CORPO CASE DIGESTS # 106-119

GOKONGWEI JR. VS. SEC ET. AL.

G.R. NO. L-45911; APRIL 11, 1979
FACTS:
Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for the declaration of
nullity of the by-laws etc. against the majority members of the BOD and San Miguel. It is stated in the
by-laws that the amendment or modification of the by-laws may only be delegated to the BODs upon an
affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital
stock of the corporation, which 2/3 could have been computed on the basis of the capitalization at the
time of the amendment. Petitioner contends that the amendment was based on the 1961 authorization,
the Board acted without authority and in usurpation of the power of the stockholders in amending the bylaws in 1976. He also contends that the 1961 authorization was already used in 1962 and 1963. He also
contends that the amendment deprived him of his right to vote and be voted upon as a stockholder
(because it disqualified competitors from nomination and election in the BOD of SMC), thus the
amended by-laws were null and void.
While this was pending, the corporation called for a stockholders meeting for the ratification of
the amendment to the by-laws. This prompted petitioner to seek for summary judgment. This was
denied by the SEC. In another case filed by petitioner, he alleged that the corporation had been using
corporate funds in other corporations and businesses outside the primary purpose clause of the
corporation in violation of the Corporation Code.
ISSUE: RE: INTERNAL ORGANIZATION OF CORPORATIONS
Are the amendments in the by-laws are valid?
HELD:
YES. The validity and reasonableness of a by-law is purely a question of law. Whether the bylaw is in conflict with the law of the land, or with the charter of the corporation or is in legal sense
unreasonable and therefore unlawful is a question of law. However, this is limited where the
reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have exercised authority.
The Court held that a corporation has authority prescribed by law to prescribe the qualifications
of directors. It has the inherent power to adopt by-laws for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs.
A corporation, under the Corporation law, may prescribe in its by-laws the qualifications, duties
and compensation of directors, officers, and employees. Any person who buys stock in a corporation
does so with the knowledge that its affairs are dominated by a majority of the stockholders and he
impliedly contracts that the will of the majority shall govern in all matters within the limits of the acts of
incorporation and lawfully enacted by-laws and not forbidden by law.
Any corporation may amend its by-laws by the owners of the majority of the subscribed stock. It
cannot thus be said that petitioners has the vested right, as a stock holder, to be elected director, in the
face of the fact that the law at the time such stockholder's right was acquired contained the prescription
that the corporate charter and the by-laws shall be subject to amendment, alteration and modification.
A Director stands in a fiduciary relation to the corporation and its shareholders, which is
characterized as a trust relationship. An amendment to the corporate by-laws which renders a
stockholder ineligible to be director, if he be also director in a corporation whose business is in
competition with that of the other corporation, has been sustained as valid. This is based upon the
principle that where the director is employed in the service of a rival company, he cannot serve both, but
must betray one or the other. The amendment in this case serves to advance the benefit of the
corporation and is good. Corporate officers are also not permitted to use their position of trust and
confidence to further their private needs, and the act done in furtherance of private needs is deemed to
be for the benefit of the corporation. This is called the doctrine of corporate opportunity.

GOKONGWEI JR. VS. SEC ET. AL. (SUPRA)

G.R. NO. L-45911; APRIL 11, 1979
ISSUE: RE: DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS
WON the amended by-laws of SMC of disqualifying a competitor (Interlocking director) from
nomination or election to the Board of Directors of SMC are valid and reasonable.

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HELD:
Under US corporate law, corporations have the power to make by-laws declaring a person
employed in the service of a rival company to be ineligible for the corporation's Board of Directors. ... An
amendment which renders ineligible, or if elected, subjects to removal, a director if he be also a director
in a corporation whose business is in competition with or is antagonistic to the other corporation is
valid." This is based upon the principle that where the director is so employed in the service of a rival
company, he cannot serve both, but must betray one or the other. Such an amendment "advances the
benefit of the corporation and is good." In the Philippines, section 21 of the Corporation Law expressly
provides that a corporation may make by-laws for the qualifications of directors. Thus, it has been held
that an officer of a corporation cannot engage in a business in direct competition with that of the
corporation where he is a director by utilizing information he has received as such officer, under "the
established law that a director or officer of a corporation may not enter into a competing enterprise
which cripples or injures the business of the corporation of which he is an officer or director.
It is also well established that corporate officers "are not permitted to use their position of trust
and confidence to further their private interests." In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal.

GOKONGWEI JR. VS. SEC ET. AL. (SUPRA)

G.R. NO. L-45911; APRIL 11, 1979
ISSUE: RE: RIGHT TO INSPECTION
WON Gokongwei may be allowed to inspect the books of the corporation.
HELD:
YES. Where the right to inspect is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. The inspection has to be germane to the
petitioners interest as a stockholder and has to be proper and lawful in character and not inimical to the
interest of the corporation.
The stockholders right to inspect is based on his ownership of the assets and property of the
corporation. It is therefore an incident of ownership of the corporate property, whether this ownership or
interest be termed an equitable ownership, beneficial ownership, or quasi-ownership, and is predicated
upon the necessity of self-protection. On application for mandamus to enforce the right, it is proper for
the court to inquire into and consider the stockholders good faith and his purpose and motives in
seeking inspection. But the impropriety of purpose such as will defeat enforcement must be set up by
the corporation defensively if the Court is to take cognizance of it as a qualification. In other words, the
law take from the stockholder the burden of showing the propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive.
The foreign subsidiary is wholly-owned by SMC and therefore under its control, and would be
more in accord with equity, good faith, and fair dealing to construe the statutory right of Gokongwei as
stockholder to inspect the books of the parent as extending to the books of the subsidiary in its control.

STRONG VS. REPIDE

G.R. NO. L-2101; NOVEMBER 15, 1906
FACTS:
This action was brought to recover 800 shares of the capital stock of the Philippine Sugar
Estates Development Company, Limited, an anonymous society formed to hold the Dominican friar
lands.
The shares were the property of one of the plaintiffs, Mrs. Strong, as part of the estate of her
first husband. They were purchased by the defendant through a broker who dealt with her agent, one
Jones, who had the script in her possession and who had made the sale without the knowledge of the
plaintiff. The defendant was a director, was the managing agent, and was in his own right the majority
stockholder of the society.
ISSUE:
WON a director and majority stockholder must disclose his information to another stockholder
before buying stock from him.

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HELD:
YES. The director and controlling stockholder who purchased the shares of another
stockholder through an agent was held to be guilty of concealing the impending purchase of the friar
lands they own by the government, a significant fact which would affect the price of the shares.
Although ordinarily, the relationship between directors and stockholders of a corporation is not
of a fiduciary character as to oblige the director to disclose to a stockholder the general knowledge
which he may possess regarding the value of the shares of the company before he purchases any form
a shareholder, there are cases when such duty and obligation upon the director is present. Being the
chief negotiator for the sale of the lands, the director was the only person who knew of the advantages
and the impending increase in the value of the shares such that he is precluded from acquiring stocks
from other shareholders without first informing them of the pertinent facts affecting the value of the
shares being bought. It is fraudulent for a stockholder to buy from a shareholder without disclosing his
identity.
NOTE: Special Facts Doctrine: a doctrine holding that a corporate officer with superior knowledge
gained by virtue of being an insider owes a limited fiduciary duty to a shareholder in transactions
involving transfer of stock.

STEINBERG VS. VELASCO

G.R. NO. L-30460; MARCH 12, 1929
FACTS:
The board of the corporation authorized the purchase of 330shares of capital stock of the
corporation and the declaration of dividends at a time when the corporation was indebted and in such a
bad financial condition. The directors relied on the face value on the books of its A/R, which had little or
no value. Furthermore it appears that two of the directors were permitted to resign so that they could sell
their stock to the corporation. The corporation became insolvent, and the receiver Steinberg sues the
directors.
ISSUE:
Duty to creditors.
HELD:
Creditors of a corporation have the right to assume that so long as there are outstanding debts
and liabilities, the BOD will not use the assets of the corporation to buy its own stock, and will not
declare dividends to stockholders when the corporation is insolvent.
In this case, it was found that the corporation did not have an actual bona fide surplus from
which dividends could be paid. Moreover, the Court noted that the Board of Directors purchased the
stock from the corporation and declared the dividends on the stock at the same Board meeting, and that
the directors were permitted to resign so that they could sell their stock to the corporation. Given all of
this, it was apparent that the directors did not act in good faith or were grossly ignorant of their duties.
Either way, they are liable for their actions which affected the financial condition of the corporation and
prejudiced creditors.

PARDO VS. HERCULES LUMBER

G.R. NO. L-22442; AUGUST 1, 1924
FACTS:
Corporate secretary of Hercules Lumber refused to permit Pardo, a stockholder, or his agent to
inspect the records and business transactions of the company at the times desired by Pardo. Basis of
the refusal was the provision in the companys by-laws which stipulated that every stockholder may
examine the books of the company and other documents upon the days which the board annually fixes.
ISSUE: RE: RIGHT OF INSPECTION
When is the time or times within which the right of inspection may be exercised?
HELD:
The resolution of the board limiting the rights of stockholders to inspect its records to a period
of 10 days prior to the annual SH meeting is an unreasonable restriction in accordance with the
Corporation Code which provides that the right to inspect can be exercised at reasonable hours. The
right of inspection was interpreted to mean that the right may be exercised at reasonable hours on
business days throughout the year, and not merely during an arbitrary period of a few days chosen by
the directors.

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GONZALES VS. PNB

G.R. NO. L-24850; MARCH 1, 1926
FACTS:
Gonzales instituted a suit, as a taxpayer, against Sec. of Public Works and Communications,
the Commissioner of Public Highways, and PNB for alleged anomalies committed regarding the banks
extension of credit to import public works equipment intended for the massive development program.
The petitioners standing was questioned because he did not own any share in PNB. Consequently,
Petitioner bought 1 share of PNB stocks in order to gain standing as a stockholder.
Petitioner thereafter sought to inquire and ordered PNB to produce its books and records which
the Bank refused, invoking the provisions from its charter created by Congress. The petitioner filed
petition for mandamus to compel PNB to produce its books and records. The RTC dismissed the petition
and it ruled that the right to examine and inspect corporate books is not absolute, but is limited to
purposes reasonably related to the interest of the stockholder, must be asked for in good faith for a
specific and honest purpose and not gratify curiosity or for speculative or vicious purposes.
ISSUE:
WON the right of inspection may be compelled by Gonzales.
HELD:
NO. The Code has prescribed limitations to the right of inspection, requiring as a condition for
examination that the person requesting must not have been guilty of using improperly any information
secured through a prior examination, and that the person asking for such must be acting in good faith
and for a legitimate purpose. It is the stockholder seeking to exercise the right of inspection to set forth
the reasons and purposes for which he desires such inspection. SC held that the purpose of Gonzales,
which was to arm himself with evidence which he can use against the bank for acts done by the latter
when he was still a total stranger (i.e. not a SH), were not deemed proper motives and his request was
denied.

VERAGUTH VS. ISABELA SUGAR CO.

G.R. NO. L-37064; OCTOBER 4, 1932
FACTS:
Veraguth, a director and stockholder of the Isabela Sugar Company, Inc., filed a petition with
the lower court praying that: a final and absolute writ of mandamus be issued to each and all of the
respondent directors to notify him within the reglementary period, of all regular and special meetings of
the board of directors of the Company, and to place at his disposal at reasonable hours the minutes,
documents, and books of said corporation for his inspection as director and stockholder. He likewise
contends that when asked that he be permitted to inspect the books of the corporation, he was denied
access on the ground that the board of directors adopted a resolution providing for inspection of the
books and the taking of copies only by authority of the President of the corporation previously obtained
in each case.
ISSUE:
WON Veraguth can exercise the right of inspection of the books prior to the approval of the
Board.
HELD:
NO. Directors have the unqualified right to inspect the books and records of a corporation at all
reasonable times. Pretexts may not be put forward by the officers to keep a director or stockholder from
inspecting the books and minutes of the corporation, and the right to inspect cannot be denied on the
grounds that the director or stockholders are on unfriendly terms with the officers. A director or
stockholder has no absolute right to secure certified copies of the minutes until these minutes have
been written up and approved by the directors.

XVII. DERIVATIVE SUIT

EVANGELISTA VS. SANTOS
G.R. NO. L-1721; MAY 19, 1950

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FACTS:
Plaintiffs, minority stockholders of Vitali Lumber Company, alleges in their complaint that
defendant as president, manager and treasurer of their company, through fault, neglect and
abandonment allowed it lumber concession to lapse and its properties and assets to disappear causing
the complete ruin of the corporations operation and total depreciation of its stocks.
They pray for an accounting from the defendant of the corporate affairs and assets, payment to
them of the value of their respective participation in said assets on the basis of the value of the stocks
held by each of them and to pay the cost of the suit.
ISSUE:
WON the plaintiff-stockholders has the right to bring suit in their benefit.
HELD:
NO. The complaint shows that the action is for damages resulting from mismanagement of the
affairs and assets of the corporation by its principal officer, it being alleged that defendant's
maladministration has brought about the ruin of the corporation and the consequent loss of value of its
stocks. The injury complained of is thus primarily to the corporation, so that the suit for the damages
claimed should be by the corporation rather than by the stockholders. The stockholders may not directly
claim those damages for themselves for that would result in the appropriation by and the distribution
among them of part of the corporate assets before the dissolution of the corporation and the liquidation
of its debts and liabilities something which cannot be legally done.
But while it is to the corporation that the action should pertain in cases of this nature, however,
if the officers of the corporation, who are the ones called upon to protect their rights, refuse to sue, or
where a demand upon them to file the necessary suit would be futile because they are the very ones to
be sued or because they hold the controlling interest in the corporation, then in that case any of the
stockholders is allowed to bring suit. But in that case, the corporation is the real party in interest.
REPUBLIC BANK VS. CUADERNO
G.R. NO. L-22399; MARCH 30, 1967
FACTS:
A derivative suit was brought against the officers and the board. Complaint alleged that the
directors approved a resolution granting excessive compensation to the corporate officers. Suit was filed
in order to prevent dissipation of the corporate funds for the payment of salaries of the said officers.
Board claims the action cannot prosper for failure to compel the board to file the suit for and in behalf of
the corporation.
ISSUE:
WON the action cannot prosper for failure to compel the board to file suit in behalf of the
corporation.
HELD:
NO. It is settled that an individual stockholder is permitted to institute a derivative or
representative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party,
with the corporation as the real party in interest. Normally, it is the corporation through the board of
directors which should bring the suit. But as in this case, the members of the board of directors of the
bank were the nominees and creatures of respondent Roman and thus, any demand for an intracorporate remedy would be futile, the stockholder is permitted to bring a derivative suit.
Should the corporation be made a party? The English practice is to make the corporation a
party plaintiff while the US practice is to make it a party defendant. What is important though is that the
corporation should be made a party in order to make the court's ruling binding upon it and thus bar any
future re-litigation of the issues.

SAN MIGUEL CORPORATION VS. KHAN

G.R. NO. 85339; AUGUST 11, 1989
FACTS:
Fourteen corporations initially acquired shares of outstanding capital stock of SMC and
constituted a Voting Trust thereon in favor of Andres Soriano, Jr. When the latter died Eduardo Cojuanco
was elected as the substitute trustee. However, after the EDSA revolution, Cojuanco fled out of the
country, and subsequently an agreement was entered into between the 14 corporations and Andres
Soriano III (as an agent of several persons) for the purchase of the shares held by the former.

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Actually the buyer of the shares was Neptunia Corporation, a foreign corporation and whollyowned subsidiary of another subsidiary wholly owned by SMC. Neptunia paid the downpayment from
the proceeds of certain loans. PCGG then sequestered the shares subject of the sale so SMC
suspended all the other installments of the price to the sellers. The 14 corporations then sued for
rescission and damages.
Meanwhile, PCGG directed SMC to issue qualifying shares to seven (7) individuals including
Eduardo de los Angeles from the sequestered shares for them to hold in trust. Then, the SMCs board of
directors passed a resolution assuming the loans incurred by Neptunia for the downpayment. De los
Angeles assailed the resolution alleging that it was not passed by the board aside from its deleterious
effects on the corporations interest. When his efforts to obtain relief within the corporation proved futile,
he filed this action with the SEC. Respondent directors alleged that de los Angeles has no legal standing
having been merely imposed by the PCGG and that the twenty (20) shares owned by him personally
cannot fairly and adequately represent the interest of the minority.
ISSUE:
WON de los Angeles have the legal standing to sue. (Derivative suit)
HELD:
YES. The bona fide ownership by a stockholder in his own right suffices to invest him with the
standing to bring a derivative suit for the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for the protection or vindication of his own
particular right, or the redress of a wrong committed against him individually but in behalf and for the
benefit of the corporation.
The requisites of a derivative suit are: (1) the party bringing the suit should be a stockholder
as of the time of the act or transactions complained of, the number of shares not being material; (2)
exhaustion of intra-corporate remedies (has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea); and (3) the cause of action
actually devolves on the corporation and not to the particular stockholder bringing the suit.
YU VS. YUKAYGUAN
G.R. NO. 177549; JUNE 18, 2009
FACTS:
The case stemmed from the petition of Anthony Yu et. al. against his younger half-brother
Joseph Yukayguan et. al., who were all shareholders of Winchester Industrial Supply Inc., a company
engaged in hardware and industrial equipment business.
Accusing his older brothers family of misappropriating funds and assets of the company,
Yukayguan filed a derivative suit. After trial, the Cebu Regional Trial Court dismissed the case, saying
Yukayguan failed to follow and observe the essentials for filing of a derivative suit or action. The ruling
was upheld but later reversed by the Court of Appeals, prompting Yu to elevate the matter to the SC.
ISSUE:
Mandatory requirements before courts can give due course to derivative suits or legal actions
that may be taken by a stockholders on behalf of a corporation or association.
HELD:
The fact that Winchester, Inc. is a family corporation should not in any way exempt
respondents from complying with the clear requirements and formalities of the rules for filing a derivative
suit.
A stockholders right to institute a derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
However, there are mandatory requirements before a derivative suit can be given due course
by the Court. Citing Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies, the SC said derivative actions may be filed provided that the suing party was a
stockholder or member at the time the acts or transactions subject of the action occurred and at the time
the action was filed; and he exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires. As additional requirements,
the SC said there must be no appraisal rights which would allow a stockholder to sell his holdings
back to the company available and the suit is not a nuisance or harassment suit.
XVIII. MERGERS AND CONSOLIDATION

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GLOBAL BUSINESS HOLDINGS VS. SURECOMP SOFTWARE

G.R. NO. 173463; OCTOBER 13, 2010
FACTS:
Respondent Surecomp Software, a foreign corporation duly organized and existing under the laws of
the Netherlands, entered into a software license agreement with Asian Bank Corporation (ABC), a
domestic corporation, for the use of its IMEX Software System (System) in the banks computer system.
ABC merged with petitioner Global Business Holdings with Global as the surviving corporation.
When Global took over the operations of ABC, it found the System unworkable for its operations, and
informed Surecomp of its decision to discontinue with the agreement and to stop further payments
thereon. Consequently, for failure of Global to pay its obligations under the agreement despite demands,
Surecomp filed a complaint for breach of contract.
ISSUE:
WON Global shall be responsible for all the liabilities and obligations of ABC after having
merged with the latter.
HELD:
YES. It cannot be denied that there is indeed a contract entered into between Surecomp and
Global, the latter as a successor-in-interest of the merging, Global is estopped from denying Surecomps
capacity to sue it for alleged breach of that contract with damages.
In the merger of two existing corporations, one of the corporations survives and continues the
business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the
surviving corporation.

XVIII. MERGERS AND CONSOLIDATION

GLOBAL BUSINESS HOLDINGS VS. SURECOMP SOFTWARE
G.R. NO. 173463; OCTOBER 13, 2010
FACTS:
Respondent Surecomp Software, a foreign corporation duly organized and existing under the laws of
the Netherlands, entered into a software license agreement with Asian Bank Corporation (ABC), a
domestic corporation, for the use of its IMEX Software System (System) in the banks computer system.
ABC merged with petitioner Global Business Holdings with Global as the surviving corporation.
When Global took over the operations of ABC, it found the System unworkable for its operations, and
informed Surecomp of its decision to discontinue with the agreement and to stop further payments
thereon. Consequently, for failure of Global to pay its obligations under the agreement despite demands,
Surecomp filed a complaint for breach of contract.
ISSUE:
WON Global shall be responsible for all the liabilities and obligations of ABC after having
merged with the latter.
HELD:
YES. It cannot be denied that there is indeed a contract entered into between Surecomp and
Global, the latter as a successor-in-interest of the merging, Global is estopped from denying Surecomps
capacity to sue it for alleged breach of that contract with damages.
In the merger of two existing corporations, one of the corporations survives and continues the
business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the
surviving corporation.

XIX. DISSOLUTION
NATIONAL ABACA VS. PORE
G.R. NO. L-16779; AUGUST 16, 1961
FACTS:
Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery of a sum of
money advanced to her for the purchase of hemp. She moved to dismiss the complaint by citing the
fact that National Abaca had been abolished by EO 372 dated Nov. 24, 1950. Plaintiff objected to such
by saying that it shall nevertheless be continued as a corporate body for a period of 3 years from the
effective date of said order for the purpose of prosecuting and defending suits by or against it and to
enable the Board of Liquidators to close its affairs.

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ISSUE:
Can an action commenced within 3 years after the abolition of plaintiff corporation be continued
by the same after the expiration of said period?
HELD:
The Corporation Law allows a corporation to continue as a body for 3 years after the time when
it would have been dissolved for the purposes of prosecuting and defending suits by or against it. But at
any time during the 3 years, the corporation should convey all its property to trustees so that the latter
may be the ones to continue on with such prosecution, with no time limit on its hands. Since the case
against Pore was strong, the corporations amended complaint was admitted and the case was
remanded to the lower court.