Articles of Incorporation, By-Laws, Corporate Powers

VII. ARTICLES OF INCORPORATION

1. Nature of Charter
The charter is in the nature of a contract between the corporation and the Government. Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).

2. Procedure and Documentary Requirements (Sec. 14 and 15)

(a) As to Number and Residency of Incorporators (Sec. 10)
(b) Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit, 60 Phil. 549 [1934]). A corporation may change its name by the amendment of its articles of incorporation, but the same is not effective until approved by the SEC. xPhilippine First Insurance Co. v. Hartigan, 34 SCRA 252 (1970) A change in the corporate name does not make a new corporation, and whether affected by special act or under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities. xRepublic Planters Bank v. CA, 216 SCRA 738 (1992). Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business. xUniversal Mills Corp. v. Universal Textile Mills Inc., 78 SCRA 62 [1977]).
A corporation has not right to intervene in a suit using a name other than its registered name; if a corporation legally and truly wants to intervene, it should have used its corporate name as the law requires and not another name which it had not registered. xLaureano Investment and Development Corporation v. Court of Appeals, 272 SCRA 253 (1997). There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name, holding that a corporation may be sued under the name by which it makes itself known to its workers. xPison-Arceo Agricultural Development Corp. v. NLRC, 279 SCRA 312 (1997)
(c) Purpose Clause (Secs. 14(2) and 42; Uy Siuliong v. Director of Commerce and Industry, 40 Phil. 541 [1919])
(d) Corporate Term (Sec. 11). No extension can be effected once dissolution stage has been reached. xAlhambra Cigar v. SEC, 24 SCRA 269 (1968).
(e) Principal Place of Business. Place of residence of the corporation is the place of its principal office. xClavecilla Radio System v. Antillon, 19 SCRA 379 (1967) The residence of its president is not the residence of the corporation because a corporation has a personality separate and distinct from that of its officers and stockholders. xSy v. Tyson Enterprises, Inc., 119 SCRA 367 (1982). (f) Minimum Capitalization (Sec. 12) - Why is maximum capitalization required to be indicated? (g) Subscription and Paid-up Requirements (Sec. 13) (h) Steps and Documents Required in SEC 3. Grounds for Disapproval (Sec. 17) When the proposed articles presented show that the object of incorporation is to organize a barrio of a given municipality into a separate corporation for the purpose of taking possession and having control of all municipal property within the barrio so incorporated and administer it exclusively for the benefit of the residents, the object is unlawful and the articles can be denied registration. xAsuncion v. De Yriarte, 28 Phil. 67 [1914]).

4. Amendments to Articles of Incorporation (Sec. 16)

5. Commencement of Corporate Existence (Sec. 19)

VIII. BY-LAWS

1. Nature and Functions (Gokongwei v. SEC, 89 SCRA 337 [1979]; Peña v. CA, 193 SCRA 717 [1991])
As the “rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,” by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. Loyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

(a) Common Law Limitations on By-Laws
(i) By-Laws Cannot Be Contrary to Law and Articles of Incorporation A by-law provision granting to a stockholder a permanent representation in the Board of Directors is contrary to the Corporation Code requiring all members of the Board to be elected by the stockholders or members. Even when the members of the association may have formally adopted the provision, their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. xGrace Christian High School v. Court of Appeals, 281 SCRA 133 (1997). Although the right to amend by-laws lies solely in the discretion of the employer, this being in the exercise of management prerogative or business judgment, such right cannot impair the obligation of existing contracts or rights or undermine the right to security of tenure of a regular employee. Otherwise, it would enable an employer to remove any employee from employment by the simple expediency of amending its by-laws and providing the position shall cease to exist upon occurrence of a specified event. xSalafranca v. Philamlife (Pamplona) Village Homeowners Association, Inc., 300 SCRA 469, 479 (1998).

(ii) By-Laws Cannot Be Unreasonable or Be Contrary to Nature of By-laws. xGovernment of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927). Authority granted to a corporation to regulate the transfer of its stock does not empower corporation 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. xThomson v. Court of Appeals, 298 SCRA 280 (1998). By-laws are intended merely for the protection of the corporation, and prescribe regulation, not restrictions; they are always subject to the charter of the corporation. xRural Bank of Salinas, Inc. v. CA, 210 SCRA 510 (1992), quoting from Thompson on Corporation Sec. 4137, cited in xFleischer v. Nolasco, 47 Phil. 583.

(iii) By-Laws Cannot Discriminate

(b) Binding Effects of By-laws (China Banking Corp. v. Court of Appeals, 270 SCRA 503 [1997]). “Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporation’s by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same.” PMI Colleges v. NLRC, 277 SCRA 462 (1997). 2. Adoption Procedure (Sec. 46) Section 46 of the Corporation, which requires the filing of by-laws, does not expressly provide for the consequence of their non-filing within the period provided therein; however, Pres. Decree 902-A allows the SEC to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations which fail to file their by-laws. Clearly, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws, and there is no outright “demise” of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society, which would require that the incorporators must be given the chance to explain their neglect or omission and remedy the same. xLoyola Grand Villas Homeowners (South) Association, Inc. v. Court of Appeals, 276 SCRA 681 (1997).

3. Contents (Sec. 47)
4. Amendments (Sec. 48) § Power to amend may be delegated to the board of directors

IX. CORPORATE POWERS, AUTHORITY AND ACTIVITIES

1. Corporate Power and Capacity (Art. 46, Civil Code; Secs. 36 and 45; Land Bank of the Philippines v. COA, 190 SCRA 154 [1990])

A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents, since the physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose of by corporate by-laws or by a specific act of the board of directors. xReynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000. Precisely because the corporation is such a prevalent and dominating factor in the business life of the country, the law has to look carefully into the exercise of powers by these artificial persons it has created. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000. (a) Classification of Corporate Powers: Express; Implied; and Incidental - There is basis to rule that the act of issuing the checks on behalf of the corporation was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001. (b) Where Corporate Power is Lodged (Sec. 23) - Unless otherwise provided by the Corporation Code, corporate powers, such as the power to enter into contracts, are exercised by the Board of Directors. However, the Board may delegate such powers to either an executive committee or officials or contracted managers, which delegation, except for the executive committee, must be for specific purposes. The delegated officers makes the latter agents of the corporation, and rules of agency as to the binding effects of their acts would apply. For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so. xABS-CBN Broadcasting Corporation v. Court of Appeals, 301 SCRA 572 (1999). 2. Ultra Vires Acts - An ultra vires act is one committed outside the object for which a corporation is created as define by the law of its organization and therefore beyond the power conferred upon it by law.” The term “ultra vire” is “distinguished from an illegal act from the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. Atrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001. Ratification of Ultra Vires Acts: (Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954]; Carlos v. Mindoro Sugar Co., 57 Phil. 343 [1932]; Republic v. Acoje Mining Co., 3 SCRA 361 [1963]; Crisologo Jose v. CA, 177 SCRA 594 [1989];

(i) Theory of Estoppel or Ratification - In order to ratify the unauthorized act of an agent and make it binding on the corporation, it must be shown that the governing body or officer authorized to ratify had full and complete knowledge of all the material facts connected with the transaction to which it relates. Ratification can never be made on the part of the corporation by the same person who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having authority to make such contract. The act or conduct for which the corporation may be liable under the doctrine of estoppel must be by those of the corporation, its governing body or authorized officers, and not those of the purported agent who is himself responsible for the misrepresentation. xVicente v. Geraldez, 52 SCRA 210 (1973).
When the counsel representing the corporation in a collection suit admits on behalf of the corporation that the latter admitted culpability for personal loans obtained by its corporate officers, such admission cannot be given legal effect to the detriment of the corporation. The admission made in the answer by the counsel for the corporation was “without any enabling act or attendant ratification of corporate act,” as would authorize or even ratify such admission. In the absence of such ratification or authority, such admission does not bind the corporation. Also, the letter issued by the corporate officers who obtained the loan “as indicating the corporate liability of the corporation,” cannot also serve to make the corporation liable. The documents and admissions cannot have the effect of a ratification of an unauthorized act. Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but the ratification must be by the officers as governing body having authority to make such contract. xAguenza v. Metropolitan Bank and Trust Co., 271 SCRA 1 (1997).

(ii) Doctrine of Apparent Authority (Prime White Cement Corp. v. Intermediate Appellate Court, 220 SCRA 103, 113-114 [1993]; Francisco v. GSIS, 7 SCRA 577 [1963]) - A contract signed by the President/Chairman without authority from the Board of Directors is void. Although the by-laws grant authority to the President "to execute and sign for and in behalf of the corporation all contracts and agreements which the corporation may enter into," the same presupposes a prior act of the corporation exercised through its Board of Directors. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992).
Although an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time. Yao Ka Sin Trading v. CA, 209 SCRA 763 (1992). Persons who deal with corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation liable. xTraders Royal Bank v. Court of Appeals, 269 SCRA 601 (1997); also Art. 1883, Civil Code.

The authority of a corporate officer in dealing with third persons may be actual or apparent. . . the principal is liable for the obligations contracted by the agent. The agent's apparent representation yields to the principal's true representation and the contract is considered as entered into between the principal and the third person. xFirst Philipine International Bank v. Court of Appeals, 252 SCRA 259 (1996). If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. xSoler v. Court of Appeals, G.R. No. 123892, 21 May 2001.

Under Article 1898 of the Civil Code, the acts of an agent beyond the scope of his authority do no bind the principal unless the latter ratifies the same expressly or implied. It also bears emphasizing that when the third person knows that the agent was acting beyond his power or authority, the principal can not be held liable for the acts of the agent. If the said third person is aware of such limits of authority, he is to blame, and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal’s ratification. In the case of the corporation as the principal, there was no such ratification. Therefore, when the officer entered into the speculative contracts without securing the Board’s approval, nor did he submit the contracts to the Board after their consummation nor were they recorded in the books of the corporation, there was, in fact, no occasion at all for ratification. xSafic Alcan & Cie. V. Imperial Vegetable Co., G.R. No. 126751, 28 March 2001.

(iii) Theory of No State Damage (Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]).

3. Specific (Express) Powers

(a) Enumerated Powers (Secs. 36)
Example of Poor Draftsmanship: When the article of incorporation expressly provides that the purpose of the corporation was to “engage in the transportation of person by water,” such corporation cannot engage in the business of land transportation, which is an entirely different line of business, and, for which reason, may not acquire any certificate of public convenience to operate a taxicab service. xLuneta Motor Co. v. A.D. Santos, Inc., 5 SCRA 809 [1962]).

Power to Sue - Under section 36 of the Corporation Code, in relation to Section 23, it is clear that where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. A minority stockholder and member of the Board, who fails to show any proof that he was authorized by the Board of Directors, has no such power or authority to sue on the corporation’s behalf. Nor can we uphold this as a derivative suit.
For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is now showing that petitioner has complied with the foregoing requisites. xTam Wing Tak v. Makasiar, G.R. 122452, 29 January 2001.

(b) Power to Extend or Shorten Corporate Term (Secs. 37 and 81 [1])

(c) Power to Increase or Decrease Capital Stock (Sec. 38) - Prior to SEC approval of the increase in the authorized capital stock, and despite the Board resolution approving the increase in capital stock, and the receipt of payment on the future issues of the shares from the increased capital stock, such funds do not constitute part of the capital stock of the corporation until approval of the increase by SEC. xCentral Textile Mills, Inc. v. National Wages and Productivity Commission, 260 SCRA368 (1996).
A reduction of capital to justify the mass layoff of employees, especially of union members, amounts to nothing but a premature and plain distribution of corporate assets to obviate a just hearing to labor of the vast profits obtained by its joint efforts with capital through the years, and would constitute unfair labor practice. xMadrigal & Co. v. Zamora, 151 SCRA 355 [1987]);

(d) Incur, Create or Increase Bonded Indebtedness (Sec. 38)

(e) Power to Sell or Dispose Assets (Sec. 40) - Sale by the Board of the only property of the corporation without compliance with the provisions of Sec. 40 of the Corporation Code requiring the ratification of members representing at least two-thirds of the membership, would make the sale null and void. xIslamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997); also xPeña v. CA, 193 SCRA 717 (1991).

(f) Invest Corporate Funds in Another Corporation or Business or For Any Other Purpose (Sec. 42; De la Rama v. Ma-ao Sugar Central Co., 27 SCRA 247 [1969]).

(g) Declare Dividends (Sec. 43; Nielson & Co. v. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]). - Stock dividend is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be terms as the “trust fund” of the corporation. xNational Telecommunications Commission v. Court of Appeals, 311 SCRA 508, 514-515 (1999).

Although the certificates of stock granted the stockholder the right to receive quarterly dividends of 1%, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. . . Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks”, on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. xRepublic Planters Bank v. Agana, 269 SCRA 1 (1997).

(h) Enter into Management Contracts (Sec. 44; Nielson & Co., Inc. v. Lepanto Consolidated Mining, 26 SCRA 540 [1968]; Ricafort v. Moya, 195 SCRA 247, at pp. 266-267 [1991]). Why the difference in rule between entity and individual?

(j) Other Powers

To Sell Land and Other Properties - A corporation whose primary purpose is to market, distribute, export and import merchandise, the sale of land is not within the actual or apparent authority of the corporation acting through its officers, much less when acting through the treasurer. Likewise Article 1874 and 1878 of the Civil Code requires that when land is sold through an agent, the agent’s authority must be in writing, otherwise the sale is void. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

To Borrow Funds - The power to borrow money is one of those cases where even a special power of attorney is required under Art. 1878 of the New Civil Code. There is invariably a need of an enabling act of the corporation to be approved by its Board of Directors. The argument that the obtaining of loan was in accordance with the ordinary course of business usages and practices of the corporation is devoid of merit because the prevailing practice in the corporation was to explicitly authorize an officer to contract loans in behalf of the corporation. xChina Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).

To Provide Gratuity Pay for Employees - Providing gratuity pay for its employees is one of the express powers of a corporation under the Corporation Code, and cannot be considered to be ultra vires to avoid any liability arising from the resolution granting such gratuity pay. xLopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).

To Donate - To Enter Into Partnership, Joint Venture. Tuason & Co. v. Bolanos, 95 Phil. 106 (1954).

X. DIRECTORS, TRUSTEES AND OFFICERS

1. Powers of Board of Directors or Trustees (Sec. 23; Gamboa v. Victoriano, 90 SCRA 40 [1979]).

(a) Two Theories on Source of Power of Board of Directors (Angeles v. Santos, 64 Phil. 697 [1937]).
(b) Board Must Act As Body (Sec. 25; The Board of Liquidators v. Heirs of Maximo M. Kalaw, 20 SCRA 987 [1967]; Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634 [1918]; Acuña v. Batac Producers Cooperative Marketing Association, 20 SCRA 526 [1967]).
The general rule is that a corporation, through its broad of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by any objecting director or shareholder. Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subseqeunt course of conduct. xLopez Realty v. Fontecha, 247 SCRA 183, 192 (1995).

(c) Effects of a “Bogus” Board - The acts or contracts effected by a bogus board would be void pursuant to Art. 1318 of the Civil Code because of the lack of “consent”. Islamic Directorate of the Philippines v. Court of Appeals, 272 SCRA 454 (1997). (d) Executive Committee (Sec. 35)

2. Business Judgment Rule (Montelibano v. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36 [1962]; Philippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 [1997])

Board members and officers who purport to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts. Those acts, when they are such a nature and are done under such circumstances, are properly attributed to the corporation alone and no personal liability is incurred by such officers and Board members. xBenguet Electric Cooperative, Inc. v. NLRC, 209 SCRA 55 (1992)

3. Qualifications of Directors and Trustees (Secs. 23 and 27; Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]).
(a) A director must own at least one share of stock (xPeña v. CA, 193 SCRA 717 [1991]; xDetective & Protective Bureau, Inc. v. Cloribel, 26 SCRA 255 [1969]) (b) Mere beneficial ownership in a voting trust arrangement no longer qualifies (Lee v. CA, 205 SCRA 752 [1992]).

4. Election of Directors and Trustees
(a) Directors (Secs. 24 and 26; Premium Marble Resources v. Court of Appeals, 264 SCRA 11 [1996]).
(b) Trustee (Secs. 92 and 138)
(c) Cumulative Voting (Sec. 24; Cumulative Voting in Corporate Elections: Introducing Strategy in the Equation, 35 South Carolina L. Rev. 295)

5. Vacancy in Board (Sec. 29)
By-law provision or the practice giving a stockholder a permanent seat in the Board of Directors would be against the provision of Sections 28 and 29 of the Corporation Code which requires member of the board of corporations to be elected. In addition, Section 23 of the Corporation Code which provides for the powers of the Board of Directors or Trustees expressly requires them “to be elected from among the holders of stock, or where there is no stock, from among the members of the corporation. xGrace Christian High School v. Court of Appeals, 281 SCRA 133 (1997).

6. Term of Office, Hold-over Principle
Directors may lawfully fill vacancies occurring in the board, and such officials, as well as the original directors, hold until qualification of their successors. xGovernment v. El Hogar Filipino, 50 Phil. 399 (1927). The remedy is quo warranto to question the legality and proper qualification of persons elected to the board. xPonce v. Encarnacion, 94 Phil. 81 (1953).

7. Removal of Directors or Trustees (Sec. 28; Roxas v. De la Rosa, 49 Phil. 609 [1926]).

8. Directors' or Trustees' Meetings (Secs. 49, 53, 54 and 92)
In a board meeting, an abstention is presumed to be counted as an affirmative vote insofar as it may be construed as an acquiescence in the action of those who voted affirmatively; but such presumption, being merely prima facie would not hold in the face of clear evidence to the contrary. xLopez v. Ericta, 45 SCRA 539 [1972]).

9. Compensation of Directors (Sec. 30)
Directors and trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office, founded on the presumption that directors and trustees render service gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216, 223 (1997).

Under Section 30 of the Corporation Code, there are two (2) ways by which members of the board can be granted compensation apart from reasonable per diems:
(a) when there is a provision in the by-laws fixing their compensation; and
(b) when the stockholders representing a majority of the outstanding capital stock at a regular or special meeting agree to give them compensation. From the language of Section 30, it may also be deduced that members of the board may also receive compensation, when they render services to the corporation in a capacity other than as directors or trustees of the corporation. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).
The position of being Chairman and Vice-Chairman, like that of Treasurer and Secretary, were considered by the officers as not mere directorship position, but officership position that would entitle the occupants to compensation. Likewise, the limitation placed under Section 30 of the Corporation that directors cannot receive compensation exceeding 10% of the net income of the corporation, would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members. Western Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).

10. Role of Directors

(a) Directors as Fiduciaries. - Pre-Corporation Code. Palting v. San Jose Petroleum, Inc., 18 SCRA 924 (1966). - Nature of Duties of Directors and Officers. Prime White Cement Corp. v. IAC, 220 SCRA 103 (1993).
(b) Duty of Obedience - A corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its charter or by the general law. xLopez Realty, Inc. v. Fontecha, 247 SCRA 183 (1995)
(c) Duty of Diligence (Sec. 31; Steinberg v. Velasco, 52 Phil. 953 [1929]; Bates v. Dresser, 251 U.S. 524, 64 L. Ed. 388, 40 S. Ct. 247 [1919]; Smith v. Van Gorkam, 488 A.2d 858, Supreme Court of Delaware, 1985)..

(d) Duty of Loyalty (Secs. 31 to 34; Mead v. McCullough, 21 Phil. 95 [1911]).
- Doctrine of Corporate Opportunity (Gokongwei v. SEC, 89 SCRA 336 [1979]; See Annotations: Doctrine of Corporate Opportunity, 89 SCRA 412).
- Self-dealings (Secs. 32 and 33) - Using Inside Information (Gokongwei v. SEC, 89 SCRA 336 [1979]). When a director, who also owns ¾ of the equity of the corporation, who has also been designated as the administrator of corporate affairs, and who was directly negotiating the sale of the corporations large landholdings to the Government at great prices, purchases the shares of stock of a shareholder without informing the latter of the on-going negotiations, such director is deemed to have fraudulently acquired the shareholdings by way of deceit practiced by means of concealing his knowledge of the state of the negotiations and their probable successful result. xStrong v. Repide, 41 Phil. 947 [1909];
- Applies to confidential employees (cf. xSing Juco v. Llorente, 43 Phil. 589 [1922])

(e) Duty to Creditors and Outsiders [xVillanueva, The Fiduciary Duties of Directors and Officers Representing the Creditor Pursuant to a Loan Workout Arrangement: Parameters Under Philippine Corporate Setting, 35 Ateneo L.J. (No. 1, Feb. 1991)]

(f) Corporate Dealings with Directors and Officers (Sec. 32; Gokongwei v. SEC, 89 SCRA 336 [1979]; Prime White Cement Corp. v. IAC, 220 SCRA 103 [1993]).
(g) Contracts Between Corporations with Interlocking Directors (Sec. 33)

11. Who Is an "Officer" of the Corporation
(Sec. 25; Gurrea v. Lezama, 103 Phil. 553 [1958]; Mita Pardo de Tavera v. Tuberculosis Society, 112 SCRA 243 [1982]; PSBA v. Leaño, 127 SCRA 778 [1984]; Dy v. NLRC, 145 SCRA 211 [1986]; xVisayan v. NLRC, 196 SCRA 410 [1991]).

Corporations act only through their officers and duly authorized agents. All acts within the powers of a corporation may be performed by agents of its selection; except so far as limitations or restrictions imposed by special charter, buy-laws, or statutory provisions. xBA Savings Bani v. Sia, 336 SCRA 484 (2000).
An “office” is created by the charter of the corporation and the officer is elected by the directors or stockholders. . . Note that a corporate officer’s removal from his office is a corporate act. If such removal occasions an intra-corporate controversy, its nature is not altered by the reason or wisdom, or lack thereof, with which the Board of Directors might have in taking such action. When petitioner, as Executive Vice-President allegedly diverted company funds for his personal use resulting in heavy financial losses in the company, this matter would amount to fraud. Such fraud would be detrimental to the interest not only of the corporation but also of its members. This type of fraud encompasses controversies in a relationship within the corporation covered by the SEC jurisdiction [now with the regular courts]. Perforce, the matter would come within the area of corporate affairs and management, and such a corporate controversy would call for the adjudicative expertise of the SEC, not the Labor Arbiter or the NLRC.” De Rossi v. NLRC, 314 SCRA 245 (1999).
When the by-laws of the condominium corporation specifically includes the position of “Superintendent/Administrator” in is roster of corporate officers, then such position is clearly a corporate officer position and issues of reinstatement would be within the jurisdiction of the SEC and not the NLRC. xOngkingco v. NLRC, 270 SCRA 613 (1997).
When the by-laws provide that one of the powers of the Board of Trustees is “[t]o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services and such other officers as it may deem necessary and prescribe their powers and duties,” then such specifically designated positions should be considered “corporate officers” position. The determination of the rights and the concomitant liability arising from any ouster from such positions, would be intra-corporate controversy subject to the jurisdiction of the SEC (now RTC). xTabang v. NLRC, 266 SCRA 462 (1997).
An “office” is created by the charter of the corporation and the officer is elected by the directors or stockholders (2 Fletcher Cyc. Corp. Ch. II, Sec. 266). On the other hand, an “employee” usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. (Ibid) . . . A corporate officer’s dismissal is always a corporate act, or an intra-corporate controversy, and the nature is not altered by the reason or wisdom with which the Board of Directors may have in taking such action. xTabang v. NLRC, 266 SCRA 462 (1997). The president, vice-president, secretary and treasurer are commonly regarded as the principal or executive officers of a corporation, and modern corporation statutes usually designate them as the officers of the corporation. However, other offices are sometimes created by the charter or by-laws of a corporation, or the board of directors may be empowered under the by-laws of a corporation to create additional offices as may be necessary. xTabang v. NLRC, 266 SCRA 462 (1997). ]

12. Powers of Corporate Officers:

(a) The Rule on Corporate Officer’s Power to Bind Corporation - An officer's power as an agent of the corporation must be sought from the statute, charter, the by-laws or in a delegation of authority to such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business. xVicente v. Geraldez, 52 SCRA 210 [1973]; reiterated in xBoyer-Roxas v. CA, 211 SCRA 470 (1992).

(b) When Corporation Bound by Act of Its President. People’s Aircargo v. Court of Appeals, 297 SCRA 170 (1998)

(c) Corporate Secretary - In the absence of provisions to the contrary, the corporate secretary is the custodian of corporate records—he keeps the stock and transfer book and makes proper and necessary entries therein. It is the duty and obligation of the corporate secretary to register valid transfers of stock in the books of the corporation; and in the event he refuses to comply with such duty, the transferor-stockholder may rightfully bring suit to compel performance. xTorres, Jr. v. Court of Appeals, 278 SCRA 793 (1997). When a Secretary’s Certificate is regular on its face, it can be relied upon by a third party who does not have to investigate the truths of the facts contained in such certification; otherwise business transactions of corporations would become tortuously slow and unnecessarily hampered. xEsguerra v. Court of Appeals, 267 SCRA 380 (1997).

(d) Corporate Treasurer - A corporate treasurer’s function have generally been described as “to receive and keeps funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers.” Unless duly authorized, a treasurer, whose power are limited, cannot bind the corporation in a sale of its assets. Selling is obviously foreign to a corporate treasurer’s function. When the corporation categorically denies ever having authorized its treasurer to sell the subject parcel of land, the buyer had the burden of proving that the treasurer was in fact authorized to represent and bind the allegedly selling corporation in the transaction. And failing to discharge such burden, and failing to show any provision of the articles of incorporation, by-laws or board resolution to prove that the treasurer possessed such power, the sale is void and not binding on the alleged selling corporation. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

(e) Other “Officers” for Service of Summons on Corporation - For purposes of determining proper service of summons to a corporation in a quasi-judicial proceeding before the NLRC, a bookkeeper can be considered as an agent of the corporation within the purview of the Rules of Court. The rationale of all rules with respect to service of process on a corporation is that such service must be made to an agent or a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. The bookkeeper’s task is one under consideration that his regular recording of the corporation’s “business accounts” and “essential facts about the transactions of a business or enterprise” safeguards the corporation from possible fraud being committed adverse to its own corporate interest. xPabon v. NLRC, 296 SCRA 7 (1998).

In spite of provisions of the Rules of Court on service of process to bind corporate entities, service made to a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him, has been considered proper service to bind the corporation. (xVilla Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 298 [1078], overturning xDelta Motor Sales Corp. v. Mangosing, 70 Phil. 598 [1976]; reiterated in xR. Transport Corp. v. CA, 24a SCRA 77 [1995]).
Section 11, Rule 14 of the 1997 Rules of Civil Procedure uses the term “general manager” and unlike the old provision in the Rules of Court, it does not include the term “agent”. Consequently, the enumeration of persons to whom summons may be served is “restricted, limited and exclusive” following the rule on statutory construction expressio unios est exclusion alterius. Therefore, the earlier cases that uphold service of summons upon a construction project manager;[2] a corporation’s assistant manager;[3] ordinary clerk of a corporation;[4] private secretary of corporate executives;[5] retained counsel;[6] officials who had charge or control of the operations of the corporation, like the assistant general manager;[7] or the corporation’s Chief Finance and Administrative Officer;[8] no longer apply since they were decided under the old rule that allows service of summons upon an agent[9] of the corporation. xE.B. Villarosa & Partners Co., Ltd. v. Benito, 312 SCRA 65 (1999).

(f) Coverage of Corporate “Agents” - Black’s Law Dictionary defines an “agent” as “a business representative, whose function is to bring about, modify, affect, accept performance of, or terminate contractual obligations between principal and third persons.” To this extent, an “agent” may also be shown to represent his principal in some one or more of his relations to others, even though he may not have the power to enter into contracts. The rules on service of process make service on “agent” sufficient. It does not in any way distinguish whether the “agent” be general or special, but is complied with even by a service upon an agent having limited authority to represent his principal. As such, it does not necessarily connote an officer of the corporation. However, though this may include employees other than officers of a corporation, this does not include employees whose duties are not so integrated to the business that their absence or presence will not toll the entire operation of the business. xPabon v. NLRC, 296 SCRA 7 (1998).

13. Liabilities of Corporate Officers:
(Sec. 31; Vazquez v. Borja, 74 Phil. 560 (1944); Palay, Inc. v. Clave, 124 SCRA 638 [1093]; Tramat Mercantile, Inc. v. CA, 238 SCRA 14 [1994]; Pabalan v. NLRC, 184 SCRA 495 [1990]; xSulo ng Bayan, Inc. v. Araneta, Inc. Inc., 72 SCRA 347 [1976]; xMindanao Motors Lines, Inc. v. Court of Industrial Relations, 6 SCRA 710 (1962);

The general rule is that corporate officers are not personally liable for their official acts unless it is shown that they have exceeded their authority. xARB Constructions Co., Inc. v. Court of Appeals, 332 SCRA 427 (200)

Jurisprudential Enumeration of Officer Liabilities

MAM Realty v. NLRC, 244 SCRA 797, (1995); reiterated in xNational Food Authority v. Court of Appeals, 311 SCRA 700 (1999); xUichico v. NLRC, 273 SCRA 35 (1997). The hornbook law is that corporate personality is a shield against personal liability of its officers. Thus, when the trust receipt sued upon was clearly entered into in behalf of the corporation by its Executive Vice-President, then such officer and his spouse cannot be made personally liable; the personality of the corporation is separate and distinct from the persons composing it. xThe Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No. 114286, 19 April 2001.

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:
(a) He assents to a patently unlawful act of the corporation;
(b) Guilty of bad faith or gross negligence in directing its affairs;
(c) for conflict on interest resulting in damages to the corporation, its stockholders or other persons;
(d) He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
(e) He agrees to hold himself personally and solidarily liable with the corporation; or
(f) He is made, by a specific provisions of law, to personally answer for his corporate action. xAtrium Management Corporation vs. Court of Appeals, G.R. No. 109491, 28 February 2001

The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation. xNational Power Corp. v. Court of Appeals, 273 SCRA 419 (1997).

When corporate officers are sued in their official capacity, the suit is equivalent to a suit against the corporation, and judgment may be enforced against corporate assets. xEmilio Cano Enterprises, Inc. v. CIR, 13 SCRA 291 (1965). An attempt by the corporation to avoid liability by distancing itself from the acts of the its President was struck down with the Court holding that a corporation may not distance itself from the acts of a senior officer: "the dual roles of Romulo F. Sugay should not be allowed to confuse the facts." xR.F. Sugay v. Reyes, 12 SCRA 700 (1961).

Generally, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into by officers of the corporation, if duly authorized. xRepublic Planters Bank v. CA, 216 SCRA 738 (1992). An officer-stockholder who is a party signing in behalf of the corporation to a fraudulent contract cannot claim the benefit of separate juridical entity: "Thus, being a party to a simulated contract of management, petitioner Uy cannot be permitted to escape liability under the said contract by using the corporate entity theory. This is one instance when the veil of corporate entity has to be pierced to avoid injustice and inequity." xParadise Sauna Massage Corporation v. Ng, 181 SCRA 719 (1990).

Special Provisions in Labor Laws.

In the Labor Code since a corporate employer is an artificial person, it must have an officer who can be presumed to be the employer, being the "person acting in the interest of (the) employer" as provided in the Labor Code. A.C. Ransom Labor Union-CCLU v. NLRC, 142 SCRA 269 (1986).

Under the Labor Code, in the case of corporations, it is the president who responds personally for violation of the labor pay laws. xVillanueva v. Adre, 172 SCRA 876 (1989). For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. Del Rosario v. NLRC, 187 SCRA 777 (1990).

A corporate officer cannot be held personally liable for a corporate debt simply because he had executed the contract for and in behalf of the corporation. It held that when a corporate officer acts in behalf of a corporation pursuant to his authority, is "a corporate act for which only the corporation should be made liable for any obligations arising from them." xWestern Agro Industrial Corporation v. Court of Appeals, 188 SCRA 709 (1990).

Only the responsible officer of a corporation who had a hand in illegally dismissing an employee should be held personally liable for the corporate obligations arising from such act. Maglutac v. NLRC,189 SCRA 767 (1990); reiterated in xGudez v. NLRC, 183 SCRA 644 (1990) and xChua v. NLRC, 182 SCRA 353 (1990). The case of Ransom v. NLRC is not in point because there the debtor corporation actually ceased operations after the decision of the Court of Industrial Relations was promulgated against it, making it necessary to enforce it against its former president. When the corporation is still existing and able to satisfy the judgment in favor of the private respondent, the corporate officers cannot be held personally liable. Lim v. NLRC, 171 SCRA 328 (1989).

The aforecited cases will not apply to the instant case, however, because the persons who were there made personally liable for the employees' claims were stockholders-officers of the respondent corporation. In the case at bar, the petitioner while admittedly the highest ranking local representative of the corporation, is nevertheless not a stockholder and much less a member of the board of directors or an officer thereof. xDe Guzman v. NLRC, 211 SCRA 723 (1992)

A mere general manager cannot be held solidarily liable with the corporation for unpaid labor claims, especially when he is neither a stockholder or a member of the board of the corporation. xDe Guzman v. NLRC, 211 SCRA 723 (1992) A president cannot be held solidarily liable personally with the corporation absent evidence of showing that he acted maliciously or in bad faith. xEPG Constructions Co. v. CA, 210 SCRA 230 (1992). A judgment rendered against a person "in his capacity as President" of the corporation was enforceable against the assets of such officer when the decision itself found that he merely used the corporation as his alter-ego or as his business conduit. xArcilla v. Court of Appeals, 215 SCRA 120 (1992).

The President and General Manager of a corporation who entered into and signed a contract in his official capacity cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect due to the personality of the corporation being separate and distinct from the persons composing it. xRustan Pulp & Paper Mills, Inc. v. IAC, 214 SCRA 665 (1992), citing xBanque Generale Belge v. Walter Bull and Co., 84 Phil. 164 (1949).

Reahs Corporation v. NLRC, 271 SCRA 247 (1997), reviewed the A.C. Ransom doctrine of imposing solidarily liability on the highest officers of the corporation for judgment on labor claims rendered against the corporation pursuant to Art. 283 of the Labor Code, and reviewed its application in subsequent cases of Maglutac, Chua, Gudez and Pabalan. It reiterated the main doctrine of separate personality of a corporation which should remain as the guiding rule in determining corporate liability to its employees, and that at the very least, to justify solidary liability, “there must be an allegation or showing that the officers of the corporation deliberately or maliciously designed to evade the financial obligation of the corporation to its employees,” or a showing that the officers indiscriminately stopped its business to perpetuate an illegal act, as a vehicle for the evasion of existing obligations, in circumvention of statutes, and to confuse legitimate issues. Corporate officers are not personally liable for money claims of discharged employees unless they acted with evident malice and bad faith in terminating their employment. xAHS/Philippines v. Court of Appeals, 257 SCRA 319 (1996).

The finding of solidary liability among the corporation and its officers and directors would patently be baseless when the decision contains no allegation, finding or conclusion regarding particular acts committed by said officers and members of the Board of Directors that show them to have been individually guilty of unmistakable malice, bad faith, or ill-motive in their personal dealings with third parties. When corporate officers and directors are sued merely as nominal parties in their official capacities as such, they cannot be held liable personal for the judgment rendered against the corporation. xNational Power Corp. v. Court of Appeals, 273 SCRA 419 (1997).

In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. In this case, it is undisputed that the corporate officers have a direct hand in the illegal dismissal of the employees. They were the one, who as high-ranking officers and directors of the corporation, signed the Board Resolution retrenching the employees on the feigned ground of serious business losses that had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. This is indicating of bad faith on the part of the corporate officers for which they can be held jointly and severally liable with the Corporation for all the money claims of the illegally terminated employees. xUichico v. NLRC, 273 SCRA 35 (1997).

A corporation, being a juridical entity, may act only through its directors, officers and employees and obligations incurred by them, acting as corporate agents, are not theirs but the direct accountabilities of the corporation they represent. xBrent Hospital, Inc. v. NLRC, 292 SCRA 304 (1998).

The manager of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. There is nothing on record to show that the manager deliberately and maliciously evaded the corporation’s financial obligation to the employee; hence, there appearing to be no evidence on record that the manager acted maliciously or deliberately in the non-payment of benefits to the employee, the manager cannot be held jointly and severally liable with the corporate employers. [CLV – Nothing was shown to determine whether the corporate employer had no assets with which to pay the claims of the employee]. xNicario v. NLRC, 295 SCRA 619 (1998).

In xRestuarante Las Conchas v. Llego, 314 SCRA 24 (1999), the Supreme Court had apparently returned to the A.C. Ransom principle that “[a]lthough as a rule, the officers and members of a corporation are not personally liable for acts done in the performance of their duties, this rule admits of exceptions, one of which is when the employer corporation is no longer existing and is unable to satisfy the judgment in favor of the employee, the officers should be held liable for acting on behalf of the corporation.” In that case, the restaurant business had to be closed down because possession of the premises had been lost through an adverse decision in an ejectment case. The Court held: “In the present case, the employees can no longer claim their separation benefits and 13th month pay from the corporation because it had already ceased operation. To require them to do so would render illusory the separation and 13tj month pay awarded to them by the NLRC. Their only recourse is to satisfy their claim from the officers of the corporation who were, in effect, acting in behalf of the corporation.” The A.C. Ransom doctrine has been reiterated in xCarmelcraft Corp. v. NLRC, 186 SCRA 393 (1990), xValderrama v. NLRC, 256 SCRA 466 (1996).