Corporate Law Notes: Concepts (02/21)

1. Definition (Sec. 2; Art. 44 (3), 45, 46 and 1775 Civil Code)
Section 2. Corporation defined. – 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.
  • Corporation 

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    • artificial being created by operation of law

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    • personality separate and distinct (from those comprising it or related to it) (Construction & Dev. Corp/ v. Cuenca (2005)

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2.  4 Corporation Attributes Based on Sec. 2:
  1. Ability to Contract and Transact (Corporation = artificial being)

    2.
  2. Creature of the Law (Created by operation of law)

    3.
  • Constutitional Provisions

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  • Civil Code Provisions (Art. 44 and Art. 45 of the Civil Code)

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    • Art. 44. The following are juridical persons:

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    1. The State and its political subdivisions;

      2.
    2. Other corporations, institutions and entities for public interest or purpose, created by law; their personality begins as soon as they have been constituted according to law;

      3.
    3. Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member

      4.
    • Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the laws creating or recognizing them

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                   Private corporations are regulated by laws of general application on the subject.
                   Partnerships and associations for private interest or purpose are governed by the provisions  
                   of this Code concerning partnerships

  • Franchises of Corporation 

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    • Corporate or general franchise 

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      • to exist as a corporation

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      • CANNOT be conveyed in the absence of a legislative authority

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    • Special or secondary franchise 

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      • certain rights and privileges conferred upon existing corporations

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      • may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property EXCEPT:  charged with public use

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     3. Strong Juridical Personality (With right of succession)
     4. Creature of Limited Powers (No powers EXCEPT: for the powers which are expressly conferred on
         it by the Corporation Code found in its charter and those that are implied by or  are incidental to its 
         existence. (Pascual and Santos Inc. v. The Members of the Tramo Wakas Neighborhood Assoc. 
         Inc. (2004))

3. Tri-level existence of the corporation
  1. Aggregation of Assets and Resources 

    2.
  2. Business Enterprise or Economic Unit

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  3. Juridical Entity

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4.  Relationships involved in a corporate setting
  1. Juridical Entity Level - State - Corporation relationship

    2.
  2. Intra - Corporate Level - 4 levels: (Contractual relationships)

    3.


  • Bet. Corp. and agents/representatives

  • Bet. Corp. and its shareholders or members

  • Bet. Shareholders and corp. directors, trustees and officers

  • Bet. and among shareholders in a common venture           


      3.  corp and 3rd parties or outsiders (Operation as a business economic unit)

 5.  Theories on the formation of corporation
  1. Theory of Concession 

    2.

  • Grant is only by virtue of a primary franchise given by the State

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Case: Tayag v. Benguet Consolidated (1968)
  • Benguet Consolidated, Inc. is a Philippine corporation owing full allegiance and subject to the unrestricted jurisdiction of local courts

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    • by-law < command of a court decree

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  • To organize a corp. that could claim a juridical personality of its own and transact business = privilege (NOT absolute right) (Ang Pue & Co, v. Sec. of Commerce (1962))

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  • Before a corp. 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 (Int'l Express Travel & Tours Services, Inc. v. CA (2000)

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  • When the law vests in a government instrumentality corporate powers, it does NOT become a necessarily a corporation

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    • UNLESS: government instrumentality is organized as a stock or non-stock corporation 

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  • All corporations,big or small (includes family corporation), must abide by the provisions of the Corporation Code (Torres v. CA (1997)

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     2. Theory of Enterprise Entity
  • Corp. is assoc. of indiv., allowed to transact under an assumed corp. name and with a distinct legal personality.  In organizing itself as a collective body, it waives no constitutional immunities and perquisites to such a body. (PSE v. CA (1997))

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  • Corps. 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 (Tan Boon Bee & Co. Inc. v. Jarencio (1988))

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  • State's approval of the corp. form sets up prima facie case that the assets, liabilities and operation of the corp. are those of the enterprise.  BUT where the corp. entity is defective, or otherwise challenged, its existence, extent and consequences may be determined by the actual existence and operations of the underlying enterprise, which by these very qualified and operation acquires a "being" of its own, recognized by law

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6. Advantages and Disadvantages of Corporate Form:
  1. 4 Advantages:

    2.
  • Strong Juridical Personality 

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    • entity separate and distinct from its stockholders (Remo Jr. v. IAC (1989))

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    • transfer of corporate assets to the stockholder = conveyance from one party to another (NOT   partition) (Stockholders of F. Guanzon and Sons, Inc v. Register of Deeds of Manila (1962))

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    • Execution pending appeal maybe allowed when "the prevailing party is already of advanced age and in danger of extinction" but NOT in this case where the winning party is a corporation.  (Manacop v. E-PCI Bank (2005))

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      • A juridical entity's existence CANNOT be likened to a natural person (its precarious financial condition is NOT by itself a compelling circumstance warranting immediate execution and does NOT outweigh the long standing general policy of enforcing only final and executory judgment. 

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  • Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. 

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  •  share of stock only typifies an aliquot part of the corporation's property, or the right to share in its proceeds to that extent when distributed according to law and equity 

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    • holder is NOT the owner of any part of the capital of the corporation 

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  • Centralized Management

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    • Sec. 23 of Corp. Code: BOD or trustees - exercises almost all the corporate powers in a corporation (Firme v. Bukal Enterprises and Dev. Corp. (2003))

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    • Exercise of the corporate powers of the corp. rest in the BOD save in those instances where the Corp. Code requires SH's approval for certain specific acts (Great Asian Sales Center Corp. v. CA (2002))

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  • Limited Liability to Investors and Officers

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    • GR: SH (distinguished from director's and trustees) =  Owners of corporate organization/investors (Don't run day-to-day operation or management) - NOT criminally liable for acts for the corp.

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    • EX: (piercing the veil)  Shown that he had knowledge of the criminal act committed in the name of the corp. and that he took part in the same or gave his consent of its commission (action or inaction)(Espiritu v. Petron Corp. (2009))

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    • Officers NOT personally liable where he signed in his official capacity (Consolidated Trust Bank v. CA (2001))

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    • Obligations incurred by the corp. acting through its directors, officers and employees

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  • Free transferability of units of ownership for investors 

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    • It is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires (PNB v. Ritratto Group (2001))

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    • Authority granted to corp. to regulate the transfer of its stock does NOT empower the corp. to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer (Thomson v. CA (1998))

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NOTE: Above are its advantages over Unregistered Associations (secret among its members) = co-ownership - no juridical personality 

  2.  Disadvantages:
  • Abuse of corp. management -lack of personal element (SH only theoretical)

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  • Abuse of limited liability feature

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  • High cost of maintenance - high degree of governmental control and supervision

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  • Double taxation

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    • Dividends received by indiv. from domestic corps are subject to final 10% tax for income earned on or after Jan 1 1998 (Sec. 24 (B)(2), 1997 NIRC)

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    • Inter-corporate dividends bet. domestic corps. - NOT subject to any tax (Sec. 27 (D)(4), 1997 NIRC)

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    • There is re-imposition of the 10% "improperly accumulated earning tax" for holding companies (Sec. 29, 1997 NIRC)

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7. Compared with Other Business Media (in terms of risk, profits and control)
  • Sole Proprietorships

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    • NOT vested with juridical personality to file or defend an action

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    • highest form of unlimited liability

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

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    • no right of succession (withdrawal, death,incapacity or insolvency of any partner would automatically bring about the dissolution of the partnership

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    • Can a defective attempt to form a corp. result at least in a partnership? 

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      • only with their intent = de facto partnership (liable as general partners) - delectus personae feature

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Case: Pioneer Insurance v. CA (1989)  (pp. 32-34)
  • GR: Partnership inter se does NOT necessarily exist, for ordinarily CANNOT be made to assume the relation of partners as bet. themselves, when their purpose is that no partnership shall exist

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  • EX: Should be implied only when necessary to do justice bet. the parties (i.e. only pretend to make others liable)

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  • having reaped the benefits of the contract entered into by persons w/ whom he previously had an existing rel., he is deemed to be part of said assoc. and covered by the doctrine of estoppel

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  • Joint Ventures -form of partnership and governed by the law on partnership

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    • assoc. of persons or companies jointly undertaking some commercial enterprise

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    • generally all contribute assets and share risks

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    • requires 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 (Kilosbayan v. Guingona (1994))

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  • Cooperatives (Art. R.A. No. 6938)

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    • autonomous and duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve their social, economical and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services and by accepting a fair share of the risks and benefits 

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    • primary objective: self-help

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    • established to provide a strong social and economical organization to ensure that the tenant-farmers will enjoy a lasting basis that benefits agrarian reforms (Corpuz v. Grospe (2000))

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  • Business Trusts (Art. 1442 Civil Code) - no juridical personality and ownership is split between:

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    • trustee who assumes legal or naked title 

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    • beneficiary who has beneficial title

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  • Sociedades Anonimas

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    • commercial partnership where upon the existence of the public instrument in w/c its articles of agreement appear (NOT necessary to make it a judicial person but only to show that it partook of a form of corp.), and the contribution of funds and personal property, becomes a judicial person - 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 corp. - not a gen. nor a limited co-partnership .

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    • Introduced by the Spanish Code of Commerce and are simile to English joint stock co. than modern commerce corp. (Benguet Consolidating Mining Co. v. Pineda (1956))

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    • Our corp. law recognizes the diff. bet. this and corp. and will NOT apply legal provision similarly. (Phil. Product. Co. v. Primateria Societe Anonyme (1965))

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  • Ceuntas En Participacion

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    • accidental partnership constituted in a manner that its existence was only known to those who had interest in the same, there being no mutual agreement bet. the partners, and w/ corp. name indicating to the public in some way that there were other people besides the 1 who ostenibly managed and conducted the business, governed under Art. 239 of the Code of Commerce. 

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    • Those who contracted w/ person under whose name the business of such partnership of cuentas en participation 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 3rd person who contracted w/ the manager UNLESS such manager formally transfers his right to them (Bourns v. Carman (1906))

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