CORPORATION LAW

ATTY. AMANTE A. LIBERATO

A. INTRODUCTION
Legislative and Historical
Background of Philippine
Corporate Law

Corporation Law (Act No.

1459)- first general law on
corporations in the Philippines
-passed by the Philippine
Commission in 1906 and took
effect on April 1 , 1906
-codification of the American law
on corporations
-repealed in1980 by Batas
Pambansa Blg. 68
(Corporation Code of the
Philippines) which took effect
on May 1, 1980
Corporation Code- applies to all
corporations already in existence
at the time the Code took effect.
It is consistent with the mandate
under Sec. 1 Art. XII of the
Constitution for Congress to
prescribe all the criteria for the
formation, organization, or
regulation of private
corporations in general law
applicable to all without
discrimination.

a)
b)
c)
d)
e)
f)

g)

PURPOSE OF CORPORATE LAW

Provide for the formation and
organization of corporations
define their powers
fix the duties of the directors and
other officers thereof
declare the rights and liabilities of
shareholders and members
prescribe the conditions under
which corporations may transact
seeks to regulate both relations
between groups as well as their
rights once they have joined the
group
to lay down rules and regulations
of the organization of corporations

with a view to the protection of the

public interest , but at the same
time, promote the economic and
social development of the
country , through the development
of the corporate vehicle as a
means of doing business the
Philippines.
h) this would spread the benefits of
prosperity among all the people
,especially the employees of the
corporations and associations
which may be organized under the
aegis of the Corporation Code.
GENERAL RULE: Corporation Code is a
PRIMARY
LAW
EXCEPT: Becomes SUPPLETROY LAW in
BANKS- governed by
General Banking Law and the New
Central Bank Act
NOTE : As between general and special
law , the latter shall prevail generalia
specialibus non derogant
B. DEFINITION AND ATTRIBUTES OF A
CORPORATION
1. Statutory Definition
Sec. 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
NOTES: CJ Marshall
Corporations is an artificial being,
invisible , intangible and existing
only in contemplation of the law
ATTRIBUTES: ( A-C-R-P)
1. It is an ARTIFICIAL BEING
2. It is created by operation of
law
3. It has the right of succession

4. it has powers, attributes

expressly authorized by law
or incident of its existence.
2.1 Artificial Being
Concession Theory- it owes its life to
the State and its birth is purely
dependent on the States will.
2.1.1 Doctrine of Corporate Entity(
separate personality)
A corporation has a personality separate
and distinct from its members. It has a
personality separate and distinct from
the persons composing it as well as from
that of any other entity to which it is
related. This separate juridical
personality is recognized under the NCC
because its Art. 44 specifies
corporations among those considered as
juridical persons with juridical
personality ,separate and distinct from
that of each shareholder or member.
ART. 45 of NCC- Private
Corporations are regulated by laws of
general application on the subject
Art.46 of NCC- 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.
Properties registered in the name
of the
corporation are owned by it
as an entity
separate and distinct
from those who compose it.
CASES:
a.) Secosa et.al. vs. Heirs of Erwin
Suarez Francisco , G.R No.
160039, January 29, 2004
A corporation has a personality
separate
and
distinct
from
its
members. It has a
personality
separate and distinct from the
persons composing it as well as

from that
may be

any other entity to which it

related.

b.) PNB vs. Aznar , G.R No.

171805 , May 30,2011
The interest of the shareholder in the
corporation is indirect, contingent
and inchoate. (PNB v. Aznar) 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 share holder
concerned

2.1.1.1 Nationality
GENERAL RULE: Corporation cannot
be
considered a citizen as the term
"citizen" is understood in political law.
In political law, citizenship is
membership
in body politic, which
carries with it the
duty of
allegiance to the State and the
exercise of political rights, like the
right of
suffrage and right to hold
public office, as well as the duty to
render military service when required to
by the State. In this
sense, the term
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 principal tests for

determining if a corporation
is foreign or domestic,
namely:
Aggregate Test- which
requires looking into the
nationality, domicile, or
residence of the individuals
who control the corporation
-aka Control Test

 Entity Test- which looks to

the nation where the
corporation was incorporated.
-aka Place of
Incorporation Test or
Incorporation Test
a. Incorporation Test
NOTES: The norm that is
expressed in the Corporation Code
is the Entity or Place of
Incorporation Test.
Section 123 of the Corporation
Code provides that a foreign
corporation is one formed,
organized, or existing under any
laws other than those of the
Philippines and whose laws allow
Filipino citizens and corporations
to do business in its own country
or state. As explained in one case,
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.
b. Control Test (Sec. 3(a), RA
7042, as amended )
NOTES: Contemplated by the SEC is
said to have been adopted under
Section 3 of Republic Act (RA.) No.
7042 as amended by R.A. 8179
otherwise known as the Foreign
Investment Act of 1991 which
provides that a corporation shall be
considered a "Philippine National" if it
is (1) 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 (2) a Corporation
organized abroad and registered
as doing business in the
Philippines under the

Corporation Code of which 100%

of the capital stocks entitled to
vote belong to Filipinos.
Section 1 (b) of the amendments to
the Implementing Rules and
Regulations of R.A. 7042 expressly
provides that the control test shall be
applied
*Where a corporation and its nonFilipino stockholders own stocks in an
SEC registered enterprise, at least
60% of the capital stock outstanding
and entitled to vote of each of both
corporations must be owned and held
by citizens of the Philippines and at
least 60% of the members of the
Board of Directors of each of both
corporations must be citizens of the
Philippines, in order that the
corporation shall be considered a
Philippine national.
EXAMPLE: X Corporation owns 70%
of the outstanding shares, entitled to
vote in A corporation. The 70%
shares outstanding entitled to vote in
X corporation are owned by Mr. A, a
Filipino and four (4) of its five (5)
directors are also Filipinos. A
corporation is a Philippine National in
this example.
However, corporation A is not a
Philippine National if 70% of the
shares outstanding entitled to vote in
X corporation (which owns 70% of A
corporation) belong to Japanese
nationals. Corporation A is also not a
Philippine National even if only 40%
of the shares outstanding entitled to
vote in X Corporation belong to aliens
but more than 60% of its directors
are aliens (e.g. 4 of 5 directors are
aliens). b. The test for compliance
with the nationality requirement is
based on the total outstanding capital
stock irrespective of the amount of
the par value of shares and whether

or not the shares are fully or partially

paid.
*Preferred shares, voting shares as
well as non-voting shares are likewise
considered in the computation
because they all form part of the
outstanding capital stock.
*Special laws may exceptionally limit
the computatione to a certain type of
shares. For example, Section 6 of RA
No. 5980 as amended limits the
computation to voting shares.
*The SEC likewise clarified that the
test that should be applied is the
Control Test and not the
"Grandfather Rule."
c. Grandfather Rule (less than
60% Filipino ownership)
NOTES: It is a method of
determining the nationality of
corporation which in turn is owned by
another corporation by breaking
down the equity structure of the
shareholders of the corporation.
The SEC en banc voted and
decided to do away with the strict
computation 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 No. 18 series
of 1989 dated January 19, 1989.
However, the Department of Justice
and the Securities and Exchange
Commission still apply the
"Grandfather Rule" in some cases
because of the qualification in the
opinion to the effect that 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.
GRANDFATHER
RULE

CONTROL TEST

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

No such
computation is
necessary and
the total
shareholdings in
the subsidiary
may, in proper
cases, be
considered as
totally Filipino
owned even if
some of the
shareholders in
the shareholder
It involves the
corporation are
computation of
not Filipinos.
Filipino ownership
Under the
of a corporation in Control Test, a
which corporation
corporation shall
of partly Filipino
be considered a
and partly foreign
Filipino
equity owns capital corporation if the
stock. The
Filipino
percentage of
ownership of its
shares held by the capital is at least
second corporation 60% and where
in the first is
the 60-40
multiplied by the
Filipino-alien
latter's own Filipino shareholding is
equity, and the
not in doubt
product of these
percentages is
determined to be
the ultimate
Filipino ownership
of the subsidiary
corporation
CASES:
a.)
Gamboa vs. Teves , G.R
No. 176579, June 8,2011 and
October 9, 2012
The legal and beneficial ownership
of 60 percent of the outstanding
capital stock must rest in the

hands of Filipinos in accordance

with the constitutional mandate.
Full beneficial ownership of 60
percent of the outstanding capital
stock, coupled with 60 percent of
the voting rights, is
constitutionally required for the
States grant of authority to
operate a public utility. The
undisputed fact that the PLDT
preferred shares, 99.44% owned
by Filipinos, are non-voting and
earn only 1/70 of the dividends
that PLDT common shares earn,
grossly violates the constitutional
requirement of 60 percent Filipino
control and Filipino beneficial
ownership of a public utility.
In short, Filipinos hold less
than 60 percent of the voting
stock, and earn less than 60
percent of the dividends, of
PLDT. This directly contravenes
the express command in Section
11, Article XII of the Constitution
that [n]o franchise, certificate, or
any other form of authorization for
the operation of a public utility
shall be granted except to
x x xcorporations x x x organized
under the laws of the
Philippines, at least sixty per
centum of whose capital is
owned by such citizens
b.)
Narra Nickel Mining
Development Corp vs.
Redmont Consolidated Mines
Corp. , G.R No. 195580, April
21, 2014
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."

2.1.1.2 Constitutional Rights

NOTES: corporation is to person,
is proper
cases, within the due
process and equal
protection
clause of the Constitution.
Just, like a natural person it
cannot be deprived of its life and
property without
due process of
law.
*As an artificial being and as a
mere creature of law, a
corporation cannot exercise
Constitutional rights that are not
consistent with its nature as a
mere artificial being or rights that
are not available because the
corporations life is just a
concession of the State.
Thus, corporation cannot claim
that it, is entitled to protection
&the due process clause for the
protection of liberty.
A corporation is entitled to the
right against unreasonable
searches and seizure.
A corporation is but an
association of individuals under
an assumed name and with its
legal entity. In organizing itself
as a collective body, it waives
no constitutional immunities
appropriate to such body.
The right pertains to the
corporation as a separate entity,
hence, only the
corporation,and not its officers

in their personal capacity, is

the real party in interest, and
to question an alleged
unreasonable search and
seizure. Where properties of the
corporation are unlawfully seized,
the right that is invaded is the
right of the corporation and not
the right of its officers and
stockholders
Right against selfincrimination has no
application to juridical persons.

CASES:
a.)
Bache & Co., Inc. vs. Ruiz
, G.R. No. L-32409, February
27, 1971
Thus, the warrants authorized the
search for and seizure of records
pertaining to all business
transactions of petitioners herein,
regardless of whether the
transactions were legal or illegal.
The warrants sanctioned the
seizure of all records of the
petitioners and the
aforementioned corporations,
whatever their nature, thus openly
contravening the explicit
command of our Bill of Rights
that the things to be seized be
particularly described as well as
tending to defeat its major
objective: the elimination of
general warrants."cralaw
virtua1aw library
While the term "all business
transactions" does not appear in
Search Warrant No. 2-M-70, the
said warrant nevertheless tends to
defeat the major objective of the
Bill of Rights, i.e., the elimination
of general warrants, for the
language used therein is so allembracing as to include all

conceivable records of petitioner

corporation, which, if seized, could
possibly render its business
inoperative.
b.)
Smith Bell & Co. vs.
Natividad , G.R. No. 15574,
September 17, 1912
While Smith, Bell & Co. Ltd., a
corporation having alien
stockholders, is entitled to the
protection afforded by the dueprocess of law and equal
protection of the laws clause of
the Philippine Bill of Rights,
nevertheless, Act No. 2761 of the
Philippine Legislature, in denying
to corporations such as Smith, Bell
&. Co. Ltd., the right to register
vessels in the Philippines
coastwise trade, does not belong
to that vicious species of class
legislation which must always be
condemned, but does fall within
authorized exceptions, notably,
within the purview of the police
power, and so does not offend
against the constitutional
provision.
c.)Stonehill vs. Diokno , 20 SCRA
383 (1967)
The Government's action in
gaining possession of papers
belonging to the corporation did
not relate to nor did it affect the
personal defendants. If these
papers were unlawfully seized and
thereby the constitutional rights of
or any one were invaded, they
were the rights of the corporation
and not the rights of the other
defendants. Next, it is clear that a
question of the lawfulness of a
seizure can be raised only by one
whose rights have been invaded.
Certainly, such a seizure, if
unlawful, could not affect the
constitutional rights of defendants
whose property had not been
seized or the privacy of whose

homes had not been disturbed;

nor could they claim for
themselves the benefits of the
Fourth Amendment, when its
violation, if any, was with
reference to the rights of another
d.)
Bataan Shipyard &
Engineering Co., PCGG, G.R.
No. L- 75885, May 27, 1987
PCGG issued an order requiring
BASECO to produce corporate
records in the exercise of its
powers under Executive Order No.
2 to require all persons in the
Philippines holding alleged ill
gotten wealth of President
Ferdinand Marcos and his alleged
cronies to make full disclosure of
the same. BASECO questioned the
order alleging that there was
violation of its right against
unreasonable searches and
seizure and self-incrimination. The
Supreme Court rejected the
argument because there was in
fact no search and seizure in the
case and BASECO as a corporation
is not entitled to the right against
self-incrimination
2.1.1.3 Civil and Criminal
Liabilty
NOTES:
1.)
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 which he expressly
directs or authorizes, and this is

just as true of a corporation as of

a natural person.
*A corporation is liable,
therefore, whenever tortuous
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 or
direct personal obligation and
may arise out of different
sources of obligation.
Thus, the liability of a corporation
may be based on contract. Under
the liable based on contract if the
breach primary rule of attribution,
the corporation directors.
Direct corporate
responsibility may be imposed
under Article 2176
*
*Vicarious liability may be
based on quasi-delict under
Article 2180 of the New Civil
Code, delict under Article 102
Revised Penal Code and under
Article 104 of the Revised Penal
Code for innkeepers or
hotelkeepers.
A single act or omission may
give rise to different sources of
obligations and may warrant the
award of damages. Tort obligation
may even concur with contractual
obligation. This is subject to
proscription against double recovery.
2..) Criminal Liability- No criminal
action can lie against a corporation
under the present rules. This is
consistent the traditional view in
Spanish law.

Spanish laws from which the criminal

law rules and principles in the
Philippines were largely derived,
does not allow a corporation to be
proceeded against.
A corporation cannot commit
felonies described under the Revised
Penal Code because artificial beings
are incapable of intent. Neither can a
corporation perform any overt act.
The officers of the corporation
may be held liable. It is settled
that an officer of a corporation can
be held criminally liable for acts or
omissions done in behalf of the
corporation only where the law
directly requires the corporation to
do an act in a given manner and the
same law makes the person who
fails to perform the act in the
prescribed manner expressly liable
criminally.
Although the performance of an act
is an obligation directly imposed on
a corporation, the responsible officer
who actually performed the act must
of necessity be the one to assume
criminal liability; otherwise this
liability as created by the law would
be illusory, and the deterrent effect
of the law.

CASES:
a.) PNB vs. CA, 83 SCRA 237, May
18, 1978
b.) Professional Services , Inc. vs.
CA, G.R No. 126297, February
11,2008
Supreme Court sustained the liability
of hospitals based on the doctrine
of corporate responsibility.
The duty of providing quality medical
service is no longer the sole
prerogative and responsibility of the
physician. This is because the
modern hospital now tends to
organize a highly professional
medical staff whose competence and
performance need also to be
monitored by the hospital
commensurate with its inherent
responsibility to provide quality
medical care. Such responsibility
includes the proper supervision of
the members of its medical staff.
Accordingly, the hospital has the
duty to make a reasonable effort to
monitor and oversee the treatment
prescribed and administered by the
physicians practicing in its premises

The same rule applies to

stockholders. Before a stockholder
may be held criminally liable for acts
committed by the corporation, it
must be shown that he had
knowledge of the criminal act
committed in the name of the
corporation and that he took part in
the same or gave his consent to its
commission, whether by action or
inaction.

The corporate negligence doctrine

imposes sever 11 duties on a
hospital:
(i) to use reasonable care in the
mainte- nance of safe and adequate
facilities and equipment:
(ii) to select and retain only
competent
physicians
(iii)to oversee as to patient care
all persons
practice medicine
within its walls. and
(iv.) to formulate. adopt, and enforce
adequate inks and policies to ensure
quality care for its patient.

The criminal statute itself may

expressly provide or may identify the
persons who are criminally liable.

These special tort duties arise from

the special relationship existing
between. a hospital or nursing home

and its patients, which are based on

the vulnerability of the physically or
mentally ill persons and their
inability to provide care for
themselves.
c.) Child Learning Center., Inc.vs.
Tagario , G.R. No. 150920,
November 25,2005
A pre-schooler was trapped inside
a small toilet in the third floor of a
school building. The child panicked
and banged and kicked the door
several times while shouting for
help. When no help came, the
child opened the window to call for
help. Tragically, in the process of
opening the window, the child
went right through and fell down
three stories.
The child suffered multiple serious
injuries. The school was made
directly and primarily liable under
Article 2176. The liability is not
vicarious because the obligation to
provide safe facilities is imposed
directly on the corporation
(school).
d.) Sia vs. People , 121 SCRA 655,
April 28, 1983
Crime was estafa under the
Revised Penal Code for the alleged
failure to return the goods covered
by a trust receipt or to account for
the proceeds of the sale of the
same goods. The Supreme Court
acquitted the president who
signed the trust receipt in question
explaining that "in the absence of
an express provision of law
making the petitioner liable for the
criminal offense committed by the
corporation of which he is a
president as in fact there is no
such provision in the Revised
Penal Code under which the
petitioner is being prosecuted, the
existence of criminal liability on

his part may not be said to be

beyond any doubt.
e.) Espiritu Jr. vs. Petron
Corporation , G.R. No.170891,
November 28
f.) Gosiaco vs. Ching ,G.R. No.
173807, April 16,2009
The third paragraph of Section 1 of
BP Big. 22 or Anti-Bouncing
Checks Law states: 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.
In other words, "when a corporate
officer issues a worthless check in
the corporate name he may be
held personally liable for violating
a penal statute. The statute
imposes criminal penalties on
anyone who with intent to defraud
another of money or property,
draws or issues a check on any
bank with knowledge that he has
no sufficient funds in such bank 'to
meet the check on presentment.
Moreover, the personal liability of
the corporate officer is predicated
on the principle that he cannot
shield himself from liability from
his own acts on the ground that it
was a corporate act and not his
personal act.
g.) Ching vs, Secretary of Justice,
481 SCRA, 626, February
6,2006
The principle making corporate
officers and employees criminally
liable "applies whether or not the
crime requires the consciousness
of wrongdoing. It applies to those
corporate agents who themselves
commit the crime and to those,
who, by virtue of their managerial
positions or other similar relation
to the corporation, could be
deemed responsible for its

commission, if by virtue of their

relationship to the corporation,
they had the power to prevent the
act.
Moreover, all parties active in
promoting a crime, whether
agents or not, are principals.
Whether such officers or
employees benefited by their
delictual acts is not a touchstone
of their In the criminal liability.
Benefit is not an operative
fact.
A corporate officer cannot protect
himself behind a corporation
where he is actual, present and
efficient actor.
2.1.1.4 Recovery of Moral
Damages
NOTES: The award of moral
damages cannot
be granted in
favor of a corporation
because,
being artificial person and having
existence only in legal
contemplation, it has no feelings, no
emotions and no senses. It cannot,
therefore experience
physical
suffering and material anguish,
which can be experienced only by
one having a nervous system.
It is believed that the better rule is
to disallow award of moral
damages to juridical entities like
corporations even for
besmirched reputation and
defamation.
This rule is consistent with the very
nature of moral damages. The award
of moral damages aims the
restoration within the limits possible
of the spiritual status quo ante. It is
predicated on the presence of injury
that is incapable of pecuniary
estimation like physical suffering,
mental anguish and other similar
injury.' The award of moral damages

is justified only if there is moral

suffering and physical suffering.
*all the cases when moral damages
may be awarded under Article 2219
of the New Civil Code "immediately
suggest physical or moral suffering.
Hence,award of moral damages
predicated on besmirched
reputation or defamation is
justified only if there is moral
suffering on the part of the
plaintiff. This is possible only in the
case of natural persons.
Consequently, an artificial being like
a corporation cannot be awarded
moral damages because it does not
have a spiritual status quo; -J.
CAPISTRANO
*besmirched reputation cannot
cause mental anguish to a
corporation unlike in the case of a
natural person , for a corporation has
no reputation in the sense that an
individual has, and besides, it is
inherently impossible for corporation
to suffer moral anguish- Judge Sanco
*This is not to say that the
commercial reputation of a
corporation cannot be besmirched or
defamed. Courts may still find that
the reputation of a corporation was
besmirched but they may not award
moral damages in favor of the
corporation. Damages must be
limited to ACTUAL, NOMINAL,
TEMPERATE, EXEMPLARY DAMAGES
and ATTORNEYS FEES.
CASES:
a.)
ABS-CBN Broadcasting
vs. CA,301 SCRA 572, January
21,1999
Observation in the said two (2)
cases regarding the right of a
corporation to moral damages is
an obiter dictum

b.)
Filipinas Broadcasting
Network vs. Ago Medical and
Educational center ,448 SCRA
413, January 17,2005
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
c.)Manila Electric Co. vs. TEAM
Corp, 540 SCRA 62, December
13,2007
The Supreme Court observed that
as a rule, a corporation is not
entitled to moral damages
because, not being a natural
person, it cannot experience
physical suffering or sentiments
like wounded feelings, serious
anxiety, mental anguish and moral
shock. The only exception to this
rule is when the corporation has a
reputation that is debased,
resulting in its humiliation in the
business realm.
d.)
Crystal vs. Bank of PI ,
G.R. No. 172428, November
28,2008
The Supreme Court reiterated that
the ruling in Manero and
Mambulao were mere obiter dicta.
However, the Supreme Court did
not eliminate the possibility that
moral damages may be awarded
to corporations observing that
"(i)ndeed, while the Court may
allow the grant of moral damages
to corporations, it is not
automatically granted; there must
still be proof of then of the factual
basic of the damage and its causal
relation to the defendant's acts.
This is so because moral damages,
though incapable of pecuniary
estimation, are in the category of
an award designed to compensate
the claimant for actual injury
suffered and not to impose a
penalty on the wrongdoer

e.)
UP vs. Dizon , G.R. No.
171182, August 23,2012
2.1.1.5 Practice of Profession
A corporation cannot engage in
the practice
of a profession
CASES:
a.)
Samahan ng
Optometrists vs. Acebedo
International Corp., 270 SCRA
298 (1997)
b.)
Alfafara vs. Acebedo
Optical Company , 381 SCRA
293(2002)
2.1.2 Doctrine of piercing the veil of
corporate fiction
NOTES: Basic in corporate law is the
principle that a corporation has a
separate personality distinct from its
stockholders and from other
corporations to which it may be
connected. It is a fiction created by law
with the intent that it should be treated
as true.
The corporations separate juridical
personality may be disregarded when
there is an abuse of the corporate form.
examples:
when the corporate identity is
used to defeat public
convenience , justify wrong ,
protect fraud , or defend crime.
where corporation is a mere alter
ego or business conduit of a
persons
where a 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
*legal fiction of a separate
corporate personality, for reasons of

public policy and in the interest of

justice , will be justifiably set aside.
2.1.2.1 Fraud Piercing
Fraud there is a fraud if
there is a deception that would lead
an ordinarily
prudent man into error
after taking the circumstances into
account.
CASES:
a.) Concept Builders , Inc.
vs. NLRC , 257 SCRA 149,
May 29,1996
b.) Enriquez Security
Services Inc. vs. Cabotaje ,
G.R. No. 147993, July
21,2006
Security guard used to work
for a dissolved corporation .
After dissolution , the guard
was transferred to a new
corporation . when the guard
retires , the time that he
worked for the dissolved corp.
was not included in the length
of service which will be used
for the purpose of
determining his retirement
pay .
RULING: The attempt because
to make the 2 security
agencies as separate entities,
when in reality they were
one , was a devise to defeat
the law. The veil of corporate
fiction was disregarded
because the same was used
to perpetrate injustice or as a
vehicle to evade obligations.
2.1.2.2 Alter ego piercing
NOTES:Piercing the veil of
corporate fiction is justified under
the Alter Ego Doctrine if there is
such unity of interest and
ownership that the separate
personalities of the corporation
and the individual no longer exist.
The interest of equity will be

served if the separate personality

of the corporation will be
disregarded.
Thus, when the corporation is
owned by one person whereby
the corporation functions only for
the benefit of such individual
owner, the corporation and the
individual should be deemed to
be the same.
CASES:
a.) Heirs of Pajarillo vs. CA,
GR Nos. 150056-57,
October 19,2007
Alter Ego doctrine was applied
to make the controlling
shareholder who is also
operations manager and the
corporation itself liable for the
obligations of a sole
proprietorship.
The sole proprietorship was
transformed into a corporation
and the franchise was
transferred to the corporation.
The corporation was
established after the sole
Proprietorship was charged by
the union with unfair labor
practice, illegal deductions ,
illegal dismissal an violation of
labor standard laws.
It was established that sole
corporation was a mere
continuation and successor of
the sole proprietorship. the
sole proprietorship was
transformed into a family
corporation in a surreptitious
attempt to evade the charges
of the union.
b.) Tomas Lao Construction
vs. NLRC , G.R.No. 116781,
September 5,1997
The High Court ruled that where it
appears
that the businesses of

three corporations
are owned,
conducted and controlled by the
same parties, both law and equity
will, when necessary to protect
the rights of
third persons,
disregard the legal fiction
that
the three corporations are distinct
entities and treat them as
identical. It was
established that
the three corporations were in
fact substantially owned and
controlled by the members of one
family; that the directors also
belong to the same family; the
corporations were engaged in the
same line of business; there was
only one management; the
corporations use the same
manpower services; and the
corporations use the same
equipment
c.)General Credit Corporation
vs. Alsons Development ,
513 SCRA 225, January
29,2007
The Alter Ego doctrine was
applied because of the presence
of numerous circumstances that
support the conclusion that the
corporation was an adjunct of the
subsidiary corporation.
Thus, there was commonality of
directors, officers and
stockholders; there was sharing
of office; there were financing and
management arrangement
between the two companies
allowing a corporate officer of the
first corporation to handle the
other; there was virtual
domination if not control wielded
by the same officer over the
finances, and business policies
and practices of the subsidiary.
RULING: it behooves the
corporation officer "as a matter of
law and equity, to assume the
legitimate financial obligation of a

cash strapped subsidiary

corporation which it virtually
controlled to such a degree that
the latter became its instrument
or agent
2.1.1.3 Equity Piercing
Piercing the corporate fiction is
necessary to attain justice and
equity
CASE: Telephone
Engineering & Service Co. Inc
vs. WCC, 104 SCRA 354 (1981)
2.1.1.4Other Cases
a.) Francisco Motors vs. CA,
309 SCRA 72, June 5,1999
The SC likewise rued that there
was no reason to pierce the veil
of corporate fiction because
there was no evidence that the
corporation was perpetuating
fraud or promoting.
The rationale behind piercing
corporations identity in a given
case is to remove the barrier
between the corporation from
the persons comprising it to
thwart the fraudulent and
illegal schemes of those who
use the corporate personality
as a shield for undertaking
certain proscribed activities.
b.) Sarona vs. NLRC, et al.,
G.R. No. 185280 January
18,2012
c.)Wensha Spa Center , Inc.
vs. Yung , G.R. No. 185122,
August 16,2010
d.) Hi- Cement & Holdings
Corp. vs. Insular Bank of
Asia and America, G.R. No.
132403
e.) Enriquez Security
Services Inc.vs. Cabotaje ,

G.R. No. 147993, July

21,2006
2.2 Created by Operation of Law
2.2.1 Created by Special law
Sec. 4- Corporations created
by special
laws or charters.
Corporations created
by
special laws or charters shall be
governed primarily by the
provisions of
the special law or
charter creating them
or
applicable to them, supplemented
by
the provisions of this Codes
insofar as they are applicable.
2.2.2. Created under a general
law
Sec. 16 , Art.XII of the 1987
Constitution
2.3 Right of Succession
NOTES: Among the most important
are immortality, and, if the expression
may be allowed, individuality;
properties by which a perpetual
succession of persons are considered
the same, and may act as a single
individual. They enable a corporation
to manage its own affairs, and to hold
property without the perplexing
intricacies, the hazardous and endless
necessity, of perpetual conveyances
for the purpose of transmitting it from
hand to hand.
It is chiefly for the purpose of clothing
bodies of men in succession with
these qualities and capacities that
corporations were invented, and are in
use.
By these means, a perpetual
sucession of individuals are capable of
acting for the promotion of the
particular object, like one immortal
being. Hence, one of the distinctive
features of a corporation is the right of

succession which is also known as

perpetual succession.
*Perpetual succession -continuous
existence which enables a corporation
to
manage its affairs, and hold
property
without the necessity of
perpetual conveyances, for purposes
of transmitting
it. By reason of this
quality, this ideal and artificial person
remains, in its legal entity
and
personality, the same, though
frequent changes may be made of
its
members.
CASE: SME Bank Inc. vs. De
Guzman , G.R. Nos. 184517 AND
186641 , October 8, 2013
2.4. Possess powers , attributes and
properties
2.4.1. Theory of special
capacities
The fourth attribute of the
corporation that it has the powers,
attributes expressly authorized by
law or incident to its existence is
recognition of what is known as the
Theory of Special Capacities. The
powers of the corporation are given
by law and it cannot exercise powers
that are not so given. In fine, the
powers of the corporation are only
those that are expressly provided for,
implied powers, and incidental
powers.
The Theory of Special Capacities
should be distinguished from the
Theory of General Capacities under
which a corporation may exercise any
and all powers that may be exercised
by natural persons.
2.4.2. Theory of general
capacities