Corporation Law, 1

I. HISTORICAL BACKGROUND

1. The Philippine Corporate Law:[1] Sort of Codification of American Corporate Law
When the Philippines came under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion "corporation" in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as the standard commercial entity and to hasten the day when the sociedad anónima of the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law. xHarden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).

2. The Corporation Law
The first corporate statute, the Corporation Law, or Act No. 1459, became effective on 1 April 1906. It had various piece-meal amendments during its 74 year history. It rapidly became antiquated and not adapted to the changing times.

3. The Corporation Code
The present Corporation Code, or Batas Pambansa Blg. 68, became effective on 1 May 1980. It adopted various corporate doctrines enunciated by the Supreme Court under the old Corporation Law. It clarified the obligations of corporate directors and officers, expressed in statutory language established principles and doctrines, and provided for a chapter on close corporations.

4. Proper Treatment of Philippine Corporate Law
Philippine Corporate Law comes from the common law system of the United States. Therefore, although we have a Corporation Code that provides for statutory principles, Corporate Law is essentially, and continues to be, the product of commercial developments. Much of this development can be expected to happen in the world of commerce, and some expressed jurisprudential rules that try to apply and adopt corporate principles into the changing concepts and mechanism of the commercial world.

II. CONCEPTS

1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code).
2. Tri-Level Existence of Corporation
(a) Aggregation of Assets and Resources
(b) Business Enterprise or Economic Unit
(c) Juridical Entity

3. Relationships Involved in Corporate Setting
(a) Juridical Entity Level, which views the State-corporations relationship
(b) Contractual Relationship Level, which considers that the corporate setting is at once a contractual relationship on four (4) levels:
- Between the corporation and its agents or representatives to act in the real world, such as its directors and its officers, which is governed also by the Law on Agency;
- Between the corporation and its shareholders or members;
- Between and among the shareholders in a common venture; and
- Between the corporation and third-parties or "outsiders", which is essentially governed by Contract Law.

4. Theories on Formation of Corporation:

(a) Theory of Concession (Tayag v. Benguet Consolidated Inc., 26 SCRA 242 [1968])
To organize a corporation that could claim a juridical personality of its own and transact business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose (x-cf. Ang Pue & Co. v. Sec. of Commerce and Industry, 5 SCRA 645 [1962]).
Before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act, and the procedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. The failure to comply with the statutory procedure and conditions does not warrant a finding that such association achieved the acquisition of a separate juridical personality, even when it adopts sets of constitution and by-laws. xInternational Express Travel & Tour Services, Inc. v. Court of Appeals, 343 SCRA 674 (2000).
Since all corporations, big or small, must abide by the provisions of the Corporation Code, then even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. xTorres v. Court of Appeals, 278 SCRA 793 (1997).

(b) Theory of Enterprise Entity (Berle, Theory of Enterprise Entity, 47 Col. L. Rev. 343 [1947])
Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity, such as the use of separate personality to avoid the execution of the property of a sister company. xTan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 (1988).
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. xPhilippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 (1997).

5. Four Attributes of Corporation from Statutory Definition:
(a) A corporation is an artificial being
(b) Created by operation of law
(c) With right of succession
(d) Only has powers, attributes and properties expressly authorized by law or incident to its existence

6. Advantages and Disadvantages of Corporate Form:

(a) Four Basic Advantageous Characteristics of Corporate Organization:
(i) Strong Legal Personality
- Entity attributable powers
- Continuity of existence
- Purpose
The corporation was evolved to make possible the aggregation and assembling of huge amounts of capital upon which big business depends; and has the advantage of non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000.
(ii) Centralized Management.
(iii) Limited Liability to Investors
One advantage of a corporate business organization is the limitation of an investor’s liability to the amount of the investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).
(iv) Free Transferability of Units of Ownership for Investors

(b) Disadvantages:
(i) Abuse of corporate management
(ii) Abuse of limited liability feature
(iii) Cost of maintenance
(iv) Double taxation
Dividends received by individuals from domestic corporations are subject to final 10% tax (Sec. 24(B)(2), NIRC of 1997) for income earned on or after 1 January 1998. Inter-corporate dividends between domestic corporations, however, are not subject to any income tax (Sec. 27(D)(4), NIRC of 1997).
In addition, there has been a re-imposition of the “improperly accumulated earnings tax,” under Section 29 of the NIRC of 1997 for corporations at the rate of 10% annually.

7. Compared With Other Media of Business Endeavors

- Distribution of Risk, Profit and Control
(a) Sole Proprietorships
(b) Business Trusts (Article 1442, Civil Code)
(c) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)
- Can a defective attempt o form a corporation result at least in the formation of a partnership? Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989).
(d) Joint Ventures
Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. the acts of working together in a joint project. xKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), citing Black’s Law Dictionary, Sixth ed., 839.
(e) Cooperatives (Art. 3, R.A. No. 6938)

(f) Sociedades Anónimas
A sociedad anónima was considered a commercial partnership, a sort of a corporation, “where upon the execution of the public instrument in which its articles of agreement appear, and the contribution of funds and personal property, becomes a juridical person—an artificial being, invisible, intangible, and existing only in contemplation of law—with power to hold, buy, and sell property, and to sue and be sued—a corporation—not a general copartnership nor a limited copartnership . . . The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person—a corporation. Such inscription only operated to show that it partook of the form of a commercial corporation.” xMead v. McCullough, 21 Phil. 95,106 (1911).
The sociedades anónimas were introduced in Philippine jurisdiction on 1 December 1888 with the extension to Philippine territorial application of Articles 151 to 159 of the Spanish Code of Commerce. Those articles contained the features of limited liability and centralized management granted to a juridical entity. But they were more similar to the English joint stock companies than the modern commercial corporations. xBenguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956)
Our Corporation Law recognizes the difference between sociedades anónimas and corporations and will not apply legal provisions pertaining to the latter to the former xPhil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).
(g) Cuentas En Participacion
A cuentas en participacion as a sort of an accidental partnership constituted in such a manner that its existence was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people besides the one who ostensibly managed and conducted the business, governed under article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against third person who contracted with the manager unless such manager formally transfers his right to them. xBourns v. Carman, 7 Phil. 117 (1906).

III. NATURE AND ATTRIBUTES OF A CORPORATION

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

2. Corporation as a Person:

(a) Entitled to due process
The due process clause is universal in its application to all persons without regard to any differences of race, color, or nationality. Private corporations, likewise, are "persons" within the scope of the guaranty insofar as their property is concerned." xSmith Bell & Co. v. Natividad, 40 Phil. 136, 144 (1920).
(b) Equal protection clause (xSmith Bell & Co. v. Natividad, 40 Phil. 136 [1920]).
(c) Unreasonable Searches and Seizure
Corporations are protected by the constitutional guarantee against unreasonable searches and seizures, but that the officers of a corporation from which documents, papers and things were seized have no cause of action to assail the legality of the seizures, regardless of the amount of shares of stock or of the interest of each of them in said corporation, and whatever the offices they hold therein may be, because the corporation has a personality distinct and separate from those of said officers. The legality of a seizure can be contested only by the party whose rights have been impaired thereby; and the objection to an unlawful search is purely personal and cannot be availed of by such officers of the corporation who interpose it for their personal interests. xStonehill v. Diokno, 20 SCRA 383 (1967).
A corporation is but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation; can only be proceeded against by due process of law; and is protected against unlawful discrimination. xBache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823, 837 (1971), quoting from xHale v. Henkel, 201 U.S. 43, 50 L.Ed. 652.
(d) But a corporation is not entitled to privilege against self incrimination
“It is elementary that the right against self-incrimination has no application to juridical persons.” Bataan Shipyard & Engineering Co v. PCGG, 150 SCRA 181, 234-235 (1987).
While an individual may lawfully refuse to answer incriminating questions unless protected by an 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 abuse of such privilege. xHale v. Henkel, 201 U.S. 43 (1906); xWilson v. United States, 221 U.S. 361 (1911); xUnited States v. White, 322 U.S. 694 (1944).

3. Liability for Torts

A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial person. That a principal or master is liable for every tort which he expressly directs or authorizes, is just as true of a corporation as a natural person. PNB v. CA, 83 SCRA 237 (1978).
Our jurisprudence is wanting as to the definite scope of “corporate tort.” Essentially, “tort” consists in the violation of a right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legal duty. When it was found that Clark Field Taxi failed to comply with the obligation imposed under Article 283 of the Labor Code which mandates that the employer to grant separation pay to employees in case of closure or cessation of operations of establishments or undertaking not due to serious business losses or financial reverses; consequently, its stockholder who was actively engaged in the management or operation of the business should be held personally liable. xSergio F. Naguiat v. NLRC, 269 SCRA 564 (1997).
As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment, even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had participated. Philippine Commercial International Bank vs. Court of Appeals, G.R. No. 121413, 29 January 2001.

4. Criminal Liability of a Corporation (West Coast Life Ins. Co. v. Hurd, 27 Phil. 401 (1914); People v. Tan Boon Kong, 54 Phil. 607 [1930]; Sia v. CA, 121 SCRA 655 [1983]; Articles 102 and 103, Revised Penal Code).
No criminal suit can lie against an accused who is a corporation. xTimes, Inc. v. Reyes, 39 SCRA 303 (1971).
When a criminal statute forbids the corporation itself from doing an act, the prohibition extends to the board of directors, and to each director separately and individually. xPeople v. Concepcion, 44 Phil. 129 (1922).

5. Recovery of Moral Damages and Other Damages

A corporation, being an artificial person, cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social humiliation which are basis for moral damages under Art. 2217 of the Civil Code. However, a corporation may have a good reputation which, if besmirched, may be a ground for the award of moral damages. xMambulao Lumber Co. v. Philippine National Bank, 22 SCRA 359 (1968).
Even when the corporation's reputation and goodwill have been prejudiced, "there can be no award for moral damages under Article 2217 and succeeding articles of Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation." xPrime White Cement Corp. vo Intermediate Appellate Court, 220 SCRA 103, 113-114 (1993).
Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life—all of which cannot be suffered by respondent bank as an artificial person. xLBC Express, Inc. v. Court of Appeals, 236 SCRA 602 (1994); xAcme Shoe, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714 (1996); xSolid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997).
In Asset Privatization Trust v. Court of Appeals, 300 SCRA 579 (1998), the Supreme Court seemed to have gone back to the original doctrine that “[u]nder Article 2217 of the Civil Code, moral damages include besmirched reputation which a corporation may possibly suffer.”
The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It cannot, therefore, experience physical suffering and mental anguish, which can be experienced only by one having a nervous system. The statement in People v. Manero [218 SCRA 85 (1993)] and Mambulao Lumber Co. v. PNB [130 Phil. 366 (1968)], that a corporation may recover moral damages if it “has a good reputation that is debased, resulting in social humiliation” is an obiter dictum. . .” The possible basis of recovery of a corporation would be under Articles 19, 20 and 21 of the Civil Code, but which requires a clear proof of malice or bad faith. xABS-CBN Broadcasting Corp. v. Court of Appeals, 301 SCRA 589 (1999).
While it is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself, it does not follow from this, however, that the corporation cannot be a real-party-in-interest for the purpose of bringing a civil action for malicious prosecution for the damages incurred by the corporation for the criminal proceedings brought against its officer. xCometa v. Court of Appeals, 301 SCRA 459 (1999).

6. Nationality of Corporation: Country Under Whose Laws Incorporated (Sec. 123).
Exceptions: The Test of Controlling Ownership Applies In:
(a) Exploitation of Natural Resources (Sec. 140; Sec. 2, Article XII, 1987 Constitution; Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC and the Register of Deeds of Davao, 102 Phil. 596 [1957]).
The donation of land to an unincorporated religious organization, whose trustees are foreigners, cannot be allowed registration for being violation of the constitutional prohibition and it would not be violation of the freedom of religion clause. The fact that the religious association “has no capital stock does not suffice to escape the constitutional inhibition, since it is admitted that its members are of foreign nationality. The purpose of the sixty per centum requirement is obviously to ensure that corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos; and the spirit of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens.” xRegister of Deeds of Rizal v. Ung Sui Si Temple, 97 Phil. 58 (1955)
(b) Public Utilities (Sec. 11, Article XII, 1987 Constitution; People v. Quasha, 93 Phil. 333 [1953]).
The primary franchise of a corporation, that is, the right to exist as such, is vested in the individuals who compose the corporation and not in the corporation itself and cannot be conveyed in the absence of a legislative authority so to do. But the special or secondary franchises of a corporation are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use. xJ.R.S. Business Corp. v. Imperial Insurance, 11 SCRA 634 (1964).
The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility; however, it does not requires a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public. In law there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and equipment used to serve the public. Tatad v. Garcia, Jr., 243 SCRA 436 (1995)
“A distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and the franchise itself which is owned by the corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction. Since stockholders own the shares of stock, they may dispose of the same as they see fit. They may not, however, transfer or assign the property of a corporation, like its franchise. In other words, even if the original stockholders had transferred their shares to another group of shareholders, the franchise granted to the corporation subsists as long as the corporation, as an entity, continues to exist. The franchise is not thereby invalidated by the transfer of the shares. A corporation has a personality separate and distinct from that of each stockholder. It has the right of continuity or perpetual succession Corporation Code, Sec. 2).” Philippine Long Distance Telephone Co. v. National Telecommunications Commission, 190 SCRA 717, 732 (1990).
(c) Mass Media (Sec. 11(1), Art. XVI, 1987 Constitution)
Sources: P.D. 36, as amended by PDs 191 and 197; DOJ Opinion No. 120, s. of 1982; Section 2, P.D. 576; SEC Opinion dated 24 March 1983; DOJ Opinion 163, s. 1973; SEC Opinion dated 15 July 1991, XXV SEC QUARTERLY BULLETIN, (No. 4—December, 1991), at p. 31.
Cable Industry
The National Telecommunications Commission (NTC), which regulates and supervises the cable television industry in the Philippines under Section 2 of Executive Order No. 436, s. 1997, has provided under NTC Memorandum Circular No. 8-9-95, under item 920(a) thereof provides that “Cable TV operations shall be governed by E.L. No. 205, s. 1987. If CATV operators offer public telecommunications services, they shall be treated just like a public telecommunications entity.”
Under DOJ Opinon No. 95, series of 1999, the Secretary of Justice, taking its cue from Allied Broadcasting, Inc. v. Federal Communications Commission, 435 F. 2d 70, considered CATV as “a form of mass media which must, theefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution.”
(d) Advertising Business (Sec. 11(2), Art. XVI, 1987 Constitution)
(e) War-Time Test (Filipinas Compania de Seguros v. Christern, Huenefeld & Co., Inc., 89 Phil. 54 [1951]; xDavis Winship v. Philippine Trust Co., 90 Phil. 744 [1952]; xHaw Pia v. China Banking Corp., 80 Phil. 604 [1948]).
(f) Investment Test as to "Philippine Nationals" (Sec. 3(a),(b), R.A. 7042, Foreign Investment Act of 1992)
(g) The Grandfather Rule (Opinion of DOJ No. 18, s. 1989, dated 19 January 1989; SEC Opinion, dated 6 November 1989, XXIV SEC Quarterly Bulletin (No. 1- March 1990); SEC Opinion, dated 14 December 1989, XXIV SEC Quarterly Bulletin (No. 2 -June 1990)
Up to what level do you apply the grandfather rule? (Palting v. San Jose Petroleum Inc., 18 SCRA 924 [1966]).
(h) Special Classifications (Sec. 140)

IV. SEPARATE JURIDICAL PERSONALITY AND DOCTRINE OF PIERCING VEIL OF CORPORATE FICTION

A. Main Doctrine: A Corporation Has A Personality Separate and Distinct from its Stockholders or Members.

Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members—by legal fiction and convenience it is shielded by a protective mantel and imbued by law with a character alien to the persons comprising it. xLim v. Court of Appeals, 323 SCRA 102 (2000).

1. Sources: Sec. 2; Article 44, Civil Code

2. Importance of Protecting Main Doctrine:
The “separate juridical personality” includes: right of succession; limited liability; centralized management; and generally free transferability of shares of stock. Therefore, an undermining of the separate juridical personality of the corporation, such as the application of the piercing doctrine, necessarily dilutes any or all of those attributes.
One of the advantages of a corporate form of business organization is the limitation of an investor’s liability to the amount of the investment. This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. xSan Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).

3. Applications:

(a) Majority Ownership of or Dealings in Shareholdings: Ownership of a majority of capital stock and the fact that majority of directors of a corporation are the directors of another corporation creates no employer-employee relationship with the latter's employees. DBP v. NLRC, 186 SCRA 841 (1990); Francisco, et al. v. Mejia, G. R. No. 141617, 14 August 2001.
The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. xRemo, Jr. v. Intermediate Appellate Court, 172 SCRA 405, 413-414 (1989).
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. xSunio v. NLRC , 127 SCRA 390 (1984); xAsionics Philippines, Inc. v. National Labor Relations Commission, 290 SCRA 164 (1998); xLim v. Court of Appeals, 323 SCRA 102 (2000); xManila Hotel Corp. v. NLRC, 343 SCRA 1 (2000); xFrancisco v. Mejia, G. R. No. 141617, 14 August 2001.
Mere substantial identity of the incorporators of the two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction. In the absence of clear and convincing evidence to show that the corporate personalities were used to perpetuate fraud, or circumvent the law, the corporations are to be rightly treated as distinct and separate from each other. xLaguio v. NLRC, 262 SCRA 715 (1996).

(b) Dealings Between the Corporation and Stockholders: The transfer of the corporate assets to the stockholder is not in the nature of a partition but is a conveyance from one party to another. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities which it may be connected and vice-versa. xARB Constructions Co., Inc. v. Court of Appeals, 332 SCRA 427 (200)

(c) On Issues of Privileges Enjoyed: The tax privileges enjoyed by a corporation do not extend to its stockholders. "A corporation has a personality distinct from that of its stockholders, enabling the taxing power to reach the latter when they receive dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of a domestic corporation which are paid and delivered in cash to foreign corporations as stockholders are subject to the payment of the income tax, the exemption clause to the charter [of the domestic corporation] notwithstanding." xManila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 898 (1936).

(d) Being a Corporate Officer: Being an officer or stockholder of a corporation does not by itself make one's property also of the corporation, and vice-versa, for they are separate entities, and that shareholders are in no legal sense the owners of corporate property which is owned by the corporation as a distinct legal person. Good Earth Emporium, Inc. v. CA, 194 SCRA 544 (1991)
The mere fact that one is president of the corporation does not render the property he owns or possesses the property of the corporation, since that president, as an individual, and the corporation are separate entities. xCruz v. Dalisay, 152 SCRA 487 (1987).

(e) Properites, Obligations and Debts: Likewise, a corporation has no legal standing to file a suit for recovery of certain parcels of land owned by its members in their individual capacity, even when the corporation is organized for the benefit of the members. Sulo ng Bayan v. Araneta, Inc., 72 SCRA 347 [1976]).
The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholder's debt or credit that of the corporation. xTraders Royal Bank v. CA, 177 SCRA 789 (1989).
Stockholders have no personality to intervene in a collection case covering the loans of the corporation on the ground that the interest of shareholders in corporate property is purely inchoate. xSaw v. CA, 195 SCRA 740 [1991])
The interests of payees in promissory notes cannot be off-set against the obligations between the corporations to which they are stockholders absent any allegation, much less, even a scintilla of substantiation, that the parties interest in the corporation are so considerable as to merit a declaration of unity of their civil personalities. xIndustrial and Development Corp. v. Court of Appeals, 272 SCRA 333 (1997).
It is a basic postulate that a corporation has a personality separate and distinct from its stockholders. Therefore, even when the foreclosure on the assets of the corporation was wrongful and done in bad faith, the stockholders of the corporation have no standing to recover for themselves moral damages. Otherwise, it would amount to the appropriation by, and the distribution to, such stockholders of part of the corporation’s assets before the dissolution of the corporation and the liquidation of its debts and liabilities. xAsset Privatization Trust v. Court of Appeals, 300 SCRA 579, 617 (1998).
Where real properties included in the inventory of the estate of a decedent are in the possession of and are registered in the name of the corporations, in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of said corporations should stand undisturbed. xLim v. Court of Appeals, 323 SCRA 102 (2000).

(f) Third-Parties: The fact that respondents are not stockholders of the disputed corporations does not make them non-parties to the case, since the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners, and that the former acquired the properties sought to be reconveyed to FGSRC in violation of directors-petitioners’ fiduciary duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if, as alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders. Gochan v. Young, G.R. No. 131889, 21 March 2001.

B. Piercing the Veil of Corporate Fiction:

1. Source of Incantation: xUnited States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247 [1905]). xSee also Francisco v. Mejia, G. R. No. 141617, 14 August 2001.

2. Nature of the Piercing Doctrine (Traders Royal Bank v. Court of Appeals, 269 SCRA 15 [1997])

Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. xLim v. Court of Appeals, 323 SCRA 102 (2000).
This Court has pierced the veil of corporate fiction in numerous cases where it was used, among others, to avoid a judgment credit, to avoid inclusion of corporate assets as part of the estate of a decedent, to avoid liability arising from debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate issues, or to promote unfair objectives or otherwise to shield them. xReynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000; also xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.

3. When Piercing Doctrine Not Applicable:

(a) Piercing the veil of corporate fiction is remedy of last resort and is not available when other remedies are still available. Umali v. CA, 189 SCRA 529 (1990).
(b) Piercing is not allowed unless the remedy sought is to make the officer or another corporation pecuniarily liable for corporate debts. Umali v. CA, 189 SCRA 529 (1990); Indophil Textile Mill Workers Union-PTGWO v. Calica, 205 SCRA 697 (1992).
(c) Piercing is not available when the personal obligations of an individual are sought to be enforced against the corporation. xRobledo v. NLRC, 238 SCRA 52 (1994)
“The rationale behind piercing a corporation’s identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or person responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation.” Francisco Motors Corp. v Court of Appeals, 309 SCRA 72, 83 (1999).
(d) To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. This is elementary. The organization of the corporation at the time when the relationship between the landowner and the developer were still cordial cannot be used as a basis to hold the corporation liable later on for the obligations of the landowner to the developer under the mere allegation that the corporation is being used to evade the performance of obligation by one of its major stockholders. xLuxuria Homes, Inc. v. Court of Appeals, 302 SCRA 315 (1999); xDevelopment Bank of the Philippines vs. Court of Appeals, G.R. No. 126200, 16 August 2001.
(e) Not Applicable to Theorizing: Piercing of the veil of corporate fiction is not allowed when it is resorted to justify under a theory of co-ownership the continued use and possession by stockholders of corporate properties. Boyer-Roxas v. Court of Appeals, 211 SCRA 470 [1992]).
The piercing doctrine cannot be availed of in order to dislodge from the jurisdiction of the SEC a the petition for suspension of payments filed under Section 5(e) of Pres. Decree No. 902-A, on the ground that the petitioning individuals should be treated as the real petitioners to the exclusion of the petitioning corporate debtor. “The doctrine of piercing the veil of corporate fiction heavily relied upon by the petitioner is entirely misplaced, as said doctrine only applies when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.” xUnion Bank of the Philippines v. Court of Appeals, 290 SCRA 198 (1998).
Changing of the petitioners’s subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity. xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.
(f) Piercing doctrine is meant to prevent fraud, and cannot be employed to perpetrate fraud or a wrong. Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal, 91 Phil. 786 (1952).
The theory of corporate entity was not meant to promote unfair objectives or otherwise, nor to shield them. xVillanueva v. Adre, 172 SCRA 876 (1989).
(g) Piercing is a power belonging to the court and cannot be assumed improvidently by a sheriff. Cruz v. Dalisay, 152 SCRA 482 (1987).

3. Consequences and Types of Piercing Cases: Umali v. CA, 189 SCRA 529 [1990])

(a) The application of the doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied. Koppel (Phil.) Inc. v. Yatco, 77 Phil. 496 (1946); xTantoco v. Kaisahan ng Mga Manggagawa sa La Campana, 106 Phil. 198 (1959).

(b) Classification of the Piercing Cases:
(i) When the corporate entity is used to commit fraud or to do a wrong ("fraud cases");
(ii) When the corporate entity is merely a farce since the corporation is merely the alter ego, business conduit or instrumentality of a person or another entity ("alter ego cases"); and
(iii) When the piercing the corporate fiction is necessary to achieve justice or equity ("equity cases").
The three cases may appear together in one application. See R.F. Sugay & Co., v. Reyes, 12 SCRA 700 (1964).

4. Fraud Cases:

(a) Acts by the Controlling Shareholder: Where a stockholder, who has absolute control over the business and affairs of the corporation, entered into a contract with another corporation through fraud and false representations, such stockholder shall be liable jointly and severally with his co-defendant corporation even when the contract sued upon was entered into on behalf of the corporation. Namarco v. Associated Finance Co., 19 SCRA 962 (1967).
The tests in determining whether the corporate veil may be pierced are: (1) the defendant must have control or complete domination of the other corporation’s finances, policy and business practices with regard to the transaction attached; (2) control must be used by the defendant to commit fraud or wrong; and (3) the aforesaid control or breach of duty must be the proximate cause of the injury or loss complained of. Manila Hotel Corporation v. NLRC, 343 SCRA 1 (2000); xAlso Lim v. Court of Appeals, 323 SCRA 102 (2000).
(b) One cannot evade civil liability by incorporating properties or the business. Palacio v. Fely Transportation Co., 5 SCRA 1011 (1962).
(c) The veil of corporation fiction may be pierced when used to avoid a contractual commitment against non-competition. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).
(d) The Supreme Court found the following facts to be legal basis to pierce: One company was merely an adjunct of the other, by virtue of a contract for security services, the former provided with security guards to safeguard the latter’s premises; both companies have the same owners and business address; the purported sale of the shares of the former stockholders to a new set of stockholders who changed the name of the corporation appears to be part of a scheme to terminate the services of the security guards, and bust their newly-organized union which was then beginning to become active in demanding the company’s compliance with Labor Standards laws. De Leon v. NLRC, G.R. No. 112661, 30 May 2001.
(e) Parent-Subsidiary Relations; Affiliates (Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22 November 2000; Commissioner of Internal Revenue v. Norton and Harrison, 11 SCRA 704, [1954]; Tomas Lao Construction v. NLRC, 278 SCRA 716 [1997]).
- Why is there inordinate showing of alter-ego elements?
(e) Guiding Principles in Fraud Cases:
(i) There must have been fraud or an evil motive in the affected transaction, and the mere proof of control of the corporation by itself would not authorize piercing; and
(ii) The main action should seek for the enforcement of pecuniary claims pertaining to the corporation against corporate officers or stockholders.

5. Alter-Ego Cases:

(a) Where the stock of a corporation is owned by one person whereby the corporation functions only for the benefit of such individual owner, the corporation and the individual should be deemed the same. Arnold v. Willets and Patterson, Ltd., 44 Phil. 634 (1923).
(b) When the corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporation entities should be disregarded. xTan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).
The corporation veil cannot be used to shield an otherwise blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court processes, particularly where, as in this case, the corporation itself has not been remiss in vigorously prosecuting or defending corporate causes and in using and applying remedies available to it. xFirst Philippine International Bank v. Court of Appeals, 252 SCRA 259 (1996).
(c) Employment of same workers; single place of business, etc. La Campana Coffee Factory v. Kaisahan ng Manggagawa, 93 Phil. 160 (1953).
The doctrine that a corporation is a legal entity or a person in law distinct from the persons composing it is merely a legal fiction for purposes of convenience and to subserve the ends of justice. This fiction cannot be extended to a point beyond its reason and policy. Where, as in this case, the corporation fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations or confuse the legitimate issues, it would be discarded and the two (2) corporations would be merged as one, the first being merely considered as the instrumentality, agency conduit or adjunct of the other. In this case, because of the actions of management of the two corporations, there was much confusion as to the proper employment of the claimant. xAzcor Manufacturing, Inc. v. NLRC, 303 SCRA 26 (1999).
(d) Use of nominees. xMarvel Building v. David, 9 Phil. 376 (1951).
(e) Avoidance of tax. Yutivo Sons Hardware v. Court of Tax Appeals 1 SCRA 160 (1961); xLiddell & Co. v. Collector of Internal Revenue, 2 SCRA 632 (1961).
(f) Mixing of bank deposit accounts. xRamirez Telephone Corp. v. Bank of America, 29 SCRA 191 (1969).
(g) Where it appears that two business enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities and treat them as identical. xSibagat Timber Corp. v. Garcia, 216 SCRA 70 (1992).
(h) Thinly-capitalized corporations. McConnel v. Court of Appeals, 1 SCRA 722 (1961).
(i) Parent-subsidiary relationship. Koppel (Phil.), Inc. v. Yatco, 77 Phil. 97 (1946); xPhilippine Veterans Investment Development Corporation v. CA, 181 SCRA 669 (1990).
(j) Affiliated companies. xGuatson International Travel and Tours, Inc. v. NLRC, 230 SCRA 815 (1990).
(k) Summary of Probative Factors: Philippine National Bank vs. Ritratto Group, Inc., et al., G.R. No. 142616, 31 July 2001; xConcept Builders, Inc. v. NLRC, 257 SCRA 149 (1996).
Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that the stockholders or officers and the corporation are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of corporate entity. xRamoso v. Court of Appeals, G.R. No. 117416, 8 December 2000.

(l) Guiding Principles in Alter-Ego Cases:
(i) The doctrine applies in this case even in the absence of evil intent; it applies because of the direct violation of a central corporate law principle of separating ownership from management.
(ii) The doctrine in such cased is based on estoppel: if stockholders do not respect the separate entity, others cannot also be expected to be bound by the separate juridical entity.
(iii) Piercing in alter ego cases may prevail even when no monetary claims are sought to be enforced against the stockholders or officers of the corporation.
6. Equity Cases:
(a) When used to confuse legitimate issues. Telephone Engineering and Service Co., Inc. V. WCC, 104 SCRA 354 (1981).
(b) When used to raise technicalities. xEmilio Cano Ent. v. CIR, 13 SCRA 291 (1965).
7. Piercing Doctrine and Due Process Clause
(a) The need to bring a new case against the officer. McConnel v. Court of Appeals, 1 SCRA 723 (1961).
(b) When corporate officers are sued in their official capacity when the corporation was not made a party, the corporation is not denied due process. Emilio Cano Enterprises v. Court of Industrial Relations, 13 SCRA 291 (1965).
(c) Provided that evidential basis has been adduced during trial to apply the piercing doctrine. Jacinto v. Court of Appeals, 198 SCRA 211 (1991); xArcilla v. Court of Appeals, 215 SCRA 120 (1992).