Professional Documents
Culture Documents
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Case Title; Topic Union Glass v. SEC Government Regulation of Corporations Quick Facts CHAPTERS I and II1 Pioneer Glass mortgaged to DBP its assets in order to get loans. DBP was able to get control of the majority of the common shares of stocks because of the payment scheme of Pioneer Glass. When Pioneer Glass suffered serious liquidity problems such that it could no longer meet its financial obligations with DBP, it entered into a dacion en pago agreement with the latter, whereby all its assets mortgaged to DBP were ceded to the latter in full satisfaction of the corporation's obligations Holifena, a stockholder, instituted the complaint contesting the dacion en pago Union Glass is a lessee of the Pioneer Glass plant Held/Ratio/Doctrine SEC has NO jurisdiction.
The fact that the controversy at bar involves the rights of petitioner Union Glass who has no intra-corporate relation either with complainant or the DBP, places the suit beyond the jurisdiction of the respondent SEC. The case should be tried and decided by the court of general jurisdiction, the Regional Trial Court. Since petitioner has no intra-corporate relationship with the complainant, it cannot be joined as party-defendant in said case as to do so would violate the rule or jurisdiction. The SC added however that for Hofileas complaint against Union Glass to prosper, final judgment must first be rendered in the issue of the validity of the dacion en pago, which is a prejudicial question, the resolution of which is a logical antecedent of the issue involved in the action against petitioner Union Glass. The Court held that such action for recovery of the glass plant could be brought by the dissenting stockholder to the regular courts only if and when the SEC rendered final judgment annulling the dacion en pago and furthermore subject to Union Glass' defenses as a third party buyer in good faith. SEC has original and exclusive jurisdiction "the issue is not the ownership of shares but rather the nonperformance by the Corporate Secretary of the ministerial duty of recording transfers of shares of stock of the Corporation of which he is secretary." The dispute at bar is an intracorporate dispute that has arisen between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the corporate secretary to perform his "ministerial duty" to record the transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed certificates of stock, in favor of Telectronics as the purchaser thereof. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the regular court questions the validity of the transfer and endorsement of the certificates of stock, claiming alleged preemptive rights in the case of the Abejos' shares and alleged loss of the certificates and lack of consent and consideration in the case of Virginia Braga's shares. Such dispute clearly involves controversies "between and among stockholders," as to the Abejos' right to sell and dispose of their shares to Telectronics, the validity of the latter's acquisition of Virginia Braga's shares, who between the Bragas and the Abejos' transferee should be recognized as the controlling shareholders of the corporation, with the right to elect the corporate officers and the management and control of its operations. Such a dispute and case clearly fall within the jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A. Insofar as the Bragas and their corporate secretary's refusal on behalf of the
dispute between the principal stockholders of Pocket Bell: spouses Abejo sold their shares to Telectronics, making the latter the majority stockholder before the sale, the erstwhile majority stockholders were the Bragas Corporate Secretary refused to transfer the certificate of stock in Telectronics name Bragas asserting that they have preemptive rights This triggered off the series of intertwined actions between the protagonists, all centered on the question of jurisdiction over the dispute. The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities and Exchange Commission, while the Abejos and Telectronics, as new majority shareholders, claim the contrary.
From http://www.scribd.com/doc/60353957/Chapter-I-and-II-Corporation-Law
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Premiere is a financing company engaged in soliciting and accepting money market placements or deposits. Premiere, with expired permit to issue commercial papers and with intention not to pay or defraud its creditors, induced and misled Magalad into making a money market placement of P50,000.00 at 22% interest per annum for which it issued a receipt as well as two (2) post-dated checks in the total sum of P51,079.00 and assigned to Magalad its receivable from a certain David Saman for the same amount. Drawee bank dishonored the checks for lack of sufficient funds to cover the amount. Despite demands by Magalad for the replacement of said checks with cash, Premiere, for no valid reason, failed and refused to honor such demands and due to fraudulent acts of Premiere.
Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and misrepresentation committed by Premiere, the SEC must be held to retain its original and exclusive jurisdiction over the case, despite the fact that the suit involves collection of sums of money paid to said corporation, the recovery of which would originally fall within the jurisdiction of regular courts. The fraud committed is detrimental to the interest of the public and, therefore, encompasses a category of relationship within the SEC jurisdiction. Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members or officers; (c) between the corporation, partnership or association and the state so far as its franchise, permit or license to operate is concerned; and (d) among the stockholders, partners or associates themselves (Union Glass & Container Corp. v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987). The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the SEC of its original and exclusive jurisdiction. The expanded jurisdiction of the SEC was conceived primarily to protect the interest of the investing public. For the liability to pay taxes to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary of a business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood.
Club Filipino, Inc. de Cebu is a civic corporation, owning and operating a club house, a bowling alley, a golf course, and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and -its golf-course. The club is operated mainly with funds derived from membership fees and dues.
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951, as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant. The Collector of Internal Revenue assessed against and demanded from the Club, percentage taxes on its gross receipts as well as fixed taxes and compromise penalty. The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for review.
Petitioner corporation through its president, Manuel Dulay, obtained various loans for the construction of its hotel project, Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money from petitioner Virgilio Dulay to be able to continue the hotel project. As a result of said loan, petitioner Virgilio Dulay occupied one of the unit apartments of the subject property since 1973 while at the same time managing the Dulay Apartment as his shareholdings
In the instant case, petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, a corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting which, in this case,
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
in the corporation was subsequently increased by his father. Manuel Dulay by virtue of Board Resolution No. 186 of petitioner corporation sold the subject property to private respondents spouses, Maria Theresa and Castrense Veloso in the amount of P300,000.00. The parties then executed a Memorandum to the Deed of Absolute, giving Manuel Dulay within two (2) years or until December 9, 1979 to repurchase the subject property for P200,000.00 which was however, not annotated. Thereafter private respondent Maria Veloso, without the knowledge of Manuel Dulay, mortgaged the subject property to private respondent Manuel A. Torres for a loan of P250,000.00 which was duly annotated. The subject property was sold on April 1, 1978 to private respondent Torres as the highest bidder in an extrajudicial foreclosure, upon default of Veloso to pay the loan. Veloso then executed a Deed of Absolute Assignment of the Right to Redeem in favor of Manuel Dulay assigning her right to repurchase the subject property from private respondent Torres. As neither private respondent Maria Veloso nor her assignee Manuel Dulay was able to redeem the subject property within the one year statutory period for redemption, private respondent Torres sought to consolidate his ownership over the property. Petitioner Virgilio Dulay appeared in court to intervene in said case alleging that Manuel Dulay was never authorized by the petitioner corporation to sell or mortgage the subject property, and sought to cancel the sheriff sale to Torres and regain possession of the property. petitioner Virgilio Dulay failed to do.
AGRIX executed in favor of Phil Veterans Bank a REM over 3 parcels of land. During the existence of the mortgage, AGRIX went bankrupt. Veterans Bank than filed a claim with the AGRIX Claims Committee for the payment of its loan credit. Agrix and NDC refused to recognize the claim, invoking PD 1717 which ordered the rehabilitation of the Agrix Group of Companies is administered by the National Development Company. Sec 4(1) thereof provides all mortgages and other liens attached to the assets of the dissolved corporations are hereby extinguished. Agrix proceeded to cancel the mortgage lien in light of the PD.
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
TC annulled the entire PD 1717. NDC appeals. It claims that since Veterans Bank invoked questioned PD when it filed a claim with the Agrix Claims committee, it is thus estopped from questioning the validity of the PD which also provides that all mortgages attached to properties of Agrix shall be extinguished the PD 1717 as unconstitutional.
Pioneer Insurance v CA
Southern Airlines was a single proprietorship. Its owner entered into contracts of sale over aircrafts Pioneer Insurance and Surety Corporation as surety executed and issued its Surety Bond in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business. Lim had duly received the amount of P151,000.00 from defendants Bormaheco and Maglana representing the latter's participation in the ownership of the subject airplanes and spare parts. The indemnitors then executed two (2) separate indemnity agreements in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors principally bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety upon the bond. Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as security for Pioneers suretyship. Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts. Pioneer also filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Petitioner prays for the removal of the word "PHILIPS" from private respondent's corporate name.
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Lyceum of Baguio asserts that it has exclusive rights to the use of the word Lyceum in its name
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Petitioner liable to PAIC Savings and Mortgage Bank, formerly known as First Summa Savings Bank. Petitioner argues that they were legally justified to withhold payments because they werent notified of the change in banks name
Petitioners brought the action for prohibition to nullify EO 386 creating the municipality of Malabang, Lanao del Sur
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
The four defendants, after having agreed to form a corporation, ordered goods from the plaintiff even before they filed their articles of incorporation. And after they had filed such articles in one of the two public offices required by law, they ordered additional goods. This is an action to recover the purchase price of said goods from the defendants as partners Counsel for defendants argue with much force and persuasiveness that they escape liability because they became a corporation de facto
On 28 May 1947, C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation described in a list appended thereto. Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers. On 2 December 1947, the said articles of incorporation were filed in the office of the Securities and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation. On 22 March 1948, pending action on the articles of incorporation by the
http://berneguerrero.com/downloads/2005nr74_comm-corp.pdf
10
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
aforesaid governmental office, Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte the civil case, alleging among other things that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action. After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at the request of Brown, et. al., appointed Pedro A. Capuciong as the receiver of the properties thereof, upon the filing of a P20,000 bond. Hall and Hall offered to file a counter-bond for the discharge of the receiver, but Judge Piccio refused to accept the offer and to discharge the receiver. Whereupon, Hall and Hall instituted the present special civil action with the Supreme Court. At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality and assigns same as reversible error.
There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate existence. Under these circumstances it was unnecessary for the plaintiff to present other evidence of the corporate existence of either of the parties. It may be noted that there is no evidence showing circumstances taking the case out of the rules stated. Under the circumstances of the case, the officer (Cranson) of a defectively incorporated association may not be subjected to personal liability There, is as we see it, a wide difference creating a corporation by means of the de facto doctrine and estopping a party, due to his conduct in a particular case, from setting up the claim of no incorporation When there is a concurrence of the 2 elements necessary for the application of the de facto doctrine, there exists an entity which is a corporation de jure agains all persons but the state. On the other hand, the estoppels theory is applied only to the facts of each particular case and may be invoked even when there is no corporation de facto. Accordingly, even though one or more of the requisites of a de facto corporation are absent, we think that this factor does not preclude the application of the estoppels doctrine in a proper case, as in the one at bar. There can be no question that a corporation with registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president and conversely, a stockholder or member cannot be held personally liable for any financial
Due to an oversight by the lawyer of which Cranson wasnt aware, the certificate of incorporation signed and acknowledged in May 1961 was not filed until November. Between that time Cransons corporation purchased 8 typewriters from IBM
Salvatierra leased his land to the corporation. He filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. Judgment against both was obtained. President complains for being held personally liable.
11
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Fausta F. Oh reported for work at the Chiang Kai Shek School in Sorsogon on the first week of July, 1968. She was told she had no assignment for the next semester. Oh was shocked. She had been teaching in the school since 1932 for a continuous period of almost 33 years. And now, out of the blue, and for no apparent or given reason, this abrupt dismissal. She demanded separation pay, social security benefits, salary differentials, maternity benefits and moral and exemplary damages. The original defendant was the Chiang Kai Shek School but when it filed a motion to dismiss on the ground that it could not be sued, the complaint was amended. Certain officials of the school were also impleaded to make them solidarily liable with the school. Court of First Instance of Sorsogon dismissed the complaint. On appeal, its decision was set aside by the respondent court, which held the school suable and liable while absolving the other defendants
http://www.scribd.com/doc/61022869/Chiang-Kai-Shek-School-vs-CA
12
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
President suing LBC because of lately-delivered parcel. TC awarded corporation moral damages
upon the request of the Sangguniang Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to consolidate their respective associations and form the Unified Mabalacat-Angeles Jeepney Operators' and Drivers' Association, Inc. (UMAJODA); petitioner and private respondent also agreed to elect one set of officers who shall be given the sole authority to collect the daily dues from the members of the consolidated association; elections were held on October 29, 1995 and both petitioner and private respondent ran for president; petitioner won; private respondent protested and, alleging fraud, refused to recognize the results of the election; private respondent also refused to abide by their agreement and continued collecting the dues from the members of his association despite several demands to desist. Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that jurisdiction was lodged with the Securities and Exchange Commission (SEC).
Lim Tong Lim v. Phil. Fishing Gear Industries, Inc.4 Corporation by Estoppel
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated 7 February 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (PFGI). They claimed that they were engaged in a business venture with Lim Tong Lim, who however was not a signatory to the agreement. The buyers, however, failed to pay for the fishing nets and the floats; hence, PFGI filed a collection suit against Chua, Yao and Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission. Lim filed the Petition for Review on Certiorari. Lim argues, among others, that
http://berneguerrero.com/downloads/2005nr74_comm-corp.pdf
13
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and not to him.
IETTSI, through its managing director, wrote a letter to the Philippine Football Federation, through its president, Henri Kahn, wherein the former offered its services as a travel agency to the latter. The offer was accepted. IETTSI secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and Brisbane. For the tickets received, the Federation made two partial payments, then through the Project Gintong Alay, paid some more On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding balance of the Federation. Thereafter, no further payments were made despite repeated demands. IETTSI sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said obligation. Kahn filed his answer with counterclaim, while the Federation failed to file its answer and was declared in default by the trial court. In due course, the trial court rendered judgment and ruled in favor of IETTSI and declared Henri Kahn personally liable for the unpaid obligation of the Federation. The complaint of IETTSI against the Philippine Football Federation and the counterclaims of Henri Kahn were dismissed, with costs against Kahn. Only Henri Kahn elevated the decision to the Court of Appeals. On 21 December 1994, the appellate court rendered a decision reversing the
ibid
14
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
trial court. IETTSI filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995. IETTSI filed the petition with the Supreme Court.
Loyola Grand Villas Homeowners Association (LGVHAI) was organized on 8 February 1983 as the association of homeowners and residents of the Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor of Home Insurance and Guaranty Corporation (HIGC), as the sole homeowners' organization in the said subdivision under Certificate of Registration 04-197. It was organized by the developer of the subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For unknown reasons, however, LGVHAI did not file its corporate by-laws. Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so. To the officers' consternation, they discovered that there were two other organizations within the subdivision the Loyola Grand Villas Homeowners (North) Association Incorporated (North Association) and the Loyola Grand Villas Homeowners (South) Association Incorporated (South Association). The North Association was registered with the HIGC on 13 February 1989 under Certificate of Registration 04-1160 covering Phases West II, East III, West III and East IV. It submitted its by-laws on 20 December 1988. In July 1989, when Soliven inquired about the status of LGVHAI,
Ibid.
15
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not submit its bylaws within the period required by the Corporation Code and, second, there was non-user of corporate charter because HIGC had not received any report on the association's activities. Apparently, this information resulted in the registration of the South Association with the HIGC on 27 July 1989 covering Phases West I, East I and East II. It filed its by-laws on 26 July 1989. These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the revocation of LGVHAI's certificate of registration without due notice and hearing and concomitantly prayed for the cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI. otherwise be valid."
March 13, 1923: Manuel Gonzales made a written statement to the Botica
Nolasco, Inc., requesting that 5 shares of stock sold by him to Henry Fleischer be noted transferred to Fleischer's name o He also acknowledged in said written statement the preferential right of the corporation to buy said five shares June 14, 1923: he withdraw and cancelled his written statement of March 13, 1923 o Nolasco replied that his letter of June 14th was of no effect, and that the shares in question had been registered in the name of the Botica Nolasco, Inc., November 15, 1923: Fleischer filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of 5 shares of fully paid stock of Botica Nolasco Co (Nolasco) by purchase from their original owner, Manuel Gonzalez Despite repeated demands, Nolasco refused to register said shares in his name in the books of the corporation caused him damages amounting to P500 Nolasco's defense: article 12 of its by-laws: it had preferential right to buy the shares at the par value of P100/share, plus P90 as dividends corresponding to the year 1922 offer was refused by Fleischer Trial Court: favored Fleischer and ordered the shared be registered
o o
A by-law cannot take away or abridge the substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction
http://incessantlylearn.blogspot.com/2011/07/corporate-law-case-digest-fleischer-vs.html
16
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
upon the right of sale.
The Phil govt instituted a quo warranto proceeding against EL Hogar for the purpose of depriving it of its corporate franchise, excluding it from all corporate rights anf privileges and effecting a final dissolution of the corpo. March 1906-Corpo law came into effect. Sec 171 to 190 are on building and loan association. El Hogar-first corpo in the Phil. Under the law then, the capital of an association was not permitted to exceed 3M but then amended to 10M. The by-laws of the corpo states a provision that: the BOD, by vote of an absolute majority of its members, is empowered to CANCEL SHARES AND RETURN TO THE OWNER thereof the balance resulting from the liquidation thereof, whenever, by reason of their conduct of any other motive, the continuation as members of the owners of such shares is not desirable. The govt questioned the validity because it conflicts with the Corpo Law which declares that the BOARD SHALL NOT HAVE THE POWER TO FORCE THE SURRENDER AND WITHRAWAL OF UNMATURED STOCK EXCEPT IN CASE OF LIQUIDATION OF THE CORPORATION OR OF FORFEITURE OF THE STOCK FOR DELINQUENCY. The govt asserts that because of the existence of the provision in the by-law, it justifies its dissolution. There is also a provision in the by-laws that the directors shall elect from amoing the shareholder members to fill the vacancies that may occur in the BOD until the election at the general meeting. Another cause of action of the govt was based on the BODs failure to hold annual meetings and fill vacancies. Third cause of action is the fact the directors of El Hogar have been receiving large compensation because the by-laws provide a 5% of the net profit shown by the annual balance sheet to be distributed to the directors in proportion to their attendance at meetings of the board. Fourth cause of action: Procedures to adopt when one is elected as a BOD=P5000 pay-up of shares as securityonly the rich can be BOD and the waiver to receive loans form the corpo ISSUE: WON El Hogar may be dissolved on such grounds. CHAPTER IV9
By-law cannot operate to defeat his rights as a purchaser who obtained them in good faith and for a valuable consideration NO. The by-law (1st) is a mere nullity and could not be enforced if the directors attempt to do so. In the second cause of action, unless the law or the charter of the corporation expressly provides that an office shall become at the expiration of the term of office for which the officer was elected, the general rule is to allow the officier to hold over until his successor is duly qualified. MERE FAILURE OF A CORPO TO ELECT OFFICERS DOES NOT TERMINATE THE TERM OF EXISTING OFFICERS AND DISSOLVE THE CORPORATION. On the third cause of action as to the compensation of the BOD=the question must be of the validity of the measure and not the propriety and wisdom of the measure adopted. The power to fix the compensation they shall receive, if any, is left to the corporation to be determined by the by-laws. The remedy is in the hands of the stockholders. On the fourth cause of action: The Corpo Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors and the requirement of security from them for the proper discharge of the duties of their offce.
http://www.scribd.com/doc/4664781/Corpo-Digests
17
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Stockholders of T. Guanzon v. Register of Deeds of Manila Theory of Corporate Entity: Its Effects In September 1960, 5 stockholders of the F.Guanzon and Sons executed a certificate of liquidation of the assets of the corpo because of the resolution of the SH which they adopted dissolving the corporation. They have distributed among themselves in propoertion to their shareholdings, as liquidating dividends, the assets of said corporation, including real properties. The certificate of liquidation was presented to the Register of Deeds of Mla but WAS DENIED. Grounds for denial: 1) number of parcels not certified to in the acknowledgement 2) fees not paid 3) documentary stamps werent attached to the documents 4) judgment of the court approving the dissolution and directing the disposition of the assets of the corpo need to be presented ISSUE: Commissioner of Land Registration=the issues hinged on WON the certificate of liquidation merely involves a distribution on the corporation assets or a transfer or conveyance. If it were a conveyance, there would be a need to reflect on the certificate a statement of the numbers of parcels of land involved in the distribution in the acknowledgement appearing therein. Documentary stamps are more expensive if its a transfer rather than distribution. Caram v. CA Theory of Corporate Entity: Its Effects CLR held that it is a transfer or conveyance. The plaintiff filed a claim for the payment of the preparation of the project study and his technical services that led to the organization of the defendant corporation. He demands the solidary liability of the petitioners and their codefendants. The petitioners contend that they had no contract with the private resp and that their position was that they are mere subsequent investors in the corporation that was later created. Caram et al asserted that they shouldnt be held solidary liable with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and Garcia. ISSUE: WON the petitioners themselves are ALSO and PERSONALLY liable for such expenses and if so to what extent (solidary or jointly?) CA held: Yes they should be jointly and severally liable for the said amount. Not only the defendant corporation but all other def who were involved in the preparatory stages of the incorporation (those who caused the preparation and/or benefited from the project study and the technical services) must be liable. Presidential Executive Assistant Clave directed petitioners Palay and Onstott (the president) to refund jointly and severally Dumpit as resolved by the National SC: Not liable. SC: Agree with the CLR.
There was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof responsible. Bona fide corporation=the corporation should alone be liable for its corporate acts as duly authorized by its officers and directors. The Carams did not contract with the plaintiff. It is only the result of such services that they were persuaded to invest in the proposed airline. Even if they have benefited, there is no justification to hold them personally liable. Otherwise, all other stockholders of the corpo including those who came in later, and regardless of the amoung of their shareholdings, would be equally and personally liable. The Carams are willing to be liable but that they are only questioning total liability. The petitioners are not liable at all, jointly or jointly and severally. 1) Judicial action for the rescission is not necessary when it is provided in the contract that it may be revoked and cancelled for violation of any of its
ibid
18
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Housing Authority because the corporation extrajudically foreclosed the parcel of land which Dumpit contracted with them under a Contract to Sell. DP was paid, installments were done. Par. 6 of the contract provided for an automatic foreclosure upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period, WITHOUT THE NEED OF NOTICE AND WITH FORFEITURE OF ALL INSTALLMENTS PAID. Dumpit (presumably) defaulted thus the foreclosure and thus the charge because he was not even notified. He wrote after 6 yrs and asking for an update of his account and request that his rights be assigned to Lourdes Dizon. Long been rescinded and has already been resold. NHA found them jointly and severally liable to refund Dumpit because the rescission is void in the absence of any judicial or notarial demand. ISSUES raised: 1) Is demand mandatory or may be dispensed with by stipulation? 2) May pet be held liable for the refund for the installments made? 3) Doctrine of piercing the veil of corporate fiction has application 4) Pres Exec Asst committed grave abuse of discretion NIDC entered into a JVA with Kawasaki for the construction, operation and management of the SNS (Subic Natl Shipyard) which became PHILSECO. Under the contract, NIDC and Kawasaki shall contribute 330M for the capitalization of the PHILSECO in the proportion of 60-40 respectively. Contract states to grant the right of first refusal should either of them decide to sell, assign or transfer its interest. In the provision it states that right of the first refusal shall be given EXCEPT when the transferee is a corporation owned or controlled by the government or by Kawasaki affiliates. NIDC transferred its rights to PNB and subsequently was transferred to the National Govt pursuant to AO No. 14. Pres Aquino established COP (comm on privatization) and APT (asset privatization trust) to take title to and possession of, conserve, manage, and dispose of non-performing assets of the National Govt. Trust agreement was entered into by the National Govt and APT where the latter is the trustee in the Govts share in PHILSECO. Because of a quasi-reorganization of PHILSECO to settle its huge obligation to PNB, govts shareholdings increased to 97% reducing Kawasakis shareholdings. In the interest of the national economy, COP and APT deemed it best to sell the govts share to private entities. Negotiations insued bet APT and Kawasaki and they agreed that the latters right to first refusal be exchanged for the right to top by 5% the highest bid for the 2)
THE SC HELD: (which reverses its previous ruling) a. Philseco is not a public utility because a shipyard is not a public utility. No law declares it to be. b. Nothing in the JVA prevents Kawasi from acquiring more than 40% of PHILSECO c. Exchange for right to top did not violate the principles of competitive bidding JG Summit filed the case to SC en banc claiming that there was executive interference when Camacho forwarded to Davide the case to be part of the Courts agenda for resolution. HELD by SC on en banc: a. The right to top was an express reservation. It is a well-settled rule that were such reservation is made in an Invitation to Bid, the higest or lowest bidder, as the case may be, is not entitled to an award as a matter of right. The right to top was a condition imposed on all bidders equally, based on APTs exercise of its discretion in deciding on how best to privatize the govts shares in PHILSECO. There is no executive interference since the memorandum was merely noted to acknowledge its filing and no further legal significance. The decision of the Court should be based on contract law and not on policy considerations. Right of first refusal or right to top cannot be exercised by a consortium which is not the proper party granted such right.
b. c. d. e.
19
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
said shares. Kawasaki would be entitled to name a company in which it was a stockholder, which could exercise the RIGHT TO TOP. It elected Philayards Holdings (PHI). From ABSR (rules for the bidding), it was stipulated that from the moment the highest bid becomes acceptable to the govt, Philyards shall have 30 days to top the highest which is to top 5%. They need to notify APT if they will exercise such right and deposit 10% of the highest bid plus 5% within 30 days. They shall be sent a notice as a preferred bidder and would have 90 days to pay the balance. JG Summit bid for 2B with an acknowledgment of Kawasakis right to top. PHILYARDS exercised its right to top and fully paid the balance. JG Summit questioned the offer of PHI to top its bid on the ff grounds: a. b. c. d. e. Kawasaki/PHI consortium was composed of Kawasaki, mitsui, Keppel, SM Group, ICTSI, and Insular Life and this violated the ASBR bec the last 4 companies were the losing bidder ONLY Kawasaki could exercise the right to top Giving right to top to PHI constituted unwarranted benefit to a third part No right of first refusal can be exercised in a public bidding or auction sale JG Summit consortium was not estopped from questioning the proceedings. f.
There is nothing in the ASBR that bars the losing bidders from joining either the winning bidder (should the right to top is not exercised) or Kawasaki/PHI (should it exercise its right to top as it did), to raise the purchase price. There was no proof of fraud. The main goal of the case is to dispose the shares of a corporation which the govt sought to privatize. HELD by SC on Reconsideration: a. Mutual rights of first refusal under the JVA bet Kawasaki and NIDC is valid. Right of first refusal is a property right of PHILSECO. It is even valid to allow PHILSECOs equity be owned by Kawasaki by more than 40% because what would be affected would not be the foreign corporations stockholders ownership but the capacity of the corporation to own landit is disqualified to own land.
Right of first refusal pertains to the shareholders while the capacity to own land pertains to the corporation. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land. What was transferred was the right of first refusal (and subsequently the right to top) as to the shares, which are immovable property, and not as to the land which PHILSECO owns or holds, which are movable. The prohibition is only to the acquisition of the land and not to the acquisition of the shares.
CA: JG is estopped from questioning because it knew from the start the right to top granted to Kawasaki/philyards. SC: Philseco shipyard is a public utility whose capitalization must be 60% Filipinoowned. That the right to top granted to Kawasaki was illegal not only because it violates the rules on competitive bidding, but more so, because it allows foreign corporations to own more than 40% equity in the shipyard. And that even when JG had the opportunity to review the ASBR, it cannot be estopped to question an illegal and inequitable provision thereof. Thus SC voided the transfer of the national govt share in Philseco to Philyard and upheld the right of JG Summit. Reconsideration was filed by Philyard to SC on three basic issues: a. Is Philseco a public utility? b. WON under the 1977 JVA, Kawasaki can exercise right of first refusal only up to 40% of the total capitalization c. WON right to top granted to Kawasaki violates the principles of competitive bidding. Melchor dela Cuesta doing business under Farmers Machineries sold a tractor to Tramat Mercantile whose president is David Ong. In payment, Ong issued a check which replaced an earlier postdated check.
The contract between dela Cuesta and Tramat was ABSOLUTE SALE and not conditional and that dela Cuesta did not violate any warranty on the sale of the tractor.
20
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Tramat sold the tractor, together with a lawn mower fabricated by it, to Nawasa. David Ong caused a stop payment of the check when NAWASA refused to pay the tractor and lawn mover after discovering that aside from stated defects of the lawn mover, the engine sold by de la Cuesta was a reconditioned unit. Dela Cuesta filed for recovery and attys fees. Ong answered that dela Cuesta has no cause of action and that the questioned transaction was between Tramat and Farmers and that they payment was stopped because the tractor had been priced as brand new and not as a reconditioned unit. Paus version: Dela Cuesta sold a tractor with a 1.3 engine to Tramat and the latter sold this same tractor to MWSS together with a fabricated lawn mower. Tramat caused a stop payment bec Nawasa refused to pay Tramat because it found out that the lawn mower had defects and that the tractors engine was reconditioned and not brand new. Dela Cuesta filed for recovery. The reason why the lawn mower was defective was because Tramat fabricated it and it was shown that it had no experience in fabricating one. Its competitor Alpha Machinery had stopped manufacturing the same. It was the fabrication of Tramat that was the root of all the problems. The engine did not function not because it was reconditioned but because it was made to do what it cannot.
b. c. d.
Plaintiffs brought this action as stockholders of Marvel enjoining the CIR from selling at public auction various properties, three lands with buildings, which were under the name of the corporation. Seized by CIR and detained for the collection of war profits taxes assessed against Maria Castro. Plaintiffs assert that these properties belong to the corpo and not to Maria. RTC: CIR failed to prove that Maria is the true owner of all the stock certificates of the corpo. An evidence susceptible of two interpretations, the interpretation which would deprive one of property without the due process of the law should not be made. Sec. of Finance: considered the report of a special committee assigned to study the war profit taxes of Mrs. Castro recommended the collection of war profits taxes and instructed the CIR to collect the same.
Not the corpos but Marias as the true sole owner. Evidence: 1) Endorsement in blank of the shares of stock issued in the name of the other incorporators, and the possession thereof by Marai. All of the certificates EXCEPT that in the name of Maria were endorsed in blank by the subscribers. (witnesses Auino as IR examiner, Mariano as examiner, and Llamado, USec of Finance). Plaintiffs are claiming that these endorsement could have been superimposed however the court said that it is a mere possibility and the circumstances prove that they were not superimposed. 2) The stockholders did not have incomes in such amounts during the time of the organization or immediately thereto as to enable them to pay in full for their supposed subscriptions. Proved by their tax return or the absence thereof. There was a prima facie case that Castro had furnished all the money that the Marvel Building Corpo had. 1) If they really wanted to prove that they paid for the subscription, they could have just showed receipts to testify their payments. But they refused to do so.
21
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Adelaida Rodriguez-Magsaysay, widow and special administratix of the late Sen. Magsaysay, brought against Panganiban, SUBIC, FILMANBANK and the Register of Deeds of Zambales an action. She alleged that she and her husband acquired thru conjugal funds a parcel of land with improvement known as Pequena Island and that after the death of her husband, she discovered an annotation at the back of the TCT that the land was acquired thru his husbands separate capital. Her husband executed an assignment to SUBIC and SUBIC executed a mortgage in favor of FILMANBANK. She questions the validity of the acts and alleged that these were done in an attempt to defraud the conjugal partnership considering that the land is conjugal, her marital consent to the annotation was not obtained, and that the change made by the Register of Deeds of the titleholders was effected without the approval of the Commissioner of Land Registration and that her husband executed the Deed of Assignment by mistake, violence or intimidation. And that the assignment in favor of SUBIC was without consideration and consequently null and void. The sisters of the senator filed for intervention of the ground that their brother conveyed to them of his shareholdings in SUBIC and as assignees of 41% of the total outstanding shares of such stocks, they have a substantial and legal interest in the subject matter. Indophil Textile Mill Workers Union-PTGWO is a labor organization duly registered with DOLE and is the exclusive bargaining agent of all the rank-and-file employees of Indophil Textile Mills Inc. Calica is the Voluntary Arbiter or the NCMB of DOLE while Indophil is a corporation engaged in the manufacture, sale, and export of yarns or various kinds and of materials of kindred character and its plants are in Bulacan. The corporation and the union executed a CBA. Indophil Acrylic Manufacturing Corp was formed and registered with SEC. Acrylic applied for incentives with the BOI under the Omnibus Investments Code. Application was approved on a preferred non-pioneer status. Workers of Acrylic unionize and a CBA was executed. However, the petitioner union claimed that the plant facilities build and set up by Acrylic should be considered as an extension or expansion of the facilities of resp Company based on the CBA which states that the agreement shall apply to the companys facilities and installations and to any extension and expansion thereat. In other words, they are claiming that they are part of the Indophil agreement unit.
22
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Pet: Both corp are engaged in the same line of business i.e. manufacture and sale of yarns of various counts and kinds of of other materials of kindred character or nature. Resp: Thru SolGen argues that Acrylic is not an alter ego or an adjunct or business conduit of private resp because it has a separate business purpose. INDOPHIL: engage in the business of manufacturing yarns of various counts and kinds and textiles. ACRYLIC: manufacture, buy, sell, at wholesale basis, barter, import, export and otherwise deal in yarns of various counts and kinds. Acrylic cannot manufacture textiles while Indophil cannot buy or import yarns. Petitioners alleged that: the two corp have their physical plants, offices and facilities in the same compound b. many of Indos machines were transferred and installed and being used in Acrylic. c. Services of a number of units, departments and sections are being provided to Acrylic. Employees of private resp are the same persons manning and servicing Acrylic Jacinto is the President and General Manager of Inland Industries and under the Trust Receips, applied for a Letter of Credit and paid this loan under the Bills of Exchange to Metropolitan Bank and Trust Co. The company failed to pay thus the charge against him and the company to pay jointly and severally the plaintiff. In the reconsideration, Inland chose not to join him in this appeal. The allegation of the bank is that Inland and Jacinto are one and the same. There was nothing in the transactions that states that he was doing the transactions in his official capacity. RTC: He is in fact the corporation itself. No mention that he did transactions in his official capacity. CA: dismissed Jacintos appeal. Although Jacinto asserted that the principles of piercing the fiction of corporate entity should be applied with great caution and not precipitately, because a dual personality by a corporation and its stockholders would defeat the principal purpose which a corporation is formed. It is not undisputed that Jacinto and his wife own the major shares of stocks which is 52%. Jacinto even asserts that he is not the President of the Corporation and that there are different officers. But in the evidence, he was the one who sighed the trust receipts as president and manager. Concept Builders Inc is a domestic corporation engaged in the construction business and the respondents were employed as laborers, carpenters and riggers. a.
ISSUE: WON the piercing of the veil was valid even when it was not alleged in the complaint. HELD: Yes. While on the face of the complaint, there is no specific allegation that the corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the present of evidence and the examination of witnesses, unequivocably prove that petitioner and the corporation are one of that he is the corporation. No serious objection was heard from petitioner. Sec. 5 or Rule 10 of Rules of Court states that when evidence is presented by one party with the express or implied consent of the adverse party, as to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues, which shall be considered as if they have been raised in the pleadings. There is implied consent to the evidence thus presented when the adverse party fails to object thereto.
HPPI is liable. Conduit or alter ego of CBI. Probative Factors of identity that will justify the application of the doctrine of
23
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
The resp were served individual written notices of termination of employement by pet and igt was stated that the contracts of employment had expired and the project in which they were hired had been completed. But the resp found out that the corp engaged the services of sub-contractors whose workers performed the functions of priv resp. They thus filed a complaint for illegal dismissal, unfair labor practice and non-payment of some sums. LA: Reinstate private resp and pay them back wages. Thus the reconsideration to NLRC by the corpo. NLRC: Dismissed the recon and made a finding as to the amount of the back wages. LA issued a write of execution directing the sheriff to execute decision and partial satisfaction of the amoung was garnished from the corps debtor MWSS. Said amount was turned to NLRC cashier. Alias writ of execution was issued by LA but the guards of the petitioner refused to let the alias be served on the ground that the corporation no longer occupy the premises. The corporation occupying the premises is Hydro Pipes Phil Inc (HPPI) and not by Concept Builders. Sheriff recommended a break-open be issued to enable him to enter petitioners premises so that he could proceed with an auction sale. The day before the scheduled auction, the vice-president Cuyegkeng filed a thirdparty claim with the LA alleging that the properties sought to be levied were properties of HPPI. Resp filed motion for the issuance of Break-Order alleging the HPPI and Concept Buildiers were owned by the same incorporator/stockholders. They also alleged that the pet temporarily suspended the business operations in order to evade its legal obligations to them. In support of their claim against HPPI, the private resp presented copies of the GIS which HPPI submitted to SEC. Pet claims that HPPI and Concept are two separate corporations and are engaged in two different kinds of businesses. HPPImanufacturing CBI construction. LA still issued the order and ordered sheriff to proceed with the auction sale. NLRC denied reconsideration. CIR ordered the petitioners Claparols et al to pay back wages and bonuses to private respondents for its unfair labor practices which was filed by Allied Workers Association because of the dismissal from the Claparols Steel and Nail Plant. CIR found Mr. Claparols guilty of union busting and of having dismissed the complainants because of their union activities. piercing the corporate veil: 1. 2. 3. 4.
SEC explained the instrumentality rule which courts have applied in disregarding the separate juridical personality of corporations: The test in determining the said doctrine: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances by of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will, or existence of its own; Such control must have been used by the defendant to commit fraud or wrong to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
2.
3.
The absence of any one of these elements prevents piercing the corporate veil. In applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation. This case cited Claparols vs CIR on the avoid-the-liability scheme 90% of the second corp is owned by the first corp. Twin requirements of due notice and hearing were complied with. Third-party and pet claimants were given the opportunity to submit evidence.
The Claparols Steel and Nail Plant was SUCCEEDED by the Claparols Steel Corporation. It is very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that already attached to its predecessor, the CSNP. Both predecessor and successor were owned and controlled by Eduardo Claparols and there was no break in the succession.
24
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Records show that the Claparols Steel Corporation was established on July 1, 1957 succeeding the Claparols Steel and Nail Plant which ceased operations on June 30, 1957 and that the Claparols Steel Corp stopped operations on Dec. 7, 1962. Corp cannot reinstate the workers and that if they are entitled to back wages, only limited to 3 months based on Sta Cecilia Sawmills vs CIR and since Claparols stopped operations in 1962, reemployment cannot go beyond that date. Villa Rey Transit v. Ferrer Disregarding Corporate Entity Villarama was an operator of a bus transportation under Villa Rey Transit pursuant to certificates of public convenience granted to him by the PSC which authorized to operate 32 buses in various routes from Pangasinan to Mla and viceversa. He sold 2 certs to Pantranco with the condition that Villarama shall not apply for 10 years for any TPU service identical or competing with Pantranco. Three months after, Villa Rey Transit INC (CORPO) was organized and Natividad Villarama was the treasurer and one of the incorporators and Natividad subscribed to 1,000 of its stocks. After a month CORPO bought 5 certs of Public convenience, 49 buses, tools and equip from VALENTIN FERNANDO. On the day of the execution of the contract, the parties applied to PSC for its approval with a prayer for the issuance of provisional authority in favor of the CORPO to operate the service. PSC granted with a condition that it may be modified or revoked by the Commission. But before PSC could make a final action on the application, the Sheriff levied two of the five certs of public convenience pursuant to a write of execution issued by the RTC of Pangasinan in favor of Eusebio Ferrer against VALENTIN FERNANDO. Public bidding was executed and highest bidder is Ferrer. FERRER SOLD the two certs to Pantranco and jointly submitted to PSC the approval of the sale. Pantranco then prayed for provisional auth to operate the service involved in the said certs. TWO SALES are therefore before the PSC, FERNANDO-CORPO (VILLA REY) and FERRER-PANTRANCO. PSC orders, during pendency and before final resolution, PANTRANCO shall be the one to operate provisionally the services under the two certs. CORPO questioned. Villarey filed for the annulment of the sheriffs sale. Ferrer and Pantranco averred that the CORPO had no valid title to the certs because the contract where they acquired the certs from Fernando was subject to a suspensive conditionthe approval of the PSC which had not been fulfilled. Thus sheriff levy and sale, then Ferrer sale to Pantranco were valid. Pantranco filed a third-party complaint against Mr. Jose Villarama, alleging that the corporation and Villarama are the same and that they were disqualified from operating the two cers because of the stipulation that Villarama shall not apply for
Villarama and the Villa Rey Transit Inc is one and the same. Villarama made it appear that he was not an incorporator nor a stockholder and that he did not have a sufficient fund to invest. That it was his wife who was an incorporator with the least subscribed shares and was elected treasurer. But the funds were managed by the treasurer in such a way and extent that Villarama appeared to be the actual owner-treasurer of the business without regard to the rights of the stockholder. Evidence: Initial cash capitalization of the corporation was mostly financed by Villarama. The initial 105K, the 85K of it was covered by VIllaramas personal check. Employees of the bank testified that the drawer of the check was Jose Villarama himself. Accountant of the corpo testified that the first and second installment for the subscriptions from the original subscribers were received but he was directed by JV to make vouchers liquidating the sums and it was made to appear that a part of the installment was payment to Villarama for an equipment purchased from him and that 100,000 was loaned as advances to the stockholders. There were no amount of money that had actually passed hands among the parties involved. Initial months of the operation, JV purchased and paid with his personal checks Ford trucks for the Corpo, the checks being drawn by JV. It appeared that JV supplied the organizations expenses and assets and there was no actual payment by the subscribers. JV used the corpos money and deposited them in his personal accounts and that the corpo has paid his personal accounts. He even admitted that he mingled the corpo funds with his own money. Gasoline purchases of the corpo were made in his name and his reason was that he wanted the corpo to benefit from the rebates that he receives. No coard of Resolution allowing him to hold the corpos fund when he is not treasurer and was only a part-time manager.
25
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
a TPU service identical with Pantranco for 10 years. The decision of the RTC were: (which Pantranco questions) a) Villarey and Jose Villarama are two distinct and separate personalities and entities b) Restriction in the contract between Villa Rey and Pantranco was null and void c) Sheriff sale was null and void d) No damages awarded to Pantranco against Villarama
Secosa et. al. v. Heirs of Erwin Suarez Francisco10 Disregarding Corporate Entity
On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy student of the Manila Central University, was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the City of Manila. At the same time, Petitioner, Raymundo Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the same road. The truck was owned by petitioner, Dassad Warehousing and Port Services, Inc. Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn was being tailed by the Isuzu truck driven by Secosa. The three vehicles were traversing the southbound lane at a fairly high speed. When Secosa overtook the sand and gravel truck, he bumped the motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his instantaneous death. Fearing for his life, petitioner Secosa left his truck and fled the scene of the collision. Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond Odani Secosa, Dassad Warehousing and Port Services, Inc. and
The seller cannot compete with the buyer and he has bound himself not to do so. While it may be true that Sy is the president of petitioner Dassad Warehousing and Port Services, Inc., such fact is not by itself sufficient to hold him solidarily liable for the liabilities adjudged against his co-petitioners. It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from that of its stockholders or members. It has a personality separate and distinct from those of the persons composing it as well as from that of any other entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality. A corporations authority to act and its liability for its actions are separate and apart from the individuals who own it. The so-called veil of corporate fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the
10
http://juliesprudence.multiply.com/journal?&show_interstitial=1&u=%2Fjournal
26
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Dassads President, El Buenasucenso Sy. The trial court rendered a decision in favor of respondents and ordered the petitioners herein to pay jointly and severally damages. Petitioners then appealed said Decision to the CA, which affirmed the Trial Courts Decision in toto.
Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos were employees of respondent corporation Tanduay Distillery, Inc. (TDI). 22 employees of TDI, including private respondents employees, received a memorandum from TDI terminating their services, for reason of retrenchment, effective 30 days from receipt thereof or not later than the close of business hours on April 28, 1988. On April 26, 1988, all 22 employees of TDI filed an application for the issuance of a temporary restraining order against their retrenchment. The labor arbiter issued the restraining order the following day. However, due to the 20-day lifetime of the temporary restraining order, and because of the on-going negotiations for the sale of TDI to the First Pacific Metro Corporation, the retrenchment pushed through. The instant petition involves only the 4 individual respondents herein, namely, Fernando Duran, Eduardo Paliwan, Roque Estoce, and Rodrigo Santos. On June 1, 1988, or after respondents-employees had ceased as such employees, a new buyer of TDI's assets, Twin Ace Holdings, Inc. took over the business. Twin Ace assumed the business name Tanduay Distillers. The employees filed a motion to implead herein petitioners James Yu and Wilson Young, doing business under the name and style of Tanduay Distillers, as party respondents in said cases. Petitioners filed an opposition thereto, asserting that they are representatives of Tanduay Distillers an entity distinct and separate from DTI, the previous owner, and that there is no employer-employee relationship between Tanduay Distillers and private respondents. Respondents-employees filed a reply to the opposition stating that petitioner of TDI labor union of Tanduay Distillers' decision to hire everybody with a clean slate on a probation basis.
27
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
1908-one Forrest L Cease, one predecessor in interest of the parties together with 5 other American citizens organized the Tiaong Milling and Plantation Company but in the course of its existence, Cease was able to buy out all other original incorporators but in the name of his children Ernest, Cecilia, Teresita, Benjamin, Florence and Bonifacia Tirante. Charter lapsed in June 1958 but there were no showing that there was a liquidation process. In 1959, Cease died and an extrajudicial partition of was disposed but this is exactly the problem because two of his children wanted actual division while the other wanted reincorporation.
28
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Those opposing incorporated the FL Cease Plantation Co. and registed it with the SEC but the the two sons wanted settlement of the estate and filed that the two corporations be declared as one. Plaintiffs wanted the properties to be placed under receivership but the defendants filed a bond so that these properties remain in their possession. On the eve of the expiration of the 3-year period provided by law for the liquidation of corporations, the BOARD OF LIQUIDATORS of Tianong Milling executed an assignment and conveyance of properties and trust agreement in favor of FL Cease as Trustee of the Tianong Milling so that during the motion, the judge ordered that the trustee be included as party defendant. RTC: Divide the properties. The properties of the TMPC are also properties of the FLC and thus the estate should be divided among the heirs. Transfer and Conveyance with Trust Agreement is null and void. FLC is removed as trustee. Thus the petition to the Supreme Court, on mandamus. Petitioners argue that no evidence has been found to support the conclusion that the registered properties of Tiaong Milling are also properties of the estate of Cease and that for 50 years these properties were registered under Act No. 496 in the name of Tiaong Siblings Deflin and Pelagia Pacheco co-owned Lot No 1095 which they leased to Construction Components. The lease contract had a right of first refusal provision in favor of the lessee. CCI then assigned its rights to Hydro Pipes, which included the RFR, with the consent of the Pachecos. The Pachecos then executed a deed of exchange of the property with Delpher Trades Corp for 2,500 shares, or a total value of P1,500,000. Delpher is a family corporation organized by the children of the Pachecos in order to perpetuate their control over the property and avoid taxes. The transfer of shares in exchange for the land are equivalent to a 55% majority stake in Delpher, with the remaining 45% also in the hands of the Pacheco family (they call it estate planning). Hydro argues that Delpher is a corporate entity separate from the Pachecos and is not their alter ego or business conduit, and that the transfer was in the nature of a sale which prejudiced their RFR and supports their claim to exercise the right under the terms granted to Delpher. Delpher claims there was no transfer of ownership in the nature of a sale prejudicing the RFR of Hydro, because the corporation is a mere alter ego or conduit of the Pachecos, hence Delpher and Pachecos should be deemed one and the same. Thus there was no sale and that the Pachecos merely exchanged the land for shares of stock in their own corporation. Hydro sues for reconveyance exercising its RFR under the same terms of the transfer to Delpher. TC rules ifo Hydro, and the CA affirms.
The DoE between Pachecos and Delpher cannot be considered a contract of sale. There was no transfer of actual ownership. The Pacheco family merely changed their ownership from one form to another, and it remained in the same hands. After incorporation, one becomes a stockholder by subscription or purchasing stock directly from the corporation or from the individual owners thereof. In this case, the Pachecos became owners of the corporation by subscription, which is an agreement to take and pay for original unissued shares of a corporation formed or to be formed. It is significant in this case that the Pachecos took no par value shares in exchange for the properties. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of shares of the issuing corporation. The capital stock of a corporation issuing only no-par shares is not set forth by a stated amount of money, but is expressed to be divided into a stated number of shares. This indicates that a shareholder of say 100 shares is an aliquot sharer in the assets of the corporation, no matter what the value of the shares are. By ownership of 2500 shares, the Pachecos have control over Delpher, which makes it a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher to take control of the properties and save on inheritance taxes. The records do no point to anything objectionable about this estate planning scheme. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or avoid them cannot
29
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Since only two of the 11 indicia occurthe ownership of most of capital stock and subscription by Southern to capital stock of Lenoir Lenoir is not a subsidiary and is a separate corporation. Thus there is no basis for the claim of Garrett with Southern under the Federal Act It is an elementary and fundamental principle of corporation law that a corporation is an artificial being invested by law with a personality separate and distinct from its stockholders and from other corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an association of persons or in case of two corporations, merge them into one, when this corporate legal entity is used as a cloak for fraud or illegality.
Jardine Davies was impleaded as defendant in a performance suit, considering that Aircon was a subsidiary of the petitioner.
30
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
(the subsidiary was so controlled by the parent that its separate identity was hardly discernible, and became a mere alter ego of the parent and was used to evade taxes) . Koppel Industrial and Car Company is a corporation organized and existing under the laws of the State of Pennsylvania. They are not licensed to do business in the RP, but do business through Koppel Phils, Inc, owning 995 out of 1000 shares of stock of the said company (the remaining 5 were owned by the 5 officers of Koppel Phils). Koppel Phils cabled Koppel Industrial for quotation desired by a prospective client. Koppel Phils however quoted a higher price for the buyer than that quoted by Koppel Industrial. Koppel Phils then cabled to ship the merchandise to Manila. Koppel Phils received a %age of the profits realized or its share of the losses on the transactions. Koppel also returned a sum allotted as payment of commercial
31
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
brokers tax of 4%. Koppel Industrial demanded from Koppel Phils the sum of P64,122.51 as merchants sales tax of 1 % of the share of Koppel Phils in the profits.
(corporate entity was used to evade the payment of higher taxes) Liddell & Co was engaged in importing and retailing cars and trucks. Frank Liddell owned 98% of the stocks. Later Liddell Motors Inc was organized to do retailing for Liddell & Co. Franks wife owned almost all of that corporations stocks. Since then, Liddell & Co paid sales tax on the basis of its sales to Liddell Motors. But the CIR considered the sales by Liddell Motors to the public as the basis for the original sales tax.
32
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
La Campana Coffee Factory v. Kaisahan Parent-Subsidary Relationship Tan Tong and family owned and controlled 2 corporations: one engaged in the sale of coffee and the other in starch. Both corporations had one office, one management, and one payroll, and the laborers of both corporations were interchangeable. The 60 members of the labor association in the coffee and starch factories demanded higher wages addressed to La Campania Starch and Coffee Factory. La Campania Coffee sought dismissal on the ground that the starch and coffee factory are two distinct juridical persons. Tan Tong had been in the business of buying and selling gaugau under the tradename La Campana Gaugau Packing in BInondo and was transferred to QC since 1932. In 1950, Tan Tong and his family as sole incorporators and stockholders, organized a family corporation known as the La Campana Coffee Factory Co. with its office located in the same place. Tan Ton entered into a CBA with the PLOW union but Tan Tongs employees later formed their own organization know as the KMLC (see above). The members of the union, 66 members, demanded for higher wages and more privileges and the demand addressed to La Campana Starch and Coffee Factory which this union just designated to the company. CHAPTER V11 McArthur v. Times Printing Co. Liability of Corporation for Promoters Contracts Times Printing has Nimocks and others as promoters. Through the latter, McArthur was contracted for his services as advertising solicitor for one year. In 1890, he was discharged in violation of the contract, thus the filing of the complaint for damages for break of contract. Defenses of Time: a. b. Not for any stated time but from week to week. He was discharged for a good cause
While a corporation is not bound by engagements made on its behalf by its promotres before its organization, it may, after its organization, make such engagements its own contracts. The BODs formal action would only be necessary where there would be any similar original contract but not a requisite in such adoption or acceptance, which may be expressed or implied. It may be inferred from the acts or acquiescence on the part of the corporation, or its authorized agents, as any similar original contract might be shown. The right of the corporation to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. The agreement must be one which the corporation itself could make and one which the usual agents of the company have express or implied authority to make. Statute of Frauds would not apply, for terms not to be performed within one year from the making of the contract because the liability of the corporation under the circumstances does not rest upon any principle of the law of agency but upon the immediate and voluntary acts of the company. The promoters act of ratifying in behalf of the corporation, is loosely applied because, ratification implies an existing person, on whose behalf the contract might have been made. There cannot, in law be a ratification of a contract which could not have been
He was contracted on and after October 1, when the company would be organized but in fact it was actually organized in October 16 but the corporation has commenced operations from October 1 when the publication of the paper was stared by the promoters. But on April or in 6 months time, he was discharged. The BOD never took any formal action with reference to his contract but the shareholders, directors and officers of the corporation knew of this contract at the time of the organization or were inform of it and none of them objected but on the contrary, retained plaintiff in the employment of the company without other or new contract as to his services.
11
http://www.scribd.com/doc/4664781/Corpo-Digests
33
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Cagayan Fishing Dev. Co. v. Teodoro Sandiko Liability of Corporation for Promoters Contracts
Manuel Tabora is the registered owner of four parcels of land in Linao, Aparri, Cagayan, and he wanted to build a Fishery. He loaned from PNB P8,000 and to guarantee, it mortgaged the said parcels of land. In May 1930, he sold the parcels to Cagayan Fishing Development which was only in the process of incorporation, in consideration of P1 and making the corporation assume the mortgages in favor of PNB and Severina Buzon and that the title of the land shall not be transferred to the company until the company has fully paid Taboras indebtedness. The articles of incorporation were filed on Oct. 22, 1930 or 5 months after the sale and after 6 days after, the company sold the parcels of land to Sandiko for 42,000 on the reciprocal obligation that Sandiko will shoulder the three mortgages. He executed a promissory note that he shall be 25,300 after a year with interest and on the promissory notes, the parcels were mortgage as security. Sandiko defaulted, thus the action for payment. The lower court held that deed of sale was invalid because of vice in consent and repugnancy to law. The corporation filed a motion for reconsideration.
Builders Duntile Co. v. Dunn Mfg. Co. Corporate Rights under Promoters Contract WE Dunn Company manufactures machinery for making duntile, a hollow building tile. Samuels told Gaston the agent of Dunn that he was organizing a company to manufacture the duntiles. Samuels preferred to organize the corporation and then make the contract for the machinery. Gaston wanted to make the contract first, then form the corporation after. Samuels then made the contract ordering the machinery from WE Dunn, which also provided for the free services of an experienced serviceman (Aaron) for 5 years to insure proper installation. WE Dunn accepted the contract, and the machinery was shipped to Samuels. Aaron the serviceman began setting up the machinery. Meantime, the articles of the Builders Duntile (Samuels company) was filed. Operations for the manufacture of the duntiles then started. It turns out that the duntiles made were so inferior in quality and practically value-less for building purposes, because the machinery had been installed improperly by Aaron the service guy, and had even used the wrong formula for the mixing. Builders (not Samuels) sues WE Dunn Co. to recover on the contract made before the corporation formed.
The case turns on the right of a corporation to sue upon a contract made in its behalf by one of its promoters before it was organized. A corporation has the power to adopt a contract of its promoters, and one of the effects of this adoption is that the contract becomes that of the corporation . But the power to adopt must only be limited to such contracts as the corporation itself can make or is authorized to make. In this case it was clear that the contract was made by Samuels in behalf of the projected corporation, and after it was formed, the incorporators took over the whole thing and ratified all that had been done in its behalf. To deny the corporation the right to sue for damages for breach of contract and the loss it sustained by reason of the first agents negligence and improper acts would be to deny it all remedy for the breach of contract, for Samuels did not make the contract for himself, and he personally did not sustain any damages. It was the corporation that sustained the damages resulting from the breach. The corporation was the real party in interest, and brought suit in its own name. The contract, though made in the name of Samuels was, as all parties knew, made in his name for the benefit of the corporation to be organized. He was one of the
34
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Rizal Light and Ice Co. v. PSC and Morong Electric Co. Corporate Rights under Promoters Contract
Case involves two (2) petitions of the Rizal Light & Ice Co., Inc., (1) to review and set aside the orders of respondent Public Service Commission cancelling and revoking the certificate of public convenience and necessity and forfeiting the franchise of Rizal, and (2) to review and set aside the decision of the Commission granting a certificate of public convenience and necessity to respondent Morong Electric Co., Inc to operate an electric light, heat and power service in the municipality of Morong, Rizal. Petitioner opposed in writing the application of Morong Electric, alleging among other things, that it is a holder of a certificate of public convenience to operate an electric light, heat and power service in the same municipality of Morong, Rizal, and that the approval of said application would not promote public convenience, but would only cause ruinous and wasteful competition. The Commission, in its decision dated March 13, 1963, found that there was an absence of electric service in the municipality of Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized and existing under the laws of the Philippines, has the financial capacity to maintain said service. The Commission found that Morong Electric is a corporation duly organized and existing under the laws of the Philippines, the stockholders of which are Filipino citizens, that it is financially capable of operating an electric light, heat and power service, and that at the time the decision was rendered there was absence of electric service in Morong, Rizal. While the petitioner does not dispute the need of an electric service in Morong, Rizal, it claims, in effect, that Morong Electric should not have been granted the certificate of public convenience and necessity because (1) it did not have a corporate personality at the time it was granted a franchise and when it applied for said certificate; (2) it is not financially capable of undertaking an electric service, and (3) petitioner was rendering efficient service before its electric plant was burned, and therefore, being a prior operator its investment should be protected and no new party should be granted a franchise and certificate of public convenience and necessity to operate an electric service in the same locality.
The bulk of petitioner's arguments assailing the personality of Morong Electric dwells on the proposition that since a franchise is a contract, at least two competent parties are necessary to the execution thereof, and parties are not competent except when they are in being. Hence, it is contended that until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. The certificate of incorporation of the Morong Electric was issued by the SEC on October 17, 1962, so only from that date, not before, did it acquire juridical personality and legal existence. Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and void and cannot be the subject of the Commission's consideration. On the other hand, Morong Electric argues, and to which argument the Commission agrees, that it was a de facto corporation at the time the franchise was granted and, as such, it was not incapacitated to enter into any contract or to apply for and accept a franchise. Not having been incapacitated, Morong Electric maintains that the franchise granted to it is valid and the approval or disapproval thereof can be properly determined by the Commission. Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its certificate of incorporation was issued by the SEC. Before that date, or pending the issuance of said certificate of incorporation, the incorporators cannot be considered as de facto corporation. But the fact that Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. The fact that a company is not completely incorpor ated at the time the grant is made to it by a municipality to use the streets does not, in most jurisdictions, affect the validity of the grant. But such grant cannot take effect until the corporation is organized. While a franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for before the company is fully organized. An ordinance granting a privilege to a corporation is not void because the beneficiary of the ordinance is not fully organized at the time of the introduction of the ordinance. It is enough that organization is complete prior to the passage and acceptance of the ordinance. The reason is that a privilege of this character is a mere license to the corporation until it accepts the grant and complies with its terms and conditions.
35
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Parr et al while in the course of negotiations with Quaker Hill Inc, a NY corporation, for the former to purchase nursery stock, undertook to organize a separate corporation to be known as the Denver Memorial Nursery Inc. Two orders for nursery stock were signed by Parr in behalf of Denver Memorial which to the knowledge of Quaker was not yet formed. The nursery stock was then delivered to Parr and was planted with the help of Quaker. A substitute order was then made, with the name Mountain View Nurseries instead of Denver Memorial, which never actually came into being. Because of name confusion, it was subsequently called Mountain View Nurseries. Its articles were filed but the companies never functioned as going concerns. After Mountain View was formed, a new note and contract was submitted to Parr et al, containing the name Mountain View as contracting party. Quaker then referred to the company as Mountain View. Mountain View became financially troubled, and Quaker sues Parr et al (in his personal capacity)on the ground that the corporation was not yet formed at the time the sales contract was made and that Parr et al as promoters should be personally liable. Action to recover secret profits made by Bigelow and Lewisohn, promoters of the Old Dominion Copper. Bigelow and Lewisohn framed a scheme for the capitalization of Old Dominion for $3,750,000, then sell to the corporation for $3,250,000 their property worth $1M but having a market value of not over $2M, and then sale to the general public at par for cash of the remaining $500,000 of stock, and all this without providing Old Dominion with any independent board of officers to pass upon the wisdom of the purchase and without disclosing the
Old Dominion Copper Mining and Smelting Co v. Bigelow Fiduciary Relationship between Corporation and Promoter
Notwithstanding this fiduciary relation, the promoter may sell property to the company which he is promoting. In order that the contract may be absolutely binding, the promoter must pursue one of 4 courses of action: (1) provide an independent board of officers and make a full disclosure to the corporation through the board; (2) make a full disclosure of all material facts to each original subscriber of
36
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
substance of the transaction and their extraordinary profit to the purchasers of its stock for cash at par. (Pau: They sold their property to themselves and assigning themselves as trustee for the corporation while it is being formed. So the fiduciary relationship is between them as promoters and the subsequent investors to the under construction corporation). The court has decided that such a transaction creates a liability on the part of the promoters to account for the secret profits to Old Dominion. The corporation seeks to recover the secret profit made by the promoters in the sale of their own property to the corporation, basing its claim on the general rule that a promoter cannot lawfully take a secret profit and will be held to account for it if he does. Fundamentally the action is to recover profits obtained by a breach of trust, as promoters have duties as fiduciaries to the company. A promoter includes those who undertake to form a corporation and to procure for it the rights, instrumentalities and capital by which it is to carry out the purposes set forth in its charter and to establish it as fully able to do its business. It is now established without exception that a promoter stands in a fiduciary relation to the corporation which he is interested in, and that he is charged with all the duties of good faith which attach to other trusts.
37
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
CHAPTER VI Acoje Mining requested the opening of a post office at its mining camp in Zambales to service employees living in the camp. The Director of Posts agreed to set up the office, provided that in the meantime that funds are not available, the company would provide for all essential equipment and assign a responsible employee to perform the duties of a postmaster. He also added that the company shall assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by reason of the dishonesty or negligence of the employee assigned. A Resolution by the Acoje Board of Directors was passed. The postmaster assigned, Hilario Sanchez, went on leave and never returned. It was soon discovered that a shortage was incurred iao P13,867.24, apparently embezzled by Sanchez. Bureau of Posts sues for the shortage. Acoje denied its liability contending that the resolution issued by the board was ultra vires, and its liability if any would only be that of a guarantor.
It should be noted that it was Acoje itself that requested for the setting up of a post office for the convenience of its employees, which the SC held to cover a subject which is a reasonable and proper adjunct to the conduct of the business of Acoje Mining. An ultra vires act is one committed outside the object for which a corporation is created, but there are certain corporate acts that may be performed outside the scope of the powers expressly conferred if they are necessary to promote the interest and welfare of the corporation. Even in the case of ultra vires acts which are not illegal per se, a corporation cannot be heard to complain that it is not liable for the acts of its board, because of estoppel by representation. The term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be invalidated. It being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. In this case, it is fair that the resolution be upheld at least on the ground of estoppel. The defense of ultra vires rests on violation of trust or duty towards the stockholders, and should not be entertained where its allowance will do greater wrong to innocent parties dealing with the corporation. The acceptance of benefits arising from the performance of the other party gives rise to an estoppel precluding the repudiation of the contract.
Sea Lion is a port and arrastre operator with a contract for stevedoring services with NPC which had already expired. Its PPA permit for cargo handling services at the NPC Calaca pier had expired as well. Napocor did not renew Sea Lions contract for Stevedoring Services for Coal-Handling Operations at Calaca plant, and took over its stevedoring services pursuant to a provision in its charter, [t[o exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose. Sea Lion sues, alleging that NPC had acted in bad
In determining whether or not the act of NPC falls within the purview of the charter which creates it, the Court must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the NPC charter. For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers. A pier located at Calaca, Batangas, which is owned by NPC, receives the various shipments of coal which is used exclusively to fuel the
38
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
faith and with grave abuse of discretion in not renewing its Contract for Stevedoring Services for Coal-Handling Operations at the Calaca plant, and in taking over its stevedoring services. Judge Vera, acting on Sea Lions suit, issued a writ of preliminary injunction enjoining NPC from further undertaking stevedoring and arrastre services in its pier located at the Batangas Coal-Fired Thermal Power Plant at Calaca, Batangas and directing it either to enter into a contract for stevedoring and arrastre services or to conduct a public bidding therefor. Sea Lion was also allowed to continue stevedoring and arrastre services at the pier.
Madrigal & Co was engaged in the management of Rizal Cement Co., Inc. and is also its sister company, both being owned by the same or practically the same stockholders. The Madrigal Central Office Employees Union sought for the renewal of its collective bargaining agreement and proposed a wage increase of P200.00 a month, an allowance of P100.00 a month, and other economic benefits. Madrigal requested for a deferment in the negotiations. Thereafter, Madrigal on two occasions reduced its capital stock from 765,000 shares to 267,366 shares and from 267,366 shares to 110,085 shares by virtue of two alleged resolutions of its stockholders, which was effected through the distribution of the marketable securities owned by the petitioner to its stockholders in exchange for their shares in an equivalent amount in the corporation. The Union filed a case for ULP with the NLRC. Madrigal answered citing operational losses. Madrigal then informed the Secretary of Labor that Rizal Cement Co., Inc., "from which it derives income as the General Manager or Agent" had "ceased operating temporarily. In addition, because of the desire of the stockholders to phase out the operations of the Madrigal & Co., Inc. due to lack of business incentives and prospects, and in order to prevent further losses," it had to reduce its capital stock on two occasions. The labor arbiter, having found that the petitioner "had been making substantial profits in its operation" since 1972 through 1975, granted the wage increase, and was affirmed by NLRC. Meanwhile Madrigal tried to terminate the services of Union members citing retrenchment but its application was declared illegal by DOLE. Upon appeal to OP, Ronaldo Zamora affirmed the decision of DOLE.
Government v. El Hogar
Accordingly, this court is convinced that the petitioner's capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had been making profits, and consequently, to justify the mass layoff in its employee ranks, especially of union members. They were nothing but a premature and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint efforts with capital through the years. Surely, we can neither countenance nor condone this. It is an unfair labor practice. This is a quo warranto proceeding, alleging 17 causes of action, instituted originally in this court by the Government of the Philippine Islands on the relation of the
39
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Corporate Powers
H: The law expressly declares that corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created; and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel important enterprises to conduct their business exclusively in leased offices a result which could serve no useful end but would retard industrial growth and be inimical to the best interests of society. We are furthermore of the opinion that, inasmuch as the lot referred to was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which would deny to one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner. I: W/N el Hogar has engaged in activities foreign to the purposes for which the corporation was created and not reasonably necessary to its legitimate ends, specifically: (1) the administration of the offices in the El Hogar building not used by the respondent itself and the renting of such offices to the public; (2) the administration and management of properties belonging to delinquent shareholders of the association; (3) the management of some parcels of improved real estate situated in Manila not under mortgage to it, but owned by shareholders, and has held itself out by advertisement as prepared to do so H: (1) The activities here criticized clearly fall within the legitimate powers of the respondent, as shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us. If the respondent had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful. (2) The case for the government supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection of the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that, according to said section, the association may treat the whole indebtedness as due, "at the option of the board of directors," and this remedy is not made exclusive. We see no reason to doubt the validity of the clause giving the association the right to take over the property which constitutes the security for the delinquent debt and to manage it with a view to the satisfaction of the obligations due to the debtor than the immediate enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to be not open to doubt.
40
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
41
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
regards the stated in the ninth cause of action.
H: the Corporation Law declares that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial persons, as indicated in section 2 of the Administrative Code. We would not say that the word "person" or persons," is to be taken in this broad sense in every part of the Corporation Law. For
42
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
43
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
changing the form of the donation from 4000 shares into a renunciation of the Companys right and title to the life insurance policies of Pirovano. It also provides that the proceeds of the policy be retained by the Company as a loan drawing interest payable to the Pirovano children whenever the company is in a position to meet this financial obligation and after the Company settles its bonded indebtedness ifo NDC. This was ratified by the Dela Rama stockholders. Mrs Pirovano accepted the donation, and buys property in the US. Upon inquiry with the Sec, it was found that the donation was illegal and thus void on the grounds that the corporation acted ultra vires and that it could not dispose of its assets through donation. The stockholders then voted to revoke the donation. Mrs Pirovano sued to demand the credit owed to them by the Company. Balatoc Mining, engaged in the mining of gold, sorely needed the infusion of new capital to resuscitate its stalled operations. The officers approached the Benguet Mining Co, an entity also engaged in gold mining. A contract was executed, which states that Benguet agrees to construct a milling plant for the Balatoc mine and erect a power plant, in exchange for Balatoc Mining shares valued at P600K and the excess in cash to compensate for the cost of the contract. By the time of the complaint, the value of the stock of Balatoc had soared for a nominal valuation to more than P11 per share. It was alleged by Harden of Balatoc that the Benguet Mining Co held shares of stock in another mining corporation, the Balatoc Mining Company, in violation of a prohibition against mining corporations from owning stock of another mining corporation in the old Corpo law. The shareholders of Balatoc sued Benguet Mining to annul stock certificates of Balatoc issued ifo Benguet and to recover money earned from the transaction. TC dismissed complaint. CHAPTER XI12 Ellingwood is a preferred SH of the Wolfs Head Oil Co. At a SH meeting, the corporation was in default in the declaration and payment of dividends for 2 years on the PS. The AOI provides that PS holders are entitled to cumulative dividends, and gives exclusive voting power to holders of CS. PS holders have no voting rights, but is the corporation is in default in the payment of dividends, the majority PS holders shall have an election to exercise the sole right to vote for the election of directors and all other purposes, to the exclusion of the CS holders, until the corporation declares and pays dividends for a full year on the PS. Thereafter the right to vote shall revert to the CS holders. Ellingwood contends that the clause until the corporation pays for a one year period dividends on the PS restricts the above provision in the AOI as to the duration of time when PS holders shall have the right to vote. TC ruled that PS were entitled to vote at the SH meeting. The Big Bend Co. is a real estate business concern. It amended its articles, stipulating that holders of PS are entitled to receive cumulative dividends, such that if in any year dividends shall not have been paid, the deficiency shall be paid before dividends are declared or paid upon the CS. It also provides: that out of any surplus profit remaining after payment of full dividends on PS for all dividend periods and after full dividends have been paid in full, then dividends may be paid
The contract stating the rights of the PS has a double aspect. The provision on annual dividends payable out of the surplus profits was founded on the hope and prospect of a profitable business. Such dividends could be paid by a corporation financially successful. There can be no dividends declared by a corporation in financial distress. But if there were provision for the rights of PS holders even in the event of a business disaster resulting in voluntary winding up or dissolution of
12
http://www.scribd.com/doc/4663657/Chapter-XI-Financing-the-Corporation
44
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
to CS; and in the event of any liquidation of the corporation the holders of PS shall be entitled to be paid in the full the par value thereof, and all accrued unpaid dividends thereon before any sum shall be paid to any assets distributed among the holders of CS. No creditors are involved. No dividends on cumulative PS have been declared or paid. No surplus profits are available with which to pay dividends. A plan of liquidation, distribution, and dissolution of the corporation was adopted. It appears that the net assets were sufficient to redeem the PS at par, but if the PS holders received the promised dividends per the amended AOI, assets instead of surplus profits would be used. The result will be that the CS holders will get no part of such assets. The liquidating trustees, being in doubt as to who was entitled to receive the assets upon liquidation after redemption of the PS, sought a declaratory judgment from the court. It is contended that the phrase all accrued unpaid dividends means that before there can be a dividend, there must be surplus profits, and that since none ever existed, the right to the dividends never accrued and therefore none are payable. A counterargument is raised that the provisions of the amended AOI relate to the payment of dividends to PS holders out of surplus profits while the corporation is a going concern, but that it authorizes payment of accumulated and unpaid dividends out of assets upon liquidation of the corporation, even though there is no surplus profits available.
Augusta Trust Co. v. Augusta Hallowell Preferred stocks: preference stockholder is not a creditor
Augusta Railroad had outstanding bonds secured by mortgage. These bonds gave the holders the right to convert into preferred stock of the company. The corporation contends that the certificates of PS issued in exchange for bonds were in fact certificates of indebtedness and not stock.
Lim Cuan Sy is the debtor of the Mercantile Bank of China, by virtue of a trust account with the bank, in the form of trust receipts guaranteed by CMs and by Defendant Lim Chu Sing as the surety of Lim Cuan. Lim Chu is also a SH of the bank iao P10000. When the obligation became due, the bank foreclosed the CMs
45
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
without the knowledge of the surety Lim Chu. The bank also required Lim Chu as surety to execute a PN, where in the event of Lims default in payment of any installment as they become due, the entire amount or unpaid balance becomes due and demandable. Lim leaves a balance of P9,105.17. The bank is under liquidation at the time of the action. Case involves a contract entered into by Wallace and the promoters of the Eclipse Pocahontas Coal Co. Wallace was to transfer and assign an option for a lease to the promoters and from the promoters to the corporation, in exchange for money to pay for the purchase price for the lease, and once the corporation is up and running, Wallace was to have a 1/5 interest in the property fully-paid up, and a 1/5 interest in the corporation fully paid up. Wallace was also to be entitled to 50 shares of the corporation, but only 5 shares were issued to him. Wallace alleged that the corporation and its promoters failed to perform their part of the contract. TC ruled that Wallace was to recover a little over $1000 from each of the defendants, or a total of $4300, which the court found to be the value of 43 shares which he had been deprived, being 1/5 of the shares issued less 5 shares delivered to him. The corporation was not held liable. Wallace contends that he was erroneously limited to money decrees against the promoters and seeks a judgment against the entire property and plant of the corporation as a trust therein his 1/5 undivided interest or a judgment to order the issuance and delivery of 43 additional shares, or a judgment for the actual, not par value of the shares. Bayla et al are SHs who file an action to recover certain sums of money which they had paid to the corporation on account of shares of stock they individually agreed to take and pay for under certain specified conditions. The action is based on a resolution by the board of Silang Traffic Inc. The resolution revokes the rescission of the agreement. Silang argues that the resolution does not apply to Bayla because on the date thereof the subscribed shares had already automatically reverted to the corporation, and the installments paid had already been forfeited, without need for demand, and that the resolution itself had been revoked. TC ruled ifo Silang Traffic, invoking the ruling in Velasco v Poizat that a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation to pay for its shares, and any agreement to this effect is invalid. CA affirms. The parties, TC and CA treated the agreement as a contract of subscription to the capital stock of Silang Traffic. It should be noted that the agreement is entitled, Agreement for Installment Sale of Shares in the Silang Traffic Co. Inc, and that while the purchaser is designated as a subscriber, the corporation is described as seller. The agreement took effect long after incorporation of the company.
46
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Datu Benito v. SEC The Preemptive Right to Shares: Waiver of Preemptive Right
Benito subscribed to 460 shares of the Jamiatul Philippine-Al Islamis Inc. The corporation increase its capital stock, with an additional issuance of worth P110,980.00. Benito files a complaint with the SEC alleging that the issuance was made in violation of his pre-emptive right to the additional issue and that the SHs of record were not notified of the meeting. SEC ruled that the issuance was valid, and that his preemptive rights are inapplicable. H: Issuance is not invalid even without notice to the SHs. The power to issue shares of stocks is lodged in the board and no SH meeting is necessary to consider it because additional issuance of shares does not need SH approval. Stokes is one of the original SHs of Continental Trust Co, owning 221 shares at the time of the controversy. Blair & Co. proposed that if the company decides to increase the capital stock, they would purchase the new shares at a higher price, and acquire the right to nominate their people to the board of trustees. The SH were informed of the Blair offer, and Stokes made his demand to exercise his preemptive right. Stokes at the SH meeting for the purpose of increasing the capital stock, demanded the right to subscribe for 221 shares of the new stock at par, but was refused. As a result, he now has only voting power that he had before, because the number of shares had been doubled while he still owns 221. After the sale to Blair, Stokes renewed his demand but was again refused. At this time the stock rose in value, from 450 to 550 to 750. Stokes sued. TC ruled that Stokes had the right to subscribe, and was entitled to recover the difference between the market value at the time of increase and its par value. CA reversed.
47
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Thom, owner of 6416 of 70000 shares, is a SH of the Baltimore Trust Co who wants to exercise his preemptive right to purchase a due proportion of a supplemental issue of its capital stock. The Baltimore Trust Co wanted to merge with the National Union Bank of Maryland, and that the company would issue 150000 shares at $112 to acquire the 10000 shares of National Union Bank at $168/share, and would require delivery of 70% of the stock. A resolution was passed to increase the capital stock of Baltimore, which also stipulated that the SH shall have the pro rata preferential right to subscribe at such price and terms as the board may fix. In any additional issuance, the directors may issue without preferential subscription rights and on such terms as the board may deem proper. Thom protested and voted against the merger, alleging the corporation disregarded the proportional purchase right of SHs. Derivative suit by SH Crothers to set aside the issuance of stock dividends to 4 SHs and ordering them to repay Ross Transport Inc the dividends received on stock declared to be illegally issued. The corporations business is to operate a fleet of buses to service the transport needs of employees of the Triumph Explosives Inc. The company was an immediate financial success. It was engaged in a special business, of which it had a monopoly. The company then issued new stock to the family of the directors and the president, and had the effect of increasing the outstanding stock. There was no meeting, no notice, and no offer to the other SHs. The company declared dividends 3 times, and authorized salary payments to the officers. The benefit of the dividends would not only increase the value of the
48
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
stock, but the first two declared dividends would pay back all the subscribers had invested, leaving any future earnings and distributions pure profit. Under these circumstances, they took the opportunity they thought they had to increase their investment. Crothers et al contend that changed conditions make it unnecessary to use the remaining unsold stock to obtain capital.
Merritt-Chapman & Scott Corp. v. NY Trust Co. Debt Securities: Convertible Securities; stock options
Stock purchase (option) warrants were issued by Merritt-Chapman (MC) in bearer form. The bearer would be entitled to purchase fully-paid and nonassessable shares of CS, no par value, at $30/share. To insure that the stock to be purchased under the warrants would be available, the trust deed requires that stock certificates for an aggregate amount of 40,000 shares be delivered to the trustee and made the Trust co the agent of the corporation to receive the purchase price and deliver the stock certificates. The board of the corporation issued a resolution declaring a stock dividend iao 40%/shares of no par CS on each legally issued and outstanding share of CS. The resolution fixed the price at $20/share, and directed the warrant holders outstanding and to the trust company the 60day notice required incase the corporation shall pay any stock dividend upon the outstanding CS. The corporation contends that the warrant holder must exercise his warrant before a certain date in order to share in the dividend. The trustee contends that the corporation must first deposit with the trustee, stock certificates in the amount equal to 40% of the certificates now on deposit with the trustee, and that the holder who wishes to exercise the warrant must pay the basic purchase price before he will be entitled to receive 1.4 share. The Jordan Company issues Debenture Stock. The company believes that the pay-outs made on the debentures were actually interest, and thus entitling them to deductions from their taxable income. The IRS claims the pay-outs were dividends to the holders.
49
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Bloom is a minority bondholder of bonds issued by the Alladin Hotel Co. The bonds are secured by a deed of trust by which was mortgaged certain real estate, with the Mississippi Valley Trust Co as trustee. The deed of trust contained provisions empowering bondholders of not less than 2/3 to modify and extend the date of payment of the bonds. The Joneses are majority bondholders as well as the majority SHs of the company who entered into an agreement with the company to extend the maturity date of the bonds. The changes were certified by the trust company and has the consent of holders of 2/3 the principal amount of the bonds. Bloom objects to the change, contending that these were invalid for not being made in GF and that it was not for the benefit of the minority bondholders and deprived them of their rights and property. She added that the Joneses acted in a dual capacity as trustees for the other bondholders, being the majority, and therefore must not act detrimental to the rights of the other holders. She also added that the modifications are void for not giving notice to the other bondholders. TC held that the changes did not benefit the minority bondholders and that the bondholders were entitled to notice. But it held that the decree should be limited to a money judgment only. The hotel appeals. CHAPTER XII13 Triplex authorized capital stock totaled $150K, broken down into $75000 PS (par
http://www.scribd.com/document_downloads/direct/4663662?extension=doc&ft=1328554074<=1328557684&uahk=HwZ8juVZzvdRV79glmVOmz/icb8
50
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Liability on Watered Stocks value $100), and $75000 no par CS. Directors meeting: Albert Dillman Pres; Solly VP and Sec, and Louis Dillman Treasurer .. agreed to receive lower compensation and in consideration of other services to be rendered and for managing the co., additional stocks were to be given as follows: A Dillman 376 CS, L Dillman 114 CS, Solly 50 CS. (Solly transferred stock to 2 Dillmans). An amendment was proposed, 2375 PS and 175 no-par CS. Rice and Hutchins purchased 249 shares of PS and 83 shares CS (as bonus). The Dillmans own 540 CS shares. During election of directors, the B ticket of the Dillmans were elected. Rice questions the election, saying the there was no consideration for the CS at the incorporation of Triplex. legally issued and outstanding at that time?
H: No, there was none. (Chancellors decision: No outstanding Cs and PS stocks were voted). The no par value CS issued before and after the amendment was invalid because consideration was never fixed. The certificate must state the total number of shares authorized that are without nominal or par value. The provision in the articles that a certain part of capital is in shares of CS no par and without stating the number of shares is not authorized and is meaningless in the eyes of the law. Thus the CS in the original AOI was invalid stock. The consideration of the shares issued to Dillman were alleged to have been for services rendered in organizing the company, and in agreeing to serve at a smaller compensation that they would get otherwise. Clearly the consideration mentioned, consisting of services, was not of such as the law contemplates. The services do not appear to be essentially different or greater than the services ordinarily rendered in the promotion and organization of the corporation. (also, services still to be rendered are not lawful consideration) -- Hence, no proper and lawful consideration was for the CS at the 1st Board Meeting. the contract is enforceable No declaration in the consti prohibition that a transaction in w/c something other than money, labor or property shall be received in payment of the stock is utterly void. If a security is to be accepted in payment for the stock, e.g. a subscribers note, w/c is not property for such purpose, the Consti doesnt say that it, or the stock issued for it, shall be void. The word void is used only once and has reference to the distinct clause w/c says that all fictitious increase of stock or indebtedness shall be void. --the affairs of the corporation in this case are in the hands of a receiver who represents not only the SHs, but also the creditors, and the rights of creditors have now intervened. The constitution of Texas prohibits such a transaction and makes it unlawful . It was aimed against his acquiring stock except upon lawful payment. It was designed for the protection of the corporation and its creditors. In such a case as this where the SH has paid nothing for his stock and deceived the public, he cannot be permitted to take shelter under the constitutional prohibition, which protects the corporation and its creditors. --Purpose is to give integrity to the corps capital. It is to prevent false pretense at its hands, and avoid imposition upon the public. None of these objects would be promoted by declaring a note given by a subscriber for stock subscription in the hands of a bonafide stockholder. Court found that only 5/12 of the par value had been paid. At the lower court, it ruled for the plaintiff on the theory that it made no difference WON the
Langdeau is the receiver of Estate Life Insurance Co, and McCarty is the President of the company. Langdeau sues McCarty for the unpaid balance of his stock subscription, iao $387,380 (he paid only $20) representing 19, 370 shares of no par stock. The contract between the corporation and McCarty was that he would: -- pay a minimum of $20/month for the balance not exceeding 30 months, evidenced by a note, payable w/o interest. --that the company will have a lien on his shares until the note is paid. -- He was to receive as much stock as his actual payments , but the company would be able to vote the stock while the contract is in force (to be voted by McCarty) -Yet despite his default (only made a total payment of $8,120), the company did not elect to terminate the contract. He claims that the contract is void for it violates the constitution of Texas (no corp. shall issue stock or bond except for money paid, labor done or property actually received, and all fictitious increase of stock or indebtedness shall be void.)
Judgment creditors of a corporation sues the original SHs or incorporators of the Dock-Hop Co, seeking to collect on the unpaid balances on the par value of their
51
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
shares. Complaint alleged that only 25c on the dollar had been paid in on the par value of their shares (watered stocks). Defendants deny however, that they are subscribers, or that the full value of their stock had not been paid
Velasco is the assignee in the insolvency of Philippine Chemical Product Company and is seeking to recover from Jean Poizat the unpaid subscription made by him to the stock of the corporation. Poizat, one of the incorporators and once the treasurer and manager of the corporation, subscribed for 20 shares and paid in the par value of 5 shares (P500). While in this capacity he called in and collected all subscriptions except 15 shares subscribed by him and another 15 by Jose Infante. 2 resolutions were adopted by the board: (1) proposal that the directors or SHs make good by new subscription the 15 shares w/h had been surrendered by Infante, and that the latter would be released from his obligation to the corporation; (2) as to Poizat, who was absent, he should be required to pay the amount of his subscription upon the 15 shares he owes to the corporation. Poizat, in a letter states that he was also to be relieved from his subscription, and that he prefers to lose the whole of the 25% rather than continue investing more money
52
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
in a ruinous proposition. Soon the company became insolvent, and Velasco as assignee sues Poizat for his unpaid subscription.
Lingayen Gulf Elec. Power Co. v. Baltazar How Payment of Shares Enforced
Baltazar subscribed for 600 shares (P100 par value) of Lingayen Gulf and paid P15000, plus another payment leaving a balance of P18500 unpaid. In a SH meeting it was agreed to call the balance of all unpaid subscribed capital stock, the first 50% payable within 60 days, remaining 50% payable within 60 days hence. All unpaid subscription after due dates of both calls would be subject to 12% interest. All remaining unpaid shares would revert to the corporation. Baltazar offered to withdraw completely from the corporation by selling out all his shares of stock. Another resolution (No. 17) was adopted rescinding the previous resolution because the corporation was not in a financial position to absorb the unpaid balance of the subscribed capital stock. Yet another resolution (No. 4) was adopted to revalue the stock and assets of the corporation to attract outside investors. Although Baltazar was informed of the demand for payment the call however was not published in a newspaper of general circulation. Another demand was made upon Baltazar, who ignores the same upon the grounds that 1. action is premature because there was no valid call, and 2. granting there was a valid call, he was released from liability thru SH Res. Nos. 17 and 4. . The corporation sues. TC rules ifo Baltazar, holding that the resolution was null and void for lack of publication.
53
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Da Silva subscribes for 650 shares (par value of P500) of Aboitiz. He pays only for 200 shares, as there are remaining 450 shares unpaid (P225,000). Thru a Res., the board declared and informed all subscribers and SHs that all shares unpaid by 31 May shall be declared delinquent and to be sold at a delinquency sale on the following June 16. Ad was published as announced in the notice. Da Silva sued Aboitiz Co., contending that in prescribing another method for payment of subscription different from that in the by-laws, the corporation had exceeded its authority. He claims that in Art 46 of the by-laws, all shares subscribed shall be paid out of the 70% of the profit obtained, to be distributed among the subscribers and said Res., violates the said by-law
IB Dexter subscribed to 300 shares of CS Salmon & Co., which shall be payable from the first dividends declared on any and all shares of said company owned by me at the time dividends are declared, until full amount of subscription has been paid. The subscription was initially paid P15,000, from a dividend declared by the company, supplemented by Dexters own money. Dexter incurs a balance of P15000 (par value of 150 shares) still unpaid on his subscription. The assignee of Salmon, National Exchange Co, sues Dexter to recover the balance. TC ruled ifo National Exchange.
54
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Lumanlan subscribed for 300 shares (par value P50) of Dizon & Co., paying only P1500 of the P15000 par value of the shares. Creditors sued the company, and prayed for a receiver as it appears that the corporation had no assets except credits against those who had subscribed for shares of stock. Tayag was appointed receiver for the purpose of collecting the unpaid subscriptions. Tayag sues Lumanlan for the unpaid shares. TC orders Lumanlan to pay the corporation (plus interest). Pending Lumanlans appeal, he agreed to assume the obligation of the corporation to Valenzuela (P8,000), and that if he withdraws his appeal, the corporation would collect only 50% of the amount subscribed by him. Lumanlan then paid Valenzuela and was subrogated in place of Valenzuela (P11,840 incl. interest). Disregarding the agreement and notwithstanding payment made to Valenzuela, the corporation asked for the execution of the judgment in the previous suit and his properties in Tarlac were levied upon. BPI as creditor of the corporation intervenes as the assignee in the insolvency case of the corporation. Chua Soco subscribed for 500 shares (P100 par) of China Banking Corporation, paying and leaving a balance of P25,000. He issued a PN ifo Fua Cun for the balance, securing the note with a CM on the shares of stock, and endorsing the receipt of the stock purchase). Chua Soco was also indebted to China Bank (P37,731.68), and upon default his interest in the 500 shareas was attached and the receipt seized by the sheriff. The attachment was levied after the bank knew of the fact that the receipt had been endorsed to Fua Cun. Fua Cun then sued, contending that by virtue of payment of the subscription price of the shares, Chua Soco in effect became the owner of 250 shares and sought to have his lien on the shares be declared to hold priority over the claim of the bank. China Bank argued that the interest of Chua Soco was merely an equity which cannot be made the subject of a CM. TC ruled ifo Fua Cun. Baltazar and Rose were incorporators of the Lingayen Gulf Electric Power Co. and subscribed to: Baltazar = 600 shares (paid 535 shares after transfers, owned 341 shares w/ cert. plus 65 shares w/o certificate) Rose = 400 shares (paid 375 shares w/ certs) leaving unpaid a certain portion thereof. It is the company practice to issue certificates of stock to its individual subscribers for unpaid shares of stock. Defendants Ungson et al are small SHs ( <100 shares) of the corporation, and are the majority of the board. Co-defendant Acena is the largest single SH with 600 shares and was responsible for election to the board of two of the 4 majority board members (Ungson Group). Baltazar was responsible for the election of the other 2 (Baltazar Group). Ungson Group which controlled the corporation passed 3 resolutions which threatened to expel the plaintiffs and prevent them from exercising their voting
Fua Cun v. Summers Rights and Obligations of Holders of Unpaid but Non-delinquent Stock
TC erred in holding that Chua Soco became owner of 250 shares. Fua Cuns rights consist in an equity of 500 shares and upon payment of the unpaid portion, he becomes entitled to the issuance of the certificate for 500 shares in his favor. As to the CM, the CM would not prevail over liens of third persons without notice; an equity in shares is of such an intangible character that is somewhat difficult to see how it can be treated as chattel and mortgaged in the same manner that the recording of the same will furnish constructive notice to third parties. There can be no doubt that an equity in shares of stock may be assigned and that the assignment is valid as between the parties and as to person to whom notice is brought home. Such an assignment exists here, though it was made for the purpose of securing a debt. As against the rights of fua cun, the bank had no lien unless by virtue of the attachment, but the attachment was levied after the bank had received notice of the assignment of Chua Socos interest to fua Cun and was therefore subject to the rights of the latter. I: W/N a SH with a balance of unpaid shares subscribed is entitled to vote the latter H: YES> The present case does not come under the principle in Fua Cun because it was the practice of the company since its inception, to issue certificates of stock even for unpaid shares and gave voting power to stocks fully paid. The present law requires as a condition before a SH can vote that his full subscription be paid in the case of no par value shares, and with respect to par value shares, the SH can vote the shares full paid, irrespective of the unpaid delinquent shares. A corporation may now, in the absence of provisions in their by-laws to the contrary, apply payments made by subscribers either as full payment for the corresponding number of stock or as payment pro-rata to each and all the entire number of shares subscribed. In this case, corporation chose to apply payments by the SHs to definite shares of stock and had full paid-up shares certificates for
Baltazar v. Lingayen Gulf Elec. Power Co. Rights and Obligations of Holders of Unpaid but Non-delinquent Stock
55
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
rights: (1) declaring watered stocks issued to Acena, Baltazar, Rose and Jubenville of no value and cancelled the same; (2) all unpaid subscriptions to bear interest, and all payments to be credited to interest first, capital debt second, and ; (3) all stock declared delinquent on the accrued interest are incapacitated to avail of voting power. Baltazar and Rose sought to allow them to vote their fully paid-up shares and to declare the resolutions invalid. A compromise deal was executed, but enforcement by the TC was enjoined by the Ungon Group and asked for amendment. TC amended but was opposed by Baltazar. The Court then reversed the amending decision, ruling that all shares of the capital stock of the corporation covered by fully paid shares are entitled to vote in all meetings. Baltazar claims that once a SH has subscribed to a certain number of shares, although he has made partial payments, but is issued a certificate for the paid-up shares, he is entitled to vote the whole number of shares subscribed, whether paid or not. The corporation counters that under the doctrine in the Fua Cun case, a partial payment of a subscription does not entitle the SH to a certificate for the total number of shares subscribed by him, and his right consists only in equity to a certificate of the total number of shares subscribed for, upon payment of the remaining portion of the subscription price. Po was an incorporator of Peers Marketing and subscribed to 80 shares (P100 p.v.) paying 25% of the amount of subscription. No certificate of stock was issued. --Po sold to Nava 20 of the shares. In the deed of sale Po represented that he was the absolute and registered owner of the 20 shares sold. -- Nava requested the corporation to register the sale, but was denied because Po had not fully paid the amount of subscription. (was informed that Po was delinquent in payment of his subscription and that corp had the claim to his entire subscription of 80 shares). Nava filed a mandamus action to compel the corporation to register the shares in the books. TC dismissed petition. --Nava contends the ruling in Fua Cun is not applicable in affirming corporations refusal to register in the books the sale to him of 20 shares. Nava relies on the ruling in Baltazar v Lingayen Gulf Electric, which held that the corpo law requires as a condition before a SH can vote his shares that his full subscription be paid in the case of no par stock; but in par value stocks, the SH can vote his shares fully paid by him, only, irrespective of the unpaid delinquent shares.
Nava v. Peers Mktg. Corp. Rights and Obligations of Holders of Unpaid but Non-delinquent Stock
CHAPTER XIII MR filed by Lepanto Corp which involves an agreement subsequently extended, as to the compensation of Nielson (a promoter?) which provides that he is entitled to
Under the Code stock dividends cannot be issued to a person who is not a SH in payment of services rendered. Nielson cannot be paid in shares of stock which
56
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
receive 10% of any dividends declared and paid by Lepanto. Nielson is not a SH of the corporation. During the extension period the corporation declared dividends worth P3M. SC ruled that Nielson was entitled to the 10% of the dividends paid and declared and Lepanto was ordered to issue and deliver to Nielson shares of stocks as well as fruits or dividends accruing to the same. Lepanto contends that payment to Nielson of stock dividends as compensation violates the Corporation Law.
Craumer et al together with one Landis (4 people), are the incorporators and directors of the Berks Broadcasting Company. The books indicate that the stock is fully paid (auth. Capital stock = $100K) , through cash ($5K each) and the fixing of a value of $80K upon an asset denominated Franchise and Promotion Expense. A year later, this was written off and in its place were substituted 1) $50K as an amount Due on Unpaid Stock Subscriptions -- (each SH paid $4.2K reducing the item to $23,300. Then it was cancelled altogether and was replaced w/ the entry Goodwill and Promo Expense) and 2) write-ups or increases in the valuation of fixed assets over and above depreciation costs, totaling $30K. Balance sheet showed assets in excess (surplus) of liabilities iao $2,545.94. However, the existence of that alleged surplus depended on the inclusion of the assets of the write-ups of $26K; otherwise, there would be a deficiency to the
57
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
extent of almost $24K. Directors sold their stock, and declared a series of dividends totaling $13K based on the earnings of the company of 12K+ plus the surplus. The corporation, now under the control of new SHs, sued the directors to recover the $13K which was allegedly unlawfully declared and paid out as dividends.
Lich is a holder of 300 non-cumulative PS of United States Rubber Company. She seeks to enjoin payment of a dividend on common stock declared. During 3 fiscal years (1935-37), the corporation experienced a deficit of close to $24M, $17M and $10M for each of the 3 years, and a corresponding impairment of capital. In each of these years, the annual net earnings were applied to the deficit, and no dividends were declared. The company underwent a reconstruction of its capital structure. It issued, in lieu of no-par value CS, CS of par value $10. In the next 3 years the deficit was reduced and cancelled and net profts were made available for dividends for noncumulative PS, but not common shares. The company then declared a dividend, from the net profits for the current year and from no other fund, on both PS and CS. In the deficit years, the company maintained adequate reserves, which remain intact even when dividends were declared. Lich contends that the preference of PS holders as to dividends extends not only to the current year, but to the prior deficit years, and dividends cannot be paid out to CS holders until dividends are paid to PS on the years in question and the arrearages must be paid in full.
58
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Keough v. St. Paul Milk Co. Dividend Declaration Discretionary with Board
Action to compel corporation to declare a cash dividend, on the ground that those in charge of the corporate affairs (the Ryans) are wrongfully and needlessly withholding profits available for cash dividends and conspiring to retain them for their benefit and to the prejudice of the majority. The business, assets, liabilities of the partnership were exchanged for 597 shares of the St Paul Milk Co. The 597 shares represent the only stock issued until the stock dividend. By amendment, the authorized capital was increased to $300K. A 6-to-1 stock dividend was declared and the amount necessary to cover the issued shares was transferred from the surplus account to the capital account. When the corporation paid out its first dividend, a total of $169,470 was distributed to SHs or about a 335% return. There were no mortgages or liens or any other substantial indebtedness. Sales are predominantly cash basis. Fixed assets were in good condition. Wages were paid. The corporation had investments in bonds, CS in a wholly-owned subsidiary, but the merchandise inventory was small. TC held that a liberal and reasonable capitalization and surplus was the sum equal to the original outstanding stock plus 2/3 of the accumulated surplus, and that all sums in excess were unreasonable and constituted a violation of the fiduciary relation. Keough et al claims that the capitalization in 1936 by the Ryans of a large percentage of the accumulated surplus without reason or necessity other than to keep it within the corporation under the dominating control of the Ryans. The Ryans contend that the capitalization was for avoiding possible federal taxes upon undistributed surplus. TC found that the capitalization was to strengthen control of the Ryans over the corporation and surplus to prevent a distribution of earnings.
59
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
Action by John Dodge, a minority SH, against the Ford Motor Company to compel the declarations of dividends. --TC granted motion and ordered the payment of dividends. -- At this time, Ford Motor Co had just concluded its most prosperous year of operations. Demand for Ford cars continued. It could make and market 500,000 cars. Sales of parts and repairs increase. It had assets of more than $132M, COH $54M, surplus of $112M. -- Liabilities continue the corporation as a semi-eleemosynary institution, and not as a business concern. Henry Ford himself testified that the company he built had made too much money, had too large profits, and that a sharing of profits with the public, by reducing the prices. It expected a profit upwards of $60M. Fords defense was that its policy was to reduce the selling price of Ford cars while improving their quality, with the goal of producing 1M cars per year. There was a general plan for expansion of the productive capacity of the business. Management decided not to reduce in the meantime the price, but to maintain the same and accumulate a large enough surplus to pay for the proposed expansion of plant and equipment. There was a large daily, weekly, monthly, receipt of cash. The output was practically continuous and within a few days, turned into cash. -- Dodge et al contend that the plan was to the selling price of cars should be attained. Ford argues that although a manufacturing corporation cannot engage in humanitarian works as its principal business, the fact that it is organized for profit does not prevent the existence of implied powers to carry on with humanitarian motives such as charity as are incidental to the main business of the corporation.
Suit by preferred SHs of Ottawa Gas, demanding an accounting of all property and assets and declare and payment of dividends. Burk claims that earnings of the business were such that the directors owed them an imperative duty to declare a dividend. --Ottawa Gas maintain that the corporate has been unable to declare a dividend because its funds were exhausted by expenditures which it was obliged to make, which was for the extensions of the companys plant. TC ruled the extensions necessary and for the betterment of the plant and its patrons.
60
Corporation Law Midterms Case Reviewer Prof. Jacinto 2nd semester AY 2011-2012
be carried over to meet a possible deficiency of the next.
McClaran v. Crescent Planning Mill Co. When Right to Dividends Vests; Rights of Transferee
McLaran is the administrator of the estate of Humber, owner of 57 paid-up shares of stock of the Crescent Planning Mill Co. and director of the company as well as President. The company declared a dividend of 6%, divided into 4 payments of 1/1/2% each. No other action taken to set apart a fund out of which to pay the dividend although the company was solvent and had adequate surplus. Nonetheless the officers proceeded to pay Humber and other SHs the 1st installment of the dividend. The next installment was not paid, the board having discovered an error in the financial statements of the company such that its assets were overstated by $6000. The board then voted to rescind and recall the order paying out the dividends and defer the payment indefinitely. The company was still perfectly solvent and had amply funds to pay the dividend. Humber demanded payment of his dividend but was refused on account of the recent action by the board. The corporation contends that there was no declaration because the board failed to set aside funds for the purpose, and that by virtue of the resolution its former action was rescinded and the payouts were recalled and put on hold.