2. Concepts

CORPORATION LAW REVIEWER (2013-‐2014)

ATTY. JOSE MARIA G. HOFILEÑA

CONCEPTS I. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code) Section 2. Corporation defined. A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (2) CIVIL CODE Article 44. The following are juridical persons: 1. The State and its political subdivisions; 2. Other corporations, institutions and entities for public interest or purpose, created by law; their personality begins as soon as they have

Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships. (36 and 37a) Article 46. Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. (38a) Article 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-‐ownership. (1669)

been constituted according to law; 3. Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. (35a) Article 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the laws creating or recognizing them. Private corporations are regulated by laws of general application on the subject.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

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Juridical persons are those who have an identity granted to it by law with powers granted and subject to the law. o As such, they can own property and conduct business as well as sue and be sued. o Juridical capacity à the capacity/ability to enter into legal relations and be bound by them.

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A corporation is an: o o o

Artificial being à essentially means that it has a fictional existence. Created by operation of law à absence of the law would mean that a corporation cannot exist. Invested by law upon coming into existence with a personality separate and distinct from the persons composing it, and from any other legal entity to which it



may be related. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).1

strong legal personality of the corporation is an attribute that has made it most attractive to businessmen when compared to other media.4 (d) Creature of Limited Powers: “It has only such powers, attributes and properties as are expressly authorized by law or incident to its existence.”

II. FOUR (4) CORPORATE ATTRIBUTES BASED ON SECTION 2: (a) An Artificial Being: “It has juridical capacity to contract and enter into legal relationships.” It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special aw or a general enabling act.2 (b) Creature of the Law: “It is created by operation of law and not by mere agreement.” o There must first be an underlying contract among the o

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The corporation has the capacity for continuous existence despite the death or replacement of its shareholders or members, for it has a personality separate and distinct from those who compose it. The

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Construction & Dev. Corp. of the Phils. v. Cuenca, 466 SCRA 714 (2005); EDSA Shangri-‐La Hotel and Resorts, Inc. v. BF Corp., 556 SCRA 25 (2008). 2 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 3 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

A corporation has no powers except for those which are: o o o

individuals forming the corporation upon which the state grant may be conferred. Therefore, you have an inter-‐play of State grant and contractual relations between the parties. Which principle has precedence in resolving conflict would depend upon the public interest or issue to be resolved.3 (c) Strong Juridical Personality: “It has a right of succession.”

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As opposed to a natural person, who has the ability to exercise any power and enter into any business activity and the only limitation would be that an individual has no right to enter into an act or transaction that is contrary to law, morals and public policy.5 Expressly conferred on it by the Corporation Code Found in its charter, and Those that are implied by or are incidental to its existence.

It exercises its powers through its Board of Directors and/or its duly authorized officers and agents. Pascual and Santos, Inc. v. The Members of the Tramo Wakas Neighborhood Assn. Inc., 442 SCRA 438 (2004).6

4

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 5 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 6 De Liano v. Court of Appeals, 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III, 434 SCRA 27 (2004); United Paragon Mining Corp. v. Court of Appeals, 497 SCRA 638 (2006); Cebu Bionic Builders Supply, Inc. v. DBP, 635 SCRA 13 (2010).




NOTE: Corporations are products of relationships. They cannot come into force unless persons agree to form one, and unless the State agrees and allows them to form a corporation. Since a corporation is formed by relationship, it does not have a body of its own and as such requires that its actions be made through its agents. The officers of a corporation are the ones who smell, touch and see for the corporation and it is through them that the corporation reaches out to the real world. III. “TRI-‐LEVEL EXISTENCE” OF THE CORPORATION: (a) “Assets-‐Only” Level: “The corporation is an aggregation of Assets and Resources” (b) “Business Enterprise” Level: “The corporation’s primary purpose is to pursue business.” (c) “Juridical Entity” Level: “The corporation is a medium of pursuing a business enterprise.” IV. “TRI-‐LEVEL RELATIONSHIPS” IN THE CORPORATE SETTING: (a) JURIDICAL ENTITY LEVEL, which treats of the aspects of the State-‐corporation relationship. (b) INTRA-‐CORPORATE LEVEL, which considers that the corporate setting is at once a contractual relationship on four (4) levels: Relationship

Governing Law

Between the corporation and its agents/representatives to Law on act in the real world, i.e., directors and officers Agency Between the corporation and its shareholders or members Between the shareholders and the corporate directors, trustees and officers

Between and among the shareholders in a common venture

(c) EXTRA-‐CORPORATE LEVEL, which views the relationship between the corporation and third-‐parties or “outsiders”, essentially governed by Contract Law and Labor Law. Relationship

Governing Law

Between the corporation and its employees

Labor Law

Between the corporation and those it contracts

Contract Laws

and transacts with Between the corporation and the publics it affects with its enterprise

Torts or Quasi-‐Delict Laws

V. THEORIES ON THE FORMATION OF CORPORATION A. Theory of Concession: Tayag v. Benguet Consolidated, 26 SCRA 242 (1968). Tayag v. Benguet Consolidated Facts: Idonah Slade Perkins owned two stocks certificates under Benguet Consolidated Inc. (a Philippine corporation). Perkins died in New York in 1960, and the stock certificates were held in trust by County Trust Company [CTC] of New York, who was the domiciliary administrator of her estate. On the other hand, Renato D. Tayag was appointed ancillary administrator of Perkins’ properties in the Philippines. A dispute arose between the domiciliary administrator in New York and the ancillary administrator in the Philippines as to which




of them was entitled to the possession of the stock certificates. The Court of First Instance of Manila ordered CTC to produce and deposit the certificates with Tayag, but the former refused. Tayag was able to have a court order issued declaring the certificates lost and new

creature without any existence until it has received the imprimatur of the State acting according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, specifically the judiciary. It is not immune

ones should be issued by Benguet Consolidated Inc. However, the latter refused because as far as it was concerned, the certificates were not lost being in the possession of CTC. Issue: Whether or not the lower court erred in declaring the certificates as lost.

from judicial control. •

then its existence and actions concedes to the law. o The theory of concession, therefore, looks at a corporation simply as a creature of the State and of limited powers and capabilities, completely within the control of the State.1

Held: NO. Since there was a refusal by the domiciliary administrator in New York to deliver the shares of stocks of Benguet to the ancillary administrator in the Philippines, there was nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to issue new certificates in lieu thereof. Moreover, the view adopted by Benguet Consolidated that it cannot issue new certificates because doing so under the circumstances would be a violation of its by-‐laws is fraught

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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. cf. Ang Pue & Co. v. Section of Commerce and Industry, 5 SCRA 645 (1962).

with implications at war with the basic postulates of corporate theory. A corporation is an artificial being created by operation of law. To assert that it can choose which court order to follow and which to disregard is to confer upon it not autonomy which may be conceded but license which cannot be tolerated. It is to argue that it may, when so minded, overrule the state, the source of its very existence; it is to contend that what any of its governmental organs may lawfully require could be ignored at will. So extravagant a claim cannot possibly merit approval. Doctrine: A corporation as known to Philippine jurisprudence is a

Theory of Concession à Since a corporation is created by law,

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“It is a basic postulate that 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. Although the statutory grant to an association of the powers to purchase, sell, lease and encumber property can only be construed the grant of a juridical personality to such an

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.




association…nevertheless, the failure to comply with the statutory procedure and conditions does not warrant a finding that such association acquired a juridical personality, even when it adopts constitution and by-‐laws. Int’l Express Travel & Tour Services, Inc. v. CA, 343 SCRA 674 (2000). •

enterprise, which by these very qualities and operations acquires an entity of its own, recognized by law.2 •

fiction alone that creates a corporate entity. Any State grant must presuppose the existence of consent or common venture among those who will form the corporation. o Although it is within the power of the State to give such grant or to deny it, the corporate fiction cannot be created unless there is an enterprise or group upon whom it would be conferred.

All corporations, big or small, must abide by the provisions of the Corporation Code; even a simple family corporation cannot claim an exemption nor can it have rules and practices other than those established by law. Torres v. Court of Appeals, 278 SCRA 793 (1997).

B. Theory of Enterprise Entity: BERLE, 47 COLUMBIA LAW REV. 343 (1947) •

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Theory of Enterprise Entity à The enterprise theory hinges itself on the fact that there can be no corporate existence without persons to compose it; there can be no association without associates.1 o The entity commonly known as "corporate entity" takes its being from the reality of the underlying enterprise, formed or in formation; that the state's approval of the corporate form sets up a prima facie case that the

Arnold v. Willets & Patterson, Ltd. 45 Phil. 634 (1923).

But once granted, and the entity acquires juridical personality, it does not mean that the group, as distinguished from the juridical entity, becomes a creature of the State, but actually becomes a creature of its own volition and maintains either singly or collectively their inherent rights under the law, which may tend to project to their business dealings done through the corporation.

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assets, liabilities and operations of the corporation are those of the enterprise. But that where the corporate entity is defective, or otherwise challenged, its existence, extent and consequences may be determined by the actual existence and operations of the underlying

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The theory draws its vitality from the fact that it is not legal

A corporation is a creation of law and a creation of a set of relationships between individuals. o It takes 5 people to form a corporation and it is formed

o

by the agreement of the individuals to establish the corporation. Even as a corporation has an identity separate from the individuals, you cannot do away completely with the notion that there are individuals behind the corporation.

2

Berle, The Theory of Enterprise, 47 COL. L. REV. No. 3 (April, 1947).




o

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As such, in cases where there is defect in the corporate identity, your recourse is to the individuals. This is why the Supreme Court has ruled that the corporation is entitled to rights – because individuals form the corporation and these individuals have rights.

corporate assets and properties. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). •

party is already of advanced age and in danger of extinction,” but not in this case where the winning party is a corporation. “[A] juridical entity’s existence cannot be likened to a natural person—its precarious financial condition is not by itself a compelling circumstance warranting immediate execution and does not outweigh the long standing general policy of enforcing

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. PSE v. Court of Appeals, 281 SCRA 232 (1997).

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only final and executory judgment.” Manacop v. Equitable PCIBank, 468 SCRA 256 (2005).

Corporations are composed of natural persons and their separate corporate personality is not a shield for the commission of injustice and inequity, such as to avoid the execution of the property of a sister company. Tan Boon Bee &

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Co. v. Jarencio, 163 SCRA 205 (1988).

“A corporation is an entity separate and distinct from its

partnership where the death of a partner dissolves the partnership.

stockholders. While not in fact and in reality a person, the law treats the corporation as though it were a person by process of fiction or by regarding it as an artificial person distinct and separate from its individual stockholders.” Remo, Jr. v. IAC, 172

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SCRA 405 (1989). •

The transfer of the corporate assets to the stockholders is not in the nature of a partition among co-‐owners but is a conveyance from one party to another. Stockholders are not co-‐owners of

As distinguished from a partnership, it has a strong legal personality having a separate and distinct personality from the members composing it, unaffected by the death, resignation, insolvency of any of its stockholders or members. Its credit-‐ worthiness and the certainty of long-‐term contractual dealings with a stable person, are strengthened by such continuity of existence.1 o A corporation can survive the death of its stockholders or members (i.e. right of succession). In contrast to a

VI. ADVANTAGES AND DISADVANTAGES OF CORPORATE FORM: A. Four Advantageous Characteristics of Corporate Medium: 1. STRONG AND SOLEMN JURIDICAL PERSONALITY (Section 2) •

Execution pending appeal may be allowed when “the prevailing

The shareholders cannot be held liable as an individual for the liabilities of the corporation (see LIMITED LIABILITY TO INVESTORS AND OFFICERS). o The function of the corporation is to absorb the risk.

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2. CENTRALIZED MANAGEMENT (Section 23)

stockholders’ approval for certain specific acts. Great Asian Sales Center Corp. v. Court of Appeals, 381 SCRA 557 (2002).

Section 23. The board of directors or trustees. Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business

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bind the corporations, unlike in a partnership setting, where each partner may bind the partnership, even without the knowledge of the other partners.1 o Therefore, in its legal relationship, a corporation presents a more stable and efficient system of governance and dealings with third parties, since management prerogatives are centralized in its board of

conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified. (28a) Every director must own at least one (1) share of the capital stock of

directors.2 3. LIMITED LIABILITY TO INVESTORS AND OFFICERS

the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-‐stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.

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The exercise of corporate powers rest in the Board of Directors, save in those instances where the Corporation Code requires

It is hornbook law that corporate personality is a shield against personal liability of its officers—a corporate officer and his spouse cannot be made personally liable under a trust receipt where he entered into and signed the contract clearly in his official capacity. Consolidated Bank and Trust Corp. v. Court of Appeals, 356 SCRA 671 (2001).3

As can be gleaned from Section 23 of Corporation Code “It is the board of directors or trustees which exercises almost all the corporate powers in a corporation.” Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). o Management is lodged essentially with the board of directors.

One of the advantages of the corporation is the limitation of an investor’s liability to the amount of investment, which flows from the legal theory that a corporate entity is separate and distinct from its stockholders. San Juan Structural and Steel Fabricators, Inc. v. CA, 296 SCRA 631 (1998).

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Shareholders are not agents of the corporation, nor can they

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 3 Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224, 672 SCRA 562 (2012); Gotesco Properties, Inc. v. Fajardo, 692 SCRA 319 (2013).




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Obligations incurred by the corporation acting through its directors, officers and employees, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001).

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However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. On equitable

laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-‐in-‐fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the

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.1

corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (35)

Where the creditor of the corporation sues not only the

company but also all stockholders to reach their unpaid subscription which appear to be the only visible assets of the company, then the controlling doctrine is that “a stockholder is personally liable for the financial obligations of the corporation to the extent of his unpaid subscription.” Halley v. Printwell, Inc. 649 SCRA 116 (2011). 4. FREE-‐TRANSFERABILITY OF UNITS OF OWNERSHIP (SHARES) FOR INVESTORS (Section 63) Section 63. Certificate of stock and transfer of shares. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-‐

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Transfer of shares is a matter of right of the holder. The corporation cannot prevent such transfer. You need to have to exit from the corporation. o It is the inherent right of the stockholder to dispose of his shares of stock (which he owns as any other property of his) anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989); PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

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Authority granted to regulate the transfer of its stock does not empower the 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. Thomson v. Court of Appeals, 298 SCRA 280 (1998). o If the transfer would cause violations of the law (such as the ratio requirement for local-‐foreign holdings), then



the corporation may restrict the right transfer of the holder’s shares. •

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However, the system of free transferability of the units of

and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-‐ownership.

investments in the corporate setting presumes a well-‐developed market for shares of stocks.1 •

By provision of law, while it is true that in so far as the buyer

and seller is concerned the sale (and transfer of the certificates) is made by meeting of the minds, there is a provision in the law that before such sale is binding to the whole word it must be recorded in the books of the corporation. 5. Advantages Over Unregistered Associations •

B. Disadvantages of the Corporate Medium: •

Note on disadvantages: Anything can be abused. Anything can

be – to a devious mind – be used for wrongdoing. o To a large extent, the corporate medium cannot be used to solve all needs, but the disadvantages have a lot to do with the manner in which it is being used. o It is a tool to do business, but not to commit illegality. 1. ABUSE OF CORPORATE MANAGEMENT; BREACH OF TRUST

A corporation established in accordance with the Corporation Code has benefits or advantages over that of an unregistered association. These advantages are: It enjoys perpetual succession under its corporate name and in an artificial form; it has the capacity to take and grant property, and contract obligations; it can sue and be sued in its corporate name as a juridical person; it has the capacity to receive and enjoy

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common grants of privileges and immunities; and its stockholders or members have generally no personal liability beyond the value of their shares. 2 The advantages of the corporation over unregistered association is subject to the rules pertaining to the corporation by estoppel doctrine.3

There is ordinarily lack of personal element in view of the transferability of shares, and the vesting of management powers in the Board of Directors who may be professional managers. This has spawned corporate irresponsibility under

the theory that those vested with corporate powers have no personal or proprietary stake in the corporate business enterprise.4 2. ABUSE OF LIMITED LIABILITY FEATURE •

The limited liability feature of the corporation has often been abused by business in order to avoid having to provide adequate protection and compensation for victims of the business ventures they undertake.

1

Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 SEC Opinion, 26 June 1989, XIII SEC QUARTERLY BULLETIN, 19-‐20 (No. 3, Sept. 1989) 3 See Chapter 5 on Corporate Contract Law.

Article 1775 of the Civil Code provides that associations and societies, whose articles are kept secret among the members,

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This has been countered by the development of jurisprudence of the doctrine of piercing the veil of corporate fiction.

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3. HIGH COST OF MAINTENANCE OF THE CORPORATE MEDIUM

Sole proprietorships are less saddled with the many requirements and regulations which corporations are often subjected to by law.

The corporation is relatively complicated in formation and management. When compared to other media like the single proprietorship or the partnership, the corporation entails

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The owner is in command of his whole business and he stands to lose as much as he puts in and even more to the extent of all his personal holdings.

relatively high cost of formation and operation. There is a greater degree of governmental control and supervision than in other forms of business organization.1 4. DOUBLE TAXATION.

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Sole proprietorships work well only for carrying-‐on simple or small business endeavors, and do not function well in cases of large enterprises which require huge capital investments and specialized management skills.

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Dividends received by individuals from domestic corporations are subject to final 10% tax for income earned on or after 01 January 1998 (Section 24(B)(2), 1997 NIRC)

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Inter-‐corporate dividends between domestic corporations, however, are not subject to any income tax (Section 27(D)(4),

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

1997 NIRC) •

There is re-‐imposition of the 10% “improperly accumulated earnings tax” for holding companies (Section 29, 1997 NIRC).

Separate and distinct juridical personality The withdrawal, death or insolvency of any partner would automatically bring about the dissolution of the partnership.

A corporation has a stronger legal personality, enabling it to continue despite the death, insolvency or withdrawal of any of its stockholders or members.

Partners are liable even with their personal properties

Limited liability of investors

A sole proprietorship is not vested with juridical personality to file or defend an action. Excellent Quality Apparel, Inc. v. Win Multiple-‐Rich Builders, Inc., 578 SCRA 272 (2009).

Every partner is an agent capable of binding the partnership

Only the Board of Directors or constituted agents can bind the corporation

VII. COMPARED WITH OTHER BUSINESS MEDIA A. Sole Proprietorships •

Corporation

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There is a flexibility that partnerships have over corporations.



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The corporation is required to have a primary purpose and this should be specified. In this sense, it is less flexible than partnerships since deviation from the primary purpose would make the act ultra vires.

"Can a Defective Attempt to Form a Corporation Result at Least in a Partnership? o Pioneer Insurance v. Court of Appeals, 175 SCRA 668 (1989). o Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999). Pioneer Insurance v. Court of Appeals

Facts: Jacob S. Lim was engaged in the airline business as owner-‐ operator of Southern Air Lines [SAL]. He entered into a sales contract with Japan Domestic Airlines [JDA] for the purchase of 2 DC-‐3A Type aircrafts and necessary spare parts. Pioneer Insurance and Surety Corporation became a surety in behalf of Lim. To pay for the aircrafts, Lim used funds contributed by Bormaheco, Francisco and Modesto Cervantes & Constancio Maglana to a new corporation proposed by Lim to expand his airline business. The 3 contributors also executed 2 indemnity agreements in favor of Pioneer. The agreements stipulated that the indemnitors principally bind themselves as surety in favor of

owners of the aircrafts and were not privy to the chattel mortgage and so it cannot be foreclosed. Issue: Whether or not Bormaheco, Maglana and the Cervanteses are liable to share the obligations incurred by Lim, as de facto partners, in view of the failed incorporation. Held: NO. Lim never had the intention to form a corporation with the respondents despite his representations to them. This gives credence to the cross-‐claims of the respondents to the effect that they were induced and lured by Petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement when Lim executed the chattel mortgage on the aircrafts without the knowledge nor consent of Bormaheco, et al. The record shows that the petitioner was acting on his own and not in behalf of his other would-‐be incorporators in transacting the sale of the airplanes and spare parts. Therefore, Bormaheco et al cannot be held liable to contribute and share the obligation with Lim. Doctrine: When parties come together intending to form a corporation, but no corporation is formed due to some legal cause, then:

Pioneer. Lim, in behalf of SAL, also then executed a registered deed of chattel mortgage over the aircrafts in favor of Pioneer, as security for the latter’s suretyship. Lim however defaulted on his subsequent installment payments. JDA went after Pioneer, the latter paying 300k. Pioneer then filed for extrajudicial foreclosure of the chattel mortgage. The Cervanteses and Maglana however alleged that they were co-‐


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General Rule: Parties who had intended to participate or actually participated in the business affairs of the proposed corporation would be considered as partners under a de facto partnership, and would be liable as such in an action for settlement of partnership obligations

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Exception: Parties who took no part except to subscribed for stock in a proposed corporation, do not become partners with other subscribers who engaged in business under the name of



the pretended corporation, and are not liable for action for settlement of the alleged partnership contribution. Lim Tong Lim v. Philippine Fishing Gear Industries, Inc. Facts: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a contract for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim in their capacities as general partners. The complaint alleged that "Ocean Quest Fishing Corporation" was a nonexistent corporation and attachment was made on the fishing nets on board F/B Lourdes. Issue: Whether or not by their acts, Lim, Chua, and Yao could be

would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have proceeded. Also, under the doctrine of corporation by estoppel, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of. Doctrine: As far as Lim was concerned, there was a corporate entity and Lim was allowing himself to be represented as part of the corporation. As such, there is corporation by estoppel. Harmonize: You can be held liable as a partner if you participated heavily and there was some form of participation on your part. C. Joint Ventures

deemed to have entered into a partnership. Held: YES. From the factual findings of both lower courts, it is clear that Chua, Yao and Lim are partners. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership. Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the floats in furtherance of their business. It


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Joint venture is an association of persons or companies jointly undertaking some commercial enterprise;

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Generally all contribute assets and share risks.

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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. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994).

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Under Philippine law, a joint venture is a form of partnership and should thus be governed by the law of partnerships, which would then include the features of separate juridical



personality, mutual agency among the co-‐venturers, and unlimited liability.1 D. Cooperatives (Article 3, R.A. No. 6938) Cooperative

Trust relationship is centered upon properties, and which places naked titled in the trustee, and beneficial title in the beneficiary.2 F. Sociedades Anónimas

Corporation

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“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

Separate and distinct juridical personality Limited liability of investors Primary objective of every cooperative is self-‐help: to provide goods and services to its members and thus

Organized for profit

law — with power to hold, buy, and sell property, and to sue and be sued — a corporation — not a general co-‐partnership nor a limited co-‐partnership . . . The inscribing of its articles of agreement in the commercial register was not necessary to make it a juridical person; such inscription only operated to show that it partook of the form of a commercial corporation.” Mead v. McCullough, 21 Phil. 95 (1911).

enable them to attain increased income and savings Governed by principles of democratic control where the members in primary cooperatives shall have equal voting rights on a one-‐member-‐one-‐vote principle

Centralized management

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Cooperatives are established to provide a strong social and economic organization to ensure that the tenant-‐farmers will enjoy on a lasting basis the benefits of agrarian reforms. Corpuz v. Grospe, 333 SCRA 425 (2000).

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E. Business Trusts (Article 1442, Civil Code) •

A sociedad anónima was considered a commercial partnership

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. Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956).

As compared to a corporation, a business trust is simply a deed of trust which is easier and less expensive to constitute for it is not bound by any legal requirements like the former. It does not have a separate juridical personality, and is mainly governed by contractual doctrines and the common law principles on trust.



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CORPORATION LAW REVIEWER (2013-‐2014) •

The old Corporation Law recognized the difference between sociedades anónimas and corporations and the Court will not apply legal provisions pertaining to the latter to the former. Phil. Product Co. v. Primateria Societe Anonyme, 15 SCRA 301 (1965).

G. Cuentas En Participacion •

A cuentas en participacion is an accidental partnership constituted in 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.

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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. Bourns v. Carman, 7 Phil. 117 (1906).



2. Concepts

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