| COMPENDIOUS BAR REVIEWER ON COMMERCIAL LAW Based on Bar Exam Syllabus NILO T. DIVINA 2024 EDITIONPhilippine Copyright, 2024 By NILO T. DIVINA ALL RIGHTS RESERVED. ‘The author prohibits unauthorized reproduction of this ‘book. No portion ofthis book shal be copied or reproduced in books, pamphlets, outlines or notes, whether printed, machine- copied, mimeographed, typewritten, photocopied, scanned orin any other form, manner or technique for dstibuion or sale, without the writen permission ofthe author. Any copy of| this book without the conesponding. number and genuine signature ofthe author or his representative on this page, either ‘proceeds fom an illegitimate source o isin possession of one who has no authority to dispose thereofis src prohibited Pe TDsa ISBN 978-621.-02-2330.9 Published and Printed by CENTRAL BOOK SUPPLY, INC. 927 Quezon Avenue, Quezon City, Philippines Email info@[Link] FOREWORD Much is alvays said about the grandeur of the legal profession, wi its traditions and accoutrements seemingly burt of reach forthe common folk, and the fame, fortune and the best fife things that avai those who ae admitted into its hallowed halls As ast, thatishow it appears from the outside looking in. But the truth is, admission to the legal profession is never a glamorous endeavor. I isas painful it is complicated Tetakes patience and wis, humor and a healthy understanding ofthe human condition. Most importantly, one must pass the Bar. After al, it is the ultimate test to determine whether the examinee has learned enough of the law to make him or her worthy of being a member of the legal profession. ‘We leam the law through reading. Constant and plenty of reading. In law school, the professor preserbes the book. For the bar, the examince picks his reading material, With nary a moment to waste, the chosen book must be complete without being verbose, as well as engaging and accurate. le must remove every little cloud on one's understanding ofthe law. Which is where reviewers ike this one from the Professors of the University of Sto, Tomas (UST) Faculty of Civil Law ‘The Divina Bar Review Series, made by some of the country’s most respected legal luminaries and educators, is formatted in Q&A so that legal concepts and principles, that may otherwise be difficult to comprehend, becomefar more comprehensible for reviewees who hope to pass if not ace the bar, and equally useful for practitioners ‘who wish to refine their craft. Indeed, each book's reade centered approach makes it an essential resource for any person in need of added proficiency in the law. ‘Then again, this reviewer is not a treatise; it is not ‘meant to dive deep into the philosophy of the law. It is akin simply to a wrench that one needs in order to finish, ‘a Taborious task such as the Bar. Indeed, Bar candidates, can use this wrench from UST Law- itis as handy and timely as it comes. 1 congratulate the UST Faculty of Civil Law on this welcome addition toa bar candidate's toolbox. Dean Nilo, T, Divina, no doubt the progenitor and benefactor for this work, is always looking for ways to help law students Fulfil their dream of becoming a lawyer. For this, the legal education community i truly grateful Dr. Anna Marie Melanie B. Trinidad Chairperson, Legal Education Board FOREWORD As the various innovations and elaborate advancements, in the conduct of the Bar Examinations and the rules concerning admission to the legal profession continue (0 transform how law graduates prepare for their journey towards the elusive title of Attorney, there is no doubt, that this has challenged our traditional methods of training Jaw students and providing guidance regarding the rigors of Bar Admission, The digital age has indeed found its way into the process by instituting the revolutionary digital Bar Baminations. The implementation of regional Examinations ako made an appearance in the field. Taking the step even further, the Chairperson for the 2023 Bar Examination has lamented the need to ‘modemize the manner in which ‘we admit those who wish to join our profession ifwe are ‘o keep up with the best practices that other legal jurisdictions ‘observe and implement in their respective areas" As the President of the Philippine Association of law Schools, Iam confident that ehrough this seemingly thick screen of novelty and unfamiliarity in the conduct, of the Bar Examination, our students’ goals remain the same: to demonstrate knowledge of the law and exhibit the correct application of legal principles and jurisprudence. Unsurprisingly, DivinaLaw isin the same boat as the Academe with this ida, being composed of lawyers who also teach in vavious law schools im the country. Thee development of this collection of Bar Reviewers isa huge boon ro aw graduates who intend to brave the challenge oF taking the 2023 Bar Examination, The extensive scope of this compendium, coupled with the beloved Q&A format, is expected tobe helpful to Bar Takers looking for‘materials to hone their substantive knowledge of the law. The incorporation of doctrines arising out of Supreme Court decisions penned by justice Ramon Paul Hernando is likewise welcome, given that Bar Questions typically, include those authored by the designated Bar Chairperson. You may see all of these in this collection dedicated to ‘each Bar subject, presented in a simplified and easy-to- understand context ~ the Compendious Bar Reviewers. ‘This may well be one of the most ambitious and useful reviewers this season, ‘Congratulations to Divinalaw for this launch! Your efforts are indeed commendable! Oh £ fale) Tat cto 1 RESTING LM. President Flippin sition of Law Sl PREFACE AND ACKNOWLEDGMENT After receiving heartfelt messages of commendation, and gratitude from the 2023 Bar-takers who used the 2023 Divina Compendious Bar Review Series, and upon seeing, the results of the recent Bar examinations, | am ecstatic ‘and honored to present the 2024 Divina Compendious Bar Review Series. ‘This yea, we take this book lap higher with its eve, updated an expanded contents. The 204 Dia Compentions Bar Review Series now includes Commercial Law ~ the fel and practice oss to my hear. This creation represents iny 30+ years of experience asa lawyer and academician. [As the sole author for this Bar subject in this eres, iis effectively me asking the questions to my students, o my txaminees, and tomy reviewees Is asf am whispering 0 their ears the answers to the Bar exam questions. It is as ilar lifting them up with a hand because iis a product oflove esa work of love. This year’s Compendious Bar Reviewer was revised, ‘updated and customized in striet accordance with the latest Bar Exam Syllabus prescribed by this year's Bar Chairperson Associate justice Mario V. Lopez. The presentation follows the 2024 Bar Examination Syllabi to serve as a seamless manual for the Bar-takers, It was designed to lay 2 strong conceptual foundation and assist candidates in their preparations, This work sa compendium of fundamental legal principles, designed in a question-and-answer format, deliberately crafted to stimulate the test raking experience fr Bar Reviewees. ‘The questions and answers ate based on the pertinent provisions of law/s and regulations, past Bar Examinations,landmark and recent Supreme Court cases, as well as the cases penned by justice M.V. Lopez. The questions were crafted to test the Bar Reviewees knowledge and application, of che law. Quick answers were then provided to aid the reader in noting the important concepts, ‘This 2024 edition vould not have been possible without the gracious collaboration of Central Book Supply Inc. | am grateful to them for collaborating again with us and ‘bing our constant partners in championing legal education. ‘This collection of Bar Reviewers for all Bar subjects was authored by lawyers from DivinaLaw—all with sterling academic eredentals, and many of whom are law professors. I wish to express my deep appreciation to the subject teams and authors for their kind and heroic involvement in this project, as they commit ta produce academically ‘competent lawyers in the country. Their names should al bbe mentioned: For Political Law: Enrique V. Dela Cruz. Jry Nasha Jemimah R. Reyes-Ferrer, ennel L. Chu, Ma. Ninna Roem ‘A. Bonsol, Peter Paolo’ P. Dim ill, Joseph Lorenz. A. ‘Asuncion, Maria Carissa C. Guinto, Iyla Marie D. Ferrer, Norbert Peter R. Indunan, Stephanie A. Serapio, Joshua Cris F. Aguilar, and Jonathan Victor S. Noel For Taxation Law: Lean Jeff M. Magsombol, Danica “Mae M, Gordons zl Jariz M, Azad, Isabella A. Rodriguez, Eplaim P. Bie, Kara C, Ramos, and Christian Gio R Senalo, For Civil Law: Alden Francis C. Gonzales, Danny E. BBunyi, Janna Mae B, Tecson, Ciselie Marie T. Gamo-Sisayan, Klinton M. Torralba, Marelli A. Sales, Alfonso Roe! D, ‘Vargas, Jalie Ann C. Manguiat, Kristina Mae C. Durana, Lowis-Mari R. Opina, Iyla Marie D. Ferrer, Alexandra Nicole D. Sugay, Davetick Angelito E, Pacumio, and ‘Angel Isah M, Romero. For Labor Law: Alden Francis C. Gonzales, Harly Jayson U. Reyes, Jarodelyn N. Mabalot, MariflleL. lip, Clarissa Joyce R. Gorreon, Karen A. De Villa, Maria Frances Faye R. Gutierrez, and lyla Marie D. Fereer. For Criminal LawiLorenzo Luigi T. Gayya, Alwyn Faye B. Mendoza, Bianca Isabel D. Soriano, Danica Mae M. Godornes, Edrea Jean V. Ramirez, Angelica Mae T. Destajo, and Beatriz Anna S. Balbacal. For Remedial Law: lan Jerny E. De Leon, Krsyl M. Cancino, Vaupetroanji J. Pia, Patricia Faith R: Lacuesta, Jairus Vincent Z. Bemardez, Edbert Marcel S. Ragadio, Daverick Angelito E. Pacumio, John Edward F. Fronda, Maria Frances Faye R. Gutierrez, Beatriz. Anna S. Balbacal, Lorrence Kyle T. Muito, Joshua Ejeil A, Pascual, and Jovelynne C. Atag. For Legal and Judicial Fthies: Janna Mae B. Tecson, Nasha Jemimah R. Reyes-errer, Terence Mark Arthur S. Ferrer, Mark Vixen M. Dorado, Daverick Angelito E Pacumio, ohn Edward F, Fronda, and Stephanie A. Serapio, am grateful to the people behind DL Publishing for their continued commitment in prodacing academic material for the benefit ofthe legal community. May they continue to publish more materials that will produce competent lawyers and Bar topnotchers, | am thankful tothe Thomasian community for their ‘unwavering support and for sharing with me the dream to produce more lawyers to serve the nation, and to honor and glorify God, Thank you to the school administration and faculty for prescribing the 2023 Compendious BarReview Series, which modesty ase, I claim, helped UST. be consistently part of the Top performing schools in the Bar Examinations, and produce two homegrown Thomasians to be among the Top 10 examinees in the recent 2023 Bar Examinations extend my gratitude to Attys. Ephraim P. Bie, Pio Vincent R. Buencamino, and Nicolo Paolo M. Manikad for their kind words and sharing their insights on how the 2023 Compendious Bar Reviewer helped them in their Bar preparation journey Of course, [thank t0, the rest ofthe lawyers, members and staff of DivinaLaw. Without their competence, hard ‘work, and devotion this collection would not have been possible | thank my wife, children, and my entie family for theie love and encouragement as they remain my inspiration. in honing my erat. Finally, I thank the Father Almighty for giving us the wisdom and allowing us to honor and glorify Him through producing legal educational materials. ‘Deo Omnis Gloria. NILO TT. DIVINA TABLE OF CONTENTS ‘MERCANTILE LAW 2024 Bar Examination 1. CORPORATION LAW |[Link] Principles 1, Nature and Attributes 2. Nationality of Corporations 8. Control Test nn bs, Grandiather Rule so vo 4. Doctrine of Separate Juridical Personality. 44 Doctrine of Piercing the Corporate Veil 5 Trust Fund Doctrine . [Link] of Corporation 1, Stock Corporations 2. Non stock Corporations 53. Educational Corporations. 4. Close Corporation 5, Religious Corporations 6. One Person Corporation +7. Holding/Parent and Subsidiary Corporation Incorporation and Organizations i, Number and Qualifieations of Incorporators ii Corporate Name. ii Capitalization iv. Corporate Term ¥. Classifications of Shares vi. Articles of Incorporations vil By-Laws acs vil. Corporate Officers "7 28 136TABLE OF CONTENTS Page ix, De Facto Corporation sn vn Corporation by Estoppel vse 5 D, Directors and Trustees sss 150 +, Qualifications and Disqualification. 50 2. Elections... cae 159 3 Independent Directors Sir 4 Term, Holdover, and Removal ~ RA. No, 1332, Section 22 and 27 ns . 8 5. Compensation ai 1 6. Vacancy SO nSegecreneeeLRy 17. Voting Requirements Sees) 8 Duties and Liabilities Sones 188 9. Doctrine of Centralized Management. 22 10, Business Judgment Rule. a4 11, Doctrine of Apparent Authority» ve 8 E, Powers of Corporations: Incidental Powers; Ulra Vires Doctrine a4 ‘a. Specific powers; theory of specific capacity wu. 231 i, Power to extend orshorten corporate term wa. 238 Power to increase or decrease capital stock or incu, create, increase bonded indebtedness scsewemnnne 241 4, Power to deny pre-emptive rights ww. a5 ‘ePowerto sell or dispose corporate assets venue 260 Power to acquire own shares Sonne 268 Power to invest corporate funds in another corporation oF business. an bh Power to declare dividends 25 i. Powerto enter into management contact 288 5. Limitations 288 F, Stockholders and Members so rites 299 A. Doctrine of Equality of Shares 299 8B. Participation in Management; Voting Requirements nen 299 TABLE OF CONTENTS Page C. Propriety Rigs. se 308 2 Right to Dividends ie 308 ‘Right to Inspection ov snnnnes 308 €.Pre-Emptive Right ag 4. Appaisl Right .Delingueney Certificate of Stock F. Mergers and Consolidtions ‘i G. Corporate Dissolution and Liquidation sue 48, H. Foreign Corporations 1. Personality to Sue and Be Suability 2. Foreign Investments Act 2. Doing Business in the Philippines. 453 ». Registration Requirement a 8 € Nationalzed Activities and the Negative LS nnn a9 1. PARTNERSHIP A. Geneva Principles 489 [Definition svn 489 Rules to determine Existence see 49 TL. Separate personality 500 IV. Partnership by Estoppél sssnsssnnannenes 504 V. Kinds Partnership 503 B, Obligations of Partners ‘Among Themselves eons 50 C. Property Rights of Partners 1. von SBR . Obligations of Partnerships) Partners to Third Persons sons 587 E. Dissolution and Winding Up 38 E Limited Partnership 538TABLE OF CONTENTS ‘TABLE OF CONTENTS Page II, INSURANCE LAW 8. The Montreal Convention 5 "Applicability = [Link] insurance. om 2: Extent of Liability of Air Cari B, Elements ofan Insurance Contract 578 |, Death or Injury to passengers [Link] and Nature of I. Destruction, loss damage or Tnsuranee Contacts. memes, 520 delay in carrying bagzage vm 820 [Link] Interest : 383 ‘ln ife/ealth V. BANKING LAWS 2. Ii Property nnn oo Concealment on : 69 A The Central Bank Act Beetles D, Representation Eee Ga) [Banks in Distress et E Policy Stain 87 a. Conservatorship 84 F, Warranties oe “6a I. Remedy of Close Bans wnncnnnnewncenne 849 Premium aa ee op B Secrecy of Bank Deposits. am oo Hi. loss ete 665 [Prohibited Acts oe 1. Notice and Proof of 0s wu 666 1 Exceptions from Coverage 861 |. Double Insurance; Overinsurance = 69 1, Garishment of Deposits... 877 fiona oo General Banking Law wer 88 K. Clases of surance : ad {Nature of Bank Funds and Le aBualy ae 6 Bank Deposits : 878 rea . Boater li, Required Diligence of Banks enn 89 Se emma oa i, Prohibited Transactions by 4. Compulaory Motor Vehicle Bank Directors and Officers 885 ability insurance m Money Laundering Act we 896 Marine Insurance Ba a s g 2. Covered Instone and “ IV. TRANSPORTATION LAW their Obligations a 896 3, Covered Transactions es ogo ‘A. General Principles of Common Carces. 755 4 Suspicious Transactions 3 [Test to Determine if Common Cartier sen 755 5 Sale Harbor Provisions. oon 11 Common Carrer v Private Caries 765 6. Money Laundering 34 IIL Diligence Required - 7 Authoriy to inquirer, Civil Code, Article 1733 | Freezing and Forfeiture Ee oo 1V. Vigilance over Goods V. Safety of Passengers Vi. Sources of Liability‘TABLE OF CONTENTS: ‘VI. INTELLECTUAL PROPERTY CODE OF ‘THE PHILIPPINES, A. Patents ‘A. Ownership ofa Patent 5. Rights and Limitation of Patent Owner € Patent Ifingement nr D. Remedies for Infringement. [Link] Voluntary Licensing G. Compulsory Licensing [Link] 1. Marks vx. Collective Maris vs. Trade Names 2. Non-Registoble Marks 5, Ownership and Registration 4. Rights and Limitations of “Trademark Own 5 TradematkIneingement nn 6 Unfair Competition 7. Cancellation €.Copytights nn 1 Copyrihtable Works 2. Non Copyrightable Werks 3 Rights Conered by Copyright ~ 4 Ownership of a Copyright 5 Limitations on Copyright 6. Copyright infingement VII. DATA PRIVACY A Personal vs. Sensitive Personal Information B, Processing of Personal and ‘Sensitive Personal Information; Law Basis Page 933 38 945 950 957 937 961 1009 126 1037 1 104 ro. 1049 1054 wo 2080 1105 m6 ‘TABLE OF CONTENTS Page . General Data Privacy Principles 54 D. Rights of Data Subject 163 VIII. SECURITIES AND REGULATION CODE. |A. Framework for Regulating of Securities Trading eS aay! B. Concept of Securities 1193 IX. ELECTRONIC COMMERCE ACT A Legal Recognition of Electronic Data Messages... secs 1208 . Obligation of Confidentiality i 16 X. ACCESS DEVICES REGISTRATION ACT (RA. No. 8484) A, Access Devices ny Bi. Prohibited Acts i m8 (Frustrated and Attempted ‘Access Device Fraud m6 XI, PHILIPPINE COMPETITION ACT. A. Anti-Competitive Agreements sense 1237 B. Abuse of Dominant Postion 239 . Mergers and Acquisitions 233 XII. PUBLIC SERVICE ACT [A Public Service a Public Utility snnsinnnsinnin 1247 ‘A. Critical Infrastracture 148 B. Powers of the President = a5 wRMERCANTILE LAW 2024 Bar Examination 1. CORPORATION LAW A. General Principles 1, Nature and Attributes 1. What isa corporation? A corporation is an artifical being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence, 2. What are the attributes of a corporation? ‘The attributes of a corporation are drawn from its statutory definition, 4 Itis an artificial being, b, itis created by operation of law. .Tthas the right of succession, 4. Ithas the powers, attributes, and properties expresly ‘authorized by law or incidental to its existence 3. Explain the attribute that the corporation is an artificial being. By this, it means that the law regards a corporation as «juridical person, with a legal personality separate and dlistinet from the persons composing i, a juridical person, ‘it may own properties, exercise rights, and incur obligations independently ofthe persons comprising it: ‘Conan Bak REvIEWERON CCOMMERCIALLAW ‘As a juridical person, itis entitled to the rights of @ person under the Bll of Rights ofthe Philippine Constitution. ‘The Supreme Court pronounced in the landmark case of ‘Stonehill ys. Diokno® that a corporation may invoke the right against unreasonable search and seizure, However, i eannot invoke the right against sel-incrimination.* ‘A corporation may also sue for moral damages. While it cannot experience wounded feclings, anxiety, and sleepless nights, which are the causes of moral damages under the Civil Code of the Philippines, it may acquire goodwill or reputation of its own, which, if besmirched or tarnished, entitles the corporation to moral damages. A cosporation may also be criminally prosecuted if the imposable penalty is not imprisonment, such as fine, forfeiture of license, and revocation of franchise.” 4 Explain the attribute that a corporation is created bby operation of law. ‘A corporation is not created by mere agreement of the incorporators nor by their execution of the articles of incorporation. There ought to be a law from which the corporation derives its legal existence. This may be a ‘general law governing the formation of private corporations, ‘which isthe RCC, of a special law passed by Congress to create a government-owned and controlled corporation. Since February 8, 1935, the legislature has not passed a single law creating a private corporation Tis is Because the Constitution itself precludes the passage of such statute, "ol Dan, GAN gg Ea ane 9 ZaasecO Pec, Ny fn Be Mara Pini rin Nt hy al nil ot, “ome Cour of Appeal GR No 9838, Ae CComresiorous Bak Revewan on 3 ‘CoMMGRCIAL LAW particularly, Section 16, Antcle XI of the 1987 Constiution* ‘which states that "The Congress shall not, except by general Jaw, provide forthe formation, organization, or regulation of private corporations.” The same provision was contained in Section 7, Article XIV of the 1935 Constitution and Section 4 Article XIV ofthe 1973 Constitution. In fact, a law enacted by the legislature to create a private corporation is unconstitutional 5. Explain the attribute that it has the right of the ight ofsuccesion of corporation does nt connote that a comoration i immortal. esimply means that i has the power to exist continuously, either by opting to have perpetual existence or to extend its corporate life if 3 Bxed {erm is specified in sates of incorporation. Its capaciy for continued existence is not affected by any changes in the composition of eorporators 6. Explain the attribute that it has the powers, attributes and properties expressly authorized by law or incidental to its existence. ‘This means that a corporation can only exercise powers conferred upon it by law, its articles of incorporation, those implied from the conferred powers, or incidental to its existence. Any act of the corporation contrary to oF ‘outside these powers i ultra vires, The testi whether the corporate actor transaction is related to or in furtherance ‘of the purposes ofthe corporation, For instance, whether ‘oF not a corporation may acquire property will not only be tested by the lawfulness ofthe consideration but whether such property is necessary to achieve the purpose of the4 Comenius HAR REEWERON CCoNRCIALLAW corporation. Thus, a corporation engaged in mining cannot ‘scquite properties for urban development.” A corporation ‘organized as lending investor cannot engage in pawnbroking® 7. Maya corporation be liable for torts? A corporation is civilly liable in the same manner as natural persons for torts because the rules governing the liability ofa principal or master fora tort committed by an agent of servant are the same whether the principal ot master bea natural person or a corporation, and whether the servant of agent bea natural or artificial person, A corporation is liable, therefore, whenever a tortious act is committed by an officer or agent under express direction or authority, from the stockholders or members acting as a body, of, generally, from the directors asthe governing body. Ina close corporation, stockholders who are actively ‘engaged in the management or operation of the business land affairs ofthe corporation shall be personally liable for ‘corporat tot ules the comporaton has obtained reasonably adequate liability insurance.” 8, May a corporation be criminally prosecuted? ‘A corporation cannot be arrested and imprisoned; hence it ‘cannot be penalized fora crime punishable by imprisonment. However, a corporation may be charged and prosecuted fora crime if the imposable penalty is a monetary fine" ot forfeiture or revocation of the corporate franchise. “Wefan ade Ga fp GN py Deer. ‘Sones one tan cane "Pipe Nel ne Corel oped ol GN Le May SERET Na, dng bans the nae ye See ogee tat Ge i Ml Ltr RG NOS Hef Str fin GR Noy, Fy 206 CCompano1ous Bak REVIEWER ON 5 CConminei. Law 9. Maya corporation claim moral damages? ‘There are conflicting decisions on the entitlement of a corporation to moral damages. In one ease, moral damage ‘was awarded when the corporation sufficiently showed that its reputation was tarnished after it ordered equipment from its suppliers on account ofthe urgency ofthe projec, ‘only tobe cancelled later bythe counterparty in the contrac” In another case, the Supreme Court ruled that while it is ‘rue that besmirched reputation is included as a bass for an award of moral damages, it cannot cause mental anguish toa corporation unlike inthe ease ofa natural person, for ‘corporation has no reputation in the sense that an individual has and besides it is inherently impossible for corporation to suffer mental anguish.” ‘The better view, however, is that generally, the award of moral damages cannot be granted in favor ofa corporation, because being an artificial person and having existence only in lal contemplation, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock which are the causes of moral damages under the Civil Code. However, it may acquire _ocill or reputation ofits own andif the same is besmirched, the corporation may recover moral damages. In Filipinas Broadcasting Network, Inc, vs. AGO Medical and Educational Center-Bicol Christian College of Medicine, (AMEC-BCCM)*, 4 radio broadcaster uttered libelous remarks against an ‘educational center (alg i the dumping ground fr intlectual misfits). The Supreme Court held that AMEC's claim for Tne Diy, cv. Coon of Appl nd Fer Ease Mil Sey Compertan Gone nese "Nato Power Corporate Pllpp Bethe Osan ne, GR ND “Tp oon Newer. AGO Mai Eine Cer ‘lc Clige eens (OIC BCCMY GR Nea ay Sy‘ Comex ous Bak REVIEWER ON ‘Counesciat Law moral damages falls under item 7 of Article 2219 of the Civil Code which expressly authorizes the recovery of moral damages in cases of libel, slander, or any other form of defamation. Article 2219(7) of the Civil Code does not 4ualify whether the plaintiff isa natural or juridical person. ‘Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation, and claim for moral damages. “Moral damages may also be awarded in case ofa tortious act against the corporation. A corporation whose checks ‘were dishonored bythe drawee bank despite the availabilty of fands and because of the negligence ofthe bank employees ‘can recover moral damages for besmirched reputation. “The standing ofthe corporation was reduced inthe business ‘community because of the bank's negligence.” ‘While the Court may allow the grant of moral damages toa corporation it is not automatically granted; there must still be proof of the existence of the factual basis of the damage and its causal relation tothe defendant’ acts. This is © because moral damages, though incapable of pecuniary estimation, are in the category of an award designed to ‘compensate the claimant for the actual injury suffered and ‘not to impose a penalty on the wrongdoer. Ie was held that ‘where the records are bereft of evidence that the name or reputation ofthe corporation has been debased asa result of {3 tortious act (orhich, in this ase, isthe disconnection of the electricity supply to the building of the corporation ddue to alleged meter tampering), the corporation is not entitled to moral damages.” i Rian isc Company ve TRAM, Betronis Corporation, GR. No Conrex10us BAR REVEWERON 7 ‘Conta Law From these cases iti clear that a corporation may be «entitled to’ moral damages if tis the victim of libel, slander or defamation, or when a tortious act is committed against st, provided that there is a reasonable connection between the tortious act and the injury caused by such tortious act to the goodwill or reputation of the corporation. to. Distinguish a corporation from other forms of business organizations. 1. Sole Proprietorship vs. Corporation soe proprietorship does noe possess juridical personality separate and distinct from the personality ofthe owner of ‘the enterprise. The law merely recognizes the existence of a sole propretrsip as form of business cmgaization conducted for profit by an individual and requires its proprietor oF owner to secure licenses and permits register its business name, and pay taxes to the national government.” Thus, the personal assets ofthe proprietor may be held to answer for the obligations incurred by the sole proprietorship in, conducting its business In contrast, 2 corporation possesses a legal personality separate and distinet from its owners b. Partnership vs. Corporation As to definition: ‘A partnership is an agreement whereby two oF more persons bind themselves to contribute money, property, or industry toa common fund, with the intention of dividing the profits among themseives™ "Ma Gaus agps Gi Raney, Thi Do Aaa an hee nealthe Cnt ade oe Paine5 (CoPeno0us BAR REVIEWERON CCONREICIALLAW ‘A conporation is an artifical being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence. ‘As ta the manner of ereation [A partnership is created by agreement while a corporation is ereated by the operation of law. ‘As co composition: In partnership, there should be at least two partners ‘while one person may compose a corporation. ‘As to commencement of juridical personality A partnership acquires juridical personality from the _moment two or more persons agree to form a partnership, "The registration of the Articles of Co-Partnership with the SSEC is not a condition sine qua non for the acquisition of legal personality but is only necessary for administrative convenience. Unless the partnership is registered with the SEC, the partnership cannot obtain the requisite licenses and permit to conduct its business. Private corporation commences to have comporate existence and juridical personality and is deemed incorporated from the date the SEC isnies 2 Certificate of Incorporation under its offical sea. As to lability ‘The liability of the stockholders, who are not directors officers and agents, is limited to their subscription to the ‘capita stock of the corporation while the general partners may be hed lable beyond their contbutin tothe partneship ithe assets thereof are not slicent to answer for ereditor' claims. CComPanoious Bak REVEWERON 9 ‘Conus Law ‘As to transfer of shares or rights: [A stockholder may sell his fully-paid shares of stock without the necessity of securing the consent ofthe comporation and/or the other stockholders, while in a partnership, a partner cannot assign his interest in the partnership in favor of a third party without the consent ofthe partners, because a partnership is essentially based on trust and. confidence, ‘As to the management: The business of a corporation is generally conducted by the by the Board of Directors whereas a partnership is managed Managing Partner designated in the Articles of Partnership, or inthe absence of designation, by anyone ofthe general partners, Asto the exercise of powers: ‘A corporation cannot exercise powers except those conferred by law and its articles of incorporation, those implied from the expressly-conferred powers and those incidental to its existence while a partnership, may perform any act unless itis contrary to laws, good morals, custom, public order, and public policy. 2. Nationality of Corporations a. Control Test It is a mode of determining the nationality of a corporation engaged in rationalized areas of activities, provided for under the Constitution and other applicable laws, where corporate shareholders with foreign shareholdings are present, by ascertaining the nationality ofthe controlling, stockholder of the corporation. If the capital of the investing Corporation, which owns 60% of the capital ofthe investee» CCorenious Bak Rrvnw8 ON (Convene Law corporation, is at least 608% owned by Filipinos, then the entire sharcholdings ofthe investing Corporation shall be recorded a8 Filipino-owned thus making both the investing and investee- corporations Philippine national b. Grandfather Rule ‘Thisis the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other applicable laws, is accurately, ‘computed, in cases where corporate shareholders with foreigg: shareholdings are present, by attributing the nationality, ‘ofthe second or even subsequent tir of ownership to determine the nationality of the corporate shareholder.” Thus, to arrive at the actual Filipino ownership and control in a ‘corporation, both the direct and indirect shareholdings in the corporation are determined. In the case of a mult tiered corporation, the stock attribution rule must be allowed to run continuously along the chain of ownership until it finally reaches the individual stockholders. The purpose ofthis rule isto trace the nationality of the stockholder of investor corporations to ascertain the nationality ofthe corporation where the investment is made.” 1, What are the common conditions for the application of the control test and grandfather rule? The corporation is engaged in economic activities that are reserved, in whole or in part, for Filipinos, ‘otherwise known as nationalized activites. 1 Stockholders include corporation/s. If stockholders are all natural persons, the nationality of the SC Opinion May 0 ‘Conannyous Bas Revie On . COMMERCIAL LAW ‘corporation, under this test, is ascertained by ‘imply computing the percentage of stock ownership by Filipino and foreigners. By way of example, in case of a corporation engaged in advertising, the capital of which, under the Philippine Constttion, is required to be 70% owned by Filipino, it shall bo considered a Philippine national if the Filipino stockholders own atleast 70% of total shares issued. Foreign stockholders are present either by owning shares directly in the corporation o awning shares in a corporation that invested in the equity of the corporation whose nationality isin issue. 12, What is the prevailing mode of determining the nationality of corporations engaged in nationalized activities? The “control test isthe prevailing mode of determining the nationality of corporations engaged in nationalized activities. However, when in the mind of the Court there is doubt as to where beneficial ownership and control reside, ‘based on the atendant facts and circumstances of the case, then it may apply the “grandfather rule.” In fact, the Control Test can be, as it has been, applied jointly with the Grandiather Rule to determine the observance ‘of foreign ownership restriction in nationalized economic activities, The Control Test and the Grandfather Rule are not asi wer, incompatible ownership-detenminant methods that can only be applied alternative to each other. Rather, these methods can, if appropriate, be used cumlatvey in the determination ofthe ownership and control of corporations ‘engaged in fally or partly nationalized activities.” ene ear» Couris0us Bak RevEWHRON ‘Conner LAW corporation, is at least 60% owned by Filipinos, then the tentie shareholdings ofthe investing Corporation shall be recorded as Fiipino-owned thus making both the and investee - corporations Philippine national b. Grandfather Rule ‘This isthe method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activites, provided for under the Constitution and other applicable laws, is accurately ‘computed, in cases where comporate sharcholders with foreign shareholdings are present, by attributing the nationality of he second or even subsequent tir of ownership to determine the nationality of the corporate shareholder.” Thus, to arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are determined. In the case of a multi tiered corporation, the stock attribution rule must be allowed. to run continuously along the chain of ownership until it finally reaches the individual stockholders. The purpose of this rule isto trace the nationality of the stockholder of investor corporations to ascertain the nationality ofthe corporation were the investment is made.” 1, What are the common conditions for the application ofthe control test and grandfather rule? 1a. The corporation is engaged in economic activities that are reserved, in whole or in part, for Filipinos, otherwise known as nationalized activities. Bb. Stockholders include corporations. If stockholders are all natural persons, the nationality of the "SEC Opinion Maya ‘Conunous Bax Revues on » COMMERCIAL LAW corporation, under this test, is ascertained by simply computing the percentage of stack ownership by Filipino and foreigners, By way of example, in case of a corporation engaged in advertising, the ‘apital of which, under the Philippine Constitution, fs required to be 70% owned by Filipinos, it shall be considered a Philippine national if the Filipino stockholders own at east 70% of total shares issued, c. Foreign stockholders are present either by owning shares directly in the corporation or owning shares in 1 corporation that invested in the equity of the ‘corporation whose nationality is in issue, 1, What is the prevailing mode of determining the nationality of corporations engaged in nationalized activities? ‘The "contol test” ie the prevailing mode of determining the nationality of corporations engaged in nationalized activites, However, when in the mind of the Court there is doubt as to where beneficial ownership and control reside, based on the attendant facts and circumstances of the case, then it may apply the “grandisther rule.” ln fact, the Control Test can be, as it has been, applied Jointly with the Grandfather Rule to determine the observance ‘of foreign ownership restriction in nationalized economic activites. The Control Test and the Grandfather Rule are not, 3 i wet, incompatible ownership-determinant methods that can only be applied alternative to each other. Rather, these methods can, if appropriate, be used cumulatively in the determination ofthe ownership and contol of comporations ‘engaged in fully or partly nationalized activities.” ins orp Ros pia sea CowPesoous BAR REVEWERON COMMERCIAL LAW The Grandfather Rule, standing alone, should not be ‘used to determine the Filipino ownership and control in ‘corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, itis only when the Control Testis frst complied with thatthe Granelther Rule may be applied. Putin another manner, if the subject corporation's Filipino equity falls below the threshold of, 60%, the corporation is immediately considered foreign- ‘owned, in which cas, the need o resort to the Grandfather Rule disappears.” ‘The Supreme Court stressed, however, that when the {6ch% Flipino ownership, is never in doubt, the control test prevails. In the relevant case, it was held that the petition is severely wanting in facts and circumstances to raise legitimate challenges to the joint venture company’s 60- 40 Filipino-Foreigner ownership. The application of the Control test will already yield the result that the company is a Philippine national. The grandéather rule no longer applies” B (¢ indicators creating doubts that warrant the application of the Grandfather Rule, cumulatively ‘with the Control test. In one case, the Supreme Court found serious doubt as tothe true nationality of the corporations involved due to the following: 1 the presence ofa common major investor, 1 in the corporations; 2) the similarities of the corporate structures ofthe corporations; 3) the presence of the same ‘nominal shareholders inthe corporations and 4) the pald-in yO Kesey sh sae Gwin woman ots GR Nt, (Comunoious Bas Reviewer on 5 COMMERCIAL LA capital of the corporate owners being paid only by the foreign investor, among many other indicators showing, the desire to circumvent the nationality requirement in, rmining activities. Corporate owners controlled by Filipinos did not pay for any of their subscribed shares, while the foreign investor conebuted 99.75% of each ofthe corporation's paid-up capital. This fact creates serious doubt as to the {rue extent of foreigners’ control and ownership over the corporations since “a reasonable investor would expect to have greater control and economic rights than other investors ‘who invested ess capital than him.” Thus, the application, of the Grandfather Rule was held to be justified.” 14. When is the grandfather rule applied? The grandfather rule is applied in the following ‘2. Under the Grandfather Rule Proper, ifthe percentage ‘of Fino owes in the corporation or partnership is les than 60%, only the numberof shares comesponding to such percentage shall be counted as of Philippine nationality. b. Under the Strict Rule or Grandfather Rule Proper, ‘the combined totals in the investing Corporation and the Ivestee Corporation, wen raced (e, gganlthered) to determine the tora percentage of Flipino ownership, show less than 60% requirement, ‘& Ifbased on records, Filipinos own at least 60% of the investing corporation but there is doubr as to where control and beneficial ownership in the corporation telly reside. hace ig Deore Cop er ig Das teh tiie4 CContenbwous BAR REVIEWER ON CCommescia La 45, Illustrate the application of the control test and grandfather rule. For better understanding, below are various diagrams to ‘lustrate the application ofthe cantrl test and gandlthe rule, Rule Canoe 16. In this illustration, ABC i a public utility corporation. Under the Philippine Constitution, at least 60% of its capital must be owned by Filipinos. The outstanding capital stock is Php 10 million divided into 100,000 shares with par value of 100/ share. Of the 100,000 ‘outstanding shares, 60% is owned by XYZ while 40% is held by foreigners. XYZ, as investing corporation in ABC, in turn, is 60% owned by Filipinos and 40% owned by the same foreigners who directly own 440% of ABC Corporation. Is ABC a Philippine national? Is it compliant ‘with the Constitution insofar as 60% Filipino capital requirement is concerned? ABC isa Philippine national and compliant with the Constitution, The prevailing mode to determine the nationality of a corporation engaged in nationalized activities s the control test. ABC, asa public utility, is engaged in a nationalized activity and as such, subject to the control test. Under the ‘control test, if the corporation is at least 60% ovned by ‘ComPex1oUs BARREVEWARON 6 ‘Comnneia LAW inos, itis a Philippine national. XYZ, the investing corporation, is also a Philippine national because 60% of its capital is likewise owned by Filipinos. Because XYZ is, at least 60% owned by Filipinos, then the entire 60,000, shareholdings of XYZ must be registered as Flipino-owned, ‘making both ABC and XYZ Philippine nationals, Note that under the control tes, it is incorrect to attribute the 40% foreign ownership to the 60,000 shares ‘owned by XYZ asthe entire shareholding should be recorded as Filipino-owned. In other words, itis erroneous to say that because the foreigners own 40% of XYZ, 40% of 60,000 shares (or 24,000 shares) should be registered in their name. If this mode of computation is adopted, ABC will not be compliant because the foreigners will then directly own 40% and indirectly own 24%, in excess ofthe 40% limit that the Constitution has set. The foregoing structure and mode of ‘computation explain why the contro rests often called the liberal test in determining the nationality ofa corporation. Rule I anc PUBLICUTILITY XYZ |[ronsionens | so om In this illustration, XYZ owns 90,000 shares of ABC while 1,000 are held by foreigners. XYZ, in turn, {s 50% owned by Filipinos and 50% by foreigners. ISABCa Philippine national? Ie is not, Because XYZ is not atleast 60% owned by Filipinos, the control test cannot be adopted. Instead, onlyCCowenowus Baa Revise On CComMRCIALLAW the percentage that corresponds to the shares owned by Filipinos should be registered in the books ofthe corporation as Filipino-owned, the rest must be recorded as foreign- ‘ovined, The 50 of 90,000 shares or 45,000 shares, therefore, should be registered as Flipino-owned and the other 45.000 as foreign-owned. Adding the 45.000 shares indirectly owned by foreigners to the 10,000 shares they directly own, the aggregate shareholdings wll exceed the allowable 40% limit, [NB: In the actual cases of Narra v. Redmont, there ‘were nominal shares issued in vor of incomporators to qualify as such, The diagrams limited the number of shares held by ‘corporations ta ilustrate the prineiples Rule 1: ‘Companions BAR REMEWERON Contact Law control actualy reside. Given such doubt, the grandfather rule then is cumulatively applied with the control test. Under the granefather rule, only the shares that correspond to the percentage owned by Filipinos shal be registered as Flipino- ‘owned. Therefore, only 60% of the 60,000 shares owned by XYZ should be recorded as Filipino-owned while 40% of the 60,000 shares shal be registered as foreign-owned. Adding the 24000 shares that the foregn-held corporation indirectly ‘wns ABC wit the 4,000 shares it dry owns, the aggregate foreign shareholdings translate to 64,000 oF 64% of the capital of ABC, in excess ofthe 40% allowable limit. Rule IV: 7c Bee. fo,000 40,000 60.000 40.000 a ES LJ corr: Lp cows 60% ath ‘corporations. [-——— Fe cc conry | na bial 50% “This case cals forthe application ofthe grandfather aS rl, First, the control testis applied because ABC appeats fo be Gol owned by a Philippine national, XYZ. XYZ is a Philippine national because 60% ofits capital is owned by Flipinos, Let us assume, however, that the share subscriptions ‘ofthe Filipinos were not pal and the foreign held-cosporation basically contributed all, or almost all of the capital of ABC, creating a doubt as to where beneficial ownership and Corporate layering is not probibited provided that it {s not used to circumvent the rules on foreign ownership restriction, Let us assume that ABC Corporation, a public utility, is 60% owned by XYZ Corporation and 40% owned by foreigners. XYZ Corporation, in turn, is wholly-owned by Corporation 1, a domestic corporation. Corporation 1, in“ Coven Bak REvIEWERON ‘COMMERCIAL LAW ‘tum, is wholly-owned by Corporation 2, a corporation organized and existing under the lavs of rts Virgin sand Corporation 2, in turn is wholly-owned by Corporation 3, a Grand-Cayman registered entity. Corporation 3s equally owned by foreigners and Filipinos Following the strict application ofthe grandsther rule, inthis ease ofa mult-iered corporation, the stock attribution rule must be allowed to run continuously along the chain of ‘ownership until it finally reaches the individual stockholders, In this illustration, despite the corporate layering, the beneficial ownership and control of XYZ, which owns 60% of the capital of ABC, show less than 6% Flipino share ownership. ‘The grandiather rule, therefore, applies. 3. Doctrine of Separate Juridical Personality 18, What is the doctrine of separate legal entity? ‘This doctrine, which emanates from the attribute of a corporation as an artifical being, means thatthe corporation thas legal personality separate and distinct fom the stockholders, directors, and officers composing it 19, What are the legal consequences of the doctrine of separate legal entity? Properties registered in the name of the corporation are owned by it 35 an entity separate and distinct from its, ‘comporators. The corpovators are not entitle tothe possession of any definite portion ofits property or assets, They are ‘ot co-owners or tenantsin common of the corporate property. Similarly, properties that the corporators own donot belong to, and cannot be used by, the corporation without the former's consent. The following cases are illustrative i. A corporation can sue to recover real property being ‘ccd by its former president (who was concurrently a Comrmous Ba RrneweRo » CContuanci La sigant stockholder) eventhough the corporation hd previously allowed him to enjoy possesion of the property” iL. Where stockolders granted 2 Joan tothe corporation to finance the acquisition of property which was eventually mortgaged to a bank to secure 2 corporate Toan, the right ofthe stockholders i subordinate to the mortgagee. The stockholder has the right to be paid theloan but nt tothe property ofthe corporation ii, ‘The acquisition ofthe substantial and controling shares of stocks of the corporation does nt entitle the buyer of the shares to the possession of the corporate property.”” In thie ease, the new controling shareholder fled a petition for issuance ofa writ of possession of the propery of the corporation. The most pragmatic thing todo is to simply vote is shares to elect his nominees tothe boa af director and afer securing contro ofthe board of decor, adopt the appropriate board resolution to allow him to use, enjoy and occupy the property ofthe corporation fora purpose germane to the interest of the corporation in, The probate court hearing the setlement of the estate ofthe deceased stockholder cannot order the lessees of the corporation to remit rentals to the estates administrator, The decedent was not the Owner of the rented property but only ofthe shares ofthe corporation that owns the property” “op Ro ve Cou of pga No 865, 9 Tet Mn na "ms pion ln eGR Nc ag» ‘CoMPeSOUS BAR REVEWERON ‘Consenera Law a. Asa general rule, directors, officers, or agents of a corporation cannot be held personally liable for the obligations incurred by the corporation, unless it can be shown that such director/oficer/agent is guilty of gross negligence or bad faith or committed an unlawful fact and that the same was clearly and convincingly proven, Thus- i, The mere fact that the director voted forthe approval of a resolution authorizing the purchase of trucks does not justify disregarding the separate juridical personality of the corporation and holding him personally liable forthe payment ofthe price." ji. A company manager acting in good faith within the scope of his authority in terminating the services of certain employees and transferring some of them to ather positions cannot be held personally liable for damages, In this particular case, the complainants did not allege or show thatthe officers ofthe corporation deliberately and maliciously designed to evade the financial obligation ofthe corporation in such exercise ‘of management prerogatives as a means to perpetrate an illegal actor asa vehicle fo the evasion of existing obligations.” ii, The president of a construction company cannot be held solidarily Hable with the corporation for breach of contract in the construetion ofa library, absent evidence of malicious acts by the former, ‘he fact that the president resisted the claims of "ho nari Apne Cot Gi No. Lr, Ae 98 "Plas Nt aes Rn No Sy, ion CCowPEnious BAR REMERON * Contec Law the client does not demonstrate malice or bad faith tomake him personally liable.” iv, The corporation's representatives are generally not bound by the terms of the contract executed by the corporation. They are not personally liable for obligations and liabilities incurred on or in behalf of the corporation.” 1. The president should not be held solidarily liable with the corporation for the unpaid commissions due to a matketing agent because no commission of an unlawful act, gross negligence, or bad faith \was alleged in the complaint, much less proven in the course of the trial.” b, The cause of action available to the corporation cannot ‘be generally enforad by its director, ofice, or stockholder and vice-versa Thus i. Ima judgment based on a compromise agreement between the creditor and the debtor corporation, the terms of which were violated by the judgment debtor, the stockholders of the judgment creditor cannot intervene. The breach of the compromise agreement will not prejudice them because their rights to corporate assets are at most inchoate, prior to the dissolution ofthe corporation. ii, “The stockholders are not themselves the real parties in interest to claim and recover compensation for "So ann ad tno, Oe BF Corin, a GR Noung Ober, so san i ern Rr mao» Comins BAR REVIEWERON CConmesci Law the damages arising from the wrongful attachment of corporate assets. Only the corporation is the real party in interest for that purpose.” It was, however, held that the doctrine of separate juridical personality does not apply if the judgment creditor ‘wanted the officers to be examined not for the purpose of passing unto them the lability ofthe respondent corporation, a5 the judgment obligor, but only to ascertain the properties, nd income ofthe latter which can be subjected for execution inorder to satisfy the final judgment and nothing ese.” 20, What factors or circumstances, per se, ae insufficient to disregard the doctrine of separate legal entity? The Supreme Court held in various cases that the following factors or circumstances are insufficient to disregard the doctrine of separate legal entity in the absence of fraud or policy considerations ‘a, Mere ownership bya single stockholder or by another corporation of all or nearly all of the capital stock of a corporation, i. If used to perform legitimate functions, a subsidiny’s separate existence may be respected and the liability ofthe parent corporation, as ‘wel a the subsidiary, will be confined to those arising in their respective businesses. When a borrower failed to pay credit accommodations ‘ranted by a subsidiary of a banking corporation, ‘the suit against the parent company to direct it to e-compute the reschedaling of the interest * Sel ss Gory Yom Ca a RN er nd SINC. Men Fr Eat Proper, NC. GR No 269. Courexoous Bax REVIEWERON a ‘COMMERCIAL LAW {be paid and to enjoin the foreclosure initiated by the parent company as attorney-in-act of the subsidiary will not prosper because the ‘wo corporations are separate and distinct from each other. fi, When an investor has a aim against a subsiry ‘of another corporation which subsequently bbecame the acquired corporation ina merger, the claim against the subsidiary cannot be the subject of legal set-off against the loan ‘obtained by the investor from the surviving. ‘corporation, even though the latter corporation by virtue ofthe merger acquired all the shares of| the absorbed corporation, because the fact that a corporation owns almost all ofthe stocks of ‘another corporation, taken alone, is not suifciene to justify their being treated as one entity, iil, "The subsidiary is no able to absorb the employees of its parent company when the latter closed its business, particularly, ifthe subsidiary was set up long before the temninaion of employment such that t could not be said that the subsidiary was organized to evade the parent company’s liabilities. This i true even ifthe parent company transferred its assets to the subsidiary because settled is the rule that generally, where one corporation sells or otherwise transfers all ts assets to another corporation for value, the latter is not, by that fect alone, liable forthe debts and liabilities ofthe transferor. . ‘The existence of interlocking directors, corporate officers, and shareholders.4 CCoMPENDIOUS HARREIEWER ON CConacia Law i. Where two banks foreclosed mortgages on certain properties of a mining company and eaumed busines operations theceo by onganing 2 diferent company to which the banks transfered the foreclosed assets, the banks are not lable to a contractor which was engaged by the re ‘organized mining company even though the latter is wholly-owned by the two banks and they have interlocking directors, officers, and stockholders, ‘c. The fact that the businesses are related, i, The fact thatthe businesses of two corporations are related, as one manufactures yams while the other sels the same product, some employees of one are the same persons manning and providing for auxiliary services to the other, land the physieal plants, offices, and facilities are situated in the same compound, are not ‘suficent to justify the piereng ofthe corporate veil of either corporation, li, A corporation could not be made a party ‘defendant to a colletion case simply because ‘summons could not be served on the debtor corporation on the mere grounds that the businesses ofthe two corporations are interrelated ‘and they have common directors absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons oftheir rights, 21, In an action for collection of a sum of money, the Regional Trial Court RTC’) of Makati City issued a decision finding D-Securities, Ine, (‘D-Securit CCompanious Bak Reviewer on 3 ‘ContueRciat Le ible to Rehouse Corporation ("Rehouse) for 'P10j000,000.00. Subsequently, the writ of execution ‘was issued but returned unsatisfied because D- Securities had no more assets to satisfy the judgment. Rehouse moved for an Alias Writ of Execution against Fairfield Bank ("FB"), the parent company ‘of D-Securities. FB opposed the motion on the grounds that itis a separate entity and that it was never made a party to the case. The RTC granted the motion and issued the Alias Writ of Execution. In its Resolution, the RTC relied on the following facts: 499,995 out of the 500,000 outstanding shares of stocks of D-Securities are owned by FB: FB had actual knowledge of the subject matter of litigation as the lawyers who represented D- Securities are also the lawyers of FB. As an alter ‘ego, there is no need for a finding of fraud or illegality before the doctrine of piercing the veil ‘of corporate fiction can be applied. The RTC tatiocinated that being one and the same entity in the eyes of the law, the service of summons ‘upon D-Secutities has bestowed jurisdiction over both the parent and wholly-owned subsidiary. Isthe RTC correct? No, the RTC isnot comect. ‘The fact that FB owns almost all of the capital stock of D-Securities is not sufficient reason to disregard the separate legal personality of the Jacter and treat it as one with its parent company. To warrant piercing the vel of corporate fiction, there must, be total and absolute control not only in shares but also in business policies and practices such that the comporation oes not have a mind of ts own with respect tothe transaction attacked, Control must also be used to commit fraud or6 CConennius Bas Revie WER ON CCOMERCIALLAW ‘wrong or perpetuate the violation of a legal duty oF dishonest or unjust act in contravention of the plaintiffs legal rights. The aforesaid contol and breach of duty must have been the proximate cause ofthe injury or unjust loss complained of These elements are not present in this case Also, the court must have first acquired jurisdiction ‘over the corporation(s) involved before its or their separate personalities are disregarded; and the doctrine of piercing the veil of corporate entity can only be raised during a full-blown tial over a cause of action duly commenced involving parties duly brought under the authority of the court by way of service of summons or what passes a5, such service, 2, In 2016, X Comp. obtained a loan worth P50,000,000:00 from J Bank, which was secured by a third-party mortgage executed by Y, Inc. in favor of X Corp. Since X Corp. was not able to settle its loan obligation to J Bank when it fell due, and despite ‘numerous demands, } Bank foreclosed the mortgaged properties. The properties were sold in a foreclosure sale for 35;000,000.00 thereby leaving a P5000,000.00 deficiency. For failure of X Corp. to pay the said deficiency, J Bank filed a complaint for sum of ‘money against X Corp, its President, Mr. Py and Y ne, With respect to Mr. P, J Bank argued that he should be held solidarily liable together with X Corp because he signed the loan document on behalf of X Corp. in his capacity as President. On the other hand, J Bank contended that Y, Inc. should also be held solidarily liable because the shareholdings of both corporations are identically ‘owned and their operations are controlled by the same people, hence, YInc. isa mere alter ego ofX Corp. ‘Cowpens Ba Rviesk ON ” ‘COMMERCIAL LAW a. Should Y Ine. be held liable? Explain, Y Ine. is not lable. The presence of interlocking, shareholders, directors, and officers, per se, isnot enough reason to set aside the separate legal personalities of X Corp. and Y Inc. Piercing the corporate veil based on the alter ego theory requites the concurrence of three elements, namely 4 Control, not mere majority or complete stock contol, Dut complete domination, not only of finances but of policy and business practice in respect co the transaction attacked so that the corporate entity 8 to this transaction had at the time no separate mind, will or existence of ts oven; Such control must have been used by the defendant ‘to commit fraud or wrong, to perpetuate the volo, ‘of a statutory of other positive legal duty, of dishonest and unjstactin conravension ofan ih and ©. The aforesaid control and breach of duty must have proximately caused the injury or unjust loss ‘complained of. Control then is not enough. The facts do not show that the cantrol ver the corporation was used to perpetuate fraud or violate a positive legal duty in contravention of } Bank’ right and that such control and breach of duty as, the proximate cause of the injury or loss suffered by the Bank b. Should Mr, P be held liable? Explain, Mr. P is not liable. The corporation, being a mere antificial person, can only act through its representative ‘The comporate representative is not liable for any action taken on behalf ofthe corporation unless he acted in bad faith oF with gross negligence in directing the affairs of2 ‘ComPex0us HAR REVEWERON ‘Covostncis. Law the corporation of made himself liable solidarily with the ‘corporation. In this ease, P, as President signed the loan ‘document not for himself but on behalf of X Corp. Nothing inthe facts indicated that he found himself liable with the corporation or he ated in bad faith or with gross negligence. 4. Doctrine of Piercing the Corporate Veil 25. What is the doctrine of piercing the veil of corporate fiction? It is the doctrine that allows the State to disregard, for certain justifiable reasons, the notion or fiction that the corporation has a separate legal personality from those ‘composing it, The doctrine of separate legal entity is only «2 fiction to promote public convenience. If ths fetion is, misused or abused, then the State shall pierce the corporate veil and treat the corporation and the persons composing, it as one and the same entity. 24. In what areas does the doctrine apply? ‘The doctrine of piercing the corporate veil applies in three 3) basic areas, namely) defeat of public convenience as when the corporate fiction is used as a vehicle for the ‘evasion of an existing obligation; 2) fraud eases or when the corporate entity is used (0 justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where 2 corporation is merely a farce since it isa mere alter ego or business conduit of person, or where the corporation is 0 organized and controled and is affairs ae so conducted, ‘as to make it merely an instrumentality, agency, conduit oF adjunct of another corporation” SDeriopmen ak af he Pipi Hr Ress Conran ‘cpa CRN es Mar a Cams Manus Copan Src Aoced Tasty Spee iy GR No sons, Ape 35 sr AS (Gk Dndsing Copter Honan GR a9 39 CConanovous Bax Reon » ‘Commeneia Li ‘The doctrine likewise applies inthe following cases: a. Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted and controlled by the same parties, both law and equity wil, ‘when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat ‘them as identical or one and the same.” b. When the complaint alleges that the directors and/or officers committed bad faith or gross negligence in conducting the affairs of the corporation 25. Cite jurisprudence where the doctrine of piercing the corporate veil was applied because the fiction ‘of separate legal personality was used to defeat public convenience. a. When an operator of bus transportation sold his two certificates of public convenience to anothe corporation with the condition, among others, that he shall not, for a period of to years from the date of the sale, apply for any transportation public utility service identical oF competing with the buyer, the organization of a corporation barely 3 months after the sale, with the wife of the Operator and his brother and sister-in-law as the incorporators, is a clear violation of the condition In ths case, the fiction was used to avoid and go around a contractual restriction.” snr el ha aden tn "hs Rey Trt ne abo. ey, a, GR. Ns a. erageCCoMPERDIOUSBARREIEWERON (ConaesCa LA? . ‘The separate juridical personality of a corporation may be disregarded where the majority stockholder filed a derivative suit in behalf ofthe corporation to declare the sale as unenforceable against the corporation although the tral court in another case hhad already ruled that the contract of sale beeween the corporation and its buyer was deemed perfected, ‘There is forum shopping where the stockholders, jn second case, and in presentation of te axnpoaton, seek to accomplish what the corporation itself failed to do in the original case In this case, the fiction was used to circumvent the rule against non-forum shopping. 26, Cite jurisprudence where the doctrine of piercing. the corporate veil was applied because the fiction ‘was used to perpetuate fraud. ‘a. At the time an unfair labor practice case was Pending against the corporation, its officers and Stockholders organized a run-away corporation, engaged in the same line of business, producing the same line of products, occupying the same compound, using the same pieces of machinery, buildings, laboratory, bodega and sales and accounts departments used by the first corporation. It was held that this is another instance where the fiction of separate and distinet corporate entities should be distegarded as the second corporation seeks the protective shield of a corporate fiction whose vel inthe present case could and should, be pierced oun at rl Bk Cou af Appa Gi Non ‘Comenous Bax REVIEWER ON » Conus Law as it was deliberately and maliciously designed to evade its financial obligation to its employees." b. The sale of the corporation’ fianchise, as well as ‘most ofits bus units, toa company owned by the daughter and family’ members of the controlling stockholder ofthe selle-corporation, right in the middle ofa labor dispute, yielded the conclusion that the transaction was made to remove the ‘corporation's remaining assets from the reach of. ‘any judgment that may be rendered in the unfair labor practice cases filed against it. Piercing the veil of corporate fiction is warranted when a corporation ceased to exist only in name ast re-emerged in te person of another corporation, for the purpose of evading its unfulfilled financial obligation under a compromise agreement. Thus, if the judgment for money claim could not be enforced against the employer corporation, an alias writ may be obtained against the other corporation considering the indubitable link between the closure of the first corporation and incorporation of the other: 27. Cite jurisprudence where the doctrine of piercing the corporate veil was applied based on the alter- ‘ego or instrumentality test ‘a. In one case, the owner of a business terminated the employment of his workers on the pretext that there will bean impending permanent closure of AC ann ar Une-CCL Natl aor Ration Coin ON Leen was cana ne yey fe Bseange Pine GR No.4 Machin. 204» (CoMPENDOUS BARREVIEWERON ‘Conia Law the business asa result of an intended sale of the asiets to an undisclosed corporation, and that there will bea change in the management Subsequent events, however, revealed that the buyer of the assets was a corporation owned by the same employer fand members of his family. Furthermore, the business reopened in les than a month under the same management. Admittedly, mere ownership by a single stockholder ofall or nearly al ofthe capital stock of the corporation does not by itself justify piercing the corporate vil. Nonetheless, in this cate, other circumstances show that the buyer of the assets ofthe proprietor employer is none other than hisalter ego." b. In another case, an investment house devised a scheme where investors are matched with accredited borrowers. An investor lent money o a botrower- corporation, as identified by the investment house ‘The president of the borrower corporation was imdefableto pay and the gal fon ofthe corporation pierced considering that the president was the rmsjoity owner who exercised complete control over the corporation; the principal fice ofthe president and the corporation ae the same; the corporation never operated to perform any business but for the benefit ofits president; and the president allowed the corporation to be used as a pawn of the investment house in avoiding its Tegal duty 0 pay investors under a filed investment scheme.® in a av New ANIM Eeprsv NH. OA Capri, “fan WA Ny Weal GR Nensnp3 nd ys 08 CCouPanoious Bak REVEWERON 2 ContweRcin LAW cc The facts show the scheme employed by three corporations ("respondents"), owned and controlled by one stockholder) escape their financial obligations to the complainants ("petitioners") The timing of the deeds of sale and the subsequent registrations of the vehicles are revealing. It clearly shows that respondents were attempting to escape their lability = as they have been successilly doing — to petkione. ‘The deeds of sale were executed only aftr respondent ‘Toledo Corporation was found liable by the Court ‘of Appeals and after submission ofthe report from the NLRC’ Computation Division. Despite the sales, respondent Toledo retained the vehicles as evidenced by its continuous payment of the Motor Vehicle User's Charge. A Motion to Quash/Recall the writ .was filed followed by the registration ofthe vehicles in respondents Dumaguete’s and Castlwels Corporations names within the same month and the month after. Another important fact that the Court of Appeals failed to seriously consider is the Land ‘Transportation Office's order of cancellation of ‘Toledd's vehicle registrations. These vehicles, originally registered in Toledo's name, were found to be faudulently transferred to respondents Dumaguete and Castehveb with the intent of avoiding respondent ‘Toledo's legal obligations to petitioner.” [Link] jurisprudence where the Supreme Court pierced the corporate veil when two or more ‘businesses are owned, controlled, and conducted by the same parties. coms neni Cot eps: amon To arina” CCoMPex04s BARREVIEWERON ‘Conta Law Three companies engaged in a work-pooling scheme, in which their workers were constantly rotated and perindally assigned among the three establishments to perform the same or similar tasks; they operated and hired employees through a common human resource department; and, they were under the control and management ofthe same party. It was held that the separate existence of the three ‘companies must be disregardedin order to safeguant the right of the workers and their unions to engage in collective bargaining,” . The internal Scenic Department which initially handled the props and set designs of ABS CBN was abolished and shat down and CCI was incorporated to cater to the props and set design requirements of [ABS CBN, thereby transferring most of is personnel to CCI. Notably, CCI was a subsidiary of ABS CBN and was incorporated through the collaboration of its former contractor (Ty) and the other major stockholders and officers of ABS CBN. CCI provided services mainly to ABS CBN and its other subsidiaries. ‘When Ty organized his own company, ABS CBN hired him as a consultant and eventually engaged the services of his company. As a result of which CCI decided to close its business operations as it no longer carried out services for the design and construction of sets and props for use in the ‘programs and shows of ABS CBN, thereby terminating ‘certain employees of CCL ABS CBN clearly exercised ‘control and influence in the management and closure of CCTs operations, which justifies the Manga seamen iat) GN ab en a CouPen04s RAR REVEWERON s ‘Contec LAW ruling ofthe appellate court and labor tribunals of disregarding thei separate corporate personalities and treating them asa single entity. 2g, Cite jurisprudence when the corporate veil may be pierced if the complaint alleges that the directors and/or oficers committed bad faith or gross negligence in conducting the affairs of the corporation. ‘a. The President’ casual manner, insouciance, and ronchalance, nay, indifference to the predicament of the distressed corporation, as gleaned from his court testimony, glaringly exhibited a lackadaisical attitude from atop oficer of corporation, a conduct totally abhorrent in the corporate world constitute gross negligence that will impute liability to the corporate officer for corporate obligations. Thus, under the circumstances, the investor who made placement with the corporation could recover the same from the grossly negligent officer.” , The president of a family-owned conporation who committed fraud in selling its vehicle to a customer and collected down payment from the latter knowing {ally well thatthe vehicle was already sold to another ‘cannot hide behind the separate corporate personality ‘of the corporation to escape from liability.” © Inanother case, the building contractor of Shangri-La mall sued Shangri-La Properties for unpaid fees, ‘The plaintiff impleaded the directors. of the corporation for bad faith and gross negligence in sa SC Hang arin ‘tc Mazag eal Ptr Ong GR Na Aa 8 olga Na a2 laa, GR. 98,