Chapter 4 - Corporate Entity

Question 1

Stockholders of Guanzon v. Register of Deeds

Answer 1

Since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, — and this is in effect the purpose which they seek to obtain from the Register of Deeds of Manila, — that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders.

It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance

Question 2

Caram v. CA

Answer 2

There was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and directors.

Question 3

Palay v. Clave (1983)

Answer 3

GENERAL RULE: A corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa.
EXCEPTION: However, the veil of corporate fiction may be pierced when it is used:
- as a shield to further an end subversive of justice;
- or for purposes that could not have been intended by the law that created it;
- or to defeat public convenience, justify wrong, protect fraud, or defend crime;
- or to perpetuate fraud or confuse legitimate issues;
- or to circumvent the law or perpetuate deception;
- or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.

Question 4

Tramat Mercantile v. CA (1994)

Answer 4

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:
(1) He assents
(a) to a patently unlawful act of the corporation, or
(b) for bad faith, or
(c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

(2) He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

(3) He agrees to hold himself personally and solidarily liable with the corporation; or

(4) He is made, by a specific provision of law, to personally answer for his corporate action.

Question 5

Marvel Bldg. v. David (1954)

Answer 5

Based on the circumstantial evidence presented, the other stockholders only served as dummies of Mrs. Castro and the latter was, in actuality, the sole and exclusive owner of all the shares of stock of MBC. Thus, the corporate fiction in this case was disregarded, as the corporation was used to evade taxes - the stockholder, Mrs. Castro became personally liable, and not the corporation.

Question 6

Palacio v. Fely Transpo (1962)

Answer 6

Isabelo Calingasan and defendant Fely Transportation may be regarded as one and the same person. It is evident that Isabelo Calingasan’s main purpose in forming the corporation was to evade his subsidiary civil liability resulting from the conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep strengthens the conviction that its formation was for the purpose above indicated.

Question 7

NAMARCO v. Associated (1967)

Answer 7

The Court found that Sycip is guilty of fraud. Through false representations, he succeeded in inducing NAMARCO to enter into the exchange agreement, with full knowledge, on his part of the fact that ASSOCIATED was in no position to comply with the obligation it had assumed. Consequently, he cannot seek refuge behind the doctrine of separate legal entity.

Question 8

Tan Boon Bee v. Jarencio (1988)

Answer 8

Evidence shows that PADCO was never engaged in the printing business; that the BOD and the officers of Graphic and PADCO were the same; and that PADCO holds 50% of the shares of stock of Graphic. PADCO’s own evidence shows that the machine in question had been in the premises of Graphic since May 1965, long before PADCO even acquired its alleged title

Question 9

Magsaysay Labrador v. CA (1989)

Answer 9

While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person.
A transfer must be registered in the books of the corporation to affect third persons.

Question 10

Indo-Phil v. Calica (1992)

Answer 10

The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. (Umali v. CA). In the instant case, petitioner does not seek to impose a claim against the members of the Acrylic. They wanted to pierce it to largen their BU.

Question 11

Jacinto v. CA (1991)

Answer 11

While on the face of the complaint there is no specific allegation that the corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the presentation of evidence and the examination of witnesses, unequivocally show that respondent Metropolitan Bank and Trust Company sought to prove that petitioner and the corporation are one or that he is the corporation.

Question 12

Alter ego doctrine

Answer 12

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.

Question 13

Control (Concept Builders, 1996)

Answer 13

• Complete domination of finances, and 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
• 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
• The control and breach of duty must proximately cause the injury or unjust loss complained of.

Question 14

Claparols v. CIR (1975)

Answer 14

This avoiding-the-liability scheme is very patent, considering that 90% of the subscribed shares of stocks of the Claparols Steel Corp (the second corp) was owned by petitioner Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corp.

Question 15

Villa Rey Transit v. Ferrer (1968)

Answer 15

held that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama upon evaluation of the evidence presented in court. Thus, the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and binding against the said Corporation. For the rule is that a seller or promissor may not make use of a corporate entity as a means of evading the obligation of his covenant.

Question 16

Bank of Commerce v. Nite (2015)

Answer 16

(1) 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) complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.

Question 17

Yu v. NLRC (1995)

Answer 17

While Twin Ace or Tanduay Distillers manufacture the same product at the same plant with the same equipment and machinery, they did not take over the corporate personality of TDI. There is no showing that TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate corporation. The buyer limited itself to purchasing assets and machinery. The genuine nature of the sale to Twin Ace is also evidenced by the fact that Twin Ace was only a subsequent interested buyer. The use of a similar sounding or almost identical name is just an obvious device to capitalize on the goodwill which Tanduay Rum has built over the years

Question 18

Delpher Trades v. IAC (1988)

Answer 18

In exchange for the property, Delfin and Pelagia Pacheko received a 55% share in the corporation. The transfer of ownership, if therefore, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners. Thus, since the ownership of the property remained in the same hands, the respondent Hydro Pipes has no basis for its claim of a right of first refusal under the lease contract.

Question 19

Garret v. Southern Railway (1959)

Answer 19

GEN: The parent corporation will be responsible for the obligations of its subsidiary when its control has been exercised to such a degree that the subsidiary has become its mere instrumentality.

AS APPLIED: The ownership of most of the capital stock of Lenoir by Southern, and Possibly subscription by Southern to the capital stock of Lenoir is not enough to show instrumentality.

Question 20

Jardine Davies v. JRB Realty (2005)

Answer 20

It held that while it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that Aircon’s corporate legal existence can just be disregarded. The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired Aircon’s majority of capital stock. It, however, does not exercise complete control over Aircon

Question 21

Koppel v. Yatco (1946)

Answer 21

In this case, KCIEC and KPI intended to evade taxes by not paying the merchant tax with KPI acting as a “broker” when in reality, it is mostly owned by KCIEC. Hence, the two entities are one and the same insofar as the sales are concerned.

Question 22

Liddel v. CIR (1961)

Answer 22

the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one from the other. However, a peculiar consequence of the organization and activities of Liddell Motors, Inc. is that under the law in force at the time of its incorporation, the sales tax on original sales of cars was progressive. Such progressive rate naturally would tempt the taxpayer to employ a way of reducing the price of the first sale, and Liddell Motors, Inc. was the medium created by Liddell & Co. to reduce the price and the tax liability.

Question 23

La Campana Coffee v. Kaisahan (1953)

Answer 23

Tan Tong appears to be the owner of the gaugau factory. And the coffee factory, though an incorporated business, is in reality owned exclusively by Tan Tong and his family.

(1) the two factories have but one office, one management and one payroll, except after the day the case was certified to the Court of Industrial Relations, when the person who was discharging the office of cashier for both branches of the business began preparing separate payrolls for the two;
(2) the laborers of the gaugau factory and the coffee factory were interchangeable;
(3) the attempt to make the two factories appear as two separate businesses, when in reality they are but one, is but a device to defeat the ends of the law

Question 24

WPM International v. Labayen (2014)

Answer 24

The piercing of the veil of corporate fiction is frowned upon and thus, must be done with caution. It can only be done if it has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception. The court must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights; it cannot be presumed

Question 25

Dutch Movers v. Lequin (2017)

Answer 25

Who is the responsible person?
The responsible person is an individual or entity who acted in bad faith in committing illegal dismissal or in violation of the Labor Code; or one who actively participated in the management of the corporation

Question 26

Lanuza v. BF Corp (2014)

Answer 26

SC held that corporate representatives may be compelled to submit to arbitration proceedings pursuant to a contract entered into by the corporation they represent if there are allegations of bad faith or malice in their acts representing the corporation

Question 27

Guillermo v. Uson (2016)

Answer 27

Key element – presence of fraud, malice or bad faith. Bad faith, in this instance – does not connote bad judgment or negligence but imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud.

Bad faith is a question of fact and is evidentiary, so that the records must first bear evidence of malice before a finding of such may be made.

Question 28

Who is made liable (Guillermo)

Answer 28

Only the “responsible officer,” i.e., the person directly responsible for and who “acted in bad faith” in committing the illegal dismissal or any act violative of the Labor Code, is held solidarily liable, in cases wherein the corporate veil is pierced.

In other instances (e.g., cases of corporate tort of a close corporation), it is the person “actively engaged” in the management of the corporation who is held liable.

In the absence of a clearly identifiable officer(s) directly responsible for the legal infraction, the Court considers the president of the corporation as such officer.

Question 29

Tantongco v. Kaisahan (1959)

Answer 29

The death of an owner and manager of a corporation, against which cases are pending in the Court of Industrial relations, does not deprive the latter of its jurisdiction over the same. The party in those cases being the corporation and not the owner or manager personally, the claims of the laborers therein, which are merely incidental to their demands for reinstatement for having been unjustly dismissed, and for better working conditions, are not the claims contemplated by law to be submitted before the administrator of the estate of a deceased person.

Question 30

Cruz v. Dalisay (1987)

Answer 30

The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate entities.

The power to “pierce the veil of corporate entity” belongs to the court and cannot be exercised by the sheriff.

Question 31

NASECO Guards v. NASECO (2009)

Answer 31

No showing that such “no loss, no profit” scheme between respondent and PNB was implemented to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, nor does the scheme show that respondent is a mere business conduit or alter ego of PNB.

Question 32

Pacific Rehaus v. CA (2014)

Answer 32

A corporation not impleaded in a suit cannot be subject to the court’s process of piercing the veil of its corporate fiction as it violates said corporation’s right to due process.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as one and the same juridical person with respect to a given transaction, is basically applied only to determine established liability; it is not available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not impleaded in a case.

Question 33

Zaragoza v. Tan (2017)

Answer 33

The monetary award in favor of petitioner CANNOT be enforced against respondents Tan and EDI as they were not impleaded in the labor case—they were never served with summons nor did they voluntarily appear. Thus, the LA never acquired jurisdiction over them as to order the piercing of the veil of corporate fiction

Question 34

Zambrano v. Philippine Carpet

Answer 34

Although ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, these circumstances are insufficient to establish an alter ego relationship or connection between Phil Carpet on the one hand and Pacific Carpet on the other hand, that will justify the puncturing of the latter’s corporate cover.

It 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.”

Question 35

Livesey v. Bumsiwinger (2014)

Answer 35

While the ostensible reason for Binswanger’s establishment is to continue CBB’s business operations in the Philippines, which by itself is not illegal, the close proximity between CBB’s disestablishment and Binswanger’s coming into existence points to an unstated but urgent consideration which was to evade CBB’s unfulfilled financial obligation to Livesey under the compromise agreement.

Question 36

Heirs of Tan Uy v. IE Bank (2013)

Answer 36

(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

When piercing the veil between 2 corporate entities, consider: (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

Question 37

Gamboa v. Teves (2011)

Answer 37

The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares. Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights, the term “capital” refers only to common shares.
However, if the preferred shares also have the right to vote in the election of directors, then the term “capital” shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors.

Question 38

Narra Nickel Mining v. Redmont (2014)

Answer 38

“Liberal 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. Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

“Grandfather rule”: Applied when PH ownership is in doubt– 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. 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.

Question 39

Narra Nickel Mining v. Redmont (2015)

Answer 39

• The Control Test and the Grandfather Rule can, if appropriate, be used cumulatively in the determination of the ownership and control of corporations engaged in fully or partly nationalized activities. It is only when the Control Test is first complied with that the Grandfather Rule may be applied. Thus:
• If the subject corporation’s Filipino equity falls below the threshold 60%, the corporation is immediately considered foreign-owned. In this case, the need to resort to the Grandfather Rule disappears.
• A corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation. In this instance, there is no need for the application of the Grandfather 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.” In this case, a further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary.

Question 40

Roy v. Herbosa (2016)

Answer 40

For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors

Question 41

JG Summit v. CA (2005)

Answer 41

The Right of First refusal, it itself, does not violate the Constitutional limit. Should a Foreign corporation’s shareholdings exceed the 40% limit, it would only disqualify the corporation from owning land. The corporation and its stockholders are separate entities. The right of first refusal over shares pertains to the shareholders, whereas the capacity to own land pertains to the corporation. Hence, the fact that PHILSECO owns land cannot deprive the stockholders of their right of firs refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.

Question 42

Control test

Answer 42

So long as the company is 60% filipino owned, then the corp is considered a filipino company

Question 43

Is it possible for a non domestic corporation (corp not organized in the corp code) to be a PH national?

Answer 43

Yes. There are 2 conditions:
1) 100% of the shares is owned by filipinos AND
2) That corporation has a license to do business here issued by the SEC