Piercing the Veil of Corporate Fiction

The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. The courts may in the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity.

While there exists no definite test of general application in determining when a subsidiary may be treated as a mere instrumentality of the parent corporation, some factors have been identified that will justify the application of the treatment of the doctrine of the piercing of the corporate veil. 

The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite variations of fact that can arise but there are certain common circumstances which are important and which, if present in the proper combination, are controlling.These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.
(h) 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.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) 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.
(k) The formal legal requirements of the subsidiary are not observed.


The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: 

a) when the separate and distinct corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 

b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or

 c) is used in alter ego cases, i.e., where a corporation is essentially 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 so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

The control necessary to invoke the instrumentality or alter ego rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. The control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.

Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

(2) Such control must have beenused 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; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.

The absence of any of these elements prevents piercing the corporate veil.


International Academy of Management and Economics Incorporated (I/AME) v. Liton and Co., Inc., G.R. No. 191525, December 13, 2017

Piercing the Corporate Veil may Apply to Non-stock Corporations

The mere fact that the corporation involved is a nonprofit corporation does not by itself preclude a court from applying the equitable remedy of piercing the corporate veil. The equitable character of the remedy permits a court to look to the substance of the organization, and its decision is not controlled by the statutory framework under which the corporation was formed and operated. While it may appear to be impossible for a person to exercise ownership control over a nonstock, not-for-profit corporation, a person can be held personally liable under the alter ego theory if the evidence shows that the person controlling the corporation did in fact exercise control, even though there was no stock ownership.

The concept of equitable ownership, for stock or non-stock corporations, in piercing of the corporate veil scenarios, may also be considered. An equitable owner is an individual who is a non-shareholder defendant, who exercises sufficient control or considerable authority over the corporation to the point of completely disregarding the corporate form and acting as though its assets are his or her alone to manage and distribute.

Piercing the Corporate Veil may Apply to Natural Persons

a) When the Corporation is the Alter Ego of a Natural Person

The piercing of the corporate veil may apply to corporations as well as natural persons involved with corporations. This Court has held that the "corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation.

b) Reverse Piercing of the Corporate Veil

In a traditional veil-piercing action, a court disregards the existence of the corporate entity so a claimant can reach the assets of a corporate insider. 

In a reverse piercing action, however, the plaintiff seeks to reach the assets of a corporation to satisfy claims against a corporate insider.

Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing) and makes the corporation liable for the debt of the shareholders.

It has two (2) types: outsider reverse piercing and insider reverse piercing. 

Outsider reverse piercing occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially controlled by the defendant. 

In contrast, in 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.

Outsider reverse veil-piercing extends the traditional veil-piercing doctrine to permit a third-party creditor to pierce the veil to satisfy the debts of an individual out of the corporation's assets. The Court has pierced the corporate veil in a reverse manner in the instances when the scheme was to avoid corporate assets to be included in the estate of a decedent as in the Cease case and when the corporation was used to escape a judgment to pay a debt.


Mabuhay Holdings Corp., v. Sembcorp Logistic Limited, G.R. No. 212734, December 5, 2018 

Joint Ventures may result in the formation of a joint venture corporation. In such case, it must comply with applicable nationalization laws. In addition, the joint venture may give certain shareholders or groups of shareholders power to select or nominate a specified number of directors, give to the shareholders control over the selection and retention of employees, or set up procedure for settlement of disputes.

However, the joint venture corporation itself is subject to corporate law not to partnership law.  The parties to the joint venture agreement cannot cite the provisions of the law on partnership with respect to the corporation itself and its relationship with its shareholders. 

By choosing to adopt a corporate entity as the medium to pursue the joint venture enterprise, the parties 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. 


The test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government corporations subject to its provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are compulsory members of the Government Service Insurance System. In a legal regime where the charter test doctrine cannot be applied, the mere fact that a corporation has been created by virtue of a special law does not necessarily qualify it as a public corporation.

A reading of petitioner’s charter shows that it is not subject to control or supervision by any agency of the State, unlike government-owned and -controlled corporations. No government representative sits on the board of trustees of the petitioner. Like all private corporations, the successors of its members are determined voluntarily and solely by the petitioner in accordance with its by-laws, and may exercise those powers generally accorded to private corporations, such as the powers to hold property, to sue and be sued, to use a common seal, and so forth. It may adopt by-laws for its internal operations: the petitioner shall be managed or operated by its officers "in accordance with its by-laws in force." 

The employees of the petitioner are registered and covered by the Social Security System at the latter’s initiative, and not through the Government Service Insurance System, which should be the case if the employees are considered government employees, another indication of petitioner’s nature as a private entity.

The fact that a certain juridical entity is impressed with public interest does not, by that circumstance alone, make the entity a public corporation, inasmuch as a corporation may be private although its charter contains provisions of a public character, incorporated solely for the public good. 

This class of corporations may be considered quasi-public corporations, which are private corporations that render public service, supply public wants, or pursue other eleemosynary objectives. While purposely organized for the gain or benefit of its members, they are required by law to discharge functions for the public benefit.

The true criterion, therefore, to determine whether a corporation is public or private is found in the totality of the relation of the corporation to the State. If the corporation is created by the State as the latter’s own agency or instrumentality to help it in carrying out its governmental functions, then that corporation is considered public; otherwise, it is private. 

By virtue of the fiction that all corporations owe their very existence and powers to the State, the reportorial requirement is applicable to all corporations of whatever nature, whether they are public, quasi-public, or private corporations—as creatures of the State, there is a reserved right in the legislature to investigate the activities of a corporation to determine whether it acted within its powers. In other words, the reportorial requirement is the principal means by which the State may see to it that its creature acted according to the powers and functions conferred upon it.



But there are stringent requirements before one can qualify as a de facto corporation:
(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.

The filing of articles of incorporation and the issuance of the certificate of incorporation are essential for the existence of a de facto corporation. We have held that an organization not registered with the Securities and Exchange Commission (SEC) cannot be considered a corporation in any concept, not even as a corporation de facto. Corporate existence begins only from the moment a certificate of incorporation is issued. 

"The de facto doctrine thus effects a compromise between two conflicting public interest[s]—the one opposed to an unauthorized assumption of corporate privileges; the other in favor of doing justice to the parties and of establishing a general assurance of security in business dealing with corporations."

Generally, the doctrine exists to protect the public dealing with supposed corporate entities, not to favor the defective or non-existent corporation.


The filing of articles of incorporation and the issuance of the certificate of incorporation are essential for the existence of a de facto corporation. In fine, it is the act of registration with SEC through the issuance of a certificate of incorporation that marks the beginning of an entity's corporate existence.

The doctrine of corporation by estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when a non-existent corporation enters into contracts or dealings with third persons. In which case, the person who has contracted or otherwise dealt with the non-existent corporation is estopped to deny the latter's legal existence in any action leading out of or involving such contract or dealing. While the doctrine is generally applied to protect the sanctity of dealings with the public, nothing prevents its application in the reverse, in fact the very wording of the law which sets forth the doctrine of corporation by estoppel permits such interpretation. Such that a person who has assumed an obligation in favor of a non-existent corporation, having transacted with the latter as if it was duly incorporated, is prevented from denying the existence of the latter to avoid the enforcement of the contract.

Jurisprudence dictates that the doctrine of corporation by estoppel applies for as long as there is no fraud and when the existence of the association is attacked for causes attendant at the time the contract or dealing sought to be enforced was entered into, and not thereafter.

The doctrine of corporation by estoppel rests on the idea that if the Court were to disregard the existence of an entity which entered into a transaction with a third party, unjust enrichment would result as some form of benefit have already accrued on the part of one of the parties. Thus, in that instance, the Court affords upon the unorganized entity corporate fiction and juridical personality for the sole purpose of upholding the contract or transaction.

Precisely, the existence of the petitioner as a corporate entity is upheld in this case for the purpose of validating the Deed to ensure that the primary objective for which the donation was intended is achieved, that is, to convey the property for the purpose of aiding the petitioner in the pursuit of its charitable objectives.


The doctrine of corporation by estoppel cannot override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties. It cannot be acquired through or waived, enlarged or diminished by, any act or omission of the parties, neither can it be conferred by the acquiescence of the court. 

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 exercise corporate functions and enter into business relations with third person. 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.

Thus, if a law will be passed granting an administrative tribunal jurisdiction to hear cases involving corporations, the same tribunal cannot assume jurisdiction over a case filed against a non-existent corporation just because one party is allegedly estopped from claiming that the corporation is non-existent. 


The 'control test' is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Section 2, Article II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. 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." The Court ruled that the Grandfather Rule is a supplement to the Control Test so that the to constitutional requirement can be given effect.

Generally, the test that should be applied is the Control Test and not the "Grandfather Rule.

The SEC en banc voted and decided to do away with the strict computation of the so-called Investment Test otherwise known as the "Grandfather Rule" in determining the nationality of corporations with foreign equity in accordance with the Opinion of the Department of Justice (DOJ) No. 18, Series of 1989 dated January 19, 1989. It should be noted in this connection that the Grandfather Rule 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. The Grandfather Rule "hews with the rule that 'beneficial ownership' of corporations engaged in nationalized activities must reside in the hands of Filipino citizens."

However, the Grandfather Rule is a corollary rule - even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt exists as to the locus of the beneficial ownership and control. These include "layering" cases contemplated in this case. Doubt exists, for instance, if the following indicators are present: 
(1) that the foreign investors provide practically all the funds for the investment jointly undertaken with Filipinos; 
(2) that the foreign investors undertake to provide practically all the technological support for the venture; and 
(3) that the foreign investors, while being minority stockholders, manage the company and prepare all economic viability studies.

In addition, the "Grandfather Rule" is applied in this case because of the qualification in the opinion to the effect that if the percentage of Filipino ownership in the corporation or partnership (that is a stockholder of another corporation that is partly nationalized) is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine Nationality.

Grandfather Test

Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and the grandfather rule. 

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, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph stating "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," pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent grandfather rule.

 "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent the Constitution and pertinent laws, then it becomes illegal. The deliberations in the Records of the 1986 Constitutional Commission shed light on how a citizenship of a corporation will be determined. It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases where corporate layering is present.

Under the Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing Corporation and added to the shares directly owned in the Investee Corporation. The Grandfather Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not apply.

However, it would be ludicrous to limit the application of the said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive to have "60% Filipino Ownership" at face value. It would be senseless for these applying corporations to state in their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the application of the Constitution.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake the exploration, development and utilization of the natural resources of the Philippines. 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."



Under the Doctrine of Equality of Shares, all stocks issued by the corporation are presumed to be equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. 

The most basic classification of shares is: common shares and preferred shares. It was explained that common shares and preferred shares are part of the corporation's capital stock and that both stockholders are no different from ordinary investors who take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the profits and losses of the enterprise.

Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest. But the exchange of shares is different - there would be shifting of the balance of stock features like priority in dividend declarations or absence of voting rights. Yet, neither the reclassification nor exchange of shares per se, yields realized income for tax purposes." In this case, certain shares were exchanged for preferred shares but no change in the proportional interest of the shareholder resulted. The Court went on to continue that: "There was no cash flow. Both stocks had the same par value. Under the facts herein, any difference in their market value would be immaterial at the time of exchange because no income is yet realized - it was a mere corporate paper transaction. It would be different, if the exchange transaction resulted into a cash flow of wealth, in which case income tax may be imposed.

Redemption is repurchase or reacquisition of stock by a corporation which issued the stock in  exchange for property, whether or not the acquired share is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment of the stock and continues in business as before.

For tax purposes, there are cases when redemption of shares (which were previously issued as stock dividends) is considered a scheme to circumvent the tax consequence  of cash dividends. Here, the redemption is used as a veil for constructive distribution of cash dividends. In this case, the amounts received by the shareholder will be treated as cash dividends because the proceeds of redemption in such a case are additional wealth; they are not merely returns of capital but gains thereon.

Tax on Stock Dividends

Sec. 83. Distribution of dividends or assets by corporations. —

(b) Stock dividends — A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent it represents a distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen. (Emphasis supplied)

For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction makes it "essentially equivalent to a distribution of taxable dividends." Of these, the most important is the third.

Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. The capital cannot be distributed in the form of redemption of stock dividends without violating the trust fund doctrine — wherein the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. Once capital, it is always capital.  That doctrine was intended for the protection of corporate creditors. 

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the redemption to be considered a legitimate tax scheme. Redemption cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade becomes manifest. 

The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from income tax when the redemption is supported by legitimate business reasons would defeat the very purpose of imposing tax on income. Such argument would open the door for income earners not to pay tax so long as the person from whom the income was derived has legitimate business reasons. The substance of the whole transaction, not its form, usually controls the tax consequences. 

In this case, even if the said purposes support the redemption and justify the issuance of stock dividends, the same has no bearing whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are deemed taxable dividends since it was shown that income was generated therefrom. After considering the manner and the circumstances by which the issuance and redemption of stock dividends were made, there is no other conclusion but that the proceeds thereof are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" it is part of the "entire income" subject to tax. As income, it is subject to income tax which is required to be withheld at source. 

Exchange of Shares

Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest. But the exchange of shares is different — there would be a shifting of the balance of stock features, like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income for tax purposes.

A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits. Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. 

Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary investors who take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to share in the profits and losses of the enterprise. Moreover, under the doctrine of equality of shares — all stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. 

In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber's rights and privileges — which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when there is still maintenance of proprietary interest. 


A family corporation may be organized to pursue an estate tax planning.

A no-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 is 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, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, 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.

It is to be stressed that by their ownership of the 2,500 no par value shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.

The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."


Non-voting shares are not totally deprived of the right to vote. The shareholders who hold non-voting shares still retain some measure of effective control. Thus, holders of non-voting shares may still vote on some matters.

Shares that are originally common may be reclassified into preferred shares. Reclassification of shares is a legitimate exercise of corporate powers under the Corporation Code.

Although the investment of a shareholder is usually locked-in and cannot be returned to the shareholder until liquidation, the redemption feature of shares was envisaged to  effectively eliminate the market volatility risks on the side of the share owners. There are clear advantages and benefits that inure to  the redeemable preferred share owners who, on one hand, prefer a stable dividend yield on their investments and, on the other hand, want security from the uncertainty of market forces over which they do not have control.

A treasury share may be common or preferred share. Treasury shares may be used for a variety of  corporate purposes, such as for a stock bonus plan for management and employees or for acquiring another company. 


San Juan's shares were not validly converted into treasury shares because Aramaywan did not have unrestricted retained earnings

Batas Pambansa Blg. 68, or the Corporation Code, the law applicable at the time the events in this case occurred, clearly sets out the parameters when a corporation may reacquire its shares and convert them into treasury shares. According to Section 9 of the Corporation Code, "[t]reasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means." Apart from reacquiring the shares through some lawful means, the Corporation Code is also explicit that while a corporation has the power to purchase or acquire its own shares, the corporation must have unrestricted retained earnings in its books to cover the shares to be purchased or acquired. In addition, in cases where the reason for reacquiring the shares is because of the unpaid subscription, the Corporation Code is likewise explicit that the corporation must purchase the same during a delinquency sale.

The Court has observed that: "The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders." Under the trust fund doctrine, "the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets." Thus, "[t]he creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of assets among the stockholders without first paying corporate debts."

Considering that San Juan's subscriptions have been fully paid, Aramaywan cannot thus reduce his shares without a corresponding return of his investment. It is undisputed, however, that San Juan received nothing for the reduction of his shares.

The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the "trust fund" of the corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefor.

A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary

Even assuming San Juan agreed to the reduction of his shares, such agreement is void for lack of consideration

As San Juan did not have any unpaid obligations for the subscription of shares in Aramaywan, and neither was he in breach of his obligations for Narra Mining, then the Court concludes that the agreement to reduce the shares did not have a cause or consideration.

To reiterate, the Corporation Code allows corporations to reacquire its shares through some lawful means, but under the Civil Code, contracts without cause or consideration are void and produce no effect whatsoever. Thus, the agreement between the parties assuming it exists is void and cannot therefore be a basis for the corporation to reacquire its shares.


The corporate name is a property right that cannot be impaired or defeated if another corporation will appropriate the same. It is in the nature of a right in rem that can be asserted against the whole world.

A corporation can no more use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another.

The jurisdiction of the SEC is not merely confined to the adjudicative functions provided in Section 5 of the SEC Reorganization Act, as amended. By express mandate, the SEC has absolute jurisdiction, supervision and control over all corporations. It is the SEC's duty to prevent confusion in the use of corporate names not only for the protection of the corporations involved, but more so for the protection of the public. It has authority to de-register at all times, and under all circumstances corporate names which in its estimation are not distinguishable from existing corporate name.

A corporation has an exclusive right to use its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and trade names. Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that name and carried on its business thereunder, that another would attempt to use the same name, or the same name with slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name.

The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption.  A corporation that is incorporated and adopts a corporate name earlier acquires a prior right over the use of the corporate name.

Under the Dominancy Test, the name cannot be used if the name indicated in the Articles of lncorporation adopts the dominant feature of an existing corporate name or even a trademark belonging to another. Standard Philips Corporation was enjoined to use the word "Philips" in its corporate name because it was considered similar to the well-known mark and corporate names of Philips Electrical Lamps, Inc. and Philips Industrial Development, Inc. 

Decision

A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field.

A name is peculiarly important as necessary to the very existence of a corporation. Its name is one of its attributes, an element of its existence, and essential to its identity. The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person; and the right to use its corporate name is as much a part of the corporate franchise as any other privilege granted.

A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him. A corporation can no more use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another.

In the statutory prohibition, two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption. In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person, using ordinary care and discrimination. In so doing, the Court must look to the record as well as the names themselves. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur.


Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610

The policy underlying the prohibition against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations

The Doctrine of Secondary Meaning that originated in trademark law likewise finds application and has been extended to corporate names. Under said doctrine, a word or phrase, which is originally incapable of exclusive appropriation because the word or phrase is geographic or otherwise descriptive, might nevertheless have been used for so long and so exclusively by one producer with reference to an article and the purchasing public has considered the word or phrase as associated to his product.

This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time.  To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.

While the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning.

Asia Pacific Resources International Holdings, Ltd. V. Paperone, Inc., G.R. No. 213365-66, December 10, 2018
Topic: Corporation Name, Unfair Competition

The essential elements of an action for unfair competition are: (1) confusing similarity in the general appearance of the goods, and (2) intent to deceive the public and defraud a competitor.

a) Confusing similarity

As to the first element, the confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. Likelihood of confusion of goods or business is a relative concept, to be determined only according to peculiar circumstances of each case.

Relative to the issue on confusion of marks and trade names, jurisprudence has noted two types of confusion, viz.: 
(1) confusion of goods (product confusion), where the ordinarily prudent purchaser would be induced to purchase one product in the belief that he was purchasing the other; and 
(2) confusion of business (source or origin confusion), where, although the goods of the parties are different, the product, the mark of which registration is applied for by one party, is such as might reasonably be assumed to originate with the registrant of an earlier product; and the public would then be deceived either into that belief or into the belief that there is some connection between the two parties, though inexistent. 

Thus, while there is confusion of goods when the products are competing, confusion of business exists when the products are non-competing but related enough to produce confusion of affiliation.

The determination of priority of use of a mark is a question of fact. Adoption of the mark alone does not suffice. One may make advertisements, issue circulars, distribute price lists on certain goods, but these alone will not inure to the claim of ownership of the mark until the goods bearing the mark are sold to the public in the market. Accordingly, receipts, sales invoices, and testimonies of witnesses as customers, or orders of buyers, best prove the actual use of a mark in trade and commerce during a certain period of time. Verily, the protection of trademarks as intellectual property is intended not only to preserve the goodwill and reputation of the business established on the goods bearing the mark through actual use over a period of time, but also to safeguard the public as consumers against confusion on these goods. 

b) intent to deceive the public and defraud a competitor

The element of intent to deceive and to defraud may be inferred from the similarity of the appearance of the goods as offered for sale to the public; actual fraudulent intent need not be shown.



The Court held that to fall within the prohibition of Section 18, two requisites must be proven, to wit: (1) that the complainant corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. With respect to the first requisite, the Court has held that the right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption. It being clear that respondents are the prior registrants, they certainly have acquired the right to use the words "De La Salle" or "La Salle" as part of their corporate names. The second requisite is also satisfied since there is a confusing similarity between petitioner's and respondents' corporate names. While these corporate names are not identical, it is evident that the phrase "De La Salle" is the dominant phrase used.

In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination. In so doing, the Court must look to the record as well as the names themselves.

Generic terms are those which constitute "the common descriptive name of an article or substance," or comprise the "genus of which the particular product is a species," or are "commonly used as the name or description of a kind of goods," or "characters," or "refer to the basic nature of the wares or services provided rather than to the more idiosyncratic characteristics of a particular product," and are not legally protectable. It has been held that if a mark is so commonplace that it cannot be readily distinguished from others, then it is apparent that it cannot identify a particular business; and he who first adopted it cannot be injured by any subsequent appropriation or imitation by others, and the public will not be deceived.

A suggestive mark is a word, picture, or other symbol that suggests, but does not directly describe something about the goods or services in connection with which it is used as a mark and gives a hint as to the quality or nature of the product. Suggestive trademarks therefore can be distinctive and are registrable.

The phrase "De La Salle" is not merely a generic term while "Lyceum" today generally refers to a school or institution of learning. It is as generic in character as the word "university." The phrase "De La Salle" is not generic in relation to respondents. It is not descriptive of respondent's business as institutes of learning, unlike the meaning ascribed to "Lyceum." 


 A corporation that is incorporated and adopts a corporate name earlier acquires a prior right over the use of the corporate name. Under the Priority of Adoption Rule, the corporation that first adopts a corporation name has the right thereto and a subsequent corporation cannot use the same name.

Under the present rules, "the name of a corporation or  partnership that has been dissolved or whose registration has been revoked shall not be used by another corporation, within five years from the approval of dissolution or five years from the date of revocation. 

FICCPI acquired a prior right over the use of the corporate name

FICCPI was incorporated on March 14, 2006. On the other hand, ICCPI was incorporated only on April 5, 2006, or a month after FICCPI registered its corporate name. 

When the term of existence of the defunct FICCPI expired on November 24, 2001, its corporate name cannot be used by other corporations within three years from that date, until November 24, 2004. FICCPI reserved the name "Filipino Indian Chamber of Commerce in the Philippines, Inc." on January 20, 2005, or beyond the three-year period. Thus, the SEC was correct when it allowed FICCPI to use the reserved corporate name. (Note: Under the Old Corporation Code [before 2019], the names of dissolved corporation can be used after three years from dissolution)

ICCPI's name is identical and deceptively or confusingly similar to that of FICCPI

ICCPFs and FICCPFs corporate names both contain the same words "Indian Chamber of Commerce." ICCPI argues that the word "Filipino" in FICCPFs corporate name makes it easily distinguishable from ICCPI. It adds that confusion and deception are effectively precluded by appending the word "Filipino" to the phrase "Indian Chamber of Commerce." Further, ICCPI claims that the corporate name of FICCPI uses the words "in the Philippines" while ICCPI uses only "Phils, Inc."

These words do not effectively distinguish the corporate names. On the one hand, the word "Filipino" is merely a description, referring to a Filipino citizen or one living in the Philippines, to describe the corporation's members. On the other, the words "in the Philippines" and "Phils., Inc." are simply geographical locations of the corporations which, even if appended to both the corporate names, will not make one distinct from the other. Under the facts of this case, these words cannot be separated from each other such that each word can be considered to add distinction to the corporate names. Taken together, the words in the phrase "in the Philippines" and in the phrase "Phils. Inc." are synonymous—they both mean the location of the corporation.

The presence of the words 'in' and 'the' in respondent's corporate name does not, in any way, make an effective distinction to that of petitioner." Petitioner cannot argue that the combination of words in respondent's corporate name is merely descriptive and generic, and consequently cannot be appropriated as a corporate name to the exclusion of the others. Save for the words "Filipino," "in the," and "Inc.," the corporate names of petitioner and respondent are identical in all other respects. 

 It is settled that to determine the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person, using ordinary care and discrimination. In so doing, the court must examine the record as well as the names themselves. Proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur.

SEC Jurisdiction

By express mandate of law, the SEC has absolute jurisdiction, supervision and control over all corporations. It is the SEC's duty to prevent confusion in the use of corporate names not only for the protection of the corporation involved, but more so for the protection of the public. It has the authority to de-register at all times, and under all circumstances corporate names which in its estimation are likely to generate confusion.

GSIS Family Bank-Thrift Bank [Formerly Comsavings Bank, Inc.] v. BPI Family Bank, 771 SCRA 284
Topic: Corporation Name

By express mandate, the SEC has absolute jurisdiction, supervision and control over all corporations. It is the SEC's duty to prevent confusion in the use of corporate names not only for the protection of the corporations involved, but more so for the protection of the public. It has authority to de-register at all times, and under all circumstances corporate names which in its estimation are not distinguishable from existing corporate name.

Even under the Corporation Code, the SEC already had the power to compel a corporation to change its corporate name in the event that the name already belonged to another corporation. The corporation is compelled to change the name especially because of its undertaking to change its corporate name which was attached to the Articles of Incorporation.

If the proposed name is similar to the name of a registered firm, the proposed name must contain at least one distinctive word different from the name of the company already registered.

Section 3 states that if there be identical, misleading or confusingly similar name to one already registered by another corporation or partnership with the SEC, the proposed name must contain at least one distinctive word different from the name of the company already registered. 

In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination. And even without such proof of actual confusion between the two corporate names, it suffices that confusion is probable or likely to occur.

The overriding consideration in determining whether a person, using ordinary care and discrimination, might be misled is the circumstance that both petitioner and respondent are engaged in the same business of banking. "The likelihood of confusion is accentuated in cases where the goods or business of one corporation are the same or substantially the same to that of another corporation."

Petitioner cannot argue that the word "family" is a generic or descriptive name, which cannot be appropriated exclusively by respondent. "Family," as used in respondent's corporate name, is not generic. Generic marks are commonly used as the name or description of a kind of goods, such as "Lite" for beer or "Chocolate Fudge" for chocolate soda drink. Descriptive marks, on the other hand, convey the characteristics, function, qualities or ingredients of a product to one who has never seen it or does not know it exists, such as "Arthriticare" for arthritis medication.

Under the facts of this case, the word "family" cannot be separated from the word "bank." In asserting their claims before the SEC up to the Court of Appeals, both petitioner and respondent refer to the phrase "Family Bank" in their submissions. This coined phrase, neither being generic nor descriptive, is merely suggestive and may properly be regarded as arbitrary. Arbitrary marks are "words or phrases used as a mark that appear to be random in the context of its use. They are generally considered to be easily remembered because of their arbitrariness. They are original and unexpected in relation to the products they endorse, thus, becoming themselves distinctive." Suggestive marks, on the other hand, "are marks which merely suggest some quality or ingredient of goods. The strength of the suggestive marks lies on how the public perceives the word in relation to the product or service."

The word "family" is defined as "a group consisting of parents and children living together in a household" or "a group of people related to one another by blood or marriage." Bank, on the other hand, is defined as "a financial establishment that invests money deposited by customers, pays it out when requested, makes loans at interest, and exchanges currency." By definition, there can be no expected relation between the word "family" and the banking business of respondent. Rather, the words suggest that respondent’s bank is where family savings should be deposited. The phrase "family bank" cannot be used to define an object.



The name cannot be used if it is the essential and distinguishing feature of another corporation's registered and protected corporate name. A corporation may be directed to change its corporate name in accordance with the undertaking that it submitted to the SEC together with its Articles of Incorporation.

The SEC has the authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to spawn confusion. It is the duty of the SEC to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public.

Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name.

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name are, as correctly observed by the SEC, merely descriptive of and also referring to the members, or kaanib, of respondent who are likewise residing in the Philippines. These words can hardly serve as an effective differentiating medium necessary to avoid confusion or difficulty in distinguishing petitioner from respondent. This is especially so, since both petitioner and respondent corporations are using the same acronym — H.S.K.; not to mention the fact that both are espousing religious beliefs and operating in the same place. Parenthetically, it is well to mention that the acronym H.S.K. used by petitioner stands for "Haligi at Saligan ng Katotohanan."

The fact that there are other non-stock religious societies or corporations using the names Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not authorize the use by petitioner of the essential and distinguishing feature of respondent's registered and protected corporate name.

Ordering petitioner to change its corporate name is not a violation of its constitutionally guaranteed right to religious freedom. In so doing, the SEC merely compelled petitioner to abide by one of the SEC guidelines in the approval of partnership and corporate names, namely its undertaking to manifest its willingness to change its corporate name in the event another person, firm, or entity has acquired a prior right to the use of the said firm name or one deceptively or confusingly similar to it.



The mere change in the corporate name is not considered under the law as the creation of a new corporation; hence, the renamed corporation remains liable for the illegal dismissal of its employee separated under that guise. The renamed corporation remains liable for the illegal dismissal of its employees who were separated under the guise that a new corporation was created when the employer corporation was renamed. 

The amendments of the articles of incorporation of Zeta to change the corporate name to Zuellig Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a corporation. For sure, the Corporation Code defined and delineated the different modes of dissolving a corporation, and amendment of the articles of incorporation was not one of such modes. The effect of the change of name was not a change of the corporate being, for, the changing of the name of a corporation is no more the creation of a corporation than the changing of the name of a natural person is begetting of a natural person. The act, in both cases, would seem to be what the language which we use to designate it imports – a change of name, and not a change of being.

A change in the corporate name does not make a new corporation, whether effected by a special act or under a general law. It has no effect on the identity of the corporation, or on its property, rights, or liabilities. The corporation, upon to change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed.

In short, Zeta and petitioner remained one and the same corporation. The change of name did not give petitioner the license to terminate employees of Zeta like San Miguel without just or authorized cause.  Petitioner, despite its new name, was the mere continuation of Zeta's corporate being, and still held the obligation to honor all of Zeta's obligations, one of which was to respect San Miguel's security of tenure. The dismissal of San Miguel from employment on the pretext that petitioner, being a different corporation, had no obligation to accept him as its employee, was illegal and ineffectual.

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