CHINA BANKING CORPORATION V.

CA 270 SCRA 503 1997

Facts: On 21 August 1974, Galicano Calapatia, Jr., a
stockholder of Valley Golf & Country Club, Inc. (VGCCI),
pledged his Stock Certificate 1219 to China Banking
Corporation (CBC). On 16 September 1974, CBC wrote VGCCI
requesting that the pledge agreement be recorded in its
books. In a letter dated 27 September 1974, VGCCI replied
that the deed of pledge executed by Calapatia in CBC's favor
was duly noted in its corporate books. On 3 August 1983,
Calapatia obtained a loan of P20,000.00 from CBC, payment
of which was secured by the pledge agreement still existing
between Calapatia and CBC. Due to Calapatia's failure to pay
his obligation, CBC, on 12 April 1985, filed a petition for
extrajudicial foreclosure before Notary Public Antonio T. de
Vera of Manila, requesting the latter to conduct a public
auction sale of the pledged stock. On 14 May 1985, CBC
informed VGCCI of the foreclosure proceedings and requested
that the pledged stock be transferred to its name and the
same be recorded in the corporate books. However, on 15 July
1985, VGCCI wrote CBC expressing its inability to accede to
CBC's request in view of Calapatia's unsettled accounts with
the club. Despite the foregoing, Notary Public de Vera held a
public auction on 17 September 1985 and CBC emerged as
the highest bidder at P20,000.00 for the pledged stock.
Consequently, CBC was issued the corresponding certificate of
sale.
On 21 November 1985, VGCCI sent Calapatia a notice
demanding full payment of his overdue account in the amount
of P18,783.24. Said notice was followed by a demand letter
dated 12 December 1985 for the same amount and another
notice dated 22 November 1986 for P23,483.24. On 4
December 1986, VGCCI caused to be published in the
newspaper Daily Express a notice of auction sale of a number
of its stock certificates, to be held on 10 December 1986 at
10:00 a.m. Included therein was Calapatia's own share of
stock (Stock Certificate 1219). Through a letter dated 15
December 1986, VGCCI informed Calapatia of the termination
of his membership due to the sale of his share of stock in the
10 December 1986 auction. On 5 May 1989, CBC advised
VGCCI that it is the new owner of Calapatia's Stock Certificate
1219 by virtue of being the highest bidder in the 17
September 1985 auction and requested that a new certificate
of stock be issued in its name. On 2 March 1990, VGCCI
replied that "for reason of delinquency" Calapatia's stock was
sold at the public auction held on 10 December 1986 for
P25,000.00. On 9 March 1990, CBC protested the sale by
VGCCI of the subject share of stock and thereafter filed a case
with the Regional Trial Court of Makati for the nullification of
the 10 December 1986 auction and for the issuance of a new
stock certificate in its name. On 18 June 1990, the Regional
Trial Court of Makati dismissed the complaint for lack of
jurisdiction over the subject matter on the theory that it
involves an intra-corporate dispute and on 27 August 1990
denied CBC's motion for reconsideration. On 20 September
1990, CBC filed a complaint with the Securities and Exchange
Commission (SEC) for the nullification of the sale of
Calapatia's stock by VGCCI; the cancellation of any new stock
certificate issued pursuant thereto; for the issuance of a new
certificate in petitioner's name; and for damages, attorney's
fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea
rendered a decision in favor of VGCCI, stating in the main that
considering that the said share is delinquent, VGCCI had valid
reason not to transfer the share in the name of CBC in the
books of VGCCI until liquidation of delinquency. Consequently,
the case was dismissed. On 14 April 1992, Hearing Officer
Perea denied CBC's motion for reconsideration. CBC appealed
to the SEC en banc and on 4 June 1993, the Commission
issued an order reversing the decision of its hearing officer;
holding that CBC has a prior right over the pledged share and
because of pledgor's failure to pay the principal debt upon
maturity, CBC can proceed with the foreclosure of the pledged
share; declaring that the auction sale conducted by VGCCI on
10 December 1986 is declared NULL and VOID; and ordering
VGCCI to issue another membership certificate in the name of
CBC. VGCCI sought reconsideration of the order. However, the
SEC denied the same in its resolution dated 7 December

1993. The sudden turn of events sent VGCCI to seek redress

from the Court of Appeals. On 15 August 1994, the Court of
Appeals rendered its decision nullifying and setting aside the
orders of the SEC and its hearing officer on ground of lack of
jurisdiction over the subject matter and, consequently,
dismissed CBC's original complaint. The Court of Appeals
declared that the controversy between CBC and VGCCI is not
intra-corporate; nullifying the SEC orders and dismissing
CBCs complaint. CBC moved for reconsideration but the same
was denied by the Court of Appeals in its resolution dated 5
October 1994. CBC filed the petition for review on certiorari.
Issue: Whether CBC is bound by VGCCI's by-laws.
Held: In order to be bound, the third party must have acquired
knowledge of the pertinent by-laws at the time the transaction
or agreement between said third party and the shareholder
was entered into. Herein, at the time the pledge agreement
was executed. VGCCI could have easily informed CBC of its
by-laws when it sent notice formally recognizing CBC as
pledgee of one of its shares registered in Calapatia's name.
CBC's belated notice of said by-laws at the time of foreclosure
will not suffice. By-laws signifies the rules and regulations or
private laws enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it.
In other words, by-laws are the relatively permanent and
continuing rules of action adopted by the corporation for its
own government and that of the individuals composing it and
having the direction, management and control of its affairs, in
whole or in part, in the management and control of its affairs
and activities. The purpose of a by-law is to regulate the
conduct and define the duties of the members towards the
corporation and among themselves. They are self-imposed
and, although adopted pursuant to statutory authority, have
no status as public law. Therefore, it is the generally accepted
rule that third persons are not bound by by-laws, except when
they have knowledge of the provisions either actually or
constructively. For the exception to the general accepted rule
that third persons are not bound by by-laws to be applicable
and binding upon the pledgee, knowledge of the provisions of
the VGCCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions,
either actual or constructive, at the time of foreclosure will not
affect pledgee's right over the pledged share. Article 2087 of
the Civil Code provides that it is also of the essence of these
contracts that when the principal obligation becomes due, the
things in which the pledge or mortgage consists maybe
alienated for the payment to the creditor. Further, VGCCI's
contention that CBC is duty-bound to know its by-laws
because of Article 2099 of the Civil Code which stipulates that
the creditor must take care of the thing pledged with the
diligence of a good father of a family, fails to convince. CBC
was never informed of Calapatia's unpaid accounts and the
restrictive provisions in VGCCI's by-laws. Furthermore, Section
63 of the Corporation Code which provides that "no shares of
stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation" cannot
be utilized by VGCCI. The term "unpaid claim" refers to "any
unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the
corporation arising from any other transaction." Herein, the
subscription for the share in question has been fully paid as
evidenced by the issuance of Membership Certificate 1219.
What Calapatia owed the corporation were merely the
monthly dues. Hence, Section 63 does not apply.
GRACE CHRISTIAN HIGH SCHOOL V. CA 281 SCRA 133 1997
Facts: Petitioner Grace Christian High School is an educational
institution offering preparatory, kindergarten and secondary
courses at the Grace Village in Quezon City. Private
respondent Grace Village Association, Inc., on the other hand,
is an organization of lot and/or building owners, lessees and
residents at Grace Village. In 1968, the by-laws of the
association provided in Article IV, as follows: The annual
meeting of the members of the Association shall be held on
the first Sunday of January in each calendar year at the
principal office of the Association at 2:00 P.M. where they shall
elect by plurality vote and by secret balloting, the Board of

Directors, composed of eleven (11) members to serve for one

year until their successors are duly elected and have
qualified.
On December 20, 1975, a committee of the board of directors
prepared a draft of an amendment to the by-laws, reading as
follows: The Annual Meeting of the members of the
Association shall be held on the second Thursday of January of
each year. Each Charter or Associate Member of the
Association is entitled to vote. He shall be entitled to as many
votes as he has acquired thru his monthly membership fees
only computed on a ratio of TEN (P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first fourteen
(14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.
This draft was never presented to the general membership for
approval. Nevertheless, from 1975, after it was presumably
submitted to the board, up to 1990, petitioner was given a
permanent seat in the board of directors of the association.
From 1975 until 1989 petitioners representative had been
recognized as a permanent director of the association. But
on February 13, 1990, petitioner received notice from the
associations committee on election that the latter was
reexamining (actually, reconsidering) the right of
petitioners representative to continue as an unelected
member of the board. As the board denied petitioners
request to be allowed representation without election,
petitioner brought an action for mandamus in the Home
Insurance and Guaranty Corporation. Its action was dismissed
by the hearing officer whose decision was subsequently
affirmed by the appeals board. Petitioner appealed to the
Court of Appeals, which in turn upheld the decision of the
HIGCs appeals board. Hence this petition for review.
1. The Petitioner herein has already acquired a vested right
to a permanent seat in the Board of Directors of Grace Village
Association;
2. The amended By-laws of the Association drafted and
promulgated by a Committee on December 20, 1975 is valid
and binding; and
3. The Practice of tolerating the automatic inclusion of
petitioner as a permanent member of the Board of Directors
of the Association without the benefit of election is allowed
under the law.
Issue: (1) WON the 1975 Amendment is valid despite not
having been approved by the General Assembly
(2) WON the Corporate Code grants Grace Christian High
School a right to a seat at the Board
Held:
(1) This provision of the by-laws actually implements
22 of the Corporation Law which provides that the owners of
a majority of the subscribed capital stock, or a majority of the
members if there be no capital stock, may, at a regular or
special meeting duly called for the purpose, amend or repeal
any by-law or adopt new by-laws. The owners of two-thirds of
the subscribed capital stock, or two-thirds of the members if
there be no capital stock, may delegate to the board of
directors the power to amend or repeal any by-law or to adopt
new by-laws: Provided, however, That any power delegated to
the board of directors to amend or repeal any by-law or adopt
new by-laws shall be considered as revoked whenever a
majority of the stockholders or of the members of the
corporation shall so vote at a regular or special meeting.
The proposed amendment to the by-laws was never approved
by the majority of the members of the association as required
by these provisions of the law and by-laws. But petitioner
contends that the members of the committee which prepared
the proposed amendment were duly authorized to do so and
that because the members of the association thereafter
implemented the provision for fifteen years, the proposed
amendment for all intents and purposes should be considered
to have been ratified by them. Petitioner contends:
Considering, therefore, that the agents or committee were
duly authorized to draft the amended by-laws and the acts
done by the agents were in accordance with such authority,
the acts of the agents from the very beginning were lawful
and binding on the homeowners (the principals) per se
without need of any ratification or adoption. The more has the
amended by-laws become binding on the homeowners when

the homeowners followed and implemented the provisions of

the amended by-laws. This is not merely tantamount to tacit
ratification of the acts done by duly authorized agents but
express approval and confirmation of what the agents did
pursuant to the authority granted to them.
(2) The present Corporation Code (B.P. Blg. 68) provides:
23. The Board of Directors or Trustees. Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled
and held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no stock,
from among the members of the corporation, who shall hold
office for one (1) year and until their successors are elected
and qualified.
This provision leave no room for doubt as to the meaning: the
board of directors of corporations must be elected from
among the stockholders or members. There may be
corporations in which there are unelected members in the
board but it is clear that in the examples cited by petitioner
the unelected members sit as ex officio members, i.e., by
virtue of and for as long as they hold a particular office. But in
the case of petitioner, there is no reason at all for its
representative to be given a seat in the board. Nor does
petitioner claim a right to such seat by virtue of an office held.
In fact it was not given such seat in the beginning. It was only
in 1975 that a proposed amendment to the by-laws sought to
give it one.
Since the provision in question is contrary to law, the fact that
for fifteen years it has not been questioned or challenged but,
on the contrary, appears to have been implemented by the
members of the association cannot forestall a later challenge
to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the
power of the members of the association to waive its
invalidity. For that matter the members of the association may
have formally adopted the provision in question, but their
action would be of no avail because no provision of the bylaws can be adopted if it is contrary to law.
It is probable that, in allowing petitioners representative to sit
on the board, the members of the association were not aware
that this was contrary to law. It should be noted that they did
not actually implement the provision in question except
perhaps insofar as it increased the number of directors from
11 to 15, but certainly not the allowance of petitioners
representative as an unelected member of the board of
directors. It is more accurate to say that the members merely
tolerated petitioners representative and tolerance cannot be
considered ratification.
Nor can petitioner claim a vested right to sit in the board on
the basis of practice. Practice, no matter how long
continued, cannot give rise to any vested right if it is contrary
to law. Even less tenable is petitioners claim that its right is
coterminus with the existence of the association.
SALAFRANCIA V. PHILAMLIFE 300 SCRA 469 1998
FACTS:
1. Petitioner Enrique Salafranca started working with private
respondent on May 1, 1981 as administrative officer for a
period of 6 months.
2. Petitioner was re-appointed to his position three more
times.
3. After petitioners term of employment expired on December
31, 1983, he still continued to work in the same capacity,
albeit , without the benefit of a renewed contract.
4. Sometime in 1987, private respondent decided to amend
its by-laws.
5. Included therein was a provision regarding officers,
specifically, the position of administrative officer under which
said officer shall hold office at the pleasure of the Board of
Directors.
6. In view of the development, private respondent informed
the petitioner that his term of office shall be co-terminus with
the Board of Directors which appointed him to his position.
7. Furthermore, until he submits a medical certificate his
employment shall be on a month to month basis.
8. Notwithstanding the failure of petitioner to submit his
medical certificate, he continued to work until his termination
in December 1992.

9. Petitioner filed a complaint for illegal dismissal , money

claims and for damages.
10. The Labor Arbiter rendered decision in favor of petitioner.
11. According to the Labor Arbiter, the amendment would not
be applicable to complainant who had become a regular
employee long time before the amendment took place.
12. The NLRC reversed the decision of the Labor Arbiter and
rendered a new one reducing petitioners monetary award to
only month pay for every year of service representing his
retirement pay.
13. The NLRC viewed the dismissal of petitioner as a valid act
of private respondent.
ISSUE:
Was the dismissal of petitioner valid by virtue of the
amendment in the by-laws making petitioners position coterminus with that of the Board of Directors.
HELD:
Admittedly, the right to amend the by-laws lies solely in the
discretion of the employer, this being in the exercise of
management prerogative or business judgment. However this
right, extensive as it may be, cannot impair the obligation of
existing contracts or rights.
If private respondents wanted to make the petitioners
position co-terminus with that of the Board of Directors, then
the amendment must be effective after petitioners stay with
the private respondent, not during his term. Obviously, the
measure taken by the private respondent in amending its bylaws is nothing but a devious, but crude, attempt to
circumvent petitioners right to security of tenure as a regular
employee guaranteed under the Labor Code.
Prescinding from these premises, private respondents
insistence that it can legally dismiss petitioner on the ground
that his tenure has expired is untenable. To reiterate,
petitioner, being a regular employee, is entitled to security of
tenure; hence, his services may only be terminated for causes
provided by law.[27] A contrary interpretation would not find
justification in the laws or the Constitution. If we were to rule
otherwise, it would enable an employer to remove any
employee from his employment by the simple expediency of
amending its by-laws and providing that his/her position shall
cease to exist upon the occurrence of a specified event.
If private respondent wanted to make the petitioners position
co-terminus with that of the Board of Directors, then the
amendment must be effective after petitioners stay with the
private respondent, not during his term. Obviously, the
measure taken by the private respondent in amending its bylaws is nothing but a devious, but crude, attempt to
circumvent petitioners right to security of tenure as a regular
employee guaranteed under the Labor Code.[28]
Interestingly, the Solicitor General is of the view that what
actually transpired was that petitioner was retired from his
employment, considering the fact that in 1992 he was already
70 years old and not terminated.[29]
While there seems to be a semblance of plausibility in this
contention for the matter of extension of service of such
employee or official is addressed to the sound discretion of
the employer, still we have no doubt that this was just a mere
after-thought - a dismissal disguised as retirement.
In the proceedings before the Labor Arbiter, it is noteworthy
that private respondent never raised the issue of compulsory
retirement,[30] as a cause for terminating petitioners service.
In its appeal before the NLRC, this ground was never
discussed. In fact, private respondent, in justifying the
termination of the petitioner, still anchored its claim on the
applicability of the amended by-laws.
MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORP V. LIM
2011
Short Summary: This lengthy case involves the validity of the
infusion of additional capital effected by the board of
directors, the questionable issuance of shares of stock by the
majority stockholders and the extension of RUBYs corporate
term. As described by the SC, the present action has been
instituted for the purpose of protecting the true and legitimate
interests of Ruby against the Majority Stockholders.

RUBY has been experiencing severe liquidity problem. The

majority stockholders wanted to infuse more capital into the
corporation through issuance of additional shares. Hence, the
Revised BENHAR/RUBY Rehabilitation Plan of the majority
stockholders proposed to call for subscription of unissued
shares for P11.814M. This led to the special meeting of RUBYs
board meeting whose resolution authorized the issuance of
the unissued portion of the authorized capital stocks of the
corporation in the form of common stocks. However, the
minority stockholders contended, among others, that they
were not given notice as required and reasonable time to
exercise their pre-emptive rights. Hence, the minority
stockholders wanted to nullify the acts of the majority
stockholders in implementing the capital infusion. Pre-emptive
right refers to the right of a stockholder of a stock corporation
to subscribe to all issues or disposition of shares of any class,
in proportion to their respective shareholdings. SC ruled in
favor of the minority stockholders.
Facts:
- Ruby Industrial Corporation (RUBY) is a domestic
corporation engaged in glass manufacturing. Reeling from
severe liquidity problems beginning in 1980, RUBY filed on
December 13, 1983 a petition for suspension of payments
with the SEC which was granted.
- On August 10, 1984, the SEC Hearing Panel created the
management committee (MANCOM) for RUBY, composed of
representatives from Rubys creditors. One of the many task
of MANCOM is study, review and evaluate the proposed
rehabilitation plan for RUBY.
- Subsequently, two (2) rehabilitation plans were submitted to
the SEC the BENHAR/RUBY Rehabilitation Plan of the
majority stockholders led by Yu Kim Giang, and the Alternative
Plan of the minority stockholders represented by Miguel Lim
(Lim). But the implementation of both majority plans has been
enjoined by the SEC and CA. Later, the SC issued a final
injunction on the implementation.
- Sept 18, 1991: Notwithstanding the injunction order, SEC
issued an Order approving the Revised BENHAR/RUBY Plan
and creating a new management committee to oversee its
implementation. It also dissolves the MANCOM.
- The Revised BENHAR/RUBY Plan had proposed the calling for
subscription of unissued shares through a Board Resolution
from the P11.814 million of theP23.7 million ACS in order to
allow the long overdue program of the REHAB Program.
- Oct 2, 1991: To implement the Revised plan, RUBYs board
of directors held a special meeting and took up the capital
infusion of P11.814 Million representing the unissued and
unsubscribed portion of the present ACS of P23.7 Million.
- The Board resolved that: The corporation be authorized to
issue out of the unissued portion of the authorized capital
stocks of the corporation in the form of common stocks
11.8134.00 [Million] to be subscribed and paid in full by the
present stockholders in proportion to their present
stockholding in the corporation on staggered basisand that
should any of the stockholders fail to exercise their rights to
buy the number of shares they are qualified to buy by making
the first installment payment of 25% on or before October 13,
1991, then the other stockholders may buy the same and that
only when none of the present stockholders are interested in
the shares may there be a resort to selling them by public
auction.
- The minority directors claimed they were not notified of said
board meeting.
- Sept 1, 1996: Lim receive a Notice of Stockholders Meeting
scheduled on September 3, 1996. The matters that will be
taken up in said meeting include the extension of RUBYs
corporate term for another twenty-five (25) years and election
of Directors.
- Sept 3, 1996: Lim together with other minority stockholders,
appeared in order to put on record their objections on the
validity of holding thereof and the matters to be taken therein.
Specifically, they questioned the percentage of stockholders
present in the meeting which the majority claimed stood at
74.75%(from 59.829%) of the outstanding capital stock of
RUBY. Lim argued that the majority stockholders claimed to
have increased their shares to 74.75% by subscribing to the
unissued shares of the authorized capital stock (ACS). Lim
pointed out that such move of the majority was in

implementation of the BENHAR/RUBY Plan which calls for

capital infusion of P11.814 Million representing the unissued
and unsubscribed portion of the present ACS of P23.7 Million.
- Jan 20, 1998: the SC affirmed CA decision setting aside the
SEC orders approving the Revised BENHAR/RUBY Plan because
it not only recognized the void deeds of assignments entered
into with some of RUBYs creditors in violation of the CAs
decision in CA-G.R. SP No. 18310, but also maintained a
financing scheme which will just make the rehabilitation plan
more costly and create a worse situation for RUBY.
- Mar 17, 2000, Lim filed a Motion informing the SEC of acts
being performed by BENHAR and RUBY. Allegedly, the
implementation of the new percentage stockholdings of the
majority stockholders and the calling of stockholders meeting
and the subsequent resolution approving the extension of
corporate life of RUBY for another twenty-five (25) years, were
all done in violation of the decisions of the CA and this Court,
and without compliance with the legal requirements under the
Corporation Code. There being no valid extension of corporate
term, RUBYs corporate life had legally ceased. Consequently,
Lim moved that the SEC: (1) declare as null and void the
infusion of additional capital made by the majority
stockholders and restore the capital structure of RUBY to its
original structure prior to the time injunction was issued; and
(2) declare as null and void the resolution of the majority
stockholders extending the corporate life of RUBY for another
twenty-five (25) years.
- Sept 18, 2002, the SEC overruled the objections raised by
the minority stockholders regarding the questionable issuance
of shares of stock by the majority stockholders and extension
of RUBYs corporate term because the filing of the
amendment of articles of incorporation by RUBY in 1996
complied with all the legal requisites and hence the the
presumption of regularity in the act of a government entity
stands. It pointed out that Lim raised the issue only in the
year 2000. Moreover, the SEC found that notwithstanding his
allegations of fraud, Lim never proved the illegality of the
additional infusion of the capitalization by RUBY so as to
warrant a finding that there was indeed an unlawful act.
- Before the CA, Lim demonstrated the following evidence to
rebut the presumption of regularity:
(1) it was the board of directors and not the stockholders
which conducted the meeting without the approval of the
MANCOM; (2) there was no written waivers of the minority
stockholders pre-emptive rights and thus it was irregular to
merely notify them of the board of directors meeting and ask
them to exercise their option; (3) there was an existing
permanent injunction against any additional capital infusion
on the BENHAR/RUBY Plan, while the CA and this Court both
rejected the Revised BENHAR/RUBY Plan; (4) there was no
General Information Sheet reports made to the SEC on the
alleged capital infusion, as per certification by the SEC.
CA Decision (which is cited by SC in its decision):
- SEC erred in not finding that the October 2, 1991 meeting
held by RUBYs board of directors was illegal because the
MANCOM was neither involved nor consulted in the resolution
approving the issuance of additional shares of RUBY. The CA
further noted that the October 2, 1991 board meeting was
conducted on the basis of the September 18, 1991 order of
the SEC Hearing Panel approving the Revised BENHAR/RUBY
Plan, which plan was set by CA and SC.
- The CA pointed out that records confirmed the proposed
infusion of additional capital for RUBYs rehabilitation,
approved during said meeting, as implementing the Revised
BENHAR/RUBY Plan. Necessarily then, such capital infusion is
covered by the final injunction against the implementation of
the revised plan.
- The CA likewise faulted the SEC in relying on the
presumption of regularity on the matter of the extension of
RUBYs corporate term through the filing of amended articles
of incorporation. SEC should have invalidated the resolution
extending the corporate term of RUBY for another twenty-five
(25) years. With the expiration of the RUBYs corporate term,
the CA ruled that it was error for the SEC in not commencing
liquidation proceedings.
Issue: WON the additional capital infusion is valid? [No
because the issuance of additional shares was done in breach
of trust by the controlling stockholders. Here, the majority
sought to impose their will and, through fraudulent means,

attempt to siphon off Rubys valuable assets to the great

prejudice of Ruby itself, as well as the minority stockholders
and the unsecured creditors.]
Ratio: A stock corporation is expressly granted the power to
issue or sell stocks. The power to issue shares of stock in a
corporation is lodged in the board of directors and no
stockholders meeting is required to consider it because
additional issuances of shares of stock do not need approval
of the stockholders. What is only required is the board
resolution approving the additional issuance of shares. The
corporation shall also file the necessary application with the
SEC to exempt these from the registration requirements under
the Revised Securities Act (now the Securities Regulation
Code).
But CA found, which the Court affirmed, that: the foregoing
payment schedules as embodied in the said Revised plan
which gives Benhar undue advantage over the other creditors
goes against the very essence of rehabilitation, which requires
that no creditor should be preferred over the other. One of the
salient features of the Revised Benhar/Ruby Plan is to Call on
unissued shares forP11.814 M and if minority will take up their
pre-emptive rights and dilute minority shareholdings.
With the nullification of the Revised BENHAR/RUBY Plan by
both CA and SC on Jan 20, 1998, the legitimate concerns of
the minority stockholders and MANCOM who objected to the
capital infusion which resulted in the dilution of their
shareholdings, the expiration of RUBYs corporate term and
the pending incidents on the void deeds of assignment of
credit all these should have been duly considered and acted
upon by the SEC when the case was remanded to it for further
proceedings. With the final rejection of the courts of the
Revised BENHAR/RUBY Plan, it was grave error for the SEC not
to act decisively on the motions filed by the minority
stockholders who have maintained that the issuance of
additional shares did not help improve the situation of RUBY
except to stifle the opposition coming from the MANCOM and
minority stockholders by diluting the latters shareholdings.
Worse, the SEC ignored the evidence adduced by the minority
stockholders indicating that the correct amount of
subscription of additional shares was not paid by the majority
stockholders and that SEC official records still reflect the 60%40% percentage of ownership of RUBY.
The SEC remained indifferent to the reliefs sought by the
minority stockholders, saying that the issue of the validity of
the additional capital infusion was belatedly raised. Even
assuming the October 2, 1991 board meeting indeed took
place, the SEC did nothing to ascertain whether indeed, as the
minority claimed: (1) the minority stockholders were not given
notice as required and reasonable time to exercise their preemptive rights; and (2) the capital infusion was not for the
purpose of rehabilitation but a mere ploy to divest the
minority stockholders of their 40.172% shareholding and
reduce it to a mere 25.25%.
Pre-emptive right under Sec. 39 of the Corporation Code
refers to the right of a stockholder of a stock corporation to
subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings. The right may be
restricted or denied under the articles of incorporation, and
subject to certain exceptions and limitations. The stockholder
must be given a reasonable time within which to exercise their
preemptive rights. Upon the expiration of said period, any
stockholder who has not exercised such right will be deemed
to have waived it.
The validity of issuance of additional shares may be
questioned if done in breach of trust by the controlling
stockholders. Thus, even if the pre-emptive right does not
exist, either because the issue comes within the exceptions in
Section 39 or because it is denied or limited in the articles of
incorporation, an issue of shares may still be objectionable if
the directors acted in breach of trust and their primary
purpose is to perpetuate or shift control of the corporation, or
to freeze out the minority interest. In this case, the following
relevant observations should have signaled greater
circumspection on the part of the SEC -- upon the third and
last remand to it pursuant to our January 20, 1998 decision -to demand transparency and accountability from the majority
stockholders, in view of the illegal assignments and
objectionable features of the Revised BENHAR/RUBY Plan, as
found by the CA and as affirmed by this Court:

There can be no gainsaying the well-established rule in

corporate practice and procedure that the will of the majority
shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws not proscribed by
law. It is, however, equally true that other stockholders are
afforded the right to intervene especially during critical
periods in the life of a corporation like reorganization, or in
this case, suspension of payments, more so, when the
majority seek to impose their will and through fraudulent
means, attempt to siphon off Rubys valuable assets to the
great prejudice of Ruby itself, as well as the minority
stockholders and the unsecured creditors.
Certainly, the minority stockholders and the unsecured
creditors are given some measure of protection by the law
from the abuses and impositions of the majority, more so in
this case, considering the give-away signs of private
respondents perfidy strewn all over the factual landscape.
Indeed, equity cannot deprive the minority of a remedy
against the abuses of the majority, and the present action has
been instituted precisely for the purpose of protecting the true
and legitimate interests of Ruby against the Majority
Stockholders. On this score, the Supreme Court, has ruled
that:
Generally speaking, the voice of the majority of the
stockholders is the law of the corporation, but there are
exceptions to this rule. There must necessarily be a limit upon
the power of the majority. Without such a limit the will of the
majority will be absolute and irresistible and might easily
degenerate into absolute tyranny. x x x[67] (Additional
emphasis supplied.)
Lamentably, the SEC refused to heed the plea of the minority
stockholders and MANCOM for the SEC to order RUBY to
commence liquidation proceedings, which is allowed under
Sec. 4-9 of the Rules on Corporate Recovery. Under the
circumstances, liquidation was the only hope of the minority
stockholders for effecting an orderly and equitable settlement
of RUBYs obligations, and compelling the majority
stockholders to account for all funds, properties and
documents in their possession, and make full disclosure on
the nullified credit assignments.
In fine, no error was committed by the CA when it set aside
the September 18, 2002 Order of the SEC and declared the
nullity of the acts of majority stockholders in implementing
capital infusion through issuance of additional shares in
October 1991 and the board resolution approving the
extension of RUBYs corporate term for another 25 years.
JUANITO ANG V. SPOUSES ANG 2013
The Facts
Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered
corporation owned by the Ang family.4 Its current stockholders
and their respective stockholdings are as
Juanito Ang (Juanito) and Roberto Ang (Roberto) are siblings.
Anecita Limoco-Ang (Anecita) is Juanitos wife and Jeannevie is
their daughter. Roberto was elected President of SMBI, while
Juanito was elected as its Vice President. Rachel Lu-Ang
(Rachel) and Anecita are SMBIs Corporate Secretary and
Treasurer, respectively.
On 31 July 1995, Nancy Ang (Nancy), the sister of Juanito and
Roberto, and her husband, Theodore Ang (Theodore), agreed
to extend a loan to settle the obligations of SMBI and other
corporations owned by the Ang family, specifically Bayshore
Aqua Culture Corporation, Oceanside Marine Resources and JR
Aqua Venture.6 Nancy and Theodore issued a check in the
amount of $1,000,000.00 payable to "Juanito Ang and/or
Anecita Ang and/or Roberto Ang and/or Rachel Ang." Nancy
was a former stockholder of SMBI, but she no longer appears
in SMBIs General Information Sheets as early as 1996.7
Nancy and Theodore are now currently residing in the United
States. There was no written loan agreement, in view of the
close relationship between the parties. Part of the loan was
also used to purchase real properties for SMBI, for Juanito, and
for Roberto.8
On 22 December 2005, SMBI increased its authorized capital
stock to P10,000,000.00. The Certificate of Increase of Capital
Stock was signed by Juanito, Anecita, Roberto, and Rachel as
directors of SMBI.9 Juanito claimed, however, that the
increase of SMBIs capital stock was done in contravention of

the Corporation Code.10 According to Juanito, when he and

Anecita left for Canada:
x x x Sps. Roberto and Rachel Ang took over the active
management of [SMBI]. Through the employment of sugar
coated words, they were able to successfully manipulate the
stocks sharings between themselves at 50-50 under the
condition that the procedures mandated by the Corporation
Code on increase of capital stock be strictly observed (valid
Board Meeting). No such meeting of the Board to increase
capital stock materialized. It was more of an accommodation
to buy peace x x x.11
Juanito claimed that payments to Nancy and Theodore ceased
sometime after 2006. On 24 November 2008, Nancy and
Theodore, through their counsel here in the Philippines, sent a
demand letter to "Spouses Juanito L. Ang/Anecita L. Ang and
Spouses Roberto L. Ang/Rachel L. Ang" for payment of the
principal amounting to $1,000,000.00 plus interest at ten
percent (10%) per annum, for a total of $2,585,577.37 within
ten days from receipt of the letter. 12 Roberto and Rachel
then sent a letter to Nancy and Theodores counsel on 5
January 2009, saying that they are not complying with the
demand letter because they have not personally contracted a
loan from Nancy and Theodore.
On 8 January 2009, Juanito and Anecita executed a Deed of
Acknowledgment and Settlement Agreement (Settlement
Agreement) and an Extra-Judicial Real Estate Mortgage
(Mortgage). Under the foregoing instruments, Juanito and
Anecita admitted that they, together with Roberto and Rachel,
obtained a loan from Nancy and Theodore for $1,000,000.00
on 31 July 1995 and such loan shall be secured by:
a) Juanito and Anecitas fifty percent share over a parcel of
land registered in the name of SMBI;
b) a parcel of land registered in the name of Juanito Ang;
c) Juanitos fifty percent share in 7 parcels of land registered
in his and Robertos name;
d) a parcel of land registered in the name of Roberto;
e) a parcel of land registered in the name of Rachel; and
f) Roberto and Rachels fifty percent share in 2 parcels of land
registered in the name of their son, Livingstone L. Ang
(Livingstone), and in another lot registered in the name of
Livingstone and Alvin Limoco Ang.13
A certain Kenneth C. Locsin (Locsin) signed on behalf of Nancy
and Theodore, under a Special Power of Attorney which was
not attached as part of the Settlement Agreement or the
Mortgage, nor included in the records of this case.
Thereafter, Juanito filed a "Stockholder Derivative Suit with
prayer for an ex-parte Writ of Attachment/Receivership"
(Complaint) before the RTC Bacolod on 29 January 2009. He
alleged that "the intentional and malicious refusal of
defendant Sps. Roberto and Rachel Ang to settle their 50%
share x x x of the total obligation x x x will definitely affect the
financial viability of plaintiff SMBI."14 Juanito also claimed that
he has been "illegally excluded from the management and
participation in the business of [SMBI through] force, violence
and intimidation" and that Rachel and Roberto have seized
and carted away SMBIs records from its office.15
The Complaint sought the following reliefs:
a) Issuance of an ex-parte Writ of Attachment and/or
Garnishment, with a Break Open Order covering the assets of
the spouses Roberto and Rachel Ang, or any interest they may
have against third parties;
b) Placement of SMBI under Receivership pending resolution
of the case;

c) Enforcement of Juanitos right to actively participate in the

management of SMBI;
d) Issuance of an Order compelling the Spouses Roberto and
Rachel Ang to:
i. Render an accounting of the utilization of the loan
amounting to $2,585,577.37 or P120,229,347.26;
ii. Pay fifty percent of the aforementioned loan, amounting to
60,114,673.62;
iii. Explain why Nancy was removed as a stockholder as far as
SMBIs reportorial requirements with the SEC are concerned;
iv. Restore Juanitos right to actively manage the affairs of the
corporation; and
v. Pay attorneys fees amounting to P20,000.00.
On 29 January 2009, the RTC Bacolod issued an Order16
granting the application for an ex-parte writ of attachment
and break open order. Atty. Jerry Basiao, who filed an
application for appointment as Receiver of SMBI, was directed
by the RTC Bacolod to furnish the required Receivership
Bond.17 On the same date, Roberto and Rachel moved to
quash the writ of attachment and set aside the break open
order and appointment of receiver.18 They claimed that these
were issued in violation of their right to due process:
Records of this case would show that the complaint was filed
before the RTC Bacolod at 2:50 p.m. of January 29, 2009. x x x
Counsel for the defendant-spouses went to the RTC Bacolod at
around 3:00 p.m. on January 29, 2009 to inquire on the status
of the case and was informed that the last pleading on record
is his entry of appearance with the conformity of the
defendant Rachel Ang. Counsel was however informed by the
clerk of court that the Honorable Judge has already issued an
order directing the issuance of the writ of preliminary
attachment, receivership and break open order but said order
was not officially released yet x x x. Due to the undersigned
counsels insistence, however, said clerk of court of this
Honorable Court furnished him a copy of said order x x x. The
clerk of court and the clerk in charge of civil cases assured
counsel that no writ of preliminary attachment was prepared
or issued x x x. Despite such assurance x x x [and counsels
advice that they shall move to quash the order the following
morning], that afternoon, the clerk of court x x x
clandestinely, hurriedly and surreptitiously, for reasons known
only to her, x x x prepared the writ of attachment x x x.19
In her Verified Answer Ad Cautelam which was filed on 10
February 2009, Rachel prayed that the Complaint be
dismissed as it was not a bona fide derivative suit as defined
under the Interim Rules of Procedure for Intra-Corporate
Controversies20 (Interim Rules). According to Rachel, the
Complaint, although labelled as a derivative suit, is actually a
collection suit since the real party in interest is not SMBI, but
Nancy and Theodore:
The cause of action does not devolve on the corporation as
the alleged harm or wrong pertains to the right of the Sps.
Theodore and Nancy Ang, as creditors, to collect the amount
allegedly owed to them. x x x
xxxx
That the instant suit is for the benefit of a non-stockholder
and not the corporation is obvious when the primary relief
prayed for in the Complaint which is for the defendants "to
pay the amount of Php 60,114,673.62 plus interest which is
50% of the loan obligations of plaintff [SMBI] to its creditor
Sps. Theodore and Nancy Ang." Otherwise stated, the instant
suit is nothing but a complaint for sum of money shamelessly
masked as a derivative suit.21
Rachel also argued that the Complaint failed to allege that
Juanito "exerted all reasonable efforts to exhaust all intracorporate remedies available under the articles of

incorporation, by-laws, laws or rules governing the corporation

to obtain the relief he desires," as required by the Interim
Rules.
During cross-examination, Juanito admitted that there was no
prior demand for accounting or liquidation nor any written
objection to SMBIs increase of capital stock. He also
conceded that the loan was extended by persons who are not
stockholders of SMBI. Thus, Rachel filed a Motion for
Preliminary Hearing on Affirmative Defenses on 27 November
2009, arguing that in view of Juanitos admissions, the
Complaint should be dismissed pursuant to Section 1 of the
Interim Rules. Juanito filed his Opposition thereto on 8 January
2010,22 arguing that applying this Courts ruling in Hi-Yield
Realty, Inc. v. Court of Appeals,23 the requirement for
exhaustion of intra-corporate remedies is no longer needed
when the corporation itself is "under the complete control of
the persons against whom the suit is filed." Juanito also
alleged that he and Anecita were deceived into signing checks
to pay off bogus loans purportedly extended by Rachels
relatives in favor of SMBI. Some of the checks were payable to
cash, and were allegedly deposited in Rachels personal
account.24 He also claimed that Rachels Motion is disallowed
under the Interim Rules.
On 9 February 2009, Juanito moved that Rachel and her
daughter, Em Ang (Em), as well as their counsel, Atty.
Filomeno Tan, Jr. (Atty. Tan) be held in contempt. Juanito
claimed that on the date the writ of attachment and break
open order were issued, Atty. Tan, accompanied by Rachel and
Em, "arrogantly demanded from the Clerk in charge of Civil
Cases that he be furnished a copy of the [said orders] x x x
otherwise he will tear the records of the subject commercial
case." Juanito also accused Atty. Tan of surreptitiously
photocopying the said orders prior to service of the summons,
Complaint, Writ of Attachment and Attachment Bond.
According to Juanito, the purpose of obtaning a copy of the
orders was to thwart its implementation. Thus, when the
authorities proceeded to the SMBI premises to enforce the
orders, they found that the place was padlocked, and that all
corporate documents and records were missing. On 14
December 2010, the Sheriff and other RTC Bacolod employees
then filed a Verified Complaint against Atty. Tan before this
Court, which also contained the foregoing allegations.25
Rachel then filed a Reply on 27 January 2010, claiming that
Juanitos reliance on the Hi-Yield case is misplaced:
The facts x x x of this case are strikingly different from that in
Hi-Yield Realty. In that case, the Supreme Court noted that the
complaining stockholder was a minority stockholder. However,
in the case at bar, Juanito Ang is one of the biggest
stockholders of [SMBI]. x x x He is a member of [SMBIs] Board
of Directors and is even the vice-president thereof.
Furthermore, in Hi-Yield Realty, the Supreme Court noted that
the complaining stockholder was excluded from the affairs of
the corporation. However, the evidence thus far presented,
particularly Juanito Angs admission, show that he and his
wife, Anecita, participate in the disbursement of [SMBIs]
funds x x x.26
Juanito filed his Rejoinder on 2 March 2010.
The Ruling of the RTC Bacolod
On 27 September 2010, the RTC Bacolod issued an Order
which stated that:
WHEREFORE, premises considered, the court hereby rules that
the present action is a DERIVATIVE SUIT and the Motion to
Dismiss based on Affirmative Defenses raised by defendants
is DENIED for lack of merit.27
The RTC Bacolod found that the issuance of the checks to
settle the purported obligations to Rachels relatives, as well
as the removal of Nancy as a stockholder in SMBIs records as
filed with the SEC, shows that Rachel and Roberto committed
fraud. The Order likewise stated that the requirement of
exhaustion of intra-corporate remedies is no longer necessary

since Rachel and Roberto exercised complete control over

SMBI.
Aggrieved, Rachel filed a Petition for Certiorari with the CACebu.
The Ruling of the CA-Cebu
On 20 September 2011, the CA-Cebu promulgated its Decision
which reversed and set aside the Order of the RTC Bacolod
dated 27 September 2010. According to the CA-Cebu, the
Complaint filed by Juanito should be dismissed because it is a
harassment suit, and not a valid derivative suit as defined
under the Interim Rules. The CA-Cebu also found that Juanito
failed to exhaust intra-corporate remedies and that the loan
extended by Nancy and Theodore was not SMBIs corporate
obligation. There is nothing on record to show that nonpayment of the loan will result in any damage or prejudice to
SMBI.
Juanito then filed a Motion for Reconsideration with Prayer for
Voluntary Inhibition on 28 October 2011. In his Motion, Juanito
pointed out that Rachel filed her Petition for Certiorari without
previously filing a Motion for Reconsideration, warranting the
dismissal of the said Petition. The CA-Cebu denied the Motion.
Hence, this petition.
The Issues
The issues raised in the instant petition are:
<
p align="justify">I. Whether based on the allegations of the
complaint, the nature of the case is one of a derivative suit or
not.
Corollary to the above, whether the Honorable Court of
Appeals erred x x x in ordering the dismissal of the Complaint
on the ground that the case is not a derivative suit.
II. Whether the Honorable Court of Appeals x x x seriously
erred in considering evidence aliunde, that is, other than the
four corners of the complaint, in determining the nature of the
complaint, in utter violation of the doctrine that the
jurisdiction is determined by law and allegations of the
complaint alone.
III. Granting arguendo, but without necessarily admitting that
the complaint is not one of a derivative suit, but only an
ordinary civil action, whether the Honorable Court of Appeals
x x x gravely erred in dismissing the petition entirely, when
the Regional Trial Court a quo has jurisdiction also over the
case as an ordinary civil action, and can just proceed to hear
the same as such.28
The Ruling of this Court
The petition has no merit.
We uphold the CA-Cebus finding that the Complaint is not a
derivative suit. A derivative suit is an action brought by a
stockholder on behalf of the corporation to enforce corporate
rights against the corporations directors, officers or other
insiders.29 Under Sections 2330 and 3631 of the Corporation
Code, the directors or officers, as provided under the bylaws,32 have the right to decide whether or not a corporation
should sue. Since these directors or officers will never be
willing to sue themselves, or impugn their wrongful or
fraudulent decisions, stockholders are permitted by law to
bring an action in the name of the corporation to hold these
directors and officers accountable.33 In derivative suits, the
real party ininterest is the corporation, while the stockholder
is a mere nominal party.

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. Hence, a stockholder may sue for
mismanagement, waste or dissipation of corporate assets
because of a special injury to him for which he is otherwise
without redress. In effect, the suit is an action for specific
performance of an obligation owed by the corporation to the
stockholders to assist its rights of action when the corporation
has been put in default by the wrongful refusal of the directors
or management to make suitable measures for its protection.
The basis of a stockholders suit is always one in equity.
However, it cannot prosper without first complying with the
legal requisites for its institution. (Emphasis in the original)
Section 1, Rule 8 of the Interim Rules imposes the following
requirements for derivative suits:
(1) The person filing the suit must be a stockholder or
member at the time the acts or transactions subject of the
action occurred and the time the action was filed;
(2) He must have exerted all reasonable efforts, and alleges
the same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to
obtain the relief he desires;
(3) No appraisal rights are available for the act or acts
complained of; and
(4) The suit is not a nuisance or harassment suit.
Applying the foregoing, we find that the Complaint is not a
derivative suit. The Complaint failed to show how the acts of
Rachel and Roberto resulted in any detriment to SMBI. The CACebu correctly concluded that the loan was not a corporate
obligation, but a personal debt of the Ang brothers and their
spouses. The check was issued to "Juanito Ang and/or Anecita
Ang and/or Roberto Ang and/or Rachel Ang" and not SMBI. The
proceeds of the loan were used for payment of the obligations
of the other corporations owned by the Angs as well as the
purchase of real properties for the Ang brothers. SMBI was
never a party to the Settlement Agreement or the Mortgage. It
was never named as a co-debtor or guarantor of the loan.
Both instruments were executed by Juanito and Anecita in
their personal capacity, and not in their capacity as directors
or officers of SMBI. Thus, SMBI is under no legal obligation to
satisfy the obligation.
The fact that Juanito and Anecita attempted to constitute a
mortgage over "their" share in a corporate asset cannot affect
SMBI. The Civil Code provides that in order for a mortgage to
be valid, the mortgagor must be the "absolute owner of the
thing x x x mortgaged."35 Corporate assets may be
mortgaged by authorized directors or officers on behalf of the
corporation as owner, "as the transaction of the lawful
business of the corporation may reasonably and necessarily
require."36 However, the wording of the Mortgage reveals
that it was signed by Juanito and Anecita in their personal
capacity as the "owners" of a pro-indiviso share in SMBIs land
and not on behalf of SMBI:
This Mortgage is made and executed by and between:
Spouses JUANITO and ANECITA ANG, of legal age, Filipino
citizens, residents of Sunrise Marketing Building at Hilado
Street, Capitol Shopping Center, Bacolod City, hereinafter
referred to as the MORTGAGORS;
Spouses THEODORE and NANCY ANG, x x x hereinafter
referred to as the MORTGAGEES represented in this instance
through their attorney-in-fact, Mr. Kenneth Locsin;

This Court, in Yu v. Yukayguan,34 explained:

xxxx

The Court has recognized that a stockholders right to

institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities

In order to ensure payment x x x the MORTGAGORS hereby

CONVEY unto the MORTGAGEES by way of EXTRA-JUDICIAL

REAL ESTATE MORTGAGE their 50% rights and interests over

the following real properties to wit:
a. Those registered in the name of SUNRISE MARKETING
(BACOLOD), INC. x x x
x x x x37 (Emphasis supplied)
Juanito and Anecita, as stockholders of SMBI, are not coowners of SMBI assets. They do not own pro-indiviso shares,
and therefore, cannot mortgage the same except in their
capacity as directors or officers of SMBI.
We also find that there is insufficient evidence to suggest that
Roberto and Rachel fraudulently and wrongfully removed
Nancy as a stockholder in SMBIs reportorial requirements. As
early as 2005, when SMBI increased its capital stock, Juanito
and Anecita already knew that Nancy was not listed as a
stockholder of SMBI. However, they attempted to rectify the
error only in 2009, when the Complaint was filed. That it took
four years for them to make any attempt to question Nancys
exclusion as stockholder negates their allegation of fraud.
Since damage to the corporation was not sufficiently proven
by Juanito, the Complaint cannot be considered a bona fide
derivative suit. A derivative suit is one that seeks redress for
injury to the corporation, and not the stockholder. No such
injury was proven in this case.
The Complaint also failed to allege that all available corporate
remedies under the articles of incorporation, by-laws, laws or
rules governing the corporation were exhausted, as required
under the Interim Rules. The CA-Cebu, applying our ruling in
the Yu case, pointed out:
x x x No written demand was ever made for the board of
directors to address private respondent Juanito Angs
concerns.1wphi1
The fact that [SMBI] is a family corporation does not exempt
private respondent Juanito Ang from complying with the
Interim Rules. In the x x x Yu case, the Supreme Court held
that a family corporation is not exempt from complying with
the clear requirements and formalities of the rules for filing a
derivative suit. There is nothing in the pertinent laws or rules
which state that there is a distinction between x x x family
corporations x x x and other types of corporations in the
institution by a stockholder of a derivative suit.38
Furthermore, there was no allegation that there was an
attempt to remove Rachel or Roberto as director or officer of
SMBI, as permitted under the Corporation Code and the bylaws of the corporation. Thus, the Complaint failed to satisfy
the requirements for a derivative suit under the
Interim Rules.
The CA-Cebu correctly ruled that the Complaint should be
dismissed since it is a nuisance or harassment suit under
Section 1(b) of the Interim Rules. Section 1(b) thereof
provides:
b) Prohibition against nuisance and harassment suits. Nuisance and harassment suits are prohibited. In determining
whether a suit is a nuisance or harassment suit, the court
shall consider, among others, the following:
(1) The extent of the shareholding or interest of the initiating
stockholder or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts
complained of; and
(5) Prejudice or damage to the corporation, partnership, or
association in relation to the relief sought.

In case of nuisance or harassment suits, the court may, motu

proprio or upon motion, forthwith dismiss the case.
Records show that Juanito, apart from being Vice President,
owns the highest number of shares, equal to those owned by
Roberto. Also, as explained earlier, there appears to be no
damage to SMBI if the loan extended by Nancy and Theodore
remains unpaid. The CA-Cebu correctly concluded that "a
plain reading of the allegations in the Complaint would readily
show that the case x x x was mainly filed to collect a debt
allegedly extended by the spouses Theodore and Nancy Ang
to [SMBI]. Thus, the aggrieved party is not SMBI x x x but the
spouses Theodore and Nancy Ang, who are not even x x x
stockholders."39
WHEREFORE, we DENY the petition. We AFFIRM the 20
September 2011 Decision of the Court of Appeals-Cebu in CAG.R. SP No. 05546.
LOYOLA GRAND VILLAS VS. CA
Loyola Grand Villas Homeowners Association, Inc. (LGVHAI)
was organized on 8 February 1983 as the homeoenwers'
association for Loyola Grand Villas. It was also registered as
the sole homeowners' association in the said village with the
Home Financing Corporation (which eventually became Home
Insurance Guarantee Corporation ["HIGC"]). However, the
association was not able file its corporate by-laws.
The LGVHAI officers then tried to registered its By-Laws in
1988, but they failed to do so. They then discovered that
there were two other homeowners' organizations within the
subdivision - the Loyola Grand Villas Homeowners (North)
Association, Inc. [North Association] and herein Petitioner
Loyola Grand Villas Homeowners (South) Association, Inc.
["South Association].
Upon inquiry by the LGVHAI to HIGC, it was discovered that
LGVHAI was dissolved for its failure to submit its by-laws
within the period required by the Corporation Code and for its
non-user of corporate charter because HIGC had not received
any report on the association's activities. These paved the
way for the formation of the North and South Associations.
LGVHAI then lodged a complaint with HIGC Hearing Officer
Danilo Javier, and questioned the revocation of its registration.
Hearing Officer Javier ruled in favor of LGVHAI, revoking the
registration of the North and South Associations.
Petitioner South Association appealed the ruling, contending
that LGVHAI's failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code effectively
automatically dissolved the corporation. The Appeals Board of
the HIGC and the Court of Appeals both rejected the
contention of the Petitioner affirmed the decision of Hearing
Officer Javier.
Issue:
W/N LGVHAI's failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code had the
effect of automatically dissolving the said corporation.
HELD:
No.
The pertinent provision of the Corporation Code that is the
focal point of controversy in this case states:
Sec. 46. Adoption of by-laws. - Every corporation formed
under this Code, must within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation
by the Securities and Exchange Commission, adopt a code of
by-laws for its government not inconsistent with this Code.
Ordinarily, the word "must" connotes an imposition of duty
which must be enforced. However, the word "must" in a
statute, like "shall," is not always imperative. It may be
consistent with an ecercise of discretion. If the language of a
statute, considered as a whole with due regard to its nature
and object, reveals that the legislature intended to use the
words "shall" and "must" to be directory, they should be given
that meaning.
The legislative deliberations of the Corporation Code reveals
that it was not the intention of Congress to automatically
dissolve a corporation for failure to file the By-Laws on time.
Moreover, By-Laws may be necessary to govern the
corporation, but By-Laws are still subordinate to the Articles of
Incorporation and the Corporation Code. In fact, there are

cases where By-Laws are unnecessary to the corporate

existence and to the valid exercise of corporate powers.
The Corporation Code does not expressly provide for the
effects of non-filing of By-Laws. However, these have been
rectified by Section 6 of PD 902-A which provides that SEC
shall possess the power to suspend or revoke, after proper
notice and hearing, the franchise or certificate of registration
of corporations upon failure to file By-Laws within the required
period.
This shows that there must be notice and hearing before a
corporation is dissolved for failure to file its By-Laws. Even
assuming that the existence of a ground, the penalty is not
necessarily revocation, but may only be suspension.
By-Laws are indispensable to corporations, since they are
required by law for an orderly management of corporations.
However, failure to file them within the period prescribed does
not equate to the automatic dissolution of a corporation.
PMI COLLEGE VS. NLRC
In 1991, PMI Colleges hired the services of Alejandro Galvan
for the latter to teach in said institution. However, for
unknown reasons, PMI defaulted from paying the
remunerations due to Galvan. Galvan made demands but
were ignored by PMI. Eventually, Galvan filed a labor case
against PMI. Galvan got a favorable judgment from the Labor
Arbiter; this was affirmed by the National Labor Relations
Commission. On appeal, PMI reiterated, among others, that
the employment of Galvan is void because it did not comply
with its by-laws. Apparently, the by-laws require that an
employment contract must be signed by the Chairman of the
Board of PMI. PMI asserts that Galvans employment contract
was not signed by the Chairman of the Board.
ISSUE:
Whether or not Galvans employment contract is void.
HELD:
No. PMI Colleges never even presented a copy of the by-laws
to prove the existence of such provision. But even if it did, the
employment contract cannot be rendered invalid just because
it does not bear the signature of the Chairman of the Board of
PMI. By-Laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons
who deal with the corporation, unless they have knowledge of
the same. In this case, PMI was not able to prove that Galvan
knew of said provision in the by-laws when he was employed
by PMI.
YU VS. YUKAYGUAN
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:
Whether or not Derivative suits filed by Yukayguan is
meritorious
HELD:
NO. 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.
REPUBLIC VS. SANDIGANBAYAN
On 7 August 1991, the Presidential Commission on Good
Government (PCGG) conducted an Eastern
Telecommunications, Philippines, Inc. (ETPI) stockholders
meeting during which a PCGG controlled board of directors
was elected.
A special stockholders meeting was later convened by the
registered ETPI stockholders wherein another set of board of
directors was elected, as a result of which two sets of such
board and officers were elected.
Victor Africa, a stockholder of ETPI, alleging that the PCGG had
since 29 January 1988 been "illegally 'exercising' the rights of
stockholders of ETPI," especially in the election of the
members of the board of directors, filed a motion before the
Sandiganbayan, prayed that said court order the "calling and
holding of the Eastern Telecommunications, Philippines, Inc.
(ETPI) annual stockholders meeting for 1992 under the
[c]ourt's control and supervision and prescribed guidelines."
The PCGG did not object to Africa's motion provided that "(1)
An Order be issued upholding the right of PCGG to vote all the
Class "A" shares of ETPI; (2) In the alternative, in the remote
event that PCGG's right to vote the sequestered shares be not
upheld, an Order be issued (a) disregarding the Stock and
Transfer Book and Booklet of Stock Certificates of ETPI in
determining who can vote the shares in an Annual
Stockholders Meeting of ETPI, (b) allowing PCGG to vote
23.9% of the total subscription in ETPI, and (c) directing the
amendment of the Articles of Incorporation and By-laws of
ETPI providing for the minimum safeguards for the
conservation of assets prior to the calling of a stockholders
meeting.
By the assailed Resolution of 13 November 1992, the
Sandiganbayan resolved Africa's motion, ordering the conduct
of an annual stockholders meeting of ETPI, for 1992. Assailing
the foregoing resolution, the PCGG filed before the Supreme
Court a petition (GR 107789) for Certiorari, Mandamus and
Prohibition.
By Resolution of 26 November 1992, the Supreme Court
enjoined the Sandiganbayan from (a) implementing its
Resolution of 13 November 1992, and (b) holding the
stockholders' meeting of ETPI scheduled on 27 November
1992. On 7 December 1992, Aerocom Investors and
Managers, Inc. (AEROCOM), Benito Nieto, Carlos Nieto, Manuel
Nieto III, Ramon Nieto, Rosario Arellano, Victoria Legarda,
Angela Lobregat, Ma. Rita de los Reyes, Carmen Tuazon and
Rafael Valdez, all stockholders of record of ETPI, filed a motion
to intervene in GR 107789.
Their motion was granted by the Supreme Court by Resolution
of 14 January 1993. After the parties submitted their
respective memoranda, the PCGG, in early 1995, filed a "VERY
URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL
STOCKHOLDERS' MEETING FOR [THE] SOLE PURPOSE OF
INCREASING [ETPI's] AUTHORIZED CAPITAL STOCK," it
claiming that the increase in authorized capital stock was
necessary in light of the requirements laid down by Executive
Order 109 and Republic Act 7975. By Resolution of 7 May
1996, the Supreme Court resolved to refer the PCGG's very
urgent petition to hold the special stockholders' meeting to
the Sandiganbayan for reception of evidence and resolution.
In compliance therewith, the Sandiganbayan issued a
Resolution of 13 December 1996, granting the PCGG
"authority to cause the holding of a special stockholders'
meeting of ETPI for the sole purpose of increasing ETPI's
authorized capital stock and to vote therein the sequestered
Class 'A' shares of stock." The PCGG-controlled ETPI board of
directors thus authorized the ETPI Chair and Corporate
Secretary to call the special stockholders meeting. Notices
were sent to those entitled to vote for a meeting on 17 March
1997.

The meeting was held as scheduled and the increase in ETPI's

authorized capital stock from P250 Million to P2.6 Billion was
"unanimously approved." On 1 April 1997, Africa filed before
the Supreme Court a motion to cite the PCGG "and its
accomplices" in contempt and "to nullify the 'stockholders
meeting' called/conducted by PCGG and its accomplices," he
contending that only this Court, and not the Sandiganbayan,
has the power to authorize the PCGG to call a stockholders
meeting and vote the sequestered shares.
Africa went on to contend that, assuming that the
Sandiganbayan had such power, its Resolution of 13
December 1996 authorizing the PCGG to hold the
stockholders meeting had not yet become final because the
motions for reconsideration of said resolution were still
pending. Further, Africa alleged that he was not given notice
of the meeting, and the PCGG had no right to vote the
sequestered Class "A" shares.
A motion for leave to intervene relative to Africa's "Motion to
Cite the PCGG and its Accomplices in Contempt" was filed by
ETPI. The Supreme Court granted the motion for leave but
ETPI never filed any pleading relative to Africa's motion to cite
the PCGG in contempt. By Resolution of 16 February 2001, the
Sandiganbayan finally resolved to deny the motions for
reconsideration of its Resolution of 13 December 1996,
prompting Africa to file on 6 April 2001 before the Supreme
Court a petition for Review on Certiorari (GR 147214),
challenging the Sandiganbayan Resolutions of 13 December
1996 (authorizing the holding of a stockholders meeting to
increase ETPI's authorized capital stock and to vote therein
the sequestered Class "A" shares of stock) and 16 February
2001 (denying reconsideration of the December 13, 1996
Resolution). The petitions were consolidated.
Issues:
Whether the PCGG can vote the sequestered ETPI Class "A"
shares in the stockholders meeting for the election of the
board of directors.
Whether the Sandiganbayan can order the Division Clerk of
Court to call the stockholders meeting and in appointing then
Sandiganbayan Associate Justice Sabino de Leon, Jr. to control
and supervise the same.
Held:
1. When sequestered shares registered in the names of
private individuals or entities are alleged to have been
acquired with ill-gotten wealth, then the two-tiered test is
applied. However, when the sequestered shares in the name
of private individuals or entities are shown, prima facie, to
have been (1) originally government shares, or (2) purchased
with public funds or those affected with public interest, then
the two-tiered test does not apply. Rather, the public
character exception in Baseco v. PCGG and Cojuangco Jr. v.
Roxas prevail; that is, the government shall vote the shares.
2. The Clerk of Court, who is already saddled with judicial
responsibilities, need not be burdened with the additional
duties of a corporate secretary. Moreover, the Clerk of Court
may not have the requisite knowledge and expertise to
discharge the functions of a corporate secretary. The case of
Board of Directors and Election Committee of SMB Workers
Savings and Loan Asso., Inc. v. Tan, etc., et al. (105 Phil. 426
(1959). Vide also 5 Fletcher Cyc Corp (Perm Ed) 2074; 18A
Am Jur 2d ) provides a solution to the Sandiganbayan's
dilemma of calling a meeting when ETPI had two sets of
officers. There, the Supreme Court upheld the creation of a
committee empowered to call, conduct and supervise the
election of the board of directors. Such a committee
composed of impartial persons knowledgeable in corporate
proceedings would provide the needed expertise and
objectivity in the calling and the holding of the meeting
without compromising the Sandiganbayan or its officers. The
appointment of the committee members and the delineation
of the scope of the duties of the committee may be made
pursuant to an agreement by the parties or in accordance
with the provisions of Rule 9 (Management Committee) of the
Interim Rules of Procedure for Intra-Corporate Controversies
insofar as they are applicable.
Gokongwei jr v. sec 1979
FACTS:
petitioner, as stockholder of respondent San Miguel
Corporation, filed with the Securities and Exchange

Commission (SEC) a petition for "declaration of nullity of

amended by-laws, cancellation of certificate of filing of
amended by- laws, injunction and damages with prayer for a
preliminary injunction" against the majority of the members of
the Board of Directors and San Miguel Corporation as an
unwilling petitioner.
As a first cause of action, petitioner alleged that
individual respondents amended by bylaws of the corporation,
basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961, when the
outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at
P10.00 per share and 150,000 preferred shares at P100.00 per
share. At the time of the amendment, the outstanding and
paid up shares totalled 30,127,047 with a total par value of
P301,270,430.00
according to section 22 of the Corporation Law and Article VIII
of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the
Board of Directors only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up
capital stock of the corporation, which 2/3 should have been
computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the
stockholders.
second cause of action, it was alleged that the authority
granted in 1961 had already been exercised in 1962 and
1963, after which the authority of the Board ceased to exist.
third cause of action, petitioner averred that the membership
of the Board of Directors had changed since the authority was
given in 1961, there being six (6) new directors.
fourth cause of action, it was claimed that prior to the
questioned amendment, petitioner had all the qualifications to
be a director of respondent corporation, being a Substantial
stockholder thereof; that as a stockholder, petitioner had
acquired rights inherent in stock ownership, such as the rights
to vote and to be voted upon in the election of directors; and
that in amending the by-laws, respondents purposely provided
for petitioner's disqualification and deprived him of his vested
right as afore-mentioned hence the amended by-laws are null
and void.
additional causes of action, it was alleged that corporations
have no inherent power to disqualify a stockholder from being
elected as a director and, therefore, the questioned act is
ultra vires and void;
It was, therefore, prayed that the amended by-laws be
declared null and void and the certificate of filing thereof be
cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
Petitioner filed with the Securities and Exchange Commission
an "Urgent Motion for Production and Inspection of
Documents",
alleging that the Secretary of respondent corporation refused
to allow him to inspect its records despite request made by
petitioner for production of certain documents enumerated in
the request, and that respondent corporation had been
attempting to suppress information from its stockholders
despite a negative reply by the SEC to its query regarding
their authority to do so.
Urgent Motion for Production and Inspection of Documents"
was opposed by respondents, alleging, among others that the
motion has no legal basis
respondents San Miguel Corporation filed their answer to the
petition, denying the substantial allegations
"the action taken by the Board of Directors on September 18,
1976 resulting in the ... amendments is valid and legal
because the power to "amend, modify, repeal or adopt new
By-laws" delegated to said Board on March 13, 1961 and long
prior thereto has never been revoked of SMC"; that contrary
to petitioner's claim, "the vote requirement for a valid
delegation of the power to amend, repeal or adopt new bylaws is determined in relation to the total subscribed capital
stock at the time the delegation of said power is made, not
when the Board opts to exercise said delegated power"; that
petitioner has not availed of his intra-corporate remedy for
the nullification of the amendment, which is to secure its
repeal by vote of the stockholders representing a majority of

the subscribed capital stock at any regular or special meeting,

as provided in Article VIII, section I of the by-laws and section
22 of the Corporation law, hence the, petition is premature;
that petitioner is estopped from questioning the amendments
on the ground of lack of authority of the Board. since he
failed, to object to other amendments made on the basis of
the same 1961 authorization: that the power of the
corporation to amend its by-laws is broad, subject only to the
condition that the by-laws adopted should not be respondent
corporation inconsistent with any existing law; that
respondent corporation should not be precluded from
adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their
personal interests over t I hat of the corporation
that the questioned amended by-laws is a matter of internal
policy and the judgment of the board should not be interfered
with: That the by-laws, as amended, are valid and binding and
are intended to prevent the possibility of violation of criminal
and civil laws prohibiting combinations in restraint of trade;
and that the petition states no cause of action. It was,
therefore, prayed that the petition be dismissed and that
petitioner be ordered to pay damages and attorney's fees to
respondents.
Respondents filed their opposition to the petition
petitioner, who is president and controlling shareholder of
Robina and CFC (both closed corporations) purchased 5,000
shares of stock of respondent corporation, and thereafter, in
behalf of himself, CFC and Robina, "conducted malevolent and
malicious publicity campaign against SMC" to generate
support from the stockholder "in his effort to secure for
himself and in representation of Robina and CFC interests, a
seat in the Board of Directors of SMC"
petitioner was engaged in a competitive business and his
securing a seat would have subjected respondent corporation
to grave disadvantages; that "petitioner nevertheless vowed
to secure a seat in the Board of Directors at the next annual
meeting; that thereafter the Board of Directors amended the
by-laws as afore-stated.
the Securities and Exchange Commission resolved the motion
for production and inspection of documents by issuing
That respondents produce and permit the inspection, copying
and photographing, by or on behalf of the petitioner-movant,
John Gokongwei, Jr., of the minutes of the stockholders'
meeting of the respondent San Miguel Corporation
Dissatisfied with the foregoing Order, petitioner moved for its
reconsideration. while the petition was yet to be heard,
respondent corporation issued a notice of special
stockholders' meeting for the purpose of "ratification and
confirmation of the amendment to the By-laws"
This prompted petitioner to ask respondent Commission for a
summary judgment insofar as the first cause of action is
concerned, for the alleged reason that by calling a special
stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of
September 18, 1976. The motion for summary judgment was
opposed by private respondents
Petitioner filed stating that the petition presents justiciable
questions for the determination of this Court because (1) the
respondent Commission acted without circumspection,
unfairly and oppresively against petitioner, warranting the
intervention of this Court; (2) a derivative suit, such as the
instant case, is not rendered academic by the act of a
majority of stockholders, such that the discussion, ratification
and confirmation of Item 6 of the Agenda of the annual
stockholders' meeting of May 10, 1977 did not render the
case moot; that the amendment to the bylaws which
specifically bars petitioner from being a director is void since
it deprives him of his vested rights.
Respondent Commission:The reason given for denial of
deferment was that "such action is within the authority of the
corporation as well as falling within the sphere of
stockholders' right to know, deliberate upon and/or to express
their wishes regarding disposition of corporate funds
considering that their investments are the ones directly
affected." It was alleged that the main petition has, therefore,
become moot and academic.
ISSUES:
1)Whether or not amended by-laws are valid is purely a legal
question which public interest requires to be resolved

It is settled that the doctrine of primary jurisdiction has no

application where only a question of law is involved. 8a
Because uniformity may be secured through review by a
single Supreme Court, questions of law may appropriately be
determined in the first instance by courts. 8b In the case at
bar, there are facts which cannot be denied, viz.: that the
amended by-laws were adopted by the Board of Directors of
the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section
22 of the Corporation Law; that in a special meeting on
February 10, 1977 held specially for that purpose, the
amended by-laws were ratified by more than 80% of the
stockholders of record; that the foreign investment in the
Hongkong Brewery and Distellery, a beer manufacturing
company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual
meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the
stockholders.
2) Whether or not the amended by-laws of SMC of
disqualifying a competitor from nomination or election to the
Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in
purely a question of law.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS
OF DIRECTORS EXPRESSLY CONFERRED BY LAW
It is recognized by an authorities that 'every corporation 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. 12
In this jurisdiction, under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications,
duties and compensation of directors, officers and
employees ... " This must necessarily refer to a qualification in
addition to that specified by section 30 of the Corporation
Law, which provides that "every director must own in his right
at least one share of the capital stock of the stock corporation
of which he is a director
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR
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 that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the
act of incorporation and lawfully enacted by-laws and not
forbidden by law." 15 To this extent, therefore, the stockholder
may be considered to have "parted with his personal right or
privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and
surrendered it to the will of the majority of his fellow
incorporators. ... It cannot therefore be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is
authorized by a majority
Under section 22 of the same law, the owners of the majority
of the subscribed capital stock may amend or repeal any bylaw or adopt new by-laws. It cannot be said, therefore, that
petitioner has a vested right to be elected director, in the face
of the fact that the law at the time such right as stockholder
was acquired contained the prescription that the corporate
charter and the by-law shall be subject to amendment,
alteration and modification
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
As agents entrusted with the management of the corporation
for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of
trust."
AN AMENDMENT TO THE CORPORATION BY-LAW 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
The doctrine of "corporate opportunity" 29 is precisely a
recognition by the courts that the fiduciary standards could
not be upheld where the fiduciary was acting for two entities
with competing interests. This doctrine rests fundamentally on
the unfairness, in particular circumstances, of an officer or

director taking advantage of an opportunity for his own

personal profit when the interest of the corporation justly calls
for protection
It is obviously to prevent the creation of an opportunity for an
officer or director of San Miguel Corporation, who is also the
officer or owner of a competing corporation, from taking
advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial
sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy
his loyalty to both corporations and place the performance of
his corporation duties above his personal concerns.
The offer and assurance of petitioner that to avoid any
possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be
discussed, would not detract from the validity and
reasonableness of the by-laws here involved
As respondent SMC aptly observes, knowledge by CFC-Robina
of SMC's costs in various industries and regions in the country
win enable the former to practice price discrimination. CFCRobina can segment the entire consuming population by
geographical areas or income groups and change varying
prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable
volume at which it could produce for every product line in
which it competes with SMC. Access to SMC pricing policy by
CFC-Robina would in effect destroy free competition and
deprive the consuming public of opportunity to buy goods of
the highest possible quality at the lowest prices.
Neither are We persuaded by the claim that the by-law was
Intended to prevent the candidacy of petitioner for election to
the Board. If the by-law were to be applied in the case of one
stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms,
applies to all stockholders
In the absence of any legal prohibition or overriding public
policy, wide latitude may be accorded to the corporation in
adopting measures to protect legitimate corporation interests.
Thus, "where the reasonableness of a by-law is a mere matter
of judgment, and 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 expressed
their authority.
Although it is asserted that the amended by-laws confer on
the present Board powers to perpetua themselves in power
such fears appear to be misplaced. This power, but is very
nature, is subject to certain well established limitations.
There is no question that stockholders are entitled to inspect
the books and records of a corporation in order to investigate
the conduct of the management, determine the financial
condition of the corporation, and generally take an account of
the stewardship of the officers and directors.
WHEREFORE, judgment is hereby rendered as follows:
sustain the validity per se of the amended by-laws in question
and to dismiss the petition without prejudice to the question
of the actual disqualification of petitioner John Gokongwei, Jr.
to run and if elected to sit as director of respondent San
Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose
decision shall be appealable to the respondent Securities and
Exchange Commission deliberating and acting en banc and
ultimately to this Court. Unless disqualified in the manner
herein provided, the prohibition in the afore-mentioned
amended by-laws shall not apply to petitioner.
CONTENTS OF BY-LAWS SEC 47
BARBA V. LICEO DE CAGAYAN 2012
FACTS
Petitioner Dr. Ma. Mercedes L. Barba was the Dean of the
College of Physical Therapy of respondent Liceo de Cagayan
University, Inc., a private
educational institution with school campus located at Carmen,
Cagayan de Oro City. started working for respondent on July 8,
1993 as medical officer/school physician for a period of one

school year or until March 31, 1994. In July 1994, she was
chosen by respondent to be the recipient of a scholarship
grant to pursue a three-year residency training in
Rehabilitation Medicine at the Veterans Memorial Medical
Center (VMMC). After completing her residency training with
VMMC in June 1997, petitioner returned to continue working
for respondent. She was appointed as Acting Dean of the
College of Physical Therapy and at the same time designated
as Doctor-In-Charge of the Rehabilitation Clinic of the Rodolfo
N. Pelaez Hall, City Memorial Hospital. petitioners
appointment as Doctor-In-Charge of the Rehabilitation Clinic
was renewed and she was appointed as Dean of the College of
Physical Therapy by respondents President, Dr. Jose Ma. R.
Golez. Petitioner accepted her appointment and assumed the
position of Dean of the College of Physical Therapy. In the
school year 2003 to 2004, the College of Physical Therapy
suffered a dramatic decline in the number of enrollees from a
total of 1,121 students in the school year 1995 to 1996 to only
29 students in the first semester of school year 2003 to 2004.
This worsened in the next year or in school year 2004 to 2005
where a total of only 20 students enrolled.8 Due to the low
number of enrollees, respondent decided to freeze the
operation of the College of Physical Therapy indefinitely
Respondents President Dr. Rafaelita Pelaez-Golez wrote
petitioner a letter9 dated March 16, 2005 informing her that
her services as dean of the said college will end at the close of
the school year. Thereafter, the College of Physical Therapy
ceased operations petitioner went on leave without pay
starting on April 9, 2005. petitioner informed Dr. Lerin that she
had not committed to teach in the College of Nursing and that
as far as she can recall, her employment is not dependent on
any teaching load. She then requested for the processing of
her separation benefits in view of the closure of the College of
Physical Therapy , petitioner through counsel wrote Dr. Golez
directly, asking for her separation pay and other benefits. Dr.
Magdale wrote petitioner a letter12 directing her to report for
work and to teach her assigned subjects on or before June 23,
2005. Otherwise, she will be dismissed from employment on
the ground of abandonment. But petitioner did not do so.
Hence, on June 28, 2005, Dr. Magdale sent petitioner a notice
terminating her services on the ground of abandonment.
petitioner filed a complaint before the Labor Arbiter for illegal
dismissal abor Arbiter found that respondent did not
constructively dismiss petitioner; therefore, she was not
entitled to separation pay. T NLRC issued a Resolution17
reversing the Labor Arbiters decision and holding that
petitioner was constructively dismissed. The NLRC held that
petitioner was demoted when she was assigned as a professor
in the College of Nursing because there are functions and
obligations and certain allowances and benefits given to a
College Dean but not to an ordinary professor
the CA reversed and set aside the NLRC resolutions and
reinstated the decision of the Labor Arbiter. The CA did not
find merit in respondents assertion in its Supplemental
Petition that the position of petitioner as College Dean was a
corporate office. Instead, the appellate court held that
petitioner was respondents employee explaining thus:
Corporate officers in the context of PD 902-A are those
officers of a corporation who are given that character either
by the Corporation Code or by the corporations By-Laws.
Under Section 25 of the Corporation Code, the corporate
officers are the president, secretary, treasurer and such other
officers as may be provided for in the By-Laws. True, the ByLaws of LDCU provides that there shall be a College Director.
This means a College Director is a corporate officer. However,
contrary to the allegation of petitioner, the position of Dean
does not appear to be the same as that of a College Director.
Aside from the obvious disparity in name, the By-Laws of
LDCU provides for only one College Director. But as shown by
LDCU itself, numerous persons have been appointed as
Deans. They could not be the College Director contemplated
by the By-Laws inasmuch as the By-Laws authorize only the
appointment of one not many. If it is indeed the Intention of
LDCU to give its many Deans the rank of College Director,
then it exceeded the authority given to it by its By-Laws
because only one College Director is authorized to be
appointed. It must amend its By-Laws. Prior to such an
amendment, the office of College Dean is not a corporate
office.

ISSUE:
whether petitioner was an employee or a corporate officer of
respondent university
HELD:
We grant the petition.
we find that the CAs previous ruling that petitioner was
respondents employee and not a corporate officer is
supported by the totality of the evidence and more in accord
with law and prevailing jurisprudence. Corporate officers are
elected or appointed by the directors or stockholders, and are
those who are given that character either by the Corporation
Code or by the corporations by-laws.27 Section 2528 of the
Corporation Code enumerates corporate officers as the
president, the secretary, the treasurer and such other officers
as may be provided for in the by-laws. In Matling Industrial
and Commercial Corporation v. Coros, the phrase such other
officers as may be provided for in the by-laws has been
clarified, thus: Conformably with Section 25, a position must
be expressly mentioned in the By-Laws in order to be
considered as a corporate office. Thus, the creation of an
office pursuant to or under a By-Law enabling provision is not
enough to make a position a corporate office.
The directors or trustees and officers to be elected shall
perform the duties enjoined on them by law and the by[-]laws
of the corporation. Unless the articles of incorporation or the
by[-]laws provide
for a greater majority, a majority of the number of directors or
trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business,
and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall
be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all the members
of the board. Directors or trustees cannot attend or vote by
proxy at board meetings.However, an assiduous perusal of
these documents does not convince us that petitioner
occupies a corporate office position in respondent university.
In respondents by-laws, there are four officers specifically
mentioned, namely, a president, a vice president, a secretary
and a treasurer.
In addition, it is provided that there shall be other appointive
officials, a College Director and heads of departments whose
appointments, compensations, powers and duties shall be
determined by the board of directors. It is worthy to note that
a College Dean is not among the corporate officers mentioned
in respondents by-laws. Petitioner, being an academic dean,
also held an administrative post in the university but not a
corporate office as contemplated by law. Petitioner was not
directly elected nor appointed by the board of directors to any
corporate office but her appointment was merely approved by
the board together with the other academic deans of
respondent university in accordance with the procedure
prescribed in respondents Administrative Manual act of the
board of directors in approving the appointment of petitioner
as Dean of the College of Therapy did not make her a
corporate officer of the corporation Though the board of
directors may create appointive positions other than the
positions of corporate officers, the persons occupying such
positions cannot be deemed as corporate officers as
contemplated by Section
25 of the Corporation Code. Thus, pursuant to the above
provision (Section 25 of the Corporation Code), whoever are
the corporate officers enumerated in the by-laws are the
exclusive Officers of the corporation and the Board has no
power to create other Offices without amending first the
corporate Bylaws. However, the Board may create appointive
positions other than the positions of corporate Officers, but
the persons occupying such positions are not considered as
corporate officers within the meaning of Section 25 of the
Corporation Code and are not empowered to exercise the
functions of the corporate Officers, except those functions
lawfully delegated to them. Their functions and duties are to
be determined by the Board of Directors/Trustees. But even
assuming that a College Director may be considered a
corporate officer of respondent, a review of the records as
well as the other documents submitted by the parties fails to
persuade that petitioner was the College Director
mentioned in the by-laws of respondent. Nowhere in
petitioners appointment letter was it stated that petitioner

was designated as the College Director or that petitioner was

to assume the functions and duties of a College Director.
Neither can it be inferred in respondents bylaws that a dean
of a college is the same as a College Director of respondent.
Another telling sign that a College Director is not the same as
a Dean is the manner of appointment. A College Director is
directly appointed by the Board of Directors. However, a
College Dean is appointed by the President upon the
recommendation of the Vice President for Academic Affairs
and the Executive Vice President and approval of the Board of
Directors. There is a clear distinction on the manner of
appointment indicating that the offices are not one and the
same.
WHEREFORE, the petition for review on certiorari is GRANTED.
UNPAID SHARES;DERIVATIVE SUITS SEC 72
BITONG V. CA 1998
FACTS:
Alleging before the SEC that she had been the Treasurer and a
Member of the Board of Directors of Mr. & Ms. from the time it
was incorporated on 29 October 1976 to 11 April 1989, and
was the registered owner of 1,000 shares of stock out of the
4,088 total outstanding shares, petitioner Nora Bitong
complained of irregularities committed from 1983 to 1987 by
Eugenia Apostol, President and Chairperson of the Board of
Directors. Petitioner claimed that except for the sale of the
name Philippine Inquirer to Philippine Daily Inquirer all other
transactions and agreements entered into by Mr. & Ms. with
PDI were not supported by any bond and/or stockholders'
resolution. And, upon instructions of Eugenia Apostol, Mr. &
Ms. made several cash advances to PDI on various occasions
amounting to P3.276 million. On some of these borrowings PDI
paid no interest whatsoever. Despite the fact that the
advances made by Mr. & Ms. to PDI were booked as advances
to an affiliate, there existed no board or stockholders'
resolution, contract nor any other document which could
legally authorize the creation of and support to an affiliate.
She further alleged that on 2 May 1986 respondents Eugenia
Apostol, Leticia Magsanoc and Adoracion Nuyda subscribed to
PDI shares of stock at P50,000.00 each or a total of
P150,000.00. The stock subscriptions were paid for by Mr. &
Ms. and initially treated, as receivables from officers and
employees. But, no payments were ever received from
respondents, Magsanoc and Nuyda. Petitioner then filed a
derivative suit before the SEC allegedly for the benefit of
private respondent Mr. & Ms. Publishing Co., Inc., against
respondent spouses Eugenia Apostol and Jose Apostol.
However, private respondents contended that petitioner,
being merely a holder-in-trust of JAKA shares, only
represented and continued to represent JAKA in the board.
Private respondents argued that petitioner was not the true
party to this case, the real party being JAKA which continued
to be the true stockholder of Mr. & Ms. Hence, petitioner did
not have the personality to initiate and prosecute the
derivative suit which, consequently, must be dismissed. At the
trial, petitioner contends that she became the registered and
beneficial owner of 997 shares of stock of Mr. & Ms. out of the
4,088 total outstanding shares after she acquired them from
JAKA through a deed of sale executed on 25 July 1983 and
recorded in the Stock and Transfer Book of Mr. & Ms. under
Certificate of Shares of Stock No. 008. She pointed out that
Senator Enrile decided that JAKA should completely divest
itself of its holdings in Mr. & Ms. and this resulted in the sale
to her of JAKA's interest and holdings in that publishing firm.
Private respondents refuted the statement of petitioner that
she was a stockholder of Mr. & Ms. since 25 July 1983 as
respondent Eugenia D. Apostol signed Certificate of Stock No.
008 only on 17 March 1989, and not on 25 July 1983. And,
since the Stock and Transfer Book which petitioner presented
in evidence was not registered with the SEC, the entries
therein including Certificate of Stock No. 008 were fraudulent.
On 3 August 1993, after trial on the merits, the SEC Hearing
Panel dismissed the derivative suit filed by petitioner. On 25
August 1993 petitioner Bitong appealed to the SEC En Banc.
The SEC En Banc reversed the decision of the Hearing Panel.
Consequently, respondent Apostol spouses, Magsanoc, Nuyda,
and Mr. & Ms. filed a petition for review before respondent CA,
while respondent Edgardo Espiritu filed a petition for certiorari
and prohibition also before respondent Court of Appeals. Said
two petitions were consolidated. On 31 August 1995 CA

rendered a decision reversing the SEC En Banc and held that

petitioner was not the owner of any share of stock in Mr. & Ms.
and therefore not the real party-in-interest to prosecute the
complaint she had instituted against private respondents. For
not being the real party-in-interest, petitioner's complaint did
not state a cause of action, a defense which was never
waived. Motion for reconsideration was likewise denied.
Hence, this petition.
ISSUE:
Whether or not petitioner is a bona fide stockholder of Mr. &
Ms. at the time of the transaction complained of which
invests him with standing to institute a derivative action for
the benefit of the corporation.
RULING:
Sec. 63 of the Corporation Code envisions a formal certificate
of stock which can be issued only upon compliance with
certain requisites. First, the certificates must be signed by the
president or vice-president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the
corporation. A mere typewritten statement advising a
stockholder of the extent of his ownership in a corporation
without qualification and/or authentication cannot be
considered as a formal certificate of stock. Second, delivery
of the certificate is an essential element of its issuance.
Hence, there is no issuance of a stock certificate where it is
never detached from the stock books although blanks therein
are properly filled up if the person whose name is inserted
therein has no control over the books of the company. Third,
the par value, as to par value shares, or the full subscription
as to no par value shares, must first be fully paid. Fourth, the
original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from a
stockholder.
The certificate of stock itself once issued is a continuing
affirmation or representation that the stock described therein
is valid and genuine and is at least prima facie evidence that
it was legally issued in the absence of evidence to the
contrary. However, this presumption may be rebutted.
Similarly, books and records of a corporation which include
even the stock and transfer book are generally admissible in
evidence in favor of or against the corporation and its
members to prove the corporate acts, its financial status and
other matters including one's status as a stockholder. They
are ordinarily the best evidence of corporate acts and
proceedings. However, the books and records of a corporation
are not conclusive even against the corporation but are prima
facie evidence only. Parol evidence may be admitted to supply
omissions in the records, explain ambiguities, or show what
transpired where no records were kept, or in some cases
where such records were contradicted. The effect of entries in
the books of the corporation which purport to be regular
records of the proceedings of its board of directors or

stockholders can be destroyed by testimony of a more

conclusive character than mere suspicion that there was an
irregularity in the manner in which the books were kept.
These considerations are founded on the basic principle that
stock issued without authority and in violation of law is void
and confers no rights on the person to whom it is issued and
subjects him to no liabilities. Where there is an inherent lack
of power in the corporation to issue the stock, neither the
corporation nor the person to whom the stock is issued is
estopped to question its validity since an estopped cannot
operate to create stock which under the law cannot have
existence.
Petitioner in her reply admitted that while respondent Eugenia
D. Apostol signed the Certificate of Stock No. 008 in
petitioner's name only in 1989, it was issued by the corporate
secretary in 1983 and that the other certificates covering
shares in Mr. & Ms. had not yet been signed by respondent
Eugenia D. Apostol at the time of the filing of the complaint
with the SEC although they were issued years before. Based
on this admission of petitioner, there is no truth to the
statement written in Certificate of Stock No. 008 that the
same was issued and signed on 25 July 1983 by its duly
authorized officers specifically the President and Corporate
Secretary because the actual date of signing thereof was 17
March 1989. Verily, a formal certificate of stock could not be
considered issued in contemplation of law unless signed by
the president or vice-president and countersigned by the
secretary or assistant secretary. In this case, contrary to
petitioner's submission, the Certificate of Stock No. 008 was
only legally issued on 17 March 1989 when it was actually
signed by the President of the corporation, and not before that
date. While a certificate of stock is not necessary to make one
a stockholder, e.g., where he is an incorporator and listed as
stockholder in the articles of incorporation although no
certificate of stock has yet been issued, it is supposed to
serve as paper representative of the stock itself and of the
owner's interest therein. Hence, when Certificate of Stock No.
008 was admittedly signed and issued only on 17 March 1989
and not on 25 July 1983, even as it indicates that petitioner
owns 997 shares of stock of Mr. & Ms., the certificate has no
evidentiary value for the purpose of proving that petitioner
was a stockholder since 1983 up to 1989.
The basis of a stockholder's suit is always one in equity.
However, it cannot prosper without first complying with the
legal requisites for its institution. The most important of these
is the bona fide ownership by a stockholder of a stock in his
own right at the time of the transaction complained of which
invests him with standing to institute a derivative action for
the benefit of the corporation. WHEREFORE, the petition is
DENIED.