ELECTION AND VOTING

Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must be
present, either in person or by representative authorized to act by written proxy, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election
must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder
entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the
time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent,
at the time of the election; and said stockholder may vote such number of shares for as many persons as there
are directors to be elected or he may cumulate said shares and give one candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them
on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes
cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation
multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporations
which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more
than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected.
Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to
time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented
by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital
stock, a majority of the member entitled to vote.

NOTE:
1. Majority of the outstanding capital stock, whether in person or by written proxy must be present at the
election of the directors; or majority of members entitled to vote, in the case of a non-stock corporation. If
the required quorum is not obtaining, the meeting may be adjourned;
2. On the request of any voting stockholder or member, the election may be held by ballot otherwise viva-voce
would suffice.
3. The candidates receiving the highest number of votes shall be elected.

CUMULATIVE VOTING:
1. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall equal or he may distribute
them among the candidates as he may see fit.
2. This is granted by law to each stockholder with voting rights. However, in non-stock corporations, cumulative
voting is generally not allowed, UNLESS allowed by the AOI or by-laws.
3. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will have 10,000 votes
which he may cast in favor of one candidate or may apportion to any number of candidate he may wish;
4. PURPOSE: to allow the minority to have a rightful representation in the board of directors.

Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation
must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be
a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be
provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except
that no one shall act as president and secretary or as president and treasurer at the same time.

NOTE:
4. Majority of the outstanding capital stock, whether in person or by written proxy must be present at the
election of the directors; or majority of members entitled to vote, in the case of a non-stock corporation. If
the required quorum is not obtaining, the meeting may be adjourned;
5. On the request of any voting stockholder or member, the election may be held by ballot otherwise viva-voce
would suffice.
6. The candidates receiving the highest number of votes shall be elected.

CUMULATIVE VOTING:
5. Cumulative voting gives the stockholder entitled to vote the right to give a candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall equal or he may distribute
them among the candidates as he may see fit.
6. This is granted by law to each stockholder with voting rights. However, in non-stock corporations, cumulative
voting is generally not allowed, UNLESS allowed by the AOI or by-laws.
7. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will have 10,000 votes
which he may cast in favor of one candidate or may apportion to any number of candidate he may wish;
8. PURPOSE: to allow the minority to have a rightful representation in the board of directors.
 9.

Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation
must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be
a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be
provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except
that no one shall act as president and secretary or as president and treasurer at the same time.

NOTE:
1. Except in a close corporation where the corporate officers may be elected directly by the stockholders, the
Code requires the BOD to elect the said officers;
2. The officers that may be elected are the:
a. President who must be a director;
b. Treasurer who may or may not be a director;
c. Secretary who should be a resident and citizen of the Philippines;
d. Such other officers as may be provided for in the by-laws.
3. Any two or more positions may be held concurrently by the same person, except:
a. The president and the secretary;
b. The president and the treasurer.

B. VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS QUORUM: requirement for a
valid board meeting is the majority of the number of the board fixed in the AOI, and a decision of at least a
majority of the directors/trustees present in a meeting at which there is a quorum shall be a valid corporate
act, except:

Sec. 25. Corporate officers, quorum

xxx
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.
1. Election of officers, which shall require the majority of all the members
of the board; and
2. Unless the AOI or the by-laws provide for a greater quorum/voting requirement.

Every action of the board without a meeting and without the required voting and quorum requirement will not
bind the corporation unless subsequently ratified, expressly or impliedlly.

Individual directors, however, can rightfully be considered as agents of the corporation. And although they cannot
bind the corporation by their individual acts, this is subject to certain EXCEPTIONS: (1) by delegation of authority;
(2) when expressly conferred; or (3) where the officer or agent is clothed with actual or apparent authority.

YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) Constacio B. Malagna, President and
Chairman of the Board of private respondent Prime White Cement Corporation (PWCC), sent a letter-offer (Exhibit
A) to Mr. Yao for the delivery of cement, which was accepted by the latter by delivering a check for P243,000.

ISSUE: WON the letter-offer sent by Malagna binds the corporation?

HELD: No. A corporation can act only through its officers and agents, all acts within the powers of said
corporation may be performed by agents of his selection and except in so far as limitations or restrictions may be
imposed by special charter, by-law or statutory provisions, the same general provision of law which govern the
relation of agency for natural person govern the officer or agent of a corporation, of whatever status or rank, in
respect to his power to act for the corporation; and the agents once appointed, or members acting in their stead,
are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons.

Moreover, a corporate officer or agent may represent and bind the corporation in transactiosn with third person to
the extent that authority has been conferred upon him, and this includes powers which have been (1)
intentionally conferred, and (2) also such powers as, in the usual course of business, are incidental thereto, or
may be implied therefrom, (3) powers added by custom and usage, as usually pertaining to the particular officer
or agent, and (4) such apparent powers as the corporation has caused persons dealing with the officer or agent
to believe that it has conferred.

While Mr. Maglana was an officer, the by-laws do not in any way confer upon the president the authority to enter
into contracts for the corporation independently of the BOD. That power is expressly lodged in the latter.

Nevertheless, to expedite or facilitate the execution of the contract, only the President shall sign the contact for
the corporation. No greater power can be implied from such express, but limited delegated authority. Neither can
it be logically claimed that any power greater than that expressly conferred is inherent in Mr. Maglanas position
as president and chairman of the corporation.

Although there is authority "that if the president is given general control and supervision over the affairs of the
corporation, it will be presumed that he has authority to make contract and do acts within the course of its
ordinary business," We find such inapplicable in this case. We note that the private corporation has a
general manager who, under its By-Laws has, inter alia, the following powers: "(a) to have the active and
direct management of the business and operation of the corporation, conducting the same accordingly to the
order, directives or resolutions of the Board of Directors or of the president." It goes without saying then that Mr.
Maglana did not have a direct and active and in the management of the business and operations of the
corporation.

Petitioner's last refuge then is his alternative proposition, namely, that private respondent had clothed Mr.
Maglana with the apparent power to act for it and had caused persons dealing with it to believe that he was
conferred with such power. The rule is of course settled that "[a]lthough an officer or agent acts without,
or in excess of, his actual authority if he acts within the scope of an apparent authority with which
the corporation has clothed him by holding him out or permitting him to appear as having such
authority, the corporation is bound thereby in favor of a person who deals with him in good faith in
reliance on such apparent authority, as where an officer is allowed to exercise a particular authority
with respect to the business, or a particular branch of it, continuously and publicly, for a
considerable time." Also, "if a private corporation intentionally or negligently clothes its officers or
agents with apparent power to perform acts for it, the corporation will be estopped to deny that
such apparent authority in real, as to innocent third persons dealing in good faith with such officers
or agents." This "apparent authority may result from (1) the general manner, by which the corporation holds
out an officer or agent as having power to act or, in other words, the apparent authority with which it clothes
him to act in general or (2) acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or without the scope of his ordinary powers.

It was incumbent upon the petitioner to prove that indeed the private respondent had clothed Mr. Maglana with
the apparent power to execute Exhibit "A" or any similar contract. This could have been easily done by
evidence of similar acts executed either in its favor or in favor of other parties . Petitioner miserably
failed to do that. Upon the other hand, private respondent's evidence overwhelmingly shows that no contract
can be signed by the president without first being approved by the Board of Directors; such approval may only
be given after the contract passes through, at least, the comptroller, who is the NIDC representative, and the
legal counsel.

LOPEZ REALTY, INC. VS. FOTENCHA (147 SCRA 183; Aug. 11, 1995) Petitioner corporation approved two
resolutions providing for the gratuity pay of its employees. Except for Asuncion Lopez-Gonzales, who was then
abroad, the remaining member of the board convened a special meeting and passed a resolution adopting the
above-mentioned resolutions. Private respondents requested for the full payment of the gratuity pay which was
granted.

At that time, however, petitioner Asuncion was still abroad, and allegedly sent a cablegram objecting to certain
matters taken up by the board in her absence.

Notwithstanding a corporate squabble between Asuncion and Arturo Lopez, the first two installments of the
gratuity pay of private respondents were paid. Also, petitioner corporation had prepared the cash vouchers and
checks for the thir installment. For some reason, said voucher was cancelled by petitioner Asuncion.

A complaint was filed before the labor arbiter who decided in favor of private respondents.

ISSUE: WON the gratuity pay should be paid?

HELD: Yes. The general rules is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law. Thus, the
directors must act as a body in a meeting called pursuant to the law or the corporations by-laws, otherwise, any
action taken therein may be questioned by any objecting director or shareholder.

Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting, which
was illegal for lack of notice, may be ratified either (1) expressly, by the action of the directors in
subsequent legal meeting, or (2) impliedly, by the corporations subsequent conduct.

Ratification by directors may be by an express resolution or vote to that effect, or it may be implied from
adoption of the act, acceptance or acquiescence. Moreover, the unauthorized acts of an officer of a corporation
may be ratified by the corporation by conduct implying approval and adoption of the act in question. Such
ratification may be expressed or may be inferred from silence and inaction.

In the case at bench, it was established that petitioner corporation did not issue any resolution revoking nor
nullifying the board resolution granting gratuity pay to private respondents. Instead, they paid the gratuity pay,
particularly, the first two installments thereof.

Despite lack of notice to Asuncion, we can glean from the records that she was aware of the corporations
obligations under the said resolution. More importantly she acquiesced thereto by affixing her signature on two
cash vouchers. The conduct of petitioners had estopped them from assailing the validity of the said board
resolutions.

PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924) W. Neumark, president of
defendant corporation borrowed P15000 from plaintiff which was delivered by means of a check in favor of
defendant and deposited in BPI and the amount of it credited to the corporations current account.

ISSUE: WON the corporation is responsible for the money borrowed by its president?

HELD: Yes. W. Neumark is the principal stockholder, president and general business manager of the defendant
corporation. On behalf of the corporation, he solicited a loan and was given a check, which was endorsed by him
in his capacity as president and deposited to the corporations account. It may be true that a large part of the
amount so deposited was diverted by Neumark to his own use, but that does not alter that the money was
borrowed for the corporation and was placed in its possession.

It is conceded that Neumark was not expressly authorized by the board of directors to borrow the money in
question and the general rule is that a business manager or other officer of a corporation, has no implied power
to borrow money on its behalf. But much depends upon the circumstances of each particular case and the rule
state is subject to important exceptions. Thus, where a general business manager of a corporation is
clothed with apparent authority to borrow money and the amount borrowed does not exceed the
ordinary requirements of the business, it has often been held that the authority is implied and that
the corporation is bound.

YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924) CC Chen or TC Chen, General Manager of
defendant corporation Kong Li Po, entered into an agreement with the plaintiffs by which the latter bound
themselves to do the necessary printing for the newspaper. Later on, the new general manager, Tan Tian Hong,
discharged plaintiffs with no special reasons. Aggrieved, plaintiffs sought to recover full payment of the
remaining term of the contract, which was originally for 3 years, as stated therein.

ISSUE: WON Chen had the power to bind the corporation under a contract of that character?
HELD: No. The general rule is that the power to bind a corporation by contract lies with its board of directors or
trustees, but this power may either be expressly or impliedly be delegated to other officers or agents of the
corporation, and it is well settled that except where the authority of employing servants and agents is
expressly vested in the BOD/T, an officer or agent who has general control and management of the
corporations business, or a specific part thereof, may bind the corporation as are usual and
necessary in th conduct of such business. But the contracts of employment must be reasonable.

Chen, as general manager of Kong Li Po, had implied authority to bind the defendant corporation by a reasonable
and usual contract of employment with the plaintiffs, but we do not think that contract here in question can be so
considered. Not only is the term of employment usually long, but the conditions are otherwise so onerous to the
defendant that the possibility of the corporation being thrown into insolvency thereby is expressly contemplated
in the same contract. This fact, in itself was, in our opinion, sufficient to put the plaintiffs upon inquiry as to the
extent of the business managers authority; they had not the right to presume that he or any other single officer
or employee of that corporation had implied authority to enter into a contract of employment which might bring
about its ruin.

TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30, 1963) Trinidad Francisco, in consideration of
loan extended by GSIS, mortgaged her property in QC. For being in arrears in her installments, GSIS
extrajudicially foreclosed the mortgage.
Plaintiffs father, Atty. Vicente Francisco sent a letter to Rodolfo Andal, general manager of GSIS, offering to
redeem the property which was replied to by Andal through a telegram saying GSIS BOARD APPROVED YOUR
REQUEST RE REDEMTPION OF FORECLOSED PROPERTY OF YOUR DAUGHTER

Later, inasmuch as, according to the defendant GSIS, the remittances made by Atty. Francisco were allegedly not
sufficient to pay off her daughters arrears, the one year redemption period has expired, said defendant
consolidated title to the property in its name.

ISSUE: WON the telegram sent by the Andal binds the corporation?

HELD: Yes. The terms of the offer were clear and over the signature of Andnal, plaintiff was informed that the
proposal has been accepted. There was nothing in the telegram that hinted at any anomaly, or gave grounds to
suspect its veracity, and the plaintiff, therefore, cannot be blamed for relying upon it. There is no denying that
the telegram was within Andals apparent authority, but eh defense is that he did not sign it, but that it was
sent by the board secretary in his name and without his knowledge. Assuming this to be true, how was appellee
to know it? Corporate transactions would speedily come to a standstill were every person dealing
with a corporation were held duty-bound to disbelieve every act of its responsible officers, no
matter how regular they should appear on their face.

Indeed, it is well-settled that If a private corporation intentionally or negligently clothes its officers or
agents with apparent power to perform acts for it, the corporation will be estopped to deny that
such apparent authority is real, as to innocent third persons dealing in good faith with such officers
or agents.

Hence, even if it were the board secretary who sent the telegram, the corporation could not evade the binding
effect produced by the telegram.

The error in the wording cannot be taken seriously. All the while GSIS pocketed the various remittances, and kept
silent as to the true facts as it now alleges. This silence, taken together with the unconditional acceptance of
three other subsequent remittances from plaintiff constitutes in itself a binding ratification of the original
agreement.

THE BOARD OF LIQUIDATORS VS. KALAW (20 SCRA 987; Aug. 10, 1965) National Coconut Corporation
(NACOCO) embarked on copra trading activities led by its General Manager Maximo Kalaw and the other
defendants as members of the board. Due to natural calamities, the business of copra became unprofitable.
Kalaw made a full disclosure of the situation and apprised the baord of the impending losses on the contracts
already entered into, but no action was taken. But later on, the contracts were unanimously approved by the
Board.
The buyers threated damage suits, but some were settled. Louis Dreyfus & Co. Ltd. Actually sued but was also
culminated in an out-of-court settlement.

NACOCO now seeks to recover the sum paid to Louis from general manager and board chairman Kalaw and the
other members who approved the contracts. It charges Kalaw with negligence and bad faith and/or breach of
trust for having approved the contracts, which was dismissed by the trial court.

ISSUE: WON the contracts executed by Kalaw binds the corporation?

HELD: Yes. A rule that has gained acceptance through the years is that a corporate officer entrusted with
the general management and control of its business, has implied authority to make any contract or
do any other act which is necessary or appropriate to the conduct of the ordinary business of
the corporation. As such officer, he may, without any special authority from the BOD perform all acts
of an ordinary nature, which by usage or necessity are incident to his office, and may bind the
corporation by contracts in matters arising in the usual course of business.

Long before the disputed contracts came into being, Kalaw contracted by himself alone as general manager for
forward sales of corpra (which is a necessity in the business) which were profitable. So pleased was NACOCO;s
BOD that it voted to grant Kalaw special bonus in recognition of the signal achievement rendered by him.

These previous contacts, it should be stressed, were signed by Kalaw without prior authority from the board. Said
contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand
to prove one thing. Obviously, NACOCOs board met difficulties attendant to forward sales by leaving the
adoption of means to end, to the sound discretion of NACOCOs general manager Maximo Kalaw.

Where similar acts have been approved by the directors as a matter of general practice, custom,
and policy, the general manager may bind the company without formal authorization of the BOD. In
varying language, existence of such authority is established, by proof of the course of business, the usages and
practices of the company and by the knowledge which the BOD has, or must be presumed to have, of acts and
doings of its subordinates in and about the affairs of the corporation.

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in NACOCOs behalf without prior board approval. If the
bylaws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts.
But the Board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior
approval.

BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969) As a consequence of P200,000
worth of ECA allocated to the Bowen & Co., Inc., it required a letter of credit in the amount of P100,000 with the
PNB. As the corporation did not have at the time the necessary funds to put up the required cash marginal
deposit of P60,000, its president Geoffrey Bowen, obligating the corporation and himself in his personal capacity,
offered to pay Fracisco Buenaseda 37 1/2% of the profits to be realized from the sale of the ECA procurement
materials, should he be able to obtain and produce the amount necessary to cover the cash marginal deposit
which Buenaseda was able to do.

The corporation refused to pay, Buenaseda filed an action in the CFI to recover the same.

ISSUE: WON the agreement was binding?

HELD: Yes. It is not here pretended that the BOD of the defendant corporation had no knowledge of the
agreement between Bowen and plaintiff. Indeed, at the time the said Agreement was made, the BOD of the
corporation was composed of Bowen himself, his wife, Buenaseda and two others, with Bowen and his wife
controlling the majority of the stocks of the corporation. The Board did not repudiate the agreement but on the
contrary,

acquiesced in and took advantage of the benefits afforded by said agreement. Such acts are equivalent to an
implied ratification of the agreement by the BOD and bound the corporation even without formal resolution
passed and recorded.

It is agreed by the respondents, defendants below, that the profits of the corporation form part of its assets and
payment of a certain percentage of the profits requires a declaration of dividends and/or resolution of the BOD.
The agreement is untenable. Although the plaintiff is a stockholder of the corporation he does not, however, claim
a share of the profits as such stockholder, but under the agreement between him and the president of the
corporation which has been impliedly ratified by the BOD.

IN SUMMARY: An unauthorized act, or the act of a single director, officer or agent of a corporation may be
ratified either expressly or impliedly.
1. Express ratification is made through a formal
n On September 1, 1998, Dinglasan resigned, BOD still constituting a
board action;
quorom elected Eric Roxas (Roxas) followed by Macalintal.
2. Implied ratification can either be (a) silence or

acquiescence; (b) acceptance and/or retention of
benefits, or (c) by recognition or adoption. On March 6, 2001, Jose Ramirez (Ramirez) was elected by the
remaining
C. REMOVAL AND FILLING UP OF BOD. Respondent Africa (Africa), a member of VVCC, questioned the
VACANCIES election of Roxas and Ramirez as members of the VVCC Board with
the Securities and Exchange Commission (SEC) and the Regional
Trial Court (RTC) as contrary to Sec. 23 and 29 of the Corporation
Sec. 28. Removal of directors or
trustees. - Any director or trustee of a corporation may be removed from office by a vote of the stockholders
holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-
stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided, That such
removal shall take place either at a regular meeting of the corporation or at a special meeting called for the
purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the
president or on the written demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a majority of the members
entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse
to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the
stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time
and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by
written notice prescribed in this Code. Removal may be with or without cause: Provided, That removal without
cause may not be used to deprive minority stockholders or members of the right of representation to which they
may be entitled under Section 24 of this Code.
NOTE:
1. By-laws may provide for casues or grounds for removal of a director;
2. A director representing the minority may not be removed except for those causes;
3. A director NOT representing the minority may be removed even without a cause.

REQUIREMENTS FOR A VALID REMOVAL:

1. The removal should take place at a general or special meeting duly call for that purpose;
2. The removal must be by the vote of the stockholders holding or representing 2/3 of the outstanding capital
stock or the members entitled to vote in cases of non-stock corporations; and
3. There must be a previous notice to the stockholders or members of the intention to propose such removal at
the meeting either by publication or on written notice to the stockholders or members.

JURISDICTION OF THE COURT: The law, as it stands now, grants the proper court, the power and authority to
hear and decide cases "involving controversies in the election or appointment of directors, trustees, officers, or
managers of such corporation, partnership or association."

DEADLOCK: In the case of deadlock in a close corporation, the SEC is also authorized to issue an Order as it
deems appropriate "canceling, altering or enjoining any resolution or other act of the corporation or its board of
directors or "directing or prohibiting" any act the corporation or the other board of directors thereby effectively
taking away the rights of the directors to act as manager of the corporation.

VACANCY:
1. If a vacancy occurs by virtue of REMOVAL, Sec. 28 authorizes the filling of the vacancy by the election of a
replacement at the same meeting;
2. If it occurs NOT by removal, Sec. 29 applies.

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled
by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director
or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office.

A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall
be filled only by an election at a regular or at a special meeting of stockholders or members duly called for
the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the
notice of the meeting.

If the VACANCY is either resulting from (1) expiration of term; or (2) other causes other than removal, the BOARD
OF DIRECTORS, if still constituting a quorum, may fill the vacancy.

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M. SANTIAGO, JR.,
FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as
members of the Board of Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ, Petitioners
vs.
Victor Africa, Respondend
(GR No. 151969; Sept. 4, 2009)

FACTS: February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal),
Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa
were elected as BOD during the Annual Stockholders Meeting of petitioner Valle Verde Country Club, Inc.
(VVCC). From 1997-2001, the requisite quorum could not be obtained so they continued to act as directors in
a hold-over capacity.

The RTC decided in favor of Africa.

ISSUE: WON the appointment of Roxas and Ramirez made by the remaining members of the Board, still
constituting a quorum, were valid?

HELD: No. The resolution of this legal issue is significantly hinged on the determination of what constitutes a
directors term of office.

The holdover period is not part of the term of office of a member of the board of
directors. The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have defined

term as the time during which the officer may claim to hold the office as of right, and fixes the
interval after which the several incumbents shall succeed one another. The term of office is not affected by the
holdover. The term is fixed by statute and it does not change simply because the office may have become vacant,
nor because the incumbent holds over in office beyond the

Term is distinguished from tenure in that an officers tenure represents the term during which the
incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the incumbent.

Based on the above discussion, when Section 23 of the Corporation Code declares that the board of
directors...shall hold office for one (1) year until their successors are elected and qualified," we construe the
provision to mean that the term of the members of the board of directors shall be only for one year;
their term expires one year after election to the office. The holdover period that time from the lapse of one year
from a members election to the Board and until his successors election and qualification is not part of the
directors original term of office, nor is it a new term; the holdover period, however, constitutes part of his
tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding
the succeeding term.

After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals term of office is
deemed to have already expired. That he continued to serve in the VVCC Board in a holdover capacity cannot be
considered as extending his term. This holdover period is not to be considered as part of his term, which, as
declared, had already expired.

With the expiration of Makalintals term of office, a vacancy resulted which, by the terms of Section 29 of the
Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called for the
purpose. To assume as VVCC does that the vacancy is caused by Makalintals resignation in 1998, not by the
expiration of his term in 1997, is both illogical and unreasonable. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the expiration of Makalintals term had been created long
before his resignation.

The powers of the corporations board of directors emanate from its

stockholders

This theory of delegated power of the board of directors similarly explains why, under Section 29 of the
Corporation Code, in cases where the vacancy in the corporations board of directors is caused not by the
expiration of a members term, the successor so elected to fill in a vacancy shall be elected only for the
unexpired term of the his predecessor in office." The law has authorized the remaining members of the
board to fill in a vacancy only in specified instances, so as not to retard or impair the corporations operations;
yet, in recognition of the stockholders right to elect the members of the board, it limited the period during which
the successor shall serve only to the unexpired term of his predecessor in office."

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the
directors term of office. When a vacancy is created by the expiration of a term, logically, there is no
more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporations stockholders who
shall possess the authority to fill in a vacancy caused by the expiration of a members term.

CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the BOD to the SEC:

Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days after
the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of
the directors, trustees, and officers elected. Should a director, trustee or officer die, resign or in any manner cease
to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director,
trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission

PURPOSE: to give public information, under sanction of oath responsible

officers, of the nature of the business, financial condition and operational status of the company together with
information on its key officers or managers so that hose dealing with it and those who intend to do business with
it may know or have the means of knowing facts concerning the corporations financial resources and business
responsibility"

D. COMPENSATION OF DIRECTORS

Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for reasonable per
diems: Provided, however, That any such compensation other than per diems may be granted to directors by the
vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special
stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten
(10%) percent of the net income before income tax of the corporation during the preceding year.

GENERALLY: Directors are not entitled to receive any compensation, EXCEPT:

1. Reasonable per diems;
2. As provided in the by-laws or upon a majority vote of the stockholders; and
3. If they are performing functions other than that of a director.

(3) above: Sec. 30 is clear on the point when it provides as such directors". Therefore, special and extraordinary
service rendered, outside of the regular duties, may form the basis for a claim of special compensation, such as
when a director acts as a general counsel.

REASON: the office of a director is usually filled up by those chiefly interested in the welfare of the institution by
virtue of their interest in stock or other advantages and such interests are presumed to be the motive for
executing duties of the office without compensation.

MAY THE COURTS LOOK INTO THE REASONABLENESS OF COMPENSATION? The courts will not generally
undertake to review the fairness of official salaries, at the suit of a stockholder unless wrongdoing and oppression
or possible abuse of fiduciary position are shown.

When the recipient does not stand in the dual relation of the (1) one compensated and (2) a participant in fixing
his own compensation, it is considered outside the proper judicial function to go into business policy question of
the fairness or reasonableness of compensation as fixed by the board. Otherwise, it will call for a scrutiny of the
reasonableness or fairness of the compensation. Likewise, even if consented to by the majority of stockholders,
the courts may still look into such reasonableness if: (1) it would amount to giving away corporate funds in the
guise of compensation as against the interest of the dissenting minority; or (2) in fraud of creditors, either
amounting to wastage of assets.

CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33 SCRA 593; June 30, 1970) This is a
complaint filed by herein petitioner CCE for the refund of certain amounts received by respondent when he served
as member of the board of directors of CCE, which were said t be per diems and transportation expenses,
representation expenses and cummutable discretionary funds.

ISSUE: WON the BOD had the power to appropriate funds for the expenses claimed by respondent?
HELD: No. The by-laws expressly reserved unto the stockholders the power to determine the compensation of
the members of the BOD, and the stockholders did restrict such compensation to (1) actual transportation
expenses plus (2) per diems of P30 and (3) actual expenses while waiting. Even without the express prohibition,
the directors are not entitled to compensation for The law is well-settled that directors of corporations
presumptively serve without compensation and in the absence of an express agreement or a
resolution thereto, no claim can be asserted therefor. Thus it has been held that there can be no
recovery of compensation, unless expressly provided for, when director serves as president or vice-
president, as secretary or treasurer or cashier, as member of an executive committee, as chairman of
a building committee, or similar offices.

Thus, the directors, in assigning themselves additional duties, such as the visitation of FACOMAS, acted within their
power, but, by voting for themselves compensation for such additional duties, they acted in excess of their
authority, as express in the by-laws.

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS ENRIQUEZ, PRESTON F.

VILLASIS & REGINALD F. VILLASIS, petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S.
SALAS & HON. JUDGE PORFIRIO PARIAN, respondents
(GR No. 113032; 278 SCRA 216; Aug. 21, 1997)

FACTS: In a special board meeting, a resolution was passed providing for compensation of officers. A few years later,
petitioners Homero Villasis, Prestod Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint for
falsification of public documents (for submission of an income reflecting the resolution as passed on 1985, when in
fact it was passed in 1986) and estafa (for the disbursement of funds by effecting payment to the aforesaid salaries)
against herein respondents who were members of the Board of Trustees who were also officers of the corporation.
The trial court acquitted respondents in both charges without civil liability. The motion for reconsideration on the civil
aspect being denied, petitioners filed this petition.

ISSUE: WON the resolution granting compensation to OFFICERS of the corporation is valid?
 HELD: Yes. The proscription under Sec. 30, is against granting compensation to directors/trustees of a corporation
is not a sweeping rule. Worthy of note is the clear phraseology of Sec 30 which states ... [T]he directors shall not
receive any compensation, as such directors, ... The phrase as such directors is not without
significance for it delimits the scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees . The unambiguous implication is
that members of the board may receive compensation, in addition to reasonable per diems, when they render
services to the corporation in a capacity other than as directors/trustees. In the case at bench, the
Resolution granted monthly compensation to private respondents not in their capacity as members of the board,
but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of
WIT.

Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the compensation to 10% of the net income
before income tax does not likewise find application in this case since the compensation is being given to private
respondents in their capacity as officers of WIT and not as board members.

GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14, 1927) The members of the board of El
Hogar Filipino receives 5% of the net profit as shown in the balance sheet and is distributed in proportion to their
attendance to meetings of the board. A complaint was filed against the, and the sixth cause of action alleged that
the directors, instead of serving without pay, or receiving nominal pay or a fixed salary - as the complainant
supposes would be proper have been receiving large compensation in varying amounts.

ISSUE: WON the courts may declared the by-law provision null and void?

HELD: No. The Corporation Law does not undertake to prescribe the rate of compensation for the
directors of corporations. The power to fixed the compensation they shall receive, if any, is left to the corporation,
to be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this authority the compensation for the directors
of El Hogar Filipino has been fixed in section 92 of its by-laws, as already stated. The justice and propriety of this
provision was a proper matter for the shareholders when the by-laws were framed; and the
circumstance that, with the growth of the corporation, the amount paid as compensation to the
directors has increased beyond what would probably be necessary to secure adequate service from
them is matter that cannot be corrected in this action; nor can it properly be made a basis for depriving the
respondent of its franchise, or even for enjoining it from compliance with the provisions of its own by-laws. If a
mistake has been made, or the rule adopted in the by-laws has been found to work harmful results, the remedy is in
the hands of the stockholders who have the power at any lawful meeting to change the rule. The remedy, if any,
seems to lie rather in publicity and competition, rather than in a court proceeding. The sixth cause of action is in
our opinion without merit.

E. LIBABILITY OF CORPORATE OFFICERS

The general rule is that unless the law specifically provides a corporate officer or agent is not civilly or criminally
liable for acts done by him as such officer or agent, or when absent bad faith or malice.

TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7, 1994) Melchor dela Cuesta, doing business
under the name Farmers Machineries, sold a tractor to Tramat Mercantile, Inc. In payment, David Ong, Tramats
president and manager issued a check for P33,500. Tramat sold the tractor, together with an attached lawn mower
fabricated by it, to NAWASA. David Ong put a stop payment on the check when NAWASA refused to pay on the
account that aside from the defects on the lawn mower, the engine (sold by dela Costa) was a reconditioned unit.

De la Costa filed an action for recovery of money which was granted by the court.

ISSUE: WON Ong should be held jointly and severally liable?

HELD: No. It was an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the
questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of a corporation,
TRAMAT, with a distinct and separate personality. As such, it should only be the corporation, not the person acting
for and on its behalf, that properly could be made liable thereon.

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other
persons;

2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;

4. He is made, by a specific provision of law, to personally answer for his corporate action.

In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under
any of the abovementioned cases.

RICARDO A. LLAMADO, petitioner,

vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents
(GR No. 99032; 270 SCRA 423; March 26, 1997)

FACTS: Private complainant Leon Gaw delivered to the accused Ricardo Llamado and Jacinto Pascual the amount of
P180,000 which is to be repaid in 6 months with 12% interest. As security, the accused issued and signed a
postdated check which was later on stopped and dishonored for being drawn against insufficient funds. Gaw filed a
complaint for violation of BP Blg. 22. Pascual remained at large and the trial on the merits against Llamado was
conducted. The trial court convicted Llamado.
ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could be held civilly and criminally liable?

HELD: Yes. Petitioner denies knowledge of the issuance of the check without sufficient funds and involvement in the
transaction with private complainant. However, knowledge involves a state of mind difficult to establish. Thus, the
statute itself creates a prima facie presumption, i.e., that the drawer had knowledge of the insufficiency of his funds
in or credit with the bank at the time of the issuance and on the check's presentment for payment. Petitioner failed to
rebut the presumption by paying the amount of the check within five (5) banking days from notice of the dishonor.
His claim that he signed the check in blank which allegedly is common business practice, is hardly a defense. If as he
claims, he signed the check in blank, he made himself prone to being charged with violation of BP 22. It became
incumbent upon him to prove his defenses. As Treasurer of the corporation who signed the check in his capacity as
an officer of the corporation, lack of involvement in the negotiation for the transaction is not a defense.

Petitioner's argument that he should not be held personally liable for the amount of the check because it was a
check of the Pan Asia Finance Corporation and he signed the same in his capacity as Treasurer of the corporation, is
also untenable. The third paragraph of Section 1 of BP Blg. 22 states:

Where the check is drawn by a corporation, company or entity, the person or persons who actually
signed the check in behalf of such drawer shall be liable under this Act"

ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners,

vs.
NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS,
SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL., respondents
(GR No. 121434; 273 SCRA 35; June 2, 1997)

FACTS: Private respondents were employees of Crispa, Inc. who were dismissed due to alleged retrenchment. They
filed an illegal dismissal complaint with the NLRC against Crispa, Inc., Valeriano Floro (major stockholder,
incorporation and director of Crispa) and petitioners, who were high ranking officials and directors of Crispa. The
Lbor Arbiter dismissed the complaint but ordered petitioners, Floro and Crispa to pay separation pay.

ISSUE: WON petitioners can be held liable?

HELD: Yes. A corporation is a juridical entity with legal personality separate and distinct from those acting for and in
its behalf and, in general, from the people comprising it. The general rule is that obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities. There are times, however,
when solidary liabilities may be incurred but only when exceptional circumstances warrant such as in the following
cases:

1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or
assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in
directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation,
its stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action."i
In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation
for the termination of employment of corporate employees done with malice or in bad faith . In this
case, it is undisputed that petitioners have a direct hand in the illegal dismissal of respondent employees. They
were the ones, who as high-ranking officers and directors of Crispa, Inc., signed the Board Resolution retrenching
the private respondents on the feigned ground of serious business losses that had no basis apart from an
unsigned and unaudited Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. This is
indicative of bad faith on the part of petitioners for which they can be held jointly and severally liable with Crispa,
Inc. for all the money claims of the illegally terminated respondent employees in this case.

F. THREE-FOLD DUTY OF DIRECTORS

Directors owe a three-fold duty to the corporation: (1) Obedience; (2) Diligence and (3) Loyalty.

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or
bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.

When a director, trustee or offi cer attempts to acquire or acquires, in violation of his duty, any interest
adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to
which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise would have accrued to the corporation.

OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting or assenting, either willfully or
knowingly, to patently unlawful acts thereby making the responsible director liable for damages resulting
therefrom;

DILIGENCE: Under the second part of Sec. 31, the directors are required to manage the corporate affairs with
reasonable care and prudence. This is because the liability of a corporation is not limited to willful breach of trust
or excess of power, but extends also to negligence. Their liability rests upon the common law rule which renders
liable every agent who violates his authority or neglects his duty to the damage of his principal.

The degree of diligence is relative. The more fair and satisfactory rule is that degree of care and diligence which
an ordinary prudent director could reasonably be expected to exercise in a like position under similar
circumstances.

BUSINESS JUDGMENT RULE: Although directors are commonly said to be responsible both for
reasonable care and also prudence, the formula is continually repeated that they are not liable for losses due to
imprudence or honest error of judgment. The business judgment rule in effect states that questions of policy and
management are left solely to the honest decision of the board of directors and the courts are without authority to
substitute its judgment as against the former. The directors are business managers and as long as they act in
good faith, its actuations are not subject to judicial review.

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
(GR No. L-15092; 5 SCRA 36; May 18, 1962)

FACTS: Appellants have been sugar planter adhered to defendat-appellees sugar central mill under identical
milling contracts with a 55% share of the resulting product. There was a proposal to increase the planters share
to 60% which was adopted by defendant in an Amended Milling Contract and consequently a Board Resolution.
In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La Carlota,
Binalbagan-Isabela and San Carlos), with a total annual production exceeding one-third of the production of all the
sugar central mills in the province, had already granted increased participation (of 62.5%) to their planters, and
that under paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had become
obligated to grant similar concessions to the plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling
Co., inc., resisted the claim, and defended by urging that the stipulations contained in the resolution were made
without consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate directors to adopt. The trial court decided
in favor of defendant, thus the present appeal.

ISSUE: WON the resolutions passed by the bard are valid and binding?

HELD: Yes. There can be no doubt that the directors of the appellee company had authority to modify the
proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other
contracting parties.
As the resolution in question was passed in good faith by the board of directors, it is valid and
binding, and whether or not it will cause losses or decrease the profits of the central, the court has
no authority to review them.

They hold such office charged with the duty to act for the corporation according to their best judgment, and
in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the
business of a corporation should be operated at a loss during depression, or close down at a smaller loss, is a
purely business and economic problem to be determined by the directors of the corporation and not by the
court. It is a well-known rule of law that questions of policy or of management are left solely to the honest
decision of officers and directors of a corporation, and the court is without authority to substitute its judgment
of the board of directors; the board is the business manager of the corporation, and so long as it acts in good
faith its orders are not reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390)."

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San Carlos and
Binalbagan (which produce over one-third of the entire annual sugar production in Occidental Negros) have
granted progressively increasing participations to their adhered planter at an average rate of
62.333% for the 1951-52 crop year;

64.2% for 1952-53;

64.3% for 1953-54;

64.5% for 1954-55; and

63.5% for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound
to grant similar increases to plaintiffs-appellants herein.

LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:

Generally: a director is not liable for the acts of their co-directors, unless: (1) He connives or participates; or (2) He
is negligent in not discovering or acting to prevent it. Thus, absent of actual knowledge of the wrongful activities,
on the part of the co-directors, the same cannot be imputed to the other director unless in the exercise of
reasonable care attending his responsibilities, he should have been aware of suspicious circumstances demanding
correlative action.

LOYALTY: refers to the proscription imposed on directors on acquiring any personal or pecuniary interest in
conflict with their duty as director. Their relationship is regarded as fiduciary relation". As fiduciaries, they are
obliged to act with utmost candor and fair dealing for the interest of the corporation and without selfish motives.

Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by refunding the same, unless his act has been
ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the
venture.
Apparent from Sec. 31 and 34, the duty of loyalty is violated in the following instances:
1. When a director or trustee acquires any personal or pecuniary interest in conflict with (his) duty as such
director or trustee";
2. When he attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in
respect to any matter which has been reposed in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf"; and
3. When he, by virtue of his office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profit to the prejudice of such corporation".

FORBIDDEN PROFITS: Forbidden in the sense that directors and officers are fiduciary representatives of
the corporation and as such they are not allowed to obtain any personal profit, commission, bonus or gain for
their official actions. This may also refer to those arising from transactions of directors with third persons which
may involve misappropriation of corporate opportunities and disloyal diverting of business. Directors and officers
are corporate insiders and cannot, therefore, utilize their strategic position for their own preferment or use their
powers and opportunities for their personal advantage to the exclusion of the interest which they represent.

CORPORATE OPPORTUNITY DOCTRINE: it places a director of a corporation in the position of a

fiduciary and prohibits him from seizing a business opportunity and/or developing it at the expense and with the
facilities of the corporation. He cannot appropriate to himself opportunity which in fairness should belong to the
corporation.
RATIFICATION:
1. The second paragraph of Sec. 31 which makes a director liable to account for profits if he attempts to acquire
or acquires any interest adverse to the corporation in respect to any matter reposed in him in confidence as
to which equity imposes a disability upon him to deal in his own behalf is not subject to ratification.
2. Whereas, in Sec. 34, if a director acquires a business opportunity which should belong to the corporation, he
is bound to account for such profits unless his act is ratified by the stockholders owing or representing at
least 2/3 of the outstanding capital stock.

Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a fair market value of
P100M for P90M.
a. If it was offered first to A, and A made a profit of P90M, this would fall under Sec. 34 and may be subject to
ratification; A merely acquired a business opportunity owing to the corporation.
b. If it was offered to REALTY CORP., and A, later on offered to buy it for P95 and sold it making a profit of P5M, it
would fall under Sec. 31 and not subject to ratification, A should return the profits to REALTY CORP. It was a
matter reposed in him in confidence.

STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) the Governor of the Philippine Islands, on behalf of the
government, made an offer of purchase for the total sum of $6,,043,219.47 in gold for all the friar lands, though
owned by different owners.

While this state of things existed, and before the final offer had been made by the Governor, the defendant,
although still holding out for a higher price for the lands, took steps to purchase the 800 shares of stock in his
own company from Mrs. Strong, which he knew were in the possession of F. Stuart Jones, as her agent. The
defendant employed Krauffman and the latter employed Mr. Sloan, a broker, to purchase the stock for him. Mr.
Sloan, the husband, did not know who wanted to buy the shares nor did Jones when he was spoken to. Jones
would not have sold at the price he did had he known it was the defendant who was purchasing, because, as he
said, it would show increased value, as the defendant would not be likely to purchase ore stock unless the price
was going up.

ISSUE: WON it was the duty of the defendant to disclose to the agent of the plaintiff the facts bearing upon or
which might affect the value of the stock?

HELD: Yes. A director upon whose action the value of the shares depends cannot avail of his knowledge of what
his own action will be to acquire shares from those whom he intentionally keeps in ignorance of his expected
action and the resulting value of the shares.

Even though a director may not be under the obligation of a fiduciary nature to disclose to a shareholder his
knowledge affecting the value of the shares, that duty may exist in special cases, and did exist upon the facts in
this case.

In this case, the facts clearly indicate that a director of a corporation owning friar lands in the Philippine Islands,
and who controlled the action of the corporation, had so concealed his exclusive knowledge of the impending sale
to the government from a shareholder from whom he purchased, through an agent, shares in the corporation, that
the concealment was in violation of his duty as a director to disclose such knowledge, and amounted to deceit
sufficient to avoid the sale; and, under such circumstances, it was immaterial whether the shareholder's agent did
or did not have power to sell the stock.

In addition to his ownership of almost three-fourths of the shares of the stock of the company, the defendant was
one of the five directors of the company, and was elected by the board the agent and administrator general of
such company, "with exclusive intervention in the management" of its general business.

Concealing his identity when procuring the purchase of stock, by his agent, was in itself stock evidence of fraud
on the part of the defendant. The concealment was not a mere inadvertent omission but was a studied and
intentional omission, to be characterized as part of the deceitful machination to obtain the purchase without
giving information whatever as to the state and probable result of the negotiations, to the vendor of the stock,
and to, in that way, obtain the same at a lower price.

G. SELF-DEALING DIRECTORS

The self-dealing director is one who deals or transacts business with his own corporation.

Sec. 32. Dealings of directors, trustees or officers with the corporation. - A contract of
the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation,
unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was nor necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

Generally: A contract entered into by a director with his own corporation is voidable at the latters option, except
when all the conditions laid down in Sec. 32 are met. On the other hand, where any of the first two conditions is
absent, the contract becomes voidable subject to the ratification of the stockholders representing 2/3 of the
outstanding capital stock the requirements of which are: (1) there must be a meeting called for that purpose;
(2) full disclosure of the adverse interest of the director; and (3) the contract is fair and reasonable under the
circumstances.

If the self-dealing director owns all or substantially all of the shares of stock, thereby making ratification easily
possible, the last sentence of Sec. 32 should be made to apply by determining reasonableness of the transaction
to
which there is no yardstick. Every case stands upon its own bottom, and the ultimate question is whether the
contract was honest and beneficial which is always a question of fact.

PRIME WHITE CEMENT CORPORATION, petitioner,

vs.
IAC and ALEJANDRO TE, respondents
(GR No. L-68555; 220 SCRA 103; March 19, 1993)

FACTS: Respondent Alejandro Te, a director of petitioner corporation, was awarded a dealership agreement
whereby Te would be the exclusive dealer and/or distributor of the corporation in the entire Mindanao. As a
consequence, Te entered into different contracts for selling white cement. Laer on, defendant corporation decided
to impose certain conditions upon the dealership agreement.

Several demands to comply with the agreement were made by Te to the corporation but was refused and Te was
constrained to cancel the contracts he entered into.

Defendant corporation entered into an exclusive dealership agreement with Napoleon Co for the marketing of
white cement in Mindanao. Hence, this suit.

ISSUE: WON the dealership agreement entered into by Te with his own corporation is valid and binding?

HELD: No. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of
Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case
his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit.
As corporate managers, directors are committed to seek the maximum amount of profits for the corporation. This
trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the
control and guidance of corporate affairs and property and hence of the property interests of the stockholders.

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into
with a person other than a director or officer of the corporation, the fact that the other party to the contract was a
Director and Auditor of the petitioner corporation changes the whole situation. First of all, We believe that the
contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and
supply to respondent Te 20,000 bags of white cement per month, for five years starting September, 1970, at the
fixed price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be
presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not
stable and were expected to rise. At the time of the contract, petitioner corporation had not even commenced the
manufacture of white cement, the reason why delivery was not to begin until 14 months later. He must have known
that within that period of six years, there would be a considerable rise in the price of white cement. In fact,
respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the
middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership agreement"
to allow for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per bag
for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to
buy the cement, would require such a provision. In fact, this unfairness in the contract is also a basis which renders
a contract entered into by the President, without authority from the Board of Directors, void or voidable, although it
may have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag for a period of
five years was not fair and reasonable. Respondent Te, himself, when he subsequently entered into contracts to
resell the cement to his "new dealers" Henry Wee and Gaudencio Galang stipulated as follows:
The price of white cement shall be mutually determined by us but in no case shall the same be less than
P14.00 per bag (94 lbs)

As director, especially since he was the other party in interest, respondent Te's bounden duty was to act in such
manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite
clear that he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the
expense of the corporation. There is no showing that the stockholders ratified the "dealership agreement" or that
they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap
the fruits of his disloyalty.

CHARLES W. MEAD, plaintiff-appellant,

vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING
AND CONSTRUCTION COMPANY, defendant-appellants
(GR No. 6217; 21 Phil. 95; Dec. 26, 1911)

FACTS: Herein plaintiff-appellant Mead with defendant McCullough formed the Philippine Engineering and
Construction Company, the incorporators being the only stockholders and directors of the company. When Mead left
for China, the other directors entered into an agreement where all the rights in a wrecking contract with the
naval authorities were sold to defendant. The defendant, in turn, sold these rights with R.W. Brown, HDC jones, John
Macleod and TH Twentyman, and retaining one sixth interest, formed Manila Salvage Association.

ISSUE: WON officers or directors of the corporation may purchase the corporate property?

HELD: Yes. While a corporation remains solvent, we can see no reason why a director or officer, by the authority
of a majority of the stockholders or board of managers, may not deal with the corporation, loan it money or buy
property from it, in like manner as a stranger. So long as a purely private corporation remains solvent, its directors
are agents or trustees for the stockholders. They owe no duties or obligations to others. But the moment such a
corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the
corporation or not, and must manage its property and assets with strict regard to their interest; and if they are
themselves creditors while the insolvent corporation is under their management, they will not be permitted to
secure to themselves by purchasing the corporate property or otherwise any personal advantage over the other
creditors. Nevertheless, a director or officer may in good faith and for an adequate consideration purchase from a
majority of the directors or stockholders the property even of an insolvent corporation, and a sale thus made to
him is valid and binding upon the minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury,
supra; Drury vs. Cross, 7 Wall., 299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New Hamphshire
Insurance Company, 43 N. H., 263; Morawetz on Corporations (first edition), sec. 579; Haywood vs. Lincoln Lumber
Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage Company, 21 Fed. Rep.,
577.)

In the case of the Twin-Lick Oil Company vs. Marbury, he court said:

That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings with the
subject-matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is
viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the
soundest morality, and which has received the clearest recognition in this court and others. (Koehler vs. Iron., 2
Black, 715; Drury vs. Cross, 7 Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30
Barb., 553; Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general doctrine, however, in regard to
contracts of this class, is, not that they are absolutely void, but that they are voidable at the election of the
party whose interest has been so represented by the party claiming under it. We say, this is the general rule;
for there may be cases where such contracts would be void ab initio; as when an agent to sell buys of himself,
and by his power of attorney conveys to himself that which he was authorized to sell. but even here, acts which
amount t a ratification by the principal may validate the sale
The sale or transfer of the corporate property in the case at bar was made by three directors who were at the
same time a majority of stockholders. If a majority of the stockholders have a clear and a better right to sell the
corporate property than a majority of the directors, then it can be said that a majority of the stockholders made
this sale or transfer to the defendant McCullough.

What were the circumstances under which said sale was made? The corporation had been going from bad to
worse. The work of trying to raise the sunken Spanish fleet had been for several months abandoned. The
corporation under the management of the plaintiff had entirely failed in this undertaking. It had broken its
contract with the naval authorities and the $10,000 Mexican currency deposited had been confiscated. It had no
money. It was considerably in debt. It was a losing concern and a financial failure. To continue its operation
meant more losses. Success was impossible. The corporation was civilly dead and had passed into the limbo of
utter insolvency. The majority of the stockholders or directors sold the assets of this corporation, thereby
relieving themselves and the plaintiff of all responsibility. This was only the wise and sensible thing for them to
do. They acted in perfectly good faith and for the best interests of all the stockholders. "It would be a harsh rule
that would permit one stockholder, or any minority of stockholders to hold a majority to their investment where
a continuation of the business would be at a loss and where there was no prospect or hope that the enterprise
would be profitable."

We therefore conclude that the sale or transfer made by the quorum of the board of directors a majority of the
stockholders is valid and binding upon the majority-the plaintiff.

H. INTERLOCKING DIRECTORS

An interlocking director is a director in one corporation who deals or transacts with another corporation of which
he is also a director. In such case, there may effectively be a dual agency, a divided allegiance where allegiance
in one corporation may subordinated to the other.

The prevailing view is that these contracts entered into where there is an interlocking director is not voidable
merely by reason of conflicting duties or interest as to corporations represented, even when a majority or all of
the directors are common to both corporations. It is recognized that such will be upheld if there is no bad faith or
unfairness or collusion.

Sec. 33. Contracts between corporations with interlocking directors. (1) Except in cases
of fraud, and provided (2) the contract is fair and reasonable under the circumstances, a contract between
two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided,
That if the interest of the interlocking director in one corporation is substantial and his interest in the other
corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar
as the latter corporation or corporations are concerned.

Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be considered substantial for
purposes of interlocking directors.

NOTE:
1. The contract between corporations with interlocking director is valid absent fraud and provided it is
reasonable under the circumstances;
2. If the interest of the interlocking director in one corporation exceeds 20% and in the other merely nominal,
the contract becomes voidable at the latter corporations option. In effect, the director would be treated as a
self-dealing director under Sec. 32;
3. If the interest in both companies is either both substantial or both nominal, Sec. 33 will apply.

I. DERIVATIVE SUIT

In case of a wrongful or fraudulent act of a director, officer or agent, stockholders have the following options:
1. Individual or Personal Action for direct injury to his rights, such as denial of his right to inspect corporate
books and records or pre-emptive rights;
2. Representative or Class Suit in which one or more members of a class
sue for themselves as a class or for all to whom the right was denied, either as an individual action or a
derivative suit; and a
3. Derivative Suit an action based on injury to the corporation to enforce a corporate right wherein the
corporation itself is joined as a necessary party, and recovery is in favor of and for the corporation. It is a suit
granted to any stockholder to institute a case to remedy a wrong done directly to the corporation and indirectly
to stockholders.

CANDIDO PASCUAL, plaintiff-appellant,

vs.
EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees
(GR No. L-5174; 19 Phil. 83; March 17, 1911)

FACTS: During 1903-1907, the defendant-appellees, without the knowledge and acquiescence of the stockholders
deducted their compensation from gross income instead of from the net profits of the bank, the same with their
predecessors for the years 1899-1902.
Plaintiff-appellant brings this action in his own right as a stockholder of the bank, for the benefit of the bank and
all the stockholders, in behalf of the corporation, which, even though, nominally a defendant, is to all intents and
purposes the real plaintiff in this case as shown in the prayer of the complaint.

ISSUE: WON plaintiff has capacity to sue?

HELD: Yes. In suits of this character the corporation itself and not the plaintiff stockholder is the real party in interest.
The rights of the individual stockholder are merged into that of the corporation. It is a universally recognized doctrine
that a stockholder in a corporation has no title legal or equitable to the corporate property; that both of these are in
the corporation itself for the benefit of all the stockholders. Text writers illustrate this rule by the familiar example of
one person or entity owning all the stock and still having no greater or essentially different title than if he owned but
one single share. Since, therefore, the stockholder has no title, it is evident that what he does have, with respect to
the corporation and his fellow stockholder, are certain rights sui generis. These rights are generally enumerated as
being, first, to have a certificate or other evidence of his status as stockholder issued to him; second, to vote at
meetings of the corporation; third, to receive his proportionate share of the profits of the corporation; and lastly, to
participate proportionately in the distribution of the corporate assets upon the dissolution or winding up. (Purdy's
Beach on Private Corporations, sec. 554.)

The right of individual stockholders to maintain suits for and on behalf of the corporation was denied until within a
comparatively short time, but his right is now no longer doubted. Accordingly, in 1843, in the leading case of Foss
vs. Harbottle, a stockholder brought suit in the name of himself and other defrauded stockholders, and for the
benefit of the corporation, against the directors, for a breach of their duty to the corporation. This case was decided
against the complaining stockholder, on the ground that the complainant had not proved that the corporation itself
was under the control of the guilty parties, and had not proved that it was unable to institute suit. The court,
however, broadly intimated that a case might arise when a suit instituted by defrauded stockholders would be
entertained by the court and redress given. Acting upon this suggestion, and impelled by the utter inadequacy of
suits instituted by the corporation, defrauded stockholders continued to institute these suits and to urge the courts
of equity to grant relief. These efforts were unsuccessful in clearly establishing the right of stockholders herein until
the cases of Atwol against Merriwether, in England, 1867, and of Dodge vs. Woolsey, in this country, in 1855. These
two great and leading cases have firmly established the law for England and America, that where corporate
directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence,
and the corporation is unable or unwilling to institute suit to remedy the wrong, a single stockholder
may institute that suit, suing on behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to
the stockholders.

So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank (corporation) has a right to
maintain a suit for and on behalf of the bank, but the extent of such a right must depend upon when, how, and for
what purpose he acquired the shares which he now owns. In the determination of these questions we can not see
how, if it be true that the bank is a quasi-public institution, it can affect in any way the final result.

It is alleged that the plaintiff became a stockholder on the 13th of November, 1903; that the defendants, as
members of the board of directors and board of government, respectively, during each and all the years 1903,
1904, 1905, 1906, and 1907, did fraudulently, and to the great prejudice of the bank and its stockholders,
appropriate to their own use from the profits of the bank sums of money amounting approximately to P20,000 per
annum.

It is self-evident that the plaintiff in the case at bar was not, before he acquired in September, 1903, the shares
which he now owns, injured or affected in any manner by the transactions set forth in the second cause of action.
His vendor could have complained of these transactions, but he did not choose to do so. The discretion whether to
sue to set them aside, or to acquiesce in and agree to them, is, in our opinion, incapable of transfer. If the plaintiff
himself had been injured by the acts of defendants' predecessors that is another matter. He ought to take things
as he found them when he voluntarily acquired his ten shares. If he was defrauded in the purchase of these
shares he should sue his vendor. (Thus, he may sue for the second half of 1903 to 1907 but not for the years 1989
to the first half of 1903.)

So it seems to be settled by the Supreme Court of the United States, as a matter of substantive law, that a
stockholder in a corporation who was not such at the time of the transactions complained of, or whose shares had
not devolved upon him since by operation of law, cannot maintain suits of this character, unless such transactions
continue and are injurious to the stockholder, or affect him especially and specifically in some other way.

HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W. ROBINSON, plaintiffs-appellants,
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED F. KELLY, JOHN W. MEARS
and CHARLES D. MACINTOSH, defendants-appellees.
(GR No. L-25241; 49 Phil. 512; Nov. 3, 1926)
FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and Company (Company), entered into a
Memorandum of Agreement and Voting Trust Agreement with defendant Asia Banking Corporation (Bank) with the
understanding that it was intended for the protection of all parties thereto from outside creditors, but that they
were not intended to be enforced according to the letter thereof, and that they did not contain the true agreement
between the Bank and the Company which was to finance the company without interference from the above-
named creditors.

That shortly after, Mullen caused the removal of the plaintiffs as directors of the Company and their
replacement. The defendants thereafter gave pledges and mortgages from the Company to the Bank and
entered into contracts as directed by the Bank, and permitted the Bank to foreclose the same and to sell the
property of the Company itself and permitted the Bank to institute suits against the Company, in which the
Company was not represented by anyone having its interest at heart and in which reason the Bank occupied
both plaintiff and defendant and tricked and deluded the courts into giving judgment in which the rights of the
real parties were concealed and unknown to the courts.

Thereafter, defendants incorporated Philippine Motors Corporation where all the assets and goodwill of the
Company were transferred by the Bank.

ISSUE: WON the plaintiffs have the legal capacity to bring an action?
HELD: Yes. Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to
the corporation, but that the action must be brought by the Board of Directors, the appellees argue and the court
below held that the corporation Teal and Company is a necessary party plaintiff and that the plaintiff
stockholders, not having made any demand on the Board to bring the action, are not the proper parties plaintiff.
But, like most rules, the rule in question has its exceptions. It is alleged in the complaint and, consequently,
admitted through the demurrer that the corporation Teal and Company is under the complete control of the
principal defendants in the case, and, in these circumstances, it is obvious that a demand upon the
Board of Directors to institute an action and prosecute the same effectively would have been
useless, and the law does not require litigants to perform useless acts. (Exchange bank of Wewoka vs.
Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden,
106 Cal., 329; Glenn vs. Kittaning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water Company, 104 U. S.,
450.)

The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors Corporation,
had no legal right to proceed against that corporation in the manner suggested in the complaint evidently rest upon
a misconception of the character of the action. In this proceeding it was necessary for the plaintiffs to set forth in
full the history of the various transactions which eventually led to the alleged loss of their property and, in making a
full disclosure, references to the Philippine Motors Corporation appear to have been inevitable. It is to be noted that
the plaintiffs seek no judgment against the corporation itself at this stage of the proceedings.

In our opinion the plaintiffs state a good cause of action for equitable relief and their complaint is not in any respect
fatally defective. The judgment of the court below is therefore reversed, the defendants demurrer is overruled, and
it is ordered that the return of the record to the Court within ten days from the return of the record to the Court of
First Instance. So ordered

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant,

vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN, THE BOARD OF DIRECTORS OF THE REPUBLIC BANK
AND THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees
(GR No. L-22399; 19 SCRA 671; March 30, 1967)

FACTS: Damaso Perez, a stockholder of Republic Bank, instituted a derivative suit against defendant Pablo Roman,
then President of the Bank, for granting certain loans to fictitious and non-existing persons and to their close
friends, relatives and/or employees, who were in reality their dummies on the basis of fictitious or inflated appraised
value of real estate properties, in connivance with other officials.

The complaint alleged that Miguel Cuaderno, then Central Bank Governor, acting upon the complaint, and the
Monetary Board ordered an investigation and found violations of the General Banking Act, but no information was
filed until his retirement; that to neutralize the impending action against him, Pablo Roman engaged Miguel
Cuaderno as technical consultant and selected Bienvenido Dizon as Chairman of the Board of the Bank; that such
appointment was done in bad faith and without intention to protect the interest of the Bank but were only prompted
to protect Pablo Roman.

The complaint, therefore, prayed for a writ of preliminary injunction against eh Monetary Board in confirming such
appointments, but was dismissed by the lower court.

ISSUE: WON the court below erred in dismissing the complaint?

HELD: Yes. The defendants mainly controvert the right of plaintiff to question the appointment and selection of
defendants Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as
stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an individual
stockholder is permitted to institute a derivative or representative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever (1) the officials of
the corporation refuse to sue, or (2) are the ones to be sued or (3) hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking
Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's
action here is precisely in conformity, with these principles. He is neither alleging nor vindicating his own
individual interest or prejudice, but the interest of the
Republic Bank and the damage caused to it. The action he has brought is a derivative one, expressly
manifested to be for and in behalf of the Republic Bank, because it was futile to demand action by the
corporation, since its Directors were nominees and creatures of defendant Pablo Roman (Complaint, p.
6). The frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of Bienvenido Dizon
to head the Board of Directors of the Republic Bank, were made only to shield Pablo Roman from criminal prosecution
and not to further the interests of the Bank, and avers that both men are Roman's alter egos. There is no denying
that the facts thus pleaded in the complaint constitute a cause of action for the bank: if the questioned appointments
were made solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures and
nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an unlawful wastage or diversion of
corporate funds, since the Republic Bank would have no interest in shielding Roman, and the directors in approving
the appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the appointments,
enjoin disbursement of its funds to pay them, and recover those paid out for the purpose, as prayed for in the
complaint in this case (Angeles vs. Santos, supra.).

Defendants urge that the action is improper because the plaintiff was not authorized by the corporation to bring suit
in its behalf. Any such authority could not be expected as the suit is aimed to nullify the action taken by the
manager and the board of directors of the Republic Bank; and any demand for intra-corporate remedy would be
futile, as expressly pleaded in the complaint. These circumstances permit a stockholder to bring a derivative suit
(Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to make common cause with
plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no ground for denying him
relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings for the absence of other
stockholders to be of any significance, no issues having even been joined.

ISSUE2: WON the Corporation should be a plaintiff or defendant?

HELD2: The English practice is to make the corporation a party plaintiff, while in the United States, the usage leans
in favor of its being joined as party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can be raised
against either method. (1) Absence of corporate authority would seem to militate against making the
corporation a party plaintiff, while (2) joining it as defendant places the entity in the awkward position
of resisting an action instituted for its benefit. What is important is that the corporation' should be
made a party, in order to make the Court's judgment binding upon it, and thus bar future relitigation
of the issues. On what side the corporation appears loses importance when it is considered that it lay
within the power of the trial court to direct the making of such amendments of the pleadings, by
adding or dropping parties, as may be required in the interest of justice (Revised Rule 3, sec. 11).
Misjoinder of parties is not a ground to dismiss an action . (Ibid.)

ISSUE3: WON the action of the plaintiff amounts to a quo warranto proceeding?

HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of the Republic Bank's board of directors.
The suit is aimed at preventing the waste or diversion of corporate funds in paying officers appointed solely to
protect Pablo Roman from criminal prosecution, and not to carry on the corporation's bank business. Whether the
complaint's allegations to such effect are true or not must be determined after due hearing.

WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under Compensation of Directors)
Petitioners assert that the motion for reconsideration of the civil aspect of the RTC decision acquitting respondents
is a derivative suit brought by them as minority stockholders of WIT for and on behalf of the corporation

ISSUE: WON the appeal may be considered as a derivative action?

HELD: No. A derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a
remedy designed by equity and has been the principal defense of the minority shareholders against
abuses by the majority. Here, however, the case is not a derivative suit but is merely an appeal on the civil
aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public
document. Among the basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege in his complaint before the
proper forum that he is suing on a derivative cause of action on behalf of the corporation and all
other shareholders similarly situated who wish to join . This is necessary to vest jurisdiction upon the tribunal
in line with the rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasi-judicial
body concerned over the subject matter and nature of the action. This was not complied with by the petitioners
either in their complaint before the court a quo nor in the instant petition which, in part, merely states that "this is
a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal
Cases Nos. 37097 and 37098" since the trial court's judgment of acquittal failed to impose any civil liability against
the private respondents. By no amount of equity considerations, if at all deserved, can a mere appeal on the civil
aspect of a criminal case be treated as a derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not, the same
is outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction to entertain
the complaint. The ease should have been filed with the Securities and Exchange Commission (SEC) which
exercises original and exclusive jurisdiction over derivative suits, they being intra-corporate disputes, per Section 5
(b) of P.D. No. 902-A.

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners,

vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO
EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR., respondents.
(GR No. 85339; 176 SCRA 447; Aug. 11, 1989)

FACTS: Eduardo de los Angeles was a director appointed by PCGG who sequestered the shares of
Andres Soriano III claiming it to belong to Eduardo Conjuangco, a close associate and dummy of then
President Marcos. De los Angeles initiated a derivative suit against herein respondents, in behalf of
SMC, for the revocation of a Board Resolution adopted to assume the loans incurred by Neptunia
Corporation, a foreign company, said to be a wholly-owned subsidiary of SMC. The action was
dismissed by the SEC on the grounds that De los Angeles does not have adequate shares to represent
the interest of the stockholders and that his assumed role as a PCGG appointed director is
inconsistent with his assumed role as a representative of minority stockholders.

ISSUE: WON De Los Angeles can institute a derivative suit?

ISSUE: WON Chase has capacity to institute a derivative suit?

HELD: Yes. The theory that de los Angeles has no personality to bring suit in behalf of the corporation
because his stockholding is minuscule, and there is a "conflict of interest" between him and the
PCGG cannot be sustained.

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only.
00001644% of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly
and adequately represent the interests of the minority stockholders. The implicit argument that a
stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or
significant block of stock finds no support whatever in the law. The requisites for a derivative suit
are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained
of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies , i.e., has made a demand on the board of directors for
the appropriate relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation , the wrongdoing or harm having been, or being
caused to the corporation and not to the particular stockholder bringing the suit.

The bona fide ownership by a stockholder of stock in his own right suffices to invest him with
standing to bring a derivative action for the benefit of the corporation . The number of his shares is
immaterial since he is not suing in his own behalf, or for the protection or vindication of his own
particular right, or the redress of a wrong committed against him, individually, but in behalf and for
the benefit of the corporation.

Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that de los Angeles now sits
in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is legally obliged to vote as
the PCGG would have him do, that he cannot legitimately take a position inconsistent with that of the PCGG, or
that, not having been elected by the minority stockholders, his vote would necessarily never consider the
latter's interests. The proposition is not only logically indefensible, non sequitur, but also constitutes an
erroneous conception of a director's role and function, it being plainly a director's duty to vote according to his
own independent judgment and his own conscience as to what is in the best interests of the company.
Moreover, it is undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in
his own right, as regards which he cannot from any aspect be deemed to be "beholden" to the PCGG, his
ownership of these shares being precisely what he invokes as the source of his authority to bring the derivative
suit.
 ELTON W. CHASE, as minority Stockholder and on behalf of other Stockholders similarly situated
and for the benefi t of AMERICAN MACHINERY AND PARTS MANUFACTURING, INC., plaintiff -appellant,
vs.
DR. VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR., JULIO B. FRANCIA and DOLORES A. BUENCAMINO,
respondents.
(GR No. L-20395; 136 SCRA 365; May 13, 1985)

FACTS: Herein plaintiff-appellant Elton Chase, entered into an agreement with Dr. Buencamino and William
Cranker (already business partners) for the establishment of a factory in Manila called American Machinery
Engineering Parts, Inc. (Amparts), where chase was to transfer his tractor plant, ship his machineries from his
former plant in America to Manila, install said machineries at Amparts plant and he is to be the production
manager of Amparts.

For some time the three maintained harmonious relations until Chase tendered his resignation which was
accepted by Buencamino and Cranker. Chase initially filed a case in California against Cranker for the recovery
of the purchase price of his plant, but this died a natural death. Eventually, he filed a case before the CFI
alleging various acts of frauds allegedly committed by the other two.

HELD: Yes. The evidence of defendants proves very clearly that right from the start, Chase was by them recognized
as a stockholder and initial incorporator with 600 paid up shares representing a 1/3 interest in Amparts, and that
would be enough for Chase to have the correct personality to institute this derivative suit; the second place, it also
appears apparently undenied that Chase did not win in California so that he did not recover the $150,000.00 that he
had prayed for there against Overseas, which if he had would really in the mind of the Court have put him in
estoppel to intervene in any manner as incorporator or stockholder of Amparts; and in the third place and most
important it should not be forgotten that Chase has filed the present case not for his personal benefit, but for the
benefit of Amparts, so that to the Court the argument of estoppel as against him would appear to be out of place;
the estoppel to be valid as a defense must be an estoppel against Amparts itself; the long and short of it is that the
Court is impelled and constrained to discard all the other defenses set up by Dr. Buencamino on the principal
complaint; the result of all these would be to sustain so far, the position of Chase that Dr. Buencamino must account
for the P570,000.00 used to pay the second series of payment on the subscription, the P330,000.00 used in paying
the lsst series on the subscription, plus another sum of P245,000.00 entered as loan on his favor and against
Amparts, for the sum of P434,000.00 earned in the blackmarketing of the excess of $140,000.00 dollars on the
forwarding costs and promotional expenses, for the sum of P391,200.00 earned in the blackmarketing of the excess
of $117,000.00 in the transaction with Bertoni and Cotti, and all these would reach a total of P1,970,200.00; and as
the appropriation of the profits for himself was a quasi-delict, the liability therefore assuming that it had been done
with the cooperation of Cranker would have to be solidary, 2194 New Civil Code.

CATALINA R. REYES, petitioner,

vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of
Manila, Branch XIII and FRANCISCA R. JUSTINIANI, respondents.
(GR No. L-16982; 3 SCRA 198; Sept. 30, 1961)

FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New York for raw materials but were found out
to consist of already finished product for which reason the Central Bank of the Philippines stopped all dollar
allocations for raw materials for the corporation which necessarily led to the paralyzation of the operations. It was
alleged that the supplier of the said finished goods was United Commercial Company of New York in which Dalamal,
appointed by the BOD of the Textile Mills as co-manager, had inrterests and that the letter of credit for said goods
were guaranteed by the Indian Commercial Company and Indian Traders in which Dalamal likewise has interests. It
was further alleged that the sale of the finished products was the business of Indian Commercial Company of Manila
who cannot obtain dollar allocations for imporations of finished goods.

An action for the appointment of a receiver was filed before the trial court after the BOD refused to proceed against
Dalamal, which was granted.

ISSUE: WON Justiniani may be allowed to institute the case for receivership and damages?

HELD: Yes. It is not denied by petitioner that the allocation of dollars to the corporation for the importation of raw
materials was suspended. In the eyes of the court below, as well as in our own, the importation of textiles instead of
raw materials, as well as the failure of the Board of Directors to take action against those directly responsible for the
misuse of dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of
trust was committed which justified the derivative suit by a minority stockholder on behalf of the corporation.

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust not of
mere error of judgment or abuse of discretion and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders. An illustration of a suit of this kind is found in the case of Pascual vs. Del
Saz Orozco (19 Phil. 82), decided by this Court as early as 1911. In that case, the Banco Espaol-Filipino suffered
heavy losses due to fraudulent connivance between a depositor and an employee of the bank, which losses, it was
contended, could have been avoided if the president and directors had been more vigilant in the administration of
the affairs of the bank. The stockholders constituting the minority brought a suit in behalf of the bank against the
directors to recover damages, and this over the objection of the majority of the stockholders and the directors. This
court held that the suit could properly be maintained. (64 Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August
31, 1937] p. 697).

The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of two years is
also without merit. During that period of time respondent had the right to assume and expect that the directors
would remedy the anomalous situation of the corporation brought about by their own wrong doing. Only after such
period of time had elapsed could respondent conclude that the directors were remiss in their duty to protect the
corporation property and business.

We are led to agree with the judge below that the appointment of a receiver was not only expedient but also
necessary to restore the faith and confidence of the Central Bank authorities in the administration of the affairs of
the corporation, thus ultimately leading to a restoration of the dollar allocation so essential to the operation of the
textile mills.

RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE LA RAMA, and the HEIRS OF
MERCEDES DE LA RAMA-BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of Negros Occidental, Branch II,
BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES respondents.
(GR No. -40620; 90 SCRA 40; May 6, 1979)

FACTS: A writ of prelimiary injunction was filed by herein respondents as purchasers of 1,328 shares of stock of
Inocented De La Rama, inc. after herein petitioners surreptitiously met and authorized the sale of 823 shares to
forestall the petitioners takeover from the previous president and vice-president (sellers of the 1,328 shares), in
violation of their pre-emptive right. The trial court ruled in favor of respondents. Later on, private respondents
entered into a compromise agreement with the recipients for the transfer of the 823 shares, against which the
petitioners filed a motion to dismiss which was denied.

ISSUE: WON a derivative suit is the more proper action that should have been filed by respondents?

HELD: No. The petitioners contend that the proper remedy of the plaintiffs would be to institute a derivative suit
against the petitioners in the name of the corporation in order to secure a binding relief after exhausting all the
possible remedies available within the corporation.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stock in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are
the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest. In the case at bar, however, the plaintiffs are
alleging and vindicating their own individual interests or prejudice, and not that of the corporation. At
any rate, it is yet too early in the proceedings since the issues have not been joined. Besides, misjoinder of parties
is not a ground to dismiss an action.

JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL SANTOS, defendant-appelle (86 Phil. 387; May
19, 1950) Juan D. Evangelista, et. al. are minority stockholders of the Vitali Lumber Company, Inc., while Rafael
Santos holds more than 50% of the stocks of said corporation and also is and always has been the president, manager,
and treasurer thereof. Santos, in such triple capacity, through fault, neglect, and abandonment allowed its lumber
concession to lapse and its properties and assets, among them machineries, buildings, warehouses, trucks, etc., to
disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks.

Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to render an account of his administration of
the corporate affairs and assets: (2) to pay plaintiffs the value of their respective participation in said assets on the
basis of the value of the stocks held by each of them; and (3) to pay the costs of suit. Evangelista, et. al. also ask
for such other remedy as may be and equitable. The trial court dismissed the action on the ground of improper
venue and lack of cause of action.

ISSUE: WON plaintiffs have a right to bring the action for their benefit?

HELD: No. The complaint shows that the action is for damages resulting from mismanagement of the affairs
and assets of the corporation by its principal officer, it being alleged that defendant's maladministration has
brought about the ruin of the corporation and the consequent loss of value of its stocks. The injury complained
of is thus primarily to that of the corporation, so that the suit for the damages claimed should be by corporation
rather than by the stockholders (3 Fletcher, Cyclopedia of