The Implications of the Principles of Corporate Governance on the Doctrine of Piercing the Veil of Corporate Fiction:
Rethinking MR Holdings v. Bajar
Allan Verman Y. Ong*
Introduction . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 209983
II.
The Transaction Explained . . . . . . . .
. . . . . . . . . . . . . . . . . . 222986
III. A Mining Operation Gone Wrong . . . . . . . . . . . . . . . . .
. . . 227988
Conclusion . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 247998
In the
corporate family which includes the corporation, its shareholders, its board of
directors and its officers, the creditor is considered an outsider. The
creditor, usually a bank or other financing institution, lends capital to the
business in exchange for onerous consideration. This comes in the form of the
payment of interest and by property against which the transaction is secured.
The corporation’s only obligations to the creditor are those which arise from
the contract of loan.[1]
Creditors who deal with
corporations are faced with unique constraints. By virtue of the separate
juridical personalities of the corporation and its directors and stockholders,
creditors cannot satisfy their claims against the directors or stockholders
when the corporation becomes insolvent. The board of directors may decide to
pay themselves large salaries that will siphon corporate funds, or enter into
risky ventures that will lead the corporate business into ruin. Thereafter, the creditors may be left with
no means to obtain the principal, much less, the interest payments. These are
the risks that the creditor takes when he lends funds to the corporation: in
exchange for the right to demand the payment of the placement of its funds at
its maturity, he has no say in the management of the corporation.[2] By virtue of this contractual obligation of the
corporation towards its stockholders, which is enforced by the principles of
the trust fund doctrine and the power of creditors to petition for the corporation’s
involuntary insolvency when the corporate business enterprise begins to
disintegrate, the relationship between the corporation and its creditors
appears to be contentious.
Adam Smith, however, gives an
alternate perspective from which to view the creditor’s contribution to the
corporation. Although the unsavory concepts of usury law, insolvency,
foreclosure of mortgages, concurrence and preference of credits come to mind
immediately when there are contentious issues between the corporation and the
creditor, creditors are more important than mere outside sources of capital.
Smith writes that the stock, which is lent at interest, can be considered as
capital by the creditor. But what the corporate borrower really wants, and what
the creditor really supplies him with, is not the money, but the money’s
worth, or the goods which it can purchase.[3] As it were, “[b]y means of the loan, the
lender…assigns to the borrower his right to a certain portion of the annual
produce of the land and labor of the country, to be employed as the borrower
pleases.”[4]
Thus, although the creditor is
theoretically a mere alternative source of capital for the corporation, the
capital which the creditor furnishes is not any lesser in utility than that
supplied by the shareholders. The loan is but the “deed of assignment” which
conveys from one hand to another the capital which its owners, the creditors,
do not care to employ themselves. Understood in this sense, what the creditors
assign to the borrower is not merely funds or capital, but the power to make
purchases, or more generally, the power to run the corporate business
enterprise.[5] In assigning the capital to the corporation, the
creditor forfeits his own right to acquire a share in the annual produce: “A
capital lent at interest may, in this manner, be considered as an assignment
from the lender to the borrower of a certain considerable portion of the annual
produce.”[6]
Corporate Law recognizes the
value of creditors. In cases where the corporation uses the fiction of corporate
personality as a means of perpetrating a fraud or an illegal act, or as a
vehicle for the evasion of an existing obligation, the circumvention of
statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, then the “veil with which the law covers and
isolates the corporation from the members of stockholders who compose it will
be lifted to allow for its consideration merely as an aggregation of
individuals.”[7]
This doctrine of piercing the
veil of corporate fiction has been applied by the Supreme Court in three areas:
1. When the corporate entity is used to commit fraud or to justify a wrong, or to defend a crime;
2. When the corporate entity is used to defeat public convenience, or a mere farce, since the corporation is merely the alter ego, business conduit or instrumentality of a person or another entity; and
3. When the piercing of the corporate fiction is necessary to achieve justice or equity.[8]
Therefore, the doctrine of
piercing the veil of corporate fiction has been observed to act as a regulating
valve by which to preserve the powerful engine that is the main doctrine of
separate juridical personality.[9] Corporations are still free, in the effort to
maximize shareholder value and obtain profit, to use corporate structures to
limit their liability, or to engage in legitimate tax avoidance schemes. Only
when such structures constitute any of the three above-mentioned instances may
the court disregard corporate fiction.
Only then will the corporation be prevented from undertaking such
schemes.
One such scheme by which
corporate structures have been availed of in order to limit liability to
certain levels is the formation of parent corporations and subsidiary
corporations.
A subsidiary corporation is
one in which control, usually in the form of ownership of majority of its
shares, is vested in another corporation, called the parent corporation.[10] Subsidiaries may be used to subdivide or to expand a
business enterprise or to accomplish a great variety of purposes. Some of the
purposes for which subsidiary corporations are used may be summarized as
follows:
1. To escape or lessen franchise taxes upon the privilege of doing business as a foreign corporation in other States, by the creation of local selling companies or branches.
2. Local subsidiaries may be used by a foreign manufacturing corporation to avoid service of process of the parent corporation and escape litigation in the courts of other States, by having a selling subsidiary carry on business there for the benefit of the parent, but not as its agent.
3. Subsidiaries may be employed for risky branches or departments of a business in order to limit liability to the property of the subsidiary corporations and render the parent and its other subsidiaries immune to the risk of that segment of the business.
4. A corporation, control of which has been acquired by purchase, may be operated as a subsidiary to retain the benefit of its well-advertised corporate name and goodwill and separate merchandising policies, the identity of which might otherwise be lost.
5. Subsidiaries have been frequently used to combine various operating companies, such as public utilities, into a large system under the control of a top holding company and obtain advantages in the merchandising of securities, in service contracts with subsidiaries and otherwise, control of operating companies at the base of a corporate pyramid may be held indirectly by a series of intermediate holding and operating companies, with a top superholding company at the apex of the system in which maximum control may be exercised on the basis of a minimum amount of investment.[11]
6. Subsidiary and affiliated corporations are sometimes used for various illegitimate purposes such as that of speculation, of taking refuge behind a “cleverly erected screen of corporate dummies” with inadequate capital, or to evade statutory regulations and restrictions on business not operate to certain class of corporations like banks and public utilities, or to evade trust laws.[12]
Because of the tendency for
the set-up of the parent-subsidiary corporation to be utilized iniquitously,
Dean Aguedo Agbayani has commented that the three theories of piercing the veil
of corporate fiction have also been applied to parent or holding corporations,
subsidiaries and affiliates, so as to hold the parent corporation liable for
the contract or tortuous obligations of the subsidiary or affiliate.[13] Thus, where the corporation’s directors become
overzealous in their mandate to maximize the profit of the corporation[14] and perform illegal acts or acts which constitute bad
faith, the piercing doctrine has served to check such indiscretions.
But legal developments in the
Philippines have changed the paradigm of permitting corporations to engage in
profit maximization by all means available. The latest development is the
passage of the Code of Corporate Governance[15] passed by the Securities and Exchange Commission
(SEC). The Code has raised the stakes
of the corporation’s accountability to the public and its aims are
awe-inspiring: to raise investor confidence, to develop capital market, and to
help achieve high sustained growth for the corporate sector and the economy.[16] Thus, although the board of directors is mandated to
maximize the profit of the corporation, it likewise assumes certain
responsibilities to different constituencies or stakeholders, who have the
right to expect that the institution is being run in a prudent and sound
manner.[17] Among these stakeholders to whom the directors are
accountable to are the creditors. Under this new paradigm, it appears that the
instances where the veil of corporate fiction may be disregarded has been
expanded and are no longer limited to fraud instances, alter ego scenario, or
equity considerations.
Conventional wisdom has thus
given way to a shift in the paradigm, and this is obvious in legislation. But
statutory law is still subject to judicial interpretation, and it is necessary
to speculate on how courts will observe this paradigm shift with regard to the
doctrine of piercing the veil of corporate fiction, particularly to a
parent-subsidiary corporate structure.
The recent case of MR
Holdings, Ltd. v. Sheriff Carlos P. Bajar[18] is important because it shows how the Supreme Court
will apply the SEC issuance, in ruling on issues involving Corporate Law.
Although the transaction involved in the case is relatively recent, having
occurred in 1992, the case traces its beginnings to a mining project,
which was supposed to uplift the impoverished Marinduque community.[19] The ruling illustrates the Supreme Court’s judicial
policy towards permitting the setting up of corporate structures that will
allow corporations to limit their liabilities. But does it likewise reflect the
judicial policy towards corporate governance?
The
creditor in this case is the Asian Development Bank (ADB), a multilateral
development finance institution. The debtor is the Marcopper Mining Corporation
(Marcopper), a domestic corporation, with 40% of its
outstanding capital stock owned by Placer Dome, Inc. (Placer), a foreign
corporation. Placer owns 100% of the outstanding capital stock of MR Holdings,
Ltd. (MR Holdings), (petitioner), a non-resident foreign corporation not doing
business in the Philippines.
ADB
extended a loan to Marcopper in the aggregate amount of US$40 million to finance the latter’s mining project. This
was done under a “Principal Loan Agreement” and “Complementary Loan Agreement,”
with the principal loan of US$15 million sourced from ADB’s
ordinary capital resources, and the complementary loan of US$25 million funded by the Bank of Nova Scotia, a
participating finance institution.
Placer and ADB executed a
“Support and Standby Credit Agreement” whereby the latter agreed to provide
Marcopper with cash flow support for the payment of its obligations to ADB. In
addition, Marcopper executed in favor of ADB a Deed of Real Estate and Chattel
Mortgage covering substantially all of Marcopper’s properties and assets in
Marinduque.
When Marcopper defaulted in
the payment of its loan obligation, Placer Dome, in fulfillment of its
undertaking under the “Support and Standby Credit Agreement,” agreed to have
its subsidiary corporation, MR Holding, assume Marcopper’s remaining obligation
to ADB in the amount of US$18,453,450.02. Thus, ADB assigned to MR Holdings all its rights,
interests and obligations under the principal and complementary loan
agreements, namely the Deed of Real Estate and Chattel Mortgage and the Support
and Standby Credit Agreement. Marcopper likewise executed a Deed of Assignment
in favor of MR Holdings. Under its provisions, Marcopper assigns, transfers,
cedes and conveys to MR Holdings, its assigns and/or successors-in-interest all
of its (Marcopper’s) properties, mining equipment and facilities.
Meanwhile, Solidbank
Corporation (Solidbank) obtained a judgment
against
Marcopper from the Regional Trial Court of Manila, in a civil case entitled Solidbank
Corp. v. Marcopper Mining Corp., John E. Loney, Jose E. Reyes and Teodulo C.
Gabor, Jr.[20] The decision ordered defendant Marcopper to pay
plaintiff Solidbank the sum of PhP52,970,756.89. Upon Solidbank’s motion, the RTC of Manila issued a
writ of execution pending appeal directing the sheriff, Carlos P. Bajar, to
require Marcopper to pay the sums of money to satisfy the judgment. Thereafter,
Bajar issued two notices of levy on Marcopper’s personal and real properties
and thereafter issued two notices setting the public auction sale of the levied
properties.
Having learned of the
scheduled auction sale, MR Holdings served an Affidavit of Third-Party Claim
upon Bajar, asserting its ownership over all Marcopper’s mining properties,
equipment, and facilities by virtue of the Deed of Assignment.
Upon the denial of its
Third-Party Claim by the RTC of Manila, petitioner commenced with the RTC of
Boac, Marinduque, a complaint for reivindication of properties, with a prayer
for preliminary injunction and temporary restraining order against Solidbank,
Marcopper, and Bajar.
The
RTC of Marinduque denied MR Holdings’ application for a writ of preliminary
injunction on the ground that it has no legal capacity to sue, it being a
foreign corporation doing business in the Philippines without license, among
others. On a petition for certiorari before the Court of Appeals, the
latter court held that the RTC did not commit grave abuse of discretion in
denying petitioner’s prayer for a writ of preliminary injunction.
The Court of Appeals held that
MR Holdings, being a non-resident foreign corporation not doing business in the
Philippines, cannot sue and seek redress in Philippine courts. On the
allegation of MR Holdings that it was suing on an isolated transaction, a
recognized exception to the proscription against foreign corporations doing
business without a license from suing in local courts, the Court of Appeals
ratiocinated:
[P]etitioner is not suing on an isolated transaction as it claims to be, as it is very obvious from the deed of assignment and its relationships with Marcopper and Placer Dome, Inc. that its unmistakable intention is to continue the operations of Marcopper and shield its properties/assets from the reach of legitimate creditors, even those holding valid and executory court judgments against it. There is no other way for petitioner to recover its huge financial investments which it poured into Marcopper’s rehabilitation and the local situs where the Deeds of Assignment were executed, without petitioner continuing to do business in the country.
x x x x x x
While petitioner may just be an assignee to the Deeds of Assignment, it may still fall within the meaning of “doing business” in light of the Supreme Court ruling in the case of Far East International Import and Export Corporation v. Nankai Kogyo Co., that:
Where a single act or transaction however is not merely incidental or casual but indicates the foreign corporation’s intention to do other business in the Philippines, said single act or transaction constitutes doing or engaging in or transacting business in the Philippines.[21]
The court went further by
declaring that even a single act may constitute doing business if it is
intended to be the beginning of a series of transactions.[22]
Petitioner MR Holdings
then brought a petition for review on certiorari citing the following
errors:
x x x
F. The Honorable Court of Appeals committed a reversible error in holding that petitioner is without legal capacity to sue and seek redress from Philippine courts, it being the case that Section 133 of the Corporation Code is without application to petitioner, and it being the case that the said court merely relied on surmises and conjectures in opining that petitioner intends to do business in the Philippines.
x x x
G. The Honorable Court of Appeals committed a reversible error in holding that respondent Marcopper, Placer Dome Inc., and petitioner are one and the same entity, the same being without factual or legal basis.[23]
The Supreme Court formulated
the issues for resolution, thus:
1. Does petitioner have the legal capacity to sue?
2. Are petitioners MR Holdings, Ltd., Placer Dome, and Marcopper one and the same entity?
The
discussion of the Supreme Court’s ruling will be divided into the issues as
defined by the Court.
Here,
the Court held that the principles governing a foreign corporation’s right to
sue in local courts have long been settled and may be condensed in three
statements, to wit:
a. if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;
b. if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; and
c. if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction. [I]t is not the absence of the prescribed license but the “doing (of) business” in the Philippines without such license which debars the foreign corporation from access to our courts.[24]
The Court recognized that the
test of whether a foreign corporation is doing business in the Philippines, as
stated in Mentholatum Co. Inc., v. Mangaliman,[25] is if the corporation is continuing the body or
substance of the business or enterprise for which it was organized, or whether
it has substantially retired from it and turned it over to another. It likewise
cited the definition found in the Foreign Investment Act of 1991,[26] and the Foreign Business Regulation Act.[27] The Court held that the common denominator among them
all is the concept of “continuity.”[28]
The Supreme Court held that
the appellate court’s ruling that MR Holdings’ participation under the
Assignment Agreement and the Deed of Assignment is untenable because the
expression “doing business” should not be given a strict and literal
construction as to make it apply to any corporate dealing:
At this early stage and with petitioner’s acts or
transactions limited to the assignment contracts, it cannot be said that it had
performed acts intended to continue the business for which it was organized. It
may not be amiss to point out that the purpose or business for which petitioner
was organized is not discernible in the records. No effort was exerted by the
Court of Appeals to establish the nexus between petitioner’s business and the
acts supposed to constitute “doing business.” Thus, whether the assignment
contracts were incidental to petitioner’s business or were continuation thereof
is beyond determination.[29]
The case of Far East Int’l.
Import and Export Corp. v. Nankai Kogyo Co., Ltd.,[30] cited by the Court of Appeals – which held that a
single act may still constitute “doing business” if it is not merely incidental
or casual, but is of such character as distinctly to indicate a purpose on the
part of the foreign corporation to do other business in the state – was held to
be inapplicable to the present case. In Far East, the act of sending the
official to the Philippines revealed an intention to continue engaging in the
business in the Philippines because there was an express admission from the
official that he was sent to the Philippines to look into the operation of
mines. In the present case, the payment of MR Holdings to ADB is not, as
Solidbank alleges, an investment into Marcopper which would compel MR Holdings
to participate in Marcopper’s recovery. It was done merely in fulfillment of
the existing Support and Standby Credit Agreement between ADB and Placer and
cannot be construed as an investment.
The Court conceded that MR
Holdings may very well decide to operate Marcopper’s mining business. However,
the Court held that this is mere speculation. There are several options
available to MR Holdings, but to see through the present facts an intention on
the part of petitioner to start a series of business transaction is to rest on
assumptions or probabilities falling short of actual proof. The Supreme Court
admonished that courts should never base their judgments on a state of facts so
inadequately developed and stated that it cannot be determined where inference
ends and conjecture begins.
Lastly, the Court noted that
long before MR Holdings assumed Marcopper’s debt to ADB, there already existed
a Support and Standby Credit Agreement between ADB and Placer. MR Holdings’
payment to ADB was done merely in fulfillment of an obligation and cannot be
construed as an investment. MR Holdings was thus held to be engaged only in
isolated acts or transactions. Since single or isolated acts are not regarded
as a doing or carrying on of business, MR Holdings had the personality to sue
in local courts.
Solidbank
seemed to argue that assuming MR Holdings has the standing to sue, it still
cannot obtain an injunction to the attachment of the properties covered in the
Deed of Assignment. This was because MR Holdings, Placer, and Marcopper are one
and the same entity. Thus, even if MR Holdings had executed a Deed of
Assignment to Placer which was subsequently assigned to MR Holdings, all these
assignments are ineffectual because all the corporations are one and the same.
It was as if no transfer had been effected and the property remained in
Marcopper.
But the Supreme Court held
that the record is lacking in circumstances that would suggest that MR
Holdings, Placer, and Marcopper are one and the same entity. While petitioner
is a wholly-owned subsidiary of Placer Dome, which, in turn, was then a
minority stockholder of Marcopper, the mere fact that a corporation owns all of
the stocks of another corporation, taken alone is not sufficient to justify
their being treated as one entity.[31] The Court held that if the parent-subsidiary structure
is used to perform legitimate functions, a subsidiary’s separate existence
shall be respected, and the liability of the parent corporation as well as the
subsidiary will be confined to those arising from their respective businesses.
The Supreme Court cited the
case of Philippine National Bank v. Ritratto Group Inc.,[32] which enumerates a list of factors which are useful
in the determination of whether a subsidiary is but a mere instrumentality of
the parent-corporation.[33] The only circumstance that would lead to the
conclusion that MR Holdings is a mere instrument of its parent is if MR
Holdings is wholly-owned by Placer Dome. Apart from this, there are no other
factors indicative that MR Holdings is a mere instrumentality of Marcopper or
Placer Dome. The mere fact that Placer Dome agreed, under the terms of the
“Support and Standby Credit Agreement” to provide Marcopper with cash flow
support in paying its obligations to ADB, does not mean that its personality
has merged with that of Marcopper. The Supreme Court thus held that in the
absence of fraud in the transaction of the three foreign corporations, it would
be improper to pierce the veil of corporate fiction: “[t]hat equitable doctrine
developed to address situations where the corporate personality of a
corporation is abused or used for wrongful purposes.”[34]
In
order to fully appreciate the doctrines enunciated by the Court, it is first
important to put the transaction into context, that is, to understand the
investment structure utilized in the corporation. To do so, concepts in the
National Internal Revenue Code[35] as well as the Philippine Canadian Tax Convention[36] will be used to aid in the analysis.
Marcopper
is engaged in the mining industry. Mining is considered a means of exploring,
developing and utilizing the natural resources of the State. Therefore, this
can be undertaken only by Filipino citizens, or corporations, at least 60% of whose capital is owned by Filipinos.[37] This is why Placer could not have owned more than 40% of the outstanding capital stock of Marcopper.
By making a direct investment
in Marcopper rather than coursing the investment through a Philippine branch or
subsidiary, Placer envisioned the tax consequences of investing through an
entity that may have been considered doing business in the Philippines.
On one hand, if Placer had set
up a branch in the Philippines and had invested in Marcopper through that
branch, the dividends received by the branch, considered a resident foreign
corporation, from Marcopper, a domestic corporation, would not be subject to
income tax.[38] This income would, instead be taxed in the
Philippines, at the rate of 32% of the net income[39] and then the remittance of the profits of the branch
to the foreign Placer head office would be taxed at 15% of the amount actually remitted.[40]
On the other hand, if Placer
had invested by setting up a Philippine subsidiary, the subsidiary, considered
a domestic corporation, having been incorporated in the Philippines, would be
taxed at the rate of 32% of net income.[41] The dividends received by the subsidiary would be
remitted to the foreign Placer parent. Such remittance would be subject to a
tax of 15% of the amount actually remitted, provided that the
county in which the foreign corporation is domiciled allows a credit against
the tax due from the nonresident foreign corporation taxes deemed to have been
paid in the Philippines.[42]
By investing in Marcopper
directly as a foreign corporation without doing business in the Philippines,
Placer would be taxed on its Philippine sourced income at the rate of 32%, but using the gross income as its tax base,[43] rather than the net income, which would be the case
if Placer had invested through a branch or a subsidiary. The remittance of
dividends to Placer from Marcopper would likewise be taxed at 15% of the amount actually remitted provided that the
foreign corporation is in a country that allows a credit against the tax due
from the non-resident foreign corporation taxes deemed to have been paid in the
Philippines.[44]
An initial look at the
situation reveals that Placer made a foolish decision in investing directly in
Marcopper instead of coursing it through a branch or a subsidiary. But there
are consequences to setting up both a branch and a subsidiary that Placer may
have wanted to avoid.
A branch is considered in
Corporate Law as a mere adjunct or department of another corporation.[45] It is taxed under the Tax Code as a resident foreign
corporation, being a department of a foreign corporation which does business in
the Philippines with a license. But since it is a mere extension of the foreign
corporation, the branch and the foreign home office is considered a single
entity. Therefore, any suit filed against the branch necessarily impleads the
foreign home office. A creditor who files a suit against the branch can
therefore look to the assets not merely of the branch but also of the home
office to satisfy the judgment which it may obtain in the case.
A subsidiary is a corporation
in which a parent corporation has a controlling share.[46] The investment may have been coursed through a
Philippine incorporated subsidiary, even if it were wholly-owned by a foreign
corporation. By investing through a subsidiary, the foreign parent corporation
can limit its liability to its capital investment in the subsidiary. Thus, the
assets of the foreign parent need not be subject to risk. However, a
subsidiary, being a domestic corporation, is taxable on all income derived from
sources within and without the Philippines.[47] This would not be the case in a branch, since being a
mere extension of a foreign corporation, and therefore a foreign corporation
itself, it is taxable only on income derived from sources within the
Philippines.[48]
Thus, by investing directly in
Marcopper, it avoids taxability of income derived from sources outside the
Philippines if it had invested as a subsidiary. And since Placer had merely
wished to invest in a venture, it need not have set up a branch, which would have
allowed local suits to reach its foreign assets. But even the investment method
that Placer chose has allowed it to avoid certain tax consequences.
As earlier discussed, by
merely investing in Marcopper, Placer would be deemed a non-resident foreign
corporation. This is because under the Tax Code provisions, residence is
ascertained by determining if the foreign corporation does or does not do
business in the Philippines. A foreign corporation which engages in trade or
business within the Philippines is considered a resident[49] whereas a foreign corporation which does not engage
in trade or business within the Philippines is considered a non-resident.[50] This distinction is crucial not only for the purposes
of limiting liability and avoiding the taxation of income sourced outside the
Philippines, but is also important for Placer, to take advantage of the
Philippine-Canada Income Tax Convention, it being a corporation incorporated in
Canada.[51]
The treaty provides that the
profits of an enterprise of the Philippines or Canada shall be taxable only in
the State where it is located, unless the enterprise carries on business in the
other contracting State through a “permanent establishment” situated in the
other contracting state. Only then shall the profits of the enterprise be taxed
in the other State.[52] The term “permanent establishment” means a fixed
place of business in which the business of the enterprise is wholly or partly
carried on.[53] Therefore, Placer avoids the taxation of its business
profits by limiting its participation in Marcopper to mere investment in its
capital stock. It is only the remittance of the dividends from Marcopper to
Placer which would be taxed, not even at the regular treaty rate of 25% of the gross amount of dividend paid, but at the
reduced rate of 15%, since Placer owns more than 10% of the company paying the dividend.[54]
Because
Placer is a mere stockholder of Marcopper, it cannot be made to assume the
liability of Marcopper towards ADB if Marcopper defaults. Apart from the
property mortgaged to ADB to secure the debt, ADB would still require an
additional security in the form of a surety, another party which would be
solidarily liable with the principal debtor. This was the reason for the execution
of the Support and Standby Credit Agreement between ADB and Placer.
The agreement was in the
nature of an undertake to guarantee the monetary obligation, whereby the
obligor agrees to pay the obligee if the principal debtor defaults on his
obligation.[55] Here, Placer sharply limited its activities to
investing in a domestic mining company and maintaining standby financial
support in a financial transaction. This allowed Placer not to be considered
doing business in the Philippines because its Canadian business is in gold
mining. Providing financial assistance is considered incidental and casual, and
not of such a character to indicate a purpose to engage in business. Since
continuity of the conduct of business and an intention to establish a
continuous business are pre-requisites for a foreign corporation to be
considered doing business in the Philippines,[56] Placer avoids further involvement and retains its
status as a foreign corporation not doing business in the Philippines. The
subject of the foreign corporation doing business in the Philippines will later
on be given extended treatment based on the Court’s decision.
When
Marcopper defaulted on its loan and Placer was compelled to comply with the Support
and Standby Credit Agreement it entered into with ADB, Placer did not do so on
its own but through a wholly owned subsidiary which was a foreign corporation,
MR Holdings, Ltd., a Cayman Islands-based company created by Placer.[57] By having a subsidiary assume the liability, Placer
was able, once again, to use the separate juridical personalities of
corporations to its advantage.
A subsidiary, possessing a
juridical personality separate from the parent, was made to assume the
liabilities incurred by the parent. With this, Placer effectively shielded its
own assets from further liability. Certainly, MR Holdings’ role seems to be
limited to the enforcement of the collection of the debt that was paid for by
Placer. But by assigning the credit to MR Holdings, Placer effectively divested
itself from any risks pertaining to the transaction.
Despite this analysis, which
has merely proven that the structure has allowed for Placer to have a tax
efficient investment vehicle in the Philippines and to limit its liabilities
where it so desires, it leaves many gaps in the otherwise coherent story.
This case speaks only of the
default to the principal loan agreement of US$15 million
between Marcopper and ADB. What was the fate of the supplemental loan agreement
between Marcopper and Bank of Nova Scotia? Furthermore, why had Placer assigned
the debt to MR Holdings if the purpose was merely for collection purposes? If
this was for purposes of divesting its whole interest in the transaction, could
the loan not have been assigned to a third party, rather than a subsidiary, to
whom another default of the transaction could be detrimental to the parent
Placer?
The
controversy under analysis traces its beginnings to the 70’s when Marinduque, the smallest province of Region IV
of the Southern Tagalog region, with a population of around 230,000[58] and a land area of 959 square
kilometers,[59] was one of the poorest provinces in the Philippines.
Marinduque welcomed Marcopper and the promise of 1,000 jobs some 30 years ago,
along with the additional inducement of power, since electricity was essential
for mining operations.[60] During its peak, Marcopper, produced 30,000 tons of copper ore each
day.[61] Placer Dome, then a diversified metals miner, held a 39.9% interest in Marcopper.[62]
Marcopper first mined the
Taipan site. Mining of Tapian's low-grade copper ore began in 1969. The mining process produced two by-products: a heavy
silt of rocks and sand, and the more dangerous tailings, a fine, grey mix of
heavy metals, including lead, zinc, and sulphur.[63] Waste from Tapian was dumped in the surrounding
countryside, including the nearby Boac river. The river was diverted to supply
water to the pit and a dam built to collect waste. By 1975, with the approval of the government, three separate
pipelines were constructed to funnel waste from Tapian down to Calancan Bay.
Rather than burying the fine tailings deep below the surface of the bay, the
waste was pumped out at shore level.[64]
The waste damaged the
environment. Calancan Bay villagers complained that the dumping was reducing
fish stocks. Surveys[65] confirmed a reduction in plant and animal life in the
bay.[66] A class action suit was filed in 1988 against the company demanding an immediate halt to
dumping. Marcopper's dumping permit expired and due to petitions filed before
the Pollution Adjudication Board, Marcopper was made to cease operations.[67] But this stoppage in operation cut the electric
supply to the island. Thus, mining was allowed to resume as with the dumping.
As a concession, Marcopper agreed to contribute to a fund to rehabilitate the
bay.[68]
It was during this time when
the loan agreement in the present case occurred. On 4 Nov. 1992, Marcopper borrowed US$15 million
from the Asia Development Bank to finance operations. An additional US$ 25 million was borrowed from the ADB, funded by
Toronto-based Nova Scotia bank. Marcopper’s Philippine assets were used as
security for the two loans while partner Placer Dome, Inc. agreed to provide
Marcopper with cash flow to repay the loans.[69]
But from 1975 until 1991, Marcopper
had essentially filled the environment with its waste. A 16-kilometre stretch of metal pipe delivered a poisonous
brew of waste from a copper mine high in the island's hills to the waters of
the bay.[70] In 1992, the firm began mining a
second pit, San Antonio. The bulk of the tailings was stored in the Tapian pit
while heavy silt was dumped in the nearby Mogpog River.[71]
In 1995, mine waste was discovered seeping through the
groundwater near the Boac river. The source of the leak was the 2.25 kilometer drainage tunnel running from the Tapian pit
to the Boac River. To relieve pressure and monitor the problem, engineers
drilled a hole down to the two-meter tunnel.[72] On 24 March 1996, the tunnel's plug gave way, releasing 1.6 million cubic meters of tailings into the Boac River.
The effects of the disaster were described as follows:
The
onrush of tailings which resulted from the accident displaced river water
downstream, which in turn flooded low-lying areas, destroying crop farms and
vegetable gardens along the banks. This clogged irrigation waterways to rice
fields, temporally isolating some villages and affecting trade and access to
services. Thousands of farmers and fishers were seriously affected and their incomes
drastically reduced. Bennagen estimated that such people lost about US$6 million at the time of the
accident. Over the last three years this has increased to US$19.5 million. Other key economic losses included US$14.4 million due to a reduction in tourism and other recreation
activities.[73]
The United Nations sent a
mission team to the Philippines to survey the disaster. The United Nations
Mission final report, 73 pages all told, contains an extensive
ecotoxicological assessment, an evaluation of the impacts on human health and
well-being, general discussion on the causes, as well as recommendations to
avoid future disasters.[74]
Based on the assessment, the
United Nations Mission team concluded that:
· The Makulapnit and Boac River systems had been so significantly degraded as to be considered an environmental disaster;
· The aquatic life, productivity and beneficial use of the rivers for domestic and agricultural purposes are totally lost as a result of the physical process of sedimentation;
· The coastal bottom communities adjacent to the mouth of the Boac River are also significantly degraded as a direct result of smothering by the mine tailings;
· There is no evidence of acute poisoning in the exposed population due to the mine tailings.
· There is an increased health and safety risk due to immersion and flooding as a result of the very large volume and physical properties of the mine tailings, should they be mobilized during the wet season; and,
· Concentrations of trace metals in the mine tailings were not sufficiently high to represent an immediate toxicological threat.[75]
Marcopper and Placer Dome
tried to sort out the disaster. The drainage tunnel was plugged and mining
operations halted, never to resume again. The catastrophe was alleged to be a
fortuitous event, which Placer claims, was triggered by a minor island
earthquake.[76] Still, criminal charges were filed in the Philippines
against three Marcopper employees, including the President of Marcopper.[77]
After the tailings spill,
Marcopper defaulted on its loan. ADB and Placer agreed to transfer the bank’s
interest to MR Holdings, whereby the latter effectively became the banker to
the mining firm.[78] What of the secondary loan agreement with Bank of
Nova Scotia? Nova Scotia bank struggled to recover its loan to Marcopper.
SolidBank, Scotia, 40%-owned Asian banking unit, won a partial judgment
from the RTC of Manila for Php60 million, about US$1.5-million, in May, 1997.[79] The RTC held: “[A]ll three corporations (Placer Dome,
MR Holdings and Marcopper) are actually one and the same person sporting a
different collar.”[80] MR Holdings appealed this ruling to the Court of
Appeals, and the decision of the RTC was affirmed. Thus, the appeal before the
Supreme Court.
A year later, Placer Dome
transferred its 39.9% holding to MR Holdings.
Subsequently, Placer Dome said all the shares of MR Holdings were then
transferred to “a group of Philippines financial investors.” But Placer Dome
had not provided officials with any documentary evidence of such a transfer.
Court documents filed by MR Holdings in 1998, one year
after Placer Dome's former president said the company ceased to have “any
ownership interest whatsoever in Marcopper,” showed MR Holding’s address as
being the same as Placer Dome’s in Vancouver.
[81]
Although Placer Dome has spent
nearly US$71 million in rehabilitating the damages, a study[82] reveals that the damages far exceeded the amount of
money paid by the company in compensation.[83] As the United Nations assessment reports, the damages
amounted to an environmental disaster. “Boac River [is] virtually dead. It will
take ten years to clean it up.”[84]
The
rulings of the Supreme Court pertinent to issues involving Corporate Law are
those which say that MR Holdings is not a foreign corporation doing business in
the Philippines, and that Marcopper, Placer, and MR Holdings are not one
corporation. These rulings shall be analyzed in this section.
The
Corporation Code provides that no foreign corporation which transacts business
in the Philippines without a license shall be permitted to maintain or
intervene in any action in any Philippine court. But such foreign corporation
may be proceeded against in Philippine courts on any valid cause of action.[85] Thus, the third party complaint filed by MR Holdings
could very well have been resolved on the basis of this provision of law, upon
a determination of whether MR Holdings does business in the Philippines. But
the Supreme Court took pains to give a careful restatement of the principles of
the foreign corporation’s capacity to sue and its suability in local courts, as
well as the concept of the “foreign corporation which does business,” citing
the important case law in support of these doctrines. Only after this did the
Court, under the learned pen of Madam Justice Gutierrez, proceed to rule upon
the case.
Here, the Court of Appeals
construed the Assignment Agreement that ADB granted to MR Holdings after it
assumed Marcopper’s obligation, to be indicative of MR Holdings’ intention to
do business in the Philippines. To this, the Supreme Court did not mince words
in its disagreement that, “this is simply untenable.”[86] The Court reiterated both the general rule and the
exception in determining whether a foreign corporation is doing business in the
Philippines.
The general rule, found in Metholatum
and the FIA, is that of continuity and the pursuit of business that is normally
incident to the purpose of the business organization. The Court held that the
court a quo exerted no effort to establish the nexus between MR Holdings
business and the acts supposed to constitute doing business. Perhaps, since MR
Holdings was a subsidiary of Placer which was a mining corporation, the
assumption of debts was simply not part of the regular course of a mining
corporation’s business.
Solidbank cited an exception
to the rule of continuity and the pursuit of business normally incident to the
company’s purpose, which is the doctrine of isolated transactions. The doctrine states that a single act may
still constitute “doing business” if it is not merely incidental or casual but
is of such character as distinctly to indicate a purpose on the part of the
foreign corporation to do other business in the State.[87] But MR Holdings still does not fall within this
exception. The court a quo held that there is no other way for MR
Holdings to recover its huge financial investments which it poured into
Marcopper’s rehabilitation without continuing Marcopper’s business in the
country. The Court struck this down as a mere presumption. There were no overt
acts of MR Holdings from which the intention to continue Marcopper’s business
may be inferred. MR Holdings was, therefore, not doing business in the
Philippines. As such, it needed no license to sue before Philippine courts on
an isolated transaction.[88]
Viewed in isolation to the
surrounding facts, the ruling of the Court on this issue is faultless. But the
facts upon which the controversy was based were not fully laid down for the
Court. These facts have most probably been excluded by the courts on charges of
irrelevance and immateriality. But these points are crucial in a full
appreciation of case. Foremost is Placer’s role in the controversy.
The earlier analysis on
Placer’s investment structure was done in order to avoid tax liabilities. By
merely investing in Marcopper, Placer did not do business in the Philippines.
Even if Placer had placed nominee directors or officers in such company to
represent its interests, it would still not have been considered doing
business.[89] But it appears that Placer went beyond mere
representation of its interest. Placer supplied the top management for two
Marcopper mines for 30 years.[90] In fact, two of Placer’s top managers of the mine are
still facing criminal charges.[91] A year after the tailings spill, Placer divested its 40% share in Marcopper.[92] In the facts reported in the Supreme Court ruling,
Placer had all but disappeared from the picture. The debt to ADB was assumed by
MR Holdings together with, under the Deed of Assignment, all the assets of
Marcopper. But MR Holdings is a wholly-owned subsidiary of Placer. As the
parent company of MR Holdings, Placer now owns, albeit indirectly, the whole of
Marcopper, not merely the 40% stake which it had
divested. Placer went to great lengths to disclose its divestment of Marcopper
in press releases on their webpage and in speeches.[93] But the company went to even greater lengths not to
disclose its renewed ownership of Marcopper’s assets through MR Holdings.[94] Placer was the 40% shareholder
of Marcopper who supplied the top management in Marcopper. If the issue of
Placer’s doing business were to arise, the courts would surely consider it to
be doing business in the Philippines. Now that the assets were wholly-owned by
Placer through a subsidiary, so much more would the courts be inclined to rule
that Placer was doing business in the Philippines.
Alas, Placer’s gambit, that of
alleging that it played no managerial role in Marcopper,[95] and having its assets transferred to a subsidiary who
would file the third party claim in its stead, had paid off. The subsidiary, MR
Holdings, was never stained with indicia of involvement in the operation of
Marcopper. The Supreme Court simply had to respect the separate personalities
of MR Holdings and Placer, on the issue of whether MR Holdings did business in
the Philippines.
Logically,
the piercing of the separate personalities of MR Holdings and Placer would be
the second instrument of attack of Solidbank. If MR Holdings was not to be
considered doing business in the Philippines, then Placer, the foreign parent
corporation who had supplied the top management of Marcopper, would be
considered doing business in the Philippines. A ruling which would disregard
the separate personalities of MR Holdings and Placer would allow Solidbank to
argue that MR Holdings was a mere instrumentality of Placer which had been
doing business without a license in the Philippines. Thus, it would have no
standing to file the third party claim. But this was not to be the case.
The
Supreme Court held that the record is lacking in circumstances that would
suggest that Placer, Marcopper and MR Holdings are one and the same entity.
Mere ownership of all the stocks of another corporation is not sufficient to
justify being treated as one entity, if used to perform legitimate functions.[96] The Court concluded that there were no other factors,
apart from ownership, which would indicate that MR Holdings is a mere
instrumentality of Marcopper or Placer.
The Court here seems to have
disregarded the tailings spill incident along with the claims of the community
against Marcopper in the ecological disaster that ensued, as no mention was
made of the incident in the exhaustive 31-page decision
of the Supreme Court. But Placer clearly transferred its ownership in order to
avoid any liability against itself or its officers. This is because the
Corporation Code provides that “directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts shall be liable jointly and
severally for all damages suffered by the corporation, its stockholders or
members and other persons.”[97] But it simply could not let go of its huge
investments in Marcopper without any means of recouping its losses. It
transferred ownership to a wholly-owned subsidiary to which the assets of
Marcopper were transferred under a Deed of Assignment. The intent of Placer to
dissociate itself from Marcopper to avoid liability but retaining a means of
holding on to its investments is unmistakable. This should have warranted a
finding of the piercing of the separate personalities of the corporations, at
least, on the part of MR Holdings and Placer.
Using the factors[98] cited by MR Holdings, the separate personality
of the parent and subsidiary could have been disregarded. First, the subsidiary
had no substantial business except with the parent corporation or no assets
except those conveyed to or by the parent corporation. As stated in its corporate
name, MR Holdings was a mere holdings company. Second, the parent corporation
pays the salaries and other expenses or losses of the subsidiary. A report
states, “[A]ccording to contracts obtained by The Globe and Mail, Placer Dome
Technical Services entered into a contract in 1997 to
pay the salaries of about 200 Marcopper staff.”[99] There is also the fact that MR Holdings is a
wholly-owned subsidiary of Placer. This was earlier disputed by Placer,
claiming that it has sold MR Holdings to another company, but Placer refused to
identify this buyer,[100] but this is not in issue in the Supreme Court ruling.
Is there an underlying policy
consideration in the way that the Court refused to pierce the separate
personalities of the parent and subsidiary in this case? A survey of cases
decided by the Supreme Court reveals that the instances where the separate
personalities of the parent and the subsidiary were disregarded are restricted
to those cases where violations of labor and tax laws were found.
The
foremost case in labor law disregarding the parent-subsidiary relationships is Tomas
Lao Construction v. NLRC.[101] Here, respondents were employees who alternately
worked for three companies, which comprised a business conglomerate exclusively
controlled and managed by members of the Lao family. These three companies were
engaged in the same line of business, would undertake their projects either
simultaneously or successively, would lease tools and equipment to one another,
and would also allow the utilization of employees from one company to another.
The respondents were illegally dismissed, and the Court ruled that all three
companies were jointly and severally liable for their backwages, disregarding
the separate personalities of the three corporations.
The Supreme Court held that
where it appears that the business enterprises are owned, conducted, and
controlled by the same parties, law and equity will, when necessary to protect
the rights of third persons, disregard the legal fiction that the corporations
are distinct entities and treat them as identical.[102] The Court added: “It should always be borne in mind
that the fiction of law that a corporation as a juridical entity has a distinct
and separate personality was envisaged for convenience and to serve justice;
therefore it should not be used as a subterfuge to commit injustice and
circumvent labor laws.”[103]
In Bibiano Reynoso v. Court
of Appeals,[104] petitioner Reynoso was an employee who obtained a
money judgment against his employer, a subsidiary of a parent corporation.
Since the subsidiary had been dissolved, he filed his writ of execution against
the parent corporation. The parent corporation alleged that the claim could not
be maintained against it, since it was never the employer of the petitioner
employee. The Supreme Court ruled for the piercing of the separate
personalities, citing several factors, including the subsidiary’s use of the
same name as the principal, the fact that both were engaged in one and the same
business, and that an exclusive management contract insured that the subsidiary
would not deviate from the commands of the mother corporation. But it was not
only the unity of interests which led the Supreme Court to decide to pierce the
separate personalities. The Court observed that to circumvent a Central bank
regulation prohibiting directors from borrowing money from their corporation,
the parent corporation set up a subsidiary in order to allow its officers to
borrow, albeit indirectly. For his unwillingness to satisfactorily conform to
these directives and his reluctance to resort to illegal practices, petitioner
earned the ire of his employers. Eventually, his services were terminated, and
criminal and civil cases were filed against him. Later on, the parent closed
the subsidiary in fraud of its creditors. The Court thus deemed it proper to
pierce the separate juridical personalities of the parent and the subsidiary.
Lastly, in the case of Simeon
De Leon v. NLRC,[105] Fortune Tobacco Co. acquired security services from
Fortune Services, Inc., which later sold out to Magnum Inc. Fortune Tobacco
later terminated the contract for security services. The displaced security
guards filed a case for illegal dismissal against all three corporations.
Fortune Tobacco denied the existence of an employer-employee relationship
between them, claiming that it obtained the services of the security guards
from a wholly separate corporation. The Supreme Court pierced the separate
personalities. It held that Fortune Services was a mere adjunct or alter ego of
Fortune Tobacco. Both companies had the same owners and business address, and
the purported sale of the shares of the former stockholders to a new set of
stockholders, who changed the name of the corporation to Magnum Inc., appears
to be part of a scheme to terminate the services of the security guards and to
bust their newly-organized union.
To draw meaning from the
rulings in the cases where the Court disregarded the separate juridical
personalities of the parent and subsidiary, it is important to analyze the
instances where the Supreme Court refused to disregard the separate
personalities of separate corporations, which do not share a parent-subsidiary
relationship.
In Diatagon Labor
Federation v. Ople,[106] Diatagon was the exclusive bargaining unit of Lianga
Bay Co. Before the expiration of its collective bargaining agreement with
Lianga Bay, it was able to negotiate a CBA with Georgia Pacific Corp., another
corporation, majority of whose employees were former employees of Lianga Bay.
Despite the transfer, the employees continued to use the pay envelopes and
identification cards of their former employer. A certification election was
held among the employees in Lianga Bay and the results were sought to be
nullified on the ground that the Lianga Bay employees who were transferred to
Georgia Pacific were not allowed to vote. The petitioner claimed that the
employees in both corporations should be treated as one bargaining unit because
they have a common interest.
The Supreme Court viewed the
two corporations as a single bargaining unit because they were indubitably
distinct entities with separate jurisdictional personalities. The fact that
their business are related and that the 236 employees of
Georgia Pacific were originally employees of Lianga Bay is not justification
for disregarding their separate personalities.
In Development Bank v. NLRC,[107] the debtor corporation obtained a loan from
Development Bank, mortgaging to it real properties with all the buildings and
improvements thereon and chattels. By virtue of the said loan agreement, DBP
became the majority stockholder of the debtor corporation. When it failed to
pay its obligation with DBP, the latter foreclosed and acquired the mortgaged
real estate and chattels. Employees of the debtor corporation filed for payment
of salaries against both the debtor corporation and the bank. The Supreme Court
held that the employees failed to prove the existence of employer-employee
relationship based on the fact that DBP is the majority stockholder of the
debtor corporation, and that majority of the members of the board of directors
of the latter are from DBP. These circumstances are insufficient indicia of the
existence of an employer-employee relationship in the light of the express declaration
of the Labor Arbiter and the NLRC that DBP is being held liable as a
foreclosing creditor.
The two cases where the
Supreme Court refused to pierce the separate personalities of the two
corporations involve cases where the companies are not related as parent and
subsidiary. In Diatagon, there was merely identity in the line of
business and the fact that previous employees of one company worked in the
other company. In Development Bank, it was a mortgage creditor acquiring
the shares of the mortgagee debtor. In labor cases therefore, the Supreme Court
closely adheres to the dictum that mere ownership of the majority of shares by
one corporation in another is not the only test by which separate corporate
personalities may be disregarded. There must be a showing that the corporate
entity is used to defeat public convenience, since the corporation is merely
the alter ego of another entity. This is clear in the cases of Lao, Reynoso,
and De Leon, where the Court disregarded the separate personalities of
the parent and the subsidiary.
An
investigation into Tax Law brings to the fore the case of Lidell & Co.,
Inc. v. Commissioner of Internal Revenue,[108] where two
corporations were owned by one person. The main corporation imported
automobiles, then conveyed them to the second corporation, which in turn sold
the vehicles to the public with a steep mark-up. Since then, the main
corporation paid sales taxes on the basis of its sales to the second
corporation, considering said sales as its original sales. For taxation
purposes, the Supreme Court determined that the second corporation was but an
alter ego of the main corporation and held that those sales made by the second
corporation to the public were the proper tax base for the sales tax. In the
case of Filipinas Life Assurance Co., v. Court of Tax Appeals,[109] in ruling
on the issue of whether domestic and resident foreign life insurance companies
are entitled to return only 25% of their income from
dividends under the 1957 amendment of the National Internal Revenue Code, the
Court observed that, “[T]he decision to tax a part (e.g., 25 per cent) of such dividends reflects the policy of
discouraging complicated corporate structures as well as corporate divisions in
the form of parent-subsidiary arrangements adopted to achieve a lower effective
corporate income tax rate.”
The separate juridical
personalities of the parent corporation and its subsidiary are disregarded
usually when the subsidiary is used merely as an alter ego of the parent
corporation. This, however, was not the consideration used by the Court in Koppel
(Phil.), Inc. v. Yatco.[110] In that case, Koppel Phil. is a local corporation, 99.5% of whose stocks is owned
by Koppel Industrial, an American corporation, and the remaining 0.5% was owned by officers of the plaintiff corporation.
It conducted business by offering for sale to the public certain merchandise.
When a local buyer is interested in the purchase thereof, a price quotation is
cabled by Koppel Phils. to the foreign company. The merchandise are shipped
from abroad, and the plaintiff charges the price quoted, plus a small
percentage. The Bureau of Internal Revenue (BIR) demanded of the plaintiff
merchants’ sales tax representing the total gross value of the sales. The BIR
claims that this must be so, since the share of stock of plaintiff corporation
were and are all owned by Koppel Industrial of U.S.A., and that Koppel (Phil.)
is a mere dummy or branch. The Supreme Court affirmed this, saying that no
group of businessmen could be expected to organize a mercantile corporation —
the ultimate end of which could only be profit — if the amount of the profit
were to be subjected to such a unilateral control of another corporation,
unless indeed the former had previously been designed by the incorporates to
serve as a mere subsidiary, branch or agency of the latter. The Supreme Court
thus disregarded the separate personalities of the parent and the subsidiary
and imposed the tax based on sales of the American parent company.
In Tax Law cases therefore,
while there is an allegation that the subsidiary is reduced to a mere
instrumentality, the Court pierces the separate personalities of the parent and
subsidiary, not so much because the subsidiary was reduced to a mere puppet, but
more so because the corporate entity is used to commit fraud or justify a
wrong, or to defend a crime. These instances are considered in Corporate Law as
“fraud piercing cases.”
There
are few cases apart from those involving Tax and Labor Law where the Supreme
Court would disregard the separate personalities of the parent and subsidiary
corporation.
In the case of Philippine
Veterans Investment Development Corportion v. Court of Appeals,[111] Violeta Borres, was injured in an accident which was
held to be due to the negligence of Phividec Railways, Inc. (PRI), a
corporation partially held by petitioner Philippine Veterans. Later, petitioner
sold all its rights and interests in the PRI to the Philippine Sugar Commission
(PHILSUCOM). Two days later, PHILSUCOM caused the creation of a wholly-owned
subsidiary, the Panay Railways, Inc., to operate the railway assets acquired
from PHIVIDEC. Borres filed a complaint for damages against PRI and Panay, and
Panay, in turn, filed a third-party complaint against the PHIVIDEC. Panay
disclaimed liability on the ground that in the Agreement concluded between
PHIVIDEC and PHILSUCOM, it was provided that PHIVIDEC holds PHILSUCOM harmless
from and against any action, claim or liability that may arise out of or result
from acts or omissions, contracts or transactions prior to the turnover.
The Supreme Court held that
PHIVIDEC’s act of selling PRI to PHILSUCOM gave PHIVIDEC complete control of
PRI’s business. PHIVIDEC had therefore expressly assumed liability for any
claim against PRI. Since the accident happened before that agreement and PRI
ceased to exist after the turn-over, it should follow that PHIVIDEC cannot
evade its liability for the injuries sustained by the private respondent.
A
disturbing implication of the survey of jurisprudence is that there seems to be
a reluctance on the part of the Court to disregard the separate personalities
of the parent and the subsidiary, where the issue involved is private. Thus,
the Supreme Court has disregarded the separate juridical personalities of the
parent and subsidiary corporation only when there is a public interest
involved, such as in the lifeblood of the proper functioning of the State in
Tax Law, or the protection of security of tenure in Labor Law. Otherwise, the
Court is slow in striking down corporate structures. In the MR Holdings
case, the only interests involved were those of the creditor and the debtor. It
did not involve any other parties who claimed to have been damaged by the
tailings spill. Is this reluctance of the Court well-placed?
The
reluctance of the Court to rule on the contractual relationships that exist
between corporations may arise from the dictum that business is largely
considered private enterprise. The functions of the government have
traditionally been classified into constituent and ministrant functions.
Constituent functions are those compulsory functions which the government must
undertake since these constitute the very bonds of society. Examples of these
functions are the keeping of order, the protection of persons and property from
violence and robbery, the fixing of personal, family, property relationships,
and the definition and punishment of crimes.[112] Ministrant functions are the optional functions of
government intended for achieving a better life for the community.[113] The production of goods for the consumption of
society does not fall under either category. Government is not in the business
of doing business – and the reason for this is that it is better to entrust
such function to private enterprises, in order for business competition to
provide better goods and services. This may have led courts to hesitate in
applying the doctrine of piercing the veil of corporate fiction on occasions
where the parent-subsidiary relation has been erected in order to further
business enterprise, and where there is no public policy consideration being
violated.
The laws on business
organizations, which include Corporate Law and Partnership Law, represent the
barest minimum of government regulation as to the doing of business. For
instance, the Corporation Code gives no limitations on what forms of activity
may be entered into, save restrictions on corporate purposes which are
unconstitutional, illegal, immoral or contrary to government rules and
regulations.[114] Very few restrictions are found elsewhere.[115] Instead of restricting the activities that a
corporation cannot enter into, certain activities are in fact restricted to the
corporate form of doing business, such as banking. The
absence of restrictions as to the activities that a corporation may engage in
is logical. The law has created, in the corporation, a convenient means by
which to do business and provides it with several advantages, in order to serve
as a means to encourage investment and to develop industries. The modern world
has seen the emergence of the corporation as the choice vehicle for the conduct
of business. As a form of doing business, the maximization of profit is its
main objective.
The profit maximization norm
falls under the dualist thought, described by Dean Robert Clark as the
traditionalist view, which regards the private and public spheres as having
distinct functions that ought to be kept distinct.[116] Thus, from the traditional legal viewpoint, a
corporation’s directors and officers have a fiduciary duty to maximize
shareholder wealth, subject to numerous duties to meet specific obligations to
other groups affected by the corporation.[117]
The dualist thought certainly does not mean that corporations and their
managers have only minimal legal obligations to persons other than
shareholders. Corporations are bound to employees under labor law, to consumers
under consumer protection law, to the government under tax law, and even to the
environment under environmental law. However, profit is considered the
company’s objective function and its residual goal. The duties to all other
groups need simply be satisfied. They are considered constraints, and profit is
to be as large as possible, within these constraints. The profit maximization
viewpoint is legally consistent with the view that the corporation exists as a
vehicle to conduct business. Business, and profit maximization, is legally and
logically inconsistent with the corporation pursuing or fulfilling other
interests.
But the “real and obvious
truth” about corporations is that once they do business in a community, they
become at once members of that community, and acquire duties and obligations.[118] Professor Sulpicio Guevarra observes that these
duties and obligations are “not far different from the duties and obligations
ordinarily expected of members in an organized, progressive, and progressing
society.”[119] Thus, American law has expressly authorized
corporations to make donations to charity, discarding the traditional defense
of shareholders that any benefit to entities other than themselves are ultra vires and impermissible.[120]
Philippine Corporate Law, in
reaction to the slew of corporate controversies involving director malfeasance,
has further recognized the interest that the public has in the way corporate
directors manage. The Preamble of the Securities and Exchange Reorganization
Act[121] lays down several of the government’s policy towards
corporations. The government encourages more active public participation in the
affairs of private corporations and enterprises through which desirable
activities may be pursued for the promotion of economic development,[122] and also seeks to promote a wider and more meaningful
equitable distribution of wealth.[123]
The Code of Corporate
Governance (CGG) states that a director assumes certain responsibilities to
different constituencies or stakeholders, who have the right to expect that the
corporation be run in a prudent and sound manner.[124] When the CCG provides that the director has
constituencies other than the shareholders, it recognizes that there are
parties who can claim a fiduciary duty from the directors. It means that while
the director may owe duties towards shareholders, they are not the only body
towards which the director is accountable.
Under
the “theory of original power,” the power of the board of directors stem not as
delegated to them by the shareholders, but as originally impressed upon them by
law.[125] The exercise of this power is free from shareholder
control, first, because the power has never been theirs to begin with, and
second, because the board exercises this power not only in their favor. Thus,
by recognizing that the board of directors has constituencies apart from
shareholders, directors can no longer hide behind the fiduciary obligations to
the principal shareholders as a shield to avoid their fiduciary obligations to
other individuals or groups who hold stakes in the corporation. Corporations
therefore have accountabilities towards the following constituencies: its
shareholders, employees, creditors, the local community where it operates, and
even its management.
Shareholders are, undeniably,
parties who hold great stake in the corporation. Shareholders put equity into
the corporation. This is the capital with which the business of the corporation
is run – assets are purchased with the initial investment, employees are paid
from these funds, and creditors are willing to lend money to the company
because it knows that it can look to the shareholder’s equity to satisfy their
debts.
Employees provide the means by
which corporations can provide products and services which can be sold or
exchanged for profit. The corporation utilizes the expertise, talent, and
efficiency of its employees in order to satisfy its consumer’s needs and to
meet the demand of business.
Creditors, like the
shareholders, lend financial resources to the company as investors and they are
confronted with the same risk of being expropriated by the insiders.[126] Creditors provide funds to the business, and the
corporation takes advantage of this from the business truism that opportunity
should be taken of making profits out of the money of others through
leveraging.[127] In a sense, creditors can be viewed as investors in
the corporation the way shareholders are. Having made their initial credit
investigation into the corporation, they agree to lend money to the
corporation, and their funds are tied to the corporation until they are paid.
The creditor risks its liquidity in the transaction, wagering in the continued
viability of the corporation as a business enterprise.
The local government unit
where the corporation is located grants the corporation the right to build its
facilities within its territory and permits it to operate therein.[128] The community provides other incentives to the
corporation in order for it to operate in the territory – it operates public
utilities such as the construction of roads and bridges, the operation of power
plants to provide electricity, and provides tax incentives for the corporation.
Also, a corporation aims to internalize all possible gains from the community,
and to externalize all possible costs onto the community.[129] The physical presence of the corporation in the
environment exerts pressure on the community which can never be quantified in
financial terms.[130]
Lastly, management, which
includes the directors and officers of the corporation, runs the corporate
business enterprise. Although an officer’s duty of loyalty prevents him from
acquiring pecuniary interest that is adverse to his position, he has the power
to manage corporate affairs, his reward being in the form of maximized
shareholder value that will eventually accrue to him as a shareholder.
Corporate
governance deals with the corporation primarily as a business enterprise. The
claims of the stakeholders are directed to the business enterprise of the
corporation as a going concern. The demands of employees, management, creditors
and the community are not satisfied when the corporation makes charitable
donations, or builds corporate goodwill. It is satisfied when the corporation
exists profitably, because the common interest of stakeholders is in the
financial well-being of the corporation. Under this proper understanding of the
claims of the various stakeholders, the corporation is mandated to satisfy
their claims not merely out of a sense of altruism nor by considerations of
selfish gain in terms of publicity or because to satisfy stakeholder claims is
profitable for the business. The corporation has to satisfy the claims of
stakeholders precisely because they hold stakes in the corporation.
In the MR Holdings
case, the creditor had the right to expect that the business enterprise be run
as a profitable business venture in order for its claims to be satisfied. The
actions of the corporation, that of divesting itself of its investments in the
venture and transplanting its stake to a subsidiary, may have been permissible
under the conventionally accepted principles of Corporate Law, calling the
directors to maximize profit at all costs apart from transgressing the law,
raising the defense of the Business Judgment Rule to prevent liability from
attaching to himself. But the principles of corporate governance runs counter
to such acts, and the Business Judgment Rule can be observed to have been
tempered in its application as well, to suit the emergent obligations of the
directors.[131]
The mandate of the recent
pieces of legislation to the courts, in deciding cases involving the increased
constituencies of the corporation, is therefore clear. The reluctance of the
Court in applying these principles is not well-placed. In doing so, it does not
directly set economic policy, but merely applies legislation. Judicial
economics would merely be an incidental result of such decisions.
Supreme
Court decisions interpreting the law have delved into areas considered private.
In Ichong v. Hernandez,[132] the Court enunciated a protectionist policy against
alien retailers when it recognized the validity of the Retail Trade
Nationalization Law. The Court reversed its position in Tańada v. Angara[133] when the Court recognized that participation in the
World Trade Organization would be a viable structure for multilateral trading
and a veritable forum for the development of international trade law. In Garcia
v. Board of Investments,[134] the Court saw it fit to rule on the matter of the
location of the plant of a foreign investor on the grounds of national
interest. Lastly, in Tatad v. Secretary of Energy,[135] the Court acknowledged that it may face criticism, in
view of the fact that policy-making demands technical expertise and skill which
it has in scarce amount, and which functionally pertain to the executive and
legislative branches.[136] To this, the Court held:
Such criticism is charmless for the Court is annulling R.A. No. 8180 not because it disagrees with deregulation as an economic policy but because as cobbled by Congress in its present form, the law violates the Constitution. x x x Striking down R.A. No. 8180 may cost losses in quantifiable terms to the oil oligopolists. But the loss in tolerating the tampering of our Constitution is not quantifiable in pesos and centavos. More worthy of protection than the supra-normal profits of private corporations is the sanctity of the fundamental principles of the Constitution. Indeed when confronted by a law violating the Constitution, the Court has no option but to strike it down dead. Lest it is missed, the Constitution is a covenant that grants and guarantees both the political and economic rights of the people. The Constitution mandates this Court to be the guardian not only of the people's political rights but their economic rights as well.[137]
Thus, the Supreme Court
acknowledges its duty to apply the full force of the law even in purely private
business enterprise relationships, and that it has to make rulings that form
policy, thus shaping the economy. But it is reluctant to provide the remedy of
piercing to cases which do not involve some public policy consideration such as
the lifeblood theory of taxation, the security of tenure and provision of
living wages to labor. The transaction involving the piercing of the
personalities of the parent and the subsidiary which did not involve such
policy considerations like the case of Phividec v. Court of Appeals,[138] still it involved a value protected by the law – the
requirement that common carriers must use extraordinary diligence in the
carriage of passengers.[139] In the MR Holdings case, it was a mere
creditor, with interests considered purely financial therefore not involving
public interests, who was asserting the doctrine of piercing the veil of
corporate fiction. However, this should not prevent the Court from applying
the clear provisions of the law.
MR
Holdings v. Bajar pitted a corporate
creditor against a corporate debtor. The ruling of the Court may very well be
valued for its clear enunciation of the concepts of foreign corporations doing
business and its adherence to earlier case law in the adjudication of the issue
of piercing the veil of corporate fiction, as a means to consolidate case law
on the matter.
But cases where corporate
parties are involved must now be viewed in the context of the corporation’s
responsibilities to its increased constituencies. Although principles in
Corporate Law and Tax Law allow corporations to minimize tax liabilities and to
limit liabilities to its capital contribution by virtue of its strong juridical
personality, the complementary doctrine of piercing the veil of corporation
fiction should apply to cases involving iniquitous actions by corporations. The
Court cannot shirk from its responsibility in applying the provisions of law
even when purely private concerns are involved. The Philippine economy relies
heavily in the continuous vigilance of the courts in the field of Commercial
Law.
The Court’s seeming hesitation
in applying principles of piercing the veil of corporate fiction in view of
avoiding interference with private enterprise must be re-examined in the face
of the mandate of the Code of Corporate Governance. Where corporations err in
their aim to maximize profit, the Code is an unmistakable reflection of the
orientation that is taken by the Securities and Exchange Commission that the
government has abandoned the laissez-faire
treatment of business and has extended its hand into the affairs of private
parties. Corporate strategy must incorporate this realization, and judicial
policy must take this into strict account.
* ’04 J.D., cand., Ateneo de Manila University School
of Law. Executive Editor, Ateneo Law
Journal.
The author
thanks Associate Dean Cesar L. Villanueva for his valuable insights which
contributed greatly to this work, and Atty. Cirilo P. Noel for his patient
explanation of the concepts in the taxation of offshore transactions, and Ms. Karla
Ng for her editing and research assistance.
Cite as 48 Ateneo L.J. 209 (2003)..
1. Cesar L. Villanueva, Philippine Corporate Law 349 (2001). In addition to this, certain obligations arise in the dissolution of a corporation where, by virtue of the trust fund doctrine, subscriptions to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims; and in the issuance of watered stocks, where any director who consents or does not manifest his objection in writing to the issuance of watered stocks is personally liable to the creditor for the difference between the fair value received and the par value of the same.
10. Jose C. Campos Jr., The Corporation Code: Comments, Notes and Selected Cases 48-49 (1990) (citing International Order of Twelve Knights and Daughter of Tabor v. Fridia, 91 SW 2d 404 193 I 6).
11.
Salonga observes that
in the U.S., the abuses of large public utility holding company systems led to
the adoption of the Public Utility Holding Company Act of 1935, applicable to electric and gas holding companies and
their subsidiaries engaged in interstate commerce.
13. Aguedo F. Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines 38-39 (1998). Here, Agbayani refers to the three theories of agency, instrumentality, and alter ego.
18.
Keith
Damsell, Philippines set to launch probe into Marcopper, Placer
Dome, Financial Post, May 19, 1999 at http://www.probeinternational.org/pi/
mining/index.cfm?DSP=content&ContentID=4816 (last
accessed Aug. 19, 2003).
[21]. Far East International Import and Export Corporation v. Nankai Kogyo Co., 6 SCRA 725 (1962).
[22].
MR
Holdings, G.R. No. 138104 at 7.
[23]. Id. at 8-10 (formatting supplied).
[24]. Id. at 12.
27. An Act to Promote Foreign Investments, Prescribe the Procedures for Registering Enterprises Doing Business in the Philippines, and for Other Purposes, Republic Act No. 7042 (1991). The said statute states:
Sec. 3 (d) The phrase ‘doing business’ shall include soliciting orders, service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eight(y) (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works; or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization; Provided, however, That the phrase ‘doing business’ shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor, nor having a nominee director or officer to represent its interests in such corporation, nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.
28. An Act to Require that the Making of Investments and the Doing of Business Within the Philippines by Foreigners or Business Organizations Owned in Whole or In Part by Foreigners Should Contribute to the Sound and Balanced Development of the National Economy on a Self-Sustaining Basis, and for Other Purposes, Republic Act No. 5455 (1968). The Act provides:
SECTION. 1. Definition and scope of this Act. - (1) x x x the phrase ‘doing business’ shall include soliciting orders, purchases, service contracts, opening offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totaling one hundred eighty days or more; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.
a.
The
parent corporation owns all or most of the capital stock of the subsidiary.
b.
The
parent and subsidiary corporations have common directors or officers.
c.
The
parent corporation finances the subsidiary.
d.
The
parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation.
e.
The
subsidiary has grossly inadequate capital.
f.
The
parent corporation pays the salaries and other expenses or losses of the
subsidiary.
g.
The
subsidiary has substantially no business except with the parent corporation or
no assets except those conveyed to or by the parent corporation.
h.
In the
papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation,
or its business or financial responsibility is referred to as the parent
corporation’s own.
i.
The
parent corporation uses the property of the subsidiary as its own.
j.
The
directors or executives of the subsidiary do not act independently in the
interest of the subsidiary, but take their orders from the parent corporation.
k.
The
formal legal requirements of the subsidiary are not observed.
[35]. National Internal Revenue Code, Republic Act No. 8424 (1997).
[36]. Convention Between the Philippines and Canada For The Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, available at http://www.fin.gc.ca/treaties/Philip_e.html (last accessed August 19, 2003) [hereinafter RP-Canada Tax Convention].
52.
Placer
Dome, Company Profile, at http://www.placerdome.com/company/
profile.html (last accessed Aug. 19, 2003).
54. Id. art. V § 1. The treaty, in Art. V § 2 & § 3, further provides:
2. The term “permanent establishment”
shall include especially:
i. a place of management;
ii. a branch;
iii. an office;
iv. a factory;
v. a workshop;
vi. a mine, quarry or other place of extraction
of natural resources;
vii. a building or construction site or
supervisory activities in connection therewith, where such activities continue
for a period more than six months;
viii. an assembly or installation project which
exists for more than three months;
ix. premises used as a sales outlet;
x. a warehouse, in relation to a person
providing storage facilities for others.
3. The
term “permanent establishment” shall not be deemed to include:
i. the use of facilities solely for the
purpose of storage, display or delivery of goods or merchandise belonging to
the enterprise;
ii. the maintenance of a stock of goods or
merchandise belonging to the enterprise solely for the purpose of storage,
display or delivery;
iii. the maintenance of a stock of goods or
merchandise belonging to the enterprise solely for the purpose of processing by
another enterprise;
iv. the maintenance of a fixed place of business
solely for the purpose of purchasing goods or merchandise, or for collecting
information for the enterprise;
v. the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.
2.
Dividends paid by a company which is a resident of the Philippines to a
resident of Canada may be taxed in Canada. However, such dividends may also be
taxed in the Philippines, but where the beneficial owner of the dividends is a
resident of Canada the tax so charged shall not exceed: 15 percent of the gross amount of any
dividend paid to a company which is a resident of Canada which controls at
least 10 percent of the voting power of the
company paying the dividend; or 25 percent of the gross amount of the dividends in all other cases.
58.
Keith Damsell, Twisted Road leads to Marcopper ownership,
Financial Post, May 8, 1999 at http://www.probeinternational.org/pi/index.cfm?DSP=
content&ContentID=4818 (last accessed Aug. 19, 2003) [hereinafter Damsell Marcopper Ownership].
60. Third World Network, The Marcopper Toxic Mine Disaster – Philippines’ Biggest Industrial Accident, at http://www.twnside.org.sg/title/toxic-ch.htm, 1996 (last accessed Aug. 19, 2003).
61. Keith Damsell, Island’s Deadly Legacy, Financial Post, May 8, 1999 at http://www.probeinternational.org/pi/mining/index.cfm?DSP=content&ContentID=4817 (last accessed Aug. 19, 2003) [hereinafter Damsell Legacy].
66. A series of annual surveys in the late 1970s and early 1980s by Synergistics Consultants, Inc. of the University of Philippines.
72. Keith Damsell, Philippines set to launch probe into Marcopper, Placer Dome, Financial Post, May 19, 1999, at http://www.probeinternational.org/ pi/mining/index.cfm?DSP=content&ContentID=4816 [hereinafter Damsell Probe].
74.
Agus Hermawan & Hang T. Nguyen, The Marcopper Disaster in the Philippines: Case Study No. 1 in Environmental Economics in Asia,
Kompas newspaper, Indonesia, Vietnam News Agency, at http://www.ecanet.net/
articles/marcopper.html (last accessed Aug. 19, 2003).
75.
United Nations
Department of Humanitarian Affairs-DHA-Online,
Joint UNEP/DHA Environment Unit, at
http://www.reliefweb.int/ocha_ol/ programs/rcb/unep4.html. Relief Co-ordination Branch Joint UNEP/DHA Environment
Unit, The Marinduque Island Mine Disaster, Philippines, Assessment mission conducted under the leadership of UNEP/Water Branch.
81. Simon Cooper, Placer Dome Gets Flood Warning, Globe and Mail, Oct. 23, 2001, at http://www.probeinternational.org/pi/mining/index.cfm?DSP= content&ContentID=4815 (last accessed Aug. 19, 2003).
83. The study, conducted by Ma. Eugenia Bennagen of the Philippines, estimated the impact of the Marcopper mining accident which poisoned the Boac river in Marinduque Island in March 1996.
89. Facilities Management Corp. v. De la Osa, 89 SCRA 131 (1979), Sunio v. NLRC, 127 SCRA 390 (1984); Asionics Philippines, Inc. v. NLRC; 290 SCRA 164 (1998); Republic v. Sandiganbayan, 346 SCRA 760 (2000).
91. Catherine Coumans, The Sore That Keeps Festering, Financial Post, Apr. 8, 1999, at http://www.probeinternational.org/pi/mining/index.cfm?DSP= content&ContentID=4820, (last accessed Aug. 19, 2003).
100. Mines and Communities Website, Placer Dome in Trouble in the Philippines, at http://www.minesandcommunities.org/Action/press11.htm (last accessed Aug. 19 2003).
101. Project Underground, Drillbits & Tailings: Placer Dome's Dirty Sore Keeps Festering, http://www.moles.org/ProjectUnderground/drillbits/990417/99041701.html (last accessed Aug. 19, 2003).
116. The few limitations that exist pertain to the
ownership of stocks. Special laws such as the Insurance Code, Presidential
Decree No. 1460, or the General Banking Act of 2000, Republic Act No. 8791, provide
minimum paid-up capitalization in recognition of the fact that
undercapitalization can harm certain interests. The Constitution and other
special laws provide for limitation on stocks that may be subscribed to by
foreigners, such as in public utilities, the exploitation of natural resources,
mass media, and the advertising industry.
126. Cesar L. Villanueva, Legal and Regulatory Issues for Bank Directors 11 (unpublished manuscript on file with author) (2002).
129. R. Edward Freeman, A Stakeholder Theory of the Modern Corporation, Ethical Theory and Business 70-71 (1997).
132. But the SEC Code and the BSP Circular now considers
the corporation as owing duties to increased constituencies called
stakeholders. The test to prevent courts from interfering with corporate
affairs, that “the corporation acted within its powers” is no longer valid,
because the Board can act within its powers and yet violate its duties to
stakeholders. When the corporation violates stakeholder interest, courts may
now exert their will on corporations because the test is now no longer the fact
that the act was within corporate powers.