CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

A. POWERS OF THE BOARD

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he
is a director, which share shall stand in his name on the books of the corporation. Any director
who ceases to be the owner of at least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director. Trustees of non-stock corporations
must be members thereof. A majority of the directors or trustees of all corporations organized
under this Code must be residents of the Philippines.
The Board of Directors (or trustees or other designation allowed under Sec. 138) is the supreme
authority in matter of management of the regular and ordinary business affairs of the
corporation.
However, this authority does not extend to the fundamental changes in the corpo rate charter
such as amendments or substantial changes thereof, which belong to the stockholders as a
whole. The equitable principle therefore is that the stockholders may have all the profits but
shall turn over the management of the enterprise to the Board of Directors.
CLASSIFICATION OF POWERS OF CORPORATE AGENTS/OFFICERS
Unless the law so provides, corporate powers may be delegated to individual directors or other
officers or agents. Whether or not the acts of the individual director, officer or agent would bind
the corporation depend on the nature of the agency created or the powers conferred upon such
person by the statute, the corporate charter, the by-laws, the corporate action of the board or
stockholders, or whether it is necessary or incidental to one’s office.
The general rule is that a corporation is bound by the acts of its corporate officers who act within
the scope of the 5 classification of powers of corporate agents, which are: 1. Those expressly
conferred or those granted by the articles of incorporation, corporate by-laws or by the official
act of the board of directors; 2. Those that are incidental or those acts as are naturally and
ordinarily done which are reasonable and necessary to carry out the corporate purpose or
purposes; 3. Those that are inherent or acts that go with the office; 4. Those that are apparent
or those acts which although not actually granted, the principal knowingly allows or permits it to
be done; and 5. Powers arising out of customs, usage or emergency.
J. F. RAMIREZ, plaintiff-appellee, vs. THE ORIENTALIST CO., and RAMON J. FERNANDEZ,
defendantsappellants (G.R. No. 11897 September 24, 1918)
FACTS: The Board of Directors were apprised of the fact the plaintiff JF Ramirez, who is based
in Paris and represented by his son Jose Ramirez, had control of agencies for two different
marks of films, “Éclair Films” and “Milano Films”.
Negotiations began between Jose Ramirez and the board of directors of Orientalist Co. where
Ramon Fernandez, one of the members of the board and TOC’s treasurer was chiefly active.
Near the end of July 1913, Jose Ramirez offered to supply from Paris the aforesaid films to TOC
through Fernandez. Accordingly, Fernandez had an informal conference with the BOD except
one, and with approval of those whom he had communicated, accepted the offer through letters
signed by Fernandez in his capacity as treasurer.
Upon arrival of the said films, it turned out that TOC was without funds, so the first drafts, taken
in the name of TOC were received and paid by its president, Hernandez, through his own funds
and such films were treated by him as his own property; and in fact, they never came into the
possession of TOC and were rented by Hernandez to TOC as they are exhibited in the Oriental
Theater.
Other films arrived together with their drafts, taken in the name of TOC through its president,
which were not paid and gave rise to the present action. TOC was declared the principal debtor
and Ramon Fernandez, the guarantor.
ISSUE: WON the corporation could be held liable for the contract?
HELD: Yes. The public is not supposed nor required to know the transactions which happen
around the table where the corporate board of directors or the s t o c k h old e r s a r e f r o m
tim e t o tim e c o n v o k e d . In dealing with corporations, the public at large is bound to rely to
a large extent upon outward appearances. If a man is acting for a corporation with the external
indicia of authority, any person not having notice of want of authority may usually rely upon
those appearances; and if it be found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind the corporation, or had
acquiesced in a contract and retained the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual authority may ever have been granted.
The failure of the defendant corporation to make an issue in its answer with regard to the
authority of Ramon Fernandez to bind it, and particularly to deny specifically under oath the
genuineness and due execution of the contracts sued upon have the effect of eliminating the
question of his authority from the case.
It is declared under Sec. 28 (now 23) that corporate powers shall be exercised, and all
corporate business conducted by the board of directors, and this principle is recognized in the
by-laws of the corporation in question which contain a provision declaring that the power to
make contracts shall be vested in the board of directors.
It is true that it is also true in the by-laws, that the president shall have the power and it shall be
his duty, to sigh contract; but this has reference rather to the formality of reducing to proper form
the contract which are authorized by the board and is not intended to confer an independent
power to make contract binding on the corporation.
The fact that the power to make corporate contracts is thus vested in the board of directors does
not signify that a formal vote of the board must always be taken before contractual liability can
be fixed upon a corporation; for a board can create liability, like an individual, by other means
than by a formal expression of its will.
P a r ticip a tio n o f t h e s t o c k h old e r s .
The letter accepting the offer was dispatched in a meeting of the board called by Ramon
Fernandez, where 4 members, including the president were present. The minutes add that
terms of this offer were approved; but at the suggestion of Fernandez it was decided to call a
special meeting of the stockholders to consider the matter and definite action was postponed.
From the meeting of the stockholders, it can be inferred that this body was then cognizant that
the offer had already been accepted. It is not, however, necessary to find the judgment of the
stockholder proceedings, even if the assumption is that they did not approve of the contract.
Both upon the principle and authority it is clear that the action of the stockholders, whatever its
character, must be ignored. The theory of a corporation is that the stockholders may have all the
profits but shall turn over the complete management of the enterprise to their representatives
and agents, called directors . Accordingly, there is little for the stockholders to do beyond
electing directors, making by-laws, and exercising certain other special powers defined by law.
In conformity with this idea, it is settled that contract between a corporation and third person
must be made by the director and not by the stockholders. The corporation, in such matters, is
represented by the former and not by the latter. It results that where a meeting of the
stockholders is called for the purpose of passing on the propriety of making a corporate
contract, its resolutions are at most advisory and not in any wise binding on the board .
BARRETO VS. LA PREVISORY FILIPINA
(57 Phil. 649; Dec. 8, 1932) – Petitioners, directors of respondent up to March 1929, sought to
recover 1% (to each plaintiff) of the profits of the company for the year 1929, under and in
accordance with an amendment to the by-laws which was made at the general meeting of the
stockholders on Feb. 1929, to which the lower court rendered in their favor.
ISSUE: WON the amendment has a binding effect as to grant plaintiffs’ claim?
HELD: No. Sec. 20 of the Corporation Law limits the authority of a corporation to adopt by-laws
which are not consistent with the provisions of the law. The appellees contend that the articled
in question is merely a provision of the compensation of directors which is not only consistent
with but expressly authorized by Sec. 21 of the Corporation Law.
We cannot agree with this contention. The authority conferred upon corporations in that section
refers only to providing compensation for the f u t u r e s e r vic e s of directors, officers, and
employees thereof after the adoption of the by-law or other provisions in relation thereto, and
cannot in any sense be held to authorize the giving, as in this case, of continuous compensation
to particular directors after their employment has terminated for part services rendered
gratuitously by them to the corporation. To permit the transaction involved in this case would be
to create an obligation unknown to law, and to countenance a misapplication of the funds of the
defendant building and loan association to the prejudice of the substantial rights of its
shareholders.
Irrespective of the above, the conclusion is the same. The article which the appellees rely upon
is merely a by-law provision adopted by the stockholders of the defendant corporation, without
any action having been taken in relation thereto by its board of directors . The law is settled that
contracts between a corporation and third person must be made by or under the authority of its
board of directors and not by its stockholders. Hence, the action of the stockholders in such
matters is only advisory and not in any wise binding on the corporation. There could not be a
contract without mutual consent, and it appears that the plaintiffs did not consent to the
provisions of the by-law in question, but, on the contrary, they objected to and voted against it in
the stockholders’ meeting in which it was adopted.
QUALIFICATIONS AND DISQUALIFICATIONS
( s e e dis c u s sio n u n d e r
DIRECTORS/TRUSTEES in chapter 4)
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners, vs. THE HON. COURT OF
APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and THOMAS
GONZALES, respondents. (GR No. 93695; 205 SCRA 752; Feb. 4, 1992)
FACTS: A complaint for a sum of money was filed by International Corporate Bank, Inc. against
the private respondents who, in turn, filed a third-party complaint against Alfa Integrated Textile
Mills, Inc.
The trial court ordered the issuance of alias summons upon Alfa through DBP, who is said to be
the transferee of Alfa’s management by virtue of a voting trust agreement.
DBP declined to receive the summons saying it is not authorized, Alfa having a personality
separate and distinct. The trial court in turn ordered private respondents to take the appropriate
steps to serve the summons to Alfa which they made through the officers and later on, was later
on declared to be proper service of summons.
After the second motion for reconsideration, the trial court reversed itself, saying that the service
of summons upon the petitioners were not proper, them not being officers of the corporation
anymore. On appeal, the CA reversed the trial court.
ISSUE: WON the petitioners can still be authorized to receive the summons despite the voting
trust agreement with DBP?
HELD: No. Sec. 59 of the Code expressly recognizes VTAs and gives a more definitive
meaning. By its very nature, a VTA results in the separation of the voting right of a stockholder
from his other rights such as the right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the corporation and other rights to
which a stockholder may be entitled until the liquidation of the corporation. However, in order to
distinguish a VTA from proxies and other voting pool and agreements, it must pass three criteria
or tests, namely: (1) the voting rights of the stock are separated from other attributes or
ownership; (2) that the voting right granted are intended to be irrevocable for a definite period of
time; and (3) that the principal purpose of the grant of voting rights is to acquire voting control of
the corporation.
The execution of VTA, therefore, may create a dichotomy between the equitable and beneficial
ownership of the corporate shares of stockholder, on the one hand and the legal title thereto, on
the other hand.
By virtue of the VTA, the petitioners are no longer directors. Under the old and new Corporation
Code, the most immediate effect of a VTA on the status of a stockholder who is a party to its
execution is that he becomes only an equitable or beneficial owner, from being the legal
titleholder or owner of the shares subject of the VTA.
Under the old code, the eligibility of a director, strictly speaking, cannot be adversely affected by
a VTA inasmuch as he remains the owner (although beneficial or equitable only) of the shares
subject of the VTA pursuant to which a transfer of the stockholder’s shares in favor of the
trustee is required. No disqualification arises by virtue of the phrase “in his own right” provided
under the Old Code, which has been omitted.
Hence, this omission requires that in order to be eligible as director, what is material is the le g
al title to, not beneficial ownership, of the stock as appearing on the books of the corporation.
The petitioners ceased to be the owners of at least one share standing in their names on the
books of Alfa as required under Sec. 23 of the new Code. They also ceased to have anything to
do with the management of the enterprise. The petitioners ceased to be directors.
Considering the VTA, DBP as trustee, became the stockholder of record with respect to the said
shares of stocks.
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL
(26 SCRA 256;
Nov. 29, 1968) – A complaint was filed by herein petitioner-plaintiff Detective and Protective
Bureau against defendant-respondent Fausto Alberto, alleging that defendant illegally seized
and took control of all the assets as well as the books, records, vouchers and receipt of the
corporation from the accountantcashier, concealed them illegally and refused to allow any
member of the corporation to see and examine the same. That on a meeting, the stockholders
removed defendant as managing director and elected Jose dela Rosa.
Alberto, on the other hand, stated that Jose dela Rosa could not be elected managing director
because he did not own any stock in the corporation.
ISSUE: WON dela Rosa may be elected managing director?
HELD: No. There is no record 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
Sec. 30 of the Corporation Law and consequently he cannot be a managing director by virtue of
the by-laws of the corporation that the manager shall be elected by the BOD among its
members.
Accordingly, Faustino Alberto could not be compelled to vacate his office and cede the same to
dela Rosa because the by-laws provide that the Directors shall serve until the election and
qualification of their duly qualified successor.
ELECTION AND VOTING
Sec. 24. Election of directors or trustees. - At all elections of directors or trustees, there must be
present, either in person or by representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital stock, a majority of the
members entitled to vote. The election must be by ballot if requested by any voting stockholder
or member. In stock corporations, every stockholder entitled to vote shall have the right to vote
in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in
his own name on the stock books of the corporation, or where the by-laws are silent, at the time
of the election; and said stockholder may vote such number of shares for as many persons as
there are directors to be elected or he may cumulate said shares and give one candidate as
many votes as the number of directors to be elected multiplied by the number of his shares shall
equal, or he may distribute them on the same principle among as many candidates as he shall
see fit: Provided, That the total number of votes cast by him shall not exceed the number of
shares owned by him as shown in the books of the corporation multiplied by the whole number
of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless
otherwise provided in the articles of incorporation or in the by-laws, members of corporations
which have no capital stock may cast as many votes as there are trustees to be elected but may
not cast more than one vote for one candidate. Candidates receiving the highest number of
votes shall be declared elected. Any meeting of the stockholders or members called for an
election may adjourn from day to day or from time to time but not sine die or indefinitely
if, for any reason, no election is held, or if there not present or represented by proxy, at the
meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock,
a majority of the member entitled to vote.
NOTE: 1. Majority of the outstanding capital stock, whether in person or by written proxy must
be present at the election of the directors; or majority of members entitled to vote, in the case of
a non-stock corporation. If the required quorum is not obtaining, the meeting may be adjourned;
2. On the request of any voting stockholder or member, the election may be held by ballot
otherwise viva-voce would suffice. 3. The candidates receiving the highest number of votes
shall be elected.
CUMULATIVE VOTING: 1. Cumulative voting gives the stockholder entitled to vote the right to
give a candidate as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal or he may distribute them among the candidates as he may
see fit. 2. This is granted by law to each stockholder with voting rights. However, in non-stock
corporations, cumulative voting is generally not allowed, UNLESS allowed by the AOI or by-
laws. 3. Under this method, if there are 10 directors to be elected, a holder of 1,000 shares will
have 10,000 votes which he may cast in favor of one candidate or may apportion to any number
of candidate he may wish; 4. PURPOSE: to allow the minority to have a rightful representation
in the board of directors.
Sec. 25.
Corporate officers, quorum. - Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a director, a treasurer who may or
may not be a director, a secretary who shall be a resident and citizen of the Philippines, and
such other officers as may be provided for in the by-laws. Any two (2) or more positions may be
held concurrently by the same person, except that no one shall act as president and secretary
or as president and treasurer at the same time.
NOTE: 1. Except in a close corporation where the corporate officers may be elected directly by
the stockholders, the Code requires the BOD to elect the said officers; 2. The officers that may
be elected are the: a. President – who must be a director; b. Treasurer – who may or may not
be a director; c. Secretary – who should be a resident and citizen of the Philippines; d. Such
other officers as may be provided for in the by-laws. 3. Any two or more positions may be held
concurrently by the same person, except: a. The president and the secretary; b. The president
and the treasurer.
B. VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE OFFICERS
Sec. 25. Corporate officers, quorum
xxx The directors or trustees and officers to be elected shall perform the duties enjoined on
them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-
laws provide for a greater majority, a majority of the number of directors or trustees as fixed in
the articles of incorporation shall constitute a quorum for the transaction of corporate business,
and every decision of at least a majority of the directors or trustees present at a meeting at
which there is a quorum shall be valid as a corporate act, except for the election of officers
which shall require the vote of a majority of all the members of the board.
QUORUM: requirement for a valid board meeting is the majority of the number of the board
fixed in the AOI, and a decision of at least a majority of the directors/trustees present in a
meeting at which there is a quorum shall
be a valid corporate act, except: 1. Election of officers, which shall require the majority of all the
members of the board; and 2. Unless the AOI or the by-laws provide for a greater quorum/voting
requirement.
Every action of the board without a meeting and without the required voting and quorum
requirement will not bind the corporation unless subsequently ratified, expressly or impliedly.
Individual directors, however, can rightfully be considered as agents of the corporation. And
although they cannot bind the corporation by their individual acts, this is subject to certain
EXCEPTIONS: (1) by delegation of authority; (2) when expressly conferred; or (3) where the
officer or agent is clothed with actual or apparent authority.
YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992) – Constacio B. Malagna,
President and Chairman of the Board of private respondent Prime White Cement Corporation
(PWCC), sent a letter-offer (Exhibit A) to Mr. Yao for the delivery of cement, which was
accepted by the latter by delivering a check for P243,000.
ISSUE: WON the letter-offer sent by Malagna binds the corporation?
HELD: No. A corporation can act only through its officers and agents, all acts within the powers
of said corporation may be performed by agents of his selection and except in so far as
limitations or restrictions may be imposed by special charter, by-law or statutory provisions, the
same general provision of law which govern the relation of agency for natural person govern the
officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the
corporation; and the agents once appointed, or members acting in their stead, are subject to the
same rules, liabilities and incapacities as are agents of individuals and private persons.
Moreover, a corporate officer or agent may represent and bind the corporation in transactions
with third person to the extent that authority has been conferred upon him, and this includes
powers which have been (1) intentionally conferred, and (2) also such powers as, in the usual
course of business, are incidental thereto, or may be implied therefrom, (3) powers added by
custom and usage, as usually pertaining to the particular officer or agent, and (4) such apparent
powers as the corporation has caused persons dealing with the officer or agent to believe that it
has conferred.
While Mr. Maglana was an officer, the by-laws do not in any way confer upon the president the
authority to enter into contracts for the corporation independently of the BOD. That power is
expressly lodged in the latter.
Nevertheless, to expedite or facilitate the execution of the contract, only the President shall sign
the contact for the corporation. No greater power can be implied from such express, but limited
delegated authority. Neither can it be logically claimed that any power greater than that
expressly conferred is inherent in Mr. Maglana’s position as president and chairman of the
corporation.
Although there is authority "that if the president is given general control and supervision over the
affairs of the corporation, it will be presumed that he has authority to make contract and do acts
within the course of its ordinary business," We find such inapplicable in this case. We note that
the private corporation has a general manager who, under its By-Laws has, inter alia , the
following powers: "(a) to have the active and direct management of the business and operation
of the corporation, conducting the same accordingly to the order, directives or resolutions of the
Board of Directors or of the president." It goes without saying then that Mr. Maglana did not
have a direct and active and in the management of the business and operations of the
corporation.
Petitioner's last refuge then is his alternative proposition, namely, that private respondent had
clothed Mr. Maglana with the apparent power to act for it and had caused persons dealing with it
to believe that he was conferred with such power. The rule is of course settled that "[a]lthough
an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of
an apparent authority with which the corporation has clothed him by holding him out or
permitting him to appear as having such authority, the corporation is bound thereby in favor of a
person who deals with him in good faith in reliance on such apparent authority, as where an
officer is allowed to exercise a particular authority with respect to the business, or a particular
branch of it, continuously and publicly, for a considerable time." Also, "if a private corporation
intentionally or negligently clothes its officers or agents with apparent power to perform acts for
it, the corporation will be estopped to deny that such apparent authority in real, as to innocent
third persons dealing in good faith with such officers or agents." This "apparent authority may
result from (1) the general manner, by which the corporation holds out an officer or agent as
having power to act or, in other words, the apparent authority with which it clothes him to act in
general or (2) acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or without the scope of his ordinary powers.
It was incumbent upon the petitioner to prove that indeed the private respondent had clothed
Mr. Maglana with the apparent power to execute Exhibit "A" or any similar contract. This could
have been easily done by evidence of similar acts executed either in its favor or in favor of other
parties. Petitioner miserably failed to do that. Upon the other hand, private respondent's
evidence overwhelmingly shows that no contract can be signed by the president without first
being approved by the Board of Directors; such approval may only be given after the contract
passes through, at least, the comptroller, who is the NIDC representative, and the legal counsel.
LOPEZ REALTY, INC. VS. FOTENCHA
(147 SCRA 183; Aug. 11, 1995) – Petitioner corporation approved two resolutions providing for
the gratuity pay of its employees. Except for Asuncion Lopez-Gonzales, who was then abroad,
the remaining member of the board convened a special meeting and passed a resolution
adopting the above-mentioned resolutions. Private respondents requested for the full payment
of the gratuity pay which was granted.
At that time, however, petitioner Asuncion was still abroad, and allegedly sent a cablegram
objecting to certain matters taken up by the board in her absence.
Notwithstanding a corporate squabble between Asuncion and Arturo Lopez, the first two
installments of the gratuity pay of private respondents were paid. Also, petitioner corporation
had prepared the cash vouchers and checks for the third installment. For some reason, said
voucher was cancelled by petitioner Asuncion.
A complaint was filed before the labor arbiter who decided in favor of private respondents.
ISSUE: WON the gratuity pay should be paid?
HELD: Yes. The general rules is that a corporation, through its board of directors, should act in
the manner and within the formalities, if any, prescribed by its charter or by the general law.
Thus, the directors must act as a body in a meeting called pursuant to the law or the
corporation’s by-laws, otherwise, any action taken therein may be questioned by any objecting
director or shareholder.
Be that as it may, jurisprudence tells us that an action of the board of directors during a meeting,
which was illegal for lack of notice, may be ratified either (1) expressly, by the action of the
directors in subsequent legal meeting, or (2) impliedly, by the corporations’ subsequent conduct.
Ratification by directors may be by an express resolution or vote to that effect, or it may be
implied from adoption of the act, acceptance or acquiescence. Moreover, the unauthorized acts
of an officer of a corporation may be ratified by the corporation by conduct implying approval
and adoption of the act in question. Such ratification may be expressed or may be inferred from
silence and inaction.
In the case at bench, it was established that petitioner corporation did not issue any resolution
revoking nor nullifying the board resolution granting
gratuity pay to private respondents. Instead, they paid the gratuity pay, particularly, the first two
installments thereof.
Despite lack of notice to Asuncion, we can glean from the records that she was aware of the
corporation’s obligations under the said resolution. More importantly she acquiesced thereto by
affixing her signature on two cash vouchers. The conduct of petitioners had estopped them from
assailing the validity of the said board resolutions.
PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct. 2, 1924) – W. Neumark,
president of defendant corporation borrowed P15000 from plaintiff which was delivered by
means of a check in favor of defendant and deposited in BPI and the amount of it credited to the
corporation’s current account.
ISSUE: WON the corporation is responsible for the money borrowed by its president?
HELD: Yes. W. Neumark is the principal stockholder, president and general business manager
of the defendant corporation. On behalf of the corporation, he solicited a loan and was given a
check, which was endorsed by him in his capacity as president and deposited to the
corporation’s account. It may be true that a large part of the amount so deposited was diverted
by Neumark to his own use, but that does not alter that the money was borrowed for the
corporation and was placed in its possession.
It is conceded that Neumark was not expressly authorized by the board of directors to borrow
the money in question and the general rule is that a business manager or other officer of a
corporation, has no implied power to borrow money on its behalf. But much depends upon the
circumstances of each particular case and the rule state is subject to important exceptions.
Thus, where a general business manager of a corporation is clothed with apparent authority to
borrow money and the amount borrowed does not exceed the ordinary requirements of the
business, it has often been held that the authority is implied and that the corporation is bound.
YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924) – CC Chen or TC Chen, General
Manager of defendant corporation Kong Li Po, entered into an agreement with the plaintiffs by
which the latter bound themselves to do the necessary printing for the newspaper. Later on, the
new general manager, Tan Tian Hong, discharged plaintiffs with no special reasons. Aggrieved,
plaintiffs sought to recover full payment of the remaining term of the contract, which was
originally for 3 years, as stated therein.
ISSUE: WON Chen had the power to bind the corporation under a contract of that character?
HELD: No. The general rule is that the power to bind a corporation by contract lies with its board
of directors or trustees, but this power may either be expressly or impliedly be delegated to
other officers or agents of the corporation, and it is well settled that except where the authority
of employing servants and agents is expressly vested in the BOD/T, an officer or agent who has
general control and management of the corporation’s business, or a specific part thereof, may
bind the corporation as are usual and necessary in the conduct of such business. But the
contracts of employment must be reasonable.
Chen, as general manager of Kong Li Po, had implied authority to bind the defendant
corporation by a reasonable and usual contract of employment with the plaintiffs, but we do not
think that contract here in question can be so considered. Not only is the term of employment
usually long, but the conditions are otherwise so onerous to the defendant that the possibility of
the corporation being thrown into insolvency thereby is expressly contemplated in the same
contract. This fact, in itself was, in our opinion, sufficient to put the plaintiffs upon inquiry as to
the extent of the business manager’s authority; they had not the right to presume that he or any
other single officer or employee of that corporation had implied authority to enter into a contract
of employment which might bring about its ruin.
TRINIDAD J. FRANCISCO VS. GSIS
(7 SCRA 557; March 30, 1963) – Trinidad Francisco, in consideration of loan extended by
GSIS, mortgaged her property in QC. For being in arrears in her installments, GSIS
extrajudicially foreclosed the mortgage.
Plaintiff’s father, Atty. Vicente Francisco sent a letter to Rodolfo Andal, general manager of
GSIS, offering to redeem the property which was replied to by Andal through a telegram saying
“GSIS BOARD APPROVED YOUR REQUEST RE REDEMTPION OF FORECLOSED
PROPERTY OF YOUR DAUGHTER”
Later, inasmuch as, according to the defendant GSIS, the remittances made by Atty. Francisco
were allegedly not sufficient to pay off her daughter’s arrears, the one year redemption period
has expired, said defendant consolidated title to the property in its name.
ISSUE: WON the telegram sent by the Andal binds the corporation?
HELD: Yes. The terms of the offer were clear and over the signature of Andnal, plaintiff was
informed that the proposal has been accepted. There was nothing in the telegram that hinted at
any anomaly, or gave grounds to suspect its veracity, and the plaintiff, therefore, cannot be
blamed for relying upon it. There is no denying that the telegram was within Andal’s apparent
authority, but eh defense is that he did not sign it, but that it was sent by the board secretary in
his name and without his knowledge. Assuming this to be true, how was appellee to know it?
Corporate transactions would speedily come to a standstill were every person dealing with a
corporation were held duty-bound to disbelieve every act of its responsible officers, no matter
how regular they should appear on their face.
Indeed, it is well-settled that If a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it, the corporation will be estopped to
deny that such apparent authority is real, as to innocent third persons dealing in good faith with
such officers or agents.
Hence, even if it were the board secretary who sent the telegram, the corporation could not
evade the binding effect produced by the telegram.
The error in the wording cannot be taken seriously. All the while GSIS pocketed the various
remittances, and kept silent as to the true facts as it now alleges. This silence, taken together
with the unconditional acceptance of three other subsequent remittances from plaintiff
constitutes in itself a binding ratification of the original agreement.
THE BOARD OF LIQUIDATORS VS. KALAW
(20SCRA987;Aug.10,
1965) – National Coconut Corporation (NACOCO) embarked on copra trading activities led by
its General Manager Maximo Kalaw and the other defendants as members of the board. Due to
natural calamities, the business of copra became unprofitable. Kalaw made a full disclosure of
the situation and apprised the board of the impending losses on the contracts already entered
into, but no action was taken. But later on, the contracts were unanimously approved by the
Board.
The buyers threated damage suits, but some were settled. Louis Dreyfus & Co. Ltd. Actually
sued but was also culminated in an out-of-court settlement.
NACOCO now seeks to recover the sum paid to Louis from general manager and board
chairman Kalaw and the other members who approved the contracts. It charges Kalaw with
negligence and bad faith and/or breach of trust for having approved the contracts, which was
dismissed by the trial court.
ISSUE: WON the contracts executed by Kalaw bind the corporation?
HELD: Yes. A rule that has gained acceptance through the years is that a corporate officer
“entrusted” with the general management and control of its business, has implied authority to
make any contract or do any other act which is necessary or appropriate to the conduct of the
ordinary business of the corporation. As such officer, he may, without any special authority from
the BOD perform all acts of an ordinary nature, which by usage or necessity are incident to his
office, and may bind the corporation by contracts in matters arising
in the usual course of business.
Long before the disputed contracts came into being, Kalaw contracted by himself alone as
general manager – for forward sales of copra (which is a necessity in the business) which were
profitable. So pleased was NACOCO;s BOD that it voted to grant Kalaw special bonus in
recognition of the signal achievement rendered by him.
These previous contacts, it should be stressed, were signed by Kalaw without prior authority
from the board. Said contracts were known all along to the board members. Nothing was said
by them. The aforesaid contracts stand to prove one thing. Obviously, NACOCO’s board met
difficulties attendant to forward sales by leaving the adoption of means to end, to the sound
discretion of NACOCO’s general manager Maximo Kalaw.
Where similar acts have been approved by the directors as a matter of general practice,
custom, and policy, the general manager may bind the company without formal authorization of
the BOD. In varying language, existence of such authority is established, by proof of the course
of business, the usages and practices of the company and by the knowledge which the BOD
has, or must be presumed to have, of acts and doings of its subordinates in and about the
affairs of the corporation.
In the case at bar, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCO’s behalf
without prior board approval. If the bylaws were to be literally followed, the board should give its
stamp of prior approval on all corporate contracts. But the Board itself, by its acts and through
acquiescence, practically laid aside the by-law requirement of prior approval.
BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29, 1969) – As a consequence of
P200,000 worth of ECA allocated to the Bowen & Co., Inc., it required a letter of credit in the
amount of P100,000 with the PNB. As the corporation did not have at the time the necessary
funds to put up the required cash marginal deposit of P60,000, its president Geoffrey Bowen,
obligating the corporation and himself in his personal capacity, offered to pay Francisco
Buenaseda 37 ½% of the profits to be realized from the sale of the ECA procurement materials,
should he be able to obtain and produce the amount necessary to cover the cash marginal
deposit – which Buenaseda was able to do.
The corporation refused to pay, Buenaseda filed an action in the CFI to recover the same.
ISSUE: WON the agreement was binding?
HELD: Yes. It is not here pretended that the BOD of the defendant corporation had no
knowledge of the agreement between Bowen and plaintiff. Indeed, at the time the said
Agreement was made, the BOD of the corporation was composed of Bowen himself, his wife,
Buenaseda and two others, with Bowen and his wife controlling the majority of the stocks of the
corporation. The Board did not repudiate the agreement but on the contrary, acquiesced in and
took advantage of the benefits afforded by said agreement. Such acts are equivalent to an
implied ratification of the agreement by the BOD and bound the corporation even without formal
resolution passed and recorded.
It is agreed by the respondents, defendants below, that the profits of the corporation form part of
its assets and payment of a certain percentage of the profits requires a declaration of dividends
and/or resolution of the BOD. The agreement is untenable. Although the plaintiff is a stockholder
of the corporation he does not, however, claim a share of the profits as such stockholder, but
under the agreement between him and the president of the corporation which has been
impliedly ratified by the BOD.
IN SUMMARY: An unauthorized act, or the act of a single director, officer or agent of a
corporation may be ratified either expressly or impliedly. 1. Express ratification is made through
a formal board action; 2. Implied ratification can either be (a) silence or acquiescence; (b)
acceptance and/or retention of benefits, or (c) by recognition or adoption.
C. REMOVAL AND FILLING UP OF VACANCIES
Sec. 28. Removal of directors or trustees. - Any director or trustee of a corporation may be
removed from office by a vote of the stockholders holding or representing at least two-thirds
(2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote
of at least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall
take place either at a regular meeting of the corporation or at a special meeting called for the
purpose, and in either case, after previous notice to stockholders or members of the corporation
of the intention to propose such removal at the meeting. A special meeting of the stockholders
or members of a corporation for the purpose of removal of directors or trustees, or any of them,
must be called by the secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the outstanding capital stock, or, if it
be a nonstock corporation, on the written demand of a majority of the members entitled to vote.
Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse
to give the notice, or if there is no secretary, the call for the meeting may be addressed directly
to the stockholders or members by any stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as well as of the intention to propose
such removal, must be given by publication or by written notice prescribed in this Code.
Removal may be with or without cause: Provided, That removal without cause may not be used
to deprive minority stockholders or members of the right of representation to which they may be
entitled under Section 24 of this Code.
NOTE: 1. By-laws may provide for causes or grounds for removal of a director; 2. A director
representing the minority may not be removed except for those causes; 3. A director NOT
representing the minority may be removed even without a cause.
REQUIREMENTS FOR A VALID REMOVAL: 1. The removal should take place at a general or
special meeting duly call for that purpose; 2. The removal must be by the vote of the
stockholders holding or representing 2/3 of the outstanding capital stock or the members
entitled to vote in cases of non-stock corporations; and 3. There must be a previous notice to
the stockholders or members of the intention to propose such removal at the meeting either by
publication or on written notice to the stockholders or members.
JURISDICTION OF THE COURT: The law, as it stands now, grants the proper court, the power
and authority to hear and decide cases “involving controversies in the election or appointment of
directors, trustees, officers, or managers of such corporation, partnership or association.”
DEADLOCK: In the case of deadlock in a close corporation, the SEC is also authorized to issue
an Order as it deems appropriate “canceling, altering or enjoining any resolution or other act of
the corporation or its board of directors or “directing or prohibiting” any act the corporation or the
other board of directors thereby effectively taking away the rights of the directors to act as
manager of the corporation.
VACANCY : 1. If a vacancy occurs by virtue of REMOVAL, Sec. 28 authorizes the filling of the
vacancy by the election of a replacement at the same meeting; 2. If it occurs NOT by removal,
Sec. 29 applies.
Sec. 29.
Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or
trustees other than by removal by the stockholders or members or by expiration of term, may be
filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special
meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected
only or the unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular or at a special meeting of stockholders or
members duly called for the purpose, or in the same meeting authorizing the increase of
directors or trustees if so stated in the notice of the meeting.
If the VACANCY is resulting from other than (1) by expiration of term; or (2) by removal, the
BOARD OF DIRECTORS, if still constituting a quorum, may fill the vacancy.
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M.
SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO
ORTIGAS III, ERIC ROXAS, in their capacities as members of the Board of Directors of Valle
Verde Country Club, Inc., and JOSE RAMIREZ, Petitioners Vs. Victor Africa, Respondent (GR
No. 151969; Sept. 4, 2009)
FACTS: February 27, 1996: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo
Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato
Dee, Augusto Sunico, and Ray Gamboa were elected as BOD during the Annual Stockholders’
Meeting of petitioner Valle Verde Country Club, Inc. (VVCC). From 1997-2001, the requisite
quorum could not be obtained so they continued to act as directors in a hold-over capacity.
On September 1, 1998, Dinglasan resigned, BOD still constituting a quorum elected Eric
Roxas (Roxas) followed by Macalintal. On March 6, 2001, Jose Ramirez (Ramirez) was
elected by the remaining BOD. Respondent Africa (Africa), a member of VVCC, questioned the
election of Roxas and Ramirez as members of the VVCC Board with the Securities and
Exchange Commission (SEC) and the Regional Trial Court (RTC) as contrary to Sec. 23 and 29
of the Corporation Code.
The RTC decided in favor of Africa.
ISSUE: WON the appointment of Roxas and Ramirez made by the remaining members of the
Board, still constituting a quorum, were valid?
HELD: No. The resolution of this legal issue is significantly hinged on the determination of what
constitutes a director’s term of office.
The holdover period is not part of the term of office of a member of the board of directors. The
word “term” has acquired a definite meaning in jurisprudence. In several cases, we have
defined “term” as the time during which the officer may claim to hold the office as of right , and
fixes the interval after which the several incumbents shall succeed one another. The term of
office is not affected by the holdover. The term is fixed by statute and it does not change simply
because the office may have become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not been elected and has failed
to qualify.
Term is distinguished from tenure in that an officer’s
“tenure” represents
the term during which the incumbent
a c t u a ll y h o l d s o f f i c e . The tenure may be shorter (or, in case of holdover, longer) than
the term for reasons within or beyond the power of the incumbent. Based on the above
discussion, when Section 23 of the Corporation Code declares that “the board of
directors…shall hold office for one (1) year until their successors are elected and qualified,” we
construe the provision to mean that the term of the members of the board of directors shall be
only for one year; their term expires one year after election to the office. The holdover period –
that time from the lapse of one year from a member’s election to the Board and until his
successor’s election and qualification – is not part of the director’s original term of office, nor is it
a new term; the holdover period, however, constitutes part of his tenure . Corollary, when an
incumbent member of the board of directors continues to serve in a holdover capacity, it implies
that the office has a fixed term, which has expired , and the incumbent is holding the succeeding
term.
After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintal’s term of office is deemed to have already expired. That he continued to serve in the
VVCC Board in a holdover capacity cannot be considered as extending his term. This holdover
period is not to be considered as part of his term, which, as declared, had already expired.
With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of
Section 29 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or
special meeting called for the purpose. To assume – as VVCC does – that the vacancy is
caused by Makalintal’s resignation in 1998, not by the expiration of his term in 1997, is both
illogical and unreasonable. His resignation as a holdover director did not change the nature of
the vacancy; the vacancy due to the expiration of Makalintal’s term had been created long
before his resignation.
The powers of the corporation’s board of directors emanate from its stockholders
This theory of delegated power of the board of directors similarly explains why, under Section
29 of the Corporation Code, in cases where the vacancy in the corporation’s board of directors
is caused not by the expiration of a member’s term, the successor “so elected to fill in a vacancy
shall be elected only for the unexpired term of the his predecessor in office.” The law has
authorized the remaining members of the board to fill in a vacancy only in specified instances,
so as not to retard or impair the corporation’s operations; yet, in recognition of the stockholders’
right to elect the members of the board, it limited the period during which the successor shall
serve only to the “ unexpired term of his predecessor in office.” It also bears noting that the
vacancy referred to in Section 29 contemplates a vacancy occurring w i t h i n t h e d i r e c t o r ’
s t e r m o f o f f i c e . When a vacancy is created by the expiration of a term, logically, there is
no more unexpired term to speak of. Hence, Section 29 declares that it shall be the
corporation’s stockholders who shall possess the authority to fill in a vacancy caused by the
expiration of a member’s term.
CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the BOD to the SEC:
Sec. 26. Report of election of directors, trustees and officers. - Within thirty (30) days after the
election of the directors, trustees and officers of the corporation, the secretary, or any other
officer of the corporation, shall submit to the Securities and Exchange Commission, the names,
nationalities and residences of the directors, trustees, and officers elected. Should a director,
trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death,
the secretary, or any other officer of the corporation, or the director, trustee or officer himself,
shall immediately report such fact to the Securities and Exchange Commission
PURPOSE: to give public information, under sanction of oath responsible officers, of the nature
of the business, financial condition and operational status of the company together with
information on its key officers or managers so that hose dealing with it and those who intend to
do business with it may know or have the means of knowing facts concerning the corporation’s
financial resources and business responsibility”
D. COMPENSATION OF DIRECTORS
Sec. 30. Compensation of directors. - In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such compensation other than per diems
may be granted to directors by the vote of the stockholders representing at least a majority of
the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the
total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding year.
GENERALLY: Directors are not entitled to receive any compensation, EXCEPT: 1. Reasonable
per diems; 2. As provided in the by-laws or upon a majority vote of the stockholders; and 3. If
they are performing functions other than that of a director.
(3) above: Sec. 30 is clear on the point when it provides “as such directors”. Therefore, special
and extraordinary service rendered, outside of the regular duties, may form the basis for a claim
of special compensation, such as when a director acts as a general counsel.
REASON: the office of a director is usually filled up by those chiefly interested in the welfare of
the institution by virtue of their interest in stock or other advantages and such interests are
presumed to be the motive for executing duties of the office without compensation.
MAY THE COURTS LOOK INTO THE REASONABLENESS OF COMPENSATION? The courts
will not generally undertake to review the fairness of official salaries, at the suit of a stockholder
unless wrongdoing and oppression or possible abuse of fiduciary position are shown.
When the recipient does not stand in the dual relation of the (1) one compensated and (2) a
participant in fixing his own compensation, it is considered outside the proper judicial function to
go into business policy question of the fairness or reasonableness of compensation as fixed by
the board. Otherwise, it will call for a scrutiny of the reasonableness or fairness of the
compensation. Likewise, even if consented to by the majority of stockholders, the courts may
still look into such reasonableness if: (1) it would amount to giving away corporate funds in the
guise of compensation as against the interest of the dissenting minority; or (2) in fraud of
creditors, either amounting to wastage of assets.
CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR.
(33SCRA
593; June 30, 1970) – This is a complaint filed by herein petitioner CCE for the refund of certain
amounts received by respondent when he served as member of the board of directors of CCE,
which were said to be per diems and transportation expenses, representation expenses and
commutable discretionary funds.
ISSUE: WON the BOD had the power to appropriate funds for the expenses claimed by
respondent?
HELD: No. The by-laws expressly reserved unto the stockholders the power to determine the
compensation of the members of the BOD, and the stockholders did restrict such compensation
to (1) actual transportation expenses plus (2) per diems of P30 and (3) actual expenses while
waiting. Even without the express prohibition, the directors are not entitled to compensation for
“The law is well-settled that directors of corporations presumptively serve without compensation
and in the absence of an express agreement or a resolution thereto, no claim can be asserted
therefor. Thus it has been held that there can be no recovery of compensation, unless expressly
provided for, when director serves as president or vice-president, as secretary or treasurer or
cashier, as member of an executive committee, as chairman of a building committee, or similar
offices.
Thus, the directors, in assigning themselves additional duties, such as the visitation of
FACOMAS, acted within their power, but, by voting for themselves compensation for such
additional duties, they acted in excess of their authority, as express in the by-laws.
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS ENRIQUEZ,
PRESTON F. VILLASIS & REGINALD F. VILLASIS, petitioner, vs. RICARDO T. SALAS,
SALVADOR T. SALAS, SOLEDAD SALASTUBILLEJA, ANTONIO S. SALAS, RICHARD S.
SALAS & HON. JUDGE PORFIRIO PARIAN, respondents ( GR No. 113032; 278 SCRA 216;
Aug. 21, 1997)
FACTS: In a special board meeting, a resolution was passed providing for compensation of
officers. A few years later, petitioners Homero Villasis, Prestod Villasis, Reginald Villasis and
Dimas Enriquez filed an affidavitcomplaint for falsification of public documents (for submission
of an income reflecting the resolution as passed on 1985, when in fact it was passed in 1986)
and estafa (for the disbursement of funds by effecting payment to the aforesaid salaries) against
herein respondents who were members of the Board of Trustees who were also officers of the
corporation. The trial court acquitted respondents in both charges without civil liability. The
motion for reconsideration on the civil aspect being denied, petitioners filed this petition.
ISSUE: WON the resolution granting compensation to OFFICERS of the corporation is valid?
HELD: Yes. The proscription under Sec. 30, is against granting compensation to
directors/trustees of a corporation is not a sweeping rule. Worthy of note is the clear
phraseology of Sec 30 which states “… [T]he directors shall not receive any compensation, a s
s u c h dir e c t o r s , …” The phrase a s s u c h directors is not without significance for it
delimits the scope of the prohibition to compensation given to them for services performed p u r
e l y i n t h e i r c a p a c i t y a s d i r e c t o r s o r t r u s t e e s . The unambiguous implication is
that members of the board may receive compensation, in addition to reasonable per diems,
when they render services to the corporation in a capacity other than as directors/trustees. In
the case at bench, the Resolution granted monthly compensation to private respondents not in
their capacity as members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of WIT.
Clearly Sec. 30 is not violated. Consequently, the last sentence limiting the compensation to
10% of the net income before income tax does not likewise find application in this case since
the compensation is being given to private respondents in their capacity as officers of WIT and
not as board members.
GOVERNMENT VS. EL HOGAR FILIPINO
(50 Phil. 399 ; July 14, 1927) – The members of the board of El Hogar Filipino receives 5% of
the net profit as shown in the balance sheet and is distributed in proportion to their attendance
to meetings of the board. A complaint was filed against the, and the sixth cause of action
alleged that the directors, instead of serving without pay, or receiving nominal pay or a fixed
salary - as the complainant supposes would be proper – have been receiving large
compensation in varying amounts.
ISSUE: WON the courts may declare the by-law provision null and void?
HELD: No. The Corporation Law does not undertake to prescribe the rate of compensation for
the directors of corporations. The power to fix the compensation they shall receive, if any, is left
to the corporation, to be determined in its by-laws (Act No. 1459, sec. 21). Pursuant to this
authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of
its by-laws, as already stated. The justice and propriety of this provision was a proper matter for
the shareholders when the by-laws were framed; and the circumstance that, with the growth of
the corporation, the amount paid as compensation to the directors has increased beyond what
would probably be necessary to secure adequate service from them is matter that cannot be
corrected in this action; nor can it properly be made a basis for depriving the respondent of its
franchise, or even for enjoining it from compliance with the provisions of its own by-laws. If a
mistake has been made, or the rule adopted in the by-laws has been found to work harmful
results, the remedy is in the hands of the stockholders who have the power at any lawful
meeting to change the rule. The remedy, if any, seems to lie rather in publicity and competition,
rather than in a court proceeding. The sixth cause of action is in our opinion without merit.
E. LIBABILITY OF CORPORATE OFFICERS
The general rule is that unless the law specifically provides a corporate officer or agent is not
civilly or criminally liable for acts done by him as such officer or agent, or when absent bad faith
or malice.
TRAMAT MERCANTILE, INC. VS. CA
( 2 3 8 S C R A 1 4 ; N o v . 7 , 1 9 9 4 ) – Melchor dela Cuesta, doing business under the name
Farmers Machineries,
sold a tractor to Tramat Mercantile, Inc. In payment, David Ong, Tramat’s president and
manager issued a check for P33,500. Tramat sold the tractor, together with an attached lawn
mower fabricated by it, to NAWASA. David Ong put a stop payment on the check when
NAWASA refused to pay on the account that aside from the defects on the lawn mower, the
engine (sold by dela Costa) was a reconditioned unit.
De la Costa filed an action for recovery of money which was granted by the court.
ISSUE: WON Ong should be held jointly and severally liable?
HELD: No. It was an error to hold David Ong jointly and severally liable with TRAMAT to de la
Cuesta under the questioned transaction. Ong had there so acted, not in his personal capacity,
but as an officer of a corporation, TRAMAT, with a distinct and separate personality. As such, it
should only be the corporation, not the person acting for and on its behalf that properly could be
made liable thereon.
Personal liability of a corporate director, trustee or officer along (although not necessarily) with
the corporation may so validly attach, as a rule, only when —
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;
4. He is made, by a specific provision of law, to personally answer for his corporate action.
In the case at bench, there is no indication that petitioner David Ong could be held personally
accountable under any of the abovementioned cases.
RICARDO A. LLAMADO, petitioner, vs. COURT OF APPEALS and PEOPLE OF THE
PHILIPPINES, respondents ( GR No. 99032; 270 SCRA 423; March 26, 1997)
FACTS: Private complainant Leon Gaw delivered to the accused Ricardo Llamado and Jacinto
Pascual the amount of P180,000 which is to be repaid in 6 months with 12% interest. As
security, the accused issued and signed a postdated check which was later on stopped and
dishonored for being drawn against insufficient funds. Gaw filed a complaint for violation of BP
Blg. 22. Pascual remained at large and the trial on the merits against Llamado was conducted.
The trial court convicted Llamado.
ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation could be held civilly and
criminally liable?
HELD: Yes. Petitioner denies knowledge of the issuance of the check without sufficient funds
and involvement in the transaction with private complainant. However, knowledge involves a
state of mind difficult to establish. Thus, the statute itself creates a prima facie presumption, i . e
., that the drawer had knowledge of the insufficiency of his funds in or credit with the bank at the
time of the issuance and on the check's presentment for payment. Petitioner failed to rebut the
presumption by paying the amount of the check within five (5) banking days from notice of the
dishonor. His claim that he signed the check in blank which allegedly is common business
practice is hardly a defense. If as he claims, he signed the check in blank, he made himself
prone to being charged with violation of BP 22. It became incumbent upon him to prove his
defenses. As Treasurer of the corporation who signed the check in his capacity as an officer of
the corporation, lack of involvement in the negotiation for the transaction is not a defense.
Petitioner's argument that he should not be held personally liable for the amount of the check
because it was a check of the Pan Asia Finance Corporation and he signed the same in his
capacity as Treasurer of the corporation, is also untenable. The third paragraph of Section 1 of
BP Blg. 22 states:
“Where the check is drawn by a corporation, company or entity, the person or persons who
actually signed the check in behalf of such drawer shall be liable under this Act”
ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners , vs . NATIONAL
LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS, SHIRLEY PORRAS, CARMEN
ELIZARDE, ET. AL., respondents ( GR No. 121434; 273 SCRA 35; June 2, 1997)
FACTS: Private respondents were employees of Crispa, Inc. who were dismissed due to
alleged retrenchment. They filed an illegal dismissal complaint with the NLRC against Crispa,
Inc., Valeriano Floro (major stockholder, incorporation and director of Crispa) and petitioners,
who were high ranking officials and directors of Crispa. The Labor Arbiter dismissed the
complaint but ordered petitioners, Floro and Crispa to pay separation pay.
ISSUE: WON petitioners can be held liable?
HELD: Yes. A corporation is a juridical entity with legal personality separate and distinct from
those acting for and in its behalf and, in general, from the people comprising it. The general rule
is that obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. There are times, however, when solidary liabilities may be
incurred but only when exceptional circumstances warrant such as in the following cases:
“1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote
for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross
negligence in directing the corporate affairs; (c) are guilty of co n flic t o f in t e r e s t to the
prejudice of the corporation, its stockholders or members, and other persons; 2. When a director
or officer has consented to the issuance of watered stocks or who, having knowledge thereof,
did not forthwith file with the corporate secretary his written objection thereto; 3. When a
director, trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or 4. When a director, trustee or officer is made, by specific
provision of law, personally liable for his corporate action.”i
In labor cases, particularly, corporate directors and officers are solidarily liable with the
corporation for the termination of employment of corporate employees done with malice or in
bad faith. In this case, it is undisputed that petitioners have a direct hand in the illegal dismissal
of respondent employees. They were the ones, who as highranking officers and directors of
Crispa, Inc., signed the Board Resolution retrenching the private respondents on the feigned
ground of serious business losses that had no basis apart from an unsigned and unaudited
Profit and Loss Statement which, to repeat, had no evidentiary value whatsoever. This is
indicative of bad faith on the part of petitioners for which they can be held jointly and severally
liable with Crispa, Inc. for all the money claims of the illegally terminated respondent employees
in this case.
F. THREE-FOLD DUTY OF DIRECTORS
Directors owe a three-fold duty to the corporation: (1) Obedience; (2) Diligence and (3) Loyalty.
Sec. 31.
L i a b ili t y o f d i r e c t o r s , t r u s t e e s o r o f f i c e r s . - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees shall be liable
jointly and severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which otherwise would
have accrued to the corporation.
OBEDIENCE: as stated in the first part of Sec. 31 refers to the act of voting or assenting, either
willfully or knowingly, to patently unlawful acts thereby making the responsible director liable for
damages resulting therefrom;
DILIGENCE: Under the second part of Sec. 31, the directors are required to manage the
corporate affairs with reasonable care and prudence. This is because the liability of a
corporation is not limited to willful breach of trust or excess of power, but extends also to
negligence. Their liability rests upon the common law rule which renders liable every agent who
violates his authority or neglects his duty to the damage of his principal.
The degree of diligence is relative. The more fair and satisfactory rule is that degree of care and
diligence which an ordinary prudent director could reasonably be expected to exercise in a like
position under similar circumstances.
BUSINESS JUDGMENT RULE : Although directors are commonly said to be responsible both
for reasonable care and also prudence, the formula is continually repeated that they are not
liable for losses due to imprudence or honest error of judgment. The business judgment rule in
effect states that questions of policy and management are left solely to the honest decision of
the board of directors and the courts are without authority to substitute its judgment as against
the former. The directors are business managers and as long as they act in good faith, its
actuations are not subject to judicial review.
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants, vs. BACOLOD-MURCIA MILLING
CO., INC., defendant-appellee. ( GR No. L - 15092; 5 SCRA 36; May 18, 1962)
FACTS: Appellants have been sugar planter adhered to defendant-appellees sugar central mill
under identical milling contracts with a 55% share of the resulting product. There was a proposal
to increase the planter’s share to 60% which was adopted by defendant in an Amended Milling
Contract and consequently a Board Resolution.
In 1953, the appellants initiated the present action, contending that three Negros sugar centrals
(La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production exceeding one-
third of the production of all the sugar central mills in the province, had already granted
increased participation (of 62.5%) to their planters, and that under paragraph 9 of the resolution
of August 20, 1936, heretofore quoted, the appellee had become obligated to grant similar
concessions to the plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling Co., Inc.,
resisted the claim, and defended by urging that the stipulations contained in the resolution were
made without consideration; that the resolution in question was, therefore, null and void ab initio
, being in effect a donation that was ultra vires and beyond the powers of the corporate directors
to adopt. The trial court decided in favor of defendant, thus the present appeal.
ISSUE: WON the resolutions passed by the bard are valid and binding?
HELD: Yes. There can be no doubt that the directors of the appellee company had authority to
modify the proposed terms of the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties.
As the resolution in question was passed in good faith by the board of directors, it is valid and
binding, and whether or not it will cause losses or decrease the profits of the central, the court
has no authority to review them.
“They hold such office charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation should be operated at a loss
during depression, or close down at a smaller loss, is a purely business and economic problem
to be determined by the directors of the corporation and not by the court. It is a well-known rule
of law that questions of policy or of management are left solely to the honest decision of officers
and directors of a corporation, and the court is without authority to substitute its judgment of the
board of directors; the board is the business manager of the corporation, and so long as it acts
in good faith its orders are not reviewable by the courts. (Fletcher on Corporations, Vol. 2, p.
390).”
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over onethird of the entire annual sugar
production in Occidental Negros) have granted progressively increasing participations to their
adhered planter at an average rate of 62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56, the appellee Bacolod-Murcia Milling Company is, under the terms of its
Resolution of August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants
herein.
LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO - DIRECTORS: Generally: a director is
not liable for the acts of their co-directors, unless: (1) He connives or participates; or (2) He is
negligent in not discovering or acting to prevent it. Thus, absent of actual knowledge of the
wrongful activities, on the part of the co-directors, the same cannot be imputed to the other
director unless in the exercise of reasonable care attending his responsibilities, he should have
been aware of suspicious circumstances demanding correlative action.
LOYALTY: refers to the proscription imposed on directors on acquiring any personal or
pecuniary interest in conflict with their duty as director. Their relationship is regarded as
“fiduciary relation”. As fiduciaries, they are obliged to act with utmost candor and fair dealing for
the interest of the corporation and without selfish motives.
Sec. 34.
Disloyalty of a director. - Where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of
such corporation, he must account to the latter for all such profits by refunding the same, unless
his act has been ratified by a vote of the stockholders owning or representing at least two-thirds
(2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact
that the director risked his own funds in the venture.
Apparent from Sec. 31 and 34, the duty of loyalty is violated in the following instances: 1. When
a director or trustee “acquires any personal or pecuniary interest in conflict with (his) duty as
such director or trustee”; 2. When he “attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect to any matter which has been reposed in him
in confidence, as to which equity imposes a disability upon him to deal in his own behalf”; and 3.
When he, “by virtue of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profit to the prejudice of such corporation”.
FO RBIDDEN PROFITS : Forbidden in the sense that directors and officers are fiduciary
representatives of the corporation and as such they are not allowed to obtain any personal
profit, commission, bonus or gain for their
official actions. This may also refer to those arising from transactions of directors with third
persons which may involve misappropriation of corporate opportunities and disloyal diverting of
business. Directors and officers are corporate insiders and cannot, therefore, utilize their
strategic position for their own preferment or use their powers and opportunities for their
personal advantage to the exclusion of the interest which they represent.
C O R P O R A T E O P P O R T U N I T Y D O C T R I N E : it places a director of a corporation
in the position of a fiduciary and prohibits him from seizing a business opportunity and/or
developing it at the expense and with the facilities of the corporation. He cannot appropriate to
himself opportunity which in fairness should belong to the corporation.
RATIFICATION : 1. The second paragraph of Sec. 31 which makes a director liable to account
for profits if he attempts to acquire or acquires any interest adverse to the corporation in respect
to any matter reposed in him in confidence as to which equity imposes a disability upon him to
deal in his own behalf is not subject to ratification. 2. Whereas, in Sec. 34, if a director acquires
a business opportunity which should belong to the corporation, he is bound to account for such
profits unless his act is ratified by the stockholders owing or representing at least 2/3 of the
outstanding capital stock.
Example: A, B, C, D and E are directors of REALTY CORP., Z wanted to sell his property with a
fair market value of P100M for P90M. a. If it was offered first to A, and A made a profit of P10M,
this would fall under Sec. 34 and may be subject to ratification; A merely acquired a business
opportunity owing to the corporation. b. If it was offered to REALTY CORP., and A, later on
offered to buy it for P95 and sold it making a profit of P5M, it would fall under Sec. 31 and not
subject to ratification, A should return the profits to REALTY CORP. It was a matter reposed in
him in confidence.
STRONG VS. REPIDE
(41 Phil. 947; May 3, 1909) – the Governor of the Philippine Islands, on behalf of the
government, made an offer of purchase for the total sum of $6,,043,219.47 in gold for all the
friar lands, though owned by different owners.
While this state of things existed, and before the final offer had been made by the Governor, the
defendant, although still holding out for a higher price for the lands, took steps to purchase the
800 shares of stock in his own company from Mrs. Strong, which he knew were in the
possession of F. Stuart Jones, as her agent. The defendant employed Krauffman and the latter
employed Mr. Sloan, a broker, to purchase the stock for him. Mr. Sloan, the husband, did not
know who wanted to buy the shares nor did Jones when he was spoken to. Jones would not
have sold at the price he did had he known it was the defendant who was purchasing, because,
as he said, it would show increased value, as the defendant would not be likely to purchase ore
stock unless the price was going up.
ISSUE: WON it was the duty of the defendant to disclose to the agent of the plaintiff the facts
bearing upon or which might affect the value of the stock?
HELD: Yes. A director upon whose action the value of the shares depends cannot avail of his
knowledge of what his own action will be to acquire shares from those whom he intentionally
keeps in ignorance of his expected action and the resulting value of the shares.
Even though a director may not be under the obligation of a fiduciary nature to disclose to a
shareholder his knowledge affecting the value of the shares, that duty may exist in special
cases, and did exist upon the facts in this case.
In this case, the facts clearly indicate that a director of a corporation owning friar lands in the
Philippine Islands, and who controlled the action of the corporation, had so concealed his
exclusive knowledge of the impending sale to the government from a shareholder from whom
he purchased, through an agent, shares in the corporation, that the concealment was in
violation of his duty as a director to disclose such knowledge, and amounted to deceit sufficient
to avoid the sale; and, under such circumstances, it was immaterial whether the shareholder's
agent did or did not have power to sell the stock.
In addition to his ownership of almost three-fourths of the shares of the stock of the company,
the defendant was one of the five directors of the company, and was elected by the board the
agent and administrator general of such company, "with exclusive intervention in the
management" of its general business.
Concealing his identity when procuring the purchase of stock, by his agent, was in itself stock
evidence of fraud on the part of the defendant. The concealment was not a mere inadvertent
omission but was a studied and intentional omission, to be characterized as part of the deceitful
machination to obtain the purchase without giving information whatever as to the state and
probable result of the negotiations, to the vendor of the stock, and to, in that way, obtain the
same at a lower price.
G. SELF-DEALING DIRECTORS
The self-dealing director is one who deals or transacts business with his own corporation.
Sec. 32.
D e a li n g s o f d i r e c t o r s , t r u s t e e s o r o f f i c e r s w i t h t h e corporation. - A
contract of the corporation with one or more of its directors or trustees or officers is voidable, at
the option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such
director or trustee was not necessary for the approval of the contract; 3. That the contract is fair
and reasonable under the circumstances; and 4. That in case of an officer, the contract has
been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case
of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of at least
two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable under the circumstances.
Generally: A contract entered into by a director with his own corporation is voidable at the
latter’s option, except when all the conditions laid down in Sec. 32 are met. On the other hand,
where any of the first two conditions is absent, the contract becomes voidable subject to the
ratification of the stockholders representing 2/3 of the outstanding capital stock – the
requirements of which are: (1) there must be a meeting called for that purpose; (2) full
disclosure of the adverse interest of the director; and (3) the contract is fair and reasonable
under the circumstances.
If the self-dealing director owns all or substantially all of the shares of stock, thereby making
ratification easily possible, the last sentence of Sec. 32 should be made to apply by determining
reasonableness of the transaction to which there is no yardstick. Every case stands upon its
own bottom, and the ultimate question is whether the contract was honest and beneficial which
is always a question of fact.
PRIME WHITE CEMENT CORPORATION, petitioner, vs. IAC and ALEJANDRO TE,
respondents ( GR No. L - 68555; 220 SCRA 103; March 19, 1993)
FACTS: Respondent Alejandro Te, a director of petitioner corporation, was awarded a
dealership agreement whereby Te would be the exclusive dealer and/or distributor of the
corporation in the entire Mindanao. As a consequence, Te entered into different contracts for
selling white cement. Laer on, defendant corporation decided to impose certain conditions upon
the dealership agreement.
Several demands to comply with the agreement were made by Te to the corporation but were
refused and Te was constrained to cancel the contracts
he entered into.
Defendant corporation entered into an exclusive dealership agreement with Napoleon Co for the
marketing of white cement in Mindanao. Hence, this suit.
ISSUE: WON the dealership agreement entered into by Te with his own corporation is valid and
binding?
HELD: No. In the instant case respondent Te was not an ordinary stockholder; he was a
member of the Board of Directors and Auditor of the corporation as well. He was what is often
referred to as a "self-dealing" director.
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his
corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the
latter to his own advantage and benefit. As corporate managers, directors are committed to
seek the maximum amount of profits for the corporation. This trust relationship "is not a matter
of statutory or technical law. It springs from the fact that directors have the control and guidance
of corporate affairs and property and hence of the property interests of the stockholders.
Granting
arguendo that the "dealership agreement" involved here would be valid and enforceable if
entered into with a person other than a director or officer of the corporation, the fact that the
other party to the contract was a Director and Auditor of the petitioner corporation changes the
whole situation. First of all, We believe that the contract was neither fair nor reasonable. The
"dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te
20,000 bags of white cement per month, for five years starting September, 1970, at the fixed
price of P9.70 per bag. Respondent Te is a businessman himself and must have known, or at
least must be presumed to know, that at that time, prices of commodities in general, and white
cement in particular, were not stable and were expected to rise. At the time of the contract,
petitioner corporation had not even commenced the manufacture of white cement, the reason
why delivery was not to begin until 14 months later. He must have known that within that period
of six years, there would be a considerable rise in the price of white cement. In fact, respondent
Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by
the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in the
"dealership agreement" to allow for an increase in price mutually acceptable to the parties.
Instead, the price was pegged at P9.70 per bag for the whole five years of the contract.
Fairness on his part as a director of the corporation from whom he was to buy the cement,
would require such a provision. In fact, this unfairness in the contract is also a basis which
renders a contract entered into by the President, without authority from the Board of Directors,
void or voidable, although it may have been in the ordinary course of business. We believe that
the fixed price of P9.70 per bag for a period of five years was not fair and reasonable.
Respondent Te, himself, when he subsequently entered into contracts to resell the cement to
his "new dealers" Henry Wee and Gaudencio Galang stipulated as follows: The price of white
cement shall be mutually determined by us but in no case shall the same be less than P14.00
per bag (94 lbs)
As director, especially since he was the other party in interest, respondent Te's bounden duty
was to act in such manner as not to unduly prejudice the corporation. In the light of the
circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to the
corporation; he was attempting in effect, to enrich himself at the expense of the corporation.
There is no showing that the stockholders ratified the "dealership agreement" or that they were
fully aware of its provisions. The contract was therefore not valid and this Court cannot allow
him to reap the fruits of his disloyalty.
CHARLES W. MEAD, plaintiff-appellant, vs. E. C. McCULLOUGH, ET AL., and THE
PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY, defendant-appellants ( GR
No. 6217; 21 Phil. 95; Dec. 26, 1911)
FACTS: Herein plaintiff-appellant Mead with defendant McCullough formed the Philippine
Engineering and Construction Company, the incorporators being the only stockholders and
directors of the company. When Mead left for China, the other directors entered into an
agreement where all the rights in a “wrecking contract” with the naval authorities were sold to
defendant. The defendant, in turn, sold these rights with R.W. Brown, HDC jones, John Macleod
and TH Twentyman, and retaining one sixth interest, formed Manila Salvage Association.
ISSUE: WON officers or directors of the corporation may purchase the corporate property?
HELD: Yes. While a corporation remains solvent, we can see no reason why a director or
officer, by the authority of a majority of the stockholders or board of managers, may not deal
with the corporation, loan it money or buy property from it, in like manner as a stranger. So long
as a purely private corporation remains solvent, its directors are agents or trustees for the
stockholders. They owe no duties or obligations to others. But the moment such a corporation
becomes insolvent, its directors are trustees of all the creditors, whether they are members of
the corporation or not, and must manage its property and assets with strict regard to their
interest; and if they are themselves creditors while the insolvent corporation is under their
management, they will not be permitted to secure to themselves by purchasing the corporate
property or otherwise any personal advantage over the other creditors. Nevertheless, a director
or officer may in good faith and for an adequate consideration purchase from a majority of the
directors or stockholders the property even of an insolvent corporation, and a sale thus made to
him is valid and binding upon the minority. (Beach et al. vs. Miller, supra ; Twin-Lick Oil
Company vs. Marbury, supra ; Drury vs. Cross, 7 Wall., 299; Curran vs. State of Arkansas, 15
How., 304; Richards vs. New Hamphshire Insurance Company, 43 N. H., 263; Morawetz on
Corporations (first edition), sec. 579; Haywood vs. Lincoln Lumber Company et al., 64 Wis.,
639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw Carriage Company, 21 Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, he court said:
That a director of a joint-stock corporation occupies one of those fiduciary relations where his
dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose
interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on
slight grounds, is a doctrine founded on the soundest morality, and which has received the
clearest recognition in this court and others. (Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7
Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553;
Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general doctrine, however, in
regard to contracts of this class, is, not that they are absolutely void, but that they are voidable
at the election of the party whose interest has been so represented by the party claiming under
it. We say, this is the general rule; for there may be cases where such contracts would be void
ab initio; as when an agent to sell buys of himself, and by his power of attorney conveys to
himself that which he was authorized to sell. But even here, acts which amount to a ratification
by the principal may validate the sale
The sale or transfer of the corporate property in the case at bar was made by three directors
who were at the same time a majority of stockholders. If a majority of the stockholders have a
clear and a better right to sell the corporate property than a majority of the directors, then it can
be said that a majority of the stockholders made this sale or transfer to the defendant
McCullough.
What were the circumstances under which said sale was made? The corporation had been
going from bad to worse. The work of trying to raise the sunken Spanish fleet had been for
several months abandoned. The corporation under the management of the plaintiff had entirely
failed in this undertaking. It had broken its contract with the naval authorities and the $10,000
Mexican currency deposited had been confiscated. It had no money. It was considerably in
debt. It was a losing concern and a financial failure. To continue its operation meant more
losses. Success was impossible. The corporation was civilly dead and had passed into the
limbo of utter insolvency. The majority of the stockholders or directors sold the assets of this
corporation, thereby relieving themselves and the plaintiff of all responsibility. This was only the
wise and sensible thing for them to do. They
acted in perfectly good faith and for the best interests of all the stockholders. "It would be a
harsh rule that would permit one stockholder, or any minority of stockholders to hold a majority
to their investment where a continuation of the business would be at a loss and where there was
no prospect or hope that the enterprise would be profitable."
We therefore conclude that the sale or transfer made by the quorum of the board of directors —
a majority of the stockholders — is valid and binding upon the majority-the plaintiff.
H. INTERLOCKING DIRECTORS
An interlocking director is a director in one corporation who deals or transacts with another
corporation of which he is also a director. In such case, there may effectively be a dual agency ,
a divided allegiance where allegiance in one corporation may subordinated to the other.
The prevailing view is that these contracts entered into where there is an interlocking director is
not voidable merely by reason of conflicting duties or interest as to corporations represented,
even when a majority or all of the directors are common to both corporations. It is recognized
that such will be upheld if there is no bad faith or unfairness or collusion.
Sec. 33. Contracts between corporations with interlocking directors. – (1) Except in cases of
fraud, and provided (2) the contract is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors shall not be invalidated on that
ground alone: Provided, That if the interest of the interlocking director in one corporation is
substantial and his interest in the other corporation or corporations is merely nominal, he shall
be subject to the provisions of the preceding section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
NOTE: 1. The contract between corporations with interlocking director is valid absent fraud and
provided it is reasonable under the circumstances; 2. If the interest of the interlocking director in
one corporation exceeds 20% and in the other merely nominal, the contract becomes voidable
at the latter corporation’s option. In effect, the director would be treated as a self-dealing director
under Sec. 32; 3. If the interest in both companies is either both substantial or both nominal,
Sec. 33 will apply.
I. DERIVATIVE SUIT
In case of a wrongful or fraudulent act of a director, officer or agent, stockholders have the
following options: 1. Individual or Personal Action – for direct injury to his rights, such as denial
of his right to inspect corporate books and records or pre-emptive rights; 2. Representative or
Class Suit – in which one or more members of a class sue for themselves as a class or for all to
whom the right was denied, either as an individual action or a derivative suit; and a 3. Derivative
Suit – an action based on injury to the corporation – to enforce a corporate right – wherein the
corporation itself is joined as a necessary party, and recovery is in favor of and for the
corporation. It is a suit granted to any stockholder to institute a case to remedy a wrong done
directly to the corporation and indirectly to stockholders.
CANDIDO PASCUAL, plaintiff-appellant, vs. EUGENIO DEL SAZ OROZCO, ET AL,
defendants-appellees ( GR No. L - 5174; 19 Phil. 83; March 17, 1911)
FACTS: During 1903-1907, the defendant-appellees, without the knowledge and acquiescence
of the stockholders deducted their compensation from gross income instead of from the net
profits of the bank, the same with their predecessors for the years 1899-1902.
Plaintiff-appellant brings this action in his own right as a stockholder of the bank, for the benefit
of the bank and all the stockholders, in behalf of the corporation, which, even though, nominally
a defendant, is to all intents and purposes the real plaintiff in this case as shown in the prayer of
the complaint.
ISSUE: WON plaintiff has capacity to sue?
HELD: Yes. In suits of this character the corporation itself and not the plaintiff stockholder is the
real party in interest. The rights of the individual stockholder are merged into that of the
corporation. It is a universally recognized doctrine that a stockholder in a corporation has no title
legal or equitable to the corporate property; that both of these are in the corporation itself for the
benefit of all the stockholders. Text writers illustrate this rule by the familiar example of one
person or entity owning all the stock and still having no greater or essentially different title than if
he owned but one single share. Since, therefore, the stockholder has no title; it is evident that
what he does have, with respect to the corporation and his fellow stockholder, are certain rights
sui generis . These rights are generally enumerated as being, first, to have a certificate or other
evidence of his status as stockholder issued to him; second, to vote at meetings of the
corporation; third, to receive his proportionate share of the profits of the corporation; and lastly,
to participate proportionately in the distribution of the corporate assets upon the dissolution or
winding up. (Purdy's Beach on Private Corporations, sec. 554.)
The right of individual stockholders to maintain suits for and on behalf of the corporation was
denied until within a comparatively short time, but his right is now no longer doubted.
Accordingly, in 1843, in the leading case of Foss vs . Harbottle, a stockholder brought suit in the
name of himself and other defrauded stockholders, and for the benefit of the corporation,
against the directors, for a breach of their duty to the corporation. This case was decided
against the complaining stockholder, on the ground that the complainant had not proved that the
corporation itself was under the control of the guilty parties, and had not proved that it was
unable to institute suit. The court, however, broadly intimated that a case might arise when a
suit instituted by defrauded stockholders would be entertained by the court and redress given.
Acting upon this suggestion, and impelled by the utter inadequacy of suits instituted by the
corporation, defrauded stockholders continued to institute these suits and to urge the courts of
equity to grant relief. These efforts were unsuccessful in clearly establishing the right of
stockholders herein until the cases of Atwol against Merriwether, in England, 1867, and of
Dodge vs . Woolsey, in this country, in 1855. These two great and leading cases have firmly
established the law for England and America, that where corporate directors have committed a
breach of trust either by their frauds, u l t r a v i r e s acts, or negligence, and the corporation is
unable or unwilling to institute suit to remedy the wrong, a single stockholder may institute that
suit, suing on behalf of himself and other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong done directly to the corporation and indirectly to the
stockholders.
So it is clear that the plaintiff, by reason of the fact that he is a stockholder in the bank
(corporation) has a right to maintain a suit for and on behalf of the bank, but the extent of such a
right must depend upon when, how, and for what purpose he acquired the shares which he now
owns. In the determination of these questions we cannot see how, if it be true that the bank is a
quasi-public institution, it can affect in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of November, 1903; that the
defendants, as members of the board of directors and board of government, respectively, during
each and all the years 1903, 1904, 1905, 1906, and 1907, did fraudulently, and to the great
prejudice of the bank and its stockholders, appropriate to their own use from the profits of the
bank sums of money amounting approximately to P20,000 per annum.
It is self-evident that the plaintiff in the case at bar was not, before he acquired in September,
1903, the shares which he now owns, injured or affected in any manner by the transactions set
forth in the second cause of action. His vendor could have complained of these transactions, but
he did not choose to do so. The discretion whether to sue to set them aside, or to acquiesce in
and agree to them, is, in our opinion, incapable of transfer. If the plaintiff himself had been
injured by the acts of defendants' predecessors
that is another matter. He ought to take things as he found them when he voluntarily acquired
his ten shares. If he was defrauded in the purchase of these shares he should sue his vendor.
(Thus, he may sue for the second half of 1903 to 1907 but not for the years 1989 to the first half
of 1903.)
So it seems to be settled by the Supreme Court of the United States, as a matter of substantive
law, that a stockholder in a corporation who was not such at the time of the transactions
complained of, or whose shares had not devolved upon him since by operation of law, cannot
maintain suits of this character, unless such transactions continue and are injurious to the
stockholder, or affect him especially and specifically in some other way.
HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W. ROBINSON,
plaintiffs-appellants, vs. THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC
BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH,
defendants-appellees. ( GR No. L - 25241; 49 Phil. 512; Nov. 3, 1926)
FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and Company (Company),
entered into a Memorandum of Agreement and Voting Trust Agreement with defendant Asia
Banking Corporation (Bank) with the understanding that it was intended for the protection of all
parties thereto from outside creditors, but that they were not intended to be enforced according
to the letter thereof, and that they did not contain the true agreement between the Bank and the
Company which was to finance the company without interference from the above-named
creditors.
That shortly after, Mullen caused the removal of the plaintiffs as directors of the Company and
their replacement. The defendants thereafter gave pledges and mortgages from the Company
to the Bank and entered into contracts as directed by the Bank, and permitted the Bank to
foreclose the same and to sell the property of the Company itself and permitted the Bank to
institute suits against the Company, in which the Company was not represented by anyone
having its interest at heart and in which reason the Bank occupied both plaintiff and defendant
and tricked and deluded the courts into giving judgment in which the rights of the real parties
were concealed and unknown to the courts.
Thereafter, defendants incorporated Philippine Motors Corporation where all the assets and
goodwill of the Company were transferred by the Bank.
ISSUE: WON the plaintiffs have the legal capacity to bring an action?
HELD: Yes. Invoking the well-known rule that shareholders cannot ordinarily sue in equity to
redress wrongs done to the corporation, but that the action must be brought by the Board of
Directors, the appellees argue — and the court below held — that the corporation Teal and
Company is a necessary party plaintiff and that the plaintiff stockholders, not having made any
demand on the Board to bring the action, are not the proper parties plaintiff. But, like most rules,
the rule in question has its exceptions. It is alleged in the complaint and, consequently, admitted
through the demurrer that the corporation Teal and Company is under the complete control of
the principal defendants in the case, and, in these circumstances, it is obvious that a demand
upon the Board of Directors to institute an action and prosecute the same effectively would have
been useless , and the law does not require litigants to perform useless acts. (Exchange bank of
Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz.,
1; Wickersham vs. Crittenden, 106 Cal., 329; Glenn vs. Kittaning Brewing Co., 259 Pa., 510;
Hawes vs. Contra Costa Water Company, 104 U. S., 450.)
The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine
Motors Corporation, had no legal right to proceed against that corporation in the manner
suggested in the complaint evidently rest upon a misconception of the character of the action. In
this proceeding it was necessary for the plaintiffs to set forth in full the history of the various
transactions which eventually led to the alleged loss of their property and, in making a full
disclosure, references to the Philippine Motors Corporation appear to have been inevitable. It is
to be noted that the plaintiffs seek no judgment against the corporation itself at this stage of the
proceedings.
In our opinion the plaintiffs state a good cause of action for equitable relief and their complaint is
not in any respect fatally defective. The judgment of the court below is therefore reversed, the
defendants demurrer is overruled, and it is ordered that the return of the record to the Court
within ten days from the return of the record to the Court of First Instance. So ordered
REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant,
vs. MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN, THE BOARD OF
DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF THE CENTRAL
BANK OF THE PHILIPPINES, defendants-appellees ( GR No. L - 22399; 19 SCRA 671; March
30, 1967)
FACTS: Damaso Perez, a stockholder of Republic Bank, instituted a derivative suit against
defendant Pablo Roman, then President of the Bank, for granting certain loans to fictitious and
non-existing persons and to their close friends, relatives and/or employees, who were in reality
their dummies on the basis of fictitious or inflated appraised value of real estate properties, in
connivance with other officials.
The complaint alleged that Miguel Cuaderno, then Central Bank Governor, acting upon the
complaint, and the Monetary Board ordered an investigation and found violations of the General
Banking Act, but no information was filed until his retirement; that to neutralize the impending
action against him, Pablo Roman engaged Miguel Cuaderno as technical consultant and
selected Bienvenido Dizon as Chairman of the Board of the Bank; that such appointment was
done in bad faith and without intention to protect the interest of the Bank but were only
prompted to protect Pablo Roman.
The complaint, therefore, prayed for a writ of preliminary injunction against eh Monetary Board
in confirming such appointments, but was dismissed by the lower court.
ISSUE: WON the court below erred in dismissing the complaint?
HELD: Yes. The defendants mainly controvert the right of plaintiff to question the appointment
and selection of defendants Cuaderno and Dizon, which they contend to be the result of
corporate acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but
Philippine jurisprudence is settled that an individual stockholder is permitted to institute a
derivative or representative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever (1) the officials of the corporation refuse to sue,
or (2) are the ones to be sued or (3) hold the control of the corporation. In such actions, the
suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil.
518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's
action here is precisely in conformity, with these principles. He is neither alleging nor vindicating
his own individual interest or prejudice, but the interest of the Republic Bank and the damage
caused to it. The action he has brought is a derivative one, expressly manifested to be for and in
behalf of the Republic Bank, because it was futile to demand action by the corporation, since its
Directors were nominees and creatures of defendant Pablo Roman (Complaint, p. 6). The
frauds charged by plaintiff are frauds against the Bank that redounded to its prejudice. The
complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of
Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield
Pablo Roman from criminal prosecution and not to further the interests of the Bank, and avers
that both men are Roman's alter egos . There is no denying that the facts thus pleaded in the
complaint constitute a cause of action for the bank: if the questioned appointments were made
solely to protect Roman from criminal prosecution, by a Board composed by Roman's creatures
and nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an
unlawful wastage or diversion of corporate funds, since the Republic Bank would have no
interest in shielding Roman, and the directors in approving the appointments would be
committing a breach of trust; the Bank, therefore, could sue to nullify the appointments, enjoin
disbursement of its funds to pay them, and recover
those paid out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos,
supra .).
Defendants urge that the action is improper because the plaintiff was not authorized by the
corporation to bring suit in its behalf. Any such authority could not be expected as the suit is
aimed to nullify the action taken by the manager and the board of directors of the Republic
Bank; and any demand for intra-corporate remedy would be futile, as expressly pleaded in the
complaint. These circumstances permit a stockholder to bring a derivative suit (Evangelista vs.
Santos, 86 Phil. 394). That no other stockholder has chosen to make common cause with
plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no ground for denying
him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings
for the absence of other stockholders to be of any significance, no issues having even been
joined.
ISSUE2: WON the Corporation should be a plaintiff or defendant?
HELD2: The English practice is to make the corporation a party plaintiff, while in the United
States, the usage leans in favor of its being joined as party defendant (see Editorial Note, 51
LRA [NS] 123). Objections can be raised against either method. (1) Absence of corporate
authority would seem to militate against making the corporation a party plaintiff, while (2) joining
it as defendant places the entity in the awkward position of resisting an action instituted for its
benefit. What is important is that the corporation' should be made a party, in order to make the
Court's judgment binding upon it, and thus bar future relitigation of the issues. On what side the
corporation appears loses importance when it is considered that it lay within the power of the
trial court to direct the making of such amendments of the pleadings, by adding or dropping
parties, as may be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of
parties is not a ground to dismiss an action. ( Ibid .)
ISSUE3: WON the action of the plaintiff amounts to a quo warranto proceeding?
HELD: No. Plaintiff Perez is not claiming title to Dizon's position as head of the Republic Bank's
board of directors. The suit is aimed at preventing the waste or diversion of corporate funds in
paying officers appointed solely to protect Pablo Roman from criminal prosecution, and not to
carry on the corporation's bank business. Whether the complaint's allegations to such effect are
true or not must be determined after due hearing.
WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS (supra, under C o m p e n s a tio
n o f Dir e c t o r s ) – Petitioners assert that the motion for reconsideration of the civil aspect of
the RTC decision acquitting respondents is a derivative suit brought by them as minority
stockholders of WIT for and on behalf of the corporation
ISSUE: WON the appeal may be considered as a derivative action?
HELD: No. A derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a
remedy designed by equity and has been the principal defense of the minority shareholders
against abuses by the majority. Here, however, the case is not a derivative suit but is merely an
appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo
for estafa and falsification of public document. Among the basic requirements for a derivative
suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation
must allege in his complaint before the proper forum that he is suing on a derivative cause of
action on behalf of the corporation and all other shareholders similarly situated who wish to join.
This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the
allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. This was not complied with by the
petitioners either in their complaint before the court a quo nor in the instant petition which, in
part, merely states that "this is a petition for review on certiorari on pure questions of law to set
aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since the trial
court's judgment of acquittal failed to impose any civil liability against the private respondents.
By no amount of equity considerations, if at all deserved, can a mere appeal on the civil aspect
of a criminal case be treated as a derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners,
which it is not, the same is outrightly dismissible for having been wrongfully filed in the regular
court devoid of any jurisdiction to entertain the complaint. The ease should have been filed with
the Securities and Exchange Commission (SEC) which exercises original and exclusive
jurisdiction over derivative suits, they being intra-corporate disputes, per Section 5 (b) of P.D.
No. 902-A.
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners,
vs. ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS,
ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and
RAMON DEL ROSARIO, JR., respondents. ( GR No. 85339; 176 SCRA 447; Aug. 11, 1989)
FACTS: Eduardo de los Angeles was a director appointed by PCGG who sequestered the
shares of Andres Soriano III claiming it to belong to Eduardo Conjuangco, a close associate and
dummy of then President Marcos. De los Angeles initiated a derivative suit against herein
respondents, in behalf of SMC, for the revocation of a Board Resolution adopted to assume the
loans incurred by Neptunia Corporation, a foreign company, said to be a whollyowned
subsidiary of SMC. The action was dismissed by the SEC on the grounds that De los Angeles
does not have adequate shares to represent the interest of the stockholders and that his
assumed role as a PCGG appointed director is inconsistent with his assumed role as a
representative of minority stockholders.
ISSUE: WON De Los Angeles can institute a derivative suit?
HELD: Yes. The theory that de los Angeles has no personality to bring suit in behalf of the
corporation — because his stockholding is minuscule, and there is a "conflict of interest"
between him and the PCGG — cannot be sustained. It is claimed that since de los Angeles 20
shares (owned by him since 1977) represent only. 00001644% of the total number of
outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the
interests of the minority stockholders. The implicit argument — that a stockholder, to be
considered as qualified to bring a derivative suit, must hold a substantial or significant block of
stock — finds no support whatever in the law. The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, t h e n u m b e r o f h i s s h a r e s n o t b e i n g material ;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and c) the
cause of action actually devolves on the corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the particular stockholder bringing the suit.
The
bona fide ownership by a stockholder of stock in his own right suffices to invest him with
standing to bring a derivative action for the benefit of the corporation. The number of his shares
is immaterial since he is not suing in his own behalf, or for the protection or vindication of his
own particular right, or the redress of a wrong committed against him, individually, but in behalf
and for the benefit of the corporation.
Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that de los
Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not follow
that he is legally obliged to vote as the PCGG would have him do, that he cannot legitimately
take a position inconsistent with that of the PCGG, or that, not having been elected by the
minority stockholders, his vote would necessarily never consider the latter's
interests. The proposition is not only logically indefensible,
non sequitur , but also constitutes an erroneous conception of a director's role and function, it
being plainly a director's duty to vote according to his own independent judgment and his own
conscience as to what is in the best interests of the company. Moreover, it is undisputed that
apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right,
as regards which he cannot from any aspect be deemed to be "beholden" to the PCGG, his
ownership of these shares being precisely what he invokes as the source of his authority to
bring the derivative suit.
ELTON W. CHASE, as minority Stockholder and on behalf of other Stockholders similarly
situated and for the benefit of AMERICAN MACHINERY AND PARTS MANUFACTURING,
INC., plaintiff-appellant, vs. DR. VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR.,
JULIO B. FRANCIA and DOLORES A. BUENCAMINO, respondents. ( GR No. L - 20395; 136
SCRA 365; May 13, 1985)
FACTS: Herein plaintiff-appellant Elton Chase, entered into an agreement with Dr. Buencamino
and William Cranker (already business partners) for the establishment of a factory in Manila
called American Machinery Engineering Parts, Inc. (Amparts), where chase was to transfer his
tractor plant, ship his machineries from his former plant in America to Manila, install said
machineries at Amparts plant and he is to be the production manager of Amparts.
For some time the three maintained harmonious relations until Chase tendered his resignation
which was accepted by Buencamino and Cranker. Chase initially filed a case in California
against Cranker for the recovery of the purchase price of his plant, but this died a natural death.
Eventually, he filed a case before the CFI alleging various acts of frauds allegedly committed by
the other two.
ISSUE: WON Chase has capacity to institute a derivative suit?
HELD: Yes. The evidence of defendants proves very clearly that right from the start, Chase was
by them recognized as a stockholder and initial incorporator with 600 paid up shares
representing a 1/3 interest in Amparts, and that would be enough for Chase to have the correct
personality to institute this derivative suit; the second place, it also appears apparently undenied
that Chase did not win in California so that he did not recover the $150,000.00 that he had
prayed for there against Overseas, which if he had would really in the mind of the Court have
put him in estoppel to intervene in any manner as incorporator or stockholder of Amparts; and in
the third place and most important it should not be forgotten that Chase has filed the present
case not for his personal benefit, but for the benefit of Amparts, so that to the Court the
argument of estoppel as against him would appear to be out of place; the estoppel to be valid as
a defense must be an estoppel against Amparts itself; the long and short of it is that the Court is
impelled and constrained to discard all the other defenses set up by Dr. Buencamino on the
principal complaint; the result of all these would be to sustain so far, the position of Chase that
Dr. Buencamino must account for the P570,000.00 used to pay the second series of payment
on the subscription, the P330,000.00 used in paying the last series on the subscription, plus
another sum of P245,000.00 entered as loan on his favor and against Amparts, for the sum of
P434,000.00 earned in the blackmarketing of the excess of $140,000.00 dollars on the
forwarding costs and promotional expenses, for the sum of P391,200.00 earned in the
blackmarketing of the excess of $117,000.00 in the transaction with Bertoni and Cotti, and all
these would reach a total of P1,970,200.00; and as the appropriation of the profits for himself
was a quasi-delict, the liability therefore assuming that it had been done with the cooperation of
Cranker would have to be solidary, 2194 New Civil Code.
CATALINA R. REYES, petitioner, vs. HON. BIENVENIDO A. TAN, as Judge of the Court of
First Instance of Manila, Branch XIII and FRANCISCA R. JUSTINIANI, respondents. ( GR No. L
- 16982; 3 SCRA 198; Sept. 30, 1961)
FACTS: Several purchases were made by Roxas-Kalaw Textile Mills in New York for raw
materials but were found out to consist of already finished product for which reason the Central
Bank of the Philippines stopped all dollar allocations for raw materials for the corporation which
necessarily led to the paralysis of the operations. It was alleged that the supplier of the said
finished goods was United Commercial Company of New York in which Dalamal, appointed by
the BOD of the Textile Mills as co-manager, had interests and that the letter of credit for said
goods were guaranteed by the Indian Commercial Company and Indian Traders in which
Dalamal likewise has interests. It was further alleged that the sale of the finished products was
the business of Indian Commercial Company of Manila who cannot obtain dollar allocations for
importations of finished goods.
An action for the appointment of a receiver was filed before the trial court after the BOD refused
to proceed against Dalamal, which was granted.
ISSUE: WON Justiniani may be allowed to institute the case for receivership and damages?
HELD: Yes. It is not denied by petitioner that the allocation of dollars to the corporation for the
importation of raw materials was suspended. In the eyes of the court below, as well as in our
own, the importation of textiles instead of raw materials, as well as the failure of the Board of
Directors to take action against those directly responsible for the misuse of dollar allocations
constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was
committed which justified the derivative suit by a minority stockholder on behalf of the
corporation.
“It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust
— not of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. An illustration of a suit of this kind is found in
the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by this Court as early as 1911. In
that case, the Banco Español-Filipino suffered heavy losses due to fraudulent connivance
between a depositor and an employee of the bank, which losses, it was contended, could have
been avoided if the president and directors had been more vigilant in the administration of the
affairs of the bank. The stockholders constituting the minority brought a suit in behalf of the bank
against the directors to recover damages, and this over the objection of the majority of the
stockholders and the directors. This court held that the suit could properly be maintained.” (64
Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697).
The claim that respondent Justiniani did not take steps to remedy the illegal importation for a
period of two years is also without merit. During that period of time respondent had the right to
assume and expect that the directors would remedy the anomalous situation of the corporation
brought about by their own wrong doing. Only after such period of time had elapsed could
respondent conclude that the directors were remiss in their duty to protect the corporation
property and business.
We are led to agree with the judge below that the appointment of a receiver was not only
expedient but also necessary to restore the faith and confidence of the Central Bank authorities
in the administration of the affairs of the corporation, thus ultimately leading to a restoration of
the dollar allocation so essential to the operation of the textile mills.
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE LA
RAMA, and the HEIRS OF MERCEDES DE LA RAMABORROMEO, petitioners, vs. HON.
OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of Negros
Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR., LEONITO LOPUE,
and LUISA U. DACLES respondents. ( GR No. - 40620; 90 SCRA 40; May 6, 1979)
FACTS: A writ of preliminary injunction was filed by herein respondents as purchasers of 1,328
shares of stock of Inocente De La Rama, inc. after herein petitioners surreptitiously met and
authorized the sale of 823 shares to forestall the petitioner’s takeover from the previous
president and vicepresident (sellers of the 1,328 shares), in violation of their pre-emptive right.
The trial court ruled in favor of respondents. Later on, private respondents entered into a
compromise agreement with the recipients for the transfer of the 823 shares, against which the
petitioners filed a motion to dismiss which was denied.
ISSUE: WON a derivative suit is the more proper action that should have been filed by
respondents?
HELD: No. The petitioners contend that the proper remedy of the plaintiffs would be to institute
a derivative suit against the petitioners in the name of the corporation in order to secure a
binding relief after exhausting all the possible remedies available within the corporation.
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation
wherein he holds stock in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation.
In such actions, the suing stockholder is regarded as a nominal party, with the corporation as
the real party in interest. In the case at bar, however, the plaintiffs are alleging and vindicating
their own individual interests or prejudice, and not that of the corporation. At any rate, it is yet
too early in the proceedings since the issues have not been joined. Besides, misjoinder of
parties is not a ground to dismiss an action.
JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL SANTOS, defendant-appelle
(86 Phil. 387; May 19, 1950) – Juan D. Evangelista, et. al. are minority stockholders of the Vitali
Lumber Company, Inc., while Rafael Santos holds more than 50% of the stocks of said
corporation and also is and always has been the president, manager, and treasurer thereof.
Santos, in such triple capacity, through fault, neglect, and abandonment allowed its lumber
concession to lapse and its properties and assets, among them machineries, buildings,
warehouses, trucks, etc., to disappear, thus causing the complete ruin of the corporation and
total depreciation of its stocks.
Evangelista, et. al. therefore prays for judgment requiring Santos: (1) to render an account of his
administration of the corporate affairs and assets: (2) to pay plaintiffs the value of their
respective participation in said assets on the basis of the value of the stocks held by each of
them; and (3) to pay the costs of suit. Evangelista, et. al. also ask for such other remedy as
may be and equitable. The trial court dismissed the action on the ground of improper venue and
lack of cause of action.
ISSUE: WON plaintiffs have a right to bring the action for their benefit?
HELD: No. The complaint shows that the action is for damages resulting from mismanagement
of the affairs and assets of the corporation by its principal officer, it being alleged that
defendant's maladministration has brought about the ruin of the corporation and the consequent
loss of value of its stocks. The injury complained of is thus primarily to that of the corporation, so
that the suit for the damages claimed should be by the corporation rather than by the
stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-980). The stockholders may not
directly claim those damages for themselves for that would result in the appropriation by, and
the distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities, something which cannot be legally
done in view of section 16 of the Corporation Law.
But while it is to the corporation that the action should pertain in cases of this nature, however, if
the officers of the corporation, who are the ones called upon to protect their rights, refuse to
sue, or where a demand upon them to file the necessary suit would be futile because they are
the very ones to be sued or because they hold the controlling interest in the corporation, then in
that case any one of the stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of
Corporations, pp. 977-980). But in that case it is the corporation itself and not the plaintiff
stockholder that is the real property in interest, so that such damages as may be recovered shall
pertain to the corporation (Pascual vs . Del Saz Orosco, 19 Phil. 82, 85). In other words, it is a
derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the
corporation, which is the real property in interest (13 Fletcher, Cyclopedia of Corporations, p.
295).
In the present case, the plaintiff stockholders have brought the action not for the benefit of the
corporation but for their own benefit, since they ask that the defendant make good the losses
occasioned by his mismanagement and pay to them the value of their respective participation in
the corporate assets on the basis of their respective holdings. Clearly, this cannot be done until
all corporate debts, if there be any, are paid and the existence of the corporation terminated by
the limitation of its charter or by lawful dissolution in view of the provisions of section 16 of the
Corporation Law.
It results that plaintiff's complaint shows no cause of action in their favor so that the lower court
did not err in dismissing the complaint on that ground.
While plaintiffs ask for remedy to which they are not entitled unless the requirement of section
16 of the Corporation Law be first complied with, we note that the action stated in their
complaint is susceptible of being converted into a derivative suit for the benefit of the
corporation by a mere change in the prayer. Such amendment, however, is not possible now,
since the complaint has been filed in the wrong court, so that the same last to be dismissed.
The order appealed from is therefore affirmed, but without prejudice to the filing of the proper
action in which the venue shall be laid in the proper province. Appellant's shall pay costs. So
ordered
IN SUMMARY: 1. That the party bringing the suit should be a stockholder as of the time the act
or transaction complained of took place, or whose shares have evolved upon him since by
operation of law. This rule, however, does not apply if such act or transaction continues and is
injurious to the stockholder or affect him specifically in some other way.
The number of his shares is immaterial since he is not suing in his own behalf or for the
protection or vindication of his own right, or the redress of a wrong done against him,
individually, but in behalf and for the benefit of the corporation. 2. He has tried to exhaust intra-
corporate remedies, he has made a demand on the board of directors for the appropriate relief
but the latter had failed or refused to heed his plea. Demand , however, is not required if the
company is under the complete control of the directors who are the very ones to be sued (or
where it becomes obvious that a demand upon them would have been futile and useless) since
the law does not require a litigant to perform useless acts; 3. The stockholder bringing the suit
must allege in his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated, otherwise, the case is dismissible. This
is because the cause of action actually devolves on the corporation and not to a particular
stockholder. 4. The corporation should be made a party, either as party-plaintiff or defendant, in
order to make the court’s judgment binding upon it, and thus, bar future litigation of the same
issues. On what side the corporation appears loses importance when it is considered that it lay
within the power of the court to direct the making of amendment of the pleading, by adding or
dropping parties, as may be required in the interest of justice. Misjoinder of parties is not a
ground to dismiss action; and, 5. Any benefit or damages recovered shall pertain to the
corporation. This is so because in all instances, derivative suit is instituted for and in behalf of
the corporation and not for the protection or vindication of a right or rights of a particular
stockholder, otherwise, the aggrieved stockholder should institute, instead, an individual or
personal suit to vindicate his personal or individual right. Or, for that matter, representative or
class suit for all other stockholders whose rights are similarly situated, injured or violated,
personally or individually.
J. EXECUTIVE COMMITTEE
Sec. 35. Executive committee. - The by-laws of a corporation may create an executive
committee, composed of not less than three members of the board, to be appointed by the
board. Said committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in the by-laws or on a majority
vote of
the board, except with respect to: (1) approval of any action for which shareholders' approval is
also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of by-laws or
the adoption of new bylaws; (4) the amendment or repeal of any resolution of the board which
by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends
to the shareholders

LADIA NOTES:

BOARD OF DIRECTORS/TRUSTEES

 Section 23

Section 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be exercised,
all business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office for
one (1) year until their successors are elected and qualified. (28a)

Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the books of
the corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof. A majority of the
 directors or trustees of all corporations organized under this Code must be residents of
the Philippines.

- Controlled by the board of directors

- Authority are however restricted to the day to day

- Stockholders may have all the profit but will turn over the management to the governing
board

- But unless the law provides the power may be delegated

 General rule

- Corporations must sit and act as a body

- Will be bound by corporate officers if they acted within the 5 classification page 150

Ramirez vs. Orientalist co.

- What was the position of Fernandez in this case? TREASURER

- Why did the court rule that actions of Fernandez bound the corporation when he is not
even a board of director?

“if a man is found acting for a corporation with the external indicia of authority,
any person not having notice of want of authority, may usually rely upon those
appearances; and if it be found that the directors had permitted the agent to exercise
that authority and thereby held him out as a person competent to bind the corporation,
or had acquiesced in a contract and retained the benefit supposed to have been conferred
by it, the corporation will be bound, notwithstanding the actual authority may never have
been granted.”

- Contracts must be made by the director and not the stockholders

- Actions of the stockholders in such matters is only advisory and not in any way binding in
the corporation

Barreto vs. La previsora Filipina

- Everything emanates from the board of directors

- Stockholders action is merely advisory except their approval or vote is necessary to prove
a valid corporate act

 Qualifications:
 - No citizenship requirement, at least majority must be residents

- Can have a governing board consisting solely of foreigners

- But we have to take into consideration partly nationalized industries and other laws which
prohibits or limits foreign ownership

- Anti-dummy act

- Utilization development of natural resources 60% must be owned by Filipino citizens,

therefore they only own 40%---10 members they can only have 4 seats, but not entirely
correct because the law may provide otherwise; educational institutions restricted to
Filipinos, but there are exceptions when created by religious and charitable institutions.

- By-laws may provide additional qualifications and disqualifications

- To qualify as a director he must own at least 1 share

 Should the stockholder be the equitable or beneficial owner in order to qualify as a

director?

- NO, it is not necessary, as long as you are listed in the books as owner of one share

Lee vs. CA

- As long as you are listed in the books as owner of one share

- Under the old law he must be the beneficial owner and legal owner thereof but in the
new law it is not required as long as it stands in his name he is qualifies

1 A-100t/S B (own in the trust of X) is B qualified to be a director?

2
3-10
2– transferring there voting rights in favor of VT
Other rights will accrue in favor of them, but not the voting rights
voting rights must be recorder in the books of the corporation that it is transferred
PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares and PNB-IFL now will be able to be nominated
 Gen. Rule:
 - Term of one year who will serve as such until there successors are elected and qualified

 Exception:

- Non-stock corporation can serve for a term of 3 years

- Educational non-stock- term of the governing board can be 5 years

 May this term exceed one year?

- Yes, they may serve in a hold over capacity until their successors have been duly elected
and qualified

Detective and protective bureau vs. Cloribel

- In the by-laws, managing director must be elected from among themselves

- Must be duly elected and qualified

How are the directors elected?

1-100T/S
2-100T/S
3-100T/S
to 10=1M/S

 Do you include the vote of 1 & 2 to have a quorum to have a valid meeting?

- NO, quorum requirements is 401,000

Quorum requirement is 501k

Holders of non-voting shares are only entitled to vote in last par. Of section 6
1-200k
2-200k
3-200k
4-100k
5-100k
6-100k
7-50k
8-40k
9-5k
10-5k
=1MS
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10, tumakbo and ninominate nila yung
sarili nila and cast all their shares on themselves

 Who wins? Or who gets elected?

- No vote requirement, the one who gets the most number of votes gets elected, section24.

 What is cumulative voting?

- Process of multiplying the number of shares to the number of director to be elected

- Matter of right granted to stockholders in a stock corporation

1 to 5 has 200k/s and members of the same family- majority 800k they have 4M votes they are
guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes

 Cumulative to allow the minority to have a rightful representation in the board

 Is it allowed in a non-stock corporation?

- Not generally available

- Section 89 unless the articles or by-laws allow cumulative voting

Section 89. Right to vote. - The right of the members of any class or classes to vote
may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited, broadened or denied, each member,
regardless of class, shall be entitled to one vote.

Unless otherwise provided in the articles of incorporation or the by-laws, a

member may vote by proxy in accordance with the provisions of this Code. (n)

Voting by mail or other similar means by members of non-stock corporations may

be authorized by the by-laws of non-stock corporations with the approval of, and under
such conditions which may be prescribed by, the Securities and Exchange Commission.
  Other corporate officers other than the governing board section 25

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

The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall constitute a quorum for
the transaction of corporate business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum shall be valid as a
corporate act, except for the election of officers which shall require the vote of a majority
of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

 Is the president required to be a stockholder. YES

 The chairman may be another person

 The president may also be another person

 Prohibited is president to be secretary or treasurer at the same time

 Board of director must sit and act as a body to arrive at a corporate act

 What would constitute a quorum if 5 then 3 must be present

 May the vote of 2 members past a 5 man governing board pass a valid corporate act?

- YES. Voting requirement is majority of directors present at which there where a quorum

1 1 and 2 present=valid voting requirement

2 1 and 2 voted yes
3 3 voted no
4
5
 Is it absolute?

- NO, except in the election because it requires the majority of all the members of the board

- If by-laws or articles provide a higher voting requirement

 Artificial beings must act through its members and act as a body to have a valid corporate
act

 Exception:

- Delegation

- Expressly conferred

- Where the officer or agent is clothed with actual or apparent authority

- Otherwise it will not bind the corporation

 Yao ka sin trading case “already asked in the bar”

- Only bind the corporation to the extent of authority confined to him or virtue of customs,
usage and policy

- Must pass first the controller and counsel

 What if the notice requirement is not complied with?

Lopez realty vs. Fotencha

- Notice requirement must be complied with hence it should have been with force and
effect, but according to the SC, it may be ratified expressly if there is a subsequent
meeting called for that purpose

- Impliedly through acts

- Asuncion was aware of the corporations obligation

- There was implied ratification or she was estopped

Pua casim vs. Neumark and Co.

- Considered 3 circumstanced

- Check which was the proceed of the loan which was endorsed and deposit in the
corporate account
- Neumark as president and also stockholder

Yu chuck vs. Kong Li Po

- General manager usually has the power to hire but the SC said the contract must be
reasonable

- The contract here is so onerous that it would throw the corporation into insolvency

Francisco vs. GSIS

- GSIS cannot evade the binding effect of the telegram

- Only 15 months later that the corporation said there was a mistake

- The silence coupled with the unconditional acceptance of the other subsequent
remittances is binding to the corporation

Board of liquidators vs. Kalaw

“Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom and policy, the general manager may
bind the company without formal authorization of the board of directors. In varying
language, existence of such authority is established, by proof of the course of business,
the usages and practices of the company and by the knowledge which the board of
directors has, or must be presumed to have, of acts and doings of its subordinates in and
about the affairs of the corporation. So also, “xx authority to act for and bind a
corporation may be presumed from acts of recognition in other instances where the
power was in fact exercised.” “xx 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 from the manner in which he has
been permitted by the directors to manage its business.”
In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading activities for and in
NACOCO’s behalf without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on all corporate contracts. But
that Board itself, by its acts and through acquiescence, practically laid aside the by-law
requirement of prior approval.

- Kalaw signed alone and said contracts were submitted to the board of directors after its
consummation and not before

Buenaseda vs. Bowen

 - Express ratification is made through a formal board action

- Implied ratification is through: silence or acquiescence, acceptance benefits and lastly

recognition or adoption

 An unauthorized act may nevertheless be binding either by express or implied by

estoppels

 By virtue of silence the board had impliedly accepted the act

 By recognition or adoption

 By virtue of payment of obligations arising therefore- Lopez realty

 May directors or trustees be disqualified to act as such?

- YES, crime, etc. disqualifications in book

- Possess or dispossess any of the qualifications or disqualifications , cease to hold at least

one share

 May directors be ousted from office?

- At least 2/3 of members representing outstanding capital stock. Again notice requirement
must be complied with

1-200 1-5 same family

2-200
3-200
4-100
5-100 electing
6-100 6 to 10 not related
7-50
8-40
9-5
10-5 outstanding director
 Meetings called by the president or the secretary ordered by the president
 It depends if the removal is without cause they cannot do so because removal without
cause shall not deprive the minority stockholders or members of the right of
representative

 If with cause they can even if it will prejudice the rights of the minority, provided of course
additional requirements by-laws and articles of incorporation

 Who will fill up the vacancy created due to the ouster of a member of the board of
directors <section 29>

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

Any directorship or trusteeship to be filled by reason of an increase in the number

of directors or trustees shall be filled only by an election at a regular or at a special
meeting of stockholders or members duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in the notice of the meeting.
(n)

 Other than by removal or expiration of term they do not have the power

 When will the vacancies be filled up?

 Is notice required, to fill up vacancies due to removal?

 What if the vacancy is due to an increase, can it be filled up in the same meeting where
in the number is increased?

 Election due to removal-in the same meeting notice is not required

 Election due to increase in number- it must be so stated in the meeting

 Section 30

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

- Generally not entitled to receive compensation because they render it gratuitously

- Unless the by-laws allows

- Stockholders may also grant pursuant to a majority vote

- Must not exceed net income of 10% tax of the preceding year

- Acting in special capacity

- In, sum directors may receive compensation when

1. there is a provision in the by-laws to that effect

2. When the stockholders, by a majority vote of the outstanding capital stock grant the
same; and,

3. If the director renders extra-ordinary or unsual service

Central cooperative exchange vs. Tibe

- By-laws may allow, stockholders may also allow such

 What do you understand by the phrase “as such directors”

Western institute vs. Salas

- Compensation was granted without by-laws authority

- Prohibition is not a sweeping rule

- Members of the board may receive when they receive in a special capacity

- Mere act of the board will suffice

 Is the 10% ceiling applicable to other officers?

- NO. the phrase “as such director” was used twice <Section 30>

- The SC ruled that the 10% ceiling will not likewise apply if they acted in a capacity other
than “as such directors”

Government vs. El Hogar

- Judicial intervention is not proper

- The appropriates remedy is to those who can make or unmake the by-laws

 Liability of corporate officers

- Obligations incurred by those acting for and in behalf of the corporations are not there’s
BUT there are exceptions even if they are acting for and in behalf of the corporation

Tramat vs. CA

- General rule was applied in the case

- Ong acted as officers and acted within the scope of his authority

- Court laid down 4 instances when even if acting within the scope of his authority he is
held solidarily liable

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

2. He consents to the issuance of watered stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation;

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

- Watered stocks- issued, fully paid up when in fact they have not been fully paid or
promised as such

Llamado vs. CA

- The corporate entity theory cannot be used as a defense to escape liability in violation of
B.P. 22

- Where the check is drawn by a corporation the persons who signed the check shall be
liable.

Uichico vs. NLRC

- Labor case corporate directors and officers are solidarily liable with the corporation for
the termination of employment of corporate employee done with malice and bad faith
 3 fold duty of directors

- obedient

- diligent

- loyal

 Business judgment rule

- Questions of policy and management are left solely to the honest decision of the board
of directors and the courts are without authority to substitute its judgment as against the
former. The directors are the business managers of the corporation and as long as they
act in good faith, its actuations are not subject to judicial review. Montelibano vs. Bacolod
Murcia Milling

- questions of policy and management are left solely to the board of directors

- BOD, business manager of the corporation and as long as they act in good faith, its
actuations are not subject to judicial review

- They are not insurer of the property of the company, they were guarantors that the
enterprise undertaken by the corporation shall be successful

Montelibano vs. Bacolod Murcia Milling Co.

- Directors are not liable due to imprudence or honest error of judgment

- Duty of loyalty of corporate directors

- 31,32,33,34

- 31,32,33- specific instances when corporate officers may violate loyalty

- 32,33 self-dealing and interlocking director

 Corporate opportunity doctrine

- It places a director of a corporation in the position of a fiduciary and prohibits him form
seizing a business opportunity and/or developing it at the expense and with the facilities
of the corporation. He cannot appropriate to himself a business opportunity which in
fairness should belong to the corporation.

 Last paragraph of section 31 and the provision of section 34 make reference to recovery
of “forbidden profits”
  Distinction between section 31 and 34 relative to the ratification by the stockholders

- The second paragraph of section 31 which makes a director liable to account for profits if
he attempts to acquire or acquires any interest adverse to the corporation in respect to
any matter reposed in him in confidence as to which equity imposes a disability upon him
to deal in his own behalf is not subject to ratification by the stockholders. Whereas, in
section 34 if a director acquires for himself a business opportunity which should belong
to the corporation, he is bound to account for such profits unless his act is ratified by the
stockholders owning ore representing at least 2/3 of the outstanding capital stock.

- If reposed in him in confidence, not subject to ratification

- If the acquisition is merely that of a business opportunity which has not been reposed in
him in confidence, the same may be subject to ratification by the stockholders.

Director x co.
A-REALTY
B
C Z owns property and is going abroad never to Return, he wants to sell for
25M the fair market value is 30M
D
E
E goes to Z and offers to pay the property for 26 M and later he sells it for 30M making 4M profit,
one of the stockholders learned and complains that he should submit the profits. E said that he
will move for ratification of his actuation. Can it be ratified?

- It can be ratified he merely acquired a business owning to the corporation

- It would be different if it was entrusted in his confidence

Another scenario:
Had A not attended the meeting he would not have known of the sale it is then a matter reposed
in him in confidence
 A corporation cannot reaquire its share if it has no restricted unretained earnings

Strong vs. Rapide

- What duty did he violate?

- He violated his duty of loyalty

- The law would be impotent if the sale were not invalidated

 Self-dealing director and interlocking director

 What is a self-dealing director?

- Director of a corporation dealing or transacting business with his corporation

 Are the contracts and dealing of a self0dealing director valid?

 General rule: voidable

 May the contracts of a self-dealing director be valid per se.

- YES. If all the 4 conditions are present they will be valid per se

1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the
contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of
directors.

 When do they become voidable?

- When any of the two requisites are absent it is voidable, but subject to ratification by 2/3
of the outstanding capital stock or 2/3 of the member

 Requisites for ratification (subject to ratification by the stockholders holding or

representing at least 2/3 of the outstanding capital stock or 2/3 of the members.)

- it must be at a meeting called for the purpose

- full disclosure of the adverse interest of the director concerned must be made

- the contract is fair and reasonable under the circumstances

 Problem if self-dealing director involved owns all or substantially all of the shares of stock
of the corporation thereby making it easily possible to have the contract ratified
- last sentence of section 32 should be made to apply by determining the reasonableness
and fairness of the contract

Section 32. Dealings of directors, trustees or officers with the corporation. - A

contract of the corporation with one or more of its directors or trustees or officers is
voidable, at the option of such corporation, unless all the following conditions are
present:

1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the
contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in case of an officer, the contract has been previously authorized by the board of
directors.

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

Prime white cement vs. IAC

- a director of a corporation owes a position in trust

- in case of conflict between himself and that of the corporation, he cannot sacrifice the
interest of the corporation to his own advantage

- as a director he should have acted in a manner as not to unduly prejudice the corporation

- he cannot be allowed to enrich himself

 May corporate directors purchase the corporate property?

Mead vs. Mccullogh

- interlocking director- a director of one corporation who deals and transacts business with
another corporation who is himself a director
 A- director of X company also a director of Y corporation

B-

C-

D-

E-

 Both companies enter into a contract and A sits, is the contract valid?

- Yes on the ground of fraud or if it is unfair

- May be subject to the provision of section 32

- Section 32 contract may become voidable, hence it may also be ratified

X Co. Y Co.
A owe 20% A owe 20%
Is it generally valid or voidable? VALID
25% 25% VALID
15% 25% VOIDABLE SUBJECT TO section 32
More than 20 substantial

 BOD mismanages corporate officers. Who may file a suit?

- General rule: BOD which can institute a case because it has all the powers. To allow
stockholders to file would violate the doctrine of corporate entity and may result to
multiplicity of suits

- Stockholders cannot therefore generally file a case EXCEPT of course in a DERIVATIVE SUIT

 Derivative suit

- An action based on injury to the corporation-to enforce a corporate right- wherein the
corporation itself is joined as a necessary party, and recovery is in favor of and for the
corporation.

- Remedy granted by law to stockholders to institute a case to remedy a wrong done

directly to the corporation and indirectly to the stockholders, if the board refuses to do
so. Otherwise if not they would be left without any recourse
 Available suits

 individual or personal

- Wrong done against his person as a stockholder

 Class suit

- Filed by a stockholder in representation of other stockholders

- A wrong or redress done, a derivative suit in nature

 Intra-corporate remedies

- Demand to the BOD to institute such action

- Negated by the BOD

- The one who instituted must be a stockholder at the date when the act was done, must
have been a stockholder by that time

 Demand will not be required if the majority of the BOD are the one’s guilty of the wrong
charged

 The corporation must be made a party in the case whatever side will not matter because
under Philippine law misjoinder is not a ground for dismissal

 Non-joinder is a ground for dismissal

 Any benefit should inure to the corporation

 Stockholder bringing the action is entitled to reimbursement such as attorney’s fee ONLY
IF the case is SUCCESSFUL to avoid harassment suit to their management

Pascual vs. Orozco

- By virtue of the fact that he is a stockholder, may maintain a derivative suit

- Depend on how, when and what reason

- Seeking for the years 1898 all the way 1907

- Only became a stockholder in 1903

- He can sue only in 1903 forward because he must be a stockholder

- The right of action is personal in nature. He became a stockholder only in 1902

 Derivative suit

- By a stockholder to address a wrong done against the corporation and the stockholder
indirectly

- Essential requisite must have been a stockholder from the time the act complained of
took place

- Cannot institute an action from the years he was still not a stockholder

Everett vs. Asia Banking

- Stockholders cannot ordinarily commence suit in equity and such is in the hands of its
BOD however there are exceptions when the BOD will not sue since they are themselves
principals to the fraud.

Republic vs. Cuaderno

- The facts constitute sufficient cause of action

- It is not the corporate interest to shield one from criminal prosecution which is personal
interest

- Perez is not suing in his behalf, but in behalf of the corporation

Western institute vs. Salas

- Assuming it was filed in the proper forum would there argument that it is a derivative suit
prosper? NO. it is people of the Philippines vs. individual director, it must be stated in the
complaint that it is being instituted as a derivative suit and for and in behalf of the
corporation

- Granting arguendo, that this is a derivative suit, the same is still outrightly dismissible for
having been wrongfully filed in the regular court devoid of any jurisdiction to entertain
the complaint. The case should have been filed with the SEC which exercises original and
exclusive jurisdiction over derivative suits, they being intra-corporate disputes, per
Section 5 (b) of P.D. 902-A

San Miguel vs. Khan

- Was a demand made? NO

- It is not necessary because he objected in the board meeting, but still it was adopted
therefore it was useless
 Chase vs. Buencamino

- Argument that he should be in estoppels since he filed in the U.S.

- Assuming the case prospered in the U.S. would not estoppels apply as against him? NO
for estoppels to step in it must be a case by the corporation

Reyes vs. tan

- Corporate director are guilty of breach of trust

- A stockholder may institute an action to remedy a wrong done

- Fraud in the conduct of corporate affairs

Gamboa vs. Victoriano

- Is derivative suit appropriate in this case

- They are not vindicatory damage done to the corporation, but rather they where
vindicating damage against him

- Violation of their rights as individuals, hence derivative suit is not the remedy

Evangelista vs. Santos

- Derivative suit is not proper

- Claim is not for the benefit of the corporation, but rather his individual benefit

 From the cases above cited, these are the requirements and the procedures that must be
followed in order that a derivative suit may prosper

1. That the party bringing the suit should be a stockholder as of the time the act or
transaction complained of took place, or whose shares have evolved upon him since by
operation of law. This rule, however, does not apply if such act or transaction continues
and is injurious to the stockholder or affect him specifically in some other way.

The number of his hares is immaterial since he is not suing in his own behalf or for the
protection or vindication of his own right, or the redress of a wrong done against him,
individually, but in behalf and for the benefit of the corporation.

2. He has tried to exhaust intra-corporate remedies, he has made a demand on the board of
directors for the appropriate relief but the latter had failed or refused to heed his plea.
Demand, however, is not required if the company is under the complete control of the
 directors who are the very ones to be sued (or where it becomes obvious that a demand
upon them would have been futile and useless) since the law does not require a litigant
to perform useless acts;

3. The stockholder bringing the suit must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders similarly
situated, otherwise, the case is dismissible. This is because the cause of action actually
devolves on the corporation and not to a particular stockholder.

4. The corporation should be made a party, either as party-plaintiff or defendant, in order

to make the court’s judgment binding upon it, and thus, bar future litigation of the same
issues. On what side the corporation appears loses importance when it is considered that
it lay within the power of the court to direct the making of amendment of the pleading,
by adding or dropping parties, as may be required in the interest of justice. Misjoinder of
parties is not a ground to dismiss action; and,

5. Any benefit or damages recovered shall pertain to the corporation. This is so because in
all instances, derivative suit is instituted for and in behalf of the corporation and not for
the protection or vindication of a right or rights of a particular stockholder, otherwise, the
aggrieved stockholder should institute, instead, an individual or personal suit to vindicate
his personal or individual right. Or, for that matter, representative or class suit for all other
stockholders whose rights are similarly situated, injured or violated, personally or
individually.

 Executive committee

- Not allowed under the OLD law

 How may executive committee created and constituted?

- Section 35

Section 35. Executive committee. - The by-laws of a corporation may create an

executive committee, composed of not less than three members of the board, to be
appointed by the board. Said committee may act, by majority vote of all its members, on
such specific matters within the competence of the board, as may be delegated to it in
the by-laws or on a majority vote of the board, except with respect to: (1) approval of any
action for which shareholders' approval is also required; (2) the filing of vacancies in the
board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the
amendment or repeal of any resolution of the board which by its express terms is not so
amendable or repealable; and (5) a distribution of cash dividends to the shareholders.
- Said committee may act and bind the corporation by the majority vote of all its members
except with respect to those matters provided for in sec. 35 these are:

1. Approval of any action for which shareholders’ approval is also required

2. The filing of vacancies in the board;

3. Amendment or repeal of by-laws or the adoption of new by-laws;

4. Amendment or repeal of any resolution of the board which by its express terms is not so
amenable or repealable; and,

5. Distribution of cash dividends to the shareholders.

 May the board alone create an executive committee without any authority provided for
the by-laws?

- NO board of directors must sit and act as a body to have a valid transaction

 May a non-member of the board of directors be a member of the executive committee?

- NO, all of them must be members of the board of directors

- BOD cannot act by proxy it would be abdication of powers

 Purpose clauses necessary because it confers and also limits the actual authority of the
corporation