corporation law term paper
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CORPORATION LAW
Ramil F. De Jesus
Introduction
The Constitution emphatically prohibits the creation of private corporations
except by a general law applicable to all citizens.[9]
The purpose of this
constitutional provision is to ban private corporations created by special charters,
which historically gave certain individuals, families or groups special privileges
denied to other citizens.[10]
In short, Congress cannot enact a law creating a private corporation with a
special charter. Such legislation would be unconstitutional. Private corporations
may exist only under a general law. If the corporation is private, it must
necessarily exist under a general law. Stated differently, only corporations
created under a general law can qualify as private corporations. Under existing
laws, that general law is the Corporation Code,[11]
except that the Cooperative
Code governs the incorporation of cooperatives.[12]
The Constitution authorizes Congress to create government-owned or
controlled corporations through special charters. Since private corporations
cannot have special charters, it follows that Congress can create corporations
with special charters only if such corporations are government-owned or
controlled.
Obviously, LWDs are not private corporations because they are not created
under the Corporation Code. LWDs are not registered with the Securities and
Exchange Commission. Section 14 of the Corporation Code states that [A]ll
corporations organized under this code shall file with the Securities and
Exchange Commission articles of incorporation x x x. LWDs have no articles of
incorporation, no incorporators and no stockholders or members. There are no
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stockholders or members to elect the board directors of LWDs as in the case of
all corporations registered with the Securities and Exchange Commission. The
local mayor or the provincial governor appoints the directors of LWDs for a fixed
term of office. This Court has ruled that LWDs are not created under the
Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from
the coverage of the CSC are those corporations created pursuant to the
Corporation Code. Significantly, petitioners are not created under the said
code, but on the contrary, they were created pursuant to a special law and
are governed primarily by its provision.[13](Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special
charter. Since under the Constitution only government-owned or controlled
corporations may have special charters, LWDs can validly exist only if they are
government-owned or controlled. To claim that LWDs are private corporations
with a special charter is to admit that their existence is constitutionally infirm.
Clearly, LWDs exist as corporations only by virtue of PD 198,
which expressly confers on LWDs corporate powers. Section 6 of PD 198
provides that LWDs shall exercise the powers, rights and privileges given to
private corporations under existing laws. Without PD 198, LWDs would have no
corporate powers. Thus, PD 198 constitutes the special enabling charter of
LWDs. The ineluctable conclusion is that LWDs are government-owned and
controlled corporations with a special charter.
The phrase government-owned and controlled corporations with original
charters means GOCCs created under special laws and not under the general
incorporation law. There is no difference between the term original charters
and special charters.
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FELICIANO V> COA
It is a doctrine well-established and obtains both at law and in equity that a
corporation is a distinct legal entity to be considered as separate and apart from
the individual stockholders or members who compose it, and is not affected by
the personal rights, obligations and transactions of its stockholders or
members.4
The property of the corporation is its property and not that of the
stockholders, as owners, although they have equities in it. Properties registered
in the name of the corporation are owned by it as an entity separate and distinct
from its members. 5Conversely, a corporation ordinarily has no interest in the
individual property of its stockholders unless transferred to the corporation, "even
in the case of a one-man corporation.6
The mere fact that one is president of a
corporation does not render the property which he owns or possesses the
property of the corporation, since the president, as individual, and the corporation
are separate similarities. 7 Similarly, stockholders in a corporation engaged in
buying and dealing in real estate whose certificates of stock entitled the holder
thereof to an allotment in the distribution of the land of the corporation upon
surrender of their stock certificates were considered not to have such legal or
equitable title or interest in the land, as would support a suit for title, especially
against parties other than the corporation. 8
It must be noted, however, that the juridical personality of the corporation, as
separate and distinct from the persons composing it, is but a legal fiction
introduced for the purpose of convenience and to subserve the ends of
justice. 9 This separate personality of the corporation may be disregarded, or the
veil of corporate fiction pierced, in cases where it is used as a cloak or cover for
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fraud or illegality, or to work -an injustice, or where necessary to achieve
equity.10
Thus, when "the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, ... the law will regard the corporation as an
association of persons, or in the case of two corporations, merge them into one,
the one being merely regarded as part or instrumentality of the other.11
The
same is true where a corporation is a dummy and serves no business purpose
and is intended only as a blind, or an alter ego or business conduit for the sole
benefit of the stockholders. 12 This doctrine of disregarding the distinct
personality of the corporation has been applied by the courts in those cases
when the corporate entity is used for the evasion of taxes 13 or when the veil of
corporate fiction is used to confuse legitimate issue of employer-employee
relationship,14
or when necessary for the protection of creditors, in which case
the veil of corporate fiction may be pierced and the funds of the corporation may
be garnished to satisfy the debts of a principal stockholder.15
The aforecited
principle is resorted to by the courts as a measure protection for third parties to
prevent fraud, illegality or injustice. 16
G.R. No. L-31061 August 17, 1976
SULO NG BAYAN INC., plaintiff-appellant,
vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL
WATERWORKS & SEWERAGE AUTHORITY, HACIENDA CARETAS, INC,
and REGISTER OF DEEDS OF BULACAN, defendants-appellees.
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To disregard the separate juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established. It cannot be presumed. This is
elementary. Luxuria Homes v. CA
The conditions under which the juridical entity may be disregarded
vary according to the peculiar facts and circumstances of each
case. No hard and fast rule can be accurately laid down, but certainly,
there are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.13
The SEC en banc explained the instrumentality rule which the
courts have applied in disregarding the separate juridical personality of
corporations as follows:
Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule is not majority or even
complete stock control but such domination of finances, policies and practices
that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must be kept in
mind that the control must be shown to have been exercised at the time the acts
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complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy 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;
2. 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 plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate veil.
in applying the instrumentality or alter ego doctrine, the courts are
concerned with reality and not form, with how the corporation operated and
the individual defendants relationship to that operation. 14
Concept Builder Inc. v. nlrc
Thus, the question of whether a corporation is amere alter ego, a mere sheet or paper corporation, a shamor a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner
claimed that it ceased its business operations on April 29,1986, it filed an Information Sheet with the Securities andExchange Commission on May 15, 1987, stating that its officeaddress is at 355 Maysan Road, Valenzuela, Metro Manila.On the other hand, HPPI, the third-party claimant, submittedon the same day, a similar information sheet stating that its
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office address is at 355 Maysan Road, Valenzuela, MetroManila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O.
Casino as the corporate secretary of both corporations. Itwould also not be amiss to note that both corporations hadthe same president, the same board of directors,the same corporate officers, and substantiallythe same subscribers.
From the foregoing, it appears that, among other things, therespondent (herein petitioner) and the third-party claimantshared the same address and/or premises. Under thiscircumstances, (sic) it cannot be said that the property leviedupon by the sheriff were not of respondents.16
Clearly, petitioner ceased its business operations in orderto evade the payment to private respondents of backwagesand to bar their reinstatement to their former positions. HPPIis obviously a business conduit of petitioner corporation andits emergence was skillfully orchestrated to avoid the financialliability that already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Courtof Industrial Relations17where we had the occasion to rule:
Respondent courts findings that indeed the Claparols Steeland Nail Plant, which ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation effectivethe next day, July 1, 1957, up to December 7, 1962, when thelatter finally ceased to operate, were not disputed by
petitioner. it is very clear that the latter corporation was acontinuation and successor of the first entity x x x. Both
predecessors and successor were owned and controlled bypetitioner Eduardo Claparols and there was no break in thesuccession and continuity of the same business. Thisavoiding-the-liability scheme is verypatent, considering that90% of the subscribed shares of stock of the Claparols SteelCorporation (the second corporation) was owned byrespondent x x x Claparols himself, and all the assets of thedissolved Claparols Steel and Nail Plant were turned over tothe emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks theprotective shield of a corporate fiction whose veil in thepresent case could, and should, be pierced as it wasdeliberately and maliciously designed to evade its financialobligation to its employees.
In view of the failure of the sheriff, in the case at bar, toeffect a levy upon the property subject of the execution,
private respondents had no other recourse but to apply for abreak-open order after the third-party claim of HPPI was
dismissed for lack of merit by the NLRC. This is inconsonance with Section 3, Rule VII of the NLRC Manual ofExecution of Judgment which provides that:
Should the losing party, his agent or representative, refuse orprohibit the Sheriff or his representative entry to the placewhere the property subject of execution is located or kept, the
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judgment creditor may apply to the Commission or Labor
Arbiter concerned for a break-open order.
Basic in corporation law is the principle that a corporation has a
separate personality distinct from its stockholders and from other corporations to which
it may be connected.[18]However, under the doctrine of piercing the veil of corporate
entity, the corporations separate juridical personality may be disregarded, for example,
when the corporate identity is used to defeat public convenience, justify wrong, protectfraud, or defend crime. Also, where the corporation is a mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation, then its distinct personality may be ignored.[19]In these
circumstances, the courts will treat the corporation as a mere aggrupation of persons
and the liability will directly attach to them. The legal fiction of a separate corporate
personality in those cited instances, for reasons of public policy and in the interest of
justice, will be justifiably set aside.
In our view, however, given the facts andcircumstances
of this case, the doctrine of piercing the corporate veil has no
relevant application here. Respondent court erred inpermitting the trial courts resort to this doctrine. The
rationale behind piercing a corporations identity in a given
case is to remove the barrier between the corporation from thepersons comprising it to thwart the fraudulent and illegal
schemes of those who use the corporate personality as a shield
for undertaking certain proscribed activities. However, in the
case at bar, instead of holding certain individuals or personsresponsible for an alleged corporate act, the situation has
been reversed. It is the petitioner as a corporation which isbeing ordered to answer for the personal liability of certain
individual directors, officers and incorporatorsconcerned. Hence, it appears to us that the doctrine has been
turned upside down because of its erroneous invocation. Note
that according to private respondent Gregorio Manuel hisservices were solicited as counsel for members of the
Francisco family to represent them in the intestate
proceedings over Benita Trinidads estate. These estateproceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from
certain Francisco family members but also from petitionercorporation on the claims that its management had requestedhis services and he acceded thereto as an employee of
petitioner from whom it could be deduced he was also
receiving a salary. His move to recover unpaid legal feesthrough a counterclaim against Francisco Motors
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Corporation, to offset the unpaid balance of the purchase and
repair of a jeep body could only result from an obvious
misapprehension that petitioners corporate assets could be
used to answer for the liabilities of its individual directors,officers, and incorporators. Such result if permitted could
easily prejudice the corporation, its own creditors, and evenother stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services
involved, whatever obligation said incorporators, directors
and officers of the corporation had incurred, it was incurredin their personal capacity. When directors and officers of a
corporation are unable to compensate a party for a personal
obligation, it is far-fetched to allege that the corporation is
perpetuating fraud or promoting injustice, and be thereby heldliable therefor by piercing its corporate veil. While there are
no hard and fast rules on disregarding separate corporate
identity, we must always be mindful of its function andpurpose. A court should be careful in assessing the milieu
where the doctrine of piercing the corporate veil may be
applied. Otherwise an injustice, although unintended, may
result from its erroneous application.
The personality of the corporation and those of its
incorporators, directors and officers in their personal
capacities ought to be kept separate in this case. The claimfor legal fees against the concerned individual incorporators,
officers and directors could not be properly directed against
the corporation without violating basic principles governing
corporations. Moreover, every action including acounterclaim must be prosecuted or defended in the name
of the real party in interest.[20]It is plainly an error to lay the
claim for legal fees of private respondent Gregorio Manuel atthe door of petitioner (FMC) rather than individual members
of the Francisco family.
Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule is not majority or even
complete stock control but such domination of finances, policies and practices
that the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal.
We find that the evidence on record demolishes, rather than buttresses,petitioners contention that BET and BEC are separate business entities. Notethat Estelita Lipat admitted that she and her husband, Alfredo, were the ownersof BET
[14]and were two of the incorporators and majority stockholders of
BEC.[15]It is also undisputed that Estelita Lipat executed a special power ofattorney in favor of her daughter, Teresita, to obtain loans and credit lines from
Pacific Bank on her behalf.
[16]
Incidentally, Teresita was designated asexecutive-vice president and general manager of both BET and BEC,respectively.
[17]We note further that: (1) Estelita and Alfredo Lipat are the
owners and majority shareholders of BET and BEC, respectively;[18](2) bothfirms were managed by their daughter, Teresita;
[19](3) both firms were engaged
in the garment business, supplying products to Mystical Fashion, a U.S. firmestablished by Estelita Lipat; (4) both firms held office in the same buildingowned by the Lipats;
[20](5) BEC is a family corporation with the Lipats as its
majority stockholders; (6) the business operations of the BEC were so merged
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with those of Mrs. Lipat such that they were practically indistinguishable; (7) thecorporate funds were held by Estelita Lipat and the corporation itself had novisible assets; (8) the board of directors of BEC was composed of the Burgosand Lipat family members;
[21](9) Estelita had full control over the activities of
and decided business matters of the corporation;[22]and that (10) Estelita Lipathad benefited from the loans secured from Pacific Bank to finance her businessabroad[23]and from the export bills secured by BEC for the account of Mystica lFashion.[24]It could not have been coincidental that BET and BEC are so
intertwined with each other in terms of ownership, business purpose, andmanagement. Apparently, BET and BEC are one and the same and the latter isa conduit of and merely succeeded the former. Petitioners attemptto isolate themselves from and hide behind the corporate personality of BEC soas to evade their liabilities to Pacific Bank is precisely what the classical doctrineof piercing the veil of corporate entity seeks to prevent and remedy. In our view,BEC is a mere continuation and successor of BET, and petitioners cannot evadetheir obligations in the mortgage contract secured under the name of BEC onthe pretext that it was signed for the benefit and under the name of BET. Weare thus constrained to rule that the Court of Appeals did not err when it appliedthe instrumentality doctrine in piercing the corporate veil of BEC.
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