UP BGC Day 1 - Aaron Gabriel Misa - 202120974

1. Corporation and its attributes

Under Sec. 2 of the RCC, a corporation is defined as an artificial being created by operation of
law, having right of succession, and the powers, attributes and properties expressly authorized
by law or incidental to its existence.

As an artificial being, a corporation does not come into being naturally and only by operation of
law can a corporation have a legal existence. This means that only upon following the proper
procedures of incorporation governed by the Corporation Code or any other special law can a
corporation exist. Furthermore, since a corporation can only exist by fiction of law, it may only
act through its directors, officers and employees. However, a corporation’s legal and juridical
personality is separate from that of its stockholders and members, and is thus generally solely
liable for its incurred obligations.

With regards to its right of succession, a corporation has the capacity for continuous existence
despite any deaths, withdrawal, insolvency, or changes in its stockholders or members, or by
any transfer of shares by its stockholders to third persons.

With regards to its powers, attributes and properties, since a corporation is a being that is purely
a creation of the law, it may only exercise such powers that are granted by the law of its
creation, or are otherwise incidental to its existence and purpose as outlined in its articles of
incorporation. This can be determined if a corporation exercises its powers or otherwise acts in
direct or immediate furtherance of its business.

2. Instrumentality or Alter Ego Test

An instrumentality or alter ego case is one of the instances in which a corporation’s veil may be
pierced and its members or directors be held personally liable for a corporation’s actions (WPM
v Labayen). The doctrine of alter ego is based upon the misuse of a corporation by an individual
for wrongful or inequitable purposes, and in such cases the courts may disregard the corporate
entity and hold the individual responsible for acts knowingly and intentionally done in the name
of the corporation.

Such instances may be determined by the concurrence of 3 elements: a) Control, not mere
majority or complete stock control, but complete domination, not only of finances but of policy
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and business practice in respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of its own; b) Such control
must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of
a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s
legal right; and c) the aforesaid control and breach of duty must have proximately caused the
injury or unjust loss complained of.

The existence of all 3 elements renders such corporation a mere alter-ego of the defendant
member or director, which renders them personally liable for the act complained of.

3. Instances of Directors/Officers Liability

Directors and officers may be held personally liable for the acts of the corporation if their
corporation veil is justifiably pierced. In the case of WPM v Labayen, piercing may occur in 3
basic instances: a) when the separate and distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a
fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially
a farce, since it is a mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation

In the case of Kho Sr. v Magbanua, there may also be a finding of personal liability against a
director, trustee, or a corporate officer requires the concurrence of these two requisites: a) a
clear allegation in the complaint of gross negligence, bad faith or malice, fraud, or any of the
enumerated exceptional instances; and b) clear and convincing proof of said grounds relied
upon in the complaint sufficient to overcome the burden of proof borne by the complainant.

Sec. 30 of the RCC also outlines that a director, trustee, or officer of a corporation may be made
solidarily liable with it for all damages suffered by the corporation, its stockholders, or members,
and other persons in the following cases: 1) The director or trustee willfully and knowingly voted
for or assented to a patently unlawful corporate act; 2) The director or trustee was guilty of gross
negligence or bad faith in directing corporate affairs; and 3) The director or trustee acquired
personal or pecuniary interest in conflict with his or her duties as director or trustee. 4) When a
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director or officer has consented to the issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written objection thereto 5) When a
director, trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; and 6)When a director, trustee or officer is made, by
specific provision of law, personally liable for his corporate action.

Special laws such as the Data Privacy Act and the Cybercrime Prevention Act also stipulate that
any criminal violation of their provisions perpetuated by a corporation or juridical person shall
have their penalties applied to the directors, officers, or members that are responsible for the
violation or are complicit by their gross negligence.

4. Close Corporations
A close corporation is a type of corporation that typically consists of a small number of
shareholders. Under Sec. 95 of the RCC, a close corporation is defined as one whose articles of
incorporation provide that: 1) All of the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a specified number of persons, not
exceeding twenty (20); 2) All of the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this Title; and 3) the corporation shall not list in
any stock exchange or make any public offering of its stocks of any class.

Notwithstanding the foregoing provisions, a corporation shall not be deemed a close corporation
when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation.

Any corporation may be incorporated as a close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public utilities, educational institutions and
corporations declared to be vested with public interest (Sec. 96)

5. Control Test in Determining Nationality

The Control Test is the prevailing mode of determining whether or not a corporation is a Filipino
corporation within the ambit of Sec. 2 Art. XII of the Constitution (Narra Nickel Mining and
Development Co. v Redmont Consolidated Mines Co.). The test provides that a corporation
shall be deemed to be FIlipino if the Filipino ownership of its capital stock is at least 60%, and
where the 60-40 Filipino-Alien equity ownership is not in doubt (SEC opinion 6 November 1989;
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DOJ Opinion No. 18, s. 1989). Upon meeting these requirements, the corporation is deemed to
be Filipino.

6. Grandfather Rule
As opposed to the Control Test, if there is doubt that exists pertaining to the 60-40 Filipino-Alien
equity ownership of a corporation, the Grandfather Rule is applied. The Grandfather rule
determines the nationality of a corporation which in turn is owned in part by another corporation
by breaking down the equity structure of the shareholder corporation. In this method, the
percentage of shares held by the second corporation in the first is multiplied by the latter’s own
Filipino equity, and the product of these percentages is determined to be the ultimate Filipino
ownership of the subsidiary corporation (SE Opinon re: Silahis)

7. Government Owned and Controlled Corporation and its elements as differentiated from a
Government Instrumentality

A government-owned or controlled corporation (GOCC), is defined as a corporation that is a)

established by original charter or through the general corporation law; b) vested with functions
relating to public need whether governmental or proprietary in nature; and c) directly owned by
the government or by its instrumentality, or where the government owns a majority of the
outstanding capital stock.

In contrast, in Bases Conversion and Development Authority vs. CIR, government

instrumentalities refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational
autonomy,usually through a charter.

Thus, while many government instrumentalities possess corporate powers, they are not
necessarily GOCCs. Government instrumentalities are not organized as stock or non-stock
corporations, which is a requirement for GOCCs.

8. Reverse piercing of the corporate veil

The case of C.F Trust Inc v First Flight Limited Partnership defined reverse piercing of the
corporate veil as having the opposite flow of a traditional veil-piercing action. Instead of
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disregarding the corporate entity in order to hold an individual liable, a reverse-piercing action
seeks to reach the assets of a corporation to satisfy the claims against a corporate insider.

There are 2 types of reverse-piercing: a) outsider reverse piercing occurs when a party with a
claim against an individual or corporation attempts to be repaid with assets of a corporation
owned or substantially controlled by the defendant; and b) insider reverse piercing occurs when
the controlling members attempt to ignore the corporate fiction in order to take advantage of a
benefit available to the corporation, such as an interest in a lawsuit or protection of personal
assets.

9. Differentiate a corporation from a partnership in terms of definition; manner of creation;

composition; commencement of juridical personality; liability of stockholders and
partners; right to transfer shares or rights; management; powers that can be exercised.

For definition, 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 (Sec. 2 RCC). On the other hand, a partnership is a contract where two or more
persons bind themselves to contribute money, property or industry to a common fund, with the
intention of dividing the profits among themselves. (Art. 1767 Civil Code).

For the manner of creation, a corporation is formed by filing articles of incorporation with the
Securities and Exchange Commission (SEC), complying with the requirements set forth in the
Corporation Code, and obtaining the Certificate of Incorporation. A partnership is established by
a contract, either oral or written, between two or more persons who agree to contribute money,
property, or industry to a common fund with the intention of dividing profits among themselves.

For the commencement of juridical personality, a corporation begins upon issuance of the
Certificate of Incorporation by the SEC, while a partnership commences upon the execution of
the partnership agreement or upon the actual start of business operations.

For the liability of the parties, both corporations and partnership have a juridical personality that
are separate and distinct from its stockholders/partners. However, in a corporation,
shareholders have limited liability, limited to their investment in the corporation, except in cases
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of fraud or wrongdoing. On the other hand, partners have unlimited joint and several liability,
meaning they are personally liable for the debts and obligations of the partnership.

For the right to transfer their shares or rights, corporations have shares of stock that are
generally freely transferable, subject to any restrictions stated in the articles of incorporation or
bylaws. On the other hand, partners cannot transfer their interest in the partnership to a third
party without the consent of all the other partners, unless otherwise provided in the partnership
agreement.

For management, the management of a corporation is typically vested in a board of directors

elected by the shareholders, who are responsible for making major decisions and overseeing
the company's operations.On the other hand, it is the partners in a partnership that have the
right to participate in the management of the partnership business.

For powers that may be exercised, corporations and partnership are similar in this regard for
both are empowered to engage in various business activities, including entering contracts,
acquiring assets, and suing or being sued in its own name. However, the scope of a
corporation’s power is limited to those provided to them by law and incidental to the purpose of
their corporation, while a partnership can only exercise powers agreed upon by the partners in
the partnership agreement.

10. Juan, acting as president of Maharlika Car Dealers Incorporated (MCDI), entered into a
contract of long-term lease with Antonio over a large commercial property along Pasong
Tamo Avenue owned by the latter. When Antonio received a better offer for the
commercial property, and having learned that MCDI was not formally incorporated with
the Securities and Exchange Commission, he sought to have the contract of lease
nullified on the ground that it was void for lack of the essential element of consent, since
the lessee was not a juridical person with capacity to contract. May Mr. Juan, acting on
behalf of MCDI, which is in the process of incorporation, legally insist on the
enforceability and binding effect of the contract of lease as against Antonio?
Explain your answer.

No. Mr. Juan may not insist on the enforceability and binding effect of the contract of lease
against Antonio.
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A contract entered into by a party who lacks legal capacity to contract, such as an
unincorporated entity, may be deemed void or unenforceable due to the absence of one of the
essential elements of a valid contract, which is the capacity to contract. The same was
established in the case of Cagayan Fishing Develpment Co v Sandiko, wherein the court ruled
to invalidate a sale made by the petitioner corporation before it was incorporated, for a
corporation, until organized, has no being, franchises or faculties, nor do those engaged in
bringing it into being have any power to bind it by contract.

In this case, since MCDI was not yet formally incorporated at the time the lease contract was
made, it did not have the legal capacity to enter into contracts. Therefore, the lease contract
may be considered void or unenforceable against Antonio.