Corporation Law Midterms Case Digests (Atty.
Quimson)
Harden v. Benguet Consolidated Mining Co.
Doctrine: As it was the intention of our lawmakers to stimulate the
introduction of the American corporation into Philippine law in the place of
sociedad anonima, it was necessary to make certain adjustments resulting
from the continued co-existence for a time of the 2 forms of commercial
entities.
A sociedad anonima is something very much like the English joint stock
company, with features resembling those of both partnership and the
corporation. However, with the enactment of Act No. 1459, or the
Corporation Law, there is an evident purpose to introduce American
corporation into the Philippines as a standard commercial entity and to
hasten the day when the sociedad anonima of the Spanish law would be
obsolete.
Facts:
Benguet Consolidated Mining Co was organized in the year 1903 as a
sociedad anonima in conformity with the provisions of the Spanish
law; while the Balatoc Mining Co. was organized in December 1925 as
a corporation in conformity with the provisions of the Corporation
Law.
Balatoc Mining, being largely undeveloped, entered into a contract
with Benguet Consolidated to secure the capital necessary to develop
their property. The principal features of said contract were that
Benguet company was to proceed with the development and
construction of a milling plant for the Balatoc Mine and to
construct an appropriate power plant for a consideration that
Benguet Company was to receive shares of a par value of
P600,000 in payment.
In compensation for the work, a certificate of stock worth
600,000 was delivered to Benguet Company. But as soon as the
success of the development had become apparent, Balatoc Mining filed
an action in court for the principal purpose of restoration of the
sum of money it paid to Benguet and the annulment of their
contract on the ground that the Corporation Law of the
country makes it unlawful for any member of a corporation
engaged in agriculture or mining and for any corporation
organized for any purpose except irrigation to be in any wise
interested in any other corporation engaged in agriculture
and mining.
Whether or not Benguet Company, organized as a sociedad anonima,
is a corporation within the meaning of the language used by the
Congress and later by the Legislature, prohibiting a mining
corporation from being interested in another mining corporation.
Ratio:
When the Philippine Bill was approved in 1902, the congress inserted
certain provisions (section 74 and 75 of the Act) were inserted. Section
75, which still remains in the law, as amended reads, "it shall be
unlawful for any member of a corporation engaged in agriculture or
mining and for any corporation organized for any purpose except
irrigation to be in any wise interested in any other corporation engaged
in agriculture or mining". Subsequently, the Corporation law was
passed with the evident purpose of setting up the corporation as the
standard commercial entity of the country.
The word corporation has been used loosely to refer to sociedad
anonima. But when the word corporation is used in the sense
of a sociedad anonima, it should be associated with the
Spanish expression either in parenthesis or connected by the
word "or". This device has been adopted in the aforequoted
provision. In drafting the Corporation Law, the words in Section 75
have been inserted bodily and it is of course obvious that whatever
meaning originally attached to the provision, the same
significance should be attached to Section 13 of the
Corporation Law insofar as such provisions may be
applicable.
Sociedad anonimas previously created in the islands are given the
option to continue business as such or to reform and organize under
the provisions of the Law. If a sociedad anonima continues to operate
as such, instead of reforming and reorganizing under the Corporation
Law, it will be continued to be governed by the laws that were in force
prior to the passage of this Act in relation to their organization and
method of transacting business , but their relations to the public
and public officials shall be governed by the provisions of
this act.
As to other issues, the court held that Benguet Company has
committed no civil wrong against the plaintiffs, and if a public wrong
was committed, that Balatoc was an active inducer of the commission
of that wrong in that a contract is performed on both sides. Balatoc
was found to have no right of action against Benguet.
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Palacio v. Fely Transportation Company
Doctrine: The defendant corporation in this case should not be heard to say
that it has a personality separate and distinct from its members when to
allow it to do so would be to sanction the use of the fiction of corporate entity
as a shield to further an end subversive of justice.
Facts:
Defendant company herein hired one Carillo as its driver. While
driving, he willfully, unlawfully and feloniously and in a negligent and
reckless manner, ran over a child Mario Palacio (son of Gregorio
Palacio, plaintiff in this case). The son suffered a simple fracture of the
right temor and was hospitalized for a period of 5 months.
By reason of this, Gregorio Palacio was forced to sell one air
compressor and one heavy duty electric drill for a sacrifice sale. In
answer to the case, Fely Transportation Company alleged that there is
no cause of action and that the sale of the jeepney to one Isabelo
Calingasan to Fely Transportation was made long after the
conviction of the negligent driver. Fely Transpo alleges that this
case was clearly an unfounded civil action filed merely to harass them.
The lower court, in the criminal case against the negligent driver, held
that the person subsidiarily liable is the employer of the driver and not
the defendant corporation. Thus, this appeal.
Issue:
Whether or not the employer is subsidiarily liable and not Fely
Transportation.
Ratio:
It is evident that Isabelo's main purpose in forming the
corporation was to evade his subsidiary civil liability. This can
be seen from the fact that the incorporators of the "corporation" are
Isabelo, his wife, his son, Dr. Calingasan and his two daughters.
Furthermore, the failure of the defendant corporation to prove that it
has other property other than the jeepney strengthens the conviction
that its formation was for the purpose of evading civil liability.
The defendant corporation in this case should not be heard to say that
it has a personality separate and distinct from its members when to
allow it to do so would be to sanction the use of the fiction of corporate
entity as a shield to further an end subversive of justice.
Guanzon and Sons Inc. v. Register of Deeds of Manila
Doctrine: Where the purpose of the liquidation as well as the distribution of
the assets of the corporation is to transfer their title from the corporation to
the stockholders in proportion to their shareholdings, that transfer cannot be
effected without the corresponding deed of conveyance from the corporation
to the stockholders, and the certificate should be considered as one in the
nature of a transfer or conveyance
Facts:
Guanzon and Sons, through its five stockholders executed a
certificate of liquidation of the assets of the corporation
reciting that by virtue of the resolution, they are dissolving the
corporation and are seeking to have the assets and real
properties distributed among themselves. Such certificate of
liquidation was presented to the Registry of Deeds of Manila, but it
was denied registration on the ground that the number of parcels need
be certified, the registration fees need be paid, documentary stamps
need be attached, and a judgment of the court approving the
dissolution and directing the disposition need be presented.
In their defense, the commissioner of land registration asserts that the
certificate of liquidation in question, although it involves a distribution
of assets, is actually a transfer of said assets from the
corporation to the stockholders. Hence, a deed of
conveyance need be presented in order to be permitted
registration.
On the other hand, the corporation claims that it is merely a
distribution of assets. Hence, there need not be a deed of conveyance
and contain a statement of the number of parcel of land involved.
Issue:
Whether or not the liquidation and distribution of assets is actually a
transfer or conveyance.
Ratio:
It is a transfer or conveyance. Properties registered in the name of
the corporation are owned by it as an entity separate and distinct from
its members. The corporation has property of its own which consists
chiefly of real estate. A share of stock is an aliquot part of the
corporation's property or the right to share in its proceeds to
that extent. The holder thereof is not the owner of any part of the
capital of the corporation. Nor is he entitled to the possession of any
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Corporation Law Midterms Case Digests (Atty. Quimson)
definite portion of its property or assets. He is not a co-owner or
tenant. Hence, it is in the nature of a transfer, not a partition.
The purpose of liquidation and distribution is to transfer the title
from the corporation to the stockholders in proportion to
their shareholdings. It is fair and logical to consider the
certificate of liquidation as one in the nature of a transfer or
conveyance.
Remo v. IAC
Doctrine: A corporation is an entity separate and distinct from its
stockholders. The law treats it as though it were a person by process of fiction
or by regarding it as an artificial person distinct and separate from its
individual stockholders. The corporate fiction may be disregarded when it is
used to defeat public convenience, justify wrong, protect fraud, or defend
crime in which instances, the law will regard the corporation as an
association of persons, or in case of 2 corporations, will merge them into one.
It may also be disregarded when it is the mere alter ego or business conduit of
a person.
Facts:
The Board of Directors of Akron Customs, composed of petitioner
Remo and Coprada (as president), among others, adopted a resolution
authorizing the purchase of 13 trucks for use in its business to
be paid out of a loan the corporation may secure from any
lending institution from Marcha Transport. In their contract, it
is stated that in the event that Akron fails to pay the balance of the
purchase price within 60 days, the balance shall constitute as a chattel
mortgage lien covering the cargo trucks and the parties are to be
allowed an extension of 30 days and thereafter, the private respondent
may ask for a revocation of the contract and the reconveyance of all
said trucks. Such obligation was further secured by a promissory
note executed by Coprada in favor of Akron.
For failure to comply with their obligations, Marcha Transpo filed a
complaint for the recovery of the amount or the return of the 13 trucks
with damages against Akron and its officers and directors.
Meanwhile, Remo sold all his shared in Akron to Coprada
and it appears that Akron amended its articles of
incorporation thereby changing its name to Akron Transport
International which assumed the liability of Akron private
respondent. The intermediate appellate court thereafter rendered
a decision ordering the stockholders to jointly and severally
pay Marcha Transpo the amount of the contract plus
damages.
Issue:
Whether or not the corporate fiction should be disregarded in this case
and hold Remo personally liable for the obligation of the Corporation
Ratio:
There is no cogent basis to pierce the corporate veil of Akron
and hold petitioner personally liable for its obligation to
private respondent. While it is true that at the time the contract
was entered into, Remo was a member of the Board of the corporation
and that he participated in the adoption of the resolution, it does not
appear that said resolution was intended to defraud anyone
and more particularly private respondent. It was Coprada who
negotiated with said respondent for the purchase of the trucks and it
was also Coprada who signed the promissory note to secure the
obligation.
If there was any fraud or misrepresentation, it is Coprada who should
account for the same and not Remo. Fraud must be established by
clear and convincing evidence. If at all, the principal character on
whom fault should be attributed is Coprada, whom private respondent
dealt with personally all through out.
As to the amendment of the articles of incorporation, the
new corporation confirmed and assumed the obligation of
the old corporation. There is no indication that Akron did this in
order to evade the payment of its obligation to private respondent.
Pamplona Plantation Company v. Tinghil
Doctrine: The corporate mask may be removes and the corporate veil pierced
when a corporation is the mere alter ego of another. Where badges of fraud
exist, where public convenience is defeated, where a wrong is sought to be
justified thereby, or where a separate corporate identity is used to evade
financial obligations to employees or to third parties, the notion of separate
legal entity should be set aside and the factual truth upheld.
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Facts:
Pamplona Plantations Company Inc. (Pamplona company for brevity)
was organized for the purpose of taking over the operations of the
coconut and sugar plantation of Hacienda Pamplona. When it took
over the operations, it did not absorb all the workers of the
hacienda. Some, however, were hired by the company during
harvest season to perform works related to harvesting.
Thereafter, the Pamplona Plantation Leisure Corporation (Pamplona
corporation for brevity) was established for the purpose of engaging in
the business of operating golf courses, and other complimentary
facilities, among others.
The union workers conducted an organizational meeting. Upon
learning this, the manager of the Pamplona Company did not allow
the workers to work anymore in the plantation. For this
reason, the workers filed a complaint with the NLRC against
the Pamplona Company. However, Tinghil(one of the
workers) amended his complaint and impleaded Pamplona
Corporation.
The NLRC issued a decision and stated that the respondent workers,
except Tinghil, failed to implead the Pamplona Corporation,
which was an indispensable party to the case. The case was
dismissed.
Issue:
Whether or not the case should be dismissed for the non-joinder of the
Pamplona Corporation.
Ratio:
The corporations herein basically have the same
incorporators and directors and are headed by the same
official. Both use only one office and one payroll and are
under one management. The courts therefore may see through the
protective shroud that distinguishes one corporation from a seemingly
separate one. The corporate mask may be removes and the corporate
veil pierced when a corporation is the mere alter ego of another. Where
badges of fraud exist, where public convenience is defeated, where a
wrong is sought to be justified thereby, or where a separate corporate
identity is used to evade financial obligations to employees or to third
parties, the notion of separate legal entity should be set aside and the
factual truth upheld.
The attempt to make the two corporations appear as two
separate entities, insofar as the workers are concerned,
should be viewed as a devious means to defeat the ends of
the law. It is clear in the facts of the case that there was a confusion
on the part of the workers as to who their true and real employer was.
In sum, the courts concluded that, insofar as the workers are
concerned, the company and the corporation were one and the
same. In any case, there is, in fact, no need to implead the leisure
corporation because they are one and the same entity insofar as the
workers are concerned.
As to the issue of whether or not there is an employer-
employee relationship, the court ruled that there is a
relationship. Documents of assignment of tasks prove that there is
an exercise of control and supervision. Proof of existence of such
power is enough. Hence, they were not mere independent contractors.
Jardine Davies, Inc. v. JRB Realty, Inc.
Doctrine: The doctrine of piercing the veil of corporate fiction applies only
when such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime.
A subsidiary has an independent and separate juridical personality distinct
from that of its parent company. Hence, any claim or suit against the latter
does not bind the former and vice versa. To apply said doctrine, there must be
1) control; 2) control was used to commit fraud or wrong; 3) the aforesaid
control and breach of duty must proximately cause the injury or unjust loss
complained of.
The existence of interlocking directors, corporate officers and shareholders,
which the respondent court considered, is not enough justification to pierce
the veil of corporate fiction in the absence of fraud or other public policy
considerations.
Facts:
JRB Realty was a builder of a 9-storey building named Blanco Center
which needed an air conditioning system for the Blanco Law firm at
the second floor of the building. Aircon and Refrigeration Industries
(Aircon) was contracted by JRB for the installation of the air-
conditioners. Upon installation, it was found that the said units could
not bring about the desired cooling temperature. The parties thereby
agreed to replace the units with reciprocating compressors instead.
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Upon delivery of the replacement compressors, TempControl
(subsidiary of Aircon) undertook the maintenance of the units.
Considering that the prescription period was fast approaching, JRB
filed an action for specific performance with damages
against Aircon with damages impleading Jardine Davies Inc.
The reason why they impleaded Jardine Davies was because at the
time the contract was entered into, Aircon was a subsidiary of Jardine
Davies as evidenced by documents and the fact that 4 out of the 7
members of the Board of Aircon, 4 are also of Jardine.
The RTC rendered a decision finding Jardine Davies and Aircon jointly
and severally liable for the obligation. CA affirmed the decision in toto.
Issue:
Whether or not Jardine Davies should be held jointly and severally
liable with Aircon considering that it is not a party to the contract.
Ratio:
While it is true that Aircon is a subsidiary of Jardine Davies,
it does not necessarily follow that Aircon's corporate legal
existence can be disregarded. Aircon is only a subsidiary of
Jardine Davies because Jardine acquired Aircon's majority of capital
stock. However, Jardine does not exercise complete control
over Aircon. Nowhere can it be gathered that the petitioner
manages the business affairs of Aircon. There exists no
management agreement between the 2. They are entirely different
entities with different purposes and natures.
The doctrine of piercing the veil of corporate fiction applies
only when such fiction is used to defeat public convenience,
justify wrong, protect fraud, or defend crime. To warrant the
resort of this remedy, it should be proven that the corporation is being
used as a cloak or cover for fraud or illegality or to work injustice. In
this case, there is no evidence that Aircon was utilized with the
intention of defrauding its creditors. In fact, Aircon complied with its
obligation in good faith pursuant to the contract and even replaced the
defective aircons with compressors (with consent of JRB) when it
failed to reach the desired cooling temperature. After enjoying 10 years
of cooling power, JRB cannot now complain about the performance of
these units nor can it demand a replacement thereof.
Jardine Davies has a separate and distinct legal personality
from that of Aircon, cannot, therefore, be held liable.
Collector of Internal Revenue v. Club Filipino de Cebu
Doctrine: For a stock corporation to exist there must be a compliance with the
following requisites: 1) a capital stock divided into shares; 2) authority to
distribute to the holders of such shares, dividends or allotments of the surplus
profits on the basis of the shares held.
A tax is a burden and, as such, it should not be deemed imposed upon
fraternal, civic, non-profit, non-stock organizations, unless the intent to the
contrary is manifest and patent.
Facts:
Club Filipino de Cebu is a civic corporation organized under the laws
of the Philippines with an authorized capital stock of P22,000 which
was subsequently increased to P200,000. There is no provision
relative to dividends and their distribution although it is
covenanted that upon dissolution, the remaining assets shall
be donated to a charitable Philippine institution in Cebu.
The Club operates a bar restaurant which was a necessary incident to
the operation of the club and its golf course. The club is operated
mainly from the funds derived from membership, fees and dues.
Whatever profits it had, were used to defray its overhead expenses and
to improve the golf course. As a result of their capital surplus,
their stocks increased.
The Club, then, received a letter form the CIR stating that the club has
never paid percentage taxes (which, according to the CIR, the
Club was required to pay as a keeper of restaurant and bars) and was
then asked to pay. Hence, this instant petition for review of
the assessment of the CIR.
Issue:
Whether or not the Club is required to pay percentage taxes under the
Tax Code.
Whether or not the Club is a stock corporation.
Ratio:
The Club derive profit from the operation of its bar and
restaurant, but such fact does not necessarily convert it into
a profit-making enterprise. The bar and restaurant are necessary
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adjuncts of the main purpose of the Club. That a club makes profit
does not make it a profit making club.
The Club is not a stock corporation. What is determinative of
whether it is a stock corporation business it its actual object or purpose
as stated in the articles and by-laws.
For a stock corporation to exist there must be a compliance with the
following requisites: 1) a capital stock divided into shares; 2) authority
to distribute to the holders of such shares, dividends or allotments of
the surplus profits on the basis of the shares held. In this case,
there is nothing in the articles or by-laws which speaks of the
distribution of dividends or surplus. It cannot, therefore, be
considered as a stock corporation, within the contemplation
of the corporation law.
Gonzales v. Philippine National Bank
Doctrine: The right of inspection granted to a stockholder are the following:
1) records must be kept at the principal office of the corporation; 2) inspection
must be made on business days; 3) he may demand a copy of the excerpts of
the records or minutes; 4) refusal to allow such inspection shall subject the
erring officer to civil and criminal liabilities. However, it is now expressly
required as a condition that one requesting must not have been guilty of using
improperly any information secured and that the person asking for such
examination must be acting in good faith and for a legitimate purpose in
making his demand.
The Philippine National bank is not an ordinary corporation. Having a
charter of its own, it is not governed by the Corporation Code of the
Philippines. Corporations shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them, supplemented by
the Corporation Code insofar as they are applicable.
Facts:
Ramon Gonzales requested the Philippine National Bank to allow him
to look into the books and records of the respondent bank in order to
satisfy himself as to the truth of published reports that the respondent
bank has guaranteed the obligation of Southern Negros Development
Corporation, that the bank is a financer of the construction of the
Cebu-Mactan bridge, and the construction of a certain Sugar Mill in
Iloilo. He stated that his request is for the reason that he
wants to inquire into the validity of the transactions, as a
stockholder of the said bank.
Having been denied this request, he filed a petition for mandamus in
court, which was also denied for the reason that he has an improper
motive in asking for an examination of the books and
records which disqualifies him to such right.
Issue:
Whether or not he has the right, solely as a stockholder, to an
examination of the books and records of the bank.
Ratio:
Under the old law, BP 68, the right of inspection is granted to a
stockholder. However, this has been modified under the present
Corporation Code. The right of inspection granted to a stockholder are
the following: 1) records must be kept at the principal office of the
corporation; 2) inspection must be made on business days; 3) he may
demand a copy of the excerpts of the records or minutes; 4) refusal to
allow such inspection shall subject the erring officer to civil and
criminal liabilities. However, it is now expressly required as a
condition that one requesting must not have been guilty of
using improperly any information secured and that the
person asking for such examination must be acting in good
faith and for a legitimate purpose in making his demand.
Being so, he is disqualified from inspecting the books and records.
Admittedly, he sought to be a stockholder in order to pry into the
transactions entered into by the bank. His obvious purpose
was to arm himself with materials which he can use against
the bank for acts done by the latter when he was a total
stranger to the same.
Also, the Philippine National Bank is not governed by the
Corporation Code since it has its own charter. According to its
charter, it is not allowed to disclose information relative to the fund in
its custody to any person except the President of the Philippines or the
Secretary of Finance and the Board of Directors. They are only
compelled to disclose when there is an order issued by a court of
competent jurisdiction.
The Philippine National bank is not an ordinary corporation.
Having a charter of its own, it is not governed by the
Corporation Code of the Philippines. Corporations shall be
governed primarily by the provisions of the special law or
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charter creating them or applicable to them, supplemented
by the Corporation Code insofar as they are applicable.
Sunset View Condominium Corporation v. Campos Jr.
Doctrine: Persons who have not fully paid the purchase price of their units
and are consequently not owners of their units are not members or
shareholders of the petitioner condominium corporation.
Facts:
Sunset View Corporation is a condominium corporation within the
meaning of the law holding title to all the common and limited
common areas of said condominium. Aguilar Bernas Realty and Lim
Siu Leng are assignees of units in the condominium. For failure to pay
the price of the condominium, Sunset filed a case for collection
of assessments levied on the units. However, in both cases, the
courts dismissed it and the parties were directed to ventilate their
controversy with the SEC (allegedly because it is the commission
who has jurisdiction over their intra-corporate dispute).
Respondents herein claim that the courts do not have jurisdiction over
the dispute since, as purchasers of the condominium unit, they are
considered as stockholders of the corporation as provided for
in the Condominium Act. Hence, it is an intra-corporate
dispute under the exclusive jurisdiction of the SEC, not the
regular courts.
Issue:
Whether or not the issue at hand is intra-corporate hence, under the
jurisdiction of the Securities and Exchanges Commission.
Ratio:
Not every purchaser of a condominium unit is a shareholder
of the condominium corporation. The Condominium Act
leaves to the Master Deed the determination when the
shareholding will be transferred to the purchaser of a unit.
The shareholding in the corporation is inseparable from the unit to
which it is only an appurtenant, and that only the owner of a unit is a
shareholder in the corporation.
Furthermore, the share of stock appurtenant to the unit will be
transferred accordingly to the purchaser of the unit only upon full
payment of the purchase price at which time he will also
become the owner of the unit. It is only the owner who is a
shareholder. A purchaser of a unit who has not paid the full purchase
price thereof is not the owner of the unit and consequently is not a
shareholder of the condominium corporation.
This is not an intra-corporate dispute, the buyers not being
shareholders. Hence, falls under the jurisdiction of the
regular courts.
Castillo v. Balinghasay
Doctrine: Unless the class of shares are clearly categorized to be "preferred"
or "redeemable", the shareholders of such class of stocks may not be deprived
of their voting rights.
Facts:
MCPI is a domestic corporation with Class A and Class B shares. At the
time of its incorporation, the old corporation law was still in force and
effect. Under their original articles of incorporation, as approved by
the SEC, only holders of Class A shares can have the right to
vote and the right to be elected as directors or as corporate
officers. Subsequently, the articles went under a number of
amendments. On the third amendment, the last sentence was
amended to read "Except when otherwise provided by law, only
holders of class A shares have the right to vote and the right
to be elected as directors or as corporate officers".
At a shareholders meeting, there were objections as to the prohibition
of holders of Class B shares to vote and B elected. According to
petitioner herein, despite the provisions in the Articles of
Incorporation, it has been the practice in the past to allow holders of
Class B shares to participate in the voting and election. Moreover,
according to them, since the class B shareholders are not
classified as holders of either preferred or redeemable
shares, then it necessarily follows that they are entitled to
vote and to be voted for as directors or officers as owners of
stocks. It was only at that time that they were prohibited to do so.
Nonetheless, the winners in the elections were all Class A holders at
the end of the meeting.
They protested and filed a complaint for injunction, accounting
and damages with the RTC and prayed for the annulment of
the declaration of directors. They also challenged the validity
of the prohibition in the articles of incorporation. The RTC
rendered a decision stating that Class B holders are not entitled to
vote, as stated in the articles.
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Issue:
Whether or not Class B holders are entitled to vote and be voted for
despite the prohibition in the Articles of Incorporation.
Ratio:
One of the rights of a stockholder is the right to participate
in the control and management of the corporation that is
exercised through his vote. The right to vote is inherent and
incidental to the ownership of the stock and as such is a proprietary
right. He cannot be deprived of his right to vote nor may the
right be essentially impaired, either by legislative or by
corporation, without his consent, through amending the
charter or the by-laws.
No share may be deprived of voting rights except those classified as
preferred or redeemable shares unless provided in the Code. Clearly,
as seen in the articles of incorporation, there is nothing on record
to show that Class B shares were categorized as preferred or
redeemable shares. Thus, falling under neither, they are allowed to
exercise their right to vote.
Alhambra Cigar & Cigarette Manufacturing Co v. SEC
Doctrine: No corporation in a state of liquidation can act in any way, much
less amend its articles for the purpose of continuing the business for which it
was established since as a rule, the corporation is ipso facto dissolved as soon
as that time expires.
Facts:
Alhambra Cigar and Cigarette Manufacturing Company (Alhambra for
brevity) was duly incorporated under Philippine laws. It was set to
exist for a period of 50 years from incorporation which already
expired. On the date of expiration, it entered into a state of
liquidation. In order to carry out its business, a new corporation,
Alhambra Industries was formed (for liquidation purposes).
At the time of the 3-year statutory period for liquidation RA 3531 was
enacted into law which amended the law in force and effect.
It empowered domestic private corporations to extend their
period of corporate life beyond the 50 year period fixed by
their articles of incorporation. Seeking to extend the life of
Alhambra, its board adopted a resolution which amended their articles
of incorporation and extended the life of the corporation to a period of
50 years. Such amended was denied by the SEC on the ground
that its term of existence already expired at the time the law
allowing such amendment took effect.
Issue:
Whether or not a corporation may extend its life by amendment of the
articles of incorporation during the 3-year statutory period for
liquidation when its original term of existence already expired?
Ratio:
No. Such new provision is a privilege given to prolong
corporate life under the amendment must be exercised
before the expiry of the term fixed in the articles of
incorporation. A dissolved corporation as a body corporate for 3
years has for its purpose the final closure of its affairs and no other;
the corporation is specially enjoined from continuing the business for
which it is established. Upon dissolution, a corporation became legally
dead for all purposes except for limited and specified purposes
incident to complete liquidation of its affairs. Thus, a moment a
corporation's right to exist ceases, its corporate powers are terminated
just as powers of a natural person to take part in mundane affairs cease
to exist upon his death. The filing and recording of the certificate of
extension after that time cannot relate back to the date of passage of a
resolution by stockholders in favor of the extension to save the life of
the corporation. When the corporate life was ended, there was
nothing left to extend. It only existed for the purpose of
winding up its affairs.
The privilege of extension is purely statutory and generally, these
conditions must be complied with, and the steps necessary to effect the
extension must be taken, during the life of the corporation and before
the expiration of its terms of existence as originally fixed by its charter
or the general law, since, as a rule, the corporation is ipso facto
dissolved as soon as that time expires.
There is a broad distinction between the extension of a charter and the
grant of a new one. To renew a charter is to revive a charter which has
expired. Our law limits itself to extension of corporate
existence. At the time of the passage of the law, Alhambra's
corporate life already expired. It had overstepped the limits
of its limited existence. No life is there to prolong.
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Lanuza v. Court of Appeals
Doctrine: The articles of incorporation has been described as one that defines
the charter of the corporation and the contractual relationships between the
State and the corporation, the stockholders and the State, and between the
corporation and its stockholders.
A stock and transfer book is not in any sense a public record and thus is not
exclusive evidence of the matters and things which ordinarily are or should be
written therein. It may be impeached or even contradicted by other
competent evidence.
Facts:
PMMSi was incorporated with 770 founder's shares and 76
common shares as its initial capital stock subscription
reflected in the articles of incorporation (total of 776 shares).
However, private respondents herein (Nolasco et. al) registered the
company's stock and transfer book for the first time
recording only 33 common shares as the only issued and
outstanding shared of PMMSI (contrary to the articles of
incorporation).
Based on the record in the transfer book, a special stockholders
meeting was held where a quorum of 27 common shares were present
which represented more than 2/3 of the common shares issued and
outstanding, based on the record in the transfer book, not the articles
of incorporation.
Petitioners Lanuza thereafter filed a petition with the SEC
questioning the validity of the said meeting alleging that the
quorum should not be based on the transfer book records, but on the
initial subscribed capital stock of 776 shares as reflected in the Articles
of Incorporation.
Issue:
Whether or not the basis of the quorum should be the articles of
incorporation and not the transfer book.
Ratio:
The stock and transfer book of PMMSI cannot be used as the
sole basis for determining the quorum as it does not reflect
the totality of shares which have been subscribed, more so
when the articles of incorporation show a significantly
larger amount of shares and outstanding as compared to
that listed in the stock and transfer book. A quorum is based on
the totality of shares which have been subscribed to and issued
whether it be founder's or common shares.
The articles of incorporation has been described as one that defines the
charter of the corporation and the contractual relationships between
the State and the corporation, the stockholders and the State, and
between the corporation and its stockholders. PMMSI's articles being
in compliance with the requirements of law, the contents of the
articles are binding not only on the corporation, but also on
the shareholders. At the time of incorporation, the corporation had
77 issued and outstanding shares. To base the shares on the transfer
book, completely disregarding the articles would work injustice to the
owners and successors in interest of the said shares.
One who is a stockholder cannot be denied his right to vote
by the corporation merely because the corporate officers
failed to keep its records accurately.
Philippine First Insurance Co v. Hartigan
Doctrine: The changing of a name of a corporation is no more the creation of
a corporation than the changing of the name of a natural person is the
begetting of a natural person. It is a mere change of name, not a change of
being. The change of a name of a corporation does not affect its right to bring
an action on a note given to the corporation under its former name.
For a change of name to be effective, a copy of the articles of incorporation as
amended, duly certified to be correct by the president, secretary and a
majority of the board of directors or trustees shall be filed with the SEC. Only
upon such time shall the amendment take effect.
Facts:
Originally, the corporation subject of this case was named Yu Tek Lin
Fire and Marine Insurance Co. Ltd. (YTLFM for brevity). In 1961, its
articles of incorporation were amended pursuant to a certificate of the
Directors, changing the name of the corporation to Philippine
First Insurance.
Prior to this amendment, YTLFM, as co-maker, signed a promissory
note with Hartigan in favor of ChinaBank payable within 30 days after
the date of the promissory note with the usual banking interest. The
defendant failed to pay the amount in full. Hence, a complaint was
filed against Hartigan and Philippine First Insurance and the court
held them jointly and severally liable for the sum of the note. On
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appeal, they claim that there is no privity of contract between
them considering that the complaint does not allege that the
Philippine First Insurance are one and the same or that it
has acquired the rights of YTLFM.
Issue:
Whether or not a corporation is allowed to change its name.
Assuming that the answer to the first issue is in the affirmative,
whether or not the plaintiff Philippine First Insurance is the real party
in interest that may be validly sued on the indemnity agreement signed
by the defendants YTLFM.
Ratio:
Section 18 of the Code explicitly permits the articles of
incorporation to be amended and there is no prohibition
therein against the change in the name. Such a change is
allowed for if it is prohibited, the legislature would have expressly
stated it in the provision of the law. However, in order for the name to
be changed, it must follow the procedure prescribed by law for the
purpose.
Philippine First Insurance is a real party in interest and may
validly be sued on the indemnity agreement. An authorized
change in the name of the corporation has no more effect upon its
identity as a corporation than a change in the name of a natural person
has upon his identity. It does not affect the rights of a
corporation or lessen or add to its obligations. Upon such
change in name, there is no new corporation nor is there a successor to
the original one. It remains and continues to be the original
corporation, only with a different name.
Even assuming that it the change in name changed the corporation, to
be effective, it requires that the articles be filed with the SEC. Only
upon such time of filing does the amendment take effect. In this case,
the transaction was entered into in May 15, 1961, prior to
their filing with the SEC of the amendment. Hence, only
after the filing with the SEC, on May 26, 1961, did they
acquire its new name.
PC Javier Sons v. Court of Appeals
Doctrine: The changing of a name of a corporation is no more the creation of
a corporation than the changing of the name of a natural person is the
begetting of a natural person. It is a mere change of name, not a change of
being. The change of a name of a corporation does not affect its right to bring
an action on a note given to the corporation under its former name.
Facts:
PC Javier applied with First Summa Savings and Mortgage Bank (First
Summa), later on renamed as PAIC Savings a loan accommodation
under the IGLF Fund for 1.5 Million pesos. Such loan was approved
and was forwarded to the Central Bank for processing and release. The
first tranche and second tranches were released to PC Javier. From the
second tranche, the amount of P250,000 was deducted from the
amount and was deposited under a time deposit.
PC Javier now claims that the second tranche release was delayed and
that he was never allowed to withdraw the proceeds of the
time deposit because the bank intended this time deposit as
automatic payments on the accrued principal and interest
due on the loan. The bank, on the other hand, claims that the time
deposit was with the knowledge of PC Javier. In fact, he even executed
an additional security of a chattel mortgage over some
machineries in favor of the Bank.
PC Javier defaulted in payments to the bank, hence an action for
extrajudicial foreclosure was initiated. In order to forestall such
foreclosure, PC Javier initiated this action seeking the
nullification of the mortgages it entered into with First
Summa which was now renamed to PAIC Savings on the
ground that these 2 corporations were separate entities.
Issue:
Whether or not First Summa and PAIC Savings are one and the same
entity.
Ratio:
There is no requirement that a change in the name of a corporation
requires notification to the debtors of such change absent any law,
circular, or regulation requiring it. In fact, PC Javier knew fully well of
the change in the name of the bank. Hence, there is no valid reason
as to why he is not to pay the loans. They are one and the
same bank to which PC Javier is indebted.
The changing of a name of a corporation is no more the creation of a
corporation than the changing of the name of a natural person is the
begetting of a natural person. It is a mere change of name, not a
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change of being. The change of a name of a corporation does not affect
its right to bring an action on a note given to the corporation under its
former name.
Clearly, this defense was merely an excuse of the plaintiff to renege on
its obligations to pay its loans after they became due and after
demands for payment were made, claiming that it never obtained the
loans from the respondent bank.
Cagayan Fishing Development v. Teodoro Sadiko
Doctrine: Before a corporation may be said to be lawfully organized, many
things have to be done. Among other things, the law requires the filing of the
articles of incorporation. Corporations are creatures of the law and can only
come into existence in the manner prescribed by law. If conditions precedent
are prescribed in the statute, or certain acts are required to be done, they are
terms of the offer and must be complied with substantially before legal
corporate existence can be acquired.
Facts:
Manuel Tabora is the registered owner of 4 parcels of land. To
guarantee the payment of a loan from Philippine National Bank, he
executed 3 mortgages in favor of the former which were registered and
annotated.
Thereafter, on May 31, 1930, by virtue of a public document, the 4
parcels of land were sold to Cagayan Fishing Development
(where only Tabora, his wife were stockholders) in consideration of 1
peso under the condition that the title to said lands shall not be
transferred in the name of the company until the company has fully
and completely paid Tabora's indebtedness to the Philippine National
Bank. It should be stressed that it was only in October of 1930 when
the articles of incorporation were filed with the Bureau of Commerce.
A year later, the parcels of land were sold, through its president
(Ventura), to Teodoro Sadiko.
Teodoro Sadiko failed to pay purchase price of the parcels of land but
the lower court absolved the defendant of liabilities. Hence this case.
Issue:
Whether or not the court erred in absolving the defendant from
liabilities.
Ratio:
No. The transfer from Tabora to the company herein was
made almost five months before the incorporation of the
company. It was not yet in existence at the time it entered
into the contract. It was not even a de facto corporation at that time.
Not being in legal existence, it did not possess juridical capacity to
enter into the contract. Obviously, if the plaintiff corporation did not
acquire the parcels of land, it follows that it did not possess any
reluctant right to dispose of them by sale to Sadiko.
Pilipinas Loan Company v. SEC
Doctrine: The certificate of incorporation gives juridical personality to a
corporation and places it within the jurisdiction of the SEC.
Facts:
Filipinas Pawnshop is a duly organized corporation registered with the
SEC. Its articles of incorporation states that its primary purpose is to
extend loans at legal interest on the security of either personal
properties or on the security of real properties and to finance
installment sales of motor vehicles, home appliances and other
chattels.
On the other hand, petitioner Pilipinas Loan is a lending corporation
duly registered with the purpose of lending money or extending loans
without however, engaging in pawn broking as defined in PD 114.
Filipinas filed a complaint against Pilipinas with the PED of the SEC
alleging that Pilipinas has been operating as a pawnbroker in
violation of its primary purpose and without the imprimatur
of the Central Bank to engage in pawn broking. It also seeks
to have its name changed since it causes confusion and
unfair competition to Filipinas.
In its answer, Pilipinas contends that the SEC has no authority to
determine whether or not there is a violation of PD 114 (pawn broking)
since such is under the jurisdiction, solely, of the Central Bank.
Issue:
Whether or not the issue falls within the jurisdiction of the SEC.
Ratio:
Yes. It should be noted that the complaint filed was based
ion the violation of Pilipinas of its articles of incorporation.
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Without question, the complaint filed against Pilipinas called upon
the SEC to exercise its adjudicatory and supervisory powers
based on the violation of the articles of incorporation. By law,
the SEC has jurisdiction over all corporations that are enfranchised to
act as corporate entities. A violation of its franchise is properly within
the jurisdiction of the SEC. The determination of the violation of PD
114 was merely incidental to the regulatory powers of the SEC to see to
it that a corporation does not go beyond the powers granted to it by its
articles of incorporation.
The certificate of incorporation gives juridical personality to a
corporation and places it within the jurisdiction of the SEC. In the
complaint, it is alleged that Pilipinas is engaged in the pawnshop
business when it is not authorized to do so by the articles amounts to
fraud, detrimental not only to the corporation, but also to
the stockholders and the public. The relationship involved in
this controversy is a category of relationship over which the
SEC has exclusive jurisdiction.
Hall v. Piccio
Doctrine: Unless there has been an evident attempt to comply with the law,
the claim to be a corporation under this act could not be made in good faith.
Not having obtained the certificate of corporation, the "corporation", even the
stockholders, may not probably claim in good faith to be a corporation.
Facts:
Petitioners Hall and the respondents Browns signed and acknowledges
the articles of incorporation of the Far Eastern Lumber and
Commercial Corporation organized to engage in a general lumber
business to carry on as general contractors, operators and managers,
etc. with the certification of shares of stock, subscribed to and fully
paid with certain properties transferred to the corporation.
Immediately after its execution, the parties filed said articles
with the SEC for the issuance of the certificate of
incorporation. However, respondents, pending the approval of their
certificate of incorporation, filed a case in court alleging that the
"corporation" was an unregistered partnership and that they
wished to have it dissolved because of the bitter dissension among
the member, mismanagement and fraud by the managers and heavy
financial losses.
In counter, the petitioners contested the court's jurisdiction. However,
the trial court granted the dissolution of the company.
Issue:
Whether or not the court had jurisdiction to decree the dissolution of
the company, being a de facto corporation, the dissolution thereof may
only be ordered in quo warranto proceedings instituted in accordance
with the Corporation Law.
Ratio:
The personality of a corporation begins to exist only from the moment
such certificate is issued, not before. Consequently, the principle of
estoppel herein does not apply. This is not a case where the
parties are trying to enforce a contract with the corporation through
estoppel.
The proposition that the "corporation" is a de facto corporation under
the Corporation Law and hence, dissolution can only be had through a
quo warranto proceeding cannot be sustained. The reasons for this
being that Far Eastern Lumber and Commercial Co. still
hasn't obtained the certificate of incorporation. Hence, it
cannot claim in good faith that it was acting as a corporation.
The immunity from collateral attack is granted only to
corporations claiming in good faith to be a corporation and
under our statute, that can only be so if there is an issued
certificate of incorporation.
As stated, this is not a case where the corporation is made a party. It is
a mere litigation between stockholders of the alleged corporation for
the purpose of obtaining dissolution. Even the existence of a de jure
corporation may be terminated in a private suit for its dissolution
between stockholders, without intervention of the state.
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Sawadjaan v. Court of Appeals
Doctrine: A corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such. The SEC Rules
on Suspension/Revocation of the Certificate of Registration of Corporations,
details the procedures and remedies that may be availed of before an order of
revocation can be issued.
Facts:
Sawadjaan was an employee of Philippine Amanah Bank (PAB), now
AIIBP, when it was created by virtue of a Presidential decree. He rose
through the ranks, working his way up from his initial designation as
security guard, to appraiser/investigator, to now loans analyst. While
he was designated as an appraiser, he was assigned to inspect
properties (2 parcels of land) offered as collaterals to the bank
by CAMEC (a corporation) for a credit line. On the basis of his
inspection and appraisal report, the PAB granted the loan
application. However, subsequently, it was later found out
that the properties used as collaterals by CAMEC were
problematic (one was inexistent and the other had a prior existing
mortgage). Consequently, because of CAMEC's failure to pay, the bank
suffered losses amounting to 6M.
He was charged with dishonesty in the performance of his
official duties and conduct prejudicial to the best interest of
the service. When he was informed of this, he sent a memorandum
questioning the fairness and impartiality of the members of the
committee and refused to recognize their jurisdiction on the ground of
partiality. Hence, he was declared in default and a decision was
rendered finding him guilty of the administrative offense of conduct
prejudicial to the best interest of the service. On appeal, the CSC
affirmed said decision. His motion for reconsideration to the
CSC was also denied.
On petition for certiorari, Sawadjaan raised the issue of the failure of
the AIIBP to promulgate rules of procedure governing the adjudication
and disposition of administrative case involving its personnel.
However, the court held that such issue cannot be raised for the first
time on appeal. RA 6848 gives the Board of Directors of the Bank the
broadest powers to manage the Islamic Bank. Hence, the
power to discipline its employees by imposing a suspension
or a dismissal is within its powers.
Also on certiorari, the petitioner assails the jurisdiction of the CSC to
take cognizance of the case, allegedly because the appeal was filed with
the Merit System Protection board, not the CSC. However, the
court held that, by filing its motion for reconsideration with
the CRC, he cannot later on impugn its jurisdiction. Also,
jurisdictional issued in a case can be raised only during the
proceedings and during the appeal of said case. This case at
hand is a petition for certiorari, not an appeal.
In sum, the SC dismissed the certiorari case and affirmed the
resolutions of the CSC holding respondent liable for the losses of the
bank due to his negligence as an appraiser. However, Sawadjaan
filed a Motion for New trial based on the ground that it was
later discovered that at the time his employment was
terminated, the AIIBP has not yet adopted its corporate by-
laws. He asserts that since there was a failure to file the by-laws of the
bank within 60 days from the passage of RA 6848 as required by
Section 51 of the said law, the bank and its stockholders already
forfeited its franchise or charter, including the license to exist and
operate as a corporation and thus, the assailed resolutions of the CSC
and the board of directors are a nullity.
Issue:
Whether or not the bank has lost its juridical personality as a
corporation when it failed to file its by-laws within 60 days as required
by law.
Consequently, whether or not the board of directors had no
jurisdiction to act on the manner they did, absent the by-laws.
Ratio:
AIIBP, at least, is considered to be a de facto corporation
whose right to exercise corporate powers may not be
inquired to collaterally in any private suit to which such
corporation may be a party. AIIBP was created by a law and has a
main office where it conducts it business. It has shareholders,
corporate officers, and a board of directors, assets and personnel. One
who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground that
there was in fact no corporation.
A corporation which failed to submit its by-laws within the specified
time prescribed does not ipso facto lose its powers as such. A
suspension or revocation case, as provided for in the Rules on
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Suspension/Revocation of Certificate by the SEC must be initiated.
Moreover, this case is a mere labor dispute and not a corporate
controversy. It is an employer's basic right to freely select or discharge
its employees as a measure of self protection against acts inimical to its
interest, as in this case.
Cagayan Fishing Development v. Teodoro Sadiko
Doctrine: Before a corporation may be said to be lawfully organized, many
things have to be done. Among other things, the law requires the filing of the
articles of incorporation. Corporations are creatures of the law and can only
come into existence in the manner prescribed by law. If conditions precedent
are prescribed in the statute, or certain acts are required to be done, they are
terms of the offer and must be complied with substantially before legal
corporate existence can be acquired.
Facts:
Manuel Tabora is the registered owner of 4 parcels of land. To
guarantee the payment of a loan from Philippine National Bank, he
executed 3 mortgages in favor of the former which were registered and
annotated.
Thereafter, on May 31, 1930, by virtue of a public document, the 4
parcels of land were sold to Cagayan Fishing Development
(where only Tabora, his wife were stockholders) in consideration of 1
peso under the condition that the title to said lands shall not be
transferred in the name of the company until the company has fully
and completely paid Tabora's indebtedness to the Philippine National
Bank. It should be stressed that it was only in October of 1930 when
the articles of incorporation were filed with the Bureau of Commerce.
A year later, the parcels of land were sold, through its president
(Ventura), to Teodoro Sadiko.
Teodoro Sadiko failed to pay purchase price of the parcels of land but
the lower court absolved the defendant of liabilities. Hence this case.
Issue:
Whether or not the court erred in absolving the defendant from
liabilities.
Ratio:
No. The transfer from Tabora to the company herein was
made almost five months before the incorporation of the
company. It was not yet in existence at the time it entered
into the contract. It was not even a de facto corporation at that time.
Not being in legal existence, it did not possess juridical capacity to
enter into the contract. Obviously, if the plaintiff corporation did not
acquire the parcels of land, it follows that it did not possess any
reluctant right to dispose of them by sale to Sadiko.
Muncipality of Malabang v. Benito
Doctrine: The rule disallowing collateral attacks applies only where the
municipal corporation is at least a de facto corporation. For when it is neither
a de facto or a de jure but a nullity, the rules is that its existence may be
questioned collaterally or directly in any action or proceeding by any one
whose rights or interests are affected thereby, including the citizens of the
territory incorporated unless they are estopped by their conduct from doing
so.
The color of authority requisite to the organization of a de facto municipal
corporation may be: 1) a valid law; 2) an unconstitutional law, valid on its
face, which has either (a) been upheld for a time by the courts or (b) not yet
declared void; provided that a warrant for its creation can be found in some
other valid law or in the recognition of its potential existence by the general
laws or constitution of the state.
The actual existence of a statute, prior to such determination, is an operative
fact and may have consequences which cannot justly be ignored. The past
cannot be erased by a new judicial declaration.
Facts:
Respondent herein is the Mayor of the Municipality of Balabagan
which was formerly a part of Malabang. It was created by Executive
Order 386 of the President which was already declared void
by the courts (in the case of Pelaez) for being
unconstitutional on the ground that the enabling law creating it, RA
2730 and Section 68 of the Administrative are in violation of the
principle of non-delegation of legislative powers by vesting powers to
create barrios on the provincial board and municipalities on the
president.
Thus, the municipality of Balabahan argues that it is at least a de
facto corporation having been organized under a color of
statute before it was declared unconstitutional its officers
having been elected or appointed and the municipality itself having
discharged corporate functions for the past 5 years. Hence, being a de
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facto corporation, its existence can only be inquired to in a proceeding
quo warranto.
Issue:
Whether or not the municipality is at least a de facto corporation.
Ratio:
The color of authority requisite to the organization of a de facto
municipal corporation may be: 1) a valid law; 2) an unconstitutional
law, valid on its face, which has either (a) been upheld for a time by the
courts or (b) not yet declared void; provided that a warrant for its
creation can be found in some other valid law or in the
recognition of its potential existence by the general laws or
constitution of the state.
In this case, the MERE FACT that Balabagan was organized
at a time when the statute had not been invalidated cannot
make it a de facto corporation since there is no other valid
statute to give color of authority to its creation. Hence, the
executive order creating it, created no office.
However, this is not to say that the acts done by the municipality are a
nullity. For the existence of the Executive Order is an operative fact
which cannot justly be ignored. The actual existence of a statute,
prior to such determination, is an operative fact and may have
consequences which cannot justly be ignored. The past cannot be
erased by a new judicial declaration.
Separate Opinions:
Fernando: Although the general rule is that an unconstitutional
statute confers no right, creates no office, affords no protection and
justifies no acts performed under it, there are several instances
wherein courts, out of equity, have relaxed its operation or qualified its
effects since the actual existence of a statute prior to such declaration
is an operative fact and may have consequences which cannot be
ignored.
Albert v. University Publishing
Doctrine: A person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts and
becomes personally liable for contracts entered into or for other acts
performed as such agent.
Facts:
Mariano Albert entered into a contract with University Publishing
through its president, Jose Aruego for the publishing of the former's
books on the Revised Penal Code and for his share in previous sale of
the book's first edition. When the defendant failed to pay the second
installment under the terms of their contract, Albert filed a suit
impleading University Publishing as corporation. Albert died
pending suit hence, Justo Albert, as his estate administrator was
substituted for him.
Judgment was rendered in court holding University liable and was
ordered to pay Albert a sum of money. Pursuant to this the court
ordered the issuance of a writ of execution against the
University but it was discovered that there was no such
entity registered, either as a corporation or a partnership, in
the SEC.
Issue:
Whether the judgment may be executed against Jose Aruego (as
president) as the real party defendant, not being impleaded in the suit.
Ratio:
Yes. In this case, University Publishing is not even a de facto
corporation, not having been registered with the SEC. University
Publishing is, therefore, only a name and has no independent
personality. Since in reality, it was Jose Aruego who answered
and litigated, although not named as real party defendant in
the suit, having had his day in court, then due process has
been substantially served. Acting as a representative of a no-
existent principal, he was the real party defendant. Perforce, in line
with the ends of justice, responsibility under the judgment falls on
him.
Due process contemplates notice and opportunity to be heard before
judgment is rendered. It is designed to secure justice as a living reality;
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not to sacrifice it paying homage to formality. For substance must
prevail over form.
Lozano v. Delos Santos
Doctrine: Corporation by estoppel applies when persons assume to form a
corporation and exercise corporate function and enter into business relations
with third persons. Where there is no such third person, and the conflict
arises only among those assuming the form of a corporation, who therefore
know that it has not been registered, there is no corporation by estoppel.
Consolidation becomes effecting not upon mere agreement of the members,
but only upon issuance of the certificate of consolidation by the SEC.
Jurisdiction is determined by a concurrence of 2 elements: 1) the status or
relationship of the parties; 2) the nature of the question that is the subject of
their controversy.
Facts:
Parties in this case are presidents of separate jeepney drivers'
association. Lozano was the president of KAMAJDA and Anda was the
president of SAMAJODA. Both jeepney associations decided to
consolidate their respective associations to form UMAJODA. They
held elections for officers who are to be given the authority
to collect daily dues from the members of the consolidated
association. When Lozano won the elections, Anda cited fraud and
refused to recognize and abide by their agreement. The latter
continued to collect dues from the members despite demands to resist.
Hence, a case was filed in court.
Lozano moved to dismiss the case on the ground that the SEC has
exclusive jurisdiction over their controversy, it being an intracorporate
dispute. MCTC denied said motion. On petition for certiorari to the
RTC, the trial court held that the SEC had jurisdiction.
Issue:
Whether or not the SEC has jurisdiction over the instant case.
Ratio:
The SEC has no jurisdiction over the complaint. The
controversy herein is between members of separate and distinct
associations. They have no intracorporate relation much less do they
have an intracorporate dispute. The controversy between them arose
from their plan to consolidate their associations. However, this was
still a proposal. It was not yet approved by the SEC, neither had
its officers and members submitted their articles of
consolidation in accordance with the corporation code. Their
consolidation becomes effective only upon issuance of a certificate of
consolidation by the SEC.
There is no corporation by estoppel herein since there is no third
person involved and the conflict arises only among them
assuming to have formed a corporation. Knowing that it has
not been registered, there is no corporation by estoppel.
Asia Banking Corporation v. Standard Products
Doctrine: In the absence of fraud, a person who has contracted or otherwise
dealt with an association in such a way as to recognize and in effect admit its
legal existence as a corporate body is thereby estopped to deny its corporate
existence in any action leading out of or involving such a contract or dealing
unless its existence is attacked for cause which have arisen since making the
contract or other dealing relied on as an estoppel and this applies to foreign
as well as to domestic corporations.
Facts:
A promissory note was issued in favor of Asia Banking Corporation by
Standard Products. In an action to recover the sum of said note, the
court rendered judgment in favor of Asia Banking.
Standard Products assert that since Asia Banking failed to
prove the corporate existence of the parties, the court erred
in finding that the parties were corporations with juridical
personalities and assigns the same as reversible error.
Issue:
Whether or not the court erred in finding that the corporations are
with separate juridical personalities.
Ratio:
The defendant, having recognized the corporate existence of
the plaintiff by making a promissory note and making partial
payments on the same is therefore estopped to deny said
plaintiff's existence also its own.
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Salvatierra v. Garlitos
Doctrine: A person who has contracted or dealt with an association in such a
way as to recognize its existence as a corporate body is estopped form
denying the same in an action arising out of such transaction or dealing. Yet
this doctrine may not be held to be applicable where fraud takes place in the
transaction.
A person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and comes personally
liable for contracts entered into or for other acts performed as such, agent.
Facts:
Salvatierra was an owner of a parcel of land which it leased to
Philippine Fibers Producers (PFP) allegedly a corporation under the
laws of the Philippines through its president. Under the terms of their
lease, 30% of the net income accruing from the harvest of any crop was
entitled to Salvatierra. The lessee was further bound to declare at the
earliest possible time, the income derived therefrom and to deliver the
corresponding share due the lessor.
The obligations under said contract were not complied with. Hence, a
complaint for accounting, rescission and damages was instituted
against PFP and president Refuerzo. The trial court rendered a
decision in favor of Salvatierra. When a writ of execution was
issued, it was found that PFP had no property to be executed
hence, the sheriff executed on the properties of Refuerzo. On
plaintiff's opposition, the court released all his properties attached
after finding that the evidence on record made no mention or referred
to any fact which might hold movant personally liable.
Issue:
Whether or not Refuerzo is personally liable for the obligations.
Ratio:
Yes. In this case, Salvatierra was unaware of the fact that PFP had no
juridical personality. Since there was neither a denial nor confirmation
from Refuerzo The court is lead to the inescapable conclusion
that the plaintiff was really made to believe that such
corporation was duly organized in accordance with the law.
Considering that the defendant, as president of the unregistered
corporation was the moving spirit behind the consummation of the
lease agreement by acting as its representative, his liability cannot
be restricted or limited. In acting in behalf of the
corporation which he knew to be unregistered, he assumed
the risk of reaping the consequential damages or resultant
rights, if any, arising from such transaction.
Ramirez v. Orientalist
Doctrine: The power to make corporate contracts resides primarily in the
company's board of directors; but the board may ratify an unauthorized
contract made by an officer of the corporation. Ratification in this case is held
to have occurred when the board, with knowledge that the contract had been
made, adopted a resolution recognizing the existence of the contract and
directing that steps betaken to enable the corporation to utilize its benefits.
The authority of the subordinate agent of a corporation often depends on the
course of dealings which the company or its directors have sanctioned. It may
be established b proof of the usage which the company had permitted to grow
up in business and of the acquiescence of the board charged with the duty of
supervising and controlling the business.
Facts:
Orientalist, a corporation in the Philippines, became apprised of the
fact that JF Ramirez had control of the agencies for 2 different marks
of files (clair Films and Milano Films). Negotiations for the
acquisition of the files were begun and one person who was actively
participating in acquiring said films was Fernandez since he believes
that these films were necessary for the success of their company.
Ramirez sent Fernandez an offer for the importation of the Films and
was given a period to reply. As the deadline for the response was
nearing, it became important for the Orientalist Company to act on the
matter speedily in order to take advantage of said offer. Hence,
Fernandez had an informal conference with the members of
the company. Thereafter, a letter of acceptance of the offer
was sent to Ramirez for the importation of the said films. In
these letters, Fernandez seemingly signed as an individual
apart from the signature of the Orientalist Company in his
capacity as treasurer.
Drafts sent by Ramirez were dishonored for nonpayment by
Orientalist. Hence, a suit was filed in court for the determination of
amount of damages Ramirez was entitled to recover.
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Issue:
Whether or not the corporation is bound by the contract.
Ratio:
Yes. The power to make corporate contracts resides primarily in the
company's board of directors; but the board may ratify an
unauthorized contract made by an officer of the corporation.
Ratification in this case is held to have occurred when the board, with
knowledge that the contract had been made, adopted a resolution
recognizing the existence of the contract and directing that steps
betaken to enable the corporation to utilize its benefits. The authority
of the subordinate agent of a corporation often depends on
the course of dealings which the company or its directors
have sanctioned. It may be established b proof of the usage which
the company had permitted to grow up in business and of the
acquiescence of the board charged with the duty of supervising and
controlling the business.
In this case, as evidenced by the minutes of the stockholders
meeting, it was evident that the corporation was cognizant
that the officer (Fernandez) has already been accepted in the
name of Orientalist Company and that the films were then
expected to arrive and were being imported by virtue of such
acceptance. The letter accepting the officer had been sent with their
knowledge and consent. However, this is not the pressing reason as to
why the company is bound.
It must be remembered that actions of stockholders, must be ignored.
Their functions in a corporation are of a limited nature. The complete
management of the enterprise are in the hands of the
directors/trustees. In conformity with this idea, it is settled that
a contract between a corporation and a third person must be
made by the director and not the stockholders. The
corporation is represented by the former and not the latter.
Resolutions of the stockholders are merely advisory and not binding.
It appears in this case that the board of directors had already
recognized the contract as being in existence and had
proceeded to take the steps necessary to utilize the films.
Particularly suggestive is the direction given at the meeting for the
publication and announcements in the newspapers to the
effect that the company was engaged in importing films. Thus, the
contracts herein were inferentially approved by the board of
directors and that the company is bound.
Gokongwei v. SEC (1979)
Facts:
John Gokongwei was a stockholder of SMC. He filed a petition for
declaration of nullity of amended by-laws, cancellation of certificate of
filing of the amended-by laws, injunction and damages against the
majority of the members of the Board of Directors of the SMC on the
ground that:
o In 1976, the board of directors amended the by laws of the
corporation basing their authority to do so on a
resolution of the stockholders adopted way back in
1961 (when the outstanding capital stock was lower).
Gokongwei asserts that under the Corporation Law and the by-
laws of the corporation itself, the power to amend or adopt
new by-laws may be delegated to the Board only by affirmative
vote at least 2/3 of the subscribed paid up capital stock of the
corporation which should have been computed on the
basis of the capitalization at the time of the
amendment. Since based on the 1961 authorization, he
contends that the board was without the power to amend.
Furthermore, he asserts that the 1961 authority has
already been exercised hence, it can no longer be
exercised again.
o As another cause of action, Gokongwei posits that prior to
the amendment, he had all the qualifications to be a
director of the corporation as a stockholder thereof
(right to vote and be voted for) and that in amending the
by-laws they purposely provided for disqualifications
and deprived him of his vested right. He contends that
corporations have no inherent power to disqualify a
stockholder from being elected.
o He also asserts that Andres and Jose Soriano (members of the
Board), while representing other corporations, entered into
a management contract with the corporation which
was avowed because the questioned amendment gave the
Board itself the prerogative to determine whether
they or other persons are engaged in a competitive
business with the SMC.
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Subsequent to this, Gokongwei also filed an urgent motion for
production and inspection of documents alleging that the secretary
refused to allow him to inspect its records despite the request made.
He posits that the corporation had been attempting to suppress
information from the stockholders.
While the petition was pending to be heard, the corporation,
nevertheless, held a special stockholders' meeting for the
purpose of ratification and confirmation of the amended by
laws. This prompted Gokongwei to ask the SEC for a summary
judgment on the ground that by calling a meeting, the board
admitted the invalidity of the amendments of 1976. Subsequently, after
the denial of the restraining order and summary judgment, the board
of directors ratified the by-laws.
Later, Gokongwei discovered that the corporation has been investing
corporate funds in other corporations and business outside of the
primary purpose of the corporation, in violation of the corporation
code. Hence, he filed a petition seeking to have the board
members be declared guilty of such violation and ordered to
account for such investments.
Issue:
Whether or not the corporation has the power to provide for the
additional qualifications/disqualifications of its directors by amending
the by-laws.
Whether or not the corporation has the power to disqualify a
competitor from being elected to the board of directors as a reasonable
exercise of corporate authority.
Ratio:
Yes. Pursuant to the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written
assent of the stockholders representing at least 2/3 of the
subscribed capital stock of the corporation. If the amendment
changes, diminishes or restricts the rights of the existing shareholders,
then the dissenting minority has only one right, to object
thereto in writing and demand payment for his share. It
cannot be said that prior to this, Gokongwei has a vested right to vote
and be voted for in the face of the fact that the law at the time such
right as stockholder was acquired contained the prescription that the
corporate charter and the by-law shall be subject to
amendment, alteration and modification.
Every corporation has the inherent power to adopt by-laws for its
internal government and to regulate the conduct and prescribe the
rights and duties of its members. Under the law, a corporation may
prescribe in its by-laws the qualifications, duties and
compensation of directors, officers and employees. Such
provision in the law is a qualification, in addition to the
requirement that every director must own in his right at
least one share of the capital stock of the stock corporation
of which he is a director.
Hence, every person who buys a stock with a corporation impliedly
contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and
lawfully enacted by-laws and not forbidden by law. A
stockholder is considered to have parted with his personal right or
privilege to regulate the disposition of his property and surrendered
it to the will of the majority of his fellow incorporators.
The corporation has such power to disqualify. A director's
relationship with the corporation is of a fiduciary nature. Such springs
from the fact that directors have control and guidance of corporate
affairs and property hence of the property interests of the
stockholders. They are agents entrusted with the management
of the corporation for the collective benefit of the
stockholders. They occupy a fiduciary relationship and in this sense,
the relation is one of trust wherein the directors are the trustees and
the stockholders are beneficiaries.
He who is in such a fiduciary position cannot serve himself
first and his cestuis second. He cannot manipulate the
affairs of his corporation to their detriment and disregard of
the standards of common decency.
The doctrine of corporate opportunity is a recognition by the
courts that the fiduciary standards could not be upheld where the
fiduciary was acting for 2 entities with competing interests. This
doctrine rests on unfairness, in particular circumstances, of an officer
or director taking advantage of an opportunity for his own personal
profit when the interest of the corporation unjustly calls for protection.
It is obviously to prevent the creation of an opportunity for an officer
or director of San Miguel Corporation, who is also the officer or owner
of a competing corporation, from taking advantage of the information
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which he acquires as director to promote his individual or corporate
interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was
made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
Detective and Protective Bureau v. Cloribel
Doctrine: Every director must own in his own right at least one share of the
capital stock of the stock corporation of which he is a director which stock
shall stand in his name on the books of the corporations. The managing
director shall be elected by the Board of Directors from among its members.
Facts:
Detective is a corporation duly organized and existing under the laws
of the Philippines and Fausto Alberto was the managing director
thereof from 1952 to 1964. When he illegally seized and took
control of all assets of the corporation, he was removed as
managing director and the board elected one Jose dela Rosa
in his stead. However, he refused to vacate his office and continued
to perform unauthorized acts for and in behalf of the corporation.
A case was filed praying for the issuance of a preliminary injunction to
enjoin Alberto from exercising functions as a managing director and
from disbursing and disposing its funds. Judge Cloribel granted the
writ of preliminary injunction but this was later set aside when the
judge admitted the counterbond filed by Fausto Alberto. On petition
for certiorari, the corporation prays for the issuance of a preliminary
injunction. As counter, Alberto asserts that dela Rosa could
not be elected as managing director because he did not own
any stock in the corporation.
Issue:
Whether or not Jose dela Rosa can be elected as managing director
Ratio:
There is in the record no showing that Jose dela Rosa owned
a share of stock in the corporation. If he did not own any share of
stock, certainly he could not be a director pursuant to the mandatory
provision of Section 30 of the Corporation Law which states that every
director must in his own right own at least one share of the capital
stock of the stock corporation of which he is a director. If he could
not be a director, he could also not be a managing director of
the corporation since the manager shall be elected by the
Board from among its members.
In this case, since dela Rosa was not qualified to become managing
director, Fausto Alberto could not be compelled to vacate his
office and cede the same to the managing director-elect
because the by-laws of the corporation provides that
directors shall serve until the election and qualification of
their duly qualified successor.
Gokongwei v. SEC (1980)
Facts:
This is a petition for review of petitioner seeking to nullify and set
aside the resolution of the court in the 1979 case sustaining the
findings of the SMC that petitioner is engaged in a business
competitive with or antagonistic to that of SMC and therefore,
ineligible for election as director, pursuant to the amended by-laws.
Petitioner alleges that his disqualification should not have been heard
in view of the pending motion for reconsideration and that the court
failed to consider that the respondent corporation board are
precluded from disqualifying petitioner because of the rule
of pari delicto and that the resolution of disqualification was
an overexertion of corporate power because by this act, the
board intended to perpetuate themselves in power.
Ratio:
The validity of the amended by-laws can no longer be relitigated on the
basis that it is already the law of the case and therefore, the
enforcement of the amended by-laws could not have been
ipso facto stayed by the motion for reconsideration.
There is evidence showing that petitioner was engaged in agricultural
and poultry business competitive with that of SMC. However,
petitioner did not adduce any evidence to rebut the evidence of his
disqualification. Findings of fact of administrative bodies will not be
interfered with by the courts in the absence of grave abuse of
discretion on the part of the agencies or unless the findings are not
supported by substantial evidence.
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Pascual and Santos v. Tramo Wakas Neighborhood Association
Doctrine: Except for powers expressly conferred on it by the Corporation
Code and those that are implied by or are incidental to its existence, a
corporation has no powers. It exercises its powers through its board of
directors and/or duly authorized officers and agents. Thus, its power to sue
and be sued is lodged with the board of directors that exercises its corporate
powers.
Facts:
Members of the Tramo Wakas Neighborhoods Association represented
by Domingo Magno lodged an action in court praying for the awarding
of parcels of land in their favor on the ground that they have openly,
peacefully and continuously occupied it since 1957.
The LMB rendered a decision stating that they may file appropriate
public land applications over the land they are claiming. Unsatisfied,
they elevated the matter to the DENR then to the Office of the
President, both offices, affirming the decision of the LMB.
On appeal, the CA dismissed their petition on the ground that their
verification and certification for non-forum shopping was
signed merely by Lombos and Pascual who allegedly are duly
authorized agents of the corporation without showing any
proof whatsoever of such authority. Thereafter, they filed a
motion for reconsideration attaching a certificate showing proof that
Lombos and Pascual were incumbent directors of the corporation and
are duly authorized representatives who may sign all papers and do
such other acts as may be necessary to prosecute the petition for
review.
Issue:
Whether or not their appeal should be given due course, having
attached the proof that Lombos and Pascual are directors of the
corporation.
Ratio:
Yes. Upon the filing of the motion for reconsideration accompanied by
the certificate stating that Lombos and Pascual were duly authorized
and are board of directors, there is justification for the
relaxation of the Rules for the purpose of allowing its
petition to be given due course.
Subsequent proof of authority on behalf of the petitioner corporation
justifies the relaxation of the rules. At all events, strict adherence to the
rules of procedure must give way to considerations of equity and
substantial justice where as in this case, there is evidence showing that
the appeal was filed on time.
Ong Yong v. Tiu
Doctrine: The Corporation Code prohibits the President from acting
concurrently as a treasurer of the corporation. The rationale behind this is to
ensure the effective monitoring of each officer's separate functions.
Facts:
The Masagana Citimall in Pasay City was owned by FLADC, a
corporation owned by the Tius. When they became heavily indebted to
the PNB, and was threatened with foreclosure of the 2 lots where the
mall was being built, they invited Ong Yong, et. al (Ong Yong)to
invest in said corporation. They entered into a Presubscription
Agreement wherein the Ongs and Tius agreed to maintain
equal shareholdings in FLADC (The Ongs were to subscribe to 1
million shares; and the Tius were to subscribe an additional 549,800
shares in addition to their already existing subscription.
Also under their agreement, the Tius were to nominate the VP
and the treasurer plus 5 directors; while the Ongs were to
nominate the President, the Secretary and 6 other directors
to the board and the right to manage and operate the mall.
Under this contract, the Tius contributed a properties and the Ongs
agreed to settle the mortgage indebtedness of FLADC to PNB in cash
as payment for their subscription.
The relationship between the 2 eventually went downhill and Tius
opted to rescind the pre-subscription agreement on the ground that
the Ongs prevented David and Cely Tiu from assuming the positions of
and performing their duties as VP and Treasurer and for refusing to
credit to them the FLADC shares covering their real property
contributions. The Tius filed a case with the SEC seeking confirmation
of the rescission. SEC confirmed the rescission.
Issue:
Whether or not the proper remedy to cancel the pre-subscription
agreement was a rescission.
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Ratio:
There is evidence in this case that there was a violation of the pre-
subscription agreement when the Ongs prevented the Tius from
participating in the management of the corporation by
having its president, Wilson Ong act as its Treasurer. The
records herein show that the president, supervised the collection and
receipt of rentals, he ordered the same to be deposited in the bank, and
held on to the cash and properties of the corporation. Such is
prohibited under the Corporation code. The rationale behind
this is to ensure the effective monitoring of each officer's separate
functions.
Nevertheless, the court held that rescission is not the proper
remedy in this case. The cash and the property sought to be
returned already belonged to FLADC by virtue of the pre-subscription
agreement which is an innocent third party (having a separate and
distinct juridical personality). Said remedy may no longer be availed of
under the law. Any contract for acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of the corporation code
notwithstanding the fact that the parties refer to it as a purchase or
some other contract. The effect of rescission in this case is the return
of the capital stocks to the parties to the subscription agreement.
However, the law only allows the distribution of the
corporate capital in three instances: 1) amendment of the
articles to reduce the authorized capital stock; 2) purchase
of redeemable shares by the corporation regardless of the
existence of unrestricted retained earnings and; 3)
dissolution and liquidation of the corporation.
Yao Ka Sin Trading v. Court of Appeals
Doctrine: A Contract signed by the President/Chairman without authority
from the Board of Directors is void. Although the by-laws granting authority
to the President "to execute and sign for and in behalf of the corporation all
contracts and agreements which the corporation may enter into", the same
presupposes a prior act of the corporation exercised through its Board of
Directors.
Facts:
Maglana, the president and chairman of the Board of PWCC sent to
YKS an offer to sell a minimum of 15,000 bags of white
cement. Thereafter, they received an amount of P243,000 pesos from
YKS for the purchase price of said white cement. However, 23 days
after the signing of the said letter by the President, it was
disapproved by the Board of Directors as evidenced by its
minutes instead, they sent a letter to YKS allegedly entering
into a separate contract of only selling 10,000 bags.
Thereafter, Henry Yao (YKS president) wrote to the PWCC a follow up
letter insisting on the delivery of the bags of cement they originally
agreed to (15,000). Unheeded, YKS filed a case for specific
performance with damages against PWCC based on the
offer. In its answer, PWCC alleged that when Mr. Maglana, as
president and chairman of the company signed the offer it was still
subject to the approval of the Board of Directors of PWCC,
the board having disapproved it, it was never consummated
and it is not enforceable against PWCC.
Issue:
Whether or not Mr. Maglana had authority to bind PWCC to the
contract.
Ratio:
No. Maglana's signing the letter-offer prepared for him was
made clearly upon the condition that it was subject to the
approval of the board of directors because according to the
corporation code and the corporation's by-laws itself, all
corporate commitments and business are conducted by, and
contracts entered into through, the express authority of the
Board of Directors. Maglana was not authorized by the Board of
Directors of defendant corporation nor was his, actuation ratified by
the Board, the agreement was unenforceable.
While it may be true that he is the president of the corporation, there
was nothing in the articles of incorporation or its by-laws that
empowered him to enter into any contract all by himself and bind the
corporation without first securing the authority and consent of the
Board of Directors. Whatever may have must be derived from
the Board of defendant corporation. A corporate officers
power as an agent must be sought from the law, the articles
of incorporation and the by-laws or from a resolution of the
Board.
The provisions in the by-laws of the corporation which states that "the
chairman has the power to execute and sign for and in behalf of the
corporation all contracts and agreements which the corporation may
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enter into. Such power presupposes a prior act of the
corporation exercised through the Board of Directors.
In this case, since the letter offer was effectively disapproved and
rejected by the Board of Directors, the court therefore rules that the
petitioner had in fact agreed to a new transaction involving only
10,000 bags of white cement.
Board of Liquidators v. Heirs of Kalaw
Doctrine: 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 form the Board of Directors perform all acts of an ordinary nature,
which by usage or necessity are incident to his office, and may bind the
corporation by contract in matters arising in the usual course of business.
Facts:
NACOCO was chartered as a non-profit governmental organization for
the protection, preservation and development of the coconut industry
of the Philippines. Its general manager and chairman, Kalaw, entered
into several contracts involving copra trading activities. Pending
fulfillment of these contracts, 4 devastating typhoons visited the
Philippines and it became apparent that the contracts would be
unprofitable. Nevertheless, they still ventured in the contracts. As was
to be expected, NACOCO but partially performed the contracts and the
buyers threatened damage suits. Because of the suits
initiated against NACOCO, it was made liable (through
compromise agreements) and suffered losses. Thus, NACOCO
now seeks to recover the sum of its losses from the general
manager, Kalaw, for the amount imputing negligence and
bad faith and/or breach of trust for having approved said
contract.
NACOCO herein alleges that under the by-laws of the corporation, the
general manager only has the power to perform or execute on behalf of
the corporation upon prior approval of the Board, all contracts
necessary and essential to the proper accomplishment for
which the Corporation was organized.
Issue:
Whether or not Kalaw, as general manager and chairman, is
empowered to enter into said contracts.
Ratio:
Yes. In this case, the movement of the market requires that sales
agreement be entered into even though the goods are not yet in the
hands of the seller. To NACOCO, forward sales were a necessity. Copra
could not stay long in its hands; it would lose weight and its value
decreases. Copra contracts had to be executed on short notice at times,
even within 24 hours. To be appreciated then is the difficulty of calling
a formal meeting of the board.
Long before the contracts disputed herein came into being, it ha
already been the practice of Kalaw as general manager to sig contracts
without prior authority from the Board. Obviously the, the forward
sales were left to the sound discretion of NACOCO's general manager.
There are even instances in the case where the contracts executed were
submitted to the board after their consummation, not before.
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 by the board of directors. Existence of such
authority is established by proof of the course of business, the usage
and practices of the company and by the knowledge which the board of
director has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. Thus, when in
the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs, his authority to
represent the corporation may be implied form the manner in which
he has been permitted by the directors to manage its business.
In this case, the practice of NACOCO has been to allow the
manager to negotiate and execute contracts in its copra
trading activities in the corporation's behalf. If the by-laws
are to be followed, prior approval on all corporate contracts
is required. But that board itself, by its acts and through
acquiescence, practically laid aside the by-law requirement
of prior approval.
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Premium Marble Resources v. CA
Doctrine: The power of the corporation to sue and be sued in any court is
lodged with the board of directors that exercises its corporate powers.
By express mandate of the corporation code, all corporations duly organized
pursuant thereto are required to submit within the period of 30 days to the
SEC the names, nationalities and residences of the directors, trustees and
officers elected. This is required so that the persons dealing with the
corporation and those who intent to do business with it may know or have the
means of knowing facts concerning the corporation's financial resources and
business responsibility.
Facts:
Former officers of the plaintiff corporation, without any authority
whatsoever from the plaintiff, deposited a check (which was
supposedly for plaintiff corporation) to the current account of his
conduit corporation, INTERVEST. Such deposit was accepted.
Hence, Premium filed a case in court. In its motion to dismiss, the
same corporation, but this time represented by the Siguion
Reyna Law Offices, alleged that the filing of the case was
done without authority from its duly constituted board of
directors as shown by the minutes of the directors' meeting.
In his opposition, Premium, through Atty. Duadag contended that the
persons who signed said the board resolution are not directors of
the corporation and were allegedly former officers and that
the Articles of Incorporation of Premium show that Belen,
Nograles and Reyes are not majority stockholders. Siguion
Law Offices however contend that it is the information sheet that
should control over the articles since the latter does not keep track of
the many changes that take place after new stockholders subscribe to
corporate shares of stocks.
Issue:
Whether or not the corporation was authorized to file the case for
damages.
Ratio:
In the absence of an authority from the board of directors,
no person, not even the officers of the corporation can
validly bind the corporation. In this case, it is alleged that the
officers of the company have already changed and that Nograles, Belen
and Reyes are no longer stockholders. However, petitioner failed to
show proof that this election was reported to the SEC as required by
the corporation code.
In the absence of any board/resolution from the board, the present
action must necessarily fail.
Roxas v. dela Rosa
Doctrine: Where it appears that a corporation already has a duly functioning
board of directors, without any existing vacancies, the election of a new
board of directors at a called meeting is irregular and the courts have
jurisdiction to enjoin the holding of a special meeting of the shareholders
called by a committee representing a majority of the shareholders.
Facts:
Binalbagan Estate is a corporation. In July, the possessors of the
majority of the shares of said corporation formed a voting trust
composed of 3 members as trustees. Such trustees were
authorized to represent and vote the shares pertaining to
their constituents and to this end, the shareholders
undertook to assign their shares to the trustees on the books
of the company.
Heilbronn, as representative of the voting trust, was able to nominate
and elect a board of directors to his own liking without opposition
form the minority. After the board has been elected and qualified, they
chose their officers. However, since the creation of the voting trust,
there has been a number of vacancies caused by the
resignation or absence from the Philippines. This resulted
into various substitutions in the personnel of the voting
trust.
Thereafter, the present trustees were apparently desirous of ousting
the officers of the company without awaiting termination of their
official terms at the expiration of 1 year form the date of their election.
To this effect, they decided to hold a special general meeting for
the election of the board of directors and amendment of the
by laws.
A case was filed for the purpose of enjoining the meeting.
Subsequently, respondent judge herein issued a restraining order.
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Issue:
Whether or not the judge acted within his powers when he issued a
restraining order enjoining the meeting of the corporation.
Ratio:
The judge was acting within his legitimate powers. Under the
law, the directors of a corporation can only be removed from office by
a vote of the stockholders representing at least 2/3 of the subscribed
capital stock entitled to vote, while vacancies in the board, when
they exist, can be filled by a mere majority vote. The law
further requires that the action is to be taken at a special meeting
to remove the directors, such purpose shall be indicated in
the call.
In this case, while the voting trust controls the majority of the stock, it
does not have a clear 2/3 majority. It was therefore impolitic
for the petitioners, in forcing the call for the meeting to
come out frankly and say in the notice that one purpose of
the meeting was to remove the directors of the corporation
from office. Instead, the call was limited to the election of the board
of directors, it being evident that the intention was to elect a new
board as if the directorate had been then vacant.
Angeles v. Santos
Facts:
Plaintiffs and defendants in this case are stockholders and members of
the board of directors of the Paranaque Rice Mill, a corporation
organized for the purpose of operating a rice mill. A complaint was
filed by Angeles against Santos for allegedly, among other
thins, using the funds of the corporation for purely personal
ends and for not rendering any account of his management
or for the condition of the business of the corporation. The
further assert that since 1932, Santos has called no meeting of the
board of directors or the stockholders thus enabling him to continue
holding, without any election, the position of present and finally, that
of manager.
After hearing both parties in this case, the trial court ordered the
appointment of a receiver, Emilio Figueroa. Subsequently, the
lower court rendered a decision ordering the removal of the
defendants from their offices and members of the board of
the corporation.
Issue:
Whether or not the court has the authority to remove a director from
the corporation.
Ratio:
Our Corporation Law does not confer expressly upon the
court the power to remove a director of a corporation. There
are abundant authorities however which hold that if the court has
acquired jurisdiction to appoint a receiver because of the
mismanagement of directors these may thereafter be removed and
others appointed in their place by the court in the exercise of its equity
jurisdiction. IN this case however, the properties and assets of
the corporation being amply protected by the appointment
of a receiver and view of the statutory provisions, the court
is of the opinion that the removal of the directors is, under
the circumstances, unnecessary and unwarranted.
When the directors are guilty of breach of trust, the court, in the
exercise of its equity jurisdiction, and upon showing that an
intracorporate remedy is unavailing, will entertain a suit filed by the
members to prevent the waste and dissipation and the commission of
illegal acts and otherwise redress the injuries the stockholders suffer
against the wrongdoing of the majority.
Valle Verde Country Club v. Africa
Doctrine: Section 29 of the Corporation Code contemplates a vacancy
occurring within the director's term of office. When a vacancy is created by
expiration of a term, logically, there is no more unexpired term to speak of.
Hence, it shall be the corporation's stockholders who shall possess the
authority to fill in a vacancy caused by the expiration of a member's term.
Facts:
During an annual stockholders' meeting, the members of the VVCC
Board of Directors were elected. However, in the years 1997, 1998,
1999, 2000, and 2001, the requisite quorum for the holding of the
stockholders' meeting could not be obtained. Consequently, the
directors continued to serve the VVCC Board in a holdover
capacity.
3 of the members of said board resigned from position as member of
the board. Hence, the remaining directors, still constituting a quorum,
filled in the vacancy created by such resignation.
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For this reason, Africa, a member of VVCC questioned the filling in of
the vacancies on the ground that the terms of the directors
already expired. Hence, the resulting vacancy, should have
been filled by the stockholders in a regular or special
meeting called for that purpose, and not by the remaining
members of the VVCC Board, as provided for in Section 29 of
the Code. Africa asserts that the successor serves for the unexpired
term of the resigning director and in this case, there was no more
unexpired term since the resigning officer was in a holdover capacity.
Issue:
Whether or not the remaining directors of the VVCC, still constituting
a quorum, can elect another director to fill in a vacancy caused by the
resignation of a holdover director.
Ratio:
No. The holdover period is not a part of the term of office of
a member of the board.
Term is defined as the time during which the officer may claim to hold
office as of right, and fixes the interval after which the several
incumbents shall succeed another. The term of office is not
affected by the holdover. It is fixed by statute and it does not
change simply because the office may become vacant or if
the successor fails to qualify.
Tenure represents the term during which the incumbent actually holds
office. It may be shorter than the term. The term of the members
of the board shall be only for 1 year. The holdover period is
not part of the term nor is it a new term. It constitutes a part
of his tenure. Corollary, when the incumbent member 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 1 year, Makalintal's term of office expired. His
holdover capacity cannot be considered as extending his term. His
term is considered as already expired. Hence, the vacancy must be
filled by the stockholders of VVCC in a regular or special
meeting called for the purpose.
Central Cooperative Exchange v. Tibe
Facts:
As a member of board of directors, respondent Concordio Tibe drew
and collected amounts representing commutable per diem for
attending meetings of the Board of Directors in Manila, per
diems and transportation expenses for FACOMA visitations,
representation expenses and commutable discretionary
funds. All of these were disbursed with the approval of the general
manager, treasurer and auditor of CCE.
It should be noted that the by-laws of the said corporation provides
that compensation, if any and the per diems for attendance at
meetings of the members of the board shall be determined by the
members at any annual meeting or special meeting of the
exchange called for the purpose. Resolutions were then passed by
the board of directors, from which, Tibe drew the amounts
sought to be refunded.
Issue:
Whether or not the board of directors of CCE had the power and
authority to adopt various resolutions which appropriated the funds of
the corporation for the above-enumerated expenses for the members
of the said board.
Ratio:
The resolutions are contrary to the by-laws of the federation
and therefore, not within the power of the board of directors
to enact. The by-laws explicitly reserved the power to determine the
compensation of members of the board of directors, and the
stockholders did restrict such compensation to "actual transportation
expenses plus per diem of P30.00 and actual expenses while waiting".
It is well settled that directors of corporations presumptively serve
without compensation and in the absence of an express agreement or a
resolution in relation thereto, no claim can be asserted therefor.
There can be no recovery of compensation, unless expressly
provided for, when a director serves as a president, VP, secretary,
treasurer or cashier, as a member of an executive committee, as
chairman of a building committee or similar offices.
In this case, the directors assigned to themselves additional
duties, such as the visitation of FACOMAS. They were clearly
acting in excess of their authority as expressed by the by-laws.
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Western Institute v. Salas
Doctrine: 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 director/trustee.
Facts:
The Salas' are majority and controlling members of the Board of
Trustees of WIT, a corporation engaged in operating an educational
institution. They called for a special board meeting for the purpose of
implementation of the amended by-laws of the WIT on
compensation of all officers of the corporation. When such
meeting adjourned, a resolution was issued granting monthly
compensation to private respondents herein as corporate
officers.
A few years later, petitioners herein implicated the respondents in a
criminal case (falsification of public documents and estafa) for
allegedly making it appear that the resolution was passed by the board
at an earlier date when in truth, the same was actually passed later, a
date not covered by the corporations fiscal year.
Respondents were acquitted. Hence, this appeal on the civil aspect of
the case. Petitioners maintain that the grant of compensation is
proscribed under the Corporation Code. Thus, they are
obliged to return the amounts to the corporation with
interest.
Issue:
Whether or not the resolution adopted by the board granting monthly
compensation to the private respondents as corporate officers (VP,
treasurer, secretary, etc.) is in violation of the corporation code.
Ratio:
No. The proscription in the code is not a sweeping rule. The
directors shall not receive any compensation as such directors. The
phrase "as such" 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/trustees. 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 director/trustee.
In this case, the members of the board were granted compensation as
officers of the corporation, not as directors/trustees.
Tramat Mercantile v. Court of Appeals
Facts:
De La Cuesta, doing business under the name and style of Farmers
Machineries sold to TRAMAT one unit of hinomoto tractor powered by
a 1.3HP diesel engine. TRAMAT's president, David Ong, issued a check
for P33,500 for such purchase.
TRAMAT, in turn, sold the tractor, together with an attached lawn
mower fabricated by it to the MWSS for P67,000. David Ong caused
a "stop payment" of the check when MWSS refused to pay
the tractor and mower after discovering that, aside from
stated defects of the attached mower, the engine was a
reconditioned unit (represented as brand new by De La Cuesta).
Hence, De La Cuesta filed a case in court for the recovery of the sum of
the check. In his answer, Ong contends that De La Cuesta has no
cause of action against him since the transaction was
between TRAMAT and De La Cuesta, not with Ong in his
personal capacity.
The trial court rendered a decision holding Ong jointly and severally
liable to pay the plaintiff the sum of the check. On appeal, the CA
affirmed.
Issue:
Whether or not Ong should be jointly and severally liable with
TRAMAT.
Ratio:
It was an error to hold David Ong jointly and severally liable
with TRAMAT to De La Cuesta under the transaction. Ong
there so acted, not in his personal capacity, but as an officer of a
corporation. TRAMAT has a separate and distinct 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 with
the corporation may so validly attach as a rule only when:
1. He assents to a) patently unlawful act of the corporation
or b) bad faith or gross negligence in directing its
affairs or c) for conflict of interest, resulting in
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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 agree to hold himself personally and solidarily liable
4. He is made, by specific provision of law, to personally answer
for his corporate action.
Uichico v. NLRC
Doctrine: 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 time however, when solidary liabilities may be incurred
but only when exceptional circumstances warrant such.
Facts:
Luzviminda, Shirley and Carmen (employee-respondents for brevity)
were employed by Crispa, Inc. for many years in the latter's garments
factory. Sometime in September, based on an unsigned and
unaudited Profit and Loss Statement, their services were
terminated on the ground of retrenchment due to alleged serious
business losses suffered by Crispa Inc.
By reason of such dismissal, employee respondents filed a case before
the NLRC for illegal dismissal against Crispa, Inc., Valeriano (a major
stockholder), and Uichico, Floro and Basilio (high ranking
officers and directors of the company).
The NLRC rendered a decision dismissing the complaint for illegal
dismissal. On appeal to the Second Division of the NLRC, the decision
was reversed, holding Crispa Inc. liable for illegal dismissal and
modified the award of separation pay in the amount of 1 month for
every 1 year of service.
When employee respondents sought a clarification of the NLRC's
resolution insofar as the computation of payment of separation pay is
concerned, the NLRC treated the motion as an appeal and thereafter
granted the inclusion in the computation, 6 months of
backwages.
Issue:
Whether or not Crispa Inc. is liable for illegal dismissal.
Whether or not the officers and directors of the company are jointly
and solidarily liable for payment of backwages and separation pay.
Ratio:
The employer is liable for illegal dismissal. Lay-off is an act of
the employer of dismissing employees because of losses in the
operation of a business, lack of work, and considerable reduction on
the volume of his business. Such is a right consistently recognized and
affirmed by the courts. However, the burden falls on the employer to
prove economic or business losses with appropriate supporting
evidence.
In this case, the Statement of Profits and Losses submitted by the
employer (Crispa, Inc.) to prove its alleged losses, without the
accompanying signature of a certified public accountant or audited y
an independent auditor, are nothing but self serving documents
which ought to be treated as a mere scrap of paper devoid of
any probative value. In view of the failure of the company to prove
the alleged financial losses, the company is found to be guilty of
illegal dismissal.
The corporate directors and officers are solidarily liable with
the corporation. In labor cases, particularly, directors and officers
are solidarily liable with the corporation for termination of
employment of corporate employees done with malice of bad faith.
In this case, it is undisputed that the petitioners have a direct
hand in the illegal dismissal of the respondent employees.
They were the ones who signed the Board Resolution retrenching the
employee-respondents on the feigned ground of serious business
losses that had no basis. This is indicative of bad faith on the part of
petitioners for which they can be held jointly and severally liable
with Crispa for all the money claims of the illegally
terminated respondent employees in this case.
Pascual v. Orozco
Facts:
Plaintiff Pascual became a stockholder of the corporation on
November 13, 1903. It is alleged that the defendant Orozco, as member
of the board of directors and board of government, during the years of
1903 1907, did fraudulently, and the great prejudice of the
bank and its stockholders, appropriate their own use form
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the profits of the bank sums of money amounting to P20,000
per annum. Defendants refuse to refund to the bank the sums so
misappropriated or any part therof.
It should be stressed that defendants herein constitute a majority of
the present board of directors of the bank who alone can
authorize an action against them in the name of the
corporation. Hence, Plaintiff Pascual brought this action before the
courts in his own right as a stockholder of the bank, for the benefit of
the bank and all other stockholders thereof. Pascual sues on behalf
of the corporation, which, even though nominally a
defendant, is to all intents and purposes the real plaintiff in
this case.
Issue:
Whether or not the plaintiff has a cause of action for the alleged
misappropriation during the years of 1903-1907.
Whether or not the plaintiff has a cause of action for the alleged
misappropriation during the years of 1899-1902.
Ratio:
It is the duty and the right of the corporation to bring suit to remedy
these wrongs. However, it is apparent in this case that the corporation
is helpless and unable to institute such suit. It was found, where
the guilty parties themselves controlled the directors and
also a majority of the stock, that the corporation was in their
power, was unable to institute suit, and that the minority of
the stockholders were being defrauded of their rights and
were without remedy. In cases where the 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.
As a general proposition, the purchaser of stock in a corporation is not
allowed to attack the acts and management of the company prior to the
acquisition of his stock. In this case, it is evident that the plaintiff was
not injured or affected in any manner by the transactions set forth in
the years 1899-1902. His vendor could have complained of
these transactions but he did not choose to do so. The
discretion whether to sue or acquiesce in and agree to them
is, in our opinion, incapable of transfer. Pascual out to take
things as he found them when he voluntarily acquired his 10 shares. If
he was defrauded in the purchase of these shares, he should sue his
vendor.
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.
Republic Bank v. Cuaderno
Facts:
Damaso Perez is a stockholder of the Republic Bank, a Philippine
banking corporation instituted a derivative suit for and in behalf of the
said Bank against Miguel Cuaderno, Bienvenido Dizon, The Board of
Directors of the Republic Bank and the Monetary Board of the Central
Bank of the Philippines. Damaso alleges that respondent Roman
granted loans to relatives and selected Cuaderno and Dizon
to shield himself from the alleged wrongdoing and from any
prosecution that may be instituted against him.
The complaint also alleges that the present composition of the board of
directors of the bank are constituted by men chosen by respondent
Roman so that it was futile to ask them, in the first place, to institute
this action on behalf of the bank.
Issue:
Whether or not the plaintiff can interfere with the corporate acts of
Roman.
Ratio:
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 the officials of the corporation refuse to sue, or
are the ones to be sued or hold the control of the
corporation. The plaintiff 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 brought is a derivative one,
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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. The frauds charged by the plaintiff are frauds
against the Bank that redounded to its prejudice.
That no other stockholder has chosen to make common cause with
plaintiff Damaso is irrelevant, since the smallness of plaintiff's
holdings is no ground for denying him relief.
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 by the
interest of justices.
This is also not a quo warranto. Damaso is not claiming title to Dizon's
position as head of the 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.
San Miguel Corporation v. Khan
Facts:
A voting trust agreement in favor of Andres Soriano was constituted.
When Andres died, Eduardo Cojuangco was elected as the substitute
trustee for said voting trust with the power to delegate the trusteeship
in writing to Andres Soriano III. Shortly thereafter, Cojuangco left the
country. Subsequently, Andres Soriano III (for and in behalf of
Neptunia Corporation, a subsidiary of SMC) entered into an
agreement with 14 corporations, as sellers, for the purchase by
Soriano for himself and as agent of several persons of shares held by
the corporations. Allegedly, Soriano wished to purchase the same to
institutionalize and stabilize the management of the company and to
direct the company towards giving the highest priority to its principal
products and extensive support to the agricultural programme of the
government.
At this point, the SMC shares were sequestered by the PCGG. When
SMC suspended payments, the 14 corporations sued for rescission and
damages. Meanwhile, by virtue of the sequestration, PCGG ordered the
issuance of qualified stocks to 7 individuals, including Eduardo de los
Angeles from the sequestered shares for them to hold in trust.
Therafter, the Board passed a resolution, assuming the loans
incurred by Neptunia for the purchase of the
aforementioned stocks. They found that there was nothing illegal
in such assumption of debt since Neptunia was an indirectly wholly
owned subsidiary of SMC and that there was no additional expense or
exposure for the SMC. It was for this reason that Eduardo de los
Santos brought the present action before the SEC.
Respondent directors alleged that de los Angeles has no legal standing
having been merely imposed by the PCGG and that the twenty (20)
shares owned by him personally cannot fairly and adequately
represent the interest of the minority.
Issue:
Whether or not Eduardo de los Angeles has legal capacity to file this
derivative suit.
Ratio:
Yes. The theory that he has no personality to bring suit in
behalf of the corporation because of his miniscule
stockholdings and that there is a conflict of interest between
him and the PCGG cannot be sustained. The implicit argument
herein that a stockholder must hold a substantial interest or significant
block of stocks to bring a derivative suit finds no support whatever in
law.
The requirements of a derivative suit are as follows:
1. That the party bringing the suit should be a shareholder at the
time of the act or transaction being complained of, the number
of his stocks not being material.
2. He has tried to exhaust the intra-corporate remedies, but to no
avail.
3. The cause of action 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.
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The bonafide ownership of a stockholder of stock in his own
right suffices to invest with him standing to bring a
derivative suit for the benefit of the corporation.
Moreover, the contention that there is a conflict of interest
because he sits in the SMC board of directors by the grace of
PCGG cannot be sustained. It is undisputed that apart from the
qualifying shares given to him by the PCGG, it should be noted that
Eduardo also owns 20 shares in his own right, as regards which
he cannot 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.
Prime White Cement v. IAC
Facts:
Alejandro Te (Te) and PWCC (Prime White Cement Corporation),
through its president and chairman of the board, entered into a
dealership agreement whereby Te was obligated to act as the
exclusive dealer and distributor of PWCC of its cement
products in the entire Mindanao Area for the term of 5 years
at a fixed price of P9.70 per bag. Relying heavily on said
dealership agreement, Te entered into agreements with different
hardware stores for the purchase of the white cement. However,
PWCC decided to impose a change in the conditions of their
dealership agreement (they pegged the price at P13,30 per bag and
was further subject to amendment). Moreover, notwithstanding their
exclusive dealership agreement, Te later found out that PQCC entered
into a dealership agreement with another corporation for the
marketing of white cement. Hence this suit.
The trial court adjudged that the corporation should be made liable to
Te since it appears that the officers who signed the dealership
agreement were authorized.
Issue:
Whether or not the dealership agreement was valid.
Ratio:
The dealership agreement is not valid. All corporate powers
shall be exercised by the Board of Directors as a body except as
otherwise provided by law. The Board may expressly delegate specific
powers to the President or any of its officers but in the absence of
declarations, a contract entered into by the president, on
behalf of the corporation, may still bind the corporation if
the board ratifies it. Also, the president may, as a general rule,
bind the corporation by a contract in the ordinary course of business.
These rules apply where the president is dealing with a third person
outside the corporation. However, the situation is different, as in this
case, when Te was not an ordinary stockholder, he was a
member of the Board of directors and auditor of the
corporation as well.
A director holds a position of trust and as such, he owes a duty of
loyalty to his corporation. In cases where a conflict of interests arises,
he cannot sacrifice the corporation's interest to his own advantage and
benefit. He cannot utilize inside information and his strategic
position for his own preferment.
However, it is not always true that a director's contract with his
corporation is void or voidable. It is valid if the contract is fair
and reasonable under the circumstances and if the
stockholders ratify it and a full disclosure of his adverse
interest is made. In this case, the contract was NOT fair and
reasonable. The contract entered into was to sell and supply 20,000
bags of white cement for 5 years at a fixed price of P9.70 per bag. Te
must have known himself that at that time, prices of commodities in
general and white cement in particular were not stable and were
expected to rise. He advanced his own interest and protected himself
from the increase in the market price of white cement.
Montelibano v. Bacolod Murcia Milling
Doctrine: The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to the
express powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not.
Facts:
Alfredo and Alejandro Montelibano and the Limited co-partnership
Gonzaga and Company (plaintiffs) had been and are sugar planters
adhered to the Bacolod Murcia Milling's sugar central mill under
identical milling contracts.
Originally executed in 1919, the contracts were stipulated to be in force
for 30 years starting with the 1920-1921 crop and provided that the
resulting product should be divided in the ratio of 45% for the mill and
55% for the planters. Sometime in 1936, there was a proposal to
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increase the planters' share to 60% of the manufactured
sugar and resulting molasses besides other concessions and
extending the operation of the milling contract to 45 years.
The Board of Directors granted this amended milling contract and
issued a resolution therefor as a supplement to the amended
milling contract which states that whatever concessions the
millers grant to the said planters will also be matched by it.
Thereafter they signed and executed the printed amended milling
contract but a copy of the resolution signed by the central's general
manager was not attached to the printed contract.
In 1953, appellants filed the present action citing that under the
resolution (with the supplement), the milling company had become
obligated to grant concessions to the plaintiffs matching
those which it granted to other planters. However, the
milling company resisted the claim and defended by urging
that the stipulations contained therein were made without
consideration, therefore null and void, being in effect a
donation that was ultra vires and beyond the powers of the
corporate directors to adopt.
Issue:
Whether or not the resolution was valid.
Ratio:
It is valid and binding. The Board of Directors of Bacolod-
Murcia Milling 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.
The controverted resolution was adopted by the appellee corporation
as a supplement to, or further amendment for the proposed milling
contract. When the milling contract was executed, the concessions
granted by the disputed resolution had been incorporated to its terms.
There is no reason why the appellants should reject them or consider
them as separate and apart from the main amended milling contract,
specially taking into account that appellant was the one that agitated
for the concessions embodied in said resolution. The resolution
formed an integral part of the amended milling contract and
not as a separate bargain as can be seen from the fact that a
copy of the resolution was attached to the printed contract
without special negotiations or agreement between the
parties. Hence, the terms in the resolution were supported by the
same cause or consideration by the planters. The conclusion
that the resolution constituted gratuitous concessions not supported
by any consideration is legally untenable.
Since there is no rational explanation for the company's
assenting to the further concessions asked by the planters
before the contracts were signed, except as further
inducement for the planters to agree to the extension of the
contract period, to allow the company to retract such
concessions would be to sanction a fraud upon the planters
who relied on such additional stipulations.
There is no doubt herein that the directors 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. It is
a question in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one
which is lawful in itself, and not otherwise prohibited, is done for the
purpose of serving corporate ends, and is reasonable tributary to the
promotion of those ends, in a substantial and not in a remote fanciful
sense, it may fairly be considered within charter powers. The test is
whether the act in question is in direct and immediate
furtherance of the corporations business, fairly incident to
the express powers and reasonable necessary to their
exercise. If so, the corporation has the power to do it.
In this case, since 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. 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.
Alhambra Cigar & Cigarette Manufacturing Co v. SEC
Doctrine: No corporation in a state of liquidation can act in any way, much
less amend its articles for the purpose of continuing the business for which it
was established since as a rule, the corporation is ipso facto dissolved as soon
as that time expires.
Facts:
Alhambra Cigar and Cigarette Manufacturing Company (Alhambra for
brevity) was duly incorporated under Philippine laws. It was set to
exist for a period of 50 years from incorporation which already
expired. On the date of expiration, it entered into a state of
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liquidation. In order to carry out its business, a new corporation,
Alhambra Industries was formed (for liquidation purposes).
At the time of the 3-year statutory period for liquidation RA 3531 was
enacted into law which amended the law in force and effect.
It empowered domestic private corporations to extend their
period of corporate life beyond the 50 year period fixed by
their articles of incorporation. Seeking to extend the life of
Alhambra, its board adopted a resolution which amended their articles
of incorporation and extended the life of the corporation to a period of
50 years. Such amended was denied by the SEC on the ground
that its term of existence already expired at the time the law
allowing such amendment took effect.
Issue:
Whether or not a corporation may extend its life by amendment of the
articles of incorporation during the 3-year statutory period for
liquidation when its original term of existence already expired?
Ratio:
No. Such new provision is a privilege given to prolong
corporate life under the amendment must be exercised
before the expiry of the term fixed in the articles of
incorporation. A dissolved corporation as a body corporate for 3
years has for its purpose the final closure of its affairs and no other;
the corporation is specially enjoined from continuing the business for
which it is established. Upon dissolution, a corporation became legally
dead for all purposes except for limited and specified purposes
incident to complete liquidation of its affairs. Thus, a moment a
corporation's right to exist ceases, its corporate powers are terminated
just as powers of a natural person to take part in mundane affairs cease
to exist upon his death. The filing and recording of the certificate of
extension after that time cannot relate back to the date of passage of a
resolution by stockholders in favor of the extension to save the life of
the corporation. When the corporate life was ended, there was
nothing left to extend. It only existed for the purpose of
winding up its affairs.
The privilege of extension is purely statutory and generally, these
conditions must be complied with, and the steps necessary to effect the
extension must be taken, during the life of the corporation and before
the expiration of its terms of existence as originally fixed by its charter
or the general law, since, as a rule, the corporation is ipso facto
dissolved as soon as that time expires.
There is a broad distinction between the extension of a charter and the
grant of a new one. To renew a charter is to revive a charter which has
expired. Our law limits itself to extension of corporate
existence. At the time of the passage of the law, Alhambra's
corporate life already expired. It had overstepped the limits
of its limited existence. No life is there to prolong.
Phil Trust Company v. Rivera
Doctrine: A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of the
capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the articles of incorporation.
Facts:
Cooperative Naval Filipina was duly incorporated under the laws of the
Philippines with a capital of P100,000 divided into one thousand
shares of a par value of 100 each. Rivera subscribed 450 shares
representing a value of P45,000 to said corporation. In the
course of time, the company became insolvent and went into the hands
of Philippine Trust as assignee in bankruptcy.
Despite Rivera's subscription to the shares, he never paid for the half
of his stock subscription by reason of a resolution adopted to that
effect by the stockholders to the effect that the capital should
be reduced by 50% and the subscribers released from the
obligation to pay any unpaid balance of their subscription in
excess of 50% of the same. It does not appear that any certificate
was at any time filed in the Bureau of Commerce and Industry showing
such reduction despite the adopted resolution.
Pursuant to Rivera's nonpayment, an action was instituted by
PhilTrust for the purpose of recovering the balance of the unpaid
subscription.
Issue:
Whether or not the resolution relied upon by defendant absolving him
from his unpaid subscription is valid.
Ratio:
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The resolution herein releasing shareholders from their
obligation to pay 50% of their respective subscriptions was
an attempted withdrawal of so much capital from the fund
upon which the company's creditors were entitled ultimately
to rely and having been effected without compliance with the
statutory requirements, was wholly ineffectual. A corporation
has no power to release an original subscriber to its capital stock from
the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of
the capital stock can take place only in the manner and under the
conditions prescribed by the statute or the charter or the articles of
incorporation.
Benito v. SEC
Doctrine: The general rule is that pre-emptive right is recognized only with
respect to new issues of shares and not with respect to additional shares of
originally authorized shares. This is on the theory that when a corporation at
its inception offers its first shares, it is presumed to have offered all of those
which it is authorized to issue. An original subscriber is deemed to have taken
his shares knowing that they form a definite proportionate part of the whole
number of authorized shares. When the shares left unsubscribed are later
reoffered, he cannot therefore claim a dilution of interest.
Note: This ruling appears to no longer be applicable as Section 39 of the new
corporation code states that stockholders' have a preemptive right to
subscribe to all issues or disposition of shares of any class in proportion to
their shareholdings.
Facts:
Corporation Jamiatul's Articles of Incorporation were filed with the
SEC and were approved with an authorized capital stock of P200,000
divided into 20,000 shares at a par value of P10.00 each. Petitioner
Benito herein subscribed to 460 shares worth P4,600.
Thereafter, the respondent corporation filed a certificate of increase of
its capital stock from 200,000 to 1,000,000. Thus, P110,980 worth
of shares were subsequently issued by the corporation from
the unissued portion of the authorized capital stock of
200,000. Of the increased capital stock of, P160,000 shares were
subscribed by Ramos, Lucoman and Alonto.
Benito then filed with the SEC a petition alleging that the
additional issue worth P110,980 of previously subscribed
shares of the corporation was made in violation of his pre-
emptive right to said additional issue and that the increase
in the authorized capital stock was illegal considering that
the stockholders of record were not notified of the meeting
wherein the proposed increase was in the agenda.
Issue:
Whether or not the increase in the authorized capital stock is illegal.
Whether or not there was a violation of Benito's pre-emptive right
Ratio:
The issuance of the unsubscribed portion of the capital stock
worth P110,980 is not invalid even if assuming that it was
made without notice to the stockholders as claimed by the
petitioner. The power to issue shares of stocks in a corporation is
lodged in the BOD (Board of Directors) and no stockholders' meeting
is necessary to consider it because additional issuance of shares
of stocks does not need the approval of stockholders.
The fact that he was not able to exercise his pre-emptive right because
of the absence of such notice to stockholders cannot serve to invalidate
the issuance. The general rule is that a pre-emptive right is
recognized only with respect to new issues of shares and not
with respect to additional issued or originally authorized
shares on the theory that when a corporation at inception
offers its first shares, it is presumed to have offered all of
those which it is authorized to issue. A subscriber is deemed to
have taken his shares knowing that they form a definite proportionate
part of the whole number of authorized shares. When the
unsubscribed shares are later reoffered, he cannot therefore claim
a dilution of interest.
However, since petitioner herein was able to prove the fact that he was
not notified of the said meeting and that he never attended the same
since he was out of the country at the time, as far as petitioner is
concerned, he had not waived his pre-emptive right to
subscribe as he could not have done so by reason that he was
not present at the meeting and had not executed a waiver
thereof. Not having waived such right and for reasons of equity, he
may still be allowed to subscribe to the increased capital stock
proportionate to his present shareholdings.
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Islamic Directorate v. Court of Appeals
Doctrine: In a sale or disposition of all the corporate property and assets
falling within Section 40 of the Corporation Code, the majority of the
legitimate Board of Trustees, concurred in by at least 2/3 of the bona fide
members of the corporation should be obtained. A sale or other disposition
shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated.
Facts:
The Islamic Directorate of the Philippines (IDP) was incorporated for
the purpose of establishing an Islamic Center in QC (construction of a
mosque and other religious infrastructures) so as to facilitate the
effective practice of Islamic faith in the area. To this end, the Libyan
government donated money to the ID to purchase land at Tandang
Sora, Quezon City to be used as a center for the Islamic populace.
After the purchase of the said land by the Libyan government in the
name of IDP, Martial law was declared and most of the members of
he board of IDP flew to the Middle East to escape political
persecution. Thereafter, 2 muslim groups sprung, the Carpizo
Group and the Abbas Group, with both groups claiming to be
the legitimate IDP. However, the SEC, in a decision involving the
two groups, held that their election was null and void and further
ordered them to hold a valid election. No election was ever called.
Without having been properly elected as new members of
the Board of Trustee, the Carpizo Group caused to be signed
an alleged Board Resolution of the IDP authorizing the sale
of the subject 2 parcels of land to private respondent INC
(Iglesia Ni Cristo) for a consideration, which sale was evidenced by an
Absolute Deed of Sale. For this reason, the Tamano Group filed a
case before the SEC which sought to nullify the sale made to INC,
allegedly because the Carpizo Group was not the legitimate members
of the Board of Trustees of the IDP.
Pending the SEC case filed by the Tamano Group, for failure to
perform its obligations under the consummated sale, the INC filed
an action for specific performance with damages in court
against the vendor Carpizo Group to compel the group to clear the
properties and deliver the full and physical possession of the property
to them.
In the meantime, the SEC came out with a decision which
declared that the sale of the 2 parcels of land in QC to the
INC was null and void. However, on appeal, the CA set aside this
portion of the decision.
Issue:
Whether or not the Carpizo Group Resolution is valid and binding.
Ratio:
All acts carried out by the Carpizo Board, particularly the
sale of the property, allegedly in the name of IDP, have to be
struck down for having been done without the consent of the
IDP through a legitimate Board of Trustees. The SEC made an
unequivocal finding that the Carpizo Group is a bogus Board of
Trustees and consequently, bereft of any authority to bind
the IDP in any kind of transaction including the sale or
disposition of the property.
In this case, the IDP, owner of the subject parcels of land, never gave
its consent thru a legitimate Board of Trustees, to the
disputed Absolute Deed of Sale executed in favor of INC.
Even assuming that they are legitimately the Board of
Trustees, the sale is still deemed void because of the failure
to comply with Section 40 of the corporation code which
requires that in selling or disposing all the corporate property and
assets falling within Section 40 of the Corporation Code, the
majority of the legitimate Board of Trustees, concurred in by
at least 2/3 of the bona fide members of the corporation
should be obtained. A sale or other disposition shall be deemed to
cover substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the business or
accomplishing the purpose for which it was incorporated.
In this case, since the property herein constitutes the only property of
the IDP, its sale to a third party is a sale or disposition of all the
corporate property and assets of IDP falling squarely within Section
40. The twin requirements were not met as the Carpizo Group together
with the sham board resolution authorizing the negotiation for the sale
were from all indications, not bonafide members of the IDP as they
were made to appear to be. Apparently, there are only 15 members of
the corporation, including 8 members of the Board of Trustees.
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Corporation Law Midterms Case Digests (Atty. Quimson)
Edward J. Nell v. Pacific Farms
Doctrine: Generally, where one corporation sells or otherwise transfers all of
its assets to another corporation, the latter does not become liable for debts
and liabilities of the transferor except 1) where the purchaser expressly or
impliedly agrees to assume such debts; 2) the transaction amounts to a
consolidation or merger of the corporations; 3) where the purchasing
corporation is merely a continuation of the selling corporation and ; 4) where
the transaction is entered into fraudulently in order to escape liability for
such debts.
Facts:
Nell, appellant, secured in a prior civil case a judgment against Insular
Farms representing the sum of an unpaid balance of the price of a
pump sold by Nell to Insular Farms. A writ of execution was
issued but it was unsatisfied for the reason that Insular
Farms had no leviable property. It is for this reason that Nell
brought an action against PACIFIC FARMS for the collection of
the judgment aforementioned upon the theory that PACIFIC
FARMS is the alter ego of Insular Farms because the latter sold
all or substantially all of the shares of stock, as well as the real
properties of Insular, including the pumping equipment sold by the
appellant.
Issue:
Whether or not Pacific is the alter ego of Insular.
Ratio:
These facts presented do not prove that Pacific is an alter ego
of Insular or is liable for its debts. Generally, where one
corporation sells or otherwise transfers all of its assets to another
corporation, the latter does not become liable for debts and liabilities
of the transferor except: 1) where the purchaser expressly or
impliedly agrees to assume such debts; 2) the transaction
amounts to a consolidation or merger of the corporations; 3)
where the purchasing corporation is merely a continuation
of the selling corporation and ; 4) where the transaction is
entered into fraudulently in order to escape liability for such
debts.
In this case, there is neither proof nor allegation that Pacific expressly
or impliedly agreed to assume the debt of Insular in favor of Nell, or
that Pacific is a continuation of Insular or that the sale either the
shares of stocks or the assets of Insular Farms to the appellee has been
entered into fraudulently in order to escape liability for the debt of
Insular in favor of appellant herein.
Steinberg v. Velasco
Doctrine: The creditors of a corporation have the right to assume that so long
as there are debts and liabilities, the board of directors of the corporation will
not use its assets to purchase its own stock or to declare dividends to its
stockholders when the corporation is insolvent.
Facts:
As receiver of the Sibugey Trading Company (Trading Company) sued
the officers and directors of the corporation for allegedly approving
and authorizing various unlawful purchases already made of a large
portion of the capital stock of the corporation from its various
stockholders and for approving a resolution for the payment of
dividends amounting to P3000 to the injury of creditors. Allegedly,
the total capital stock unlawfully purchases was P3300 and
that allegedly, at the time of such purchase, the corporation
had accounts payable amounting to P13,807.50 most of
which were unpaid at the time of the petition for the
dissolution of the corporation, in contemplation of an
insolvency dissolution. These stocks were actually purchased from
2 former directors of the company who resigned before the board of
directors approved the purchase and declared dividends.
In its defense, the defendants assert that they were purchased by virtue
of a resolution of the board of directors of the corporation when the
business of the company was going very well. Moreover, they assert
that the amount of dividends paid really constituted a surplus profit of
the corporation.
Issue:
Whether or not the corporation legally purchased its own stock.
Whether or not the directors legally declared a dividend of P3000.
Ratio:
From the facts presented, it appears that the board of
directors of the corporation authorized the purchase of,
purchased and paid for 330 shares of the capital stock of the
corporation at the agreed price of P3300 and at the time of
the purchase, the corporation was indebted in the sum of
P13,807.50.
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As to dividends, the corporation then, did not have a bona
fide surplus from which the dividends could be paid, and
that payment of them in full at that time would affect the
financial condition of the corporation.
In this situation, it is very apparent that the directors did not act in
good faith or that they were grossly ignorant of their duties. The
directors are bound to care for its property and manage its affairs in
good faith and for violation of these duties resulting in waste of its
assets or injuries to the property, they are liable to account the same as
other trustees. If they do acts beyond their power, whereby
losses ensue to the corporation or dispose of its property or
pay away its money without authority, they will be required
to make good the loss out of their private estates.
The creditors of a corporation have the right to assume that so long as
there are debts and liabilities, the board of directors of the corporation
will not use its assets to purchase its own stock or to declare dividends
to its stockholders when the corporation is insolvent.
Dela Rama v. Ma-Ao Sugar Central
Doctrine: Section 42 of the Corporation Code allows a corporation to invest
its funds in any other corporation or business, or for any purpose other than
the main purpose for which it was organized, provided that its board of
directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least 2/3 of the voting power.
Facts:
This is a derivative suit instituted by 4 minority stockholders against
the Ma-Ao Sugar Central (Sugar Central) and Amado Araneta and 3
other directors of the corporation for allegedly committing illegal
and ultra vires acts consisting or corporate irregularities
and unauthorized investments. The plaintiffs herein allege that
the defendants made illegal investments in the Mabuhay
Printing and the Acoje Mining, not made in the pursuance of
the corporate purpose and without the requisite authority of
2/3 of the stockholders as required by Section 42 of the
Corporation Code (then Section 17). They further posit that even
assuming that these resolutions were valid, that it is still wanting in
legality for no resolution was approved by the affirmative vote of the
stockholders holding shares in the corporation entitling them to
exercise at least 2/3 of the voting power.
Allegedly, the defendants invested P655,000 in shares of stock of the
company but was later ratified by the Board of Directors. More than
that, the defendants contend that since the company was
engaged in the manufacture of sugar bags, it was perfectly
legitimate for the sugar central to manufacture sugar bags or
invest in another corporation engaged in the said
manufacture.
Issue:
Whether or not the investments made herein were valid.
Ratio:
A private corporation has the power to invest its corporate funds in
any other corporation or business, or to any purpose other than the
main purpose for which it was organized, provided that its board of
directors has been so authorized in a resolution by the affirmative vote
of stockholders holding shares in the corporation entitling them to
exercise at least 2/3 of the voting power on such a proposal at a
stockholders' meeting called for that purpose, and provided further
that no agricultural or mining corporation shall be in anywise be
interested in any other agricultural mining corporation. When the
investment is necessary to accomplish its purpose as stated
in the Articles of Incorporation, the approval of the
stockholders is not necessary.
The investment in question does not fall under the purview
of the Corporation Law. Sec. 40 of the Corporation Law allows a
corporation to "invest its fund in any other corporation or business, or
for any purpose other than the main purpose for which it was
organized," provided that its board of directors has been so authorized
by the affirmative vote of stockholders holding shares entitling them to
exercise at least two-thirds of the voting power.
Gokongwei v. SEC (1979)
Facts:
John Gokongwei was a stockholder of SMC. He filed a petition for
declaration of nullity of amended by-laws, cancellation of certificate of
filing of the amended-by laws, injunction and damages against the
majority of the members of the Board of Directors of the SMC on the
ground that:
o In 1976, the board of directors amended the by laws of the
corporation basing their authority to do so on a
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resolution of the stockholders adopted way back in
1961 (when the outstanding capital stock was lower).
Gokongwei asserts that under the Corporation Law and the by-
laws of the corporation itself, the power to amend or adopt
new by-laws may be delegated to the Board only by affirmative
vote at least 2/3 of the subscribed paid up capital stock of the
corporation which should have been computed on the
basis of the capitalization at the time of the
amendment. Since based on the 1961 authorization, he
contends that the board was without the power to amend.
Furthermore, he asserts that the 1961 authority has
already been exercised hence, it can no longer be
exercised again.
o As another cause of action, Gokongwei posits that prior to
the amendment, he had all the qualifications to be a
director of the corporation as a stockholder thereof
(right to vote and be voted for) and that in amending the
by-laws they purposely provided for disqualifications
and deprived him of his vested right. He contends that
corporations have no inherent power to disqualify a
stockholder from being elected.
o He also asserts that Andres and Jose Soriano (members of the
Board), while representing other corporations, entered into
a management contract with the corporation which
was avowed because the questioned amendment gave the
Board itself the prerogative to determine whether
they or other persons are engaged in a competitive
business with the SMC.
Subsequent to this, Gokongwei also filed an urgent motion for
production and inspection of documents alleging that the secretary
refused to allow him to inspect its records despite the request made.
He posits that the corporation had been attempting to suppress
information from the stockholders.
While the petition was pending to be heard, the corporation,
nevertheless, held a special stockholders' meeting for the
purpose of ratification and confirmation of the amended by
laws. This prompted Gokongwei to ask the SEC for a summary
judgment on the ground that by calling a meeting, the board
admitted the invalidity of the amendments of 1976. Subsequently, after
the denial of the restraining order and summary judgment, the board
of directors ratified the by-laws.
Later, Gokongwei discovered that the corporation has been investing
corporate funds in other corporations and business outside of the
primary purpose of the corporation, in violation of the corporation
code. Hence, he filed a petition seeking to have the board
members be declared guilty of such violation and ordered to
account for such investments.
Issue:
Whether or not the corporation has the power to provide for the
additional qualifications/disqualifications of its directors by amending
the by-laws.
Whether or not the corporation has the power to disqualify a
competitor from being elected to the board of directors as a reasonable
exercise of corporate authority.
Ratio:
Yes. Pursuant to the Corporation Law, any corporation may
amend its articles of incorporation by a vote or written
assent of the stockholders representing at least 2/3 of the
subscribed capital stock of the corporation. If the amendment
changes, diminishes or restricts the rights of the existing shareholders,
then the dissenting minority has only one right, to object
thereto in writing and demand payment for his share. It
cannot be said that prior to this, Gokongwei has a vested right to vote
and be voted for in the face of the fact that the law at the time such
right as stockholder was acquired contained the prescription that the
corporate charter and the by-law shall be subject to
amendment, alteration and modification.
Every corporation has the inherent power to adopt by-laws for its
internal government and to regulate the conduct and prescribe the
rights and duties of its members. Under the law, a corporation may
prescribe in its by-laws the qualifications, duties and
compensation of directors, officers and employees. Such
provision in the law is a qualification, in addition to the
requirement that every director must own in his right at
least one share of the capital stock of the stock corporation
of which he is a director.
Hence, every person who buys a stock with a corporation impliedly
contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and
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lawfully enacted by-laws and not forbidden by law. A
stockholder is considered to have parted with his personal right or
privilege to regulate the disposition of his property and surrendered
it to the will of the majority of his fellow incorporators.
The corporation has such power to disqualify. A director's
relationship with the corporation is of a fiduciary nature. Such springs
from the fact that directors have control and guidance of corporate
affairs and property hence of the property interests of the
stockholders. They are agents entrusted with the management
of the corporation for the collective benefit of the
stockholders. They occupy a fiduciary relationship and in this sense,
the relation is one of trust wherein the directors are the trustees and
the stockholders are beneficiaries.
He who is in such a fiduciary position cannot serve himself
first and his cestuis second. He cannot manipulate the
affairs of his corporation to their detriment and disregard of
the standards of common decency.
The doctrine of corporate opportunity is a recognition by the
courts that the fiduciary standards could not be upheld where the
fiduciary was acting for 2 entities with competing interests. This
doctrine rests on unfairness, in particular circumstances, of an officer
or director taking advantage of an opportunity for his own personal
profit when the interest of the corporation unjustly calls for protection.
It is obviously to prevent the creation of an opportunity for an officer
or director of San Miguel Corporation, who is also the officer or owner
of a competing corporation, from taking advantage of the information
which he acquires as director to promote his individual or corporate
interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was
made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
Gokongwei v. SEC (1980)
Facts:
This is a petition for review of petitioner seeking to nullify and set
aside the resolution of the court in the 1979 case sustaining the
findings of the SMC that petitioner is engaged in a business
competitive with or antagonistic to that of SMC and therefore,
ineligible for election as director, pursuant to the amended by-laws.
Petitioner alleges that his disqualification should not have been heard
in view of the pending motion for reconsideration and that the court
failed to consider that the respondent corporation board are
precluded from disqualifying petitioner because of the rule
of pari delicto and that the resolution of disqualification was
an overexertion of corporate power because by this act, the
board intended to perpetuate themselves in power.
Ratio:
The validity of the amended by-laws can no longer be relitigated on the
basis that it is already the law of the case and therefore, the
enforcement of the amended by-laws could not have been
ipso facto stayed by the motion for reconsideration.
There is evidence showing that petitioner was engaged in agricultural
and poultry business competitive with that of SMC. However,
petitioner did not adduce any evidence to rebut the evidence of his
disqualification. Findings of fact of administrative bodies will not be
interfered with by the courts in the absence of grave abuse of
discretion on the part of the agencies or unless the findings are not
supported by substantial evidence.
Nielson & Company v. Lepanto Consolidated Mining Co.
Facts:
A contract was executed between Nielson and Lepanto whereby
Nielson operated and managed the mining properties owned by
Lepanto for a management fee of 2,500 a month and 10% participation
in the net profits resulting from the operation of the mining properties
for a period of 5 years, renewable. When the Pacific War broke out,
the operation of the mining properties was disrupted on
account of the war and the rehabilitation and reconstruction
of the mine and mill was not completed until 1948. In that
year, the mines resumed operation under the management of Lepanto.
Lepanto made a proposal to amend the management contract at the
special meeting of the BOD. In this meeting, the BOD of Lepanto
authorized its president to enter into an agreement with
Nielson modifying the pertinent provision of the contract in
such a way that Nielson will receive
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o 10% of the dividends declared and paid, when and as
paid, during the period of the contract and at the end
of each year
o 10% of any depletion reserve that may be set up
o 10% of any amount expended during the year out of surplus
earnings for capital account
Pursuant to this management contract, it was shown that Subsequent
to this, Lepanto declared stock dividends totaling to P3,000,000. In its
decision, the court ordered Lepanto to issue and deliver to
Nielson those shares of stocks (amounting to 10%) as well as
the fruits or dividends that accrued to said shares. Lepanto,
however, contends that this payment to Nielson stock dividends as
compensation for its services under the management contract is a
violation of the Corporation Code and that it was not, and could not be,
the intention of Lepanto and Nielson that the services of Nielson
should be paid in shares of stock taken out of stock dividends declared
by Lepanto.
Issue:
Whether or not the court erred in ordering Lepanto to issue and
deliver to Nielson 10% of the stock dividends declared.
Ratio:
Nielson should receive the equivalent of 10% of the amount
of the dividends declared and paid not the dividends itself.
Under the Corporation Code, the consideration for which shares of
stocks may be issued are 1) cash; 2) property; and 3) undistributed
profits. Shares of stock are given the name "stock dividends" only if
they are issued in lieu of undistributed profits. If the shares are
issued in exchange of cash or property then those shares do not fall
under the category of stock dividends.
A corporation may legally issue shares of stock in consideration of
services rendered to it by a person not a stockholder or in payment of
its indebtedness. But a share of stock thus issued should be
part of the original capital stock of the corporation upon its
organization, or part of the stocks issued when the increase
of the capitalization of a corporation is properly authorized.
In other words, it is the shares of stock that are originally issued by the
corporation forming part of the capital that can be exchanged
for cash or services rendered or property that is, if the
corporation has original shares of stock unsold or unsubscribed either
coming from the original capitalization or from the
increased capitalization, not coming from stock dividends
declared (these stock dividends cannot be issued to one who is not a
stockholder).
A stock dividend implies a distribution of the shares of stock of the
corporation among the stockholders as dividends. It is a dividend
paid in shares of stock instead of cash and is properly
payable only out of the surplus profits. It is a dividend and
the enforced use of the dividend money to purchase
additional shares of stock at par. Only stockholders are entitled
to dividends since they are the only ones who have a right to a
proportional share in the part of the surplus which is declared as
dividends.
Hence, in the case at bar, Nielson cannot be paid in shares of
stock which form part of the stock dividends of Lepanto for
services it rendered under the management contract. The
phrase in the contract was simply to make the cash value of the stock
dividends declared as the basis for determining the amount of
compensation that should be paid to Nielson in proportion
of 10% cash value of the stock dividends declared. It can be
inferred from the meeting that the chairman believed that it would be
better to tie the computation of the 10% participation of Nielson to the
dividend because Nielson would then be able to definitely compute its
net participation by the amount of the dividends declared. It does not
mean that the compensation of Nielson will be taken from the amount
actually declared as cash dividend to be distributed to the stockholder,
nor from the shares of stocks to be issued to the stockholders as stock
dividends, but from the other assets or funds of the
corporation which are not burdened by the dividends thus
declared (ex. if the case dividends declared is P300,000, Nielson is
entitled to a compensation of P30,000 but the P30,000 will not be
taken from the P300,000 but from some other fund or asset of the
corporation which is not included in the amount to answer for the cash
dividends thus declared.
Pirovana v. Dela Rama Steamship
Facts:
Enrico Pirovano was the president of the Dela Rama Steamship
company. He managed the company until it became a multi-million
corporation but by that time, he was executed by the Japanese during
the occupation. For this reason, the BOD issued a resolution which
sets aside P400,000 for equal division among Enrico's 4
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children convertible into shares of stock of the company. Also
in this resolution was the request to present registered stockholders to
waive their pre-emptive right to 4,000 shares of the unissued stock of
the company in order to enable each of the 4 minor heirs to obtain
1,000 shares at par each. However, subsequently, when the said
resolution met protests from the stockholders, the BOD again
adopted a resolution changing the form of donation to a
renunciation in favor of the children of all the company's
right, title interest as beneficiary in and to the proceeds of
Enrico's life insurance policies subject to the condition that the
proceeds should be retained by the company as a loan drawing interest
at 5% per annum and payable to the children after the company shall
have first settled in full the balance of its present remaining
indebtedness in the sum of P5,000.
Sometime in March 1950, the president of the corporation, Sergio
Osmena addressed an inquiry to the SEC asking for the opinion
regarding the validity o the donation of the proceeds of the insurance
policy to the children. The SEC rendered its opinion that the donation
was void because the corporation could not dispose of its assets by gift
and therefore, the corporation acted beyond the scope of its corporate
powers. Because of this SEC opinion, the president held a meeting
where he expressed his view that the corporation was not authorized
by its charter to make the donation to the children. Thereafter, the
majority stockholders voted to revoke the resolution
approving the donation to the children.
Issue:
Whether or not the grant of the proceeds of the insurance policies
taken on the life of the late Enrico is a remunerative donation.
Whether or not the corporation can give by way of donation the
proceeds of the said insurance policies to the minor children under the
law or its articles of incorporation or is that donation an ultra vires
act?
Ratio:
It is remunerative in nature or that which is made to a
person in consideration of his merits or services rendered to
the donor, provided that they do not constitute recoverable
debts. Also, said donation can no longer be rescinded even if the
corporation wanted to. The same has not only been granted in several
resolutions duly adopted by the BOD, but also in all these corporate
acts, the concurrence of the representatives of the only creditor whose
interest may be affected was expressly given. The donation has already
reached the stage of perfection which is valid and binding upon the
corporation and as such cannot be rescinded unless there exists legal
grounds for doing so. The revocation cannot have the effect of
nullifying the donation in question.
After a careful perusal of the provisions of the Articles of
Incorporation, the court finds that the corporation was given
broad and unlimited powers to carry out the purposes for
which it was organized among them: 1) to invest and deal
with the moneys of the company not immediately required,
in such a manner as from time to time may determine and;
2) to aid in any other manner, any person, association, or
corporation of which any obligation or in which any interest
is held by the corporation or in the affairs of prosperity of
which this corporation has a lawful interest. The word deal
here is broad enough to include any manner of disposition and refers
to moneys not immediately required by the corporation. The donation
in question undoubtedly comes within the scope of this broad power
for it is a fact appearing in the evidence that the insurance proceeds
were not immediately required when they were given away.
Under the second broad power, that is, to aid in any other manner ay
person in the affairs and prosperity of whom the corporation has a
lawful interest, the court doesnt see much distinction between these
acts of generosity or benevolence extended to some employees of the
corporation, and even to some in whom the corporation was merely
interested because of certain moral or political considerations and the
donation which the corporation has seen fit to give to the children of
the late Enrico from the point of view of the power of the corporation
as expressed in its articles of incorporation. Moreover, the gratuity
given here is not merely motivated by pure liberality, it was because of
a deep sense of recognition of the valuable services rendered
by Enrico which had immensely contributed his time to the
growth of the corporation to the extent that it blossomed
into a multi-million corporation that it is today.
Clearly the donation is within the scope of the board's
powers. Even assuming that it is ultra vires, since the stockholders
themselves expressly ratified the resolution, the infirmity of the
corporate act has been cured. Ultra vires acts are not illegal and void
ab initio, but are not merely within the scope of the articles of
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incorporation. They are merely voidable and may become binding and
enforceable when ratified by stockholders.
Republic v. Acoje Mining
Doctrine: An ultra vires act is not void for it was approved not in
contravention of the law, customs, public order or public policy. It is merely
voidable which may be enforced by performance, ratification or estoppel.
Where an ultra vires transaction has been executed by the other party and the
corporation has received the benefit of it, the law interposes an estoppel and
will not permit the validity of the transaction to be questioned, and this is
especially true where there is nothing in the circumstances to put the other
party to the transaction on notice that the corporation has exceeded his
powers in entering into it and has in doing so overstepped the line of
corporate privileges.
Facts:
The Acoje Mining Company requested the Director of Posts for the
opening of a post, telegraph and money order office at its mining camp
in Zambales to service its employees and their families living in said
camp. Pursuant to this, the BOD of the mining company passed a
resolution stating that the company assumes direct
responsibility for whatever pecuniary loss may be suffered
by the Bureau of Posts by reason of any act of dishonesty,
carelessness or negligence on the part of the employee of the
company who is assigned to take charge of the post office, as
required by the Director of Posts.
When Acoje's requests were granted to put up a post office, it
appointed one Hilario Sanchez as its postmaster. However, said
postmaster went on a 3 day leave and never returned leaving
a shortage in the amount due to the Post Office. Thus, the
government commenced the present action before the CFI of Manila
seeking to recover said amount.
In its defense, the corporation claims that the corporate acts were ultra
vires.
Issue:
Whether or not the acts of the mining company were ultra vires.
Ratio:
The contention that it is ultra vires in character has no
factual or legal basis. In the first place, the idea to put of a post
office in their mining site did not come from the government. The
company signified its own willingness to comply with the requirements
of the government that it furnish free quarters and all the
essential equipment required for the operation including the
assignment of an employee who will perform the duties of a
postmaster. It is evident that the company cannot now be hear to
complain that it is not liable for the irregularity committed by its
employee. It cannot now go back on its word on the ground of
estoppel.
While an ultra vires act is one committed outside the object for which
the corporation is created and defined by the law of its organization
and therefore beyond the powers conferred upon it by law, there are
certain corporate acts that may be performed outside the
scope of its powers if they are necessarily to promote the
interest or welfare of the corporation. In this case, the post
office is a vital improvement in the living conditions of the employees
and laborers in the mining camp.
Japanese War Notes v. SEC
Facts:
In this case, the Japanese War Notes (JWNCA) was issued an order by
the SEC requiring them to show cause why they should not be
proceeded against for making misrepresentations to the public about
the need of registering and depositing Japanese war notes. On the
investigation, they tried to show that there was actually no
misrepresentation and that the representations were made in good
faith and was later retracted and rectified.
Notwithstanding, the commissioner of the SEC found that petitioner
JWNCA, as a civic non-stock corporation, should not engage
in business for profit and that it had received war notes for
deposit and upon payment of fees, without authority in its
articles to do so. Despite this prohibition, the SEC found that it has
done so in the guise of service fees.
Petitioner however contends that the registration of war notes and the
collection of fees therefor (which it committed) is not prohibited by the
corporation law and was under the authority implied from its
articles of incorporation.
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Issue:
Whether or not the registration of war notes and collection of fees
therefor is implied from the corporation's articles of incorporation.
Ratio:
The articles authorize collection of fees from members; but
they do not authorize the corporation to engage in the
business of registering and accepting war notes for deposit
and collecting fees from such services. Neither do we find any
merit in the third contention that the association has authority to
accept and collect fees for reparation claims for civilian casualties and
other injuries. This is beyond any of the powers of the association as
embodied in its articles and have absolutely no relation to the avowed
purpose of the association to work for the redemption of war notes.
Loyola Grand Villas Homeowners (South) Association v. Court of
Appeals
Doctrine: The word "must" in a statute, like "shall" is not always imperative.
It may be consistent with an exercise of discretion. In this jurisdiction, the
tendency is to interpret these as the context or a reasonable construction of
the statute in which it is used demands or requires. Thus, if the language of
the statute, considered as a whole and with due regard to its nature and
object reveals that the legislature intended to use the words "shall" and
"must" to be directory, they should be given that meaning.
Facts:
LGVHAI (Loyola Grand Villas Homeowners Association) is the sole
homeowners' association in Loyola Grand Villas, a duly registered
subdivision in Quezon City. It was organized in 1983 as the association
of the homeowners and residents by its president, Soliven. For
unknown reasons, LGVHAI did not file its corporate by-laws.
Sometime in 1988, when the officers tried to register its by-laws, they
discovered that there were 2 other organizations within the
subdivision (the North Association and the South Association).
These associations were registered with the HGIC.
Thereafter, when Soliven inquired about the status of the LGVHAI, it
was informed by the HGIC that it was automatically dissolved
already for the reason that it did not submit its by-laws within
the required period of time by the Corporation Code, and
second, there was non-user of corporate charter because
there was no receipt of any report on the association's
activities.
The LGVHAI lodged a complaint with the HGIC questioning the
revocation without due hearing and prayed for the cancellation of the
certificates of registration of the North and South Associations by
reason of their earlier issuance of registration in favor of LGVHAI.
Arguments:
Petitioner herein (South Association) contends that the use of the word
"must" in the corporation code with respect to the filing of the by-laws
implies that noncompliance therewith would result in "self-
extinction" either due to non-occurrence of a suspensive
condition or occurrence of a resolutory condition under the
hypothesis that the issuance of the certificate of registration alone, the
corporation personality is deemed already formed. It means that the
mandatory nature of the provision is so clear that there can be no
doubt as to its being an essential attribute of corporate birth.
On the other hand, LGVHAI contends that the non-filing of the by
laws is only a ground for suspension or revocation of the
certificate of registration of corporations and therefore, it may
not result in automatic dissolution of the corporation. The adoption of
the by-laws is a condition subsequent and does not affect the corporate
personality of a corporation like the LGVHAI. The existence of the
corporation begins form the date the SEC issues a certificate
of incorporation under its official seal. Even if the by-laws have
not yet been filed, a corporation may be considered a de facto
corporation.
Issue:
Whether or not the LGVHAI's failure to file its by-laws within the
period prescribed by Section 46 of the Corporation Code had the effect
of automatically dissolving the said corporation.
Ratio:
No. There can be no automatic corporate dissolution simply
because the incorporators failed to abide by the required
filing of by-laws embodied in Section 46 of the Corporation
Code. Proper notice and hearing are cardinal components of due
process. The incorporators must be given the chance to explain their
neglect or omission and remedy the same.
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The word "must" in a statute, like "shall" is not always imperative. It
may be consistent with an exercise of discretion. In this jurisdiction,
the tendency is to interpret these as the context or a reasonable
construction of the statute in which it is used demands or requires.
Thus, if the language of the statute, considered as a whole and with
due regard to its nature and object reveals that the legislature intended
to use the words "shall" and "must" to be directory, they should be
given that meaning.
The deliberations of the Batasang Pambansa No. 68 demonstrates
such legislative intent. Clearly, such was never the intention.
Note should be taken of the second paragraph of the Code
which allows the filing of the by-laws even prior to
incorporation. The provision in the same section of the Code rules
out mandatory compliance with the requirement of filing the by-laws
within 1 month after receipt of official notice of the issuance of its
certificate of incorporation by the SEC. It necessarily follows that the
failure to file the by laws within that period does not imply
the demise of the corporation. The by-laws are necessary for the
government of the corporation but these are subordinate to the
articles of incorporation as well as to the Corporation Code
and related statutes.
The existence of PD 902-A which empowers the SEC to suspend or
revoke, after proper notice and hearing, the franchise or certificate of
registration of a corporation on the ground of failure to file by-laws
within the required period also indicates that there is no automatic
dissolution. Every statute must be construed and harmonized with
other statutes as to form a uniform system of jurisprudence.
Fleischer v. Botica Nolasco
Doctrine: By-Laws of a corporation must be reasonable and for a corporate
purpose and always within the charter limits. They must be strictly
subordinate to the constitution and the general laws of the land. They must
not infringe the policy of the state, nor be hostile to public welfare. They must
not disturb vested rights or impair the obligation of a contract, take away or
abridge the substantial rights of stockholder or member, affect rights of
property or create obligations unknown to the law.
Facts:
Manuel Gonzales was the original owner of the 5 shares of stocks
subject of this case. He assigned and delivered said shares of stock to
Fleischer in consideration of a large sum of money owed by Gonzales
to Fleischer. Thereafter, the corporation, through Dr. Miciano,
offered to buy said shares from Fleischer at their par value
and insisted that said corporation, under its by-laws, had a
preferential right to buy from Manuel Gonzales instead of
Fleischer. Fleischer refused to sell the same to the corporation
and asked that it be registered in his name but the
corporation refused to do so.
Thus, this action was commenced against the corporation praying that
the such corporation be ordered to register in the books the 5 shares of
stock in Fleischer's name.
The gist of the case here is that under the by-laws of the corporation,
the shares should first be offered to the corporation before it can be
sold to someone else.
Issue:
Whether or not such preferential right given to the corporation in the
by-laws is consistent with the corporation code.
Ratio:
It is inconsistent. In adopting said by-law, the corporation
has transferred the limits fixed by the law and has not taken
into consideration its provisions. Restrictions upon the traffic in
stock must have their source in legislative enactment, as the
corporation itself cannot create such impediments.
Every owner of corporate shares has the same uncontrollable right to
alienate them which attaches to the ownership of any other species of
property. A shareholder is under no obligation to refrain from
selling his shares at the sacrifice of his personal interest, in
order to secure the welfare of the corporation or to enable
another shareholder to make gains and profits. The
corporation has no power to prevent or to restrain transfers of its
shares, unless such power is expressly conferred in its charter or
governing statute.
In this case, the only restraint in the Corporation Code upon
transfers of shares is in Section 35 of Act No. 1459 which
states that "No transfer shall be valid except as between the
parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the
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number of the certificate and the number of shares
transferred". As such, any restriction of the nature of that imposed
in the by-law now in question is ultra vires, violative of the property
rights of the shareholders and in restraint of trade.
Salafranca v. Philamlife (Pamplona) Village Homeowners Assoc.
Doctrine: The right to amend its by-laws lies solely in the discretion of the
employer, this being in the exercise of management prerogative or business
judgment. However, this right, extensive as it may be, cannot impair the
obligation of existing contracts or rights.
Facts:
Enrique Salafranca started working with PHILAM as an administrative
officer for a period of 6 months. He was reappointed to said position
for three more times. As such administrative officer, he was
responsible for the management of the village's day to day activities.
Upon expiration of his employment contract, he continued to work for
PHILAM albeit without the benefit of a renewed contract.
Sometime in 1987, the corporation decided to amend its by-laws
which included a provision which stated that the position of
the administrative officer under which said officer, shall
hold office at the pleasure of the Board of Directors. Petitioner
herein was therefore informed that his term of office shall be
coterminous with the Board of Directors which appointed him to his
position. He was terminated in 1992. He now claims that his
termination was unlawful.
Issue:
Whether or not Salafranca was illegally dismissed.
Ratio:
Yes. At the outset, the petitioner already attained the status
of a regular employee, as evidenced by his 11 years of service
with the corporation He enjoys the right to security of tenure
and his services may be terminated only for causes provided
by law. The theory that his holding of the position is coterminous
with that of the BOD as provided for in the amended by-laws cannot be
sustained.
The right to amend its by-laws lies solely in the discretion of the
employer, this being in the exercise of management prerogative or
business judgment. However, this right, extensive as it may be, cannot
impair the obligation of existing contracts or rights. Petitioner,
being a regular employee, is entitled to security of tenure. If
the court were to rule otherwise, it would enable an
employer to remove any employee from his employment by
the simple expediency of amending its by-laws and providing
that his or her position shall cease to exist upon the
occurrence of a specified event.
If the corporation wanted to make the position coterminous with that
of the BOD, then the amendment must be effective after the
petitioner's stay with the private respondent, not during his
term. The measure taken in amending its by-laws is nothing but a
devious, but crude, attempt to circumvent the right to
security of tenure as a regular employee under the Labor
Code.
Grace Christian High School v. Court of Appeals
Doctrine: The Board of Directors of Corporations must be elected from
among the stockholders or members. There may be corporations in which
there are unelected members in the board but it is clear that the unelected
members sit as ex officio members.
Facts:
GCHS (Grace Christian High School) is an educational institution.
Private respondent Grace Village Association, on the other hand, is an
organization of lot and/or building owners at Grace Village.
In 1968, the by-laws of the association provided that the
"board of directors [shall] be composed of 11 members to
serve for 1 year until their successors are duly elected and
have qualified." However, in 1975, a committee of the board
prepared a draft of an amendment of the by-laws which
proposed that "GCHS [shall] be a permanent director of the
association."
After said amendment draft was presumably submitted to the board
and up to the year 1990, GCHS was given a permanent seat in the BOD
of the association. However subsequently, the association's committee
on election sent a letter informing them that all directors should be
elected by the members of the association, thereby proposing
that the practice of making GCHS a permanent director be
reexamined.
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As the board denied the request that their permanent
director status be continued, they brought an action for
mandamus in the HGIC (Home Insurance and Guaranty
Corporation).
Issue:
Whether or not the amended by-laws of the association drafted by a
committee which made the GCHS a permanent director valid and
binding.
Whether or not the GCHS has a vested right to a permanent seat in the
BOD.
Ratio:
No. Section 28 and 29 of the Corporation Law requires that
the members of the board of directors of corporations to be
elected. Similarly, the present Corporation Code provides
that the "board of directors or trustees [are] to be elected
form among the holders of stockswho shall hold office for 1
year until their successors are elected and qualified. These
provisions leave no room for doubt as to their meaning: the board of
directors of corporations must be elected form among the stockholders
or members. There may be corporations in which there are unelected
members in the board but it is clear that the unelected members sit as
ex officio members.
In the case of petitioners, however, there is no reason at all for its
representative to be given a seat in the board. Nor does
petitioner claim a right to such seat by virtue of an office
held. In fact, it was not given such seat in the beginning. It was only in
1975 that a proposed amendment to the by-laws sought to give it one.
The fact that it has not been questioned or challenged cannot forestall
a later challenge to its validity. It cannot attain validity to acquiescence
because, if it is contrary to law, it is beyond the powers of the
members of the association to waive its invalidity. For that
matters the members of the association may have formally adopted the
provision in question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law.
Nor can petitioner claim a vested right since practice, no
matter how long continued, cannot give rise to any vested
right if it is contrary to law.
Board of Directors v. Tan
Doctrine: Notice of a special meeting of members should be given at least 5
days before the date of the meeting.
Facts:
John del Castillo commenced an action before the CFI of Manila to
declare null and void the election of the members of the BOD of
SMB Workers Savings and Loan Association and of the
members of the Election Committee for the year 1957 and to
compel the board of directors of the association to call for
and hold another election in accordance with its constitution
and by-laws and the Corporation Law.
The court in said case rendered a judgment declaring the election null
and void and ordered that the defendants call for another election in
accordance with the constitution, by-laws and the Corporation Law.
Plaintiffs moved for the immediate execution of the
judgment and such writ of execution was issued.
In compliance with the judgment and writ, the election committee
called and set the meeting of the members of the association
for March 28 to elect the new members of the BOD. However,
this was again attacked by del Castillo, alleging that the election
committee was composed of the same people and that the
notice was sent only on March 26.
Issue:
Whether or not there is compliance with the previous notice required.
Ratio:
The five days previous notice is not complied with. Section 3,
Article II of the Constitution and By-Laws of the association provides
that "notice of the time and place of holding of any annual meeting or
any special meeting of the members shall be given.at least 5 days
before the date set for such meeting." It appears herein that the
notice was posted on March 26 and the election was set for
March 28.
Ponce v. Encarnacion and Gapol
Doctrine: On the showing of good cause, the court may authorize a
stockholder to call a meeting and to preside thereat until the majority
stockholders representing a majority of the stock present and permitted to be
voted shall have chosen among them to preside it. And this showing of good
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cause therefore exists when the court is apprised of the fact that the by-laws
of the corporation require the calling of a general meeting of the stockholders
to elect the board of directors but the call for such meeting has not been done.
Facts:
On a meeting duly called, Dagohoy Enterprises agreed to the voluntary
dissolution of the said corporation and appointed Potenciano Gapol as
receiver. Petitioner Domingo Ponce now avers that instead of filing
the petition for voluntary dissolution, the respondent Gapol
(receiver and largest stockholder of the company) changed his mind
and filed a complaint before the CFI to compel the
petitioners to render an accounting of the funds and assets
of the corporation and to reimburse funds that were
misspent.
Moreover, Gapol petitioned the court praying for an order
directing him to call a meeting of the stockholders of the
corporation and to preside at such meeting in accordance
with the Corporation Law. Such order was issued by the court.
Issue:
Whether or not the said order (direct Gapol to call a meeting for the
stockholders) can be issued.
Ratio:
The relief granted by the respondent court lies within its
jurisdiction. Having authority to grant said relief, the court
did not act in excess of its jurisdiction, nor did it abuse it. On
the showing of good cause, the court may authorize a stockholder to
call a meeting and to preside thereat until the majority stockholders
representing a majority of the stock present and permitted to be voted
shall have chosen among them to preside it. And this showing of good
cause therefore exists when the court is apprised of the fact that the
by-laws of the corporation require the calling of a general meeting of
the stockholders to elect the board of directors but the call for such
meeting has not been done.
The requirement on showing of good cause therefore, the court
may grant to a stockholder the authority to call such meeting and to
preside thereat does not mean that the petition must be set for hearing
with notice served upon the board of directors.
Herein, it was found that there was a showing of good cause for
authorizing Gapol for the purpose of electing the BOD as
required and provided for in the by-laws because the chairman of
the BOD called upon to do so had failed or refused to
perform his duty.
the alleged illegality of the election of one member of the BOD at the
meeting called by the respondent Gapol as authorized by the court
being subsequent to the order complained of cannot affect the validity
and legality of the order.
Commissioner of Internal Revenue v. Manning
* I really don't understand this case. Sorry. Read origs
Facts:
MANTRASCO was a corporation with 25,000 common shares. 24,700
of which was owned by one Reese and the rest were owned by 3 other
private respondents. A trust agreement was entered into among
them with the manifest intention to make respondents the
sole owners of Reese's interest in MANTRASCO upon his
death. When Reese died, MANTRASCO made partial payments of
Reese's shares and a new certificate was issued in favor of
MANTRASCO.
Thereafter, MANTRASCO's stockholders issued a resolution
declaring that the 24,700 shares to be reverted to the capital
account of the company as a stock dividend to be distributed
to respondent. Eventually, all the shares were paid and distributed
to private respondents.
BIR claims that the distribution of the shares was a stock dividend and
are taxable as income. On the other hand, the respondents claim that
their respective shares remained the same before and after the
declaration of the stock dividends and only the number of shares held
have changed. Therefore, they are not liable for taxes. In submitting
their contentions, both parties are of the assumption that the shares
were treasury shares.
Issue:
Whether or not the stock dividends were treasury shares.
Ratio:
The said shares were not, or at anytime before or after that
date, treasury shares. Treasury shares are stocks issued and fully
paid for and re-acquired by the corporation either by purchase,
donation, forfeiture or other means. Treasury shares are issued
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Corporation Law Midterms Case Digests (Atty. Quimson)
shares but being treasury shares, they do not have the status
of outstanding shares. Although a treasury share, not having been
retired by the corporation acquiring it, may be re-issued or sold again,
such share, as long as it is held by the corporation as a treasury share,
participates neither in dividends, because dividends cannot be
declared by the corporation itself, nor on the meetings of the
corporation as voting stock, for otherwise equal distribution of voting
powers among stockholders will be effectively lost and the directors
will be able to perpetuate their control of the corporation, though it
still represents a paid-for interest in the property of the corporation.
In this case, the essential features of a treasury stock are lacking in the
questioned shares:
1. Under the trust agreement, the trustees were authorized to
vote all stock standing in their names at all meetings
and exercise all rights as owners of the said shares.
2. Any dividends paid on said shares after the death of the
owner shall be subject to the provisions of the agreement
3. The amount of retained earnings to be declared as dividends
was made subject to the approval of the trustees
4. The corporate directors were delegated exclusively as
trustees who were also given the authority to transfer
qualifying shares to such directors
5. MANTRASCO and its two subsidiaries were expressly
prohibited from paying dividends except as may be
authorized by the trustees.
The manifest intention of the parties of the trust agreement was to
treat the shares of Reese as absolutely outstanding shares of
Reese's estate until they were fully paid. Such being the true
nature of the shares, their declaration as treasury stock dividend in
1958 was a complete nullity and plainly violative of public
policy. A stock being dividend, being one payable in capital stock,
cannot be declared out of outstanding corporate stock, but only from
retained earnings.
They used the trust instrument as a convenient technical device and
bestowed unto themselves the full worth and value of
Reese's corporate holdings with the use of the very earnings
of the companies. Such device was used exclusively for expanding
the capital base of the respondents in MANTRASCO, not to carry out
the usual stock dividend purpose of corporate expansion investment.
Lee v. Court of Appeals
Doctrine: A trust agreement is a trust created by an agreement between a
group of the stockholders of a corporation and the trustee or by a group of
identical agreements between individual stockholders and a common trustee,
whereby it is provided that for a term of years, or for a period contingent
upon a certain event, or until the agreement is terminated, control over the
stock owned by such stockholders, either for a certain purpose or for all
purposes, is to be lodged in the trustee, either with or without reservation to
the owners, or persons designated by them of the power to direct how such
control shall be used.
To distinguish a voting trust from proxies and other voting pools and
agreements it must pass 3 criteria: 1) the voting rights of the stocks are
separated form the other attributes of ownership; 2) the voting rights
granted are intended to be irrevocable for a definite period of time; 3) that
the principal purpose of the grant of voting rights is to acquire voting control
of the corporation.
Facts:
In a complaint for sum of money filed in court filed by International
Corporate Bank (ICB) against the private respondents ALFA, the trial
court issued an order requiring the issuance of an alias
summons upon ALFA through DBP as a consequence of the
letter informing the court that the summons for ALFA was
erroneously served upon them considering that the
management of ALFA has been transferred to DBP (in the
trust agreement). However, DBP manifested that it was not authorized
to receive the summons since DBP has not taken over the company
which had a separate and distinct corporate personality and existence.
For this, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to
ALFA.
Arguments:
In their comment, the private respondents (ICB) argued that the
voting trust agreement did not divest the petitioners of their position
as president and executive vice president of ALFA so that the service of
summons upon ALFA, through the corporate officers was proper.
On the other hand petitioners (corporate officers of ALFA) reiterated
that by virtue of the voting trust agreement, they ceased to be
officers and directors of ALDA, hence they could no longer
receive summons or any court processes for and on behalf of ALFA.
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Corporation Law Midterms Case Digests (Atty. Quimson)
Allegedly, management and control of ALFA became vested upon the legal title to, not the beneficial ownership of the stock as
DBP. appearing on the books of the corporation.

Issue:
Whether or not service upon the petitioners of summons who were no
longer corporate officers of ALFA can be considered as proper service
of summons on ALFA.
Ratio:
No. Considering that the voting trust agreement between
ALFA and DBP transferred legal ownership of the stocks
covered by the agreement to the DBP as trustee, the latter
became the stockholder of record with respect to the said
shares of stocks. Petitioners herein can no longer be deemed
to have retained their status as officers of ALFA. DBP has
taken over full control and management of the firm.
By is very nature, a voting trust agreement results in the separation
of the voting rights of the stockholder form his other rights
such as the receipt of dividends, the right to inspect, the right to sell
certain interests and other rights which a stockholder may be entitled
until the liquidation of the corporation. Such trust agreement may
confer upon the trustee not only the stockholder's voting
rights but also other rights pertaining to his shares as long as
the agreement is not entered for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or
used for purposes of fraud. It is a legal device whereby a transfer of
the stockholder's shares is effected subject to the specific
provision of the voting trust agreement. Therefore, the
agreement may create a dichotomy between the beneficial ownership
of the corporate shares of a stockholder, on the one hand, and the legal
title thereto on the other hand.
In this case, since their trust agreement disposed of all their shares
through assignment and delivery in favor of the DBP as trustee, the
petitioners ceased to own at least 2 share standing on their
names which is required in order to be a director. The
transfer, in effect, created vacancies in their positions as directors of
ALFA. DBP became the stockholder of record with respect to
the shares of stocks.
Also, there can be no reliance on the inference that the 5 year period in
the trust agreement would cause the ipso facto reversion of the said
stocks to the petitioners. Under Section 59 of the Corporation
Code, the voting trust certificates as well as the certificates of
stock in the name of the trustee shall be thereby deemed
cancelled and new certificates of stock shall be reissued in
the name of the transferors.
There was no proper service of summons. It should be served with
DBP since service must be made on a representative so integrated with
the corporation sued as to make it a priori supposable that he will
realize his responsibilities and know what he should do with any legal
papers served upon him. Service may only be made on the president,
manager, secretary, cashier or any of its directors. The
petitioners in this case do not fall under any of the enumeration.

In the old code, the eligibility of a director cannot be adversely

affected by the simple act of such director being a party to a voting
trust agreement inasmuch as he remains owner (albeit a mere
beneficial owner) of the shares subject of the voting trust agreement.
There is no disqualification by virtue of the phrase in the provision. "in
his own right". However, with the omission of the phrase, the
election of trustees and other persons who are in fact not the
beneficial owners of the shares becomes formally legalized.
In order to be an eligible director, what is material is the

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