CORPORATION

 LAW  CASE  DIGESTS  

3C  &  3S  –  ATTY.  CARLO  BUSMENTE  

TURNER  vs.  LORENZO  SHIPPING  CORP.   as   borne   out   by   its   Financial   Statements   for   Fiscal   Year   1999   showing   a  
G.R.  No.  157479  -­‐  November  2010   deficit  of  P72,973,114.00  as  of  December  31,  1999.  
   
FACTS:   Upon   the   respondent’s   refusal   to   pay,   the   petitioners   sued   the  
The   petitioners   (Philip   and   Elnora   Turner)     held   1,010,000   shares   of   respondent  for  collection  and  damages  in  the  RTC  on  January  22,  2001.    
stock   of   the   respondent   (Lorenzo   Shipping   Corp.),   a   domestic    
corporation   engaged   primarily   in   cargo   shipping   activities.   The   The   petitioners   filed   their   motion   for   partial   summary   judgment,  
respondent   decided   to   amend   its   articles   of   incorporation   to   remove   claiming  that  the   respondent  has   an   accumulated   unrestricted   retained  
the   stockholders’   pre-­‐emptive   rights   to   newly   issued   shares   of   stock.   earnings  of  P11,975,490.00,  evidenced  by  its  Financial  Statement  as  of  
The  petitioners  voted  against  the  amendment  and  demanded  payment   the  Quarter  Ending  March  31,  2002;  
of  their  shares  at  the  rate  of  P2.276/share  based  on  the  book  value  of    
the  shares,  or  a  total  of  P2,298,760.00.   The   respondent   opposed   the   motion   for   partial   summary   judgment,  
  stating   that   the   determination   of   the   unrestricted   retained   earnings  
The   respondent   found   the   fair   value   of   the   shares   demanded   to   be   should   be   made   at   the   end   of   the   fiscal   year   of   the   respondent,   and   that  
unacceptable.   It   insisted   that   the   market   value   on   the   date   before   the   the  petitioners  did  not  have  a  cause  of  action  against  the  respondent.  
action  to  remove  the  pre-­‐emptive  right  was  taken  should  be  the  value,    
or   P0.41/share   (P414,100.00)   and   that   the   payment   could   be   made   RTC  granted  the  petitioners’  motion  fixing  the  fair  value  of  the  shares  of  
only   if   the   respondent   had   unrestricted   retained   earnings   in   its   books   stocks   at   P2.54   per   share.   The   evidence   submitted   shows   that   the  
to  cover  the  value  of  the  shares,  which  was  not  the  case.   respondent   has   retained   earnings   of   P11,975,490   as   of   March   21,   2002.  
  This   is   not   disputed   by   the   defendant.   Its   only   argument   against  
The   disagreement   on   the   valuation   of   the   shares   led   the   parties   to   paying  is  that  there  must  be  unrestricted  retained  earnings  at  the  
constitute   an   appraisal   committee   pursuant   to   Sec.   82   of   the   time   the   demand   for   payment   is   made.   RTC   further   stated   that   the  
Corporation   Code.     The   committee   reported   its   valuation   of   law   does   not   say   that   the   unrestricted   retained   earnings   must   exist   at  
P2.54/share,  for  an  aggregate  value  of  P2,565,400.00.   the   time   of   the   demand.   Even   if   there   are   no   retained   earnings   at   the  
  time   the   demand   is   made   if   there   are   retained   earnings   later,   the   fair  
Subsequently,   the   petitioners   demanded   payment   based   on   the   value   of   such   stocks   must   be   paid.   The   only   restriction   is   that   there  
valuation   plus   2%/month   penalty   from   the   date   of   their   original   must   be   sufficient   funds   to   cover   the   creditors   after   the   dissenting  
demand   for   payment,   as   well   as   the   reimbursement   of   the   amounts   stockholder  is  paid.    
advanced  as  professional  fees  to  the  appraisers.    
  Subsequently,   on   November   28,   2002,   the   RTC   issued   a   writ   of  
Respondent   refused   the   petitioners’   demand,   explaining   that   pursuant   execution.  
to   the   Corporation   Code,   the   dissenting   stockholders   exercising   their    
appraisal   rights   could   be   paid   only   when   the   corporation   had   The   respondent   commenced   a   special   civil   action   for   certiorari   in   the  
unrestricted  retained  earnings  to  cover  the  fair  value  of  the  shares,  but   CA.     CA   issued   a   TRO,   enjoining   the   petitioners,   and   their   agents   and  
that  it  had  no  retained  earnings  at  the  time  of  the  petitioners’  demand,   representatives  from  enforcing  the  writ  of  execution.  By  then,  however,  
the  writ  of  execution  had  been  partially  enforced.  The  TRO  then  lapsed  

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without   the   CA   issuing   a   writ   of   preliminary   injunction   to   prevent   the   Corporation   Code   did   not   provide   that   the   unrestricted   retained  
execution.  Thereupon,  the  sheriff  resumed  the  enforcement  of  the  writ   earnings  must  already  exist  at  the  time  of  the  demand.  
of  execution.    
  The   RTC’s   construal   of   the   Corporation   Code   was   unsustainable,  
CA   granted   respondent's   petition.   The   Orders   and   the   corresponding   because   it   did   not   take   into   account   the   petitioners’   lack   of   a   cause   of  
Writs   of   Garnishment   are   NULLIFIED   and   the   Civil   Case   is   ordered   action  against  the  respondent.  In  order  to  give  rise  to  any  obligation  to  
DISMISSED.   pay   on   the   part   of   the   respondent,   the   petitioners   should   first   make   a  
  valid   demand   that   the   respondent   refused   to   pay   despite   having  
ISSUE:   unrestricted   retained   earnings.   Otherwise,   the   respondent   could   not   be  
WON   the   petitioners   have   a   valid   cause   of   action   against   the   said   to   be   guilty   of   any   actionable   omission   that   could   sustain   their  
respondent.   action  to  collect.  
   
HELD:   Neither  did  the  subsequent  existence  of  unrestricted  retained  earnings  
No.   SC   upheld   the   decision   of   the   CA.     RTC   acted   in   excess   of   its   after   the   filing   of   the   complaint   cure   the   lack   of   cause   of   action.   The  
jurisdiction.   petitioners’   right   of   action   could   only   spring   from   an   existing   cause   of  
  action.   Thus,   a   complaint   whose   cause   of   action   has   not   yet   accrued  
No   payment   shall   be   made   to   any   dissenting   stockholder   unless   cannot  be  cured  by  an  amended  or  supplemental  pleading  alleging  the  
the  corporation  has  unrestricted  retained  earnings  in  its  books  to   existence   or   accrual   of   a   cause   of   action   during   the   pendency   of   the  
cover   the   payment   (apply   the   Trust   fund   doctrine).   In   case   the   action.  For,  only  when  there  is  an  invasion  of  primary  rights,  not  before,  
corporation   has   no   available   unrestricted   retained   earnings   in   its   does   the   adjective   or   remedial   law   become   operative.   Verily,   a  
books,  Sec.  83  provides  that  if  the  dissenting  stockholder  is  not  paid  the   premature   invocation   of   the   court’s   intervention   renders   the   complaint  
value   of   his   shares   within   30   days   after   the   award,   his   voting   and   without  a  cause  of  action  and  dismissible  on  such  ground.  In  short,  the  
dividend  rights  shall  immediately  be  restored.   Civil  Case,  being  a  groundless  suit,  should  be  dismissed.  
   
The   respondent   had   indisputably   no   unrestricted   retained   earnings   in   Even   the   fact   that   the   respondent   already   had   unrestricted   retained  
its   books   at   the   time   the   petitioners   commenced   the   Civil   Case   on   earnings   more   than   sufficient   to   cover   the   petitioners’   claims   on   June  
January   22,   2001.     It   proved   that   the   respondent’s   legal   obligation   to   26,  2002  (when  they  filed  their  motion  for  partial  summary  judgment)  
pay   the  value  of  the  petitioners’  shares  did  not  yet  arise.    The  Turners’   did   not   rectify   the   absence   of   the   cause   of   action   at   the   time   of   the  
right   of   action   arose   only   when   petitioner   had   already   retained   commencement   of   the   Civil   Case.   The   motion   for   partial   summary  
earnings  in  the  amount  of  P11,975,490.00  on  March  21,  2002;  such   judgment,  being  a  mere  application  for  relief  other  than  by  a  pleading,  
right  of  action  was  inexistent  on  January  22,  2001  when  they  filed   was   not   the   same   as   the   complaint   in   the   Civil   Case.   Thereby,   the  
the  Complaint.   petitioners   did   not   meet   the   requirement   of   the   Rules   of   Court   that   a  
  cause  of  action  must  exist  at  the  commencement  of  an  action,  which  is  
The  RTC  concluded  that  the  respondent’s  obligation  to  pay  had  accrued   "commenced  by  the  filing  of  the  original  complaint  in  court."  
by   its   having   the   unrestricted   retained   earnings   after   the   making   of   the    
demand   by   the   petitioners.   It   based   its   conclusion   on   the   fact   that   the    

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Additional  info:   2.  If  the  withdrawing  stockholder  and  the  corporation  cannot  agree  on  
Cause  of  Action:   the   fair   value   of   the   shares   within   a   period   of   60   days   from   the   date   the  
A  cause  of  action  is  the  act  or  omission  by  which  a  party  violates  a  right   stockholders   approved   the   corporate   action,   the   fair   value   shall   be  
of   another.   The   essential   elements   of   a   cause   of   action   are:   (a)   the   determined  and  appraised  by  three  disinterested  persons,  one  of  whom  
existence  of  a  legal  right  in  favor  of  the  plaintiff;  (b)  a  correlative  legal   shall   be   named   by   the   stockholder,   another   by   the   corporation,   and   the  
duty  of  the  defendant  to  respect  such  right;  and  (c)  an  act  or  omission   third   by   the   two   thus   chosen.   The   findings   and   award   of   the   majority   of  
by   such   defendant   in   violation   of   the   right   of   the   plaintiff   with   a   the  appraisers  shall  be  final,  and  the  corporation  shall  pay  their  award  
resulting   injury   or   damage   to   the   plaintiff   for   which   the   latter   may   within   30   days   after   the   award   is   made.   Upon   payment   by   the  
maintain   an   action   for   the   recovery   of   relief   from   the   defendant.   corporation   of   the   agreed   or   awarded   price,   the   stockholder   shall  
Although  the  first  two  elements  may  exist,  a  cause  of  action  arises  only   forthwith  transfer  his  or  her  shares  to  the  corporation.  (Sec.  82)  
upon  the  occurrence  of  the  last  element,  giving  the  plaintiff  the  right  to    
maintain   an   action   in   court   for   recovery   of   damages   or   other   3.  All  rights  accruing  to  the  withdrawing  stockholder’s  shares,  including  
appropriate  relief.   voting  and  dividend  rights,  shall  be  suspended  from  the  time  of  demand  
  for   the   payment   of   the   fair   value   of   the   shares   until   either   the  
Stockholder's  Appraisal  Right:   abandonment   of   the   corporate   action   involved   or   the   purchase   of   the  
Section   81.   Instances   of   appraisal   right.   -­‐   Any   stockholder   of   a   shares   by   the   corporation,   except   the   right   of   such   stockholder   to  
corporation  shall  have  the  right  to  dissent  and  demand  payment  of  the   receive  payment  of  the  fair  value  of  the  shares.  (Sec.  83)  
fair  value  of  his  shares.    
   4.   Within   10   days   after   demanding   payment   for   his   or   her   shares,   a  
The   right   of   appraisal   may   be   exercised   when   there   is   a   fundamental   dissenting   stockholder   shall   submit   to   the   corporation   the   certificates  
change   in   the   charter   or   articles   of   incorporation   substantially   of   stock   representing   his   shares   for   notation   thereon   that   such   shares  
prejudicing   the   rights   of   the   stockholders.   It   does   not   vest   unless   are   dissenting   shares.   A   failure   to   do   so   shall,   at   the   option   of   the  
objectionable   corporate   action   is   taken.     It   serves   the   purpose   of   corporation,   terminate   his   rights   under   this   Title   X   of   the   Corporation  
enabling  the  dissenting  stockholder  to  have  his  interests  purchased  and   Code.  If  shares  represented  by  the  certificates  bearing  such  notation  are  
to  retire  from  the  corporation.   transferred,  and  the  certificates  are  consequently  canceled,  the  rights  of  
The  Corporation  Code  defines  how  the  right  of  appraisal  is  exercised,  as   the   transferor   as   a   dissenting   stockholder   under   this   Title   shall   cease  
well  as  the  implications  of  the  right  of  appraisal,  as  follows:   and  the  transferee  shall  have  all  the  rights  of  a  regular  stockholder;  and  
  all   dividend   distributions   that   would   have   accrued   on   such   shares   shall  
1.   The   appraisal   right   is   exercised   by   any   stockholder   who   has   voted   be  paid  to  the  transferee.  (Sec.  86)  
against  the  proposed  corporate  action  by  making  a  written  demand  on    
the   corporation   within   30   days   after   the   date   on   which   the   vote   was   5.   If   the   proposed   corporate   action   is   implemented   or   effected,   the  
taken  for  the  payment  of  the  fair  value  of  his  shares.  The  failure  to  make   corporation   shall   pay   to   such   stockholder,   upon   the   surrender   of   the  
the  demand  within  the  period  is  deemed  a  waiver  of  the  appraisal  right.   certificates  of  stock  representing  his  shares,  the  fair  value  thereof  as  of  
(Sec.  82)   the   day   prior   to   the   date   on   which   the   vote   was   taken,   excluding   any  
  appreciation   or   depreciation   in   anticipation   of   such   corporate   action.  
(Sec.  82)  

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  Following  the  trend  in  the  development  of  properties  in  the  same  area,  
CUA  JR.  vs.  OCAMPO   PRCI   wished   to   convert   its   Makati   property   from   a   racetrack   to   urban  
G.R.  Nos.  181455-­‐56  &  182008  -­‐  December  4,  2009   residential   and   commercial   use.   Given   the   location   and   size   of   its  
  Makati   property,   PRCI   believed   that   the   same   was   severly   under-­‐
FACTS:   utilized.   Hence,   PRCI   management   decided   to   transfer   its   racetrack  
Two  petitions  were  presented  before  the  SC:  (1)  a  Petition  for  Review   from  Makati  to  Cavite.  
on   Certiorari   under   Rule   45   of   the   Rules   of   Court   filed   by   petitioners    
Santiago,  Cua,  Jr.,  Solomon  Cua,  and  Robles  in  their  capacity  as  director   As  to  its  Makati  property,  PRCI  management  decided  it  was  best  to  spin  
of   the   Philippine   Racing   Club,   Inc.   (PRCI)   and   (2)   a   Petition   for   off   the   management   and   development   of   the   same   to   a   wholly   owned  
Certiorari  and  Prohibition  under  Rule  65  of  the  Rules  of  Court  filed  by   subsidiary,  so  that  PRCI  could  continue  to  focus  its  efforts  on  pursuing  
petitioner  Santiago  Cua  Sr.   its   core   business   competence   of   horse   racing.   Instead   of   organizing   and  
establishing   a   new   corporation   for   the   said   purpose,   PRCI   management  
Both   petitions   assail   the   Decision   and   Resolution   of   the   CA   in   the   opted   to   acquire   another   domestic   corporation,   JTH   Davies   Holdings,  
consolidated  cases  CA-­‐G.R.  No.  99679  and  No.  99780.   Inc.  (JTH).  
   
PRCI  is  a  corporation  organized  and  established  under  Philippine  laws   The   PRCI   Board   of   Directors   held   a   meeting   on   September   26,   2006.  
to:  (1)  carry  on  the  business  of  a  race  course  in  all  its  branches,  and,  in   Among  the  directors  present  were  petitioners  Santiago  Sr.,  Santiago  Jr.,  
particular,  to  conduct  horse  races  or  races  of  any  kind,  to  accept  bets  on   and   Solomon   as   well   as   respondent   Dulay.   All   the   directors   present,  
the  results  of  the  races,  etc.;  and  (2)  to  promote  the  breeding  of  better   except   respondent   Dulay,   voted   affirmatively   and   resolved   that   PRCI  
horses   in   the   Philippines,   lend   all   possible   aid   in   the   development   of   intends   to   acquire   up   to   100%   of   the   common   shares   of   stock   of   JTH   by  
sports,  and  uphold  the  principles  of  good  sportmanship  and  fair  play.   way  of  negotiated  sale.  
   
In   1999,   the   AOI   of   PRCI   was   amended   to   include   a   secondary   purpose,   The   next   day,   September   27,   2006,   PRCI   entered   into   a   Sale   and  
viz:   Purchase   Agreement   for   the   acquisition   from   JME   of   95.5%   of   the  
  outstanding  capital  stock  of  JTH.  
To  acquire  real  properties  and/or  develop  real  properties  into  mix-­‐use    
realty   projects   including   but   not   limited   to   leisure,   recreational   and   In   the   Special   Stockholders’   Meeting   held   on   November   7,   2006,   almost  
memorial   parks   and   to   own,   operate,   manage   and/or   sell   these   real   84.42%   of   the   outstanding   capital   stock   of   PRCI   were   present.   The  
estate  projects.     acquisition  by  PRCI  of  JTH  was  presented  for  approval.    
   
PRCI  owns  only  2  real  properties,  each  covered  by  several  TCT.  One  is   The   matter   of   the   proposed   exchange   was   taken   up   and   approved   by  
known   as   the   Sta.   Ana   Racetrack   (Makati   property),   measuring   up   to   the  PRCI  Board  of  Directors  in  its  May  11,  2007  meeting,  again  with  the  
21.2  hectares  and  the  other  is  located  in  the  towns  of  Naic  and  Tanza  in   lone  dissent  of  respondent  Dulay.    
Cavite  (Cavite  property).    
  On  July  10,  2007,  respondents  Miguel,  et  al.,  as    minority  stockholders  
of  PRCI  filed  before  the  RTC  a  Complaint,  denominated  as  a  Derivative  

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Suit     with   prayer   for   the   issuance   of   TRO/Preliminary   Injunction,   The   basis   of   a   stockholders’   suit   is   always   one   of   equity.   However,   it  
against  the  rest  of  the  Directors  of  PRCI  and/or  JTH.  RTC  Judge  issued   cannot  prosper  without  first  complying  with  the  legal  requisites  for  its  
the  TRO  prayed  for.     institution.   Rule   8,   Sec   1   of   the   Interim   Rules   of   Procedure   for  
  Intacorporate   Controversies   (IRPICC)   lays   down   the   ff.   requirements  
The  Annual  Stockholders’  Meeting  of  PRCI  scheduled  on  July  17,  2007,   which  a  stockholders  must  comply  with  in  filing  a  derivative  suit:  
failed   to   push   through   for   lack   of   quorum.   On   July   19,   2007,   petitioners    
Santiago   Jr.,   et   al.,   filed   a   Petition   for   Certiorari   with   the   CA.   The   day   Sec  1.  Derivative  Action.-­‐  A  stockholder  or  member  may  bring  an  action  
after,   Santiago,   Sr.,   also   as   PRCI   director,   filed   his   own   petition   for   in   the   name   of   a   corporation   or   association,   as   the   case   may   be,  
Certiorari  and  Prohibition.   provided,  that:  
   
In   the   meantime,   upon   the   expiration   of   the   TRO   issued   by   RTC   Judge   4. He   was   a   stockholder   or   member   at   the   time   the   acts   or  
Untalan,   the   Annual   Stockholders’   Meeting   (ASM)   of   PRCI   was   again   transactions  subject  of  the  action  occurred  and  at  the  the  time  the  
scheduled   on   October   10,   2007.   However,   Judge   Untalan   issued   a   action  was  filed;  
Permanent   Injunction.   As   a   result,   the   ASM   of   PRCI   proceeded   as   5. He   exerted   all   reasonable   efforts,   and   alleges   the   same   with  
scheduled   without   taking   up   the   matters   covered   by   the   permanent   particularity   in   the   complaint,   to   exhaust   all   remedies   available  
injunction  issued  by  the  RTC.   under   the   articles   of   incorporations   by-­‐laws,   laws   or   rules  
  governing   the   corporation   or   partnership   to   obtain   the   relief   he  
At   their   annual   meeting   on   June   18,   2008,   PRCI   stockholders   had   desires;  
already   confirmed   and   approved   the   actions   and   resolutions   of   the   6. No  appraisal  rights  are  available  for  the  act  or  acts  complained  
PRCI  Board  of  Directors.  Resultantly,  on  July  7,  2008,  PRCI  and  JTH  duly   of;  and  
signed   and   executed   a   Deed   of   Transfer   with   Subscription   Agreement,   7. The  suit  is  not  a  nuisance  or  harassment  suit.  
covering   the   exchange   of   the   Makati   propertyo   of   PRCI   for   shares   of    
stock  of  JTH.   The   import   of   establishing   the   availability   or   unavailability   of   appraisal  
  rights  to  the  minorit  stockholder  is  further  highlighted  by  the  fact  that  
However,  the  BIR  reversed/revoked  its  earlier  ruling  that  the  propert-­‐ it   is   one   of   the   factors   in   determining   whether   or   not   a   complaint  
for-­‐shares  exchange  between  PRCI  and  JTH  was  a  tax-­‐free  transaction.   involving  an  intra-­‐corporate  controversy  is  a  nuisance  and  harassment  
As   a   result,   PRCI   and   JTH   executed   a   Disengagement   Agreement,   by   suit.  
virtue   of   which   PRCI   and   JTH   would   disengaged   and   would   no   longer    
implement   the   Deed   of   Transfer   with   Subscription   Agreement.   PRCI   The   Corporation   Code   expressly   made   appraisal   rights   available   to  
disclosed  the  Disengagement  Agreement  to  SEC.     dissenting  stockholder  as  provided  in  Secs.  42  and  81.  
   
ISSUE:   Respondents  Miguel,  et  al.,  themselves  admitted  that  the  property-­‐for-­‐
WON  the  derivative  suit  was  proper   shares   exchange   between   PRCI   and   JTH,   approved   by   majority   of   the  
  PRCI   Board   of   Directors,   involved   all   or   substantially   all     of   the  
HELD:   properties   and   assets   of   PRCI.   Irrefragably,   the   said   transaction  
The  court  ruled  in  the  negative.  

 CORPO  CASE  DIGESTS  3C  &  3S    ||     5  

 CORPORATION  LAW  CASE  DIGESTS  
3C  &  3S  –  ATTY.  CARLO  BUSMENTE  

qualified  as  one  of  the  instances  when  dissenting  stockholders,  such  as  
respondents  Miguel,  et  al.,  could  have  exercised  their  appraisal  rights.  
 
The   Court   finds   specious   the   averments   of   respondents   Miguel,   et   al.,  
that   appraisal   rights   were   not   available   to   them,   because   appraisal  
rights  may  only  be  exercised  by  stockholders  who  had  voted  against  the  
proposed  corporate  action;  and  that  at  the  time  respondents  Miguel,  et  
al.,   instituted   a   civil   case,   PRCI   stockholders   had   yet   to   vote   on   othe  
intended   property-­‐for-­‐shares   exchange   between   PRCI   and   JTH.  
Respondents   themselves   caused   the   unavailability   of   appraisal   rights  
by  filing  the  complaint  in  civil  case  No.  07-­‐0610.  
 
More   than   anything,   the   derivative   suit   of   respondents   Miguel,   et   al.,  
raises  questions  of  whether  their  derivative  suit  was  prematurely  filed  
for   they   had   failed   to   ecert   all   reasonable   efforts   to   exhaust   all   other  
remedies  available  under  the  AOI,  by-­‐laws,  laws  or  rules  governing  the  
corporation   or   partnership,   as   required   by   Rule   8,   Section   1   (2)   of  
IRPICC.   The   obvious   intent   behind   the   rule   is   to   make   the   derivative  
suit   the   final   recourse   of   the   stockholder,   after   all   other   remedies   to  
obtain  the  relief  sought  have  failed.  
 

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