Posted by: Elmer Brabante | April 12, 2010

Reviewer in Corporation Law, Part 1


I.  HISTORICAL BACKGROUND

1.  The Philippine Corporate Law

When the Philippines came under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion “corporation” in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad anónima of the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law.  Harden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).

2.  The Corporation Law

The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. It had various piece-meal amendments during its 74 year history. It rapidly became antiquated and not adapted to the changing times.

3.  The Corporation Code

The present Corporation Code, or Batas Pambansa Blg. 68, became effective on 1 May 1980. It adopted various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified the obligations of corporate directors and officers, expressed in statutory language established principles and doctrines, and provided for a chapter on close corporations.

4.  Proper Treatment of Philippine Corporate Law

Philippine Corporate Law comes from the common law system of the United States. Therefore, although we have a Corporation Code that provides for statutory principles, Corporate Law is essentially, and continues to be, the product of commercial developments. Much of this development can be expected to happen in the world of commerce, and some expressed jurisprudential rules that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world.

II.  CONCEPTS

See opening paragraphs of Villanueva, Corporate Contract Law,38 Ateneo L.J. 1 (No. 2, June 1994).

1.  Definition:  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. [Sec. 2. BP 68] ( See also Section 2; Articles 44(3), 45, 46, and 1775, Civil Code. )

2.  Tri-Level Existence of Corporation

(a) Aggregation of Assets and Resources

(b) Business Enterprise or Economic Unit

(c) Juridical Entity

3.  Relationships Involved in Corporate Setting

(a) Juridical Entity Level, which views the State-corporations relationship

(b) Contractual Relationship Level, which considers that the corporate setting is at once a contractual relationship on four (4) levels:

-  Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by the Law on Agency;

-  Between the corporation and its shareholders or members;

-  Between and among the shareholders in a common venture; and

-  Between the corporation and third-parties or “outsiders”, which is essentially governed by Contract Law.

4.  Theories on Formation of Corporation:

(a) Theory of Concession (Tayag v. Benguet Consolidated Inc., 26 SCRA 242 [1968])

To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose (x-cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 [1962]).

Before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. The failure to comply with the statutory procedure and conditions does not warrant a finding that such association achieved the acquisition of a separate juridical personality, even when it adopts sets of constitution and by-laws. xInternational Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).

Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. xTorres v. Court of Appeals, 278 SCRA 793 (1997).

(b) Theory of Enterprise Entity (Berle, Theory of Enterprise Entity, 47 Col. L. Rev. 343 [1947])

Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as the use of separate personality to avoid the execution of the property of a sister company. xTan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).

A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. xPhilippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 (1997).

5.  Four Attributes of Corporation from Statutory Definition:

(a) A corporation is an artificial being

(b) Created by operation of law

(c) With right of succession

(d) Only has powers, attributes and properties expressly authorized by law or incident to its existence

6.  Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:

(i) Strong Legal Personality

- Entity attributable powers

- Continuity of existence

- Purpose

The corporation was evolved to make possible the aggregation and assembling of huge amounts of capital upon which big business depends; and has the advantage of non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons.  Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.

(ii) Centralized Management.

(iii) Limited Liability to Investors

One advantage of a corporate business organization is the limitation of an investor’s liability to the amount of the investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

(iv) Free Transferability of Units of Ownership for Investors

(b) Disadvantages:

(i) Abuse of corporate management

(ii) Abuse of limited liability feature

(iii) Cost of maintenance

(iv) Double taxation

Dividends received by individuals from domestic corporations are subject to final 10% tax (Sec. 24(B)(2), NIRC of 1997) for income earned on or after 1 January 1998. Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), NIRC of 1997).

In addition, there has been a re-imposition of the “improperly accumulated earnings tax,” under Section 29 of the NIRC of 1997 for corporations at the rate of 10% annually.

7.  Compared With Other Media of Business Endeavors

- Distribution of Risk, Profit and Control

(a) Sole Proprietorships

(b) Business Trusts (Article 1442, Civil Code)

(c) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)

-  Can a defective attempt o form a corporation result at least in the formation of a partnership? Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).

(d) Joint Ventures

Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. the acts of working together in a joint project. xKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), citing Black’s Law Dictionary, Sixth ed., 839.

(e) Cooperatives (Art. 3, R.A. No. 6938)

(f) Sociedades Anónimas

sociedad anónima was considered a commercial partnership, a sort of a corporation, “where upon the execution of the public instrument in which its articles of agreement appear, and the contribution of funds and personal property, becomes a juridical person—an artificial being, invisible, intangible, and existing only in contemplation of law—with power to hold, buy, and sell property, and to sue and be sued—a corporation—not a general copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person—a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation.” xMead v. McCullough, 21 Phil. 95,106 (1911).

The sociedades anónimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern commercial corporations. xBenguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956)

Our Corporation Law recognizes the difference between sociedades anónimas and corporations and will not apply legal provisions pertaining to the latter to the former xPhil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).

(g) Cuentas En Participacion

cuentas en participacion as a sort of an accidental partnership constituted in such a manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under article 239 of the Code of Commerce.

Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the manager unless such manager formally transfers his right to them. xBourns v. Carman, 7 Phil. 117 (1906).

III. NATURE AND ATTRIBUTES OF A CORPORATION

1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution)

2.  Corporation as a Person:

(a) Entitled to due process

The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are “persons” within the scope of the guaranty insofar as their property is concerned.” xSmith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920).

(b) Equal protection clause (xSmith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).

(c) Unreasonable Searches and Seizure

Corporations are protected by the constitutional guarantee against unreasonable searches and seizures, but that the officers of a corporation from which documents, papers and things were seized have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose rights have been impaired thereby; and the objection to an unlawful search is purely personal and cannot be availed of by such officers of the corporation who interpose it for their personal interests. xStonehill v. Diokno, 20 SCRA 383 (1967).

A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. xBache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting fromxHale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.

(d) But a corporation is not entitled to privilege against self incrimination

“It is elementary that  the right against self-incrimination has no application to juridical persons.” Bataan Shipyard & Engineering Co v. PCGG, 150 SCRA 181, 234-235 (1987).

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 privilege. xHale v. Henkel, 201 U.S. 43  (1906); xWilson v. United States, 221 U.S. 361 (1911); xUnited States v. White, 322 U.S. 694 (1944).

3. Liability for Torts

A corporation is civilly liable in the same manner as natural persons 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. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. PNB v. CA, 83 SCRA 237 (1978).

Our jurisprudence is wanting as to the definite scope of “corporate tort.”  Essentially, “tort” consists in the violation of a right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legal duty.  When it was found that Clark Field Taxi failed to comply with the obligation imposed under Article 283 of the Labor Code which mandates that the employer to grant separation pay to employees in case of closure or cessation of operations of establishments or undertaking not due to serious business losses or financial reverses; consequently, its stockholder who was actively engaged in the management or operation of the business should be held personally liable. xSergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).

As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment, even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had participated. Philippine Commercial International Bank vs. Court of Appeals, G.R. No. 121413, 29 January 2001.

4. Criminal Liability of a Corporation (West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914);People v. Tan Boon Kong, 54 Phil. 607 [1930]; Sia v. CA, 121 SCRA 655 [1983]; Articles 102 and 103, Revised Penal Code).

No criminal suit can lie against an accused who is a corporation. xTimes, Inc. v. Reyes, 39 SCRA 303 (1971).

When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. xPeople v. Concepcion, 44 Phil. 129 (1922).

5. Recovery of Moral Damages and Other Damages

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral damages.xMambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968).

Even when the corporation’s reputation and goodwill have been prejudiced, “there can be no award for moral damages under Article 2217 and succeeding articles of Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.” xPrime White Cement Corp. vo Intermediate Appellate Court, 220 SCRA 103, 113-114 (1993).

Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which cannot be suffered by respondent bank as an artificial person. xLBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); xAcme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); xSolid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).

In Asset Privatization Trust v. Court of Appeals, 300 SCRA 579 (1998), the Supreme Court seemed to have gone back to the original doctrine that “[u]nder Article 2217 of the Civil Code, moral damages include besmirched reputation which a corporation may possibly suffer.”

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system. The statement in People v. Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB [130 Phil. 366 (1968)], that a corporation may recover moral damages if it “has a good reputation that is debased, resulting in social humiliation” is an obiter dictum. . .” The possible basis of recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith. xABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).

While it is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself, it does not follow from this, however, that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. xCometa v. Court of Appeals, 301 SCRA 459 (1999).

6. Nationality of Corporation: Country Under Whose Laws Incorporated (Sec. 123).

Exceptions:  The Test of Controlling Ownership Applies In:

(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution;Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]).

The donation of land to an unincorporated religious organization, whose trustees are foreigners, cannot be allowed registration for being violation of the constitutional prohibition and it would not be violation of the freedom of religion clause. The fact that the religious association “has no capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. The purpose of the sixty per centum requirement is obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos; and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens.” xRegister of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955)

(b) Public Utilities (Sec. 11, Article XII, 1987 Constitution; People v. Quasha, 93 Phil. 333 [1953]).

The primary franchise of a corporation, that is, the right to exist as such, is vested in the individuals who compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative authority so to do. But the special or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use. xJ.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility; however, it does not requires a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. In law there is a clear distinction between the “operation” of a public utility and the ownership of the facilities and equipment used to serve the public. Tatad v. Garcia, Jr., 243 SCRA 436 (1995)

“A distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and the franchise itself which is owned by the corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction. Since stockholders own the shares of stock, they may dispose of the same as they see fit. They may not, however, transfer or assign the property of a corporation, like its franchise. In other words, even if the original stockholders had transferred their shares to another group of shareholders, the franchise granted to the corporation subsists as long as the corporation, as an entity, continues to exist. The franchise is not thereby invalidated by the transfer of the shares. A corporation has a personality separate and distinct from that of each stockholder. It has the right of continuity or perpetual succession Corporation Code, Sec. 2).” Philippine Long Distance Telephone Co. v. National Telecommunications Commission, 190 SCRA  717, 732 (1990).

(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)

Sources: P.D. 36, as amended by PDs 191 and 197; DOJ Opinion No. 120, s. of 1982;Section 2, P.D. 576; SEC Opinion dated 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4—December, 1991), at p. 31.

Cable Industry

The National Telecommunications Commission (NTC), which regulates and supervises the cable television industry in the Philippines under Section 2 of Executive Order No. 436, s. 1997, has provided under NTC Memorandum Circular No. 8-9-95, under item 920(a) thereof provides that “Cable TV operations shall be governed by E.L. No. 205, s. 1987. If CATV operators offer public telecommunications services, they shall be treated just like a public telecommunications entity.”

Under DOJ Opinon No. 95, series of 1999, the Secretary of Justice, taking its cue from Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70, considered CATV as “a form of mass media which must, theefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution.”

(d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)

(e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 [1951]; xDavis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; xHaw Pia v. China Banking Corp., 80 Phil. 604 [1948]).

(f) Investment Test as to “Philippine Nationals” (Sec. 3(a),(b), R.A. 7042, Foreign Investment Act of 1992)

(g) The Grandfather Rule (Opinion of DOJ No. 18, s. 1989, dated 19 January 1989; SEC Opinion, dated 6 November 1989, XXIV SEC Quarterly Bulletin (No. 1- March 1990); SEC Opinion, dated 14 December 1989, XXIV SEC Quarterly Bulletin (No. 2 -June 1990)

Up to what level do you apply the grandfather rule? (Palting v. San Jose Petroleum Inc., 18 SCRA 924 [1966]).

(h) Special Classifications (Sec. 140)

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