01 CORPORATION LAW - A. GENERAL PRINCIPLES

Question 1

What is a corporation?

Answer 1

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 incidental to its existence [RCC Sec 2].

Question 1

What are the attributes of a corporation?

Answer 1

The attributes of a corporation are drawn from its statutory definition:
1. It is an artificial being
2. It is created by operation of law
3. It has the right of succession
4. It has the powers, attributes, and properties expressly authorized by law or incidental to its existence

Question 2

Explain the attribute that the corporation is an artificial being

Answer 2

This means that the law regards a corporation as a juridical person, with a legal personality separate and distinct from the persons composing it. As a juridical person, it may own properties, exercise rights, and incur obligations independently from the persons comprising it.

Question 3

Is a corporation protected by the Bill of Rights?

Answer 3

Yes (when applicable). In Stonehill v. Diokno, SC ruled that a corporation may invoke the right against unreasonable search and seizure. However, it canot invoke the right against self-incrimination.

Question 4

May a corporation sue for moral damages?

Answer 4

Yes. While it cannot experience wounded feelings, anxiety, and sleepless nights, which are the usual causes of moral damages under the Civil Code, it may acquire goodwill or reputation of its own, which, if besmirched or tranished, entitles the corproation to moral damages [Filipinas Broadcasting Network v. Ago Medical and Educational Center]

Question 5

Explain the attribute that a corporation has powers, attributes and properties expressly authorized by law or incidental to its existence.

Answer 5

This means that a corporation can only exercise powers conferred upon it by law, its articles of incorporation, those implied from the conferred powers, or incidental to its existence. Any act of the corporation contrary to or outside these powers is ultra viers.

The test is whether the corporate act or transaction is related to or in furtherance of hte purposes of the corporation. For instance, whether or not a corporation may acquire property is necessary to achieve the purpose of the corporation. Thus, a corproation engaged in mining cannot acquire properties for urban development. A corporation organized as a lending investor cannot engage in pawnbroking.

Question 6

Sole Proprietorship v. Corporation

Answer 6

A sole proprietorship does not possess a juridical personality and distinct from the personality of the owner of the enterprise. The law merely recognizes the existence of a sole proprietorship as a form of business organization conducted for profit by an individual and requires its proprietor or owner to secure licenses and permits, register its business name, and pay taxes to the national government. Thus, the personal assets of the proprietor may be held to answer for the obligations incurred by the sole proprietorship in conducting its business.

In contrast, a corporation possesses a legal personality separate and distinct from its owners.

Question 7

Partnership v. Corporation as to definition

Answer 7

A partnership is an agreement whereby two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. [NCC Art. 1767]

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 incidental to its existence [RCC Sec. 2]

Question 8

Partnership v. corporation as to manner of creation

Answer 8

A partnership is created by agreement while a corporation is created by the operation of law.

Question 9

Partnership v. corporation as to composition

Answer 9

In a partnership, there should be at least two partners while one person may compose a corporation.

Question 10

Partnership v. corporation as to commencement of juridical personality

Answer 10

A partnership acquires juridical personality from the moment two or more persons agree to form a partnership. The registration of the Articles of Co-partnership with the SEC is not a condition sine qua non for the acquisition of legal personality but is only necessary for administrative convenience. Unless the partnership is registered with the SEC, the partnership cannot obtain the requisite licenses and permit to conduct its business.

Private corporation commences to have corporate existence and juridical personality and is deemed incorporated from the date the SEC issues a Certificate of Incorporation under its official seal.

Question 11

Partnership v. corporation as to liability

Answer 11

The liability of stockholders, who are not directors, officers and agents, is limited to their subscription to the capital stock of the corporation while the general partners may be held liable beyond their contribution to the partnership if the assets thereof are not sufficient to answer for creditors’ claims.

Question 12

Partnership v. corporation as to transfer of shares or rights

Answer 12

Corporation - a stock holder may sell his fully-paid shares of stock without the necessity of securing the consent of the corporation and/or the other stockholders, while in a

Partnership - a partner cannot assign his interest in the partnership in favor of a third party without the consent of the partners, because a partnership is essentially based on trust and confidence.

Question 13

Partnership v. corporation as to the exercise of powers

Answer 13

A corporation cannot exercise powers except those conferred by law and its articles of incorporation, those implied from the expressly-conferred powers and those incidental to its existence

while a partnership, may perform any act unless it is contrary to laws, good morals, custom, public order, and public policy.

Question 14

What are the classes of corporations?

Answer 14

1. Existence of stocks - Stock Corp; Non-stock corp
2. Organizers - Public corp; private corp
3. Function - Public corp; private corp
4. Governing law - GOCC; private corp
5. Legal status - De jure corp; De facto corp; Corp by estoppel; Corp by prescription
6. Relationship of Management and Control - Holding corp; Subsidiary corp; Affiliates; Parent company
7. Place of incorporation - Domestic corp; Foreign corp
8. Other classifications - Closed corp; Special Corp; One-person Corp

Question 15

What is a de facto corporation?

Answer 15

A de facto corporation is one that is organized with colorable compliance with the requirements of incorporation under the law and allowed to exist and exericse the powers of a corporation until its corporate existence is assailed by the State in a quo warranto proceeding.

Question 16

What are the powers of a de facto corporation?

Answer 16

A de facto corporation has all the powers and authority of a de jure corporation until it is ousted of its corporate existence. Its existence cannot be assailed collaterally in a private suit but only in a quo warranto proceeding. Thus, if a collection suit is initiated by a de facto corporation, a motion to dismiss filed on the ground that the corporation has no power to sue, should not propser. A de facto corporation, like a de jure corporation, may sue. The existence of such de facto corporation cannot be questioned in a collateral proceeding like a collection suit.

Question 17

Are the stockholders of a de facto corporation liable as general partners?

Answer 17

No, stockholders of a de facto corporation are liable in the same way as stockholders of a de jure corporation. They are liable only to the extent of their subscription to the corporation. Those liable as general partners are persons who assume themselves to be a corporation when they have no legal authority to do so.

Question 17

What are the elements of a de facto corporation?

Answer 17

1. Existence of a valid law under which it may be incorporated (e.g. Congress creating a private corporation is unconstitutional hence no de facto);
2. Attempt in good faith to incorporate (must have certificate of incorporation from SEC); and
3. Actual use or exercise in good faith of corporate powers.

Question 18

What is a corporation by estoppel?

Answer 18

A corporation by estoppel is one that exists when two or more persons assume to act as a corporation knowing it to be without authority to do so.

Question 19

What is the rule on liability under the doctrine of corporation by estoppel?

Answer 19

All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities, and damages incurred or arising as a result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use its lack of corporate personality as a defense. Anyone who assumes an obligation to an ostensible corporation as such cannot resist performance thereof on the ground that there was in fact no corporation [RCC Sec. 20]

Question 20

Are all those who subscribed for the stock of a proposed corporation which was never legally formed liable as general partners?

Answer 20

No. If only subscribed, cannot be sued as general partners. However, if they obtained benefit, yes.

The doctrine of corporation by estoppel does not apply against a person who takens no part except to subscribe for stock in the proposed corporation which was never legally formed, and hence, cannot be liable as a partner of those who engaged in business under the name of the pretended corporation.

However, a passive subscriber who obtained benefit from a contract entered into by others with whom he previously had an existing relationship is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel.

Question 21

May a corporation by estoppel be sued?

Answer 21

Yes. A corporation by estoppel may be impleaded as aparty defendant considering that it possesses the attributes of a juridical person, otherwise, it cannot be held liable for damages and injuries it may inflict to other persons [Macaset v. Francisco]

Question 22

When is the doctrine of corporation by estoppel inapplicable?

Answer 22

When the petitioner is not trying to escape liability from the contract but rather the one claiming from the contract, the doctrine of corporation by estoppel is not applicable. This doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation.

The doctrine can only be invoked by the aggrieved party who relied on the representations by others that they are legally formed as a corporation. It cannot be invoked by the one who benefited from the transaction.

Question 23

What are the tests to determine the nationality of a corporation?

Answer 23

1. Place of incorporation test - state where the corporation is incorporated is its nationality;
2. Control test - nationality of a corporation is the nationality of 60% of its shareholders
3. Grandfather rule - applicable only when control test is satisfied but there is doubt as to the beneficial ownership and control of the corporation.Control test must first be complied with. Not applicable when there is no doubt as to the 60% filipino ownership of a corporation.

Question 24

When does the grandfather rule apply?

Answer 24

When circumstances exist as to the beneficial ownership and control of the 60% shares allegedly held by Filipinos.

Example: The share subscriptions of the Filipinos werre not paid and the foreig-held corporation basically contributed all or almost all of the capital of ABC, creating doubt as to where beneficial ownership and control actually reside.

Question 25

What is the doctrine of piercing the veil of corporate fiction?

Answer 25

The doctrine of piercing the veil of Corporate fiction allows the State to disregard, for certain justifiable reasons, the notion or fiction that the corporation has a separate legal personality from those composing it. The doctrine of separate legal entity is only a fiction to promote public convenience. If this fiction is misused or abused, then the State shall pierce the veil and treat the corporation and the person composing it as one and the same entity.

Question 26

When does the doctrine of piercing the corporate veil apply?

Answer 26

It applies in 3 basic areas:
(1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
(2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or
(3) alter ego cases, where a corporation is merely a frace since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affaris are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.

Other cases where it also applies:
(1) when two business enterprises are owned, conducted and controlled by the same parties, legal fiction of the corporations is disregarded when necessary to to protect the rights of third parties;
(2) when the complaint alleges that the directors and/or officers committed bad faith or gross negligence in conducting the affairs of the corporation.

Question 27

What are the elements of the alter ego test?

Answer 27

Three-pronged test to determine the application of the alter ego theory:
(1) Control - not mere majroity 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 separatemind, will or existence of its own

(2) The control must have been used 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.

Question 28

Can we apply the doctrine of piercing the corporate veil to a nonstock non-profit corporation and natural persons?

Answer 28

Yes. The fact that the corporation involved is a NS NP Corp does not itself preclude the court from applying the equitable remedy of piercing the corporate veil.

While it may appear to be impossible for a person to exercise ownership control over a nonstock non-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 execise control even though tere was no stock ownership [Lanuza v. BF Corp, GR 174938]

Question 29

What is reverse piercing of the corporate veil?

Answer 29

Revere piercing is the opposite of the traditional piercing of corporate veil. Reverse piercing makes the corporation liable for the debt of the shareholders or members.

Applies in alter ego cases (not sure for other cases)

Question 30

Does piercing the corporate veil dissolve the corporation?

Answer 30

No. The piercing of the corporate veil does not dissolve the corporation. It simply means that the stockholder and/or director and/or officer, whose action/s became the basis for the application of the doctrine, and the corporation shall be treated as one and the same entity.

Question 31

What is the trust fund doctrine?

Answer 31

The trust fund doctrine gives basic protection to corporate creditors. Under the trust fund doctrine, subscriptions to the capital stock of a corporateion constitute a fund to which the creditors may have a right to look for the satisfaction of their claims.

In Halley v. Printwell, Inc: the scope of the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts.