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PHILIPPINE CORPORATE LAW 12 ND SEMESTER, SY 2020-DEAN CESAR L. VILLANUEVA DEAN JOSE MARIA G. HOFILEÑA ATTY. TERESA VILLANUEVA-TIANSAY ____MODULE 1STRUCTURE OF PHILIPPINE CORPORATE LAW(1ST WEEK: FEBRUARY 2 AND 4)I. CORPORATE CONCEPTS AND D OCTRINES1. Common Law Nature of the Revised Corporation Code2...

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ATENEO DE MANILA

LAW SCHOOL

PHILIPPINE CORPORATE LAW

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DEAN CESAR L. VILLANUEVA DEAN JOSE MARIA G. HOFILEÑA ATTY. TERESA VILLANUEVA-TIANSAY ________________________________________________________________________________ 2ND SEMESTER, SY 2020-2021

MODULE 1

STRUCTURE OF PHILIPPINE CORPORATE LAW (1ST WEEK: FEBRUARY 2 AND 4)

I. CORPORATE CONCEPTS AND DOCTRINES 1.

Common Law Nature of the Revised Corporation Code

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Definition and Essence of the “Corporation” (Sec. 2) A corporation is an artificial being created by operation of law, 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).2

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FOUR CORPORATE ATTRIBUTES BASED ON SECTION 2 DEFINITION: a. An Artificial Being: “A corporation is granted a juridical capacity to own properties, to contract and to enter into legal relationships.” b. Creature of the Law: “Each corporation is created by operation of law pursuant to a covenant to pursue a business enterprise.” c. With a Right of Succession: “A corporation has a juridical personality separate and distinct from its shareholder or members, officers and directors or trustees.” A corporation is invested by law with a personality separate and distinct from the persons composing it, and from that of any other entity to which it may be related. Its artificial being makes possible the assembling of huge amounts of capital upon which big business depends. It also 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, 345 SCRA 335 (2000). d. Creature of Limited Powers: “A corporation has only such powers, attributes and properties as are expressly authorized by law or incident to its existence.” A corporation has no powers except for those expressly conferred on it by the [Revised] Corporation Code, and those found in its charter and those 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. Members of the Tramo Wakas Neighborhood Assn. Inc., 442 SCRA 438 (2004).3 A corporation as a creature of the State is presumed to exist for the common good; and the special privileges and franchises it receives are subject to the laws of the State and the limitations of its charter. There is therefore a reserved right of the State to inquire how these privileges had been employed, and whether they have been abused. PAGCOR therefore has no power to grant franchise on internet gambling, which power finds no basis in its charter. Jaworski v. PAGCOR, 419 SCRA 317 (2004).

4. “ TRI-LEVEL EXISTENCE ” IN THE CORPORATE SETTING a. “ASSETS-ONLY” LEVEL: “The corporation is an aggregation of property and assets.” b. “BUSINESS ENTERPRISE” LEVEL: “The corporation’s primary purpose is to pursue business.” “When one buys the business of another as a going concern, he usually wishes to keep it going; he wishes to get the location, the building, the stock in trade, and the customers. He wishes to step into the seller's shoes and to enjoy the same business relations with other men. He is willing to pay much more if he can get the goodwill of the business, meaning by this the good will of the customers, that they may continue to tread the old footpath to his door and maintain with him the business relations enjoyed by the seller.” Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).4 c. “JURIDICAL ENTITY” LEVEL: “The corporation’s juridical personality is primarily a medium through which to pursue a business enterprise.”

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indicated otherwise, all references to sections pertain to the Revised Corporation Code of the Philippines, Republic Act No. 11232 CDCP v. Cuenca, 466 SCRA 714 (2005); EDSA Shangri-La Hotel and Resorts, v. BF Corp., 556 SCRA 25 (2008).

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De Liano v. Court of Appeals [“CA”] , 370 SCRA 349 (2001); Monfort Hermanos Agricultural Dev. Corp. v. Monfort III , 434 SCRA 27 (2004); United Paragon Mining Corp. v. CA , 497 SCRA 638 (2006); Cebu Bionic Builders Supply, v. DBP , 635 SCRA 13 (2010); Esguerra v. Holcim Phils., 704 SCRA 490 (2013). 4 Footnote 35: Recent cases have enlarged the concept of good will over the behavioristic resort of old customers to the old place of business. It is now recognized that “It may include in addition to those factors all that goes with a business in excess of its mere capital and physical value; such as reputation for promptness, fidelity, integrity, politeness, business sagacity and commercial skill in the conduct of its affairs, solicitude for the welfare of customers and other tangible elements which contribute to successful commercial venture.”

5. “ TRI-LEVEL RELATIONSHIPS ” IN THE CORPORATE SETTING a. “JURIDICAL ENTITY” RELATIONSHIP: Treats of the legal consequences arising from the relationship between the State as the creator, and the corporation as its creature. b. “INTRA-CORPORATE” RELATIONSHIPS: Treat of the legal consequences arising from “corporate contractual relationships” — (1) Between the corporation and its agents (directors/trustees and officers) to act in the real world, governed by Law on Agency transmuted into Corporate Law doctrines; (2) Between the corporation and its shareholders/members, governed primarily by Corporate Law; (3) Between shareholders/members and the directors/trustees and officers, governed by the Law on Business Trusts transmuted into Corporate Law doctrines; (4) Among the shareholders or members in common venture, governed by Corporate Law implementing Contract Law doctrines.  Underpinned by the “Doctrine of Maximization of Shareholder Value” c. “EXTRA-CORPORATE” RELATIONSHIPS: Deals with legal consequences arising from the relationships of the corporation with the public it deals with or those affected by its business enterprise — (1)

Between the corporation and those it contracts with, governed by various Laws on Contracts;

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Between the corporation and its employees, governed by Labor Laws; Between the corporation and those affected by its enterprise, governed by Law on Torts

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 Underpinned by the emerging “Stakeholder Theory”

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Power to Create a Corporation Is Legislative in Character (Sec. 16, Art. XII, 1987 Constitution) Since under the Constitution, Congress cannot enact a law creating a private corporation with a special charter, except when it is a GOCC, it follows then that Congress can create corporations with special charters only if such are GOCCs. Thus, all water districts which are not created under the Corporation Code but pursuant to P.D. 198, are GOCCs and within COA’s jurisdiction. Feliciano v. COA , 419 SCRA 363 (2004).5 P.D. 1717 creating New Agrix, Inc. violated the constitutional prohibition on the formation of a private corporation by special legislative act, as it is not a GOCC, since NDC was merely required to extend a loan to the new corporation, and the new stocks of the corporation were to be issued to the old investors and shareholders of the insolvent Agrix upon proof of their claims against the abolished corporation. National Development Corporation v. Philippine Veterans Bank, 192 SCRA 257 (1990).

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THEORIES ON THE FORMATION OF CORPORATIONS a. Theory of Concession: A corporation’s claim of a juridical personality of its own and to 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. Sec. of Commerce & Industry, 5 SCRA 645 (1962). “There is thus a rejection of Gierke’s genossenchaft theory, the basic theme of which … ‘is the reality of the group as a social and legal entity, independent of state recognition and concession.’ A corporation as known to Philippine jurisprudence is a 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, certainly not excluding the judiciary, whenever called upon to do so.” Tayag v. Benguet Consolidated, 26 SCRA 242 (1968). All corporations, big or small, must abide by the provisions of the [Revised] 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). “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 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 a constitution and a set of bylaws. Int’l Express Travel & Tour Services v. Court of Appeals, 343 SCRA 674 (2000).

b. Theory of Enterprise Entity: BERLE, 47 COLUMBIA LAW REV. 343 (1947) A corporation is but an association of individuals, allowed to transact business under a corporate name with a distinct legal personality. In organizing itself as a collective body, the group or its members waives no constitutional immunities and perquisites appropriate to such a body. Philippine Stock Exchange (PSE) v. Court of Appeals, 281 SCRA 232 (1997). Corporations are composed of natural persons and their separate corporate personality is no shield

for the commission of injustice and inequity, such as to avoid the execution of the property of a sister company. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205 (1988).

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Veterans Federation of the Phils. v. Reyes, 483 SCRA 526 (2006).

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ADVANTAGEOUS ATTRIBUTES AND DISADVANTAGES OF THE CORPORATION a. PRIMARY ATTRIBUTES OF THE CORPORATION

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CORPORATE LAW FRAMEWORK:

(1) STRONG/SOLEMN JURIDICAL PERSONALITY (Sec. 2; Arts. 44[3], 45 and 46, Civil Code) While not in fact a person, the corporation is treated through fiction by the law as though it were a person—an artificial person distinct and separate from its shareholders. Remo, Jr. v. IAC , 172 SCRA 405 (1989). Shareholders are not co-owners of corporate assets ; the transfer of corporate assets to the shareholders by way of dissolution is an act of conveyance and not a partition among co-owners. Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962). Execution pending appeal may be allowed when “the prevailing party is already of advanced age and in danger of extinction,” but not in this case a corporation whose “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 only final and executory judgment.” Manacop v. Equitable PCIBank, 468 SCRA 256 (2005). (2) CENTRALIZED MANAGEMENT (Sec. 22) Under [Sec. 22 of RCC], save in those instances where the Code requires shareholders’ approval for certain specific acts, it is the Board of Directors/Trustees which exercises all the corporate powers in a corporation. Great Asian Sales Center Corp. v. Court of Appeals , 381 SCRA 557 (2002).6 (3) LIMITED LIABILITY TO SHAREHOLDERS AND NON-LIABILITY TO DIRECTORS/TRUSTEES AND OFFICERS FOR THE LIABILITIES OF THE CORPORATION An important advantage 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 shareholders. San Juan Structural and Steel, Inc. v. CA, 296 SCRA 631 (1998). By virtue of the principle separate juridical personality, the corporate debts or credits are not the those of the shareholders. This protection from corporate liability for shareholders is the principle of limited liability. PNB v. Hydro Resources Contractors Corp., 693 SCRA 294 (2013).7 Where the creditor sues not only the company but also all shareholders to reach their unpaid subscription which appear to be the only visible assets of the company, 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). 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).8 Obligations incurred by the corporation through its directors and officers, are its sole liabilities. Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, 357 SCRA 77 (2001). (4) FREE-TRANSFERABILITY OF “UNITS OF OWNERSHIP” (SHARES) (Sec. 62) It is the inherent right of the shareholder to dispose of his shares, which he owns as any other property, anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).9 No corporation can restrict the right of a shareholder to transfer shares, but merely has authority to adopt regulations on the formalities and procedure to be followed in effecting such sale or transfer. Thomson v. Court of Appeals, 298 SCRA 280 (1998).

b. Disadvantages of the Corporate Medium: (1) Agency Cost: Abuse of Management; Breach of Trust (2) Abuse of Limited Liability Feature (3) High Cost of Maintenance of the Corporate Medium (4) Double Taxation:

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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. Sec. 24(B)(2), 1997 NIRC.

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However, inter-corporate dividends between domestic corporations are not subject to any income tax. Sec. 27(D)(4), 1997 NIRC.

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Re-imposition of the 10% “improperly accumulated earnings tax” for holding companies. Sec. 29, 1997 National Internal Revenue Code (NIRC).

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Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). Aboitiz Equity Venture v. Chiongbian, 729 SCRA 580 (2014).

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Ever Electrical Manufacturing, Inc. (EEMI) v. Samahang Manggagawa ng Ever Electrical/NAMAWU Local 224 , 672 SCRA 562 (2012); Gotesco Properties v. Fajardo, 692 SCRA 319 (2013). 9

PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

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COMPARED WITH OTHER BUSINESS MEDIA a. Sole Proprietorships A sole proprietorship, although regulated separately from its owner for purpose of taxation and regulation, is not vested with juridical personality to file or defend an action. Excellent Quality Apparel v. Win Multiple-Rich Builders, 578 SCRA 272 (2009).10 b. Business Trusts (Art. 1442, Civil Code) c. Partnerships (Arts. 1768 and 1775, Civil Code) d. Joint Ventures Joint venture is 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 agreement to share both in profit and losses. Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110 (1994). e. Joint Accounts or Cuentas en Participacion (Arts. 239-243, Code of Commerce) 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 Art. 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. Bourns v. Carman, 7 Phil. 117 (1906). A joint account is when a third person is financially interested in the business of a merchant but does not give rise to the creation of a juridical person. CIR v. Cojuangco, 109 Phil. 443 (1960).

f. Cooperatives (Art. 3, R.A. No. 6938) 10. x CLASSIFICATION OF CORPORATIONS a. In Relation to the State: (1) Private Corporations (Sec. 3, Act 1459) (2) Public Corporations or Local Government Units (LGUs) (Sec. 3, Act No. 1459) (3) Quasi-Public Corporations (4) GOVERNMENT-OWNED-OR-CONTROLLED CORPORATIONS (GOCCS) – SEE R.A. No. 10149; Villanueva &

Reyes, The Great Restructuring of the Public Corporate Sector, 59 ATENEO L.J. 41 (2014). Local water districts created under P.D. 198 by the different local legislative bodies, with the primary function to sell water to residents within their territory, under such schedules of rates and charges as may be determined by their boards are considered quasi-public corporations , performing public services and supplying public wants, Marilao Water Consumers Assn. v. IAC , 201 SCRA 437 (1991); they are clearly GOCCs, and their Board of Directors and personnel are government employees subject to civil service laws and anti-graft laws. Feliciano v. COA, 419 SCRA 363 (2004). The doctrine that employees of GOCCs, whether created by special law or formed as subsidiaries under the general corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the 1987 Constitution. GOCCs created by special charter are subject the Civil Service Law, while those incorporated under the [Revised] Corporation Code are governed by the Labor Code. PNOC-EDC. v. NLRC, 201 SCRA 487 (1991).1 A GOCC has a personality of its own, distinct and separate from that of the government, and the intervention of the Executive Secretary does not change the independent existence of a government entity as it deals with another government entity. PUP v. Court of Appeals, 368 SCRA 691 (2001). The GOCC Governance Act (R.A. 10149), which governs compensation and position classification systems within the GOCC Sector, does not distinguish between chartered and nonchartered GOCCs, and its provisions apply equally to both. GSIS Family Bank Employees Union v. Villanueva , 891 SCRA 206 (2019). A GOCC is a government agency when it is organized as a stock or non-stock corporation, and must comply with three requisites: (a) it has a capital stock, (b) the capital stock is divided into shares, and (c) it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. As for non-stock corporations, they must have members and must not distribute ay part of their income to said members. However, the is now formal administrative and statutory recognition of “government instrumentalities with corporate powers/government corporate entities,” which may not fall within the definition of stock and non-stock corporations, but are government instrumentalities that are vested with corporate powers. LRTA v. Quezon City, G.R. No. 221626, 09 Oct. 2019. Under the Constitution, the COA has audit juri...