CHAPTER III
FORMATION AND ORGANIZATION OF CORPORATIONS
Philips Export BV v. CA (1992)
FACTS: Philips Group of Companies filed a petition before the SEC
seeking to enjoin Standard Philips from using “Philips” as part of its
corporate name in view of the its prior registration of PHILIPS and
PHILIPS SHIELD EMBLEM. Philips contends that this amounts to an
infringement and clear violation of petitioners’ exclusive right to use
the same, considering that both parties engage in the same business.
Standard Philips countered that its products consisting of chain rollers,
belts, bearings and cutting saw are grossly different from petitioners’
electrical products. It further argues that Philips did not present any
proof of actual confusion or deception of the public that it is a part of
the Philips Group of Companies.
ISSUE: WON Standard Philips should be ordered to change its
corporate name (YES)
HELD:
A corporation’s right to use its corporate name and trade name is a
property right, a right in rem, which it may assert and protect against
the world in the same manner as it may protect its tangible property
against trespass or conversion
Sec. 18 of the Corporation Code provides:
“No corporate name may be allowed by the SEC if the proposed name is
identical or deceptively or confusingly similar to that of an existing
corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing law. Where a change in
corporate name is approved, the commission shall issue an amended
certificate of incorporation under the amended name.”
To come within the scope of the prohibition, two requisites must
be proven:
(1) That the complainant corporation acquired a prior right over
the use of such corporate name; and
(2) The proposed name is either:
(a) Identical; or
(b) Deceptively or confusingly similar to that of any
existing corporation or to any other name already
protected by law; or
(c) Patently deceptive, confusing or contrary to existing
law.
As to requisite 1: there is no doubt with respect to petitioners’ prior
adoption of the name PHILIPS as part of its corporate name
As to requisite 2:
- In determining the existence of confusing similarity in corporate
names, the test is whether the similarity is such as to mislead a
person using ordinary care and discrimination
- While the corporate names are not identical, a reading of
petitioners’ corporate names inevitably leads one to conclude
that PHILIPS is the dominant word, in that all the companies
affiliated or associated with the principal corporation PEBV are
known in the Philippines and abroad as the PHILIPS Group of
Companies
- Proof of actual confusion need not be shown. It suffices that
confusion is probably or likely to occur
- It is of no moment that Standard Philips’ products are different
from that of the petitioners’.
o Among Standard Philips’ primary purposes in its Articles of
Incorporation are the ff: “To buy, sell, barter, trade,
manufacture…and deal in and deal with any kind of foods,
wares, and merchandise such as but not limited plastics,
carbon products…electrical wiring devices, electrical
component parts and/or complement...”
o Philips Electrical has, for its primary purposes, the following:
“To develop, manufacture and deal in electrical products,
including electronic, mechanical and other similar products”
o Nothing could prevent Standard Philips from dealing in the
same line of business of electrical devices, products or
supplies which fall under its primary purposes. Besides, there
is a showing that Standard Philips did in fact manufactured
and sold ballasts1 for fluorescent lamps
o The inclusion of PHILIPS in Standard Philips’ corporate name
tends to show its intention to ride on the popularity and
established goodwill of petitioners’ business throughout the
world
It is true that in the Guidelines in the Approval of Corporate and
Partnership Names formulated by SEC, the proposed name should not
be similar to one already used and if it contains a word already used by
a registered company, the proposed name must contain two other
words different from the company already registered. It is then
pointed out that Petitioners Philips Electrical and Philips Industrial
have two words different form Standard Philips’ name
- However, PHILIPS is a trademark or trade name which was
registered as far back as 1922
- Petitioners have the exclusive right to its use which must be free
from any infringement by similarity
- A corporation has an exclusive right to the use of its name, which
may be protected by injunction upon a principle similar to that
upon which persons are protected in the use of trademarks and
trade names
- Notably too, Standard Philips’ name actually contains only a
single word (STANDARD) that is different from that of
petitioners. The inclusion of “Corporation“ merely serves the
purpose of distinguishing a corporation from a partnership and
other business organizations
Lyceum of the Philippines v. CA
Lyceum of the Philippines instituted proceedings before the SEC to
compel other educational institutions with “Lyceum” in their
corporate names to stop using “Lyceum” as part of their names. It
alleged that “Lyceum” was so identified with Lyceum of the PH that
the use of it by others had violated the Corporation Code rule on
corporate name.
The SC ruled otherwise. Lyceum is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and
that other institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is "identical" or
"confusingly or deceptively similar" with another entity's corporate
name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their
entirety and when the name of Lyceum is juxtaposed with the names
of other Lyceums, they are not reasonably regarded as "identical" or
"confusingly or deceptively similar" with each other.
P.C. Javier & Sons, Inc. v. CA(2005)
1An electrical device for starting and regulating fluorescent
and discharge lamps
FACTS: P.C. Javier applied with First Summa for an IGLF loan for
P1.5M. First Summa – later renamed PAIC – granted the application.
The 1st tranche was released on time. However, the 2nd tranche was
delayed: there proved to be a shortfall in the collateral provided by
P.C. Javier – the tranche was only released after P.C. Javier committed
to provide additional security and to open up a time deposit in order to
cover the collateral deficiency. Thus, P.C. Javier executed a chattel
mortgage on some of its equipment and opened up a time deposit
account. P.C. Javier ended up defaulting it the payment of the IGLF
loan. After several demand letters went unheeded, PAIC initiated
extrajudicial foreclosures. P.C. Javier thus filed a complaint for
Annulment of Mortgage and Foreclosure with Preliminary Injunction,
Prohibition, and Damages in order to enjoin the foreclosures and
resulting auction sales. (Relevant: P.C. Javier argued that it had
been justified in withholding the amortization payments since it
had NOT been formally notified that First Summa had changed its
name to PAIC.) The RTC dismissed the complaint, holding that First
Summa and PAIC were one and the same company – thus, P.C. Javier
was liable to pay PAIC on the loan. The CA affirmed the trial court in
toto.
The Supreme Court affirmed the decision and resolution of the CA. It
clarified that a change in name does not make a new corporation and
has no effect on the identity of a corporation.
DOCTRINE: The corporation, upon such change in name, is in NO
SENSE a new corporation, NOR is it the successor of the original
corporation. It is the same corporation with a different name. The
Court cannot impose on a bank that changes its corporate name to
notify a debtor of such change – ABSENT any law, regulation, or
circular requiring it. To do so would be judicial legislation.
Phil First Insurance Co. Inc. v. Hartigan et. al.
FACTS: Defendants owe The Yek Tong Lin Fire and Marine Insurance
Co., Ltd. a certain sum by virtue of an indemnity agreement. The Yek
Tong Lin Fire and Marine Insurance Co., Ltd. changed its name.
Defendants’ defense is that there is no privity of contract because it
was not with petitioner (now bearing new name) that they contracted
with.
DOCTRINE: Our law authorizes an amendment of the articles of
incorporation. There is no prohibition therein against a change of
name. The inference is clear that such a change is allowed, for if the
legislature had intended to enjoin corporations from changing names,
it would have expressly stated so in this section or in any other
provision of the law.
Change of name of a corporation DOES NOT result in its dissolution.
An authorized change in the name of a corporation has no more effect
upon its identity as a corporation than a change of name of a natural
person has upon his identity. It does not affect the rights of the
corporation or lessen or add to its obligations. After a corporation has
effected a change in its name it should sue and be sued in its new
name
Zuellig Freight and Cargo Systems vs. NLRC
FACTS: San Miguel was an employee of Zeta, whom the latter
terminated when it changed its name to Zuellig. The corporation
argued that such dismissal was valid under Art. 283 of the Labor Code
because Zeta ceased its operations when it amended its AOI.
DOCTRINE: The corporation, upon the change in its name, is in no
sense a new corporation, nor the successor of the original corporation.
It is the same corporation with a different name, and its character is In
no respect changed.
Municipality of Malabang v Benito (1969)
FACTS: E.O. 386, relying on the authority given by the Administrative
Code, created the municipality of Balabagan out of some barrios in
Malabang, Lanao del Sur. The case of Pelaez v. Auditor General
nullified that section of the Administrative Code. However, the mayor
of Balabagan insists that the creation of the municipality is valid
because it is a de facto corporation.
DOCTRINE: No de facto corporation can arise from an
unconstitutional charter unless there is some other valid law which
recognizes its potential existence.
Harril v. Davis (1909)
FACTS: Defendants Mann, F. Davis, R. Davis and Knight agreed to
take specified shares in a $10,000 enterprise for the purpose of
building a cotton gin and carrying on the business of buying, ginning
and selling cotton, and to organize a corporation for this purpose.
They transacted a business with the Western Investment Company
consisting of the purchase of lumber, materials and labor for their
buildings, and of dealing in cotton with it, which amounted to tens of
thousands of dollars, and they remained indebted to it over $5000, of
which $4700 was incurred prior to the date when they first filed
articles of incorporations in one of the 2 places required by the statute.
During all this time, they treated themselves, and the plaintiff treated
them, as a corporation. The Court held that defendants did not
become a corporation de jure because they failed to file their articles of
incorporation in both the places required by the statute; they did not
become a corporation de facto before they filed their articles, to such
an extent as to exempt them from individual liability because they did
not, before that time, secure any color of legal organization as a
corporation under any charter or enabling act; and they were liable
individually as partners for that part of the plaintiff’s claim incurred
prior to the filing of their articles.
DOCTRINE:
 The general rule is that parties who associate themselves
together and conduct a business for profit under a name adopted
or used by them for that purpose are liable as partners for the
debts they incur under that name. This governs if the name used
be that of a supposed corporation which the associates have
attempted but failed to organize according to law. But a
compliance by such associates with the statutes authorizing them
to become a corporation exempts them from other individual
liability than that prescribed by such laws for debts incurred after
they become a corporation to authorized to do business as such.
 2 XPNs to the GR that corporators failing to organize legally
are individually liable are:
1. Where such associates procure a charter or file articles of
incorporation under a general enabling act, secure thereby
the color of a corporation, believe they are such, and use the
supposed franchise of their corporation and 3rd parties deal
with them as a corporation, they become a de facto
corporation, which exempts them from individual liability to
such parties, although there are defects in their
incorporation. 

2. Projectors of a corporation to be organized who inform 3rd
parties that they are contracting for such a corporation and
assure them that the obligations incurred will become the
 obligations of the future corporation may escape individual
liability to such 3rd parties for obligations thus incurred for
services necessary to effect the corporate organization and
for machinery and other property necessary to the
commencement of the contemplated business of the
corporation, where corporation is subsequently organized,
takes the benefit of such contracts, and assumes the
obligations. 
 Philippine Fibers and Refuerzo for accounting, rescission and
 When the fact appears that parties associated themselves
together 
and incurred liabilities in the conduct of a business
under a certain name, the presumption is that they are governed
by the general rule and are liable as partners, and the burden is on
them to prove that they are duly incorporated or that they fall
under some exception.
 Color of legal organization as a corporation (charter or filing of
articles of incorporation, and user of the supposed corporate
franchise in good faith) are indispensable to the existence of a de
facto corporation which will exempt from individual liability those
who actively conduct it.
 Execution of articles which are not filed, statements or beliefs of
promoters that they are a corporation, treatment of themselves,
by themselves and by those who deal with them as a corporation,
or all of these together will not exempt those who actively
conduct the business under their assumed name of such a
nonexistent corporation from individual liability for the debts
they incur.
 One who deals with a corporation de facto may be estopped from
denying its existence as a corporation de jure. But no one is
estopped by dealing with parties as a corporation who are
actively conducting business for profit under an assumed
corporate name when they have no charter, have filed no articles
of incorporation and procured no color of legal organization as a
corporation, from denying that they constitute a corporation of
any kind or from enforcing their individual liability for the debs
they incur under such a name.
Hall v. Piccio
FACTS: The Halls and the Browns formed a corporation, Far Eastern.
Before its certificate of incorporation was issued, however, the Browns
filed a suit against the Halls for dissolution. They claimed it was an
unregistered partnership and prayed for its dissolution. The CFI ruled
in favor of the Browns. Hence the petition.
DOCTRINE: The lack of a certificate of incorporation will render a
corporation unable to claim its existence “in good faith” as a
corporation. The certificate of incorporation is the evident attempt to
comply with the law, necessary to be able to claim “in good faith.”
Cranson v. IBM (1964)
FACTS: Cranson is an officer and director at the same time a
stockholder of the Bureau, a new business corporation. The Bureau
purchased 8 typewriters from IBM but was unable to pay its balance.
IBM brought suit against Cranson for payment of such because at the
time the purchase was made the Bureau was not able to file its
certificate of incorporation and only did so after the purchase was
made.
DOCTRINE: A creditor having dealt with a debtor as if it were a
corporation and relied on its credit rather than that of its
stockholder/officers, is estopped to assert that the corporation was
not incorporated at the time of the transaction. (Doctrine of Estoppel)
Vda. De Salvatierra v. Hon. Garlitos and Refuerzo (1958)
FACTS: Vda. De Salvatierra owned a parcel of land in Leyte. She
entered into a contract of lease with the Philippine Fibers Producers
Co., Inc., allegedly a corporation “duly organized and represented by
Segundino Refuerzo, the President.” Several obligations were
provided in the contract, but these obligations were not complied with
because Salvatierra filed with the CFI of Leyte a complaint against
damages. She alleged that the defendants planted kenaf on 3
hectares of the leased property, and refused to render an accounting
of income derived and to deliver her share. Such were in violation of
the terms of their covenant.
ISSUE: WON Refuerzo must be exonerated from any liability for the
non-fulfillment of obligation imposed on the corporation.
RATIO:
NO. While as a general rule a person who has contracted or dealt with
an association in such a way as to recognize its existence as a
corporate body is estopped from denying the same in an action arising
out of such transaction or dealing, yet this doctrine may not be held to
be applicable where fraud takes part in the said transaction. On
plaintiff’s charge that she was unaware of the fact that Philippine
Fibers had no juridical personality, Refuerzo gave no confirmation or
denial and the circumstances surrounding the execution of the
contract lead to the inescapable conclusion that Salvatierra was really
made to believe that such corporation was duly organized in
accordance with law.
A corporation when registered has a juridical personality separate and
distinct from its component members or stockholders and officers
such that a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president and
conversely, a stockholder or member cannot be held personally liable
for any financial obligation by the corporation in excess of his unpaid
subscription. But this rule refers merely to registered corporations and
cannot be made applicable to the liability of members of an
unincorporated association. The reason is that since an organization
which before the law is non-existent has no personality and would be
incompetent to act and appropriate for itself the powers and attribute
of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf. Thus, those who act or
purport to act as its representatives or agents do so without authority
and at their own risk. A person who acts as an agent without authority
or without a principal is himself regarded as the principal, possessed of
all the rights and subject to all the liabilities of a principal. Thus a
person acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts
performed as such agent. Refuerzo, as president of the unregistered
corporation was the moving spirit behind the consummation of the
lease agreement by acting as its representative, his liability cannot be
limited or restricted to that imposed upon corporate shareholders. In
acting on behalf of a corporation which he knew to be unregistered, he
assumed the risk of reaping the consequential damages or resultant
rights arising out of such transaction.
Palacio vs Fely Transportation Company
FACTS: Carillo, a driver working for Fely Company, run over a child,
Mario Palacio. The father of the child then filed a case for damages
against the corporation.
DOCTRINE: A corporation should not be heard to say that it has a
personality separate and distinct from its members when to allow it to
do so would be to sanction the use of the fiction of corporate entity as
a shield to further an end subversive of justice
Lim Tong Lim v Philippine Fishing Gear Industries, Inc.
Chua and Yao bought nets from Phil Fishing and failed to pay. Phil.
Fishing filed a collection case against the two and Lim, whom the two
claimed to be in business with. Lim denied being a partner of the two,
but the trial court, CA, and SC found that a partnership existed based
on numerous facts, among them that the three bought boats with
money borrowed from Lim’s brother. They fought, and in a
compromise agreement agreed to sell the boats they bought, pay
Lim’s brother, and divide the excess among the three of them.
The SC ruled that a partnership may be deemed to exist among parties
who agree to borrow money to pursue a business and to divide the
profits or losses that may arise therefrom, even if it is shown that they
have not contributed any capital of their own to a “common fund.”
Also, based on the doctrine of corporation by estoppel, a third party
who, knwoing an association to be unincorporated, but nonetheless
treats it as a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought against the
corporation. Since Lim reaped the benefits from the use of the nets,
he is covered by the doctrine. Those acting on behalf of the
corporation and those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
International Express Travel & Tour Services, Inc. v. CA (2000)
FACTS: Khan, President of the Federation, entered into a service
contract with the travel agency. The travel agency bought tickets on
behalf of the Federation. However, the Federation was not able to
fully pay the travel agency for the costs of the tickets. The travel
agency thus filed a complaint against Khan (and the Federation) – the
travel agency sought to hold Kahn liable for the unpaid balance in his
personal and official capacity. While the RTC held Kahn personally
liable, the CA held otherwise – along the way ratiocinating that,
through the doctrine of Corporation by Estoppel, the travel agency
could not deny the corporate existence of the Federation because it
had contracted and dealt with the Federation.
The SC reversed and set aside the decision of the CA. On corporation
by estoppel, the SC held that the CA had erroneously applied the
doctrine.
DOCTRINE: The correct application of corporation by estoppel –
applies to a 3rd party only when he tries to escape liability on a
contract from which he has benefitted on the irrelevant ground of
defective incorporation, NOT to a party claiming from the contract.
Loyola Grand Villas vs. CA (1997)
FACTS: In 1983, the Loyola Grand Villas Association, Inc. (LGVAI) was
incorporated by the homeowners of the Loyola Grand Villas (LGV), a
subdivision. The Securities and Exchange Commission (SEC) issued a
certificate of incorporation under its official seal to LGVAI in the same
year. LGVAI was likewise recognized by the Home Insurance and
Guaranty Corporation (HIGC), a government-owned-and-controlled
corporation whose mandate is to oversee associations like LGVAI.
Later, LGVAI later found out that there are two homeowners
associations within LGV, namely: Loyola Grand Villas Homeowners
(South) Association, Inc. (LGVAI-South) and Loyola Grand Villas
Homeowners (North) Association, Inc. (LGVAI-North). The two
associations asserted that they have to be formed because LGVAI is
inactive. When LGVAI inquired about its status with HIGC, HIGC
advised that LGVAI was already terminated; that it was automatically
dissolved when it failed to submit it By-Laws after it was issued a
certificate of incorporation by the SEC.
DOCTRINE: Failure of a corporation to file its by-laws within one
month from the date of its incorporation, as mandated by Section 46
of the Corporation Code, does NOT result in its automatic dissolution.
The deliberations of the Batasang Pambansa No. 68 reveals that law
makers did not intend non-filing to automatically result in a
dissolution. It demonstrates clearly that automatic corporate
dissolution for failure to file the by-laws on time was never the
intention of the legislature.
Note should be taken of the second paragraph of the law which allows
the filing of the by-laws even prior to incorporation. This provision in
the same section of the Code rules out mandatory compliance with
the requirement of filing the by-laws within one (1) month after
receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission. It
necessarily follows that failure to file the by-laws within that period
does not imply the demise of the corporation. By-laws may be
necessary for the government of the corporation but these are
subordinate to the articles of incorporation as well as to the
Corporation Code and related statutes. There are in fact cases where
by-laws are unnecessary to corporate existence or to the valid exercise
of corporate powers.
Fleischer v. Botica Nolasco Co. (1925)
FACTS: Fleischer was the transferee, for valuable consideration, of 5
shares of stock of the Botica Nolasco Corp, transferred to him by
Manuel Gonzales. The Corporation however denied to register the
stocks in Flesicher’s name by invoking Article 12 of its corporate
bylaws, which gives the corporation a preferential right of the shares
in question. SC held that said Article of the by-laws was inconsistent
with existing law (sec 35 of the then Corporation Law et al), governing
among others the transfer of its stock.
DOCTRINE: Under said section stocks are personal property and may
be transferred as therein provided. It contemplates no restriction as to
whom they may be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favour or against
a certain purchaser. The holder of shares, as owner of personal
property, is at liberty, under said section, to dispose of them in favour
of whomsoever he pleases, without any other limitation in this
respect, than the general provisions of law.
CHAPTER IV
THE CORPORATE ENTITY
Stockholders of Guanzon vs Register of Deeds Manila (1922)
FACTS: 5 stockholders of Guanzon and Sons executed a certificate of
liquidation of the assets of the corporation, dissolution and
distribution among themselves in proportion to their shareholdings, as
liquidating dividends, corporate assets, including real properties.
Register of deeds denied because number of parcels were not certified
to in the acknowledgment, the P430.50 reg fee is unpaid and P 940.45
documentary stamps were not attached, and the judgment of the
Court approving dissolution should be presented. Stockholders appeal
on the ground that the certificate of liquidation is not a conveyance or
transfer but merely a distribution of assets of the corporation which
has ceased to exist for having been dissolved

DOCTRINE: A corporation is a juridical person distinct from the
members composing it. Properties registered in the name of the
corporation are owned by it as an entity separe and distinct from its
members and while shares of stock constitute personal property they
do not represent the property of the corporation. A share of stock only
typifies an aliquot part of the corporation's property or the right to
share in its proceeds to that extent when distributed according to law
and equity but its holder is not the owner of any part of the capital of
the corporation nor entitled to possession. The stockholder is not a
co-owner or tenant in common of the corporate property.
Caram v. CA
FACTS: Arellano was asked to do a project study to form a new
corporation, by Barretto and Garcia. On the strength of such study,
the Carams invested in the corporation. When Arellano went
uncompensated for his work, he filed a claim against the corporation
and its stockholders. The court held the stockholders (Carams
included) to be jointly and severally liable, along with the corporation
itself. Hence, the petition.
DOCTRINE: A bona fide corporation will alone be liable for its
corporate acts duly authorized by its officers and directors.
JG Summit Holdings, Inc. v. CA
FACTS: The National Investment and Development Corporation
(NIDC), a government corporation, entered into a Joint Venture
Agreement (JVA) with Kawasaki Heavy Industries, Ltd. for the
construction, operation and management of the Subic National
Shipyard, Inc., later became the Philippine Shipyard and Engineering
Corporation (PHILSECO). Under the JVA, NIDC and Kawasaki would
maintain a shareholding proportion of 60%-40% and that the parties
have the right of first refusal in case of a sale.
Through a series of transfers, NIDC’s rights, title and interest in
PHILSECO eventually went to the National Government. In the
interest of national economy, it was decided that PHILSECO should be
privatized by selling 87.67% of its total outstanding capital stock to
private entities. After negotiations, it was agreed that Kawasaki’s right
of first refusal under the JVA be “exchanged” for the right to top by
five percent the highest bid for said shares. Kawasaki that Philyards
Holdings, Inc. (PHI), in which it was a stockholder, would exercise this
right in its stead.
During bidding, Kawasaki/PHI Consortium is the losing bidder. Even
so, because of the right to top by 5% percent the highest bid, it was
able to top JG Summit’s bid. JG Summit protested, contending that
PHILSECO, as a shipyard is a public utility and, hence, must observe
the 60%-40% Filipino-foreign capitalization. By buying 87.67% of
PHILSECO’s capital stock at bidding, Kawasaki/PHI in effect now owns
more than 40% of the stock.
ISSUE: Whether or not Kawasaki/PHI can purchase beyond 40% of
PHILSECO’s stocks
HELD: A shipyard such as PHILSECO being a public utility as provided
by law is therefore required to comply with the 60%-40%
capitalization under the Constitution. Likewise, the JVA between
NIDC and Kawasaki manifests an intention of the parties to abide by
this constitutional mandate. Thus, under the JVA, should the NIDC opt
to sell its shares of stock to a third party, Kawasaki could only exercise
its right of first refusal to the extent that its total shares of stock would
not exceed 40% of the entire shares of stock. The NIDC, on the other
hand, may purchase even beyond 60% of the total shares. As a
government corporation and necessarily a 100% Filipino-owned
corporation, there is nothing to prevent its purchase of stocks even
beyond 60% of the capitalization as the Constitution clearly limits only
foreign capitalization.
Kawasaki was bound by its contractual obligation under the JVA that
limits its right of first refusal to 40% of the total capitalization of
PHILSECO. Thus, Kawasaki cannot purchase beyond 40% of the
capitalization of the joint venture on account of both constitutional
and contractual proscriptions.
Marvel Building Corp. v. David (1954)
FACTS: Before the CFI, the plaintiffs as stockholders of the Marvel
Building Corporation were able to order the defendant Collector of
Internal Revenue to enjoin from selling at public auction various
properties registered in the name of the said corporation, to collect
war profits taxes assessed against plaintiff Maria B. Castro. The CIR
appealed to this Court, contending that Castro is the sole owner of all
the subscribed stock of the corporation.
The existence of endorsed certificates, discovered by the internal
revenue agents between 1948 and 1949 in the possession of the
Secretary-Treasurer, the fact that 25 certificates were signed by the
president of the corporation, for no justifiable reason, the fact that
two sets of certificates were issued, the undisputed fact that Castro
had made enormous profits and, therefore, had a motive to hide them
to evade the payment of taxes, the fact that the other subscribers had
no incomes of sufficient magnitude to justify their big subscriptions,
the fact that the subscriptions were not receipted for and deposited by
the treasurer in the name of the corporation but were kept by Castro
herself, the fact that the stockholders or the directors never appeared
to have ever met to discuss the business of the corporation, the fact
that Castro advanced big sums of money to the corporation without
any previous arrangement or accounting, and the fact that the books
of accounts were kept as if they belonged to Castro alone — these
facts are of patent and potent significance. Castro was the sole and
exclusive owner of the shares and that they were only her dummies.
Tan Boon Bee & Co., Inc. v. Jarencio (1988)
FACTS: Tan Boon Bee & Co. Inc., doing business under the name of
Anchor Supply Co. sold on credit to Graphic Publishing Inc. paper
products amounting to P55,214.73. Graphic made partial payment by
check in the total amount of P24,848.74; it executed a promissory
note (PN) for the remaining balance. In the PN, it was stipulated that
the amount will be paid on monthly installments and failure to pay any
installment would make the amount immediately demandable with an
interest of 12% per annum. Graphic failed to pay any installment. Tan
Boon filed a collection suit against Graphic. RTC Ruled in favor of Tan
Boon and issued a writ of execution which expired without satisfaction
because sheriff did not find any property of Graphic so an alias writ
was issued. Sheriff then levied upon one unit printing machine
identified as “Original Heidelberg Cylinder Press” found in the
premises of Graphic. Philippine American Drug Company (PADCO)
informed the sheriff that the printing machine is its property and not
that of Graphic; advised the sheriff to cease and desist from carrying
out the scheduled auction sale. Notwithstanding this, the sheriff
proceeded with the sale and sold the printing machine to Tan Boon as
the highest bidder. PADCO filed an Affidavit of Third Party Claim with
the office of the city sheriff and thereafter filed a Motion to Nullify
Sale on Execution which was opposed by Tan Boon. The RTC ruled in
favor of PADCO and declared the sale null and void; ordered the return
of the machinery to PADCO.

Tan Boon contends that the controlling stockholders of PADCO are
also the same controlling stockholders of Graphic and therefore, the
levy upon the said machinery should be upheld. Tan Boon presented
evidence showing the following:
1. That PADCO was never engaged in the printing business
2. The Board of Directors of PADCO and Graphic were the same
3. That PADCO holds 50% shares of stock of Graphic
Tan Boon further contends that PADCO’s own evidence shows that
the printing machine had been in the premises of Graphic even before
PADCO purchased it from Capital Publishing. This shows that
PADCO’s claim of ownership over the printing machine is a farce
ISSUE: WON the veil of corporate fiction should be pierced (YES)
HELD: YES, pierce that veil! Evidence presented by Tan Boon
warrants the piercing of the veil of corporate fiction. The separate and
distinct personality of a corporation is merely a fiction created by law
for convenience and to promote justice. This separate personality of
the corporation may be disregarded or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or
illegality, or to work an injustice, or where necessary to achieve equity
or when necessary for the protection of creditors. The legal fiction is
not a shield for commission of injustice and inequity. When a
corporation is merely an adjunct, business conduit or alter ego of
another corporation, the fiction of separate and distinct corporation
entities should be disregarded
Magsaysay-Labrador v. CA
Wife of the deceased filed a case to annul a title over a land that was
previously owned by her deceased husband and now owned by a
corporation. She wanted the title to be transferred to her. The sisters
of the deceased wanted to intervene arguing that the shares owned by
their brother were transferred to them and they, as stockholders, have
the right to intervene because the property in question is owned by
their corporation. Lower court denied this motion and said they as
shareholders have no legal interest over the case because the
corporation has a separate and distinct personality from them as
shareholders.
SC ruled that while a share of stock represents a proportionate or
aliquot interest in the property of the corporation, it does not vest the
owner thereof with any legal right or title to any of the property, his
interest in the corporate property being equitable or beneficial in
nature. Shareholders are in no legal sense the owners of corporate
property, which is owned by the corporation as a distinct legal person
No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing
the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the number of shares
transferred
Indophil Textile Mill Workers Union-PTGWO v. Calica (1992)
FACTS: The Textile Union became the exclusive bargaining agent for
the RnF EEs of Indophil Textile –it bargained a CBA with the company.
Subsequently, Indophil Acrylic was formed. It appeared that the
businesses of Indophil Textile and Indophil Acrylic were related, that
some of the EEs of the Indophil Textile were the same persons
manning and providing auxiliary services to the units of Indophil
Acrylic, and that the physical plants, offices, and facilities were
situated in the same compound. The Acrylic Union became the
exclusive bargaining agent in Indophil Textile, and it entered into a
CBA with the company. The Textile Union and Indophil Textile
submitted to arbitration the issue of whether Indophil Textile and
Indophil Acrylic were one and the same company. The Voluntary
Arbiter ruled against the Textile Union.
The Supreme Court held that the Voluntary Arbiter was not guilty of
GAD. In doing so, the SC held that the doctrine of piercing the veil of
corporate entity was not applicable.
DOCTRINE: The legal corporate entity is disregarded only if it is
sought to hold the officers and stockholders directly liable for a
corporate debt or obligation.
Jacinto v. CA (1991)
FACTS: Jacinto failed to pay his loan. In his defense, he said that the
transactions were made in his official capacity as president and
general manager of Inland. RTC and CA pierced the corporate veil and
held Jacinto liable.
DOCTRINE: When the veil of corporate fiction is made as a shield to
perpetuate fraud and/or confuse legitimate issues, the same should be
pierced. In this case, evidence points out that the person and the
company are one and the same and the person acted not in his official
capacity when he contracted the loan. He will not be permitted to use
the company to shield himself from liability.
Concept Builders, Inc. vs NLRC
FACTS: Respondents were workers of Concept Builders before they
were terminated. After winning in an illegal dismissal case, Sheriff
tried to levy on the properties of the petitioner to satisfy the
judgment. HPPI filed a third-party claim, alleging that it is a
corporation separate and distinct from Concept and that the
properties levied by the sheriff belonged to HPPI and not Concept
Builders.
DOCTRINE: The corporate mask may be lifted and the corporate veil
may be pierced when a corporation is just but the alter ego of a person
or of another corporation. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should come
to naught. The law in these instances will regard the corporation as a
mere association of persons and, in case of two corporations, merge
them into one.
Claparols vs. Court of Industrial Relations
FACTS: Claparols Steel and Nail Plant dismissed Demetrio Garlitos et
al. Shortly after or on occasion of the dismissal (case did not mention
the exact time), Claparols Steel and Nail Plant ceased operations. A
new corporation was formed, Claparols Steel Corporation. The
dismissed workers filed an illegal dismissal case and won. The award
was computed from the time of their dismissal and beyond the life of
Claparols Steel and Nail Plant.
DOCTRINE: When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association or persons, or, in the case of
two corporations, will merge them into one.

Where a corporation is a dummy and serves no business purpose and
is intended only as a blind, the corporate fiction may be ignored.
Where a corporation is merely an adjunct, business conduit or alter
ego of another corporation, the fiction of separate and distinct
corporate entities should be disregarded.
Secosa v. Heirs of Francisco
FACTS: A truck of Dassad Warehousing hit the motorcycle of
Francisco which caused him to be killed. A suit was filed by the latter’s
parents against the driver, the corporation, and its president. All three
were adjudged to be solidarily liable for damages. Hence the petition.
DOCTRINE: A corporation is invested by law with a personality
separate from that of its stockholders or members. Hence, a
corporation’s authority to act and its liability for its actions are
separate and apart from the individuals who own it. The so-called veil
of corporation fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders.
Cease v. CA (1979)
FACTS: Forrest Cease and five (5) other American citizens formed
Tiaong Milling and Plantation Company. Eventually, the shares of the
other original incorporators were bought out by Cease with his
children. The company’s charter lapsed in June 1958. Forrest Cease
died in August 1959. There was no mention whether there were steps
to liquidate the company. Some of his children wanted an actual
division while others wanted a reincorporation. Two of his children,
Benjamin and Florence, initiated Special Proceeding No. 3893 with
CFI Tayabas asking that the Tiaong Milling and Plantation
Corporation be declared identical to Forrest Cease and that its
properties be divided among his children as intestate heirs.
Defendants opposed the same but the CFI ruled in favor of the
plaintiffs. Defendants filed a notice of appeal from the CFI’s decision
but the same was dismissed for being premature. The case was
elevated to the SC which remanded it to the Court of Appeals. The CA
dismissed the petition.
ISSUE: Whether or not the Court of Appeals erred in affirming the
lower court’s decision that the subject properties owned by the
corporation are also properties of the estate of Forrest Cease
HELD: NO. The trial court indeed found strong support, one that is
based on a well-entrenched principle of law which is the theory of
"merger of Forrest L. Cease and The Tiaong Milling as one
personality", or that "the company is only the business conduit and
alter ego of the deceased Forrest L. Cease and the registered
properties of Tiaong Milling are actually properties of Forrest L. Cease
and should be divided equally, share and share alike among his six
children, ... ", the trial court aptly applied the familiar exception to the
general rule by disregarding the legal fiction of distinct and separate
corporate personality and regarding the corporation and the individual
member one and the same. In shredding the fictitious corporate
veil, the trial judge narrated the undisputed factual premise,
thus:
While the records showed that originally its incorporators were aliens,
friends or third-parties in relation to another, in the course of its
existence, it developed into a close family corporation. The Board of
Directors and stockholders belong to one family the head of which
Forrest L. Cease always retained the majority stocks and hence the
control and management of its affairs. It must be noted that as his
children increase or become of age, he continued distributing his
shares among them adding Florence, Teresa and Marion until at the
time of his death only 190 were left to his name. Definitely, only the
members of his family benefited from the Corporation.
The corporation 'never' had any account with any banking institution
or if any account was carried in a bank on its behalf, it was in the name
of Mr. Forrest L. Cease. There is truth in plaintiff's allegation that the
corporation is only a business conduit of his father and an extension of
his personality, they are one and the same thing. Thus, the assets of
the corporation are also the estate of Forrest L. Cease, the father of
the parties herein who are all legitimate children of full blood.
A rich store of jurisprudence has established the rule known as the
doctrine of disregarding or piercing the veil of corporate fiction.
GENERAL RULE: a corporation is vested by law with a personality
separate and distinct from the persons composing it as well as any
other legal entity to which it may be related. By virtue of this attribute,
a corporation may not, generally, be made to answer for acts or
liabilities of its stockholders or those of the legal entities to which it
may be connected, and vice versa. This separate and distinct
personality is, however, merely a fiction created by law for
convenience and to promote the ends of justice
EXCEPTIONS: Such rule may not be used or invoked for ends
subversive of the policy and purpose behind its creation or which could
not have been intended by law to which it owes its being. This is
particularly true where the fiction is used to defeat public
convenience, justify wrong, protect fraud, defend crime, confuse
legitimate legal or judicial issues, perpetrate deception or otherwise
circumvent the law. This is likewise true where the corporate entity is
being used as an alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate. In any of these
cases, the notion of corporate entity will be pierced or disregarded,
and the corporation will be treated merely as an association of persons
or, where there are two corporations, they will be merged as one, the
one being merely regarded as part or the instrumentality of the other.
Delpher Trades Corp. V. IAC (1988)
FACTS: Delfin and Pelagia Pacheco leased the lot they co-owned to
CCII to which the siblings granted a right of first refusal. CCII assigned
its rights to Hydro Pipes. A deed of exchange was executed between
the Pachecos and Delpher Trades Corp. wherein the Pachecos
conveyed the leased lot to Delpher in exchange for 2500 shares of
stock. Hydro Pipes filed a complaint for reconveyance for alleged
violation of its right of first refusal. Neria testified that Delpher is a
family corporation organized by the children of Pelagia Pacheco and
Benjamin Hernandez, and Sps. Delfin and Pilar Pacheco, who owned
in common the parcel of land leased to Hydro Pipes in order to
perpetuate their control over the property through the corporation
and to avoid taxes. To accomplish this, two pieces of real estate,
including the land leased to Hydro Pipes, were transferred to the
corporation. The leased property was transferred to the corporation
by virtue of a deed of exchange of property; in exchange for these
properties, Pelagia and Delfin acquired 2500 unissued no par value
shares of stock which are equivalent to a 55% majority in the
corporation because the other owners only owned 2000 shares
ISSUE: WON the Deed of Exchange executed by the Pachecos and
Delpher was meant to be a contract of sale, which prejudiced
respondent’s right of first refusal.
RATIO: NO. The Delpher Trades Corporation is a business conduit of
the Pachecos. What they really did was to invest their properties and
change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take
control of their properties and at the same time save on inheritance
taxes. The Deed of Exchange of property cannot be a considered a
contract of sale since there was no transfer of actual ownership
interests by the Pachecos to a third party. The Pacheco family merely
changed their ownership from one form to another.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or
from individual owners thereof. In exchange of their properties, the
Pachecos acquired 2500 original unissued no par value shares of stocks
of the Delpher Trades Corporation. Consequently, the Pachecos
became stockholders of the corporation by subscription. A no-par
value share does not purport to represent any stated proportionate
interest in the capital stock measured by value, but only an aliquot
part of the whole number of such share issuing corporation. The
holder of no-par shares may see from the certificate itself that he is an
aliquot sharer in the assets of the corporation. But this character of
proportionate interest is not hidden beneath a false appearance of a
given sum in money, as in the case of par value shares. The capital
stock of a corporation issuing only no-par value shares is not set forth
by a stated amount of money, but instead is expressed to be divided
into a stated number of shares, such as 1000 shares. This indicates
that a shareholder of 100 such shares is an aliquot sharer in the assets
of the corporation, no matter what value they may have to the extent
of 100/1000, or 1/10. Thus, by removing the par value of shares, the
attention of persons interested in the financial condition of a
corporation is focused upon the value of assets and the amount of its
debts.
Liddell v. CIR
Liddell and co. Is a corporation engaged in importing and retailing
automobile. Liddell Motors Inc. Was soon incorporated and Liddell
transferred the retail function of the corporation to the new
corporation. The two corporation operated in such a way that the
older corporation would import automobiles and then sell them to
liddell motors at a low price. Liddell motors then would sell the cars at
a higher price. CIR assessed them of sales tax deficiency after
reviewing the transactions of the 2 corporations.
SC ruled that where a corporation is a dummy, is unreal or a sham and
serves no business purpose and is intended only as a blind, the
corporate form may be ignored for the law cannot countenance a form
that is bald and a mischievous fiction
La Campana Coffee Factory, Inc. v. Kaisahan ng mga Manggagawa
sa Lakampana (KKM) (1953)
FACTS: Originally, Tan Tong was engaged in the business of buying
and selling gaugau under the trade name “La Campana Gaugau
Packing.” He later entered into a CBA with PLOW, and later with the
Union – after his EEs had seceded from PLOW. Tong subsequently
organized a family corporation, La Campana. A year later, the Union –
purporting to represent workers from both LCGP and La Campana –
demanded higher wages and more privileges. This controversy was
certified by the DOL to the CIR. (A short time later, while the case was
pending before the CIR, the DOL suspended the permit it granted to
the Union.) Separate MtDs were filed by Tan Tong, La Campana, and
PLOW, on the ground that – among others – the action had been
brought against two entities with separate personalities. These MtDs
were denied by the CIR, which held that the filing of action against “La
Campana Starch and Coffee Factory” was PROPER and JUSTIFIED.
Tan Tong, La Campana, and PLOW brought the case before the SC on
a petition for certiorari.
The SC held that the corporate entity of La Campana could be
disregarded.
DOCTRINE: The doctrine that a corporation is a legal entity existing
separate and apart from the persons composing it is a legal theory
introduced for purposes of convenience and to subserve the ends of
justice. The concept cannot, therefore, be extended to a point beyond
its reason and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the courts. A
subsidiary or auxiliary corporation which is created by a parent
corporation merely as an agency for the latter may sometimes be
regarded as identical with the parent corporation, especially if the
stockholders or officers of the two corporations are substantially the
same or their system of operation unified.
WPM International Trading, Inc. v. Labayen (2014)
FACTS: Respondent contracted CLN to renovate a restaurant owned
by WPM. Renovation cost was not paid by WPM. Labayen became
liable for the cost so she asked WPM for reimbursement saying that it
was on the corporation’s behalf that she entered the renovation
agreement.
DOCTRINE: The piercing the corporate veil based on the alter ego
theory requires the concurrence of three elements:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will or existence of
its own;
(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of.
Lack of any of the elements will prevent the piercing of the corporate
veil, as in this case. In the present case, the attendant circumstances
do not establish that WPM is a mere alter ego of Manlapaz.
Aside from the fact that Manlapaz was the principal stockholder of
WPM, records do not show that WPM was organized and controlled,
and its affairs conducted in a manner that made it merely an
instrumentality, agency, conduit or adjunct of Manlapaz. The mere
ownership by a single stockholder of even all or nearly all of the capital
stocks of a corporation is not by itself a sufficient ground to disregard
the separate corporate personality. To disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and
convincingly established.
Here, the respondent failed to prove that Manlapaz, acting as
president, had absolute control over WPM. Even granting that he
exercised a certain degree of control over the finances, policies and
practices of WPM, in view of his position as president, chairman and
treasurer of the corporation, such control does not necessarily warrant
piercing the veil of corporate fiction since there was not a single proof
that WPM was formed to defraud CLN or the respondent, or that
Manlapaz was guilty of bad faith or fraud.
CLASS NOTES:
Sir disagrees with ruling in this case. “If this is not absolute control, I
don’t know what it is,”
If Corporation was not used to commit something bad  no “piercing”
of the corporate veil.
Cruz v. Dalisay (1987)
FACTS: Dalisay attached the money belonging to Cruz even though
the judgment debtor in the NLRC case is sought to be enforced to
Qualitrans Limousine Service, Inc. Dalisay argues that Cruz is the
owner of the corporation and the fiscal in the NLRC case advised him
to serve notice of garnishment to the Philtrust Bank
DOCTRINE: It is a well-settled doctrine both in law and in equity that
as a legal entity, a corporation has a personality distinct and separate
from its individual stockholders or members. The mere fact that one is
president of a corporation does not render the property he owns or
possesses the property of the corporation, since the president, as
individual, and the corporation are separate entities.
NASECO Guards Association – PEMA v. National Service Corporation
(2010)
FACTS: NASECO, PNB’s subsidiary, was made liable to pay monetary
awards in favour of the unions in a labor case. NASECO is contesting
the amount of the award and that due to its poor financial standing, it
will result to cessation of its business operations. NAGA-PEMU argues
that PNB should be made liable for the monetary liability of its
subsidiary.
DOCTRINE: Control, by itself, does not mean that the controlled
corporation is a mere instrumentality or a business conduit of the
mother company. Even control over the financial and operational
concerns of a subsidiary company does not by itself call for
disregarding its corporate fiction. There must be a perpetuation of
fraud behind the control or at least a fraudulent or illegal purpose
behind the control in order to justify piercing the veil of corporate
fiction.
Pacific Rehouse Corp. v. CA
FACTS: After failing to satisfy the writ of execution against E-
Securities, Pacific Rehouse tried to go after its parent company,
Export Industry Bank. The RTC issued an alias writ against the latter,
on the basis of the alter ego doctrine, which called for a ‘piercing of
the corporate veil’ between E-Securities and EIB. EIB appealed to the
CA which ruled in its favor. Hence, the petition.
DOCTRINE:
The Court has laid down a three–pronged control test to establish
when the alter ego doctrine should be operative:
- Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
- Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention
of plaintiff’s legal right; and
- The aforesaid control and breach of duty must [have] proximately
caused the injury or unjust loss complained of.
If any one of these elements are absent, then ‘piercing the corporate
veil’ will not be proper. It is ONLY when ALL THREE are present that
will call for the application of the alter ego doctrine.
Kukan International Corporation v. Reyes (2010)
FACTS: Romeo M. Morales doing business under the name
RM Morales Trophies and Plaques was awarded a P5 million contract
for the supply and installation of signages in a building constructed in
Makati. Morales complied with his contractual obligations but he was
paid only the amount of P1,976,371.07 leaving a balance
ofP1,412,130.93. He filed a case against Kukan, Inc., for sum of money
with the RTC of Manila. Kukan Inc., stopped participating in the
proceedings in November 2000, hence, it was declared in default and
Morales presented his evidence ex-parte against petitioner and a
decision was rendered in favour of the latter. During the execution,
the sheriff levied the personal properties found at the office of Kukan,
Inc. Claiming it owned the properties levied, Kukan International
Corporation (KIC) filed an Affidavit of Third Party Claim. Morales filed
an Omnibus Motion praying to apply the principle of piercing the veil
of corporate entity. He alleged that Kankun, Inc. and KIC are one and
the same corporation.
DOCTRINE: Piercing the veil of corporate entity applies to
determination of liability not of jurisdiction. This is so because the
doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already
acquired jurisdiction over the corporation. Hence, before this doctrine
can be applied, based on the evidence presented, it is imperative that
the court must first have jurisdiction over the corporation.
Macasaet v. Co, Jr. (2013)
FACTS: Co sued Abante Tonite and the petitioners, claiming damages
because of an allegedly libellous article that petitioners published in
Abante. RTC Br. 51 issued summons to be served on each defendant,
including Abante Tonite, at their business address. Petitioners
contend that Abante Tonite should be dropped as a defendant
because it is neither a natural nor a juridical person. They also contend
that the trial court did not acquire jurisdiction over the individual
petitioners because of invalid and ineffectual substituted service of
summons.
ISSUES:
1. WON the CA committed reversible error by sustaining the
inclusion of Abante Tonite as party in the instant case. (NO)
2. WON the CA committed an error of law in holding that the trial
court acquired jurisdiction over the petitioners. (NO)
RATIO:
1. NO. Abante Tonite is a corporation by estoppel as the result of its
having represented itself to the reading public as a corporation despite
its not being incorporated. Non-incorporation of Abante Tonite with
the SEC was of no consequence, for, otherwise, whoever of the public
who would suffer any damage from the publication of articles in the
pages of its tabloids would be left without recourse. The editorial box
of the daily tabloid disclosed that although Monica Publishing
Corporation had published the tabloid on a daily basis, nothing in the
box indicated that Monica Publishing Corp. had owned Abante Tonite.
2. Only when the defendant cannot be served personally within a
reasonable time may substituted service be resorted to. Hence, the
impossibility of prompt personal service should be shown by stating
the efforts made to find the defendant himself and the fact that such
efforts failed, which statement should be found in the proof of service
or sheriff’s return. Sheriff Medina’s attempts to personally serve the
summons proved futile because Macasaet and Quijano were “always
out and not available,” and the other petitioners were “always roving
outside and gathering news.” After Medina learned on his second
attempt that there was no likelihood of any of petitioners going to the
office during business hours of that or any other day, he concluded
that further attempts to serve them in person within a reasonable time
would be futile. The circumstances fully warranted his conclusion.
Heirs of Fe Tan Uy v. International Exchange Bank (2013)
FACTS: Hammer contracted a loan from iBank which was secured by a
third-party Real Estate Mortgage covering properties of Goldkey. The
loan was also secured by a Surety Agreement signed by Chua and Uy,
who were both officers of Hammer and Goldkey. Hammer defaulted in
the payment of its obligations prompting iBank to foreclose.
Mortgaged properties were sold but there was a deficiency which
Hammer refused to pay. iBank then filed a complaint for sum of
money against Hammer, Chua, Uy, and Goldkey, alleging that fraud
was perpetrated in their transactions. iBank demands that the veil of
corporate fiction be pierced so that the said defendants could be made
liable for the obligations of Hammer.
ISSUES:
Whether Uy can be held liable to iBank for the loan obligation of
Hammer as an officer and stockholder of the said corporation (NO)
Whether Goldkey can be held liable for the obligation of Hammer for
being a mere alter ego of the latter (YES)
HELD:
A director, officer or employee of a corporation is generally not held
personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a
means to perpetrate fraud or an illegal act or as a vehicle for the
evasion of an existing obligation, the circumvention of statutes, or to
confuse legitimate issues. Before a director or officer of a corporation
can be held personally liable for corporate obligations, the following
requisites must concur:
(1) The complainant must allege in the complaint that the director
or officer assented to patently unlawful acts of the corporation,
or that the officer was guilty of gross negligence or bad faith;
and
(2) The complainant must clearly and convincingly prove such
unlawful acts, negligence or bad faith.
When two business enterprises are owned, conducted and controlled
by the same parties, both law and equity will, when necessary to
protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or one
and the same.
Medical Plaza v Cullen
Cullen was an owner of the condominium unit with MLHI and was a
member of the corporation for condominium owners (Medical plaza).
Medical Plaza assessed him unpaid association dues which prevented
him from voting and being voted for in an election for the board of
directors. Cullen filed a case for damages against Medical plaza before
the RTC. RTC dismissed the complaint ruling that the HLURB has
jurisdiction. CA reversed this and ruled that it was RTC which had
jurisdiction of over the controversy.
SC ruled that while it was correct that the RTC had jurisdiction, it was
wrong for the CA to remand the case to the RTC branch which
originally ruled on it since said branch was not acting as a commercial
court.
In determining whether a dispute constitutes an intra-corporate
controversy, the Court uses two tests, namely, the relationship test
and the nature of the controversy test.
Under the relationship test, the existence of any of the ff intra-
corporate relations makes the case intra-corporate
 (1) between the corporation, partnership or association and
the public;
 (2) between the corporation, partnership or association and
the State insofar as its franchise, permit or license to operate
is concerned;
 (3) between the corporation, partnership or association and
its stockholders, partners, members or officers; and
 (4) among the stockholders, partners or associates
themselves.
Under the nature of the controversy test, "the controversy must not
only be rooted in the existence of an intra-corporate relationship, but
must as well pertain to the enforcement of the parties’ correlative
rights and obligations under the Corporation Code and the internal
and intra-corporate regulatory rules of the corporation. In other
words, jurisdiction should be determined by considering both the
relationship of the parties as well as the nature of the question
involved.
Gamboa v. Teves (2012)
FACTS: The Supreme Court acted on the motions for reconsideration
filed vis-à-vis the 2011 Decision. It denied with finality those motions
for reconsideration.
DOCTRINE: Both the Voting Control Test and the Beneficial
Ownership Test must be applied to determine whether a corporation
is a "Philippine national.” Note that the 60-40 ownership requirement
in favor of Filipino citizens must also apply to shares WITHOUT voting
rights
Compliance with the constitutional limitation(s) on engaging in
nationalized activities must be determined by ascertaining if 60% of
the investing corporation’s outstanding capital stock is owned by
“Filipino citizens”. If such investing corporation is in turn owned to
some extent by another investing corporation, the same process must
be observed. One must not stop until the citizenships of the individual
or natural stockholders of layer after layer of investing corporations
have been established, the very essence of the Grandfather Rule.
Public utilities that fail to comply with the nationality requirement
under Art. XII, Sec. 11 of the 1987 Constitution and the FIA can cure
their deficiencies PRIOR to the start of the administrative case or
investigation.
Narra Nickel Mining et. al. vs. Redmont Consolidated Mines
Corporation (2015)
FACTS: Redmont assails that the petitioner-corporations are foreign
corporations hence disqualified from undertaking mining business in
the Philippines.
DOCTRINE: In ending, the "control test" is still the prevailing mode of
determining whether or not a corporation is a Filipino corporation,
within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the natural
resources of the Philippines. When in the mind of the Court there is
doubt, based on the attendant facts and circumstances of the case, in
the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule."
CHAPTER V
PROMOTER’S CONTRACTS
McArthur vs. Times Printing Co.
FACTS: McArthur was hired by one of the incorporators of Times
before its organization. When he was terminated from service, he
sued the corporation for breach of contract.
DOCTRINE: While a corporation may is not bound by engagements
made on its behalf by its promoters before its organizations, it may,
after its organization, make such engagements its own contracts.
Such adoption or acceptance of these engagements need not be
express but it may be inferred from acts or acquiescence on the part of
the corporation, or its authorized agents, as any similar original
contract might be shown
Cagayan Fishing v. Sandiko (1937)
FACTS: Tabora owned 4 parcels of land in Aparri. He sold the 4 parcels
to the Cagayan Fishing Development Company, (of which he is a
promoter) then under the process of incorporation, for one peso,
subject to the REM ifo PNB, and under the condition that title shall not
pass until Cagayan pays Tabora’s debt to PNB. Cagayan Fishing was
then formed, and the Board adopted a resolution authorizing the
president to sell the lands to Sandiko for P42000. Cagayan executed a
deed of sale transferring and ceding all rights titles and interests to the
land to Sandiko. Sandiko failed to make good on the PN. Cagayan
Fishing sues Sandiko. TC dismisses suit on the ground that the deed of
sale is void.
DOCTRINE: Promoters cannot act as agent for a projected
corporation since that which has no legal existence cannot have an
agent.
Builders Duntile v. W.E. Dunn (1929)
FACTS: Samuels and other promoters wished to put up a company for
manufacturing duntile. Samuels signed a contract placing an order
with W.E. Dunn to order machinery for making duntile, with a
provision that W.E. would provide an agent to set up the machinery
and give instructions. Only after W.E. sent the first agent, did Samuels
et. al. file the Articles of Incorporation for Builders’ Dunn. It was later
found that first agent did a bad job setting up the machinery. Builders’
sued to recover damages. W.E.’s defense: breach of contract occurred
prior to incorporation, Builders’ has no right to sue. Court upheld
Builders’ right to sue on a written contract entered into prior to its
incorporation.
DOCTRINE: A corporation may sue on the contract of its promoters,
which it has adopted. Even if Samuels had signed the contract and no
formal assignment had been made to Builders’ after, Builders had
taken over the machinery purchased by Samuels and assigned stock to
the latter equivalent to the amount of his expenditures. Further, all
parties were aware that the contract had been made on the
corporation’s behalf. Builders’ is the real party in interest, having been
the only one to suffer damages on account of the breach. It is the
proper party to recover on account thereof.
Rizal Light v. PSC and Morong Electric
FACTS: Rizal Light’s CPCN was revoked, and another operator,
Morong Electric, was granted a CPCN for the same service. Rizal Light
now question the impropriety of (1) the revocation of its CPCN, and (2)
the grant of Morong Electric’s application despite its non-existence at
the time of the application and the grant (since its certificate of
incorporation came only after such facts).
DOCTRINE: A franchise for a public utility can be (1) applied for and
(2) be granted EVEN if the corporation is not created until after the
fact.
Quaker Hill v. Parr (1961)
FACTS: Plaintiff, a New York Nursery, sold a quantity of nursery stock
to defendants, who were to form a corporation which would purchase
the stock, re-selling much of it to a cemetery corporation which the
individual defendants owned. The nursery’s salesman was the one
who insisted that the time was short and the transaction go forward
even though a corporation had not yet been formed. After the
corporation had been formed, the nursery kept the records in the
name of Denver memorial Nursery, Inc. Due to the lateness of the day,
the nursery stock died. The Denver Corporation refuse to pay. The
New York Nursery sued the promoters individually.
DOCTRINE: If the contract is made on behalf of the corporation and
the other party agrees to look to the corporation and not to the
promoters for payment, the promoters incur no personal liability.
Old Dominion Copper Mining and Smelting Co. v. Bigelow
FACTS: The property in this case is the mining property of the Old
Dominion Copper Company of Baltimore, and also the mining rights
and land held by one Keyser who owned the stock of the Baltimore
company with Simpson. Bigelow and Lewisohn obtained options from
Simpson's executors and Keyser for the purchase of the stock and the
property. They also formed a syndicate to carry out their plan, with
the agreement that the money subscribed by the members should be
used for the purchase and the sale to a new corporation at a large
advance, and that the members, in the proportion of their
subscriptions, should receive in cash or in stock of the new corporation
the profit made by the sale. Bigelow paid Simpson's executors for their
stock on behalf of the syndicate, in cash and notes of himself and
Lewisohn, and Keyser was paid in the same way. Bigelow and
Lewisohn started the corporation, officers were elected, and the
corporation became duly organized. Some of the officers resigned,
and Bigelow and Lewisohn and three other absent members of the
syndicate came in. An offer was received from the Baltimore company
to sell substantially all its property for 100,000 shares of the company.
The offer was accepted, and then Lewisohn offered to sell the real
estate obtained from Keyser, for 30,000 shares, to be issued to
Bigelow and himself. Possession of all the mining property was
delivered the next day. The remaining 20,000 shares was offered to
the public at par, and they were taken by subscribers who did not
know of the profit made by Bigelow and Lewisohn and the syndicate.
It was alleged that 40,000 shares went to the syndicate as profit, and
the members had their choice of receiving a like additional number of
shares or the repayment of their original subscription. The remaining
20,000 of the stock paid to the Baltimore company was divided by
Bigelow and Lewisohn without the knowledge of the syndicate.
ISSUE: WON Bigelow as a promoter was liable for the secret profits he
made
HELD: YES. A promoter, notwithstanding his fiduciary duties to the
corporation, may still sell properties to it, but he must pursue one of
four courses to make the contract binding. These are: 1) provide an
independent board of officers in no respect directly or indirectly under
his control, and make full disclosure to the corporation through them;
2) make full disclosure of all material facts to each original subscriber
of shares in the corporation; 3) procure a ratification of the contract
after disclosing its circumstances by vote of the stockholders of the
completely established corporation; or 4) be himself the real
subscriber of all the shares of the capital stock contemplated as a part
of the promotion scheme. The promoter is liable, even if owning all
the stock of the corporation at the time of the transaction, if further
original subscription to capital stock contemplated as an essential part
of the scheme of promotion came in after such transaction.
A promoter of a corporation who has wrongfully sold property to it
at an undue profit cannot avoid repayment to the corporation of the
profit so secured, on the ground that it will result in a benefit to the
stock taken by himself and his co-promoters, who have ratified the
act, and whose stock is all but a small part of that issued.
The remedy of a corporation whose promoter has taken an illegal
secret profit in a sale of property to it is not limited to a rescission of
the transaction, but it may compel a return of it to the corporation.
The right of a corporation to compel a repayment of illegal
promoters' profits for the benefit of all its stockholders is not defeated
by the fact that, after the suit was instituted, certain of the
stockholders entered into an illegal agreement as to the disposition of
the proceeds of the suit.
The law will not approve a transaction by which property is
purchased by a promoter of a corporation with money solicited in
substantial part from associates by representations that he intends to
form a corporation with a specified capitalization, and sell the
property to it for a certain amount of stock, followed by its actual sale
to the corporation for a much larger amount, the settlement with the
associates at the price agreed upon, and the retention by the
promoter of the difference as a secret profit, and taking cash
subscriptions from the general public, who understand that the
corporation is organized under a statute which requires property to be
taken for stock only at its true value. That, at the time of the sale by
promoters of property to a corporation organized to purchase it, they
are the owners of all the stock which has been issued, no issue having
been made of that intended for the public, or that a ratification of the
purchase is secured, does not, if at the time of the ratification a
substantial portion of the stock intended for the public remains
unissued, avoid the operation of the rule that promoters who organize
a corporation to purchase property from them for stock the par value
of which is largely in excess of the value of the property, and as part of
the scheme sell to the general public
as original subscribers a portion of the stock for cash at par, to
secure a working capital, without providing an independent board of
officers to pass upon the wisdom of the purchase, having the purchase
ratified by such board, or disclosing their extraordinary profit to
purchasers of stock, are liable to account to the corporation for the
profit of the proceeding.
Republic of the Philippines v. Acoje Mining (1963)
FACTS: Acoje Mining requested the opening of a post, telegraph and
money order offices in its mining camp in Zambales. The Director of
Posts agreed provided that the company shall assume direct
responsibility for pecuniary losses that may be suffered by the Bureau
of Posts by reason of dishonesty, carelessness and negligence on the
part of the employees of the company. The company’s BOD passed a
resolution stating that the Bureau’s condition be complied with. The
office was opened, but its postmaster, an employee of the company,
filed a leave and never came back. Upon investigation, his accounts
were found to have a shortage. The Government demanded payment
of the shortage but the company did not pay. The Government filed
this suit. The contention of the company was that the resolution
regarding the assumption of liability was ultra vires.
ISSUE: WON the resolution was ultra vires. – NO.
RATIO: It should be noted that it was Acoje itself that requested for
the setting up of a post office for the convenience of its employees,
which the SC held to cover a subject which is “a reasonable and proper
adjunct to the conduct of the business of Acoje Mining.” An ultra vires
act is one committed outside the object for which a corporation is
created, but there are certain corporate acts that may be performed
outside the scope of the powers expressly conferred if they are
necessary to promote the interest and welfare of the corporation.”
Even in the case of ultra vires acts which are not illegal per se, a
corporation cannot be heard to complain that it is not liable for the
acts of its board, because of estoppel by representation. The term
ultra vires should be distinguished from an illegal act for the former is
merely voidable which may be enforced by performance, ratification,
or estoppel, while the latter is void and cannot be invalidated. It being
merely voidable, an ultra vires act can be enforced or validated if there
are equitable grounds for taking such action. In this case, it is fair that
the resolution be upheld at least on the ground of estoppel.
The defense of ultra vires rests on violation of trust or duty towards
the stockholders, and should not be entertained where its allowance
will do greater wrong to innocent parties dealing with the corporation.
The acceptance of benefits arising from the performance of the other
party gives rise to an estoppel precluding the repudiation of the
contract.
Carlos v Mindoro Sugar
It is not ultra vires for a corporation to enter into contracts of guaranty
or suretyship where it does so in the legitimate furtherance of its
purposes and business. And it is well settled that where a corporation
acquires commercial paper or bonds in the legitimate transaction of its
business it may sell them, and in furtherance of such a sale it may, in
order to make them the more readily marketable, indorse or
guarantee their payment.
Whenever a corporation has the power to take and dispose of the
securities of another corporation, of whatsoever kind, it may, for the
purpose of giving them a marketable quality, guarantee their
payment, even though the amount involved in the guaranty may
subject the corporation to liabilities in excess of the limit of
indebtedness which it is authorized to incur. A corporation which has
power by its charter to issue its own bonds has power to guarantee the
bonds of another corporation, which has been taken in payment of a
debt due to it, and which it sells or transfers in payment of its own
debt, the guaranty being given to enable it to dispose of the bond to
better advantage. And so guaranties of payment of bonds taken by a
loan and trust company in the ordinary course of its business, made in
connection with their sale, are not ultra vires, and are binding.
When a contract is not on its face necessarily beyond the scope of the
power of the corporation by which it was made, it will, in the absence
of proof to the contrary, be presumed to be valid.
National Power Corporation v. Vera (1989)
FACTS: NPC had a contract with Sea Lion whereby the latter is
obliged to provide the former with stevedoring and arrastre services in
its pier in Calaca Batangas. The contract expired and NPC opted to
undertake the services itself. Sea Lion filed a petition for mandamus
praying that NPC be enjoined to renew their contract. A writ of
preliminary injunction was issued by Judge Vera, ruling that NPC is not
empowered by its Charter to provide stevedoring and arrastre
services.
ISSUE: WON NPC, under its Charter, is empowered to undertake
stevedoring and arrastre services (YES)
HELD: YES. NPC is empowered under its Charter to undertake
stevedoring services in its pier.
In determining whether or not an act falls within the purview of the
above provision, the Court must decide whether or not a logical and
necessary relation exists between the act questioned and the
corporate purpose expressed in the NPC Charter. If the act is one
which is lawful in itself and not otherwise prohibited, and is done for
the purpose of serving corporate ends, and reasonably contributes to
the promotion of those ends in a substantial and not in remote and
fanciful sense, it may be fairly considered within the corporation’s
charter powers
A corporation is not restricted to the exercise of powers expressly
conferred upon it by its charter, but has the power to do what is
reasonably necessary or proper to promote the interest or welfare of
the corporation.
Madrigal v. Zamora
FACTS: Madrigal & Company, Inc. (MCI) manages the business of
another corporation, Rizal Cement Co., Inc. (RCC). In 1973, a labor
union in MCI sought the renewal of the collective bargaining
agreement (CBA). The union proposes a P200.00 monthly wage
increase and an additional P100 monthly allowance. MCI refused to
negotiate. Later, MCI reduced its authorized capital stocks through
the distribution of the marketable securities owned by the petitioner
to its stockholders in exchange for their shares in an equivalent
amount in the corporation(simply put, it bought its own shares of
stock back by using corporate property). It then wrote a letter to the
Department of Labor averring that it is incurring losses and so it will
enforce a retrenchment program. The letter is however unsupported
by documents and so the Department of Labor ignored it. However,
MCI went on to dismiss several employees which led the labor union to
sue MCI for unfair labor practices and illegal dismissal. The labor
arbiter ruled in favor of the labor union. The issue reached the Office
of the President. The then Presidential Assistant For Legal Affairs,
Ronaldo Zamora, denied MCI’s appeal.
On appeal, MCI insists that it is incurring losses; that as such, it has to
reduce its capitalization; that the profits it is earning are cash
dividends from RCC; that under the law, dividends are the absolute
property of a stockholder like MCI and cannot be compelled to share it
with creditors (like the employees).
ISSUE: Whether or not the dividends in this case (which are from the
shares of stock in another corporation which were investments of the
MCI) by the corporation in another) can be used to meet its employees
economic demands.
HELD: YES. As found by the labor arbiter, MCI is in fact making
significant profits. MCI’s reduction of its capitalization is simply a
scheme to avoid negotiations with the labor union. It is therefore
correct for the arbiter to order MCI to comply with the union’s
demands.
Cash dividends are the absolute property of the stockholders and
cannot be made available for disposition to a corporation’s creditors.
But this is only true in the case of corporation distributing dividends in
favor of its stockholders. If this is the case, then creditors cannot touch
such dividends.
But if like in this case, MCI received dividends as stockholder of RCC,
said dividends are considered corporate earnings( hence, property of
MCI itself) and therefore can be used to pay off its creditors (or
laborers in this case). It was obvious that the reduction in the ACS of
MCI was just the corporation distributing corporate property
prematurely in order to justify the massive layoffs done by the
corporation.
Pirovano v. De la Rama Steamship Co., Inc. (1954)
FACTS: Enrico Pirovano served as the president of De la Rama
Steamship Co., Inc. (DLRSCI) – under his leadership, the company
grew into a multi-million Peso corporation. In 1941, Pirovano was
executed by the Japanese. Shortly before he had been executed,
DLRSCI had insured Pirovano’s life for a Million pesos, with itself as
the beneficiary. Through a resolution, the Board of Directors resolved
to give the 4 minor children of Pirovano P400k of the proceeds of the
insurance policies. However, because the resolution provided that the
sum of money would be convertible into 4k shares of stock, the
donation could actually amount to P1.4M – and the voting strength of
Mrs. Pirovano would be twice as much as that of her sisters.
Subsequently, the Board adopted another resolution changing the
grant to a renunciation the company’s interest as beneficiary in and to
the proceeds of the insurance policy in favor of Pirovano’s children.
The donation was later accepted on behalf of the children by Mrs.
Pirovano, such acceptance having been officially noted by the Board
during a meeting. In another meeting, the Board also adopted a
resolution consenting to paying for a house in New York for the
Pirovano heirs, with the funds to be taken from the trust fund
belonging to the children. The stockholders formally ratified the
donation. Later, however, the SEC – acting on an inquiry from the new
President of the corporation – held that the donation was void, on the
ground that the corporation could not dispose of its assets by gift and,
thus, had acted beyond the scope of its corporate powers. The
stockholders then voted to revoke the resolution approving the
donation. The heirs of Pirovano instituted an action to recover the
credit due them.
ISSUE: WON the corporation had acting within its powers in granting
a gift in favor of the heirs of Pirovano
HELD: YES. Such act was within the broad powers granted to the
Corporation, through its Articles of Incorporaton.
(1) "To invest and deal with the moneys of the company not
immediately required, in such manner as from time to time may be
determined" and, (2) "to aid in any other manner any person,
association, or corporation of which obligation or in which any interest
is held by this corporation or in the affairs or prosperity of which this
corporation has a lawful interest." The word deal is broad enough to
include any manner of disposition, and refers to moneys not
immediately repaired by the corporation, and such disposition may be
made in such manner as from time to time may be determined by the
corporation. The donation in question undoubtedly comes within the
scope of this broad power for it is a fact appearing in the evidence that
the insurance proceeds were not immediately required when they
were given away. Under the second broad power we have above
stated, that is, to aid in any other manner any person in the affairs and
prosperity of whom the corporation has a lawful interest, the record of
this case is replete with instances which clearly show that the
corporation knew well its scope and meaning so much so that, with
the exception of the instant case, no one has lifted a finger to dispute
their validity.
Harden, et. al. vs. Benguet (1933)
FACTS: Balatoc Mining officers approached the Benguet Mining Co to
infuse new capital. A contract was executed, which states that
Benguet agrees to construct a milling plant for the Balatoc mine and
erect a power plant, in exchange for Balatoc Mining shares valued at
P600K and the excess in cash to compensate for the cost of the
contract.
By the time of the complaint, the value of the stock of Balatoc had
soared for a nominal valuation to more than P11 per share. It was
alleged by Harden of Balatoc that the Benguet Mining Co held shares
of stock in another mining corporation, the Balatoc Mining Company,
in violation of a prohibition against mining corporations from owning
stock of another mining corporation in the old Corpo law. The
shareholders of Balatoc sued Benguet Mining to annul stock
certificates of Balatoc issued to Benguet and to recover money earned
from the transaction.
DOCTRINE: Harden was are not unaware of the shares and since both
parties benefitted, no mutual restitution can be done. Benguet Mining
has already been issued shares and even if it’s illegal for contravening
the old Corpo Law, the Legislature, in adopting such a provision had
the intention that public policy should be controlling in the granting of
mining rights. The violation in this case was of such a nature that it can
be proceeded upon only by way of a criminal prosecution, or by action
quo warranto, which can be maintained only by the State, not the
petitioners herein.
Stonehill
Bache & Co. v. Ruiz (1971)
FACTS: Judge issued a search warrant by just asking his stenographer
to read her notes to him. Search warrant declared null & void because
the Rules of Court requires that he personally examine on oath or
affirmation the complainant and any witnesses he may produce.
DOCTRINE: A corporation is, after all, but an association of individuals
under an assumed name and with a distinct legal entity. In organizing
itself as a collective body it waives no constitutional immunities
appropriate to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law,
and is protected against unlawful discrimination.
Mambulao Lumber v PNB Angeles J., (1968)
FACTS: Mambulao had a loan with the PNB. The PNB had a wrong
computation and sold the properties in Camarines Norte. Mambulao is
now claiming for damages.
DOCTRINE: An artificial person like herein appellant corporation
cannot experience physical sufferings, mental anguish, fright, serious
anxiety, wounded feelings, moral shock or social humiliation which are
basis of moral damages.
ABS-CBN Broadcasting Corporation v. CA (1999)
FACTS: ABS CBN and VIVA executed an agreement where VIVA gave
ABS an exclusive right to exhibit some VIVA films. ABS was also given
a right of first refusal to the next 24 VIVA films. Del Rosario (Viva)
offered to Concio (ABS) offered a list containing 52 original movies
and 104 reruns, but Concio did not accept. Mrs. Concio sent the draft
of the contract between ABS-CBN and VIVA which contained a
counter-proposal covering 53 films for P35M. VIVA’s Board of
Directors rejected the counter-proposal as it would not sell anything
less than the package of 104 films for P60M. After said rejection, ABS-
CBN closed a deal with RBS including the 14 films previously ticked off
by ABS-CBN. ABS-CBN filed a complaint for specific performance with
prayer for a writ of preliminary injunction and/or TRO against RBS,
VIVA and Del Rosario. RTC then enjoined the latter from airing the
subject films. RBS posted a P30M counterbond to dissolve the
injunction. Later on, the trial court as well as the CA dismissed the
complaint holding that there was no meeting of minds between ABS-
CBN and VIVA, hence, there was no basis for ABS-CBN’s demand,
furthermore, the right of first refusal had previously been exercised.
DOCTRINE: The corporate power to enter into a contract is lodged in
the Board of Directors. (Sec. 23, Corporation Code). Without such
board approval by the Viva board, whatever agreement Lopez and Del
Rosario arrived at could not ripen into a valid contact binding upon
Viva.
Filipinas Broadcasting v. Ago Medical Center
FACTS: Rima & Alegre were host of FBNI radio program “Expose”.
Respondent Ago was the owner of the Medical & Educational center,
subject of the radio program “Expose”. AMEC claimed that the
broadcasts were defamatory and owner Ago and school AMEC
claimed for damages. The complaint further alleged that AMEC is a
reputable learning institution. With the supposed expose, FBNI, Rima
and Alegre “transmitted malicious imputations and as such, destroyed
plaintiff’s reputation. FBNI was included as defendant for allegedly
failing to exercise due diligence in the selection and supervision of its
employees. The trial court found Rima’s statements to be within the
bounds of freedom of speech and ruled that the broadcast was
libelous. It ordered the defendants Alegre and FBNI to pay AMEC 300k
for moral damages.”
ISSUE: Whether or not AMEC is entitled to moral damages.
HELD: A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock. Nevertheless, AMEC’s claim, or moral
damages fall under item 7 of Art – 2219 of the NCC. This provision
expressly authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Art 2219 (7) does not qualify
whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly complain
for libel or any other form of defamation and claim for moral
damages. Moreover, where the broadcast is libelous per se, the law
implied damages. In such a case, evidence of an honest mistake or the
want of character or reputation of the party libeled goes only in
mitigation of damages. In this case, the broadcasts are libelous per se.
thus, AMEC is entitled to moral damages. However, we find the award
P500,000 moral damages unreasonable. The record shows that even
though the broadcasts were libelous, per se, AMEC has not suffered
any substantial or material damage to its reputation. Therefore, we
reduce the award of moral damages to P150k.
CHAPTER VII
CONTROL AND MANAGEMENT OF CORPORATION
Ramirez v. Orientalist Co. and Fernandez (1918) – Street, J.
Concept: Control and Management of Corporation
FACTS:
Orientalist Company (Orientalist for brevity) exhibited films in a
theatre in Manila. Plaintiff JF Ramirez, a resident of Paris and
represented in Manila by his son Jose Ramirez, was engaged in
business of marketing films for manufacturers and in the production or
distribution of cinematographic material. In 1913, there were
negotiations between the officials of Orientalist and Jose Ramirez, as
agent of JF Ramirez, for the exclusive agency of two films in the hands
of Orientalist. Jose Ramirez placed a formal offer stating in detail the
terms upon which Ramirez would undertake to supply from Paris the
films. The board of directors approved and accepted the offer. The
most important portion of the two letters of acceptance written by
Fernandez to Ramirez is in the following terms: “These
communications were signed in the following form, in which it will be
noted the separate signature of RJ Fernandez, as an individual, is
placed somewhat below and to the left of the signature of the
Orientalist Company, as signed by RJ Fernandez, in the capacity of
treasurer:
THE ORIENTALIST COMPANY,
By RJ Fernandez
Treasurer.
RJ Fernandez
The record showed that JF Ramirez himself procured the films
upon his own responsibility. Thus, the only contracting parties in this
case are JF Ramirez (first party), and Orientalist with RJ Fernandez
(second party). The films arrived in Manila but Orientalist had no funds
to meet its obligations. Hence, the first few drafts were accepted in
the name of Orientalist by its president B Hernandez, and were taken
up by him with his own funds. As the drafts had been paid by
Hernandez, he treated the films as his own property, and they never
came into the actual possession of Orientalist as owner at all.
Hernandez rented the films to Orientalist and they were exhibited by
it in the Oriental Theater under an arrangement made between him
and the theater’s manager. Several remittances of films from Paris
arrived. All of the drafts accompanying these films were drawn upon
the Orientalist Company; and all were accepted in the name of
Orientalist by its president, B Hernandez, except the last which was
accepted by Hernandez individually. None of the drafts thus accepted
were taken up by the drawee or by Hernandez when they fell due; and
it was finally necessary for Ramirez to take them up as dishonoured by
non-payment.
Ramirez instituted an action against Orientalist and RJ Fernandez.
Upon application of Ramirez, the films were sold and the amount
realized from the sale was applied to the satisfaction of the plaintiff’s
claim. Judgment was given for the balance due to Ramiez. Orientalist
was declared to be a principal debtor and Fernandez was declared to
be subsidiarily liable as guarantor. Defendants appealed. The Court
noted that the action is primarily founded upon the liability created by
the two acceptance letters.
ISSUES:
1. WON Fernandez’s actions bound the company .
2. WON the company is still liable, assuming that the company
was able to deny the authority of Fernandez.
3. What is the character of liability assumed by Fernandez?
HELD:
1. YES. The corporation was not able to deny the genuineness and
due execution of the contracts in question and the authority of
Fernandez to bind the Orientalist Company. Sec. 103 of the Code
of Civil Procedure requires that the Answer setting up the defense
of lack of authority of an officer of a corporation to bind it by a
contract should be verified and the denial contemplated must be
specific. In this case, the failure of the corporation to make any
issue in its answer with regard to the authority of Fernandez to
bind it, and particularly its failure 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.
Whether a particular officer actually possesses the authority
which he assumes to exercise is frequently known to very, very
few and the proof of it usually is not readily accessible to the
stranger who deals with the corporation on the faith of the
ostensible authority exercised by some of the corporate officers.
2. YES. If a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority
and thus holds him out to the public as possessing power to do
those acts, the corporation will, as against anyone who has in
good faith dealt with the corporation through such agent, be
estopped from denying his authority; and where it is said “if the
corporation permits” this means the same as “if the thing is
permitted by the directing power of the corporation.”
The stockholders adopted a resolution to the effect that the
agencies of the two films should be accepted if the corporation
could obtain the money with which to meet the expenditure
involved, and to this end appointed a committee to apply to the
bank for a credit. An attempt to obtain credit was made, but
failed. Another special meeting of stockholders was held and a
resolution was passed to the effect that the company should pay
to Hernandez, Fernandez, Monroy and Papa an amount equal to
10% of their outlay in importing the films, said payment to be
made in shares of the company. At the time this meeting was
held three shipments of the film had already been received in
Manila. Therefore, the body was then cognizant that the offer
had already been accepted in the name of Orientalist Company
 and that the films which were then expected to arrive were being
imported by virtue of such acceptance.
3. In affixing his signature to the contracts, Fernandez was a
guarantor. From the testimony of both Ramirez and Fernandez,
the Court was convinced that the responsibility of the later was
that of a guarantor. Fernandez said that his name was signed as a
guaranty that the contract would be approved by the
corporation, while Ramirez said that the name was put on the
contract for the purpose of guaranteeing its performance. The
Court believed that the latter was the real intention of the parties.
Lopez vs. Ericta
FACTS: The case is about the ad interim appointment of the Dr.
Consuelo Blanco as Dean of the College of Education in the UP. The
Board of Regents met and President Lopez submitted to it the ad
interim appointment of Dr. Blanco for reconsideration. The Board
voted to defer action on the matter in view of the objections cited by
Regent Kalaw based on the petition against the appointment,
addressed to the Board, from a majority of the faculty and from a
number of alumni. President Lopez extended another ad interim
appointment to her with the condition, “unless sooner terminated,
and subject to the approval of the Board of Regents and to pertinent
University regulations.” Then, the election was held. The roll-call
voting on which the Chairman of the Board of Regents based his ruling
aforesaid gave the following results: five (5) votes in favor of Dr.
Blanco’s ad interim appointment, three (3) votes against, and four (4)
abstentions — all the twelve constituting the total membership of the
Board of the time. The next day Dr. Blanco addressed a letter to the
Board requesting “a reconsideration of the interpretation made by the
Board as to the legal effect of the vote of five in favor, three against
and four abstentions on my ad interim appointment. Dr. Blanco wrote
the President of the University, protesting the appointment of Oseas
A. del Rosario as Officer-in-Charge of the College of Education.
ISSUE: WON the abstentions should be counted in favor of or against
Blanco –
HELD: In case of abstention in board meeting on vote taken on any
issue, the general rule is that the abstention is counted in favor of the
issue that won a majority vote. Since their act of abstention, the
abstaining directors are deemed to abide the rule of majority.
However, all authorities cited in support of the general rule become
academic and purposeless in the face of the fact that respondent Dr.
Blanco was clearly not the choice of a majority of the members of the
Board of Regents, as unequivocally demonstrated by the transcript of
the proceedings. The votes of abstention, viewed in their setting, can
in no way be construed as votes for confirmation of the appointment.
There can be no doubt whatsoever as to the decision and
recommendation of the three members of the Personnel Committee:
it was for rejection of the appointment. If the committee opted to
withdraw the recommendation it was on the understanding (also
referred to in the record as gentlemen's agreement) that the President
would talk to Dr. Blanco for the purpose of having her appointment
withdrawn in order to save them from embarrassment. No inference
can be drawn from this that the members of the Personnel
Committee, by their abstention, intended to acquiesce in the action
taken by those who voted affirmatively. Neither, for that matter, can
such inference be drawn from the abstention that he was abstaining
because he was not then ready to make a decision.
Expert Travel &Tours Inc. vs CA
Facts: Korean Air Lines (KAL) filed a complaint against Expert Travel &
Tours Inc (ETI) with the RTC of Manila for collection of sum of money
plus attorney’s fees and damages. The verification and certification
against non-forum shopping was signed by Atty. Mario Aguinaldo,
who indicated therein that he was the resident agent and legal counsel
of KAL.
At the hearing, Atty. Aguinaldo claimed that thru a resolution of KAL
Board of Directors approved during a special meeting, he was
authorized to file the complaint.
Issue: WON KAL was able to comply with the requirement of the ROC
on the verification and certification against non-forum shopping?
HELD: No.
In a case where the plaintiff is a private corporation, the
certification may be signed, for and on behalf of the said corporation,
by a specifically authorized person, including its retained counsel, who
has personal knowledge of the facts required to be established by the
documents.
The corporation, such as the petitioner, has no powers except
those expressly conferred on it by the Corporation Code and those
that are implied by or are incidental to its existence. In turn, a
corporation exercises said powers through its board of directors
and/or its duly-authorized officers and agents. Physical acts, like the
signing of documents, can be performed only by natural persons duly-
authorized for the purpose by corporate by-laws or by specific act of
the board of directors.
Citibank NA v. Chua (1993)
FACTS: Sps. Velez entered into loan agreements with Citibank and
their contracts were eventually restructured. The bank failed to
comply with their obligations so the spouses filed a complaint for
specific performance and damages. In pursuance of the authority
granted to him by the bank’s by-laws, its Executive Officer appointed
Ferguson as its Attorney-in-Fact, empowering the latter to represent
the bank in court cases. In turn, Ferguson executed a SPA in favor of
J.P. Garcia & Associates, and later to employees of the bank, to
represent the bank in the pre-trial conference before the lower court.
The spouses moved to declare the bank in default on the ground that
the SPA was not executed by the Board of Directors of Citibank. The
bank contended that no board resolution is necessary for the
appointment of an Attorney-in-Fact in the case at bar because the
bank’s by-laws grant to its Executive Officer the power to delegate to
a Citibank Officer, in this case Ferguson, the authority to represent
and defend the bank. The by-laws also allow Ferguson to delegate his
powers in favor of one or more employees of the Bank. The spouses
countered that the authority granted in the by-laws cannot be given
effect because the same was not approved by the SEC. The lower
courts ultimately declared the bank in default, ruling that the SPA
cannot be given effect.
ISSUE:
1. WON a resolution of the board of directors of a corporation is
always necessary for granting authority to an agent to represent
the corporation in court cases (NO)
2. WON the by-laws of Citibank, a foreign corporation which has
previously been granted a license to do business in the
Philippines, are effective in this jurisdiction (YES)
HELD:
1. No. Corporate powers may be directly conferred upon corporate
officers or agents by statute, the articles of incorporation, the by-
laws or by resolution or other act of the Board of Directors. An
 officer who is not a director may also appoint agents when so
authorized by the by-laws or by the Board.
- Since the by-laws are a source of authority for corporate
officers and agents of the corporation, a resolution of the
Board of Citibank appointing an Attorney-in-Fact to
represent and bind it during the pre-trial conference of the
case at bar is not necessary because its by-laws allow its
officers to execute a SPA to a designated bank officer,
Ferguson. The by-laws also specifically allow Ferguson to
delegate his powers. Hence, the SPA in favor of J.P. Garcia &
Associates, and later, of the bank’s employees, constitutes
valid delegation of Ferguson’s express power to represent
the bank in the pre-trial conference in the lower court.
2. No. The by-laws of Citibank are valid and effective in this
jurisdiction.
- Sec. 46 of the Corporation Code, requiring the prior approval
of the SEC of the articles of incorporation and by-laws
before their effectivity, apply only to corporations
incorporated in the Philippines. Hence, it only applies to
domestic and not to foreign corporations.
- Sec. 125 of the same Code requires that a foreign
corporation applying for a license to transact business in the
Philippines must submit, among other documents, to the
SEC, a copy of its articles of incorporation and by-laws,
certified in accordance with law.
- Under Sec. 126, SEC will only grant a license when the
foreign corporation has complied with all the requirements
of law
- It follows that when the SEC decides to issue such license, it
is satisfied that the applicant’s by-laws, among other
documents, meet the legal requirements. Therefore, the
bank’s by-laws are valid and effective in the Philippines.
Prime White Cement v IAC
Alejandro Te entered into a “dealership agreement” with Prime White
Cement Corporation (signed by its President and Chairman) where he
would be the exclusive dealer and/or distributor of Prime White
Cement in the Mindanao Area for a term of 5 years. He subsequently
entered into contracts with several hardware stores in CDO and
Davao. However, after he informed the corporation that he was
already preparing to open the required L/C, he received
communication from the corporation whereby the BOD of White
Corporation changed the conditions originally agreed upon in the
“dealership agreement.” TC held the corporation liable to Te. CA
affirmed, stating that when the President and Chairman entered into
the agreement with Te, they had authority from the corporation and
signed the same for and in behalf of Prime White Cement.
SC ruled that the “dealership agreement” was not a valid and
enforceable contract. The Corporation Law in force at the time
provides that all corporate powers shall be exercised by the BOD. The
BOD may expressly delegate certain powers to officers of the
corporation or, in the absence of such express delegation, ratify the
acts of the officers. However, such applies only when the president or
other officer, purportedly acting for the corporation, is dealing with a
third person, i.e. someone OUTSIDE the corporation. In this case, Te
was not just an ordinary stockholder. He was a member of the BOD
and Auditor of the corporation.
Boyer-Roxas v. CA (1992)
FACTS: “Heirs of Eugenia V. Roxas” was a corporation with a primary
purpose of engaging in agriculture to develop the properties inherited
from its namesake decedent and Eufrocino Roxas, whose
incorporators were all members of the same family. The corporation
put up a resort, Hidden Valley Springs Resort. Boyer-Roxas and her
son occupied building within the resort which had been constructed
using corporate money. Years later, however, the Boar adopted a
resolution authorizing the eviction of Boyer-Roxas et al. In the
ejectment suit, the RTC ruled in favor of the Corporation and ordered
Boyer-Roxas to vacate the premises. This was affirmed by the CA.
ISSUE: WON the corporation could rightly evict Boyer-Roxas et al.,
who are owners of an aliquot portion of the properties of the
Corporation, as stockholders.
HELD: YES. The corporation has a distinct juridical personality from
its stockholders. Properties registered in the name of the corporation
are owned by it as an entity separate and distinct from its members.
The holder of a share of stock in not the owner of any part of the
capital of a corporation, nor is he entitled to the possession of any
definite portion of its properties or assets. The stockholder is not a co-
owner or tenant in common of the corporate property.
ISSUE: WON the authority given by the corporation to the person
who had co-managed the corporation with the deceased husband of
Boyer-Roxas to convert the buildings into residential houses can no
longer be questioned by the stockholders or the board of directors.
HELD: NO. The Corporation may rightly evict Boyer-Roxas through
the adoption of a resolution. Boyer-Roxas et al.’s stay within the
questioned properties was merely by tolerance – the manager’s
actions could not have bound the corporation forever. In the absence
of any existing contract, the corporation may elect to eject Boyer-
Roxas et al. at any time it wishes for the benefit and interest of the
corporation.
EPG Constructions v. CA
FACTS: EPG failed to make good of their agreement with UP Law
Library in reparing the aircons they installed. UP sues EPG and its
President, Emmanuel de Guzman. TC ruled for UP, and ordered both
the company and its president to pay UP solidarily. The president
Guzman claims that as to him, UP was suing him in his official capacity
and not in his personal capacity, thus his inclusion as president of the
company is superfluous, because his acts were corporate acts
imputable to EPG itself as his principal.
DOCTRINE: Guzaman as President cannot be held liable. A
corporation is invested by law with a personality separate and distinct
from those of the persons composing it as well as from that of any
other entity to which it may be related. Mere ownership by a since SH
or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate personality. The GM of a corporation cannot be made
personally liable for his official acts in behalf of the corporation, with
the exception that if he official had acted maliciously or in BF, which
would make him liable personally. Since it was not proven that
Guzman acted maliciously or in BF, whatever damage was caused to
UP as a result of his acts is the sole responsibility of EPG even though
Guzman is the principal officer and controlling SH.
Woodchild vs. Roxas Electric
FACTS: Roxas Electric, through resolution of its Board of Directors,
authorized its president to sell a piece of land adjoining another land
owned by the corporation. The president sold the land, but also a
portion of the adjoining land as right of way.
DOCTRINE: The corporation has a separate juridical personality
independent of its stockholders, members, or officers. Stockholders,
members, or officers cannot sell or encumber corporate property
without authorization. Such authorization must come from the Board
of Directors, upon whom are conferred control over corporate
property.
The relation between the corporation and its officers is one of agency.
Without authorization from the Board of Directors acting for the
corporation or grant of power through its Articles of Incorporation or
By-Laws, officers cannot act for the corporation.
Yu Chuck v Ko Ling Po (1924)
FACTS: In 1919 one C.C. Chen or T.C. Chen was appointed general
business manager of the newspaper Ko Ling Po. During the month of
December of that year he entered into an agreement with Yu Chuck
by which Yu Chuck bound themselves to do the necessary printing for
the newspaper for the sum of P580 per month. Under this agreement,
Yu Chuck worked for Ko Ling Po from January 1, 1920, until January
31, 1921, when they were discharged by the new manager, Tan Tian
Hong, who had been appointed in the meantime, C.C. Chen having
left for China. The letter of dismissal stated no special reasons for the
discharge. Yu Chuck filed a complaint stating that their contract of
employment was for a term of three years from the first day of
January, 1920
ISSUE: WON Chen had the power to bind the corporation by a
contract?
HELD: YES. Chen, as general manager of the Kong Li Po, had implied
authority to bind Ko Ling Po by a reasonable and usual contract of
employment with Yu Chuck. However, the contract here in question
can be so considered. Not only is the term of employment unusually
long, but the conditions are otherwise so onerous to Ko Ling Po that
the possibility of the corporation being thrown into insolvency thereby
is expressly contemplated in the same contract.
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
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 board of
directors or trustees, an officer or agent who has general control and
management of the corporation's business, or a specific part thereof,
may bind the corporation by the employment of such agents and
employees as are usual and necessary in the conduct of such business.
But the contracts of employment must be reasonable.
Lapulapu Foundation Inc. v. CA
FACTS: Tan, the president of Lapulapu Foundation (the Foundation,
for brevity), obtained four loans from Allied Banking (Allied). They
were covered by 4 promissory notes. Tan and the Foundation failed to
pay the obligation on time, despite Allied’s demands upon them.
Hence, Allied filed a collection suit against them, praying that Tan and
the Foundation be held solidarily. The Foundation set up the defense
that they were Tan’s personal loans, and hence, they should not be
held liable. Tan, on the other hand, admitted that they were personal
loans but that it was made pursuant to an agreement among the
parties that the promissory notes covering the loans would be
automatically renewable every year until Tan could pay, using the
proceeds from his shares from a real estate firm. The trial court ruled
in favor of Allied, which the CA affirmed.
DOCTRINE: “If a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to those acts, and
thus, the corporation will, as against anyone who has in good faith,
dealt with it through such agent, will be estopped from denying the
agent’s authority.
Advance Papers v. Arma Traders
FACTS: Advance Paper is a domestic corporation with George Haw as
the President while his wife, Connie Haw, is the General Manager.
Antonio Tan was formerly the President while Uy Seng Kee Willy is the
Treasurer of Arma Traders. They represented Arma Traders when
dealing with its supplier, Advance Paper, for about 14 years. Manuel
Ting, ChengGui and Benjamin Ng worked for Arma Traders as Vice
President, General Manager and Corporate Secretary, respectively.
On various dates from September to December 1994, Arma Traders
purchased on credit notebooks and other paper products amounting
to P7,533,001.49 from Advance Paper. Upon the representation of Tan
and Uy, Arma Traders also obtained three loans from Advance Paper
in November 1994. Arma Traders needed the loan to settle its
obligations to other suppliers because its own collectibles did not
arrive on time. Because of its good business relations with Arma
Traders, Advance Paper extended the loans. As payment for the
purchases on credit and the loan transactions, Arma Traders issued 82
postdated checks payable to cash or to Advance Paper. Tan and Uy
were Arma Traders’ authorized bank signatories who signed and
issued these checks. Advance Paper presented the checks to the
drawee bank but these were dishonored either for "insufficiency of
funds" or "account closed." Despite repeated demands, however,
Arma Traders failed to settle its account with Advance Paper.
ISSUE: WON Arma Traders is liable
HELD: The doctrine of apparent authority provides that a corporation
will be estopped from denying the agent’s authority if it knowingly
permits one of its officers or any other agent to act within the scope of
an apparent authority, and it holds him out to the public as possessing
the power to do those acts. The doctrine of apparent authority does
not apply if the principal did not commit any acts or conduct which a
third party knew and relied upon in good faith as a result of the
exercise of reasonable prudence. Moreover, the agent’s acts or
conduct must have produced a change of position to the third party’s
detriment. In People’s Aircargo and Warehousing Co., Inc. v. Court of
Appeals, we ruled that the doctrine of apparent authority is applied
when the petitioner, through its president Antonio Punsalan Jr.,
entered into the First Contract without first securing board approval.
Despite such lack of board approval, petitioner did not object to or
repudiate said contract, thus “clothing” its president with the power to
bind the corporation. “Inasmuch as a corporate president is often
given general supervision and control over corporate operations, the
strict rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such officer has
certain limited powers in the transaction of the usual and ordinary
business of the corporation.”
In the absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the domain
of the general objectives of its business and within the scope of his or
her usual duties.
Cosare v. Broadcom Asia Inc. (2014)
FACTS: Cosare alleged that he was employed as salesman by Arevalo
who was then in the business of selling broadcast equipment. Then,
Arevalo set up Broadcom wherein Cosare was named an incorporator.
He later became AVP for Sales. In 2003, Abiog was appointed as VP for
Sales. In 2009, Cosare sent a memo to Arevalo informing him of
anomalies allegedly committed by Abiog. Arevalo failed to act on
these accusations. He instead called for a meeting wherein Cosare was
asked to tender his resignation in exchange for financial assistance.
Cosare did not comply. Later Cosare received a memo signed by
Arevalo charging him of serious misconduct and wilful breach of trust.
He was then precluded from reporting for work and was totally barred
from entering company premises. Cosare filed a complaint for
constructive dismissal, illegal suspension and monetary claim against
Broadcom Asia and Dante Arevalo. LA dismissed the complaint and
NLRC reversed, finding the respondents guilty. Respondents appealed
to the CA raising the argument that the case involved an intra-
corporate controversy which was within the jurisdiction of the RTC
instead of the LA. They argued that the case involved a complaint
against a corporation filed by stockholder, who, at the same time, was
a corporate officer. CA granted respondents’ petition.
ISSUE: WON this case is an intra-corporate controversy.
HELD: NO. The LA has jurisdiction. An intra-corporate controversy,
which falls within the jurisdiction of regular courts, has been regarded
in its broad sense to pertain to disputes that involve any of the
following relationships: (1) between the corporation, partnership or
association and the public; (2) between the corporation, partnership or
association and the state in so far as its franchise, permit or license to
operate is concerned; (3) between the corporation, partnership or
association and its stockholders, partners, members or officers; and
(4) among the stockholders, partners or associates,
themselves. Settled jurisprudence, however, qualifies that when the
dispute involves a charge of illegal dismissal, the action may fall under
the jurisdiction of the LAs upon whose jurisdiction, as a rule, falls
termination disputes and claims for damages arising from employer-
employee relations as provided in Article 217 of the Labor Code.
Consistent with this jurisprudence, the mere fact that Cosare was a
stockholder and an officer of Broadcom at the time the subject
controversy developed failed to necessarily make the case an intra-
corporate dispute. Cosare, although an officer of Broadcom for being
its AVP for Sales, was not a “corporate officer” as the term is defined
by law.
Corporate officers are those officers of the corporation who are
given that character by the Corporation Code or by the
corporation’s by-laws. There are three specific officers whom a
corporation must have under Sec. 25 of the Code. These are the
president, secretary and the treasurer. The number of officers is
not limited to these three. A corporation may have such other
officers as may be provided for by its by-laws like, but not limited
to, the VP, cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the corporation’s
by-laws. In Broadcom’s by-laws the only officers who are
specifically listed, and thus with offices that are created under
Broadcom’s by-laws are the President, Vice-President, Treasurer
and Secretary. Also, the Court has ruled that in determining the
existence of an intra-corporate dispute, the status or relationship
of the parties and the nature of the question that is the subject of
the controversy must be taken into account. Considering that the
pending dispute particularly relates to Cosare’s rights and
obligations as a regular officer of Broadcom, instead of as a
stockholder of the corporation, the controversy cannot be
deemed intra-corporate.
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of
ascertaining whether the controversy itself is intra-corporate. The
controversy must not only be rooted in the existence of an intra-
corporate relationship, but must as well pertain to the
enforcement of the parties’ correlative rights and obligations
under the Corporation Code and the internal and intra-corporate
regulatory rules of the corporation. If the relationship and its
incidents are merely incidental to the controversy or if there will
still be conflict even if the relationship does not exist, then no
intra-corporate controversy exists.
Grace Christian High School v CA
Facts: Petitioner school wants to sit in the board of directors of
respondent Grace Village Association, Inc. as a permanent
member. For fifteen years from 1975 until 1989 petitioners
representative had been recognized as a permanent director of the
association. 15 years after, the board of the association denied
petitioner’s request to be allowed representation without election,
citing that the by-laws of the association was never amended to allow
a permanent director in the board. The said amendment was only a
draft that was never approved by the members.
Issue: WON petitioner can sit as a permanent director in the board of
the association - NO
Held: The proposed amendment to the by-laws was never approved
by the majority of the members of the association as required by these
provisions of the law and by-laws. The mere fact that the homeowners
followed and implemented the provisions of the amended by-laws for
years is not tantamount to tacit ratification of the acts done, for
Sections 28 and 29 of the Corporation Law require that members of
the boards of directors of corporations be elected. There is no reason
at all for its representative to be given a seat in the board. Nor does
petitioner claim a right to such seat by virtue of an office held. Since
the provision in question is contrary to law, the fact that for 15 it has
not been questioned or challenged but, on the contrary, appears to
have been implemented by the members of the association cannot
forestall a later challenge to its validity. It is beyond the power of the
members of the association to waive its invalidity.
Board of SMB Workers v. Tan (1959)
FACTS: Members of SMB Workers Savings and Loan Association, Inc.
filed a suit to declare null and void the election of the members of the
board of directors of the association. and of the members of the
Election Committee for the year 1957. They prayed that the board of
directors be compelled to call for and hold another election in
accordance with its constitution and by-laws and the Corporation Law.
They also sought to restrain the defendants who had been illegally
elected as members of the board of directors from exercising the
functions of their office. The court declared the election null and void
and ordered defendants to call for and hold another election. The
Court issued a writ of execution and an election committee set the
meeting of the members of the association for March 28 at 5:30 p.m.
to elect the new members of the board of directors. On March 27, the
members filed an ex parte motion alleging that the election to be
conducted and supervised by the election committee would not be
held in accordance with the constitution and by-laws of the
association providing for 5 days notice to the members before the
election, since the notice was posted and sent out only on March 26,
and the election would be held on March 28. The court cancelled the
scheduled elections on March 28 and constituted a committee of three
and appointed the same to call and conduct the election of the
members of the board of directors.
ISSUE:
1. WON the election was scheduled in violation of the Association’s
Constitution and By-Laws (YES)
2. WON the court has authority to constitute an election committee
and to grant the same with authority to supervise the election of
the board of directors of the association (YES)
HELD:
1. Notice of a special meeting of members should be given at least 5
days before the date of the meeting, as provided in the
Association’s Constitution and By-Laws. The notice was posted
on March 26 and the election was scheduled to take place on
March 28. The 5 days previous notice would not be complied with
2. The court in the exercise of its equity jurisdiction, may appoint
such committee, it having been shown that the Election
Committee provided for in the by-laws of the association, if
allowed to act as such may jeopardize the rights of the members.
- A court of equity may, on showing of good reason, appoint a
master to conduct and supervise an election of directors,
when it appears that a fair election cannot otherwise be had.
However, such a court cannot make directions contrary to
statute and public policy with respect to the conduct of such
election.
Ponce v. Encarnacion
Daguhoy Enterprises, Inc., was duly registered as such on 24 June
1948. On 16 April 1951 at a meeting duly called, the voluntary
dissolution of the corporation and the appointment of Gapol as
receiver were agreed upon and to that end a petition for voluntary
dissolution was drafted which was sent to, and signed by, the
petitioner Domingo Ponce. Instead of filing the petition for voluntary
dissolution of the corporation as agreed upon, Gapol, who is the
largest stockholder, changed his mind and filed a complaint in the CFI
of Manila to compel the petitioners to render an accounting of the
funds and assets of the corporation, to reimburse it, jointly and
severally, a total sum of P18,690, plus interest, which have been
converted by the petitioner Domingo Ponce to his own use and
benefit.
On 18 May 1951 Gapol filed a motion praying that the petitioners be
removed as members of the board of directors which was denied by
the court. On 3 January 1952 Gapol filed a petition praying for an order
directing him to call a meeting of the stockholders of the corporation
and to preside at such meeting in accordance with section 26 of the
Corporation Law. Two-days later, without notice to the petitioners
and to the other members of the board of directors and in violation of
the Rules of Court which require that the adverse parties be notified of
the hearing of the motion three days in advance, the respondent court
issued the order as prayed for.
ISSUE: Whether or not under and pursuant to section 26 of the
Corporation Law, the respondent court may issue the order
complained of.
HELD: NO.
Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides: The
Board of Directors shall compose of five (5) members who shall be
elected by the stockholders in a general meeting called for that
purpose which shall be held every even year during the month of
January. Article 22 of the by-laws provides: The Chairman shall have
the right to fix the date, the time and the place where the general
meeting shall be held, either special or general.
Section 26 of the Corporation Code provides: - Whenever, from any
cause, there is no person authorized to call a meeting, or when the
officer authorized to do so refuses, fails, or neglects to call a meeting,
any judge of a Court of First Instance, on the showing of good cause
therefor, may issue an order to any stockholder or member of a
corporation, directing him to call a meeting of the corporation by
giving the proper notice required by this Act or the by-laws; and if
there be no person legally authorized to preside at such meeting, the
judge of the Court of First Instance may direct the person calling the
meeting to preside at the same until a majority of the members or
stockholders representing a majority of the stock present and
permitted by law to be voted have chosen one of their number to act
as presiding officer for the purposes of the meeting.
Petitioners were not deprived of their right without due process of
law. They had no right to continue as directors of the corporation
unless reelected by the stockholders in a meeting called for that
purpose every even year.
Detective & Protective Bureau, Inc. v. Cloribel (1968)
FACTS: Alberto, the managing director, allegedly illegally seized and
took control of all the assets of the corporation, as well as its books,
records, vouchers, and receipts from the accountant-cashier – refusing
to allow any member of the corporation to see and examine them.
Subsequently, the stockholder removed Alberto from his position and
elected de la Rosa in his stead. (NOTE: there is nothing on record
showing that de la Rosa owned a share of stock in the corporation.)
However, Alberto refused to vacate his office and allegedly continued
to perform unauthorized acted on behalf of the corporation. The
corporation thus instituted and action for accounting with preliminary
injunction and receivership against Alberto. Although the court
granted the issuance of the writ, it eventually admitted a counter-
bond and set aside the writ of preliminary injunction.
ISSUE: WON Alberto could be compelled to vacate his office and cede
the same to the managing director-elect.
HELD: NO. The By-Laws of the corporation provided that Directors
shall serve until the election AND qualification of their duly qualified
successor. De la Rosa could not be a director pursuant to the
Corporation Law which provided that every director must own at least
one share of stock. If de la Rosa could not be a director, he could also
not be a managing director, pursuant to the By-Laws which provided
that the manager would be elected by the board from among its
members.
Roxas v. Dela Rosa (1926)
FACTS: The majority SHs of Binalbagan Estate Inc formed a voting
trust, wherein the trustees (Fisher, Laguda, and Monteblanco) were
authorized to represent and vote the shares pertaining to the majority
SHs. During the SH meeting the trustees were able to elect a board to
their liking without opposition from the minotiry. Various
substitutions have been made in the personnel of the voting trust,
such that the present composition wanted to oust the officers of
Binalbagan elected by the voting trust previously, without waiting the
termination of their official term or after one year from date of their
election. The trust then called a special general meeting of the SHs for
the election of the board, amendment of by-laws, and other business.
A board member and a single SH sued the trustees to enjoin them
from holding said meeting. TC granted the petition.
DOCTRINE: Under the law the directors of a corporation can only be
removed from office by a vote of the SH representing 2/3 of the
subscribed capital stock entitled to vote, while vacanies in the board
can only be filled by mere majority vote. While the trust controls a
majority of the stock, it does not have a clear 2/3 majority. It was
therefore impolitic for the trust, in forcing the call for the meeting, to
come out frankly and say in the notice that one of the purposes of the
meeting was to remove the directors of the corporation. Instead the
call was limited to the election of the board, it being the evident
intention to elect a new board as if the directorate had been then
vacant. Since the present directors were regularly elected, the
proposal to elect another directorate, if carried into effect, would
result in the election of a rival set of directors, who would need a court
order of quo warranto to install them in office. Thus the TC was
correct in forestalling that eventuality and to enjoin the second
election.
Angeles vs Santos(1992)
Concept: Control and Management of Corporation
FACTS:
The parties in this case are stockholders and members of the board of
directors of Paranaque Rice Mills. Plaintiffs herein appointed an
investigation committee to investigate the properties, profits, and
losses of the company. However, defendant Santos, who was the
president of the company, denied access to its books and records.
Plaintiffs suspect that the reason for doing so is because Santos, along
with other directors, has been appropriating the corporation’s
property for their own benefit.
ISSUE: WON the Corporation is a necessary party in receivership
proceedings
HELD:
NO. There is ample evidence in the present case to show that the
defendants have been guilty of breach of trust as directors of the
corporation and the lower court so found. In such cases, a derivative
suit may be filed in behalf of the corporation to protect the rights of
the minority stockholders.
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
Campbell v Leow’s Inc., J. Seitz (1957)
Concept: Control and Management of Corporation, right of
stockholders to remove from directors
FACTS:
Leow’s Inc. was an American corporation that was directed by two
factions that were fighting for control.
One faction was led by Vogel who was president of Loew’s and herein
defendant. The other faction was led by a director named Tomlinson,
and his supporters were attempting to take control of Loew’s from
Vogel’s faction. The two factions were initially balanced, fielding an
equal number of directors on the board. However, after four directors
retired, Vogel sent notice setting a stockholders’ meeting in
September 1957 with three agendas: 1. To fill director vacancies, 2. To
increase the number of directors, and 3.To remove from the board
Tomlinson and one of his supporters under the claim that they were
uncooperative and bad for the corporation. The Tolimson faction
asked for a stockholder’s list to facilitate their sending their own
notice to the stockholders (to explain their side.) The Vogel Faction
refused. This prompted Campbell, a member of the Tolimson faction,
to ask for an injunction to stop the shareholders’ meeting.
ISSUES:
1. WON a president has the power to call a special meeting of
stockholders to act upon policy matters which have not been
defined by the board of directors, to amend by-laws to increase
the number of directors, and to remove directors from the board
2. WON stockholders have the power to remove a director
3. WON the Tolimson faction was denied due process when the
Vogel faction refused to give it a copy of the stockholder’s list
HELD:
1. YES. The extent of an officer’s authority in a corporation is
determined by the corporation’s by-laws. In this case, the
corporation’s by laws conferred broad powers to the president,
allowing him to call “a stockholder’s meeting for any purpose.”
Any exception to this must have likewise been specified in the by-
laws, as there were no such exceptions, it was held that it was
within Vogel’s power to call the meeting.
2. YES. The by-laws of the corporation were quiet on this issue, so
here the court relied on the fact that to hold otherwise would be
prejudicial. It held that “considering the damage a director might
be able to inflict upon his corporation, I believe the doubt must be
resolved by construing the statutes and by-laws as leaving
untouched the question of director removal for cause. This being
so, the Court is free to conclude on reason that the
stockholders have such inherent power.” Note here that the
Court affirmed that the power is inherent.
3. YES. The fact that there was a proposal to remove a director
from the board turned the requirement to be heard into a more
stringent one, because under the law directors manage the
corporation and each has a somwehat independent status during
his term of office. This right could be greatly impaired if
substantial safeguards were not afforded a director whose
removal for cause is sought. The possibility of abuse is evident. As
the Tolimson group was denied a copy of the stockholder’s list
they were deprived of the possibility of expressing their side to
the stockholders, constituting a deprivation from the
stockholders the opportunity to consider the case made by both
sides before voting and would make a mockery of the
requirement that a director sought to be removed for cause is
entitled to an opportunity to be heard before the stockholders
vote
RULING:
1. No preliminary injunction will issue to enjoin the holding of the
meeting, now fixed for October 15, 1957.
2. The corporation will be preliminarily enjoined from recognizing and
counting any proxies held by the individual defendants unless the
corporation supplies the Tomlinson board members the stockholders'
list as herein provided.
3. Without regard to the action taken by the defendant under Point 2,
the corporation will be preliminarily enjoined from recognizing or
counting any proxies held by the Vogel group or others to the extent
that such proxies purport to grant authority to vote for the removal of
Tomlinson and Meyer as directors.
4. No preliminary injunction will issue to restrain the corporation from
paying reasonable sums incurred by the Vogel group in soliciting
proxies.
5. A preliminary injunction will issue restraining the corporation from The purchase of the beer manufacturing facilities by SMC was an
permitting the use of its personnel and facilities for the solicitation of investment in the same business stated as its main purpose which was
proxies by the Vogel group. to manufacture and market beer.
6. No mandatory preliminary injunction will issue to compel the
The ruling in De la Rama vs. Ma-ao Sugar is applicable here:
individual defendants to attend directors' meetings.
A private corporation, in order to accomplish is purpose as stated in its
Present order on notice. articles of incorporation, and subject to the limitations imposed by the
Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of another
Dela Rama vs. Ma-ao Sugar Central Co (1969) corporation is done solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of the stockholders
FACTS: In 1950, the Corporation, through its President J. Amado is necessary. 

Araneta, subscribed for P3M worth of capital stock of the Philippine


Fiber Processing Co., Inc. When the first two payments were made on
In Re: Giant Portland Cement
the subscription there was no board resolution authorizing the
investment. It was only on Nov. 26, 1951 when the Board of Directors
FACTS: The voting rights of the corporation were vested in its
issued a resolution authorizing the President. 355 shares of stock of
common stock, and both of the petitioners were owners of that class
the Philippine Fiber Processing previously owned by another
of stock. Nine directors of the corporation were to be elected, and two
corporation was transferred to Ma-ao on May 31, 1952. Again, the
tickets were nominated. For convenience, one of these tickets will be
investment was made without prior board resolution
called the corporate "Management" ticket, and the other the
"Opposition". Four of the persons nominated for directors were,
ISSUE: WON the investment of corporate funds made by Ma-ao
however, on both tickets, and were, therefore, unquestionably
needed the prior approval of the stockholders. [NO]
elected. The defendant corporation had issued 282,543 shares of
common stock, of which 214,823 shares, including those held by the
HELD: NO. Investment made by Ma-ao did not need prior approval of
petitioners, were represented at the meeting and were voted either in
the stockholders. A corporation has the power to acquire, hold,
person or by proxy. The petitioners not only claim that numerous
mortgage, pledge or dispose of shares, bonds, securities, and other
votes cast on certain shares should not be counted for the
evidences of indebtedness of any domestic corporation. Such an act, if
"Opposition" ticket, declared elected, but also claim that certain other
done in pursuance of the corporate purpose, does not need the
votes cast for the corporate "Management" ticket were improperly
approval of the stockholders. However, when the purchase of shares
rejected by the inspectors, and should be counted. By a resolution of
of another corporation is done solely for investment and not to
the Board of Directors, the stock transfer books of the corporation
accomplish the purpose of its incorporation, the vote of approval of
were closed from February 4th to February 24th, 1941, or for twenty
the stockholders is necessary. A private corporation has the power to
days prior to the stockholders' meeting, on the latter date. During that
invest its corporate funds in any other corporation or business, or for
period no stock was transferred on the corporate records. Certain
any purpose other than the main purpose for which it was organized,
shares were, however, sold by record owners, and the stock
provided that its board of directors has been so authorized in a
certificates were duly assigned and delivered to the purchasers prior to
resolution by the affirmative vote of stockholders meeting called for
the stockholders' meeting. Some of these shares were voted for each
that purpose. When the investment is necessary to accomplish its
ticket on proxies given by the record owners. The persons on whose
purpose or purposes as stated in the articles of incorporation, the
proxies the stock was voted at the stockholders' meeting were
approval of the stockholders is not necessary.
stockholders of record within this provision of the statute, though they
were not the real beneficial or equitable owners of that stock.
Gokongwei v. SEC (1979)
HELD: Stock transferred on the books of the corporation within 20
FACTS: This case is a consolidation of 2 SEC cases. In SEC case 1423,
days prior to a stockholders meeting, for the election of directors,
petitioner John Gokongwei, Jr. (John) alleged that SMC had been
is temporarily disenfranchised, and cannot be voted either by the
investing corporate funds in other corporations and businesses outside
transferor or by the transferee. The persons on whose proxies the SH
of the primary purpose clause of the corporation, in violation of
meeting were the SH of record within the provision of the statute,
section 17 of the Corporation Law. Thus, he filed a petition seeking to
although they were not real beneficial or equitable owners of the
have private respondents Andres Soriano, Jr. and Jose Soriano, as well
stock. The right to vote shares of corporate stock, having voting
as the SMC declared guilty of such violation, and ordered to account
powers, has always been incident to its legal ownership. Whatever
for such investments and to answer for damage. 

the rights of the mere unrecorded assignee of the stock certificate
might be in the absence of a by-law or other contract provision
ISSUE: WON respondent SEC gravely abused its discretion in allowing
requiring all transfers of shares to be recorded on the books of the
the stockholders of respondent corporation to ratify the investment of
corporation, it is not contended that such a provision is not authorized
corporate funds in a foreign corporation? (NO)
or is not binding as between SHs and the corporation. As between the
transferor and the unrecorded transferee to the stock certificate, the
RATIO: NO, the investment was for the purchase of beer
legal title passes to the latter.
manufacturing and marketing facilities which is relevant to SMC’s
corporate purpose.
A very different rule applies between the corporation and the mere
unrecorded assignee of the certificate of stock. That is because limited
contract restrictions relating to stock transfers, are for the benefit of
the corporation, and to enable it to ascertain from its records who its
members of SHs are. So far as the corporation is concerned, until such
a by-law is complied with, the record owner must therefore be
regarded as the real owner of the stock, with the consequent general
right to vote it by proxy or otherwise. When considered from a legal
standpoint, there is no privity of contract between the mere holder of
the certificate and the corporation, and he is not a real member of that
organization until the transfer is recorded. Until that time, the possible
legal rights of the holder of the certificate are of an inchoate nature. In
other words, a real novation, whereby a new contract between the
mere holder of the certificate and the corporation is substituted for
the prior contract of the record owner, can only be brought about by
complying with the corporate regulation relating to transfers of stock.
The record owner may, therefore, be the mere nominal owner, or
technically a trustee for the holder of the certificate, but legally he is
still a stockholder in the corporation, and so far as the corporation is
concerned, like the usual trustee, ordinarily has the right to vote the
stock standing in his name. In cases of this nature, when nothing more
than a mere dry trust is involved the owners of the certificates can
usually protect their rights by recording the transfers and having the
new certificates issued; but even though that could not be done in this
case because the corporate transfer books were closed at the time of
the assignments, they could have compelled the record owners to give
them proxies to vote the stock standing in their names. A mere
nominal owner naturally owes some duties to the real beneficial owner
or equitable owner of the stock, and even if the right to demand a
proxy is not exercised, if the vendor exercises his legal right to vote in
such a manner as to materially and injuriously affect the rights of the
vendee, he is perhaps answerable in damages in some cases. It can
hardly be contended that the actual consent of the holder of the
certificate is ordinarily essential to the right of the record owners to
vote stock standing in their names. When the right and power of a
mere record owner to vote is questioned, some ultra vires, negligent,
or improper willful act or omission on the part of the corporation or its
agents is relied upon and must appear. In some cases the court may
also reject votes cast by the record owners, which are regarded as
improper, solely because of some peculiar inequitable circumstances
affecting the relation between such apparent owners and the
transferee of the certificates. Conceding that as between a transferor
who has parted will all the beneficial interest in stock and his
transferee, the board equities are all in favor of the latter in the matter
of its voting.
Alejandrino v. De Leon (1943)
FACTS: Alejandrino and the respondents are stockholders of
Pasudeco. In the stockholders’ meeting held for the purpose of
electing a new BOD, Alejandrino received 14, 305 votes and the nine
respondents, who were proclaimed elected, each garnered more than
19, 000 votes. De Leon garnered 19, 907 votes. Petitioner, aside from
the shares voted in his favour, held proxies given to him by 18 other
stockholders representing an aggregate of 6,084 shares by which
proxies the said stockholders revoked any and all proxies given by
them to any other persons. Before voting, Alejandrino offered to
register and vote said proxies, but the chairman and the secretary of
the meeting refused to register them and likewise refused to permit
him to vote the said shares. If Alejandrino were permitted to do so, he
would have garnered 20, 389 votes. The reason given for rejecting the
said proxies and the votes offered by Alejandrino was that the 18
stockholders who gave the proxies in question had previously
executed contracts of pledge in favour of Pambul, Inc., wherein it was
stipulated that “during the existence of the pledge the pledgor grants
irrevocably in favour of the President of the pledge, or whoever shall
be actin in his place, the right to vote the shares pledged in any
meeting of the Pasudeco. Alejandrino filed a quo warranto to annul
the election of all or any one of the respondents as members of the
board, and to declare Alejandrino elected thereto.
ISSUES:
1. WON the irrevocable proxy is valid.
2. WON the “peculiar circumstances of this case” render the proxy
“grossly and manifestly contrary to good morals and public
policy, and therefore void or at least recoverable.
HELD:
1. YES. The right of the stockholder to vote his shares is inherent in
and incidental to his ownership of the stock. If the owner can
dispose of the property itself, it is apparent that he can also
dispose of the right to manage it. There is no reason why it should
be considered immoral or violative of public policy for him to
demand, as part of the consideration for the loan, the right to
protect his investment by exercising the right to vote the stock or
to manage the property delivered to him as security so long as
the loan is unpaid.
2. NO. There is no intimation that the irrevocable proxies in
question were procured or given thru error, deceit, fraud or
intimidation. The desire and design of a majority of the
stockholders of a private corporation to control its management
and operation is legitimate per se, and is in fact the universal
practice in the business world.
Everett v Asia Banking
Teal and Co., including its Board, was already under the
control of Asia Banking. Thus, it would have been useless
to ask the Board to institute the present suit, and the law
does not require litigants to perform useless acts. The
court held that the stockholders could bring the said
action (in the nature of a derivative suit) on behalf of Teal
and Co.
When the Board of Directors in a Corporation is under the
complete control of the principal defendants in the case
and it is obvious that a demand upon the board of
directors to institute an action and prosecute the same
effectively would be useless, the action may be brought by
one or more of the stockholders without such demand. The
Court however, did not rule on the propriety or
impropriety of the Voting Trust Agreement between the
Bank and the Company.
NOTE: However, it may be inferred that the stockholders
may bring suit against the trustees if the voting trust
agreement is being used by the said Trustees to
perpetuate fraud against the corporation, as is present in
this case. The stockholders would still have legal standing
to institute the suit in behalf of the corporation for acts
done by the trustees to defraud the corporation, when the
said trustees already have control of the Board of the said
corporation. A derivative suit is still proper.
NIDC v. Aquino (1988)
FACTS: Batjak is a Filipino-American corporation organized under the
laws of the Philippines and engaged in the manufacture of oil and
copra in the Philippines. Its financial condition deteriorated to the
point of bankruptcy. As of 1965, its indebtedness to some private
banks and to PNB amounted to P11M. as security for payment of its
obligations, it mortgaged its 3 coco-processing oil mills to several
banks. In need for additional operating capital, Batjak applied to PNB
for additional financial assistance. Under the agreement, NIDC, a
wholly-owned subsidiary of PNB, would invest P6M in Batjak in the
form of preferred shares of stock convertible within 5 years at par into
common stock, to liquidate Batjak’s obligations to the other banks
and the balance of the investment was to be applied to Batjak’s past
due account of P5M with the PNB. Upon receiving payment, the other
banks released in favor of PNB the mortgages they held on the
properties of Batjak.
A voting trust agreement was executed in favor of NIDC by the
stockholders representing 60% of the outstanding paid-up and
subscribed shares of Batjak. This agreement was for a period of 5
years and upon its expiration, was subject to negotiation between the
parties.
PNB, forced by the insolvency of Batjak, foreclosed on the mortgage
and emerged as the winning bidder and acquired ownership of two oil
mills. NIDC acquired ownership over one oil mill also under a
mortgage foreclosure sale. PNB later transferred ownership over the
two oil mills to NIDC. Upon expiration of the voting trust agreement,
the same was no longer renegotiated, so Batjak requested NIDC to
return all of Batjak’s assets, including the three oil mills, and render a
full accounting which the latter refused to do. Batjak filed a complaint
for mandamus against NIDC. It likewise filed a petition for
receivership. Batjak argues that upon expiration of the voting trust
agreement, NIDC is obligated to return all its assets, including the
three oil mills.
ISSUE:
WON Batjak has an interest in the three oil mills, warranting the
appointment of a receiver over the same (NO)
HELD: Properties in question belong to NIDC. The properties are not
covered by the voting trust agreement and the possession and
ownership of NIDC over the same is not extinguished by the voting
trust agreement’s expiration.
- PNB acquired ownership of two of the three oil mills by virtue of a
mortgage foreclosure sale. NIDC acquired ownership over one oil
mill also by virtue of a mortgage foreclosure sale. PNB later
transferred ownership over the two oil mills to NIDC. There can
be no doubt that NIDC has title to the three oi mills previously
owned by Batjak
- Nowhere in the voting trust agreement is mention made of any
transfer or assignment to NIDC of Batjak’s assets, operations and
management. NIDC was constituted as trustee only of the voting
rights of 60% of the paid-up and outstanding shares of stock in
Batjak. Upon the expiration of the agreement, what was to be
returned by NIDC are the certificates of stock belonging to
Batjak’s stockholders and not the properties or assets of Batjak
itself which were never delivered in the first place to NIDC nder
the terms of the voting trust agreement.
- In any event, a voting trust transfers only voting or other rights
pertaining to the shares subject of the agreement or control over
the stock.
- The acquisition by PNB-NIDC of the properties was not made
under the capacity of a trustee by as a foreclosing creditor for the
purpose of recovering on a just and valid obligation of Batjak.
Ringling Bros. V. Ringling
Plaintiff and Haley each owned 315 out of 1000 shares of Defendant
company, Ringling Brothers-Barnum & Bailey Combined Shows, with
the remaining 370 shares owned by another defendant, John Ringling
North. The company’s board was comprised of seven members, and if
each shareholder voted independently the most likely outcome would
be for each shareholder electing two board members with North
selecting the extra member. However, in 1941 Plaintiff and Healey
contracted to pool their votes, wherein each selected two members
and then used their remaining votes to select a fifth member of their
choosing. The contract called for an arbitrator, Karl Loos, to resolve
any disputes. The contract was terminated a year later with the parties
still bound by the arbitrator provision that called for Loos to help
decide how to vote. In 1946, Haley could not attend the meeting and
sent her husband in her place, and instead of following Loos’ advice he
chose to move for adjournment. Plaintiff and Defendant voted their
shares, and Plaintiff brought this action to force Healey to vote
according to Loos’ decision. Healey argued that the agreement
between her and Plaintiff was invalid as it took the voting power away
from the shareholders and gave it to a third party (Loos).
The issue is whether the agreement between Healey and Plaintiff to
pool their votes was valid
The court held that it no other shareholder’s rights were violated and
public policy was not violated, as the result of a pooling agreement.
Shareholders should be allowed to benefit as they see fit from their
voting rights, and this often means banding together to strengthen
their position. However, the court decided not to invalidate the voting
and held that the members that were voted in by Healey and North
would remain.
Clark v. Dodge
FACTS: Action for specific performance between Clark and Dodge,
SHs of two New Jersey corporations, Bell & Co and Hollings-Smith Co,
engaged in the business of manufacturing medicinal preparations by
secret formulae. Clark owned 25% and Dodge 75% of each
corporation. Dodge, a director, took no active part in the business but
controlled the other directors of both corporations. Clark was a
director, treasurer and GM of Bell but was in charge of a major part of
the business of Hollings-Smith. The secret formulae were known to
Clark alone. Both entered into an agreement that Clark should
continue in the management and control of Bell so long as he
remained faithful and competent, and that he should not be the sole
custodian of the formulae but share his knowledge with Dodge’s son.
The agreement also provides that Dodge during his lifetime and after
death, a trustee to be appointed by him in his will would vote his stock
and so vote as director that Clark would continue to be a director and
GM and receive ¼ of the net income of the corporations, among
others. Clark agreed to share the formula to Dodge’s son and instruct
him on the methods of manufacturing. Clark accuses Dodge of breach
and his failure to use his control of the stock to continue Clark as
director and GM, and even prevented Clark from receiving a
proportion of the income as stipulated in the agreement.
DOCTRINE: Contracts held valid. The consideration here was that
there was only two SHs and no public shareholder.
GENERAL RULE: The business of the corporation shall be managed
by its board. If the enforcement of a particular contract damages
nobody—not even the public—one sees no reason for holding it illegal,
even though it impinges on the general rule stated above. Damage
suffered or threatened is a logical and practical test. Where the
directors are the sole SHs, there seems to be no objection to enforcing
an agreement among them to vote for certain people as officers. The
rule that all SHs by their universal consent may do as they choose with
corporate concerns and assets, provided the interests of creditors are
not affected, because they are the complete owners of the
corporation, cannot apply in a case where the SHs are not parties to
the agreement in question. So when the public is not affected, the
parties in interest might, by their original agreement of incorporation,
limit their respective rights and powers. As the parties are the
complete owners of the corporation, there is no reason why the
exercise of power and discretion of the directors cannot be controlled
by valid agreement between themselves, provided that the interests
of creditors are not affected.
The agreement here in question was legal and that the complaint
states a cause of action. The only restrictions on Dodge were that he
should vote for Clark as director, and that as director he should
continue Clark as GM, so long he “proved faithful, efficient and
competent, and entitlement to ¼ of the income. These are all
perfectly legal contractual stipulations. If there was an invasion of
powers of the board, it is so slight as to be negligible; and certainly
there is no damage suffered or threatened to anybody.
NOTE: Although the GR is that pooling or voting agreement cannot
limit the discretion of directors, this principle has not been applied
strictly to close corporations, as illustrated by the Clark case. This
variation is incorporated in sec 100. The Clark case also illustrates that
the remedy of specific performance is available in case of violation of a
voting agreement.
Sherman & Ellis v. Indiana Mutual (1930)
Concept: Management Contracts
FACTS: Indiana Mutual Casualty Co was organized to take over the
business of an unincorporated association engaged in writing policies
covering risks created by the Indiana Workmen’s Compensation Law.
It ratified an agreement with Sherman & Ellis by which the
management of the casualty company was conferred upon Sherman
Ellis for 20 years. Indiana Mutual terminated its contract after some
difficulties arose between Sherman Ellis and the Indiana state
department in which the latter tried to appoint a receiver for Indiana
Mutual. Sherman sued for specific performance to enforce the
contract.
ISSUE:
WON the agreement is void and, in effect, its breach creates no
liability on the part of Indiana Mutual
HELD: YES, the agreement is void.
The contract provides that the underwriting and executive
management for Indiana Mutual will be performed by Ellis, president
of Sherman Ellis, and may appoint another officer to be the chief
executive head and underwriting manager of the company. It also
provides that the managing company (Sherman Ellis) shall have
general supervision and charge of underwriting affairs and shall be
entitled to 10% of the net earned premiums collected from all
policyholders. The grant of corporate power by a state is upon the
hypothesis that these powers shall be exercised by the corporation’s
officers, annually elected by the SHs and not by the officers of another
corporation. Although generally corporations may for a limited period
delegate to a stranger certain duties performed by the officers, there
are duties the performance of which may not be delegated to
outsiders. In this case the period of control of the managing
corporation is 20 years. Nothing of importance was left for the BOD
but mere ministerial duties. The agreement contemplated the
substitution of Sherman Ells for the officers of Indiana Mutual. The
principal business of Indiana was write casualty insurance, which is
now solely exercised by Sherman Ellis. No other conclusion can be
drawn other than that Indiana Mutual was to be an instrumentality
through which Sherman Ellis was to conduct a casualty business in the
state of Indiana.
Benintendi vs. Kenton Hotel (1945)
Concept: Control and Management
FACTS: Two men who owned all the stock of a domestic business
corporation made an agreement to vote for and later did vote for and
adopt at a stockholder’s meeting the by-laws of the corporation. The
minority stockholders brought this suit to have those by-laws
adjudged valid and to enjoin the other stockholders from doing
anything inconsistent therewith. These by-laws provide, among
others, that directors are to be elected by unanimous vote of the
stockholders, that stockholders can only makes actions in unanimity,
and that directors must act in unanimity to bind the corporation. The
Special Term and the Appellate Division held that by-laws 1 and 2
were invalid. Both parties appealed.
ISSUE: WON the by-laws are valid <Only the fourth by-law is valid>
HELD: The by-laws of a corporation cannot be in contravention of
legal principles, whether they be expressly stated in statutes or as held
in common law. Under corporation law, a quorum is the requirement,
not unanimity. Requiring a different standard would run in
contravention to the will of the Legislature.
The by-law which requires unanimous action of shareholders to pass
any resolution or take action of any kind, is equally obnoxious to the
statutory scheme of stock corporation management. The whole
concept of a representative government in a corporation, with voting
conducted conformably to statute, and with the power of decision
lodged in certain fractions of the stock is destroyed when the
shareholders by agreement or by-law or AOI provision as to
unanimous action, give the minority interest an absolute, permanent
and all-inclusive power of veto.
The last by-law makes it impossible for the directors to act on any
matter except by unanimous vote of all of them. Such a by-law is
almost unworkable and unenforceable because, prima facie in all acts
done by a corporation, the major number must bind the lesser, or else
differences could never be determined. Every corporation is given the
privilege of enacting a by-law fixing its own quorum requirement at a
fraction not less than that mandated by law. But the very idea of a
quorum is that when that required number of persons goes into
session as a body, the votes of a majority thereof are sufficient of
binding action.
Fua Cun v. Summers
FACTS: Chua Soco subscribed to 500 shares of stock of the China
Banking Corporation for a par value of P100 per share. Soco paid the
sum of P25,000, which was one-half of the subscription price. Later
on, Soco executed a promissory note in favor of Fua Cun for a loan
received by Soco from Fua Cun. The promissory note was for the
amount of P25,000 with interest rate of 1% per month, and was
secured by a chattel mortgage on the shares of stock of China Banking
subscribed to by Soco. Fua Cun, in turn, took the promissory note and
the mortgage to China Banking and informed them of his transaction
with Soco. He was told to await action upon the matter by China
Banking’s board of directors.
When Soco’s obligation ballooned to around P37,000, China Banking
brought an action against Soco. It obtained favorable judgment and
subsequently attached on the 500 shares which Soco subscribed to.
This attachment occurred after Fua Cun had already notified China
Banking of his interest over the shares when Soco mortgaged them to
him to secure a loan. Fua Cun then brought an action to hve his right
over the shares be prioritized over that of China Banking’s attachment
over the same. The trial court ruled in favor of Fua Cun. Hence, the
petition.
DOCTRINE: An equity in shares of stock may be assigned, and such
assignment is considered as valid as between the parties, and as to
persons to whom notice is brought home. China Banking having been
notified of Fua Cun’s interest (through the chattel mortgage) over the
shares, its subsequent attachment is therefore subject to the rights of
Fua Cun.
Baltazar v Lingayen Gulf
FACTS: The Baltazar and Rose group, both incorporators of the
Lingayen Gulf Corp are the subject of the dispute in this case.
Baltazar subscribed to 600 shares of stock, 535 of which are already
fully paid, duly covered by certificates of stock issued to him. Rose
subscribed to 400 shares of stock, 375 of which are fully paid, duly
covered by certificates of stock issued to him. Ungson, Estrada,
Fernandez and Yuson were small stockholders of Lingayen, all holding
a total number of fully paid-up shares of stock, of not more than 100
shares. These 4 constituted the majority of the 7-member Board of
Directors of Lingayen. Acena, was likewise an incorporator and
stockholder, holding 600 shares of stock, duly covered by certificates
of stock issued to him. The Ungson group had been in complete
control of the management and property of the Corporation since
January 1, 1955. In order to continue retaining such control, they
passed 3 Resolutions during the regular Board meeting held on Jan.
30, 1955 to expel and oust the Baltazar group and their companion
stockholders.
1. declaring watered stocks issued to Acena, Baltazar, Rose
and Jubenville of no value and cancelled;
2.a. all unpaid subscriptions to bear interest, and all
payments to be credited to interest 1st, capital debt 2nd,
2.b declared as of no value and cancelled all capital stock
shares certificates issued as fully paid up, upon payments
made by stockholders, when interests on unpaid
subscription from date of subscription were not previously
and/or then and there paid
3. all stock declared delinquent on the accrued interest are
incapacitated to avail of voting power.
The Baltazar group filed a complaint and prayed that a writ of
preliminary injunction be issued against the the Ungson group. They
sought to allow them to vote their fully paid-up shares and to declare
the resolutions invalid.
HELD: Sec. 37 of the Corporation Law, provides:
SEC. 37. No certificate of stock shall be issued to a subscriber as fully
paid up until the full par value thereof, or the full subscription in the
case of no par stock, has been paid by him to the corporation.
Subscribed shares not fully paid up may be voted provided no
subscription is unpaid and delinquent.
The present law requires as a condition before a shareholder can vote
his shares, that his full subscription be paid in the case of no par value
stock; and in case of stock corporation with par value, the stockholder
can vote the shares fully paid by him only, irrespective of the unpaid
delinquent shares. Since it was the practice of Lingayen to issue stock
certificates to not fully paid subscribers, it may not take away the right
to vote granted by the certificate. Stock certificates may be issued for
less than the number of shares subscribed for provided that: the par
value of each represented by the certificate has been paid, and it is not
prohibited by the by-laws.
Nava v. Peers (1976)
FACTS: Teofilo Po as an incorporator subscribed to 80 shares of Peers
Marketing Corporation at P100 PV and paid 25%. No certificate of
stock was issued to him or to any incorporator, subscriber or
stockholder. April 2, 1966: Po sold to Ricardo A. Nava for P2,000 20 of
80 shares. Nava requested to register the sale in the books of the
corporation. This was denied since Po has not paid fully the amount of
his subscription. Po was delinquent of the balance due so the
corporation claimed on his entire subscription of which included 20
shares sold to Nava. December 21, 1966: Nava filed this mandamus to
register 20 shares in Nava's name in the corporation's transfer book.
CFI: court dismissed the petition. Nava appealed on the basis that
Section 37: "no certificate of stock shall be issued to a subscriber as
fully paid up until the full par value thereof, or the full subscription in
case of no par stock, has been paid by him to the corporation"
ISSUE: W/N officers of Peers Marketing Corporation can be compelled
by mandamus to enter in its stock and transfer book the sale made
HELD: NO. Dismissal affirmed. No provision of the by-laws of the
corporation covers that situation. SEC. 35. The capital stock of stock
corporations shall be divided into shares for which certificates signed
by the president or the vice-president, countersigned by the secretary
or clerk and sealed with the seal of the corporation, shall be issued in
accordance with the by-laws. Shares of stock so issued are personal
property and may be transferred by delivery of the certificate indorsed
by the owner or his attorney in fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as
between the, parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate, and
the number of shares transferred.
No share of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation.
SEC. 36. (re voting trust agreement) ... The certificates of stock so
transferred shall be surrendered and cancelled, and new certificates
therefor issued to such person or persons, or corporation, as such
trustee or trustees, in which new certificates it shall appear that they
are issued pursuant to said agreement. A stock subscription is a
subsisting liability from the time the subscription is made. The
subscriber is as much bound to pay his subscription as he would be to
pay any other debt. The right of the corporation to demand payment
is no less incontestable. There is no clear legal duty on the part of the
officers of the corporation to register the 20 shares in Nava's name
hence no cause of action for mandamus. In the Baltazar case: partial
payment = entitled to vote the said shares although he has not paid
the balance of his subscription and a call or demand had been made
for the payment of the par value of the delinquent shares. Without
stock certificate, which is the evidence of ownership of corporate
stock, the assignment of corporate shares is effective only between
the parties to the transaction delivery of the stock certificate, which
represents the shares to be alienated , is essential for the protection of
both the corporation and its stockholders.
Otis & Co. v Pennsylvania Railroad Co. (1946)
Concept: Duties of Directors and Controlling Stockholders
FACTS: Otis & Co is a stockholder in and among the wholly-owned
subsidiaries of the Pennsylvania Railroad Co (PRR), which included
Pennsylvania Ohio 7 Detroit Railroads (POD). One of its subsidiaries
had an outstanding bond issuance of $28.4M. The parent then
negotiated with a third party, Kuhn, Loeb and Co, to refinance the
bonds. The directors of POD approved a resolution authorizing the
sale of the new Series D bonds at a best obtainable price. Bonds were
then sold to Kuhn and Loeb. Another buyer was willing to purchase
the bonds at a better price but the directors declined. The Interstate
Commerce Commission found that the corporation was not able to
get the best price for the sale and that other options were not
explored, that negotiations were only with one investment house and
were at “arms-length dealing”, and that it was possible to have greater
savings.
ISSUE: W/N the directors are liable for failing to exercise ordinary care
and judgment in the issuance and sale of $28M in bonds, which
resulted in alleged losses suffered by the corporation.
HELD: According to the business judgment rule, courts will not
interfere in matters of business judgment, in which it is presumed that
judgment—reasonable diligence—has in fact been exercised. A
director cannot close his eyes to what is going on about him in the
conduct of business judgment. Courts have given directors wide
latitude in the management of the affairs of the corporation provided
that the judgment is unbiased, honest and reasonably exercised.
Negligence must be determined as of the time of transaction.
Mistakes or errors in the exercise of honest business judgment do not
subject the officers and directors to liability for negligence in the
discharge of their appointed duties. Directors are entrusted with the
management of the affairs of the corporation. If in the course of
management they arrive at a decision for which there is a reasonable
basis, and they acted in GF as the result of their independent
judgment, and uninfluenced by any other consideration than what
they honestly felt was in the best interests of the corporation. In the
present case, the SC found that the officers and directors of the
corporations acted honestly in GF and sought to exercise their best
judgment for the best interests of their corporation. No fraud was
present, but only a faint suggestion of BF. The directors had the right
to negotiate privately with Kuhn and Loeb. In contracting with the
latter, the directors were not contracting with another firm in which
they were interested, nor did the directorship or officership positions
interlock. There is no contention that fraud existed and fraudulent acts
will not be presumed.
PSE v. CA
Facts:
Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, had sought to offer its shares to the public but
When they wanted to get listed with the PSE, it denied its
application because of certain issues on the alleged
ownership of Puerto Azul (PSE received a letter from the
heirs of Ferdinand E. Marcos, claiming that the late
President Marcos was the legal and beneficial owner of
certain properties forming part of the Puerto Azul Beach
Hotel and Resort Complex which PALI claims to be among
its assets). The SEC ordered that the PSE list the said corp.
Doctrine The PSE is, after all, a corporation authorized by
its corporate franchise to engage in its proposed and duly
approved business.
In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to
such body As to its corporate and management decisions,
therefore, the state will generally not interfere with the
same. Questions of policy and of management are left to
the honest decision of the officers and directors of a
corporation, and the courts are without authority to
substitute their judgment for the 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.
Litwin v. Allen (1940)
Concept: Duties of directors and controlling stockholders; duty of
diligence; business judgment rule
FACTS: A derivative stockholders’ action was brought on behalf of
persons owning 36 shares of stock of Guaranty Trust Company of NY
out of 900,000 shares outstanding against the directors of the trust
company and its wholly owned subsidiary, Guaranty Company of NY.
The controversial transaction which is the subject of the inquiry is the
Missouri Pacific Bond Transaction which involves the participation by
the Trust Company, to the extent of $3M, in a purchase of Missouri
Pacific Convertible debentures through the firm JP Morgan & Co., at
par, with an option to the seller, Alleghany Corporation to repurchase
them at the same price at any time within 6 months. Thereafter, the
Guaranty Company committed itself to the Trust Company to take up
the bonds from the Trust Company at the end of the 6-month period
for the same price the Trust Company paid if Alleghany failed to
repurchase. Due to the decline in the market, the bonds which were
originally at 103-7/8 dropped to 86 high and 81 low at the end of the 6-
month period. At the end of said period, Guaranty Company took
them from the Trust Company at par.
The stockholders urge that the purchase subject to the option to
repurchase at the same selling price is ultra vires and therefore
imposes absolute liability upon the directors. If it were not ultra vires,
the transaction is nonetheless attended by negligence as the Trust
Company, as the buyer, bears all risks of loss. Under the terms of their
agreement, if the market price of the securities should rise, Alleghany
would simply exercise its option to repurchase in order to recover the
securities at a lower price. If the market price should fall, Alleghany
will not exercise the option to repurchase and the Trust Company will
sustain the loss.
ISSUE: WON the directors of Trust Company should be made
personally liable for the loss incurred due to the fall of the market price
of the debenture from the time the transaction was entered into until
the end of the 6-month repurchase period (YES)
HELD: The directors are declared to be personally liable for the
losses because the entire arrangement was so improvident, so
risky, so unusual and unnecessary to be contrary to fundamental
conceptions of prudent banking practice.
- A director owes loyalty and allegiance to the company—a loyalty
that is undivided and an allegiance that is influenced in action by
no consideration other than the welfare of the corporation. Any
adverse interest of a director will be subjected to a scrutiny rigid
and uncompromising. He may not profit at the expense of his
corporation and in conflict with its rights; he may not for personal
gain, divert unto himself the opportunities which in equity and
fairness belong to his corporation. He is required to use his
independent judgment. In the discharge of his duties, a director
must act honestly in good faith, but that is not enough. He
must also exercise some degree of skill, prudence and
diligence.
- They should know of and give direction to the general knowledge
of the manner in which the business is conducted, the character
of the investments, the employment of the resources.
- Directors are liable for negligence in the performance of their
duties. Not being insurers, directors are not liable for errors of
 judgment or for mistakes while acting with reasonable skill and
prudence. The director is required to conduct the business of
the corporation with the same degree of fidelity and care as an
ordinarily prudent man would exercise in the management of
his own affairs of like magnitude and importance.
- A director of a bank is held to a stricter accountability. A director
of a bank is entrusted with the funds of depositors and the
stockholders look to him for protection from imposition of
personal liability.
- In order to determine whether transactions approved by a
director subject him to liability for negligence, the court must
look at the facts as they exist at the time of their occurrence,
not aided or enlightened by those which subsequently take
place.
- A bank director when appointed or elected takes oath that he
will, so far as the duty devolves on him “diligently and honestly
administer the affairs of the bank or trust company.” Honesty
alone does not suffice—there must be diligence, and that
means care and prudence as well.
- This transaction was unusual, yet there is nothing in the record to
indicate that the advice of counsel was sought. There is more
here than a question of business judgment, as to which men
might well differ. The directors plainly failed in this instance to
bestow the care which the situation demanded.
- The directors are only liable for the loss attributable to the
improper repurchase option itself. Any loss incurred after the
option had expired was occasioned by the directors’ independent
business judgment in holding them thereafter.
Steinberg v. Velasco (1929)
Concept: Duties of Directors and Controlling Stockholders
FACTS: During a meeting, the board approved the purchase of its own
stock from erstwhile directors. They also approved the payment of
dividends to its stockholders. At the time, it appeared that the board
acted on the assumption that it had a surplus over and above its debts
and liabilities, since it appeared from the books that it had accounts
receivable with a face value of around P19k and only around P14k in
accounts payable. Almost one year later, the corporation filed a
petition for dissolution. By this time its accounts receivable appeared
on paper to be around P13k and its accounts payable around P9k.
However, the receiver was unable to collect.
ISSUE: WON the actions of the board in approving the purchase of its
own stock and the payment of dividends to its stockholders were
proper.
HELD: NO. Directors of a corporation are bound to care for its
property and manage its affairs in good faith. If they do acts clearly
beyond their power, whereby loss ensues to the corporation, or
dispose of its property or pay away its money without authority – they
will be required to make good the loss out of their private estates. The
acceptance of the office of a director implies a competent knowledge
of the duties assumed – directors cannot excuse imprudence on the
ground of their ignorance or inexperience. If they commit an error of
judgment through mere recklessness or want of ordinary prudence or
skill, they may be held liable for the consequences. Creditors of a
corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board will not use the assets of
the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
The action of the board in purchasing the stock from the corporation
and in declaring dividends on the stock during the same meeting,
which left only P4k from what had been P10k of the paid up capital
showed that the directors did not act in good faith or were grossly
ignorant of their duties.
Barnes vs. Andrews
FACTS: Corporation manufactures starters for Ford motor vehicles
and airplanes. Director Andrews, the largest SH, who was induced by
the President to become director, held only two board meetings.
During his term, the company business was mismanaged. Barnes was
then appointed receiver after the corporation had gone under, and
was found that the company had no funds. He alleged that Andrews
failed to give adequate attention to the affairs of the company, which
had been conducted incompetently and without regard to the
wastage in salaries. Andrews allegedly relied solely on the President’s
updates on the status of the corporation. Work had languished from
incompetence and extravagance and quarrels between the factory
manager and the other personnel affected production.
DOCTRINE: The director was not liable. The court said that despite
being guilty of misprision in his office, still the plaintiff must clearly
show that the performance of the director’s duties would have
avoided the losses. When a business fails from general
mismanagement, business incapacity, or bad judgment, it is difficult
to conjecture that a single director could turn the company around, or
how much dollars he could have saved had he acted properly.
Petitioner bears burden of showing that the performance of duties
would have avoided loss. “No man of sense would take office, if the
law imposed upon them a guaranty of the general success of their
companies as a penalty for neglect.” Inattentive director not liable for
loss if full attentiveness of all directors would not have saved the
situation
CLASS NOTES: The court considered the fact that Andrews had no
previous experience
Foster v. Bowen et al. (1942)
Concept: Duties of Directors and Controlling Stockholders
FACTS: Bowen, a lawyer, is the president and director of Fitchburg
and Leominster Street Railway Company. The company owns and
operates an amusement resort, Whalon Park. The park has a roller
skating rink which is being leased by the company’s treasurer and
manager, Cushing, even prior to Bowen assuming the position of
president. With the approval of then president Baker, Cushing had
been leasing the rink and had been paying the company 25% of the
gross receipts. In 1934, Cushing subleased the place and was paid 50%
of the gross receipts although it seemed that the company/ Baker was
not aware of the agreement between Cushing and the sublessee.
Nevertheless, he assured Cushing that it was all right for Cushing to
improve the rink for the company.
When Bowen became president, he expressed his doubts regarding
the legality of a lease from an officer of a corporation to himself. At a
director’s meeting on May 14, 1935, Bowen commented that the lease
was illegal but Cushing claimed that the lease had been going on since
Baker’s time and that Baker knew about it and that he will give up the
lease after the current term. Bowen asked the directors what they
wished to do. No one made any suggestion and the passed on to
consideration of the next business. Eventually, in 1938, Cushing was
ousted as director and officer. This case is brought by the minority
stockholders in behalf of all stockholders who want to recover losses
which were allegedly sustained by the company because of Bowen’s
breach of his fiduciary duty as director and president.
ISSUE: WON Bowen should be held liable for the loss of the company.
(NO)
HELD: Bowen is not liable for the sums received by Cushing from his
lease after Bowen’s discovery on January 20, 1937. Bowen cannot also
be held liable for the loss of benefit under two fidelity bonds which
were allegedly to indemnify the company against loss of money or
other personal property such as the improper conduct of Cushing.
Directors of a business corporation in the absence of positive statutory
enactment are not responsible for errors of judgment provided they
act honestly. Bowen’s delay from January 20 to May 14 is of no
material consequence. When only Bowen and Cushing were dealing
prior to the directors’ meeting, there was an agreement that Cushing
should make improvements to the rink which he actually performed.
Further, the income had greatly increased in the 3 years preceeding
May 14. There is no absolute prohibition of dealings between a
corporation and its officers, if proper safeguards are observed to
insure that those acting for the corporation are themselves
disinterested and the utmost good faith is exercised. So far as the
records prove, it may have been a reasonable exercise of judgment to
take no action during the directors’ meeting. Further, it could have
been interpreted that they ratified that lease. The Court held that the
acts of Cushing do not fall within those “insured” by the bonds and
Cushing seems to have acted in good faith.
Lowell Hoit & Co. v. Detig et. al
Concept: Duties of Directors and Controlling
Stockholders
FACTS:
Lowell Hoit & Co. (LHC) entered into a lease
agreement with the Steward Co-operative Grain
Corporation (SCGC), through its manager Hermann,
leasing certain bins in the elevator for storage of
grain. It is charged in the complaint that LHC had
12,000 bushels of oats stored in the bins, 9,081 bushels
of which was shipped and sold by SCGC without the
knowledge or consent of LHC, and failed to account
for the proceeds. Detig, etc. had no knowledge of
the arrangement between LHC and Hermann.
Action is for recovery for the alleged conversion,
and LHC seeks to make Detig, etc. liable as directors
of SCGC. LHC seeks to impute common law liability
on Detig, etc.
ISSUE:
WON Detig, etc. may be held liable
HELD:
NO. Nothing in the case indicates that Detig, etc.
did not exercise care and prudence in their selection
of the agent Hermann. Neither does it appear that
they sought to divest themselves of a general
supervision of the conduct of the business. Further,
nothing appears to indicate that they had any
knowledge of, or had acquiesced in a continuous or
repeated course of conduct.
The mere fact that a person is a director in a
corporation does not necessarily render him liable for
the torts of the corporation or its agents; directors are
not to be held liable for the negligence of the
corporation merely because of their official relation
to it.
Palting v San Jose Petroluem
FACTS: In 1956, San Jose Petroleum, Inc. (SJP), a mining corporation
organized under the laws of Panama, was allowed by the Securities
and Exchange Commission to sell its shares of stocks in the
Philippines. Apparently, the proceeds of such sale shall be invested in
San Jose Oil Company Inc. (SJO), a domestic mining corporation.
Pedro Palting opposed the authorization granted to SJP because said
tie up between SJP and SJO is violative of the constitution; that SJO is
90% owned by SJP; that the other 10% is owned by another foreign
corporation; that a mining corporation cannot be interested in another
mining corporation. SJP on the other hand invoked that under the
parity rights agreement (Laurel-Langley Agreement), SJP, a foreign
corporation, is allowed to invest in a domestic corporation.
HELD: The parity rights agreement is not applicable to SJP. The parity
rights are only granted to American business enterprises or
enterprises directly or indirectly controlled by US citizens. SJP is a
Panamanian corporate citizen. The other owners of SJO are
Venezuelan corporations, not Americans. SJP was not able to show
contrary evidence. Further, the Supreme Court emphasized that the
stocks of these corporations are being traded in stocks exchanges
abroad which renders their foreign ownership subject to change from
time to time. This fact renders a practical impossibility to meet the
requirements under the parity rights. Hence, the tie up between SJP
and SJO is illegal, SJP not being a domestic corporation or an
American businessenterprise contemplated under the Laurel-Langley
Agreement.
Piccard v. Sperry Corp. et al.
FACTS: Cowdin, a director of Sperry Corporation, negotiated on
behalf of the corporation with Field Glore and Company. The proceeds
of the negotiation went to Standard Capital Company, another
corporation where Cowdin was also a director. The other directors of
Sperry Corporation demanded from Cowdin and SCC &193,000. The
dispute led to fruitful negotiations and ended in Sperry accepting
$101,407.50 from Cowdin and SCC and releasing Cowdin from any
liability.
Minority stockholders filed a derivative suit against the directors
claiming that the settlement was attended by bad faith and that the
release was not the act or deed of the corporation the execution of
which was never authorized by the board of directors. There were two
meetings of Sperry’s BOD: the meeting of June 30, 1936 at which the
settlement was authorized and the meeting of July 28, 1936 wherein it
was approved and ratified. During the June 30 meeting, 6 out of 8
directors were present. Cowdin left the meeting before the
consideration of the settlement. Only five directors remained; thus
there was no quorum.
The minority stockholders claim was also based on the fact that two of
the directors who approved the settlement were not independent in
that they were also stockholders of SCC at the time the settlement
was approved. Morgan was at the time a stockholder of Standard
Capital, while Sanderson’s wife was at that time a stockholder of the
same corporation.
ISSUES:
1. WON the settlement was bona fide.
2. WON Morgan and Sanderson are ineligible such that their
disqualification will invalidate the June 30 proceedings for lack of
quorum.
HELD:
1. YES. The transaction was attended, on the part of the directors,
by good faith, sound business judgment and prudent solicitude
for the welfare of the corporation. The mere fact that this was a
transaction between the corporation and one of its directors does
not avail to rob the release of its effectiveness.
2. NO. The court held that the charter of Sperry specifically provides
that even interested directors may be counted for purposes of
quorum. According to the charter: “Any director whose interest in
any such contract or transaction arises solely by reason of the fact
that he is a stockholder, officer or creditor of such other company
xxx shall not be deemed interested in such contract or other
transaction under any of the provisions of this paragraph, or shall
any such contract or transaction be void or voidable, nor shall any
director be liable to account because of such interest nor need
such interest be disclosed.” Moreover, this is preceded by:
“Directors so interested may be counted when present at
meetings of the BOD for the purposes of determining the
existence of a quorum. Thus, based on the charter, Morgan might
be counted towards a quorum if interested but also that mere
stock ownership does not make him an interested director. If this
is valid as to Morgan, then it is also valid as to Sanderson.
Central Cooperative Exchange v. Tibe (1970)
Concept: Fixing compensation of directors
FACTS: Central Cooperative Exchange, Inc. (CCE) filed a complaint
against Concordio Tibe for the refund of certain amounts received by
the latter from the corporation, while he served as a member of the
board of directors of the Exchange. Tibe has drawn several sums
representing, among others, commutable per diems for attending
meetings of the Board of Directors of Manila, per diems and
transportation expenses, representation expenses and commutable
discretionary funds. All these sums were disbursed with the approval
of general manager, treasurer and auditor of CCE.
ISSUE: WON the board of directors of CCE had the power and
authority to adopt various resolutions which appropriated funds of the
corporation for the above-enumerated expenses for the members of
the said board.
HELD: The Board Resolutions approving the disbursements are
contrary to the by-laws of the federation and are not within the
power of the board of directors to enact.
- The by-laws explicitly reserved unto the stockholders the power
to determine the compensation of members of the board of
directors, and the stockholders did restrict such compensation to
“actual transportation expenses plus per diems of P30.00 and
actual expenses while waiting.”
- Even without the express reservation of said power, the directors
are not entitled to compensation for the law is well settled that
directors of corporation presumptively serve without
compensation and in the absence of agreement or a resolution in
relation thereto, no claim can be asserted therefor.
- There can be no recovery of compensation unless expressly
provided for, when a director serves as president or vice
president, as secretary, as treasurer or cashier, as a member of an
executive committee, as chairman of a building committee, or
similar offices.
- The directors, in assigning themselves additional duties, such as
the visitation of farmers’ cooperative marketing associations
scattered throughout the country, acted within the power, but by
voting themselves compensation for such additional duties, they
acted in excess of their authority, as expressed in the by-laws.
- The authority granted by the by-laws of general supervision and
control of the affairs of and property of the Exchange cannot be
used as justifications for the adoption of the questioned
resolutions because the authority referred to herein pertain to
the board’s general powers merely, and do not extend to giving
the members of the said board the compensations stated in the
resolution, as the matter of providing for their compensations are
specifically withheld from the board of directors, and reserved to
the stockholders.
Fogelson vs. American Woolen Co.
FACTS: Two stockholders of the American Woolen Co. wants to
enjoin the proposed plan of four of its directors in fixing a retirement
income or pension to be paid annually by the corporation to an
employee after his retirement. The plan is to be administered by
means of a pension trust. The president of the corporation will be
eligible for retirement on June 1, 1949 and thereafter be entitled to
receive an annual pension of $54,220. The plaintiffs alleges that
pensions is “excessive and unconscionable”; that the purpose of
funding service benefits by a single payment is to insure that he will
receive such pension irrespective of business vicissitudes which may
hereafter overtake the corporation; and that the proposal to fund past
service benefits by a single payment, instead of installments over a
term of years, disregards the custom and usage of other companies
with respect to retirement income plans, and disregards the
inadequate cash position of said defendant corporation. The district
judge, said that there was no colorable reason to disturb the exercise
by the directors of their judgment and discretion in the discharge of
their duties.
ISSUES:
1. WON the proposal to fund past service benefits by a single
payment instead of by installment payments extending over a
term of years constitute a waste of corporate assets
2. WON the failure to set a reasonable ceiling in dollars, limiting the
maximum pension payable annually to any one individual is
allowed
3. WON the proposal to pay the president so large an annual
pension after his retirement is proper
HELD:
1. The affidavits of both parties are not yet conclusive and thus
preclude any trial of this issue. Defendants in their answer,
supported by affidavits of the directors argued that each director
who voted for the plan exercised his best business judgment. This
denial would be refuted if the plaintiffs were able to prove that
the real purpose was as alleged. Therefore, a triable issue of facts
exists as to whether the directors did exercise their best business
judgment or were motivated by the alleged purpose of favoring
the president.
2. Plaintiffs assert that such a limitation is customary, but defendant
states that the present trend of corporate pension plans “is away
from the fixing of low maximums on retirement incomes” and
cites instances where the operation of the percentage formula
results in retirement incomes for particular individuals in excess
of $50,000 per year. The practice of other companies is not
conclusive, but it is relevant, and thus obviously cannot be tried
out upon affidavits.
3. A retirement plan which provides a very large pension to an
officer who has served to within one year of the retirement age
 without any expectation of receiving a pension, would seem
analogous to a gift or a bonus. The size of a bonus may thus raise
a justifiable inquiry as to whether it amounts to spoliation or
waste of corporate property. The court does not say that a
pension of $54,220 to such an officer cannot be justified, but, if
justified, it must be because it is in the interest of the employer to
insure to even those who receive so high a salary that they may
retire on a pension computed upon the same percentage formula
as the lowest salaried employees. Because of this, the Court is not
prepared to say that providing a pension whose present value, as
we compute it, is more than $450,000, is so clearly the exercise of
proper business judgment that courts may not even allow the
issue to be tried. The Court intimates no opinion as to how it
should be decided; but the Court submits, that nothing would
more tend to weaken confidence in the courts than to hold that
the decision of a board of directors to give to a retiring president
so large a sum beyond the reach of any scrutiny whatever.
Kerbs v. California Eastern (1952)
Concept: Duties of Directors and Controlling Stockholders
FACTS: California Eastern Airways, had been in a precarious financial
position from its incorporation. Under the direction of the new
President, d Saint-Phalle, the corporation dismissed 85% of its
personnel, stopped operating its aircraft, leased them to others, and
converted its aircraft from freight to passenger carriers. The
Corporation became profitable. The Board subsequently proposed a
stock option plan which would allow named executives the option to
purchase unissued shares of stock. The Board also proposed a profit-
sharing plan that provided that whenever the quarterly earnings
exceeded a certain threshold, that such excess would be distributed
among named officers and executive personnel. Both plans were
adopted during a meeting of the Directors. Kerbs and Haney sought to
enjoin California Eastern Airways from granting stock options to
executives and from paying or distributing any money under a profit
sharing plan. Kerbs and Haney attacked the adoption of the plans on
the ground that the votes of interested directors were required. The
lower court dismissed the action.
ISSUE: WON the adoption of the stock option plan was valid.
HELD: NO. The ratification by a majority of the stockholders during a
special meeting called for that purpose cured any voidable defect in
the action of the board. Stockholders’ ratification of voidable acts of
directors is effective for all purposes – unless the action of the
directors constituted a gift of corporate assets to themselves or were
ultra vires, illegal, or fraudulent. The interested character of the
directors who voted for the stock option plan makes their action
voidable only – thus, subject to stockholders’ ratification. HOWEVER,
the stock option constituted a GIFT – thus, NOT subject to
stockholders; ratification. There must be some circumstances which
may reasonably be regarded as sufficient to insure that the
corporation will receive that which it desires to obtain by granting the
options, that is, the retention of the officers and personnel in its
employ. Note that the options may be exercised in toto immediately
upon their issuance and may be exercised within a 6 mo. period after
the termination of employment. The plan and options issued
thereunder do not of themselves insure that the benefit of retaining
the services of the officials and personnel.
ISSUE: WON the adoption of the profit-sharing plan was valid.
HELD: NO. The corporation’s by-laws provided that 3 (out of 11)
directors would suffice for a quorum. However, the law provided that
in no case may a quorum of the Board be less than 1/3 of the total
number of directors – thus, for a board of 11, the quorum is at least 4.
A by-law which is repugnant to the statute must always give way to
the statute’s superior authority.
Since only 3 of the directors present in the meeting were not
interested in the profit-sharing plan, a majority was not obtained to
pass the action. it is a general rule that the votes of interested
directors will not be counted in determining whether a proposed
action has received the affirmative vote of a majority of the board. The
5 interested directors should not be disregarded for quorum purposes,
and the votes of the 3 disinterested directors did not cause the
adoption of the action by the board.
Strong et. al. vs. Gutierrez Repide
FACTS: Erica Strong is the owner of 800 shares of the Phil Sugar
Estates Devt Company, which owned ½ of the value of friar lands in
the Philippines. Repide is director and majority SH. The government
made an offer to purchase the lands owned by the corporation and
from the other owners. The offer was rejected by Repide, without
consulting the other SHs, and held out for a better deal. He was aware
that the value of the lands and the shares would be of no value if the
sale were not consummated, since the company had not paid
dividends, was living on credit, and could not even paid taxes. The land
was the only valuable asset of the corporation. Repide than took steps
to purchase 800 shares of stock owner by Strong. He employed
Kaufmann, who then employed Sloan the broker, to purchase the
stock for him. Negotiations ensued. Strong through Jones agreed to
sell Strong’s shares to Repide. He thus obtained the 800 shares for
1/10th the amount they were worth by the eventual sale of the lands
two months after he bought the shares. The probable value of the
shares was unknown to anyone except Repide, while the agent of
Strong had no idea that it was Repide who wanted to purchase the
shares.
DOCTRINE: An executive cannot use privileged information for profit.
The question in this case WON there is a duty on the part of the SH to
disclose information such as his directorship? In this case, the court
held yes.
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, Repide was the chief negotiator for the sale of the lands,
acting for all the other SHs. Only he knew the state-of-play in the
proposed sale. He owned ¾ of the shares of the corporation. Under
these circumstances, and before the negotiations for the sale were
completed, he employs agents to purchase shares of his company
from another SH and conceals his own identity and knowledge of the
state of the negotiations on the sale of the lands and their probable
effect on the value of the shares to be purchased. A director may be
accountable directly to the SH where the special facts surrounding
the transaction give rise to the obligation to disclose his identity or
the inside information he possesses. This is known as the special
facts doctrine.
Gokongwei v. SEC (1979)
Concept: Control and Management of Corporation
FACTS: This case is a consolidation of 2 SEC cases. In SEC case 1423,
petitioner John Gokongwei, Jr. (John) alleged that SMC had been
investing corporate funds in other corporations and businesses outside
of the primary purpose clause of the corporation, in violation of
section 17 of the Corporation Law. Thus, he filed a petition seeking to
have private respondents Andres Soriano, Jr. and Jose Soriano, as well
as the SMC declared guilty of such violation, and ordered to account
for such investments and to answer for damage. 

ISSUE: WON respondent SEC gravely abused its discretion in allowing
the stockholders of respondent corporation to ratify the investment of
corporate funds in a foreign corporation? (NO)
RATIO: NO, the investment was for the purchase of beer
manufacturing and marketing facilities which is relevant to SMC’s
corporate purpose.
The purchase of the beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose which was
to manufacture and market beer.
The ruling in De la Rama vs. Ma-ao Sugar is applicable here:
A private corporation, in order to accomplish is purpose as stated in its
articles of incorporation, and subject to the limitations imposed by the
Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of the stockholders
is necessary. 
 10 years there will be saving of $600/month, $300 for each mill,


Singer v. Carlisle (1941)
Concept: Seizing Corporate Opportunity
FACTS: Stockholders of UNITED Corp. filed a derivative suit against
the directors and officers of the corporation and the partners, officers
and stockholders of several banking companies engaged in the
business of underwriting securities2. Through several transactions with
holding and operating companies, JP Morgan became underwriters of
some issued securities and acquired the underwriting business of the
said companies; UNITED was not offered the opportunity to acquire
the same benefits and was effectively excluded as a competitor of JP
Morgan. Stockholders alleged that the director and officers acted in
concert with JP Morgan and willfully deprived UNITED of the
opportunity to compete in the underwriting business.
director in the position of serving 2 competing corporations and the
director ends up neglecting his duty to the other.
Globe Woolen Co. v Ultica Gas and Electric Co.
FACTS: Globe Woolen needed electric power to run its mills. Its
president and majority SH, Maynard, was able to get a contract with
the electric company Utica Gas which was ratified by the executive
committee of Globe’s board. Maynard was a nominal SH in the electric
company also, and did not vote in the meeting. Globe desires to
enforce the contract.
HELD: Contracts are voidable at the instance of Utica Gas. Globe
argues that by refusing to vote, Maynard shifted responsibility to his
associates, and may reap a profit from their errors. One does not
divest oneself so readily of one’s duties as trustee. The refusal to vote,
has indeed this importance: it gives to the transaction the form and
presumption of propriety, and requires one who would invalidate it to
prove beneath the surface. The trustee or director holds a duty of
constant and unqualified fidelity. He cannot rid himself of the duty to
warn and to denounce, if there is improvidence or oppression, either
apparent on the surface, or lurking beneath it. There was an influence
in this case which was exerted by Mr Maynard the president of Globe
Woolen. From beginning to end he dealt with a subordinate, who was
alert to serve at his pleasure. The unfairness in the contract is startling
and the consequences could be disastrous. No matter how large the
business, or how great the increase in prices of labor or fuel, or there
be extensions to the plant, the electric company had pledged that for
$7200/year. As a result of that pledge it has supplied the plaintiff with
electric current for practically nothing, and even owes it some money
thereafter. Mr Maynard knew the unfairness of the contract, and he
cannot have failed to know that he held a one-sided contract which
left the defendant at his mercy. Thus his refusal to vote does not
nullify, as of course an influence and predominance exerted without a
vote. A constant duty rests on a trustee to seek no harsh advantage to
the detriment of his trust, but rather to protect and renounce he gains
what is unfair.

ISSUE: WON the derivative suit should prosper

HELD: YES. The directors and officers have the duty to acquire for
UNITED as much of the underwriting business as possible and
ensure that it would be profitable. A director occupies a fiduciary
relation towards the minority stockholders and is charged with the
duty of exercising a high degree of good faith and diligence in the
protection of the minority interests.

However, the allegations in the complaint are insufficient to charge

the defendants with breach of duty. There was no allegation as to
what securities were issued and that the same might have been
acquired by UNITED as underwriter. Complaint should state the
specific transactions.

Directorship in 2 competing corporations does not in itself constitute a

breach of the director’s duty to act in the interest of the corporation.
There is a breach when the business opportunity arises placing the

2 UNITED is engaged in the same business