COPORATION LAW

I.
BRIEF
HISTORY
CORPORATION LAW

OF

Construction reasonable and literal

construction which will best execute
its purpose.
Sociedad Anonimas
Derived from
commerce.

Spanish

Code

of

A commercial partnership, a sort of

corporation, where upon the execution
in the public instrument in which the
articles of incorporation appears, and
the contributions of funds and
personal property, becomes a juridical
person.
The same as corporation in terms of
juridical entity, limited liability and
centralized management, but different
in terms of organizations, distribution
of dividends and those in which equity
intervened for the benefit of creditors.
However, American colonized the
Philippines and removed the traced of
Spanish laws. Thus, under our
Corporation Law, a sociedad anonima
existing at the time of the passage of
the law was authorized at its option to
either continue doing business a such
entity or to transform and be
organized and by the virtue of the
provisions of the coporate law. If opted
to reorganized, its assets will be
transferred to the new corporation.
If did not opted to organized under the
Corporation code, they will be
governed by the law inforced before
the passae of the Philippine Corporate
law.
Cuentas en Participacion

Bourns vs Carman, described it as a

sort of an accidental partnership
constituted in such a maner that its
existence was only known to those
who had interest in it, there being no
mutual
agreement
between
the
partners, and without a corporate
name indicating to the public in some
way that here were other people
besides the one who ostensibly
managed and conducted the business,
governed under Art. 238 of Code of
Commerce.
Legal consequences of Cuentas en
Participacion those who contract
with the person whose name the
business of cuentas en partipacion
was conducted, only had a right of
action against such person and not
against the other persons interested in
the venture.
The Corporation Law, RA. 1459
The first corporate statue in PH
jurisdiction, became effective on April
1, 1906.
The Corporation Code, BP, 69
Became effective on May 1, 1980.
Clarified the obligations of corporate
directors and officers, expressed in
statutory
language,
established
principles and doctrines, and provided
a chapter for closed corporations.
Purpose of Corporation Code, to
establish a new concept of business
corporation so that they are not
merely entities established for private
again but effective partners of
National Government spreading the
benefits of capitalism for social and
economic development of the nation.

II.
NATURE
ATTRIBUTES
CLASSIFICATIONS
CORPORATIONS

AND
OF

Corporation is an artificial being

created by n operation of law, having
the right of succession and the
powers, attributes and properties
expressly authorized by law or
incident to its existence.
A. THORIES OF FORMULATION
1. Theory of Concession
Tayag vs Benguet Consolidated, a
corporation is an artificial being,
created by operation of law, and that
it owes its life to the state, its birth
being purely dependent on its will.
Under this theory, a corporation as
known tto the Philippine jurisprudence
is a creature without any existence
until it has received imprimatur of the
state acting according to the law. It is
logically inconceivable therefore that it
will have rights and privileges of
higher priority than its creation.
It rejects the genosenschaft theory
which states that it is independent of
concession from the State.
Thus, the state may compel a
corporation to issue replacements of
certificate of stocks even though it will
violate their by-laws.
Torres vs Court of Appeals declared
that all corporations, big or small,
must abide with the provisions of
Corporation Code.
Thus, the corporation is simply a
creature of State and has limited
capabilities.

2. Theory of Enterprise Entity

Under the enterprise theory, the

corporate entity is viewed as taking its
significance primarily from the reality
of the underlying enterprise, formed or
in formation; that the States approval
of the corporate form set ups a prima
facie case that the assets, liabilities
and operations of the corporation are
those of enterprise.
A corporation is but an association of
individuals, allowed to transact under
an assumed corporate name, and with
a distinct legal personality organizing
itself as a collective body, it waives no
constitutional
immunities
and
perquisites appropriate to such body.
Example, the state would not destroy
a corporation without observing the
due process close.
The theory is embodied also in
corporation code, section 10, that
there be no corporation of less than 5
members but not more than 15.
Tri-level
Existence
Corporate setting

of

the

First, the corporation as a juridical

entity
or
fiction,
which
views
relationship between the state and the
corporation.
Second, the corporate setting provides
for contractual relationships on 4 sub
levels, namely:
a. Between corporation and its
agents and representatives to
act in the real world, such as
directors
and
its
officers,
governed suppletory by the Law
on Agency
b. Between the corporation and its
shareholders and members
c. Between
and
among
the
shareholders
in
common
venture

d. Between the corporation and

third parties or outsiders, which
essentially governed by the
Contract Law, and Labor Law
when it comes to relationship of
officers to its employees.
Third, the corporation becomes in its
operation a business economic unit, a
business enterprise, or what is called
in Accounting as a Going Concern.
B. CONSTITUTIONAL PROVISIONS
AND CIVIL CODE PROVISIONS ON
CORPORATION LAW
1. Constitutional Provisions
The power to create corporation is one
of the attributes of sovereignty. The
legislature
may,
subjective
to
restrictions of Constitution, create a
particular corporation.
Under Sec. 16, Art XII of the 1987
Constitution, the congress cannot,
except by general law, provide for the
formation, organization, or regulation
of private corporations. Thus, they can
also
create
public
corporations
through special charter and not
private corporations.
Additional Constitutional Provisions:
Secs. 1, 10, and 12 of Art. XII, 1987
Constitution
Section 1. The goals of the national
economy are a more equitable
distribution
of
opportunities,
income, and wealth; a sustained
increase in the amount of goods
and services produced by the
nation for the benefit of the people;
and an expanding productivity as
the key to raising the quality of life
for
all,
especially
the
underprivileged.
The
State
industrialization

shall
promote
and
full

employment based on sound

agricultural
development
and
agrarian reform, through industries
that make full of efficient use of
human and natural resources, and
which are competitive in both
domestic and foreign markets.
However, the State shall protect
Filipino enterprises against unfair
foreign competition and trade
practices.
In the pursuit of these goals, all
sectors of the economy and all
region s of the country shall be
given optimum opportunity to
develop.
Private
enterprises,
including
corporations,
cooperatives, and similar collective
organizations, shall be encouraged
to broaden the base of their
ownership.
Section 10. The Congress shall,
upon recommendation of the
economic and planning agency,
when the national interest dictates,
reserve
to
citizens
of
the
Philippines or to corporations or
associations at least sixty per
centum of whose capital is owned
by such citizens, or such higher
percentage as Congress may
prescribe,
certain
areas
of
investments. The Congress shall
enact measures that will encourage
the formation and operation of
enterprises whose capital is wholly
owned by Filipinos.
In the grant of rights, privileges,
and concessions covering the
national economy and patrimony,
the State shall give preference to
qualified Filipinos.
The State shall regulate and
exercise authority over foreign
investments within its national
jurisdiction and in accordance with
its national goals and priorities.

Section 12. The State shall promote

the preferential use of Filipino
labor, domestic materials and
locally produced goods, and adopt
measures that help make them
competitive.
Nationalized Undertakings
Secs. 19 and 20, Art. II of Consti
Section 19. The State shall develop
a self-reliant and independent
national
economy
effectively
controlled by Filipinos.
Section 20. The State recognizes
the indispensable role of the
private sector, encourages private
enterprise, and provides incentives
to needed investments.
Sec. 17, Art. XII of Consti
Section 17. In times of national
emergency,
when
the
public
interest so requires, the State may,
during the emergency and under
reasonable terms prescribed by it,
temporarily take over or direct the
operation of any privately-owned
public utility or business affected
with public interest.

2. Civil Code Provisions

Under the Art. 44 of the Civil
Code, other than the State and its
political
subdivisions
and
other
corporations, institutions and entities
for public interest or purpose, the law
recognizes corporations, partnerships,
and association for private interest or
purpose to which are granted a
juridical personality, separate and
distinct of each shareholder, partner
or member.
Art. Article 45 of the Civil Code, the
juridical persons organized as public
corporations are governed by the laws
creating and organizing them, while
private corporations are governed by

the laws of general application on the

subject, i.e. Corporation Code.
C.
FRANCHISES
CORPORATIONS

OF

Corporate/General/Primary Franchise
franchise to exist as a corporation
Secondary or special franchise are
certain rights and privileges conferred
on existing corporations, such as right
to use streets of a municipality to lay
pipes or tracks, erect poles, or string
wires
D.
ATTRIBUTES
CORPORATION

OF

1. Artificial being it is a fiction of

law which creates the person of the
corporation, with the same attributes
of an individual with full capacity to
enter into contractual relations.
2. Create of the law the juridical
existence
of
a
corporation
is
dependent on the consent or grant of
the state. A corporation cannot come
into being by mere consent of the
parties, there must be a law granting
it, and once granted, forms the
primary franchise of the corporation.
3. Right of succession Under the Sec.
3 of the Corporation Code, the
corporation has the capacity for
continuous existence despite the
death
and
replacement
of
its
shareholders or members, for it has
personality separate and distinct from
those who compose it.
4. Creature of enumerated powers,
attributes and properties Under the
classic concession theory, once a
corporation has been granted a
juridical personality by the State, it is
allowed and can legally exercise only
such powers granted by the law for its

creation, as opposed to a natural

person who has the ability to exercise
any power an denter into any business
activity and the only limitation would
be that an individual has no right to
enter into transaction contrary to law,
moral and public policy.
On other jurisdiction, they adopted the
creature of unlimited powers that a
corporation is organized with full
powers to undertake any venture and
engage in any transaction, provided it
is not contrary to laws, morals, and
public policy.
However, this notion of unlimited
powers under Sec.2 is buttressed
(strengthened) by the Sec 45 of the
Corporation Code which defines ultra
vires all acts or transactions effected
outside the express, implied or
incidental powers of the corporation.
A corporation has no power except
those expressly conferred on it by
the Corporation Code and those
that are implied by or are
incidental to its existence.

E.
ADVANTAGES
OF
THE
CORPORATE MIDUM VIS A VIS
OTHER
FORMS
OF
BUSINESS
ORGANIZATION
1. Strong juridical personality
The corporation has legal capacity to
act and to contract as distinct person
and it has continuity of existence.
Also, the jurisprudential law governing
corporations are more established.
2. Centralized management a
corporations
management
is
centralized in the Board of Directors,
to whom also granted are all corporate
powers under Sec. 23 of the

Corporation Code. Note Stockholders

are not agents of corporation, nor can
they bind the corporation unlike the
partnership.
3. Limited liability to investors
The liability of investors in a
corporation is limited to their shares
as distinguished from partnerships
where even if the assets of the
partnership are already exhausted,
creditors can still go after the
individual properties of partners.
4. Free transferability of units of
investment As a general rule, its
certificate of stocks can be transferred
without
the
consent
of
other
stockholders.
5. Advantages over unregistered
associations these are perpetual
succession of its corporate name and
in an artificial form; it has the capacity
to take and grant property, and
contract obligations; it can sue or be
sued under its corporate name as
juridical person; it has the capacities
to receive common grants of privileges
and immunities; and its stockholders
or members generally have no liability
beyond the value of their shares.
Note if their articles of incorporation
are kept secret among the members,
it has no juridical personality and they
shall be governed by the rules on copartnership Art. 1755.
Disadvantages
medium

of

corporate

1.
Commplicated
and
costly
formation and maintenance there
is greater degree of governmental
control and supervision than other
forms of business organizations
2. Lack of personal element and
abuse of corporate management

3. Limited liability hits innocent

victims However, the abuse has
been countered by the doctrine of
piercing of corporate veil.
4.
Double
taxation

it
is
traditionally subjected to heavier
taxation than other forms of business
organization; the profits of the
corporation
which
are
already
subjected to corporate income tax
when declared and distributed as
dividends and are again subjected to
further income tax.
Q: Does defective corporation
result in a partnership?
A: It depends.
The parties who had intended to
participate or actually participated in
the business affairs of the proposed
corporation would be considered as
partners under a defacto partnership,
and would be liable as such in an
action for settlement of partnership
obligations.
Parties who took no part except
subscribe to shares of stock in the
intended corporation, do not become
partners with other subscribers who
engaged in business under the name
of pretended corporation, and are not
liable for an action for settlement of
alleged partnership contribution.
Business trusts as compared to
corporation, business trust is created
under the terms of deed of trust which
is easier and less expensive to
constitute for it is not bounded by the
legal requirements of the former, it
does not have a separate juridical
personality and mainly governed by
the law of contracts.
Joint ventures a joint venture is a
form of partnership and should thus be

governed by the law on partnerships

which would then include features of
separate juridical personality, mutual
agency among co-ventures, and
unlimited liability.
Joint venture is an association of
persons
or
companies
jointly
undertaking
some
commercial
enterprise; generally all contribute
assets and share risks.
Cooperatives is an autonomous
and duly registered association of
persons, with a common bond of
interest, who have voluntarily joined
together to achieve their social,
economic and cultural needs and
aspirations by making equitable
contributions to the capital required,
patronizing their own products and
services, and by accepting a fair share
of the risks and benefits of the
undertaking
in
accordance
with
universally
accepted
cooperative
principles.
Unlike ordinary corps, they are
governed by democratic control and
shall
have
one-member-one-vote
principle; where the board of directors
manages its affairs of cooperative, the
General Assembly of full membership
exercises all rights and performs all
obligations of the cooperative, and
under the control of Cooperative
Development Authority and not the
SEC.
The objective of cooperative is selfhelp, to improve the quality of life of
its members.
F. ENTITLEMENT OF CORPORATION
TO CONSTITUTIONAL GUARANTEES

1. Due process close Philippine bill

of rights are universal in application to

all persons within its territorial

jurisdiction without regard to any
differences of race, color or nationality.
The word person includes aliens
private corporations, likewise are
persons within the scope of guaranties
in so far as their property is
concerned.
2.
Unreasonable
search
and
seizure it is recognized that the
corporations are protected by the
constitutional
guarantees
against
unreasonable search and seizures.
In Stonehill vs Diokno, the Court
ruled that the officers of a corporation
from which documents, papers, and
things were sized have no cause of
action to assail the legality of the
seizures, regardless of the amount of
the shares of stock or of the interested
of each of them in the corporation and
whatever the offices they hold therein
maybe, because the corporation has a
personality separate and distinct from
those of said officers. IT held that the
legality of seizure can be contested
only by the party whose rights have
been
impaired
thereby
and
anobjection to an unlawful search is
purely personal and cannot be availed
of third parties, such as officers of the
corporation who interpose it for their
personal interests.
3. Right Against Self Incrimination
In Bache vs Co, the court denied that
corporation have a right to claim on
constitutional
right
against
selfincrimination. This was affirmed in the
Bataan Shipyard vs PACGG, and held
that while an individual may lawfully
refuse
to
answer
incriminating
questions,
unless
protected
by
immunity statute, it does not follow
that a corporation, vested with special
privileges and franchises may refuse

to show its hand when charged with

an abused of such privilege.
Corporations
rights
to
act
as
corporation are only preserved to it so
long as it obeys its creator.
Unlike the right against unreasonable
seizures, the right of self-incrimination
does not really result in physical
intrusion
into
the
premises
of
corporation, because it would require
only the corporation, through its
agents, produce records and books
before the courts.
G. LIABILITY ON TORTS
The liabilities of the corporation for
tort committed by tits agent must
generally follow the rules provided in
law of agency.
Firstly, a corporation must be held
liable for all contracts and default that
arise from those entered into by its
agent within the scope of his
authority, or even outside but ratified
by the corporation.
Secondly, the acting officer is solidarily
liable
with
the
corporation
for
damages resulting from his negligence
as joint-tortfeasor.
In Philippine National Bank vs Court of
Appeals set out clearly the nature of
the liability of the corporation for the
tortious acts of its directors or officers.
In that case, it was shown that the
PNB, through unreasonableness of its
Board in refusing to timely approve
the lease of sugar quota allocation
mortgaged with the bank, caused its
borrower to lose the lease income it
was to earn therefrom, which rentals
were more than enough to fully paid
the loan obligations of the borrower
with the bank.

The lower court found the bank,

through
the
unreasonable
intransigence of its directors, as being
guilty of torts under Art. 19 of Civil
Code which mandates that every
person must in the exercise of his
rights and in the performance of its
duties, act with justice give everyone
his due and observe honestly and
good faith.
NOTE Can a corporation be held
liable even without express direction
from the board or ratification?
Yes. When the tortious act arises from
or is connected with the business of
the corporation, it would be safe to
assume thar the corporate principal
would also be liable under the premise
that when acting in the legal or
commercial world, every corporation
must necessarily rely upon the
intervention of individuals to act on its
behalf,
and
therefore
human
imperfection that cause 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 and for which
the corporate coffers must stand to
cover when it does arise. Ano daw?
In such case, the remedy of the
corporation, acting through its board,
is to recover the damages from the
acting corporate officer who was
directly responsible.

H.
CRIMINAL
CORPORAITON

LIABILITY

OF

Note in Philippine jurisdictions,

corporations cannot be held criminally
liable even though there are laws that
they may violate.

The primary reason why corporations

cannot be proceeded against as
defendants or accused in criminal
proceedings is that there are no
existing laws by which to support such
process.
Note, in People vs Concepcion, when a
criminal statute forbids a corporation
itself from doing an act, it actually
forbids its board of directors.
Note however, that the corporation
would still be civilly liable from civil
obligations arising from criminal act.
Note that under the Trust Receipts law,
and if the entrustee is the corporation,
the law expressly made the officers, or
employees
or
other
persons
responsible for the offense liable to
suffer the penalty.
Note,
regarding
the
Anti-Money
Laundering law, the corporation may
be an accused, and in case of
violation, the court may suspend or
revoke its license.
I.
ENTITLEMENT
DAMAGES

TO

MORAL

The court has inconsistent decisions

regarding this matter.
In Mambulao Lumber vs PNB, the court
held that since corporation is artificial
person,
and
cannot
experience
physical sufferings, there would be no
basis for moral damages.
In Primewhite Cement vs IAC, the
supreme court help that if the
corporations reputation and good will
have been prejudiced, there can be no
reward for moral damages.
In Asset Privitization Trusts vs CA, the
court held that the corporation may
receive
moral
damages
for
besmirched reputation.

However, the Supreme Court in the

case of ABS CBN vs Court of Appeals,
held that they are not entitled of
moral
damages,
and
the
pronouncement in previous cases
are mere obiter.

a foreign corporation is one formed,

organized or existing under any laws
other than those of Philippines and
whose laws allow Filipino citizens and
corporations to do business in its own
country or state.

In the case of Meralco vs Team

Electronics, the Supreme Court goes
back to its previous ruling that as a
general rule there can be no moral
damages, but if there is a damaged
reputations, moral damages can be
granted.

Control test the nationality of

corporation is determined by the
nationality of the majority of the
stockholders on whom equity control
is vested, on the theory that they
would be able to elect the majority of
Board of Directors.

However, in the recent case Crystal vs

BPI, 2007, the Supreme Court affirmed
the decision in ABS CBN vs CA, that
they are not entitled of moral
damages. Indeed, while the court
may allow the grant of moral
damages to corporations, it is not
automatically granted, there must
be a proof of existence of the
factual basis of the damage and
its casual relations to defendants
acts.

The SEC has confirmed in an opinion,

that in application of control test, all
capital stock of the corporation,
whether common or preferred shares,
and whether voting or non-voting,
must be included.

This is because moral damages

though incapable of pecuniary
estimation, are in the category of
an award to compensate the
claimant for actual injury suffered
and not to impose a penalty to a
wrongdoer.

J.
NATIONALITY
CORPORATION

OF

Place of incorporation test a

corporation is a national of the country
under whose laws it has been
organized and registered.
It has been embodied in Sec. 123 of
Corporation Code which provides that

Note as a general rule, control test

cannot overcome the place of
incorporation test, i.e. a foreign
corporation even when 100% of its
equity is owned by Filipino citizen
continues to be considered as foreign
corporation.
The only exception to this rule
recognized by the SEC in an opinion, is
that found in the provision of Foreign
Investments Act of 1991 that a
corporation organized abroad and
registered as doing business in the PH
under the Corp Code 100% of the
capital stock outstanding and entitled
to vote is wholly owned by Filipinos.
Note The reacquisition of Fil
citizenship of former Filipino who had
been naturalized as American Citizen,
under the Citizenship Retention and
Reacquisition Act of 2003 had the
legal effect of converting his equity
holdings in domestic corporation to be
re-classified as Filipino investment.

Place of principal business test is

applied to determine whether a state
has jurisdiction over the existence and
legal character of a corporation.
Note The constitutional provision on
limiting the exploitation of natural
resources to corporation of which at
least 60%
of the capital stock is
owned by the Filipino citizens, does
not contain the place of incorporation
test. It is presumed that the control
test is to be applied. It also does not
distinguished whether it be a voting or
non-voting shares.
CASE: Register of Deeds of Rizal
vs Ung Sui Si Temple the Court
disqualified
a
non-incorporated
religious organization, whose trustees
and whose members were Chinese
nationals, from acquiring by donation
a piece of land. It declared that the
purpose of the sixty per centum
requirement is obviously to ensure
that corporations or associations
allowed to acquire agricultural land or
exploit
natural
resources
are
controlled by Filipinos.
CASE:
Roman
Catholic
Administration of Davao vs LRC
the Court held that a corporation
would have no nationality at all to
disqualify it from owning a land in the
Philippines even though its only
corporator was a Canadian citizen. But
the Court went to say, that even if
nationality is ascribed to a corporation
sole,
the
nationality
of
the
constituents of the diocese, and not
the nationality of the actual incumbent
o the parish, must be taken into
consideration,
because
the
corporation
ordinarily
holds
the
property in trust for the benefit of
Roman Catholic faithful
of their
respective locality or diocese.

2. Owning and Operating Public

Utilities
Section 11, Art. XII of the Constitution
provides that no franchise certificate,
or any other form of authorization for
the operation of a public utility shall
be granted except to citizens of
Philippines or to corporations or
associations organized under the laws
of Philippines at least sixty per centum
of whose capital is owned by such
citizens,
nor
shall
franchise,
certificate,
or
authorization
be
exclusive in character or for a longer
period than fifty years.
CASE: People vs Quasha, the Court
held that the Constitution does not
prohibit the mere formation of public
utlity corporation without the required
proportion of Filipino capital. What it
does prohibit is the granting of
franchise
or
other
form
of
authorization for operation of public
utility to corporation already in
existence but without the requisite
proportion of Filipino capital. It
distinguish the primary and secondary
franchise.
Thus, foreign nationals can create
corporations for public utility however,
they are barred to operate such.
Operation and formation are different.
3. Mass Media
Under Section 11, Art. XVI of the 1987
Constitution, the ownership of mass
media shall be limited to citizens of
the Philippines, or to corporations,
cooperatives,
and
associations,
wholly-owned and managed by such
citizens.
Although the constitutional provision
governing mass media does not
expressly include the place of
incorporation test, the same shall be

deemed included under the same

principle governing exploitation of
natural resources.
In fact, the ancillary control test for
mass media under Constitution is
more stringent than in other defined
areas, since it requires not only
100% of Filipino ownership of
capital stock of the corporation,
but
also
100%
Filipino
management of the entity.
4. Advertising Industry
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 company.

5. War-time Test
CASE:
Filipinas
Compana
de
Seguros vs Christern, the Court held
that in times of war, the nationality of
a private corporation is determined by
the character or citizenship of its
controlling stockholders.
The Court considered the juridical
entity as an enemy based on the fact
that the majority of the stockholders
of the respondent corporation were
German subjects. It rules that the
control test was applicable only in wartime. It refused the sole application of
the place of incorporation test during
war-time to determine the nationality
of an enemy corporation.
6.
Investment
Grandfather Rule

Test

and

Grandfather rule where various

nationality tests shall first be applied
on shareholders of the holding
companies,
to
determine
the
nationality of the equity in the target

corporation, and thereby arrive at the

nationality of the target corporation.
It provides where corporation and its
non-Filipino stockholders own stocks in
SEC registered enterprise, at least
60%
of
the
capital
stock
of
outstanding and entitled to vote of
both corporations must be owned and
held by such citizens of the Philippines
and at least 60% of the members of
the Board of Directors of both
corporation must be citizens of the PH
to be considered as Philippine
National.
How many level the Grandfather
rule be applied?
CASE:
Palting
s
San
Jose
Petroleum the SC refused the
registration and sale into Philippines of
Secutiries of Pnamanian registered
company the proceeds of which were
to be exclusively used to finance the
oil exploration efforts of a domestic
corporation, which was owned by
Panamanian company.
It was the contention of Panamanian
company that since its majority
shareholdings are owned by another
Panamanian company, which in turn
was owned 100% by two Venezuelan
companies whose shares were being
traded in stock exchanges of US, then
it was qualified to exercise privileges
granted under the Laurel-Langley
agreement.
In refusing to apply the long chain of
ownership source to find control to be
American citizens in the US who have
bought shares of the two Venezuelan
companies, the court held that with a
long chain of intervening foreign
corporations is to unduly stretch and
strain the language and spirit of the
law. For, to what extent must the word

indirectly be carried? Must we trace

the ownership or control of these
various corporation ad infinitum for
purpose of determining the americian
ownership control requirement be
satisfied?
In short, in this case, the application of
the grandfather rule to determine the
nationality of the ultimate controller of
a subject corporation cannot go
beyond
the
level
of
what
is
reasonable.
Note in 1997 internal memorandum
of Sec, for publicly held corporation, it
shall be two tier, and in closed
corporation, it shall be 3 levels. In
banking institutions, it is 4 level as per
monetary board.
CASE: Narra
Redmond-

Nickel

Mining

vs

Commercial law; Tests to determine

the nationality of a corporation. There
are two acknowledged tests in
determining the nationality of a
corporation: the control test and the
grandfather rule. Paragraph 7 of DOJ
Opinion No. 020, Series of 2005,
adopts the 1967 SEC Rules which
implemented the requirement of the
Constitution and other laws pertaining
to
the
controlling
interests
in
enterprises
engaged
in
the
exploitation of natural resources
owned by Filipino citizens. The first
part of paragraph 7, DOJ Opinion No.
020, stating shares belonging to
corporations or partnerships at least
60% of the capital of which is owned
by Filipino citizens shall be considered
as of Philippine nationality, pertains
to the control test or the liberal rule.
On the other hand, the second part of
the DOJ Opinion which provides, if the
percentage of the Filipino ownership in
the corporation or partnership is less

than 60%, only the number of shares

corresponding to such percentage
shall be counted
as Philippine
nationality, pertains to the stricter,
more stringent grandfather rule.
Application of the Grandfather Rule.
Based on the said SEC Rule and DOJ
Opinion, the Grandfather Rule or the
second part of the SEC Rule applies
only when the 60-40 Filipino-foreign
equity ownership is in doubt (i.e., in
cases
where
the
joint
venture
corporation with Filipino and foreign
stockholders with less than 60%
Filipino stockholdings [or 59%] invests
in other joint venture corporation
which is either 60-40% Filipino-alien or
the
59%
less
Filipino).
Stated
differently, where the 60-40 Filipinoforeign equity ownership is not in
doubt, the Grandfather Rule will not
apply.
Existence of doubt. The assertion of
petitioners that doubt only exists
when the stockholdings are less than
60% fails to convince this Court. DOJ
Opinion No. 20, which petitioners
quoted in their petition, only made an
example of an instance where doubt
as to the ownership of the corporation
exists. It would be ludicrous to limit
the application of the said word only to
the instances where the stockholdings
of non-Filipino stockholders are more
than 40% of the total stockholdings in
a
corporation.
The
corporations
interested in circumventing our laws
would clearly strive to have 60%
Filipino Ownership at face value. It
would be senseless for these applying
corporations
to
state
in
their
respective articles of incorporation
that they have less than 60% Filipino
stockholders since the applications will
be denied instantly. Thus, various
corporate schemes and layerings are

utilized to circumvent the application

of the Constitution.
CASE: Gamboa v. Teves etal., GR
No. 176579, October 9, 2012
Meaning of Capital - The Court said
that the Constitution is clear in
expressing
its
State
policy
of
developing an economy effectively
controlled by Filipinos. Asserting the
ideals that our Constitutions Preamble
want to achieve, that is to conserve
and develop our patrimony hence, the
State
should
fortify
a
Filipinocontrolled economy. In the 2011
decision, the Court finds no wrong in
the construction of the term capital
which refers to the shares with voting
rights, as well as with full beneficial
ownership (Art. 12, sec. 10) which
implies that the right to vote in the
election of directors, coupled with
benefits, is tantamount to an effective
control.
Therefore,
the
Courts
interpretation of the term capital was
not erroneous. Thus, the motion for
reconsideration is denied.
K.
CLASSIFICATIONS
CORPORATIONS

OF

1. In relation to the State

Public corporations those created for
political purpose connected with public
good
in
administration
of
civil
government.
Primary
for
the
government and portion of a state.
Created by its charter.
Note GOCC are also created by a
special charter, but shall still be
considered as private corporation.
Note a municipal corporation has two
character, the public or governmental,
or the private or proprietary character.

Private corporations created for

private purposes. It is divided into
stock corporations and non-stock
corporations. Created by general
corporation law.
Quasi public corporations are private
corporation that serves public utility
services.
Note Employees of GOCC created by
a special law are governed by the Civil
Service law, and not by the Labor
code. But if GOCC is created in
accordance of general corporation law,
it is governed by the law in Labor
Code.
CASE:
Philippine
Society
for
Prevention of Cruelty to Animals
vs COA
The court held that although the
corporation had its own charter, it
was still a private corporation and
not agency of government since a
reading of its charter showed that it is
not subject to control to agency of the
State and the fact that its employees
are registered and covered in SSS.
2. As to place of incorporation
Domestic corporations incorporated
under the laws of the Philippines
Foreign corporations incorporated
abroad, and licensed by the SEC to do
business in the Philippines and their
state also allows Filipino or Philippine
corporations to transact there.
3. As to legal status
De Jure Corporation if there is a full
or substantial compliance with the
requirements of an existing law
permitting
organization
of
such
corporation as by proper incorporation
duly executed and filed.

Generally, its juridical personality is

not subject to attack in courts from
any source even in quo warranto
proceeding.
Corporation de facto if there is a
bona fide attempt to incorporate,
colorable compliance with the statute
and user of corporate powers.
Corporation by Estoppel these are
the persons who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as
general partners for all debts,
liabilities, and damages incurred or
arising as a result thereof. These
persons, by estoppel or admission, are
precluded from denying its corporate
existence.
Corporation
by
Prescription

acknowledged juridical personality

inasmuch as it is an institution which
antedated by almost a thousand
years of any other personality in
Europe, and which existed when
Grecian eloquence still flourished in
Antioch
and
when
idols
were
worshipped in the temple of Mecca.
4. As to existence of shares of
stocks
Stocks Corporation those which have
a capital stock divided into shares and
authorized to distribute such shares.
Note even if not authorized, it can
still issue dividends because it is one
of the expressed powers of the
corporation.
Non-stock is one where no part of its
income is distributable as dividends to
its members ,trustees, or officers,
subject
to
the
provisions
on
dissolution.

CASE: Collector of Internal Revenue vs

Club Filipino The Filipino club was a
civic
organization
created
for
recreational purposes, and neither in
the articles of incorporation nor in the
by-laws was there a provision relative
to dividends and their distribution. All
profits of the club was used to defray
its expenses and to improve its golf
course.
ISSUE: is the golf club required to pay
business taxes?
Ruling: No. The ordinary meaning of
business is restricted to activities
where the purpose is for profit, and
the club is not as such because it was
organized only to develop and
cultivate sports.

5.
As
to
relationship
management and control

of

Holding company one that controls

another as a subsidiary or affiliate by
the power to elect its management.
One which old stocks in other
companies for purposes of control
rather than investment.
Affiliate company which is a subject
to common control of a mother or
holding company and operated as part
of a system.
6. Parent and subsidiary company
When a corporation has controlling
financial interest in one or more
corporations, the one having control is
known as parent company and the
others are known as the subsidiary
companies.

RE: FUNA vs MECO Manila

Economic and Cultural Office
In a 33-page ruling of the SC en banc
written by Associate Justice Jose Perez,
the SC partially granted the petition
for mandamus filed by Atty. Dennis
Funa seeking to compel the COA to
audit and examine the funds of MECO
and the latter to submit to such audit
and examination.
Exercising delegated functions, the
MECO
is
the
Philippines
representative office at Songjiang Rd.,
Zhongshan Dist., Taipei City 104,
Taiwan (R.O.C.).
The Philippines has no embassy in
Taiwan due to the existing "One China
Policy".
The MECO was created in 1975 and is
organized as a non-profit and nonstock
private
corporation
under
Philippine law.
Promoting,
trade,
investments,
tourism, labor, scientific and cultural
cooperation with Taiwan, the MECO
provides assistance to Filipinos and
provides visas, legal and consular
services.
It coordinates with the Philippine
government agencies and the private
sector to fulfill this mandate.
Funa filed in 2009 a leading
constitutional test case, the case of
Funa vs. Executive Secretary et al.
He was appointed as the National
Deputy Director for Bar Discipline of
the Integrated Bar of the Philippines
(IBP) on Sept. 6, 2011.
Funa and several other officers of a
news daily were sued by former

President and now Manila Mayor

Joseph "Erap" Ejercito Estrada for
publishing the news series purportedly
narrated
allegations
of
moneylaundering
by
some
Philippine
government officials.
He filed the petition before the SC in
his capacities as a taxpayer, a
concerned citizen, a member of the
Philippine Bar and law book author.
Funa impleaded both the COA and the
MECO.
He argued that by failing to audit the
accounts of the MECO, the COA is
neglecting its duty under Section 2(1),
Article
IX-D
of
the
Philippine
Constitution to audit the accounts of
an otherwise bona fide GovernmentOwned and Controlled Corporation
(GOCC) or government instrumentality.
It is Funa's adamant claim that the
MECO is a GOCC without an original
charter or, at least, a government
instrumentality, the funds of which
partake the nature of public funds.
According
to
Funa,
the
MECO
possesses
all
the
essential
characteristics of a GOCC and an
instrumentality under Executive Order
No. 292, s. 1987 of the Administrative
Code.
Funa stressed that the MECO performs
functions that are equivalent to those
of an embassy or a consulate of the
Philippine government.
He said that a reading of the
authorized functions of the MECO, as
found in EO No. 15, s. 2001, reveals
that they are subtanstially the same
functions
performed
by
the
Department of Foreign Affairs (DFA),
through its diplomatic and consular
missions, per Administrative Code.

In its ruling, the SC said that "the

mandamus petition was able to craft
substantial issues presupposing the
commission of a grave violation of the
Constitution and involving paramount
public interest, which need to be
resolved nonetheless."
The SC ruled that the petition "raises
issues of transcendental importance,
involved as they are with the
performance of a constitutional duty,
allegedly neglected, by the COA.
Hence, we hold that the petitioner, as
a concerned citizen, has the requisite
legal standing to file the [mandamus
petition.]"
It said that the MECO is not a GOCC or
government instrumentality.
The SC added that "government
instrumentalities are agencies of the
national government that, by reason
of some special function or jurisdiction
they perform or exercise, "are allotted
operational autonomy and are not
integrated within the department of
framework."
However, it stressed that the MECO is
a non-profit and non-stock private
corporation.
The ruling said that the MECO "is a sui
generis
private
entity especially
entrusted by the government with the
facilitation of unofficial relations with
the people in Taiwan with jeopardizing

the country's faithful commitment to

the One China Policy of the PROC
[People's Republic of China.]"
"However,
despite
its
nongovernmental character, the MECO
handles government funds in the form
of the verification fees it collects on
behalf of the [Department of Labor
and Employment] and the consular
fees it collects under Section 2(6) of
EO No. 15, s. 2001," it added.
Hence, the SC said that under existing
laws, "the accounts of the MECO
pertaining to its collection of such
verification fees and consular fees
should be audited by COA."
"Wherefore, premises considered, the
petition is partially granted. The
[MECO] is hereby declared a nongovernmental entity. However, the
accounts of the [MECO] pertaining to:
the verification fees contemplated by
Section 7 of Executive Order N. 1022
issued on May 1, 1985, that the former
collects on behalf of the DOLE, and the
fees it was authorized to collect under
Section 2(6) of [E.O.] No. 15 issued 16
May 2001, are subject to the audit
jurisdiction of the COA," the SC ruling
said. (PNA)
See
more
at:
http://www.zambotimes.com/archives/
news/86105-SC-declares-MECO-a-nongovernmentalentity.html#sthash.jAuMv41U.dpuf