DOCTRINE OF PIERCING THE CORPORATE VEIL; INCORPORATION AND ORGANIZATION OF A DOMESTIC CORPORATION

Instances where Corporate Purpose is Relevant

1. Authority to Invest Corporate Funds 2. Determines if Corporation is Subject to Special Law or Rules; and 3. Legality of Joint Venture Agreement

Contents of AOI

1. Corporate Name 2. Purpose; 3. Principal Office Address; 4. Corporate Term, if the corporation has not elected perpetual existence; 5. Names, Nationalities, and Residences of the Incorporators; 6. Number of Directors or Trustees; 7. Names, Nationalities and Residences of persons who shall act as Directors or Trustees until the first regular directors or trustees are duly elected; 8. If it be a stock corporation: a. the amount of its authorized capital stock; b. the number of shares; c. the par value of shares, or a statement that some or all of the shares are without par value, if applicable; and d. Names, Nationalities, and Residences of the original subscribers, and the amount subscribed and paid by each; 9. If it be a non-stock corporation: a. the amount of capital; and b. the names, nationalities and residences of the contributors and the amount contributed by each; and 10. Other matters may be deemed necessary and convenient (REVISED CORPORATION CODE, Sec. 13)

When will a Corporation Become Delinquent

1. Delinquency for Non-Operation 2. Failure to Submit Reports

Cases of Piercing the Corporate Veil (FAPE)

1. FRAUD Piercing 2. ALTER-Ego Piercing 3. PUBLIC Convenience Piercing 4. EQUITY Cases

Instances when there is a De Facto Corporation

1. Failure to give the notice required by the statute for the meeting for its organization 2. Failure to fix and limit the amount of capital stock of the company at the first meeting 3. Failure to issue stocks; 4. Informalities in the proceedings of corporate meetings; 5. Lack of certificate of organization filed or executed; 6. Lack of elected Board of Directors; 7. Irregularities with respect to the number, term, place of residence, and of meeting of the Board of Directors; 8. Some of the persons elected as directors are disqualified; and 9. In general, when there is a defect in the organization of the corporation and not on its creation (Chung Ka Bio v. IAC)

Elements of Alter-Ego Piercing (Three-Pronged Test):

1. Instrumentality or Control Test 2. Fraud Test 3. Harm Test

Two Types of Reverse Piercing

1. Outsider Reverse Piercing 2. Insider Reverse Piercing

Kinds of Piercing Cases

1. Traditional Veil-Piercing Action 2. Reverse Piercing Action

Three-Fold Nature of AOI

1. a contract between the corporation, the State, and the stockholders; and 2. a contract between the State and the stockholders; and 3. a contract between the corporation and its stockholders (Lanuza v. CA)

When De Facto Doctrine Does Not Apply

1. a corporation whose purpose is prohibited by law or contrary to public policy; 2. a corporation created for the practice of learned profession in the absence of a law expressly permitting the organization of such corporations NOTE: the business organization for the practice of profession shall be by particular partnership under Art. 1783 of the Civil Code

Limitation on Purpose of Corporation

1. a non-stock corporation may not include a purpose which would change or contradict its nature as such (RCC, Sec. 13(b)); and 2. the SEC shall reject the AOI or disapprove any amendment when the stated purpose/s of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations (RCC, Sec. 16(b))

Requisites of a De Facto Corporation: (LAC)

1. a valid LAW under which the corporation is organized; 2. a bona fide ATTEMPT in good faith to incorporate; and 3. an assumption of CORPORATE Powers (Seventh Day Adventist Conference Church of Southern Philippines, Inc. v. Northeastern Mindanao Mission of Seventh Day Adventists, Inc.)

Number and Qualifications of Incorporators (PSM-FIN-MAS)

1. any PERSON, partnership, association or. corporation, singly or jointly with others, may now be incorporators; 2. must be a STOCKHOLDER or MEMBER of the corporation; 3. not more than FIFTEEN (15) in number; 4. NO minimum number is required; 5. MAJORITY of incorporators need not be Philippine residents; 6. of legal AGE; and 7. any SINGLE natural person, trust, or an estate is now allowed to form a corporation by himself (REVISED CORPORATION CODE, Secs. 10 & 116)

Basic Rules On Corporate Term

1. as a general rule, the corporate term is perpetual; 2. the AOI of new corporations can specify a fixed term-the incorporators can choose not to have a perpetual term and specify a fixed term in the AOI; 3. corporations duly incorporated prior to the effective date of the Revised Corporation Code and still existing shall also automatically have perpetual term; 4. if existing corporations do not want a perpetual term, they must notify the SEC that they want to maintain their fixed term; 5. a corporation with a fixed term may be dissolved by shortening its term; 6. corporations with fixed terms may extend their term; and 7. no extension can be made earlier than three (3) years prior to the original or subsequent expiry date

Three Violations of Conditions Subsequent to Incorporation

1. failure to organize within five years from incorporation; 2. failure to commence business within five years from incorporation; and 3. becoming continuously inoperative for a period of at least five consecutive years

Statutory Limitations on the Form and Use of Corporate Name

1. in respect to a corporate name already reserved, registered for the use of another corporation, protected by law, or its use is not contrary to existing law, rules and regulations, the proposed name must be distinguishable (RCC, Sec. 17); 2. Must contain either - a. "Incorporated" or "Inc."; or b. "Corporation" or "Corp."; 3. in the case of a One Person Corporation, it must contain the word "OPC" either - a. Below; or b. At the end of its corporate name (RCC, Sec. 120); 4. in case of foundation, shall use the word "Foundation"; 5. in case of non-stock, non-profit corporations engaged in microfinance activities, shall use the word "Microfinance" or "Microfinancing"; 6. if the name applied for is similar to that of a registered corporation or partnership, the applicant shall add one or more distinctive words to the proposed name; 7. punctuation marks, spaces, signs, symbols, and other similar characters, regardless of their form or arrangement, shall not be acceptable as distinguishing words for differentiating a proposed name from a registered name; and 8. shall not consist solely of special symbols. punctuation marks or specially designed characters (see Amended Guidelines and Procedure on the Use of Corporate and Partnership Names, SEC Memorandum Circular No, 13 Series of 2019, June 21, 2019)

COMMENCEMENT OF CORPORATE EXISTENCE Grounds for Rejection or Disapproval of AOI or Amendment: (NUCO)

1. that the AOI or any amendment thereto is NOT substantially in accordance with the form prescribed in the Corporation Code; 2. that the purpose or purposes of the corporation are patently UNCONSTITUTIONAL, illegal, immoral, or contrary to government rules and regulations; 3. that the CERTIFICATION concerning the amount of capital stock subscribed and/or paid is false; 4. that the required percentage of Filipino OWNERSHIP of the capital stock under existing laws or the Constitution has not been complied with (REVISED CORPORATION CODE, Sec. 16)

Limitations on Ratification by Corporation

1. the contract must be adopted in its entirety and not only that part that is beneficial to the corporation and discard that which is burdensome; and 2. the contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter (Rizal Light v. Municipality of Morong)

Elements of Fraud Piercing (FUP):

1. 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 2. the corporate entity has been USED in the perpetration of the fraud or in justification of wrong or to defend crime; 3. the main action should seek enforcement of PECUNIARY claims pertaining to the corporation against corporate officers or stockholders, or vice-versa (Concept Builders, Inc. v. National Labor Relations Commission)

Purpose of Fixing Principal Office Address

1. to fix the residence of the corporation in a definite place, instead of allowing it to be ambulatory (Young Auto Supply Co. v. CA); 2. for purposes of stockholders' or members' meeting (RCC, Sec. 50); and 3. to determine the place where the books and records of the corporation are ordinarily kept (RCC, Sec. 73)

Purposes of the De Facto Doctrine

1. to promote the security of business transactions and to eliminate quibbling over irregularities; 2. a third person dealing with a corporation will rarely be prejudiced if the company is recognized as a corporation in spite of minor defects in its formation; 3. seldom would it be just to allow a wrongdoer to quibble over such objections to escape liability for wrongdoing; and 4. it would be unjust to allow a claimant against a supposed company to assert the individual liability of innocent passive investors on the ground of flaws in the formal steps of incorporation, when they have attempted in good faith to comply with statutory requirements and the objecting party is not prejudiced

Additional Paid-In Capital

Additional Paid-in Capital is considered a contribution of a stockholder over and above the par value of shares and falls under the concept of corporate Trust Fund upon its recording in the books of the corporation (SEC Opinion dated June 11, 2004)

Public Convenience Piercing

Aggravating Ransom's clear evasion of payment of its financial obligation is the organization of a "runaway corporation," Rosario both Ransom and Rosario were close corporations owned and managed by members of the same family its organization proved to be a convenient instrument to avoid payment of back wages and reinstatement of the 22 workers this is another instance where the fiction should be disregarded (A.C. Ransom v. NLRC)

Foreign Equity Restrictions Examples

NO FOREIGN EQUITY ALLOWED 1. Retail trade enterprises with paid-up capital of less than US$2,500,000 (R.A. No. 8762) 2. Private security agencies (R.A. No. N 5487) 3. Small-scale Mining (CORPORATION CODE, Sec. 3; RA. No. 7076) 4. Mass Media except recording (CONST. Art. XVI, Sec. 11; Presidential Memorandum dated May 04, 1994) 60% MAXIMUM 1. Financing companies regulated by the SEC (RA. No. 5980 as amended by R.A. No. 8556, Sec. 6) 2. Investment houses regulated by the SEC (P.D. No. 129 as amended by R.A. No. 8366, Sec. 5) 40% MAXIMUM 1. Operation and management of public utilities (CONST., Art. XII, Sec. 11; C.A. 146, Sec. 16); 2. Ownership/establishment and administration of educational institutions (CONST., Art. XIV, Sec. 4); 3. Exploration, development and utilization of natural resources (CONST., Art. XII, Sec. 2); 30% MAXIMUM 1. Advertising (CONST., Art. XVI, Sec. 11) 25% MAXIMUM 1 . Private recruitment, whether for local or overseas employment (P.D. No. 442, Art. 27)

NO MINIMUM SUBSCRIBED CAPITAL AND PAID UP CAPITAL UNDER THE REVISED CORPORATION CODE OF THE PHILIPPINES

Section 13 of the Corporation Code had been repealed upon the effectivity of the Revised Corporation Code there is no required minimum subscribed capital and paid-up capital under the RCCP the exceptions are corporations governed by special laws that require a minimum subscribed and/or paid- up capital

Contents of AOI NOTE

Section 13 of the Revised Corporation Code provides that the Articles of Incorporation must contain "substantially" the matters indicated therein the RCCP recognizes that special laws and the Code itself may require strict compliance with certain provisions thus, a corporate name and a purpose clause in the Articles of Incorporation are indispensable special laws may likewise impose additional provisions for strict compliance such as minimum capitalization requirements

Indicia that a Subsidiary Company is Merely an Alter Ego of its Parent Corporation:

a COMBINATION OF 2 OR MORE of the following circumstances, TAKEN TOGETHER, may be INDICIA that a subsidiary corporation is but a mere instrumentality or alter ego of its parent corporation: 1. the parent corporation owns all or most of the capital stock of the subsidiary 2. the parent and subsidiary corporations have common directors or officers 3. the parent corporation finances the subsidiary 4. the parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation 5. the subsidiary has grossly inadequate capital 6. the parent corporation pays the salaries and other expenses or losses of the subsidiary 7. the subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation 8. in the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own 9. the parent corporation uses the property of the subsidiary as its own 10. the directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation 11. the formal legal requirements of the subsidiary are not observed (Philippine National Bank v. Ritratto Group Inc.)

Change of Corporate Name

a corporation can change the name originally selected by it by amending its AOI in accordance with Sec. 16 of the Corporation Code [Sec. 15 of the Revised Corporation Code of the Philippines] (Philippines First Insurance Company, Inc. v. Hartigan) a mere change in corporate name does not make a new corporation, whether effected by a special act or under a general law it has no effect on the identity of the corporation, or on its property, rights, or liabilities (Zuellig Freight and Cargo Systems v. National Labor Relations Commission)

Alter Ego Piercing Cases (Conduit/Instrumentality Cases) NOTE

a corporation may be the alter-ego of a person, whether natural or juridical in other words, the corporation may be used as the conduit or instrumentality of an individual or by another corporation

Instances where Corporate Purpose is Relevant 3. Legality of Joint Venture Agreement

a corporation may validly enter into a joint venture agreement, provided that the nature of that venture is in line with the business authorized by the corporation's charter (J.M. Tuason v. Bolaños; SEC-OGC Opinion No. 16-22, 2008)

Corporate Term Term of Existence - GENERAL RULE

a corporation shall have perpetual existence (RCC, Sec. 11)

CORPORATE NAME Right to a Corporate Name

a corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert or protect against the whole world in the same manner as it may protect its tangible property against trespass or conversion (Philips Export B.V. v. CA) under the Priority of Adoption Rule, the corporation that first adopts a corporation name has the right thereto and a subsequent corporation cannot use the same name (De La Salle Montessori International of Malolos Inc. v. De La Salle Brothers. Inc.) the right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption, in which two requisites must be proven, to wit: 1. that the complainant corporation acquired a right over the use of such corporate name; and 2. that the proposed name is either: a. identical; or b. deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or c. patently deceptive, confusing or contrary to existing law (Industrial Refractories Corporation of the Philippines v. Court of Appeals)

Kinds of Piercing Cases 1. Traditional Veil-Piercing Action

a court disregards the existence of the corporate entity so a claimant can reach the assets of a corporate insider (International Academy of Management Economics v. Litton and Company)

Resumption of Operations

a delinquent corporation shall have a period of two (2) years to resume operations and comply with all requirements that the Commission shall prescribe Upon compliance by the corporation, the Commission shall issue an order lifting the delinquent status (REVISED CORPORATION CODE, Sec. 21)

Promoter

a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor (SECURITIES REGULATION CODE, Sec. 3) before incorporation, the promoter is an agent of the incorporators but not of the corporation a promoter cannot act as agent for a corporation that does not yet exist (Cagayan Fishing v. Sandiko)

Instrumentality Rule

also known as the "Three-Pronged Control Test", which has gained wide acceptance as the primary test in the application of the doctrine of piercing the veil of corporate fiction (Pacific Rehouse Corporation v. Court of Appeals) in the application of this rule, courts are called upon to apply the "Three-Pronged Control Test", that is, to determine the presence of three factors, namely: 1. 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 the time no separate mind, will or existence of its own; 2. SUCH CONTROL MUST HAVE BEEN USED BY THE DEFENDANT TO COMMIT FRAUD OR WRONG, to perpetuate the violation of a statutory positive legal duty, or dishonest and unjust act or other in contravention of plaintiff's legal right; and 3. THE AFORESAID CONTROL AND BREACH OF DUTY MUST PROXIMATELY CAUSE THE INJURY OR UNJUST LOSS COMPLAINED OF (Philippine National Bank v. Hydro Resources Contractors Co.)

DEFECTIVE INCORPORATION DE FACTO CORPORATION

an association of persons existing under a valid law under which it may be incorporated after having attempted in good faith to incorporate, and assuming corporate powers (Seventh Day Adventist Conference Church of Southern Philippines, Inc. v. Northeastern Mindanao Mission of Seventh Day Adventists, Inc.)

Distinguished from De Facto Corporation

an unincorporated association which represented itself to be a corporation will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation it cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which received advantages and benefits (Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.) a de facto corporation results from a defective incorporation a corporation was incorporated in law and in fact such that a juridical person came into existence except that such personality is impaired due to some defect in its creation a corporation by estoppel contemplates a situation of absence of incorporation no corporation was created at all and no separate legal personality was created however, by express provision of law, the persons purporting to act as a corporation shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result of their representations failure to incorporate does NOT result into a partnership because: 1. the creation of a partnership is not the intent of the parties, and therefore does not constitute a part of their consent to the contractual relationship; and 2. the important differences between the corporation and the partnership cannot lead one to the conclusion that in the absence of the first, the contracting parties would have gone along with the latter in the Lim Tong Lim case, the parties were not only held liable as if they were general partners for acting as a corporation by estoppel, the court found that that requisites of partnership was present such that the defendants therein can be said to have formed a true partnership within the meaning of Article 1767 of the Civil Code by implication, where the elements of a partnership contract are NOT present, persons who act as a corporation by estoppel are liable as if they were general partners even if no partnership contract is perfected in legal contemplation they are liable not because a partnership is created but because they are made liable by statute in such manner

Corporate Purpose Purpose Clause

any person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a corporation for any lawful purpose or purposes (REVISED CORPORATION CODE, Sec. 10) where a corporation has more than one purpose, the articles of incorporation shall indicate the primary purpose and the secondary purpose or purposes (REVISED CORPORATION CODE, Sec. 13(b))

Corporation by Estoppel also applies against the Third Person who knowingly transacts with the non-existent corporation

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 (REVISED CORPORATION CODE, Sec. 20) a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation (Lim Tong Lim v. Phil. Fishing Gear Industries, Inc.) the doctrine does not apply against the ostensible corporators when such persons are not trying to escape liability from the contract from which he has benefitted but rather are the ones claiming from the contract (International Express v. CA)

Application of the TFD

as a general rule, money, property, and other assets constituting the capital assets of the corporation cannot be distributed to the shareholders or members without first settling all the obligations of the corporation there can only be a return of the remaining capital assets after all the liabilities of the corporation has been extinguished (See Corporate Insolvency under the FRIA)

Due Process in Rejection of AOI

before rejecting the AOI, the SEC should give the incorporators, directors, trustees, or officers a reasonable time from receipt of the disapproval within which to modify the objectionable portions of the articles or amendments (REVISED CORPORATION CODE, Sec. 16) any decision of the Commission rejecting the AOI or disapproving any amendment thereto is appealable by Petition for Review to the CA in accordance with the pertinent provisions of the Rules of Court (PD No. 902-A, Sec. 6)

Meaning of Commencement of Business

corporation shall be considered to have commenced the transaction of its business when it has performed preparatory acts geared toward the fulfillment of the purposes for which it was established such as but not limited to the following: 1. entering into contracts or negotiation for lease or purchase of properties to be used as business or factory site; 2. making plans for and the construction of the factory; and 3. taking steps to expedite the construction of the company's working equipment

Liability of Corporation for Promoter's Contracts GENERAL RULE

corporation, as a separate juridical person, is not bound to a contract made by a promoter before its incorporation (Cagayan Fishing v. Sandiko)

Directors and Trustees Term of the Board

d: 1 year (RCC, Sec. 22) t: not exceeding 3 years (RCC, Sec. 22 and 91)

Directors and Trustees Numbers of Directors/Trustees

d: not be more than 15 (RCC, Sec. 10) t: may or may not be more than 15 (RCC, Sec. 91)

DE JURE CORPORATION V. DE FACTO CORPORATION V. CORPORATION BY ESTOPPEL As to Capacity to Sue or Be Sued

dj: can sue and be sued df: can sue and be sued e: cannot sue or be sued except by a third party who relied on its representations in good faith

DE JURE CORPORATION V. DE FACTO CORPORATION V. CORPORATION BY ESTOPPEL As to Creation

dj: complied with all mandatory requirements for incorporation df: has not complied with all requirements but there has been a colorable compliance e: absence of conditions precedent needed for a de facto corporation

DE JURE CORPORATION V. DE FACTO CORPORATION V. CORPORATION BY ESTOPPEL As to Liabilities of Officers and Directors

dj: liable only to the extent of their subscription unless acted in bad faith df: same as de jure e: all who have knowledge of its lack of authority to act as such are liable as general partners

DE JURE CORPORATION V. DE FACTO CORPORATION V. CORPORATION BY ESTOPPEL As to Who Can Question its Corporate Existence

dj: no one (not even the State) df: the State only in a direct proceeding e: State or any third person who relied in good faith on its represenation (directly or collaterally)

DE JURE CORPORATION V. DE FACTO CORPORATION V. CORPORATION BY ESTOPPEL As to Being Subject to a Direct and Collateral Attack

dj: not subject df: direct e: both collateral and direct

Consequence of De Facto Status

for all intents and purposes, a de facto corporation has the same rights, powers, obligations, and liabilities as a de jure corporation the only difference is that the due incorporation of a de facto corporation may be directly inquired into by the Solicitor General in a quo warranto proceeding (REVISED CORPORATION CODE, Sec. 19) conversely, in contrast to a de facto corporation, a de jure corporation can successfully resist a suit brought by the State challenging its existence

Fraud Piercing Cases NOTE

fraud cases require a showing of an element of injustice or fundamental unfairness

Fraud Piercing Cases

fraud refers to all kinds of deception - whether through insidious machination, manipulation, concealment or misrepresentation - that would lead an ordinarily prudent person into error after taking the circumstances into account (Solidbank Corporation v. Mindanao Ferroalloy Corporation)

NON-USE OF CORPORATE CHARTER OR CONTINUOUS INOPERATION OF A CORPORATION

if a corporation does not formally organize and commence its business within five (5) years from the date of its incorporation, its certificate of incorporation shall be deemed revoked as of the day following the end of the five-year period (REVISED CORPORATION CODE, Sec. 21) however, if a corporation has commenced its business but subsequently becomes inoperative for a period of at least five (5) consecutive years, the Commission may, after due notice and hearing, place the corporation under delinquent status

Basic Rules On Corporate Term NOTE

if the corporation has a fixed term, the last day of the corporate term is the day before the corresponding numbered day of the same month of incorporation in the last year of the existence of the corporation (CIR v. Primetown Property)

Instances where Corporate Purpose is Relevant 1. Authority to Invest Corporate Funds

if the corporation is going to invest in another corporation, business, or purpose other than its primary purpose, the investment must first be approved by the board and ratified by a 2/3 vote of the outstanding capital stock or membership in a special meeting called for that purpose otherwise, approval of the board is sufficient (REVISED CORPORATION CODE, Sec. 41) NOTE: the rule does not apply to investments related to its secondary purposes

Cases of Piercing the Corporate Veil (FAPE) 4. EQUITY Cases

in Equity cases, the doctrine of piercing the veil may be applied to include both (1) cases when fraud or other wrongful acts or omission are present, and (2) cases when there is no intent to commit a wrongful act in organizing the corporation or operation of the corporation but injustice and inequity may result if the corporate veil is not pierced

Piercing only affects specific transactions Note

in other words, piercing of the corporate veil in one case does not have the effect of res judicata in another case involving the same corporation

Capital

includes properties and assets of the corporation that are used for its business or operation

Incorporators NOTE

incorporators are also corporators but not all corporators are incorporators

Local Government Units

it is believed that municipal corporations fall under the term "corporation" under Section 10 of the RCCP it is believed that corporations include both private and public corporations

Stretching the Purpose Clause

it is legal to stretch the meaning of the purpose clause to cover new and unexpected situations there is no need to amend the AOI to accommodate new situations (SEC Opinion No. 08-24, October 22, 2008)

Authorized Capital

it is maximum value of the property or estate of the corporation fixed in the AOI that may be sourced from stock subscriptions or from members' contributions for the purpose of pursuing the business for which the corporation is organized it is the maximum amount of assets a corporation may have that can be held liable for any debts the corporation may incur from the time it incorporated until its dissolution in stock corporations, such capital is divided into shares of stock in accordance with the AOL and is referred to as the authorized capital stock. In non- stock corporations, the capital is not divided and instead referred to as authorized capital contribution (REVISED CORPORATION CODE, Secs. 3, & 6-9)

Subscribed Capital Stock

it is that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not NOTE: the corporation only issues stocks which have been subscribed to

Incorporation and Organization of a Domestic Corporation Articles of Incorporation (AOI)

it is the basic contract document in corporate law, defining the charter of the corporation

Unissued Capital Stock

it is the portion of the authorized capital stock in a stock corporation that has not been issued and subscribed. It does not vote and draws no dividends

Paid-up Capital

it is the portion of the authorized capital that is subscribed and paid (MSCI-Nacusip Local Chapter v. National Wages and Productivity Commission)

TRUST FUND DOCTRINE (TFD)

it provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims (Ong Yong v. Tiu) the trust fund doctrine is not limited to reaching the stockholders' unpaid subscriptions 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 all assets and property belonging to the in corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim (Halley v. Printwell, Inc.) it is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts (Philippine Trust Company v. Marciano Rivera)

Outstanding Capital Stock

it shall mean the total shares of stock issued under binding subscription contracts to subscribers or stockholders, whether fully or partially paid, except treasury shares (REVISED CORPORATION CODE, Sec. 173)

Two Types of Reverse Piercing 1. Outsider Reverse Piercing

occurs when a party with a claim against an individual or corporation attempts to be repaid with assets of a corporation owned or substantially owned by the defendant (International Academy of Management and Economics v. Litton)

Meaning of Organization

organization as used in reference to corporations has a well-understood meaning, which is the election of officers, providing for the subscription and payment of the capital stock, the adoption of by- laws, and such other similar steps (Benguet Consolidated Mining Co. v. Pineda) thus, organization under SEC Rules include: 1. Adoption, filing by the corporation and approval by the SEC of the corporate By-laws after incorporation; 2. Election of Directors or Trustees and Officers; 3. Establishment of the principal office; 4. Providing for the subscription and payment of capital stock; and 5. Taking such steps as are necessary to endow the legal entity with capacity to transact the legitimate business for which it was created

Rationale for Perpetual Term

prior to the effectivity of the Revised Corporation Code, Philippines is one of the few countries that sets limits to the corporate term the amendment aims to allow corporations to develop long-term plans and to look into more sustainable and far-reaching strategies for more economic growth and, to address the following problems: 1. arduous task of incorporating; 2. risk of having their corporations dissolved simply by forgetting to renew their corporate term; 3. loss of income and livelihood for families; and 4. loss of legacy and dreams for entrepreneurs and employees

Liability of Promoter

promoters are personally liable on their contracts even if made on behalf of the corporation to be formed (Cagayan Fishing Development Co. v. Sandiko)

Associations

refers to non-profit organizations being organized however, it follows that these associations/organizations already acquired legal personality non-profit organizations can be non-stock corporations incorporated under the RCCP. In addition, duly registered homeowners associations likewise have juridical personality

Kinds of Piercing Cases 2. Reverse Piercing Action

reverse-piercing flows in the opposite direction of traditional corporate veil piercing and makes the corporation liable for the debt of the shareholders

NO MINIMUM AUTHORIZED CAPITAL STOCK REQUIRED OF STOCK CORPORATION

stock corporations shall not be required to have any minimum authorized capital stock except as otherwise specially provided for by special law (REVISED CORPORATION CODE, Sec. 12)

Elements of Alter-Ego Piercing (Three-Pronged Test): 2. Fraud Test

such control must have been used by the defendant to commit fraud or wrong in contravention of plaintiff's legal rights

"Valid Law" NOTE

the "valid law under which the corporation is organized" refers to the Articles of Incorporation approved and recognized by the State (through the SEC) the de facto doctrine therefore contemplates a situation where the corporation is granted a certificate of incorporation despite formal or substantial defects in any requisite for due incorporation under the Code

PRINCIPAL ADDRESS Principal Office Address

the AOI must state the place where the principal office of the corporation is to be located, which must be within the Philippines (RCC, Sec. 13(c)) well established in our jurisprudence is the rule that the residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation (Hyatt Elevators and Escalators Corporations, v. Goldstar Elevators, Phils., Inc.) existing corporations and partnerships whose Articles indicate only a general address as their principal office address such as "Metro Manila" are directed to file an amended AOI in order to specify their complete address such that, if feasible, it has a street number, street name, barangay, city or municipality and if applicable, the name of the building, the number of the building and name or number of the room or unit (SEC Memorandum Circular No. 6, February 20, 2014)

Foreign Equity Restrictions

the Constitution and statutes limit foreign participation in certain business and industries which therefore limits the percentage of capital stock that foreigners can subscribe or own in a certain corporation

CERTIFICATE OF INCORPORATION

the SEC has the ministerial duty to approve an application for registration and issue the Certificate of Incorporation provided all the requirements, of the law with respect to the AOI are complied with a private corporation organized under the Revised Corporation Code commences its corporate existence and juridical personality from the date the SEC issues certificate of incorporation under its official seal (REVISED CORPORATION CODE, Sec. 18)

When will a Corporation Become Delinquent 1. Delinquency for Non-Operation

the SEC may place a corporation under delinquent status if it fails to operate for at least five consecutive years

When will a Corporation Become Delinquent 2. Failure to Submit Reports

the SEC may place the corporation under delinquent status in case of failure to submit the reportorial requirements three (3) times, consecutively or intermittently, within a period of five (5) years (REVISED CORPORATION CODE, Sec. 177)

Elements of Alter-Ego Piercing (Three-Pronged Test): 3. Harm Test

the aforesaid control and breach of duty must be the proximate cause of the injury or unjust loss complained of (Maricalum Mining Corp v. Florentino)

Two Types of Reverse Piercing 2. Insider Reverse Piercing

the controlling members will attempt to ignore the corporate fiction in order to take advantage of a benefit available to the corporation

Piercing only affects specific transactions

the corporate mask may be removed and the corporate veil pierced when a corporation is the mere alter ego of another when that happens, the corporate character is not necessarily abrogated it continues for other legitimate objectives (Pamplona Planters Company. Inc. v. Tinghil)

Effect of Failure to Organize and Commence

the corporation's certificate of incorporation shall be deemed revoked as of the day following the end of the five-year period (REVISED CORPORATION CODE, Sec. 21)

Jurisdictional Requisites for Piercing

the court must properly acquire jurisdiction over the corporation involved and it was shown after a full-blown trial that the grounds to do pierce the veil exists in fact and law (Kukan International Corporation v. Reyes) to pierce the veil of corporate fiction, being a power belonging to the courts, a sheriff who has ministerial duty to enforce a final and executory decision cannot pierce the veil of corporate fiction by enforcing the decision against the stockholders who are not parties to the action (Cruz v. Dalisay)

A Remedy in Equity

the doctrine of piercing could not be employed by a corporation to complete its claims against another corporation and cannot therefore be employed by the claimant who does not appear to be the victim of any wrong or fraud the court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights (Traders Royal Bank v. CA)

Doctrine of Secondary Meaning as Applied to Corporation Names

the doctrine of secondary meaning provides that "a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product." (Lyceum of the Philippines, Inc., v. Court of Appeals) the doctrine of secondary meaning originated in the field of trademark law its application has, however, been extended to corporate names since the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename

"Valid Law"

the filing of AOI and the issuance of the certificate of incorporation are essential for the existence of a de facto corporation an organization not registered with the SEC cannot be considered a corporation in any concept, not even as a corporation de facto (Seventh Day Adventist Conference Church of Southern Philippines, Inc. v. Northeastern Mindanao Mission of Seventh Day Adventist, Inc.)

Determination as Alter-Ego Case to Case

the general rule is still to the effect that if used for legitimate functions, a subsidiary's separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business (MR Holdings, Ltd. v. Bajar) in the case of San Miguel Corporation Employees Union-PTGWO, v. Confessor (1996), Magnolia and Feeds and Livestock Division were spun-off and became two separate and distinct corporations: Magnolia Corporation (Magnolia) and San Miguel Foods, Inc. (SMFI) the Supreme Court ruled that the transformation of the companies was a management prerogative and business judgment which the courts cannot look into unless it is contrary to law, public policy or morals neither can we impute any bad faith on the part of SMC so as to justify the application of the doctrine of piercing the corporate veil therefore, Magnolia and SMFI became distinct entities with separate juridical personalities mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality (Wensha Spa Center, Inc. and/or Xu Zhi Jie v. Yung) while 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, these circumstances are insufficient to establish an alter ego relationship that will justify the puncturing of corporate cover (PNB v. Hydro Resources Contractors Corporation)

Good Faith

the issuance of the Certificate of Incorporation is essential to the claim of good faith an association of persons claiming to exercise the powers of a corporation knowing that no Certificate of Incorporation had yet been issued cannot claim to be exercising such powers in good faith (Hall v. Piccio) if after incorporation, the incorporators discovered that they have not complied substantially with the law and still continued transacting business as a corporation, without doing anything to correct the defect, the privilege of de facto existence can no longer be invoked in good faith (see Endnote 10 of Seventh Day Adventist Conference Church of Southern Philippines, Inc. v. Northeastern Mindanao Mission of Seventh Day Adventist, Inc.,)

Directors and Trustees

the number of trustees shall be fixed in the AOI or by laws which may or may not be more than fifteen (15) (REVISED CORPORATION CODE, Sec. 91) a non-stock corporation may have more than 15 trustees under Section 91 this is to give more representation to the Board of Trustees of nationwide membership associations however, while there appears to be no maximum limit, the number should not exceed the number of members of the corporation (SEC Opinion dated August 21, 1997) moreover, the SEC has adopted the policy of requiring registrant corporations to submit an explanation/justification if its Articles of Incorporation provide for more than 15 members in the Board thus, while the RCCP expressly allows more than 15 members of the Board, the SEC may question the propriety of a large number if it feels that the number is unreasonable under the surrounding circumstances

Incorporators REASON

the statement of nationalities of the incorporators will enable the SEC to determine prima facie compliance with constitutional or legal requirements regarding ownership by Filipino citizens of certain percentages of capital stock of certain corporations

CORPORATION BY ESTOPPEL

there is a corporation by estoppel when a group of persons assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance it cannot be permitted to deny its existence in an action under said transaction (REVISED CORPORATION CODE, Sec. 20)

Elements of Alter-Ego Piercing (Three-Pronged Test): 1. Instrumentality or Control Test

there is complete control or dominion of the corporate entity as to render it without a separate mind, will, or existence of its own

Treasury Shares NOTE

they do not lose their status as issued or subscribed shares except that they are deprived of the ordinary rights of outstanding shares (SEC-OGC Opinion No. 16-16, June 27, 2016)

Incorporators

those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof (RCCE, Sec. 5) the AOI must specify the names, nationalities, and residences of the incorporators (RCC, Sec. 13) all incorporators must sign and acknowledge the AOI together with the treasurer the AOI is defective if not all incorporators acknowledged the same before the notary public

Composition of the Corporation Corporators

those who compose a corporation, whether as stockholders or shareholders in stock corporations, or as members in non-stock corporations (RCC, Sec. 5)

Doctrine of Piercing the Veil of Corporate Entity

though the corporation has separate and distinct personality from its stockholders, such personality may be disregarded, or veil of corporate fiction may be pierced, attaching personal liability to the responsible person, if the personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or use to defeat the labor laws (Dutch Movers, Inc. vs. Edilberto Lequin) the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation or reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality, or inequity committed against third persons (Sarona v. NLRC) where it appears that business enterprises are owned, conducted and controlled by the same parties, law and equity will disregard the legal fiction that these corporations are distinct entities and shall treat them as one this is in order to protect the rights of third persons, as in this case, to safeguard the rights of respondents (Vicmar Development Corp. v. Elarcosa)

Probative Factors to Be Considered in Alter-ego Cases (MIMS):

to determine if a corporation is merely an alter-ego, the following factors are to be considered: 1. METHODS of conducting the business 2. IDENTITY of directors and officers 3. MANNER of keeping corporate books records 4. STOCK ownership by one or common ownership of both corporations (Concept Builders, Inc. v. NLRC)

Grounds to Pierce not Presumed

to disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established it cannot be presumed (Luxuria Homes, Inc. v. CA) any application of the doctrine of piercing the corporate veil should be done with caution a court should be mindful of the milieu where it is to be applied it 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 rights (Sarona v. NLRC)

Traditional Piercing v. Reverse Piercing Object of the Piercing

tp: reaches for the underlying shareholder to make his personal properties liable rp: reaches for the corporate assets of the pierced corporation

Traditional Piercing v. Reverse Piercing Purpose

tp: to make the underlying shareholder liable for debts and damages which would normally be considered corporate debts rp: to make corporate asses liable for the debts and damages which a shareholder of such corporation is personally liable for

Treasury Shares

treasury shares are shares of stock which have been issued, and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means (REVISED CORPORATION CODE, Sec. 9)

Rural Banks

under the RCCP, corporations can now be incorporators not only of rural banks but also of other types of banks, like commercial banks and universal banks, provided that they are allowed to do so by the Monetary Board of the Bangko Sentral ng Pilipinas there is no prohibition in the New Central Bank Act and the General Banking Law for corporations to be incorporators

Corporate Term Term of Existence - EXCEPTION

unless its articles of incorporation provides otherwise

Corporation and Persons composing the corporation are treated as one person

when corporate veil is pierced, the corporation and persons who are normally treated as distinct from the corporation are treated as one person, such that when the corporation is adjudged liable, these persons, too, become liable as if they were the corporation (Lanuza v. BF Corporation)

Cases of Piercing the Corporate Veil (FAPE) 3. PUBLIC Convenience Piercing

when the corporate fiction is used to defeat public convenience or evade an existing obligation (Sarona v. NLRC)

Cases of Piercing the Corporate Veil (FAPE) 1. FRAUD Piercing

when the corporate fiction is used to justify wrong, protect fraud, or defend a crime (China Banking Corporation v. Dyne-Sem Electronics)

Liability of Corporation for Promoter's Contracts EXCEPTIONS

when the corporation, after it has been organized: 1. adopts or ratifies the contract; or 2. accepts its benefits with knowledge of the terms thereof (McArthur v. Times Printing; Rizal Light v. Municipality of Morong)

Personality Not Abrogated

when the veil of corporate fiction is pierced in proper cases, the corporate character is not necessarily abrogated it continues for legitimate objectives (Reynoso IV v. Court of Appeals) the application of the doctrine of piercing the corporate veil does not deny the corporation of legal personality for and any and all purposes, but only for the particular transaction or instance for which the doctrine was applied the courts' action in this regard must be confined to the transactions involved in the case at bar for the purpose of adjudging the rights and liabilities of the parties in the case they have no jurisdiction to do more (Koppel (Phil.), Inc. v. Yatco)

Estoppel is a Defense Available Only to Third Persons against the Ostensible Corporation

when there is no third person involved and the conflict arises only among those assuming the form of a corporation, who therefore know that it has not been registered, there is no corporation by estoppel (Lozano v. De Los Santos)

Alter Ego Piercing Cases (Conduit/Instrumentality Cases)

where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the 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 (Maricalum Mining Co. v. Florentino)

Cases of Piercing the Corporate Veil (FAPE) 2. ALTER-Ego Piercing

where the corporation is so organized and its affairs are so conducted as to make it merely an instrumentality, agency, conduit, or adjunct of another person or corporation (Concept Builders, Inc. v. National Labor Relations Commission)

Period to Organize

while the five-year period to commence business or to organize is counted from the date of incorporation, the five-year period in case of continuous inoperation may commence thereafter or on a date after the date of incorporation