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Corp Law Outline

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ATENEO LAW SCHOOL OUTLINE ON PHILIPPINE CORPORATE LAW1 I. HISTORICAL BACKGROUND 1. The Philippine Corporate Law:2 Sort of Codification of American Corporate Law When the Philippines came under American sovereignty, attention was drawn to the fact that there was no entity in Spanish law exactly corresponding to the notion corporation in English and American law; the Philippine Commission enacted the Corporation Law (Act No. 1459), to introduce the American corporation into the Philippines as th
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  ATENEO LAW SCHOOLOUTLINE ON PHILIPPINE Atty. CESAR L. VILLANUEVA CORPORATE LAW 1 2nd Semester, SY 2001-2002I. HISTORICAL BACKGROUND 1. The Philippine Corporate Law: 2 Sort of Codification of American Corporate Law When the Philippines came under American sovereignty, attention was drawn tothe fact that there was no entity in Spanish law exactly corresponding to the notion corporation in English and American law; the Philippine Commission enacted theCorporation Law (Act No. 1459), to introduce the American corporation into thePhilippines as the standard commercial entity and to hasten the day when the sociedad anónima of the Spanish law would be obsolete. The statute is a sort of codification of American Corporate Law.  xHarden v. Benguet Consolidated Mining Co. , 58 Phil. 141 (1933). 2. The Corporation Law The first corporate statute, the Corporation Law, or Act No. 1459, becameeffective on 1 April 1906. It had various piece-meal amendments during its 74 year history. It rapidly became antiquated and not adapted to the changing times. 3. The Corporation Code The present Corporation Code, or  Batas Pambansa Blg  . 68, became effectiveon 1 May 1980. It adopted various corporate doctrines enunciated by the SupremeCourt under the old Corporation Law. It clarified the obligations of corporate directorsand officers, expressed in statutory language established principles and doctrines, andprovided for a chapter on close corporations. 4. Proper Treatment of Philippine Corporate Law Philippine Corporate Law comes from the common law system of the UnitedStates. Therefore, although we have a Corporation Code that provides for statutoryprinciples, Corporate Law is essentially, and continues to be, the product of commercial developments. Much of this development can be expected to happen inthe world of commerce, and some expressed jurisprudential rules that try to apply andadopt corporate principles into the changing concepts and mechanism of thecommercial world. II. CONCEPTS See opening paragraphs of  V ILLANUEVA , Corporate Contract Law, 38 A TENEO L.J. 1 (No. 2, June 1994). 1. Definition (Section 2; Articles 44(3), 45, 46, and 1775, Civil Code). 2. Tri-Level Existence of Corporation (a) Aggregation of Assets and Resources(b) Business Enterprise or Economic Unit(c) Juridical Entity 3. Relationships Involved in Corporate Setting(a) Juridical Entity Level , which views the State-corporations relationship (b) Contractual Relationship Level , which considers that the corporate setting is atonce a contractual relationship on four (4) levels: 1 Unless otherwise indicated, all references to sections pertain to The Corporation Code of thePhilippines. 2 The whole body of statutory and jurisprudential rules pertaining to corporations is referred to as Corporate Law to differentiate it from the old statute known as The Corporation Law, or Act No. 1459.  - Between the corporation and its agents or representatives toact in the real world, such as its directors and its officers,which is governed also by the Law on Agency;- Between the corporation and its shareholders or members;- Between and among the shareholders in a common venture; and- Between the corporation and third-parties or outsiders , whichis essentially governed by Contract Law. 4. Theories on Formation of Corporation:(a)   Theory of Concession ( Tayag v. Benguet Consolidated Inc. , 26 SCRA 242[1968])To organize a corporation that could claim a juridical personality of its ownand transact business as such, is not a matter of absolute right but a privilegewhich may be enjoyed only under such terms as the State may deem necessary toimpose (x- cf.    Ang Pue & Co. v. Sec. of Commerce and Industry  , 5 SCRA 645[1962]).Before a corporation may acquire juridical personality, the State must giveits consent either in the form of a special law or a general enabling act, and theprocedure and conditions provided under the law for the acquisition of such juridical personality must be complied with. The failure to comply with the statutoryprocedure and conditions does not warrant a finding that such associationachieved the acquisition of a separate juridical personality, even when it adoptssets of constitution and by-laws. x International Express Travel & Tour Services,Inc. v. Court of Appeals, 343 SCRA 674 (2000).Since all corporations, big or small, must abide by the provisions of theCorporation Code, then even a simple family corporation cannot claim anexemption nor can it have rules and practices other than those established by law.x Torres v. Court of Appeals , 278 SCRA 793 (1997). (b)   Theory of Enterprise Entity (B ERLE , Theory of Enterprise Entity  , 47 C OL . L. R EV .343 [1947])Corporations are composed of natural persons and the legal fiction of aseparate corporate personality is not a shield for the commission of injustice andinequity, such as the use of separate personality to avoid the execution of theproperty of a sister company. x Tan Boon Bee & Co., Inc. v. Jarencio , 163 SCRA205 (1988).A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. In organizingitself as a collective body, it waives no constitutional immunities and perquisitesappropriate to such a body. x Philippine Stock Exchange, Inc. v. Court of Appeals, 281 SCRA 232 (1997). 5. Four Attributes of Corporation from Statutory Definition: (a) A corporation is an artificial being(b) Created by operation of law(c) With right of succession(d) Only has powers, attributes and properties expressly authorized by law or incident to its existence 6. Advantages and Disadvantages of Corporate Form:(a) Four Basic Advantageous Characteristics of Corporate Organization: (i) Strong Legal Personality- Entity attributable powers- Continuity of existence- PurposeThe corporation was evolved to make possible the aggregation andassembling of huge amounts of capital upon which big business depends;and has the advantage of non-dependence on the lives of those whocompose it even as it enjoys certain rights and conducts activities of natural persons. Reynoso, IV v. Court of Appeals, G.R. No. 116124-25, 22November 2000.2  (ii) Centralized Management.(iii) Limited Liability to InvestorsOne advantage of a corporate business organization is the limitationof an investor’s liability to the amount of the investment, which flows fromthe legal theory that a corporate entity is separate and distinct from itsstockholders. x San Juan Structural and Steel Fabricators, Inc. v. Court of  Appeals , 296 SCRA 631, 645 (1998).(iv) Free Transferability of Units of Ownership for Investors (b) Disadvantages: (i) Abuse of corporate management(ii) Abuse of limited liability feature(iii) Cost of maintenance(iv) Double taxationDividends received by individuals from domestic corporations aresubject to final 10% tax (Sec. 24(B)(2), NIRC of 1997) for income earnedon or after 1 January 1998. Inter-corporate dividends between domesticcorporations, however, are not subject to any income tax (Sec. 27(D)(4),NIRC of 1997).In addition, there has been a re-imposition of the “improperlyaccumulated earnings tax,” under Section 29 of the NIRC of 1997 for corporations at the rate of 10% annually. 7. Compared With Other Media of Business Endeavors - Distribution of Risk, Profit and Control  (a) Sole Proprietorships(b) Business Trusts (Article 1442, Civil Code)(c) Partnerships and Other Associations (Arts. 1768 and 1775, Civil Code)- Can a defective attempt o form a corporation result at least in the formationof a partnership? Pioneer Insurance v. Court of Appeals, 175 SCRA 668(1989).(d) Joint Ventures Joint venture is defined as an association of persons or companies jointlyundertaking some commercial enterprise; generally all contribute assets and sharerisks. It requires a community of interest in the performance of the subject matter,a right to direct and govern the policy in connection therewith, and duty, whichmay be altered by agreement to share both in profit and losses. the acts of workingtogether in a joint project. x Kilosbayan, Inc. v. Guingona, Jr. , 232 SCRA 110, 143(1994), citing B LACK ’ S L AW D ICTIONARY , Sixth ed., 839.(e) Cooperatives (Art. 3, R.A. No. 6938)(f) Sociedades Anónimas A sociedad anónima was considered a commercial partnership, a sort of acorporation, “where upon the execution of the public instrument in which its articlesof agreement appear, and the contribution of funds and personal property,becomes a juridical person—an artificial being, invisible, intangible, and existingonly in contemplation of law—with power to hold, buy, and sell property, and tosue and be sued—a corporation—not a general copartnership nor a limitedcopartnership . . . The inscribing of its articles of agreement in the commercialregister was not necessary to make it a juridical person—a corporation. Suchinscription only operated to show that it partook of the form of a commercialcorporation.” x Mead v. McCullough , 21 Phil. 95,106 (1911).The sociedades anónimas were introduced in Philippine jurisdiction on 1December 1888 with the extension to Philippine territorial application of Articles151 to 159 of the Spanish Code of Commerce. Those articles contained thefeatures of limited liability and centralized management granted to a juridicalentity. But they were more similar to the English joint stock companies than themodern commercial corporations. x Benguet Consolidated Mining Co. v. Pineda , 98Phil. 711 (1956)Our Corporation Law recognizes the difference between sociedadesanónimas and corporations and will not apply legal provisions pertaining to the3  latter to the former   xPhil. Product Co. v. Primateria Societe Anonyme , 15 SCRA301 (1965).(g) Cuentas En Participacion A cuentas en participacion as a sort of an accidental partnership constitutedin such a manner that its existence was only known to those who had an interest inthe same, there being no mutual agreement between the partners, and without acorporate name indicating to the public in some way that there were other peoplebesides the one who ostensibly managed and conducted the business, governedunder article 239 of the Code of Commerce.Those who contract with the person under whose name the business of suchpartnership of  cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and thelatter, on the other hand, shall have no right of action against third person whocontracted with the manager unless such manager formally transfers his right tothem.  xBourns v. Carman ,   7 Phil. 117 (1906). III. NATURE AND ATTRIBUTES OF A CORPORATION 1. Nature of Power to Create a Corporation (Sec. 16, Article XII, 1987 Constitution) 2. Corporation as a Person : (a) Entitled to due process The due process clause is universal in its application to all persons withoutregard to any differences of race, color, or nationality. Private corporations,likewise, are persons within the scope of the guaranty insofar as their property isconcerned. x Smith Bell & Co. v. Natividad  , 40 Phil. 136, 144 (1920). (b) Equal protection clause (x Smith Bell & Co. v. Natividad  , 40 Phil. 136 [1920]). (c) Unreasonable Searches and Seizure Corporations are protected by the constitutional guarantee againstunreasonable searches and seizures, but that the officers of a corporation fromwhich documents, papers and things were seized have no cause of action to assailthe legality of the seizures, regardless of the amount of shares of stock or of theinterest of each of them in said corporation, and whatever the offices they holdtherein may be, because the corporation has a personality distinct and separatefrom those of said officers. The legality of a seizure can be contested only by theparty whose rights have been impaired thereby; and the objection to an unlawfulsearch is purely personal and cannot be availed of by such officers of thecorporation who interpose it for their personal interests. x Stonehill v. Diokno , 20SCRA 383 (1967).A corporation is but an association of individuals under an assumed nameand with a distinct legal entity. In organizing itself as a collective body it waives noconstitutional immunities appropriate for such body. Its property cannot be takenwithout compensation; can only be proceeded against by due process of law; andis protected against unlawful discrimination. x Bache & Co. (Phil.), Inc. v. Ruiz  , 37SCRA 823, 837 (1971), quoting from x Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652. (d) But a corporation is not entitled to privilege against self incrimination “It is elementary that the right against self-incrimination has no applicationto juridical persons.” Bataan Shipyard & Engineering Co v. PCGG , 150 SCRA 181,234-235 (1987).While an individual may lawfully refuse to answer incriminating questionsunless protected by an immunity statute, it does not follow that a corporation,vested with special privileges and franchises may refuse to show its hand whencharged with an abuse of such privilege. x Hale v. Henkel  , 201 U.S. 43 (1906);x Wilson v. United States, 221 U.S. 361 (1911); x United States v. White, 322 U.S.694 (1944). 3. Liability for Torts A corporation is civilly liable in the same manner as natural persons for torts,because generally speaking, the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the principal or master be a natural person or a corporation, and whether the servant or agent be a natural or 4
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