Garments and Textile Export Board

November 12, 1986 Garments and Textile Export Board 357 New Solid Bldg. Gil J. Puyat Ave. Extension Makati, Metro Manila Attention : Ms . Angelica S . Hernandez Officer-In-Charge Madam: This has reference to your letter dated October 28, 1986, requesting from this Commission for the proper interpretation of the phrase "principal stockholders" in its generic sense and as used in connection with the liability of such "principal stockholders" for corporate acts. Anent thereto, please be informed that "principal stockholders" are owners of majority or controlling shares or stock of a corporation. On question whether taxpayer was personal service corporation, stockholder owning 62 percent of stock absolutely and also legal title as co-trustee and part of beneficial remainder of 32 percent held "principal stockholder".(C.I.R. v. Isaac Winkler & Bro. Co. C.C.A. 53 F2d 580, 581 cited in Words and Phrases, Vol. 33, p. 629). Where stockholders owning more than 80 percent of capital stock were regularly and actively engaged in conducting insurance agency's corporation business, percentage of stock so represented was large enough to constitute owners thereof "principal stockholders" and corporation was personal service corporation" for income and excess profits tax purposes ...(Harry Kaufman, Ltd. v. CIR, (CCA La.) 24, F2d 44, 46, cited in Words & Phrases, Vol. 33, p 629). Insofar as liability of principal stockholders for corporate acts is concerned, please be informed that generally, a corporation has a personality separate and distinct from that of its stockholders, and as such, it is not and can never be held liable for the personal indebtedness or obligations of its stockholders. The stockholders are liable personally for their own obligations and their individual acts, done not as agents or officers of the corporation and for and in behalf of the corporation, shall never bind them. (Wise and Co. vs. Man Sun Lung, G.R. No. 46997, Enero 11, 1940, 40 O.G. No. 106, p. 50), unless the corporate entity is being used merely as an alter ego or business conduit for the sole benefit of the stockholders (Koppel (Phil.) Inc. vs. Yatco, G.R No. L-47673, October 10, 1946, 43 O.G. 4606) in which case the corporate fiction may be disregarded and the stockholders may be held personally liable. From the above, it is clear that the principal stock holders cannot be held liable for corporate acts unless such corporate acts were made in their capacity as directors or agents of the corporation. In such instances, Section 31 of the Corporation Code shall apply. Section 31 provides, and we quote: "SECTION 31. Liability of directors, trustees or Officers . Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation". Where one man or family controls it is especially true that he or they must act in the utmost good faith towards minority stockholders in the management and he or they cannot purchase property from the corporation to the detriment of minority stockholders. (Fletcher Cyclopedia Corporations, Vol. 13, p. 61). prcd Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman