Corporate Law Notes: Nature and Attributes of a Corporation (03/21)

Section 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.

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

GR: The Constitution explicitly prohibits the regulation by special laws of private corporation

EX: government-owned or controlled corporations (GOCCs)

(Veterans Federation of the Philippines v. Reyes (2006))

Case: P.D. 1717 creating New Agrix, Inc violates the Constitution prohibits the formation of a private corporation by special legislative act which is NOT a GOCC, since NDC was merely required to extend a loan to the new corp, and the new stocks of the corp. were to be issued to the old investors and stockholders of the insolvent Agrix upon proof of their claims against the abolished corp. (NDC v. Veterans Bank (1990))

2. Corporation as a person

Due process and equal protection

Unreasonable searches and seizure

BUT officers have NO cause of action to assail the legality of the seizures because the corp. has a personality distinct and separate from those of said officers (Stonehill v. Diokno 1967)

Can be contested only by the party whose rights have been impaired thereby; objection to an unlawful search is purely personal and CANNOT be availed of by 3rd parties such as officers who intrpose in their personal interests

3. Not entitled to privilege against self incrimination - personal one only applicable to natural persons

3. Cannot Practice of Profession - lack moral and technical competence require by the PRC (ULEP v. The Legal Clinic (1993))

Case: A corp. engaged in the selling of eyeglasses and which hires optomtrists - NOT engaged in the practice of optometry (Alfalfa v. Acebedo Optical Co. (2002))

EX: Architectural professional corporations allowed under R.A. 9266 (2004)

4. Liability for Torts

Corporation must be held liable for all the contracts and defaults that arise from those entered into by its agent:

w/in the scope of its authority; or

outside the scope of his scope which has been ratified by the corp, through its BOD

A corp. is liable whenever a tortuous act is committed by an officer or agent under express direction or authority:

fro the stockholders or members acting as a body; or

generally, from the directors as the governing body

GR: directors and officers of a corp. CANNOT be held personally liable

EX: acted in bad faith or with gross negligence - solidarily liable with the corp. (Sec. 31 of the Corp. Code)

Loss or damage as a result of negligence and even fraud, a reasonable business risk that every corporate principal must assume to be an integral part of the costs of doing business

Remedy of the Corp. acting through its BOD: to recover the damages from the acting corp. officer who was directly responsible for the tort act

Case: PNB v. CA (1978) - pp. 42

Same manner as natural persons - Principal or master is liable for every tort which he expressly directs or authorizes

Art. 21 of the Civil Code: any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.

Corporate Tort - consists in violation of a right given or the omission of a duty omission of a duty imposed by law; breach of a legal duty i.e. failure to provide separation pay under the Labor Code (Sergio F. Naguit v. NLRC (1997)) - pp. 43

Case: Professional Services, Inc v. CA (2010)

While in theory a hospital as a juridical entity CANNOT practice medicine, in reality it utilizes doctors, surgeons and medical practitioners in the conduct of its in the conduct of its business of facilitating medical and surgical treatment. Within that reality, 3 legal relationships crisscross:

between the hospital and doctor practicing within its premises

between the hospital and the patient being treated or examined in its premises

between the patient and the doctor

Regardless of its relationship with its doctor, the hospital may be held directly liable to the

patient for its own negligence or failure to follow established standard of conduct to which it

should conform as a corporation

Art. 102. Subsidiary civil liability of innkeepers, tavernkeepers and proprietors of establishments. — In default of the persons criminally liable, innkeepers, tavernkeepers, and any other persons or corporations shall be civilly liable for crimes committed in their establishments, in all cases where a violation of municipal ordinances or some general or special police regulation shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable for the restitution of goods taken by robbery or theft within their houses from guests lodging therein, or for the payment of the value thereof, provided that such guests shall have notified in advance the innkeeper himself, or the person representing him, of the deposit of such goods within the inn; and shall furthermore have followed the directions which such innkeeper or his representative may have given them with respect to the care and vigilance over such goods. No liability shall attach in case of robbery with violence against or intimidation of persons unless committed by the innkeeper's employees.

Art. 103. Subsidiary civil liability of other persons. — The subsidiary liability established in the next preceding article shall also apply to employers, teachers, persons, and corporations engaged in any kind of industry for felonies committed by their servants, pupils, workmen, apprentices, or employees in the discharge of their duties.

5. Corporate Criminal Liability (Art. 102 and 103, RPC)

Case: West Coast Life Insurance Co. v. Hurd (1914)

Corporation = lack of malicious intent so cannot be held criminally laible

Case: People v. Tan Boon Kong (1930)

corporation can act only through its officers and agents and where the business itself involves a violation of the law, the correct rule is that all who participate in it = liable

Case: Sia v. People (1983)- *Strange and Exceptional Case

Only a corp. officer can only be held liable for the crime committed by or in behalf of a corp. only in cases when the "corp. was directly required by law to do an act in a given manner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liable criminally"

For crimes committed by corp. officers criminally charged, existence of criminal liability for which the petition is being prosecuted must be clear and certain, here it may not be said to be beyond reasonable doubt - Sia was not criminally liable despite using consigned goods for personal use

Case: Ong v. CA: The Trust Receipt Law recognizes the impossibility of imposing the penalty of imprisonment on a corp, hence, if the entrustee is a corp. the law makes the officers or employees or other persons responsible for the offense liable to suffer the penalty of imprisonment

When the criminal statute forbids the corp. itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. (People v. Concepcion (1922))

The existence of the corp. entity does NOT shield from prosecution the corp. agent who knowingly and intentionally causes the corp. to commit the crime. The corp. obviously acts, and can act, only by and through its human agents, and it is their conduct which the law must deter (The Exec. Sec. v. CA (2004))

If the crime is committed a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of the crime and penalty thereof. A corp. cannot be arrested and imprisoned. However, a corporation may be charged and prosecuted for a crime if the imposable penalty is a fine (According to Atty. Dy, this is civil liability). Even if the statute prescribes both prescribes both fine and imprisonment, corp. only fined (Ching v. Sec. of Justice (2006))

Case: Ching v. Sec. of Justice (2006)

If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense shall be charged and penalized for the crime

because of the nature of the crime and the penalty: a corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment.

However, a corporation may be charged and prosecuted for a crime if the imposable penalty is fine.

Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined

When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it creates a criminal offense which, otherwise, would not exist and such can be committed only by the corporation.

But when a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation may be punished.

On the other hand, if the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty therefor to be suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such individuals will suffer such penalty.

Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime.

The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those corporate agents who themselves commit the crime and to those, who, by virtue of their managerial positions or other similar relation to the corporation, could be deemed responsible for its commission, if by virtue of their relationship to the corporation, they had the power to prevent the act. Benefit is not an operative fact.

Case: Consolidated Bank v. CA (2003)

Solidbank is bound by the negligence of its employees under the principle of respondeat superioror command responsibility

The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana

In this case, L.C. Diaz was guilty of contributory negligence in allowing a withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the liability of Solidbank should be reduced.

While it is true that a criminal case can only be filed against the officers and NOT against the corp. itself, it does NOT follow that the corp. CANNOT be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corp. for the criminal proceedings brought against its officer (Cometa v. CA (1999))

Moreover, apart from its sweeping allegation that respondents misappropriated or converted its money placements, petitioner failed to establish the particular role or actual participation of each respondent in the criminal act. Neither was it shown that they assent to its commission. It is basic that only corporate officers shown to have participated in the alleged anomalous acts may be held criminally liable (Cruzvale v. Eduque (2009))

Corporate criminal recognized in the anti-money launching law of 2001

Penalty: applies specifically to the corporate offender - suspension or revocation of its license or franchise

Recovery of Moral and Other Damages

A corp. 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 corp. may have a good reputation which if besmirched, may be a ground for the award of moral damages. (Mambulao Lumber Co. PNB (1968))

Corp, being an artificial person and having existence only in legal contemplation, has no feelings, emotions nor senses; therefor it CANNOT experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it slows from real ills, sorrows, and griefs of life - all of which CANNOT be suffered by an artificial person (Prime White Cement Corp. v. IAC (1993))

Corp. may recover moral damages if it has a good reputation that is debased, resulting in social humiliation is an obiter dictum. Recovery if a corporation would be under Art. 19, 20 and 21 of the Civil Code but which requires a clear proof of malice of bad faith(ABS-CBN v. CA (1999))

An educational corp's claim for moral damages arising from libel fails under Art. 2219(7) of the Civil Code, which expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation, and does NOT qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person can validly complain for libel or any other form of defamation and claim for damages (Filipinas Broadcasting Network v. Ago Medical Educational Center (2005))

There must be actual injury before moral damages can be awarded (Crystal v. BPI)

Corporate Nationality

Sec. 123. Definition and rights of foreign corporations. – For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency.

GR: Place of incorporation test - under whose laws incorporated (Sec. 123)

Example: foreign corp. even when 100% of its equity is owned by Filipino citizens continues to be considered as a foreign corp.

EX: Foreign Investment Act 91 - a corp. organized abroad and registered as doing business in the Phils. under the Corp. Code 100% of the capital stock outstanding and entitled vote is wholly owned by Filipinos

Citizen Retention and Re-acquisition Act of 2003: reacquisition of Phil. citizenship by a former Filipino had been neutralized as an American citizen had the legal effect of converting his equity holdings in a domestic corp. to be re-classified as Filipino investment

EX: Control Test (also applies) - by nationality of the majority of the SH on whom equity control is vested on theory that they will be able to elect the majority of the BODs

does NOT distinguish between voting and non-voting shares

Exploitation of Natural Resources

Sec. 140. Stock ownership in certain corporations. - Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development.

In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of business and industry.

Sec. 140 of the Corporation Code

Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant.

The State shall protect the nation's marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.

The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fish- workers in rivers, lakes, bays, and lagoons.

The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources.

The President shall notify the Congress of every contract entered into in accordance with this provision, within thirty days from its execution.

Sec. 2, Art. XII of the 1987 Constitution

Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.

Sec. 7, Art. XII of the 1987 Constitution

Policy of the State it to ensure that the exploitation of natural resources or the pursuit of activities deemed to be of public of public or national interest are in the control of policies

Place of principal business test

corp. is subject to the jurisdiction of the place where its principal office or center of management (siege is social) is located

to determine whether a state has jurisdiction over the existence and legal character of a corp, its capacity or powers, internal org., capital structure, the rights and liabilities of directories, officers, and SHs towards each other and to creditors and 3rd persons

Case: Roman Catholic Apostolic Administrator of Davao v. LRC (1957) - pp.59

A corporation sole consists of one person only, and his successors (who will always be one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had.

Corporation sole (a Canadian Citizen) would have no nationality at all to disqualify it from owning land in the Philippines -depends on its members

Members of the Roman Catholic Apostolic faith within the territory of Davao are predominantly Filipino citizens

According to Dean Villanueva it has flaws unlike in

Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens because (Register of Deeds of Rizal vs. Ung Sui Si Temple)

ownership divorced from control is NOT true ownership

members of the religious association CANNOT overrule or override the decision of the sole corporator

2. Ownership of Private Land

Strategic Alliance Dev. Corp. v. Radstock Securities (2009)

Radstock, foreign corp. with unknown owners whose nationalities are also unknown is NOT qualified to own land in the Phils. since such foreign corp. is disqualified to own land in the Phils., it is also disqualified to own the rights to ownership of lands in the Phils.

The reg. of the donation of land to an unincorporated religious org., whose trustees are foreigners, would violate constitutional prohibition and the refusal would NOT be in violation of the freedom of religious clause.

The fact that the religious assoc. has no capital stock does NOT suffice to escape the constitutional inhibition, since it is admitted that its members are foreign nationality... and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens

J.G. Summit Holdings v. CA (2005)

If the foreign shareholdings in a landholding corp. exceed 40%, it is NOT the foreign SH ownership of the shares w/c is adversely affected by the capacity of the corp. to own land - that is, corp becomes disqualified to own land

The prohibition in the Constitution applies only to ownership of land, it does NOT extend to immovable or real property as defined under Art. 415 of the Civil Code. Otherwise, we would have a strange situation where the ownership of immovable property such as trees, plants and growing fruit attached to the land would be limited to Filipinos and Filipino corp. only

3. Public Utilities

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least 60% of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than 50 years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.

Sec. 11 Art. XII Constitution

Case: People v. Quasha (1953)- pp.61

Primary franchise: mere formation of public utility corp. - NOT prohibited

Secondary Franchise: granting of a franchise or other form of authorization for the operation of a public utility to a corp. already in existence but w/o the req. proportion of Filipino capital -prohibited

The primary franchise - right to exist is vested in the indiv. who compose the corp. and NOT in the corp. itself and CANNOT be conveyed in the absence of a legislative authority so to do

Special or secondary franchise - vested in the corp. and may ordinarily be conveyed or mortgaged under a general power granted to a corp. to dispose of its property EX: special or secondary franchises as are charged w/ a public use (JR Business Corp. v. Imperial Insurance (1964))

Clear distinction bet.: (Tatad v. Garcia Jr. (1995)) - pp. 62

operation of a public utility (component of corp. venture)

ownership of the facilities and equipment used to serve the public (assets-only level of existence)

4. Mass Media

Section 11. (1) The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens.

The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combinations in restraint of trade or unfair competition therein shall be allowed.

Sec. 11(1) Art XVI, 1987 Constitution - 100% Filipino ownership + 100% Filipino Management

Sources:

P.D. 36 amended by P.D.s 191 and 197

DOJ Opinion No. 120.s of 1982

Sec. 2 OD 576

SEC Opinion Mar 24 1983

DOJ Opinion 163 s. 1973

SEC Opinion 15 July 1991

XXV SEC Quarterly Bulltin (No. 4 Dec 1991) pp. 31

a. Cable Industry

Cable TV operations shall be governed by E.O. No. 205 s. 1987

CATV operators offer public telecommunications services - treated just like a public telecommunications entity (NTC Memo Circular No. 8-9-95)

Cable TV as a form of mass media which must be owned and managed by Filipino citizens, or corps., cooperatives or assocs., wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution (Allied Broadcasting v. Federal Comm)

b. Advertising Business

(2) The advertising industry is impressed with public interest, and shall be regulated by law for the protection of consumers and the promotion of the general welfare.

Only Filipino citizens or corporations or associations at least 70% of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry.

The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines.

Sec. 11(2) Art XVI, 1987 Constitution - 70% Filipino owned + all Filipino executive and managing officers

c. War-Time Test (Filipinas Compania de Seguros v. Christern (1951)

In times of war, the nationality of a private corp. is determined by the char. or citizenship f its controlling SH

d. Investment Test as to "Phil. Nationals"

Philippine national =

citizen of the Philippines

of a domestic partnership or association wholly owned by citizens of the Philippines

corp. organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines

corp. organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos; or

a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals

PROVIDED: That where a corporation and its non-Filipino stockholders own stocks in a SEC registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least 60% of the members of the BODs of each of both corporations must be citizens of the Philippines, in order that the corporation, shall be considered a "Philippine national." [as amended by Republic Act No. 8179]

investment = equity participation in any enterprise organized or existing under the laws of the Phils.

Sec. 3 (a) & (b), RA 7042, Foreign Investment Act of 1991

e. Grandfather Rule

method by w/c the % of Filipino equity is computed, in a corp. engaged in fully or partly nationalized areas of activities provided for under the Constitution and other nationalized laws, in cases where corp. SH are present in the situation, by attributing the nationality of the 2nd or even subsequent tier of ownership to determine the nationality of the corporate SH

Up to what level do you apply the grandfather rule?

Case: Palting v. San Jose Petroleum - pp. 65

SC: refused the registration and sale into the Phils. of securities of a Panamanian registered co. the proceeds of w/c were to be exclusively used to finance the oil exploration efforts of a domestic corp., which was owned 90% by the Panamanian Co

SJP > SJO (domestic)- 90% owned by SJP (foreign) wholly owned by Pantepec Oil Co. and Pancoastel Petroleum, both organized and existing under the laws of Venezuela

CANNOT go beyond the level of what is reasonable

1977 SEC internal memorandum

2 levels of corp. relations - publicly-held corps. or where shares are traded in the stock exchange

3 levels of corp. relations - closely held corps. or where shares of w/c are not traded in the stock exchange

CB Circular # 1171

4 level of corp ownership - banking institutions

Section 140. Stock ownership in certain corporations. - Pursuant to the duties specified by Article XIV of the Constitution, the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws, and shall submit to the Batasang Pambansa, whenever deemed necessary, a report of its findings, including recommendations for their prevention or correction.

Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint or trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development.

In recommending to the Batasang Pambansa corporations, business or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential, as well as other factors which are germane to the realization and promotion of business and industry.

f. Special Classifications (Sec. 140) (Policy of the Corp. Code on the Control Test)

Phil. authority will always consider the person from the point of view of Phil. doctrine and will treat it as Phil. national if it falls squarely w/in the test

double or multiple nationality arising from different nationality tests employed by various jurisdictions - NOT impt. consideration under the Phil. setting