Corporation law intro

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 
incident to its existence

Question 2

What are the attributes of a Corporation (ALS-PAPI)

Answer 2

ARTIFICIAL BEING
LAW - created by operation of law
SUCCESSION-enjoys the right of succession
POWERS
ATTRIBUTE
PROPERTIES authorized by law of 
INCIDENT to its existence

Question 3

Types of Business organizations (S2J2C 2PT)

Answer 3

SOLE PROPRIETORSHIP
SYNDICATE
JOINT ACCOUNTS/Cuentas Participacion/
JOINT VENTURE
COOPERATIVE
CORPORATIONS
PARTNERSHIP
BUSINESS TRUSTS

Question 4

What is Sole proprietorship?

Answer 4

This is a form of business organization with only one proprietary owner; a single individual conducts business under his own name or under a business name

Question 5

What are the Theories in the formation of a corporation?

Answer 5

THEORIES ON THE FORMATION OF A CORPORATION:

1. Concession Theory – espouses that a corporation is an artificial creature without any existence until it has received the imprimatur of the state acting according to law, through the SEC. (Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242)
2. Theory of corporate enterprise or economic unit – espouses that the corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.)
3. Genossenschaft Theory – treats a corporation as “ the reality of the group as a social and legal entity, independent of state recognition and concession”. (Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242)

Question 6

What is the DOCTRINE OF SEPARATE PERSONALITY



Answer 6

DOCTRINE OF SEPARATE PERSONALITY
 A corporation has a juridical personality separate and distinct from that of its stockholders or members.
 Used for purposes of convenience and to subserve the ends of justice.

Question 7

Consequences/significance of Doctrine of Separate Personality

Answer 7

1. Liability for acts or contracts – obligations incurred by a corporation, acting through its authorized agents are its sole liabilities. (Creese vs. CA, 93 SCRA 483)
2. Right to bring actions – may bring civil and criminal actions in its own name in the same manner as natural persons. (Art. 46, Civil Code)
3. Right to acquire and possess property – property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members. (Art. 44(3), Civil Code)
4. Acquisition of court of jurisdiction – service of summons may be made on the president, general manager, corporate secretary, treasurer or in-house counsel. (Sec. 11, Rule 14, Rules of Court).
5. Changes in individual membership – remains unchanged and unaffected in its identity by changes in its individual membership. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.)
6. Entitlement to constitutional guaranties:
   a. Due process (Albert vs. University Publishing, 13 SCRA 84)
   b. Equal protection of the law (Smith, Bell & Co. vs. Natividad, 40 Phil. 136)
   c. Protection against unreasonable searches and seizures. (Stonehill vs. Diokno, 20 SCRA 383)
    A corporation is not entitled to invoke the right against self-incrimination. (Bataan Shipyard vs. PCGG)
   
   7. Liability for torts – a corporation is liable whenever a tortuous act is committed by an officer or agent under the express direction or authority of the stockholders or members acting as a body, or, generally, from the directors as the governing body. (PNB vs. CA, 83 SCRA 237)
7. A corporation is not entitled to moral damages because it has no feelings, no emotions, no senses. (ABS-CBN vs. Court of Appeals)
8. Liability for Crimes – since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case the responsible officers would be criminally liable. (People vs. Tan Boon Kong, 54 Phil.607)

Question 8

What is the DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY

Answer 8

 Requires the court to see through the protective shroud which exempts its stockholders from liabilities that they ordinarily would be subject to, or distinguishes a corporation from a seemingly separate one, were it not for the existing corporate fiction. (Lim vs. CA, 323 SCRA 102)

Question 9

Rules to follow inorder that the

DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY may apply

Answer 9

 Rules: (Philippine Corporate Law, Cesar Villanueva, 2001 ed.)

1. has only a res judicata effect
2. to prevent wrong or fraud and not available for other purposes
3. judicial prerogative only
4. must be with necessary and with factual basis

example:
 When directors and officers are unable to compensate a party for a personal obligation, it is far-fetched to allege that a corporation is perpetuating fraud or promoting injustice, and thereby could be held liable therefor by piercing the corporate veil. (Francisco Motors, Inc. vs. CA, G.R. No. 100812, June 25, 1999)

Question 10

3 CLASSES OF PIERCING

Answer 10

1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong.
    Rules:
   a. There must have been fraud or evil motive in the affected transaction and the mere proof of control of the corporation by itself would not authorize piercing.
   b. The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders.
2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation.
    Rules:
   a. It applies because of the direct violation of a central corporate law principle of separating ownership from management.
   b. If the stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity.
   c. Applies even when there are no monetary claims sought to be enforced.
3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity.

Question 11

INSTRUMENTALITY / ALTER EGO RULE

Answer 11

 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 12

What arethe requisites of the alter ego rule

Answer 12

Requisites:

1. There must be 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 that time, no separate mind, will or existence of its own (control);
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive duty, or dishonest and unjust act in contravention of plaintiff’s legal rights (breach of duty); and
3. Such control and breach of duty must proximately cause the injury to the plaintiff. (Concept Builders, Inc. vs. NLRC, 257 SCRA, 149)

Question 13

Distinguish Partnership and Corporation

Answer 13

1. As to creation, Partnership is by mere agreement of parties while Corp is by law or operation of law
2. As to number of incorporators, P may be organized by atleast 2 while C requires atleast 5 except corporation sole
3. As to powers, P may exercise any power authorized by partners, while C can exercise only the powers expressly granted by law or implied from those granted or incidental to its exisence
4. As to Management, in P, When management is not agreed upon, every partner is an agent of the partnership, while in C, The power to do business and manage its affairs is vested in the board of directors or trustees
5. As to effect of mismanagement,
   in P, A partner as such can sue a co-partner who mismanages, while in C, The suit against a member of the board of directors or trustees who mismanages must be in the name of the corporation
6. As to right of succession, in P there is no right, while in C, there is
7. As to extent of liability to 3rd persons,
   in P, Partners are liable personally and subsidiarily (sometimes solidarily) for partnership debts to third persons while in C, Stockholders are liable only to the extent of the shares subscribed by them
8. As to Transferrabilty of interest, in P, a Partner cannot transfer his interest in the partnership so as to make the transferee a partner without the unanimous consent of all the existing partners because the partnership is based on the principle of delectus personarum, while in C, a Stockholder has generally the right to transfer his shares without prior consent of the other stockholders because corporation is not based on this principle
9. As to terms of existence, in P, partnership may be established for any period of time stipulated by the partners, while in C, corporation may not be formed for a term in excess of 50 years extendible to not more than 50 years in any one instance
10. As to firm name, in P, Limited partnership is required by law to add the word “Ltd.” To its name while in C,corporation may adopt any name provided it is not the same as or similar to any registered firm name
11. As to Dissolution,
    P may be dissolved at any time by any or all of the partners while C can only be dissolved with the consent of the State
12. As to governing law, in P, CC, while in C, Corpo Code

Question 14

What are the advantages if a business corporation

Answer 14

1. has a legal capacity to act and contract as a distinct unit in its own name
2. continuity of existence
3. its credit is strengthened by its continuity of existence
4. centralized management in the board of directors.
5. its creation, management, organization and dissolution are standardized as they are governed under one general incorporation law.
6. limited liability
7. shareholders are not the general agents of the business
8. transferability of shares

Question 15

What are the disadvantages of a corporation?

Answer 15

1. complica-ted in formation and management
2. high cost of formation and operations
3. its credit is weakened by the limited liability feature
4. lack of personal element.
5. greater degree of governmental supervision
6. manage-ment and control are separated from ownership.
7. Stockhol-ders have little voice in the conduct of the business.

Question 16

What are the TESTS TO DETERMINE NATIONALITY OF

CORPORATIONS (IDC)

Answer 16

INCORPORATION-DOMICILE-CONTROL TEST

1. Incorporation Test – determined by the state of
   incorporation, regardless of the nationality of its
   stockholders.
2. Domicile Test – determined by the state where it is
   domiciled.
    The domicile of a corporation is the place fixed by
   the law creating or recognizing it; in the absence
   thereof, it shall be understood to be the place
   where its legal representation is established or
   where it exercise its principal functions (Art. 51,
   NCC).
3. Control Test – determined by the nationality of the
   controlling stockholders or members. This test is
   applied in times of war. Also known as the WARTIME
   TEST

Question 17

What constitutes a "Philippine National" under the Foreign Investment Act
of 1991 (R.A. No. 7042)?

Answer 17

a. 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;
b. 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.
 However, it provides that where a corporation and its
non-Filipino stockholders own stocks in a SECregistered
enterprise, at least 60% of the capital stock
outstanding and entitled to vote of both corporations
and at least 60% of the members of the board of
directors of both corporations must be Filipino citizens
(double 60% rule).

Note: The law applies the control test both with respect to
the ownership of shares entitled to vote and the
membership in the board of directors.