1.

CHONA
Petitioners, vs PAMPANGA I ELECTRIC COOPERATIVE, INC., and LOLIANO E. ALLAS, ESTACIO and
LEOPOLDO MANLICLIC,

Respondents. G.R. No. 183196

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure assailing
the Decision[1] of the Court of Appeals dated 29 May 2008 in CA-G.R. SP No. 93971, which annulled
and set aside the Decision dated 30 June 2005 and Resolution dated 24 January 2006 of the National
Labor Relations Commission (NLRC) in NLRC-NCR Case No. 040757-04. The NLRC found that
petitioners Chona Estacio (Estacio) and Leopoldo Manliclic (Manliclic) were illegally dismissed by
respondents Pampanga I Electric Cooperative, Inc. (PELCO I) and Engineer Loliano E. Allas (Engr.
Allas), and ordered the reinstatement of petitioners and payment of their backwages. The NLRC
reversed the Decision dated 30 April 2004 of the Labor Arbiter in NLRC Case No. RABIII-03-5517-03
dismissing petitioners Complaint for illegal dismissal against respondents for lack of merit.

The facts of the case as culled from the records are as follows:

Respondent PELCO I is an electric cooperative duly organized, incorporated, and registered

pursuant to Presidential Decree No. 269.[2] Respondent Engr. Allas is the General Manager of
respondent PELCO I.[3]

Petitioner Estacio had been employed at respondent PELCO I as a bill custodian since 1977,
while petitioner Manliclic had been working for respondent PELCO I as a bill collector since June 1992.[4]
On 22 August 2002, Nelia D. Lorenzo (Lorenzo), the Internal Auditor of respondent PELCO I, submitted
her Audit Findings at the San Luis Area Office to respondent Engr. Allas, pertinent portions of which
state:

Evaluation of the results of physical inventory of bills through reconciliation of records

such as aging schedule of consumer accounts receivable balance, collection reports and
other related documents revealed 87 bills amounting to One Hundred Twenty Six
Thousand Seven Hundred Fifty and 93/100 (P126,750.93) remained unremitted as of
August 20, 2002.

Accounting of which includes the accountability of Ms. Estacio amounting to One Hundred
Twenty Three Thousand Eight Hundred Seven and 14/100 (P123,807.14) representing
86 bills.[5]

Respondent Engr. Allas issued a Memorandum dated 6 September 2002 to petitioner Estacio informing
her of the audit findings, and directing her to explain in writing, within 72 hours upon receipt thereof,
why no disciplinary action should be imposed upon her for Gross Negligence of Duty under Section 6.6
of Board Policy No. 01-04 dated 23 July 2001.

1
In her written explanation, petitioner Estacio averred that she had no control over and should not be
held answerable for the failure of the bill collectors at the San Luis Area Office to remit their daily
collections. Petitioner Estacio also asserted that according to her revised job description as a bill
custodian, she merely had to ascertain on a daily basis the total bills collected and uncollected by
collectors. Any failure on her part to update the bill custodian records by the time the audit was
conducted on 9 August 2002 was due to the abnormal weather conditions during July 2002, resulting
in the flooding of San Luis and Candaba, Pampanga. Such negligence could not be categorized as gross
in character as would warrant the imposition of disciplinary action against her.[6]

Unsatisfied with petitioner Estacios explanation, respondent Engr. Allas issued a

Memorandum[7] dated 26 September 2002 charging Estacio with gross negligence of duty. A formal
investigation/hearing then ensued, during which petitioner Estacio was duly represented by
counsel. The investigating committee, in the report it submitted to respondent Engr. Allas on 23
October 2002, found petitioner Estacio guilty of dishonesty and gross negligence of duty under Section
6.4[8] and Section 6.6,[9]respectively, of Board Policy No. 01-04 dated 23 July 2001; and recommended
her dismissal from service with forfeiture of benefits.[10]

On 25 October 2002, respondent Engr. Allas rendered a Decision which adopted the recommendation
of the investigation committee dismissing petitioner Estacio from service, with forfeiture of her benefits,
effective 28 October 2002; with the modification deleting the charge of dishonesty.[11] Petitioner Estacio
sought a reconsideration of the said decision but it was denied by respondent Engr. Allas.

In the same Audit Findings at the San Luis Area Office submitted to respondent Engineer Allas on 22
August 2002, Internal Auditor Lorenzo reported that petitioner Manliclic, a bill collector, failed to remit
to respondent PELCO I management his collection amounting to P4,813.11, as of 20 August 2002.
Respondent Engr. Allas issued a Memorandum dated 6 September 2002 directing petitioner Manliclic
to explain in writing, within 48 hours from receipt thereof, why no disciplinary action should be taken
against him for committing offenses against respondent PELCO I properties,[12] under Section 2.1 of
Board Policy No. 01-04 dated 23 July 2001.
On 11 September 2002, petitioner Manliclic submitted his written explanation[13]admitting the he used
the amount of P4,813.11 from his collection to cover pressing family obligations and requesting two
months to pay the same. With this admission, respondent Engr. Allas issued another
Memorandum[14] dated 28 September 2002dismissing petitioner Manliclic from service effective 1
October 2002, with forfeiture of benefits. Petitioner Manliclic sought reconsideration[15] of his dismissal,
but was rebuffed by respondent Engr. Allas in the latters letter[16] dated 10 October 2002, which reads:

Your letter of reconsideration detailed in full the manner by which the amount
of P4,813.11 was misappropriated. You admitted having lend (sic) to Joselito Ocampo
2
 the sum of P3,719.75 and this is supported by the affidavit of admission of said Mr.
Joselito Ocampo which was duly notarized by Notary Public, Juan Manalastas. Thus, said
affidavit is taken by management as gospel truth.

This affidavit does not however exculpate you from the offense of misappropriation,
defined and penalized under Section 2, paragraph 2.1 ON COOP FUNDS (2.1.2, 2.1.3 &
2.1.4) of the Board Policy No. 27-96 and Administrative Policy No. 10-89.

If we may inform you the money you collected are held in trust by you so that you have
to remit the same to the cooperative (San Luis Area Office) at the proper time.

You should not take the liberty of lending them to any co-employee because you have to
account for them to the last centavo at the end of the collection day.

In view of the foregoing, it is sad to say that your letter of reconsideration is hereby
denied.[17]

From respondent Engr. Allas actions on their administrative case, petitioners Estacio and Manliclic
separately filed with the Board of Directors of respondent PELCO I their memoranda of appeal.[18] The
Board of Directors of respondent PELCO I subsequently passed two resolutions, with essentially the
same contents, i.e., Resolutions No. 38[19] dated 15 November 2002 and No. 39,[20] dated 25
November 2002, respectively. In said Resolutions, the Board of Directors of respondent PELCO I
reinstated petitioners to their positions without loss of seniority, and ordered respondent Engr. Allas to
pay in full the salaries and other incentives accruing to petitioners after deducting the first 15 days of
their suspension.

Notwithstanding the approval of Resolutions No. 38 and No. 39, respondent Engr. Allas refused to
reinstate petitioners and proceeded to dismiss them from service.Addressing the Board of Directors of
respondent PELCO I, respondent Engr. Allas stated in his letter dated 29 November 2002[21]:

The act of reducing their penalties is a gross abuse of authority and commission of acts
inimical to the interest of the cooperative and the public at large because you have no
authority to do so since Board Policy No. 01-04 of PELCO I clearly provides the penalty
of dismissal for the offenses they were found guilty. Your honors authority to act is
governed by the rules as provided in the aforesaid Board Policy. Going beyond that is
abuse of authority instead of protecting the interest of the cooperative you protected the
employees who through their acts depleted the earnings and funds of the cooperative.
In a letter dated 9 December 2002 by Regional Director Alberto A. Guiang of the National
Electrification Administration (NEA) to the Board of Directors of respondent PELCO I, he wrote:

THE BOARD OF DIRECTORS

Pampanga I Electric Cooperative, Inc. (PELCO I)
Mexico, Pampanga
3
 Gentlemen:

This has reference to your Board Resolution No. 38 and 39 series of 2002, granting the
letters of appeal of Ms. Chona Estacio and Mr. Leopoldo Manliclic for reinstatement of
their positions to the PELCO I workforce.

While we appreciate your concern to the coop operation, we wish to call your attention
to the NEA Guidelines dated 27 January 1995, specifying the delineation of Roles of EC
Board of Directors and General Managers, and on Memorandum No. 35. Accordingly, the
Board is not vested with the authority to hire and fire nor rehire employees. The General
Manager is the only authorized official for this matter, while the Board has to formulate
policies nor guidelines only for the GM to implement.

This office carefully reviewed the facts surrounding the issues raised by the concerned
parties, and we found that due process was undertaken after rendering the decision by
the General Manager on this matter, and should be enforced. This is healthy move of
eradicating dishonesty and inefficiency among the employees. Thus, the disapproval of
the above resolutions.

Thank you.

Very truly yours,

(SGD)ALBERTO A. GUIANG[22]

NEA through Regional Director Alberto A. Guiang issued another letter to the Board of Directors
of respondent PELCO I dated 10 December 2002 stating that it was disapproving Resolution No. 39
issued by the Board of Directors of respondent PELCO I granting the letter of appeal of petitioners.[23]

The foregoing events prompted petitioners to file with the NLRC, Regional Arbitration Board
(RAB)-III, City of San Fernando, Pampanga, their Complaints[24]against respondents for illegal dismissal
and payment of backwages, 13th month pay, and other benefits. The Complaints were docketed
as NLRC Case No. RABIII-03-5517-03.

In a Decision dated 30 April 2004, the Labor Arbiter ruled in favor of respondents, for the following
reasons:
Respondents under their onus were required to show that [herein petitioners] were
dismissed for cause.

As to [petitioner] Chona Estacio respondents contended that she was guilty of gross
negligence of duty under sec. 6.6.6. of its Employees Code of Discipline (Board Policy 01-
04). Respondents have shown that [petitioner] Estacio failed to carry out her duties and
responsibilities as a bill custodian per the latters job description more particularly no. 2
and no. 3 of her detailed duties, namely:
4
 2. Maintains an accurate record of all Official Electric Bill Receipts (OERB)
issued to and returned by collectors, and sees to it that the same are
properly signed or initialed by the collector as clearance to any
accountability;

3. Accounts and ascertains on a daily basis the total bills collected and
uncollected by collectors and those bills paid in the office by consumers
through the maintenance of bill route control and related record (Annex 1
of respondents Reply).

It was likewise shown that this infraction carries the penalty of dismissal. Record also
showed that the requirements of procedural due process was afforded the [petitioner]
before she was finally separated.

In the case of [petitioner] Manliclic, respondents were able to show with the admission
of the former that sec. 2, subsection 2.1, pars. 2.1.2 to 2.1.4 of Board Policy No. 01-04
were violated by [petitioner]. The same violations carry the penalty of dismissal. The
procedural requirements of notice and hearing were likewise afforded [petitioner]
Manliclic before he was finally terminated.

In view of the above, we hold that there is no illegal dismissal.[25]

In the end, the Labor Arbiter decreed:

WHEREFORE, premises considered, judgment is hereby rendered dismissing instant

complaint for illegal dismissal for lack of merit.

However, respondents are held liable and ordered to pay [petitioners] the following:

Service Incentive 13th month pay

Leave pay

1. Chona Estacio P5,765.19 P5,074.03

2. Leopoldo Manliclic 8,294.19 6,596.25

All other claims are hereby dismissed for utter lack of merit.[26]

Disgruntled with the Labor Arbiters Decision, petitioners appealed to the NLRC. The appeal was
docketed as NLRC-NCR Case No. 040757-04.

The NLRC, in its Decision dated 30 June 2005, disagreed with the Labor Arbiter:

5
 There is nothing on record showing that Resolution No. 39, Series of 2002 is null and
void. Neither is there any evidence on record showing that there is legal basis to hold the
December 9 and 10, 2002 letters of Alberto A. Guiang, Regional Director, National
Electrification Administration (NEA), Regional Electrification Office III as having nullified
Resolution No. 39, Series of 2002. For what the mentioned letters may be worth, we are
convinced they were nothing but mere opinions which bear no weight on the labor dispute
obtaining between complainants and respondents. Verily, complainants employer is
Pampanga I Electric Cooperative, Inc. (PELCO), not the National Electrification
Administration (NEA).

Finally, jurisprudence teaches us that the Court, out of its concern for those less privileged
in life, has inclined towards the worker and upheld his cause on his conflicts with the
employer (Revidad vs. NLRC, 245 SCRA 356). Time and again we have held that should
doubts exist between the evidence presented by the employer and the employee, the
scales of justice must be tilted in favor of the latter (Asuncionvs. NLRC, G.R. No.
129329, July 31, 2001). This favored treatment is directed by the social justice policy of
the Constitution (Article II of the 1987 Constitution), and embodied in Articles 3 and 4 of
the Labor Code.[27]

The dispositive portion of the NLRC Decision[28] reads:

WHEREFORE, premises considered, the decision appealed from is hereby MODIFIED.

The findings a quo dismissing the complaint for illegal dismissal is REVERSED and SET
ASIDE and a new one entered finding [herein petitioners] to have been illegally dismissed
by respondents. Accordingly, respondents are hereby ordered to reinstate [petitioners]
and pay them backwages pursuant to Article 279 of the Labor Code.The rest of the
assailed decision is AFFIRMED.

Let the Arbitration Branch of origin render the appropriate computations of [petitioners]
backwages.[29]

Respondents filed a Motion for Reconsideration[30] of the NLRC Decision dated 30 June 2005, asking
the Commission to affirm, instead, the Decision dated 30 April 2004 of the Labor Arbiter which
dismissed petitioners Complaints for illegal dismissal for lack of merit.

On 24 January 2006, the NLRC promulgated its Resolution[31] denying respondents Motion for
Reconsideration.[32]

Respondents elevated their case to the Court of Appeals via a Petition for Certiorari, under Rule 65 of
the 1997 Rules of Civil Procedure, docketed as CA-G.R. SP No. 93971.

6
In a Decision dated 29 May 2008, the Court of Appeals held:

We agree with the [herein respondents], who was joined by the Labor Arbiter in their
stance, pointing out that if only [herein petitioner] Estacio had conscientiously performed
her duties in accordance with the revised job description of a bill custodian, then the
unremitted collection of P123,807.14, representing different collection periods from July
3, 5, 6, 10, 23, 26, 27, 31 to August 1, 3, 5, 7, 2002, in the hands of the bill collector
could have been discovered earlier and could not have accumulated to a bigger
amount. [Petitioner] Estacios excuse that if she was not able to update the records of the
Bill Custodian at the time when the audit was made on August 9, 2002, it is because due
to the abnormal weather condition on the month of July 2002 when San Luis and Candaba
were flooded, was correctly rejected by [respondents] for being insufficient justification
since the whole month of July 2002 was not flooded and she was only on leave for a total
of five (5) days.

So also, from the evidence adduced by [respondents], it has been adequately established
that [herein petitioner] Manliclic violated Section 2.1 of the Revised Employees Code of
Discipline under Board Policy No.` 01-04 for failure on his part to remit/turn-over his
collection to the management and misappropriating the same for his own personal use
and benefit, constituting serious misconduct.[33]

The Court of Appeals disposed of CA-G.R. SP No. 93971, thus:

WHEREFORE, premised considered, the instant petition is GRANTED. The assailed

Decision dated June 30, 2005 and the Resolution dated January 24, 2006 rendered by
public respondent NLRC are hereby ANNULLED and SET ASIDE. The Decision dated 30
April 2004 of the Labor Arbiter in NLRC Case No. RAB-III-03-5517-03 is REINSTATED.[34]

Petitioners did not file a Motion for Reconsideration to the Court of Appeals.

Petitioners now come to this Court raising the following issues in the instant Petition:

I. WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS IS IN ACCORDANCE

WITH LAW AND APPLICABLE DECISION OF THE SUPREME COURT AND ITS
FINDINGS AND CONCLUSIONS WHICH ARE BASED ON MISAPPREHENSION OF
FACTS WITHOUT CITATION OF SPECIFIC EVIDENCE OF WHICH THEY ARE
PREMISED DUE TO THE APPARENT REASON THAT THEY WERE NOT SUPPORTED
BY EVIDENCE AND CONTRADICTED BY RECORDS, SHALL PREVAIL OR
PREPONDERATE OVER THE DECISION OF THE NLRC, WHICH IS SUPPORTED BY
EVIDENCE ADDUCED BY BOTH PARTIES, LAWS, APPLICABLE JURISPRUDENCE
AND CONSTITUTIONAL PROVISIONS.

II. WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH

EVIDENCE ON RECORD, APPLICABLE LAWS AND JURISPRUDENCE WHEN IT
7
 RULED THAT RESOLUTIONS NOS. 38 AND 39 GRANTING THE LETTERS OF
APPEAL OF ESTACIO AND MANLICLIC AND ORDERING THEIR REINSTATEMENT
WITHOUT LOSS OF SENIORITY RIGHTS AND THE PAYMENT OF THEIR
BACKWAGES INVALID.

III WHETHER OR NOT THE COURT OF APPEALS ACTED IN ACCORDANCE WITH LAWS,
ESTABLISHED JURISPRUDENCE AND CONSTITUTIONAL MANDATES WHEN IT
RULED THAT RESPONDENT ALLAS AS GENERAL MANAGER OF PELCO I HAS THE
SOLE PREROGATIVE AND POWER TO SUSPEND AND/OR DISMISS THE
EMPLOYEES OF PELCO I, BASED ON NATIONAL ELECTRIFICATION
ADMINISTRATION BULLETIN NO. 35.

IV. WHETHER OR NOT THE FINDINGS OF THE COURT OF APPEALS COMMITTED

SERIOUS ERRORS IN IGNORING OR THRUSTING ASIDE THE UNDISPUTED FACTS
THAT THE PETITION FOR CERTIORARI FILED BY ALLAS TO THE COURT OF
APPEALS WHICH WAS VERIFIED BY HIM WITHOUT BOARD RESOLUTION OF
PELCO I BOARD OF DIRECTORS ASSAILING OR QUESTIONING RESOLUTIONS
NO. 38 AND 39 OF PELCO I BOARD OF DIRECTORS DISCLOSED HIS LACK OF
LEGAL PERSONALITY CONSIDERING THAT THE LATTER IS THE GOVERNING
BODY OF PELCO I, AND HAS THE DIRECT INTEREST AND CONTROL OF ITS
CORPORATE POWERS AND IN OVERLOOKING OR DISREGARDING THE FACT
THAT RESOLUTION NO. 53-06 BELATEDLY ISSUED BY ANOTHER SET OF
MEMBERS OF BOARD OF DIRECTORS OF PELCO I ATTACHED BY ALLAS IN A
MOTION FOR RECONSIDERATION IN EFFECT RATIFIED OR CONSENTED ALLAS
PETITION QUESTIONING OR ASSAILING PELCO I BOARD OF DIRECTORS VERY
OWN RESOLUTIONS NO. 38 AND 39 EARLIER PROMULGATED BY DIFFERENT SET
OF MEMBERS OF BOARD OF DIRECTORS, DEBAR OR PRECLUDE PELCO I FOR
DOING SO, FOR IT IS AN OBVIOUS INSTANCE OF ESTOPPEL AND LACHES AND
AN ELOQUENT PROOF OF AFTERTHOUGHT.

V. WHETHER OR NOT RESOLUTIONS NO. 38 AND 39 WHICH WAS (sic) UPHELD BY THE
NLRC IS IN ACCORDANCE WITH LAW, SETTLED JURISPRUDENCE AND
CONSTITUTIONAL MANDATES.[35]

Before delving into the substantial issues in this case, the Court must first resolve the procedural issue
of whether respondent Engr. Allas had the legal personality to file before the Court of Appeals the
Petition in CA-G.R. SP No. 93971.

The Court answers in the affirmative.

It bears to stress that petitioners themselves filed their Complaints before the NLRC against both
respondents PELCO I and Engr. Allas. Respondent Engr. Allas participated in the proceedings before
the Labor Arbiter and the NLRC. As a party aggrieved by the NLRC decision and resolution, respondent

8
Engr. Allas had a substantial interest to file with the Court of Appeals the Petition for Certiorari under
Rule 65 of the 1997 Revised Rules of Civil Procedure, on his own behalf.[36]

As for respondent Engr. Allas authority to file the same Petition on behalf of respondent PELCO
I, it is evidenced by Board Resolution No. 53-06,[37] approved by the Board of Directors of the
cooperative on 5 August 2006. Even though Board Resolution No. 53-06 was belatedly filed, the Court
of Appeals rightfully accepted the same. In the present case, the findings and conclusion of the Labor
Arbiter and the NLRC are at odds, and the case concerns a labor matter to which our fundamental law
mandates the state to give utmost priority and full protection.[38] Necessarily, this Court will look beyond
alleged technicalities to open the way for resolution of substantive issues.[39]

The Court cannot subscribe to petitioners argument that after passing Resolutions No. 38 and No. 39
reversing petitioners dismissal from service and ordering that they be reinstated and paid their
backwages, the Board of Directors of respondent PELCO I was estopped from subsequently passing
Board Resolution No. 53-06. The Board Resolution authorized respondent Engr. Allas to file the Petition
for Certiorari with the Court of Appeals, challenging the NLRC judgment that petitioners were illegally
dismissed.

Estoppel, an equitable principle rooted upon natural justice, prevents persons from going back on their
own acts and representations, to the prejudice of others who have relied on them.[40]

The party claiming estoppel must show the following elements:

1) lack of knowledge and of the means of knowledge of the truth as to the facts in
question;

2) reliance in good faith, upon the conduct or statements of the party to be estopped;
and

3) action or inaction based thereon of such character as to change the position or status
of the party claiming the estoppel, to his injury, detriment or prejudice.[41]

In this case, the essential elements of estoppel are inexistent.[42]

The first element is unavailing in the case at bar. Petitioners have the knowledge and the means of
knowledge of the truth as to the facts in question. In issuing Resolutions No. 38 and No. 39, the Board
of Directors of respondent PELCO I relayed its initial determination that petitioners dismissal from
service was harsh and drastic. These Resolutions merely expressed the position of the Board of
Directors of respondent PELCO I at the time of their issuance. The subsequent passing of Board

9
Resolution No. 53-06 by the same Board of Directors of respondent PELCO I, explicitly conveyed a
change of mind, i.e., the Board now wanted to contest, through respondent Engr. Allas, the finding of
the NLRC that petitioners were illegally dismissed.

Without any basis, the Court cannot conclude that by the mere issuance of Board Resolution
No. 53-06, the Board of Directors of respondent PELCO I committed false representation or
concealment of material facts in its earlier Resolutions No. 38 and No. 39. What is apparent to this
Court, on the face of these Resolutions, is that the Board of Directors of respondent PELCO I eventually
arrived at a different conclusion after reviewing the very same facts, which it considered for Resolutions
No. 38 and No. 39.

Also, Board Resolution No. 53-06 was unanimously passed by all the directors of respondent
PELCO I. There is no allegation, much less, evidence, of any irregularity committed by the Board in the
approval and issuance of said Board Resolution. Hence, the Court cannot simply brush Board Resolution
No. 53-06 aside.Questions of policy and of management are left to the honest decision of the officers
and directors of a corporation (or in this case, cooperative), 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.[43]

Moreover, petitioners were unable to establish the third element of estoppel. It bears stressing
that if there be any injury, detriment, or prejudice to the petitioners by the action of the Board of
Directors in passing Resolution Nos. 38 and 39 and subsequently Resolution No. 53-06, such injury was
due to petitioners own fault.Petitioner Estacio failed to account for and ascertain on a daily basis a total
of 86 bills collected and uncollected by the bill collectors of PELCO I, resulting in unremitted bills
amounting to P123,807.14. In the case of petitioner Manliclic, he admitted having used the amount
of P4,813.111 from his collection. Estoppel is a shield against injustice; a party invoking its protection
should not be allowed to use the same to conceal his or her own lack of diligence.[44]

To be sure, estoppel cannot be sustained by mere argument or doubtful inference; it must be clearly
proved in all its essential elements by clear, convincing and satisfactory evidence.[45]
The Court then proceeds to resolve the substantive issue of whether petitioners were illegally dismissed
by respondents.

The requisites for a valid dismissal are: (a) the employee must be afforded due process, i.e., he must
be given an opportunity to be heard and defend himself; and (b) the dismissal must be for a valid
cause as provided in Article 282[46] of the Labor Code or for any of the authorized causes under Articles
283[47] and 284[48] of the same Code.

10
Well-settled is the rule that the essence of due process is simply an opportunity to be heard or as
applied to administrative proceedings, an opportunity to explain one's side or an opportunity to seek a
reconsideration of the action or ruling complained of.[49]

It is undisputed that petitioners were accorded due process. Through the Memoranda issued by
respondent Engr. Allas, petitioners were duly informed of the results of the audit conducted by Internal
Auditor Lazaro, which were unfavorable to petitioners.Petitioners were given a chance to submit their
written explanations. As to petitioner Estacio, a formal hearing/investigation was even conducted by
an investigating committee. Only thereafter, did respondent Engr. Allas notify petitioners Estacio and
Manliclic, through a Decision dated 25 October 2002 and Memorandum dated 28 September 2002,
respectively, that they were found guilty of the charges against them and were being dismissed from
service. Both petitioners had the opportunity to seek reconsideration of their dismissal.

The Court also finds that there was valid cause for petitioner Estacios dismissal.

Petitioner Estacio was dismissed from service for the commission of an offense under Board
Policy No. 01-04 dated 23 July 2001 of respondent PELCO I, particularly:

Section 6.6 On Negligence of Duty

6.6.6 Gross negligence in assigned tasks/duties as specified in the job description.

Gross negligence connotes want or absence of or failure to exercise even slight care or diligence, or
the total absence of care. It evinces a thoughtless disregard of consequences without exerting any
effort to avoid them. To warrant removal from service, the negligence should not merely be gross, but
also habitual.[50] A single or isolated act of negligence does not constitute a just cause for the dismissal
of the employee.[51]

In JGB and Associates, Inc. v. National Labor Relations Commission,[52] the Court further declared that
gross negligence connotes want of care in the performance of ones duties. Habitual neglect implies
repeated failure to perform ones duties for a period of time, depending upon the circumstances. Fraud
and willful neglect of duties imply bad faith of the employee in failing to perform his job, to the
detriment of the employer and the latters business.

To determine if indeed petitioner Estacio was grossly negligent in the performance of her duties,
the Court must first understand what her duties were.Petitioner Estacio, as a bill custodian of
respondent PELCO I

11
 1. Issues and accounts all electric bills issued to and returned by collectors
as well as paid office bills and shall be accountable and liable for all uncollected
bills under his/her custody.

2. Maintains an accurate record of all Official Electric Bill Receipts (OEBR)

issued to and returned by collectors, and sees to it that the same are properly
signed or initialed by the collector as clearance to any accountability.

3. Accounts and ascertains on a daily basis the total bills collected and
uncollected by collectors and those bills paid in the office by consumers through
the maintenance of bill route control and related records;

4. Prepares listings of delinquent consumers due for disconnection;

5. Issues or certifies to the clearance of accounts of consumers before

reconnection or change of billing names is effected.

6. Issues bills due from employees to be deducted from their respective pay
and correspondingly logs the same in the bill route control;

7. Files in an orderly and systematic manner all the pertinent electric bills and
other related documents in her possession for easy access and reference;

8. Performs other duties that may be assigned from time to time.[53]

There is no more question that petitioner Estacio did fail to account for and record the bill
collections for eight days of July and four days of August 2002. As a result of petitioner Estacios
improper accounting and records keeping, the amount of P123,807.14 remains unremitted to
respondent PELCO I. As correctly observed by the investigating committee of PELCO[54]:

From the record of the case and investigation conducted it appears that Ms. Estacio as
the designated Bill Custodian at San Luis Area Office is responsible for the safekeeping
of consumers of electric bills especially the unpaid or uncollected bills.That for control
and accounting purposes, she has to account daily all collected and uncollected bills in
her custody including the bills paid in the office. That in issuing the bills to the bill
collectors, she has to maintain an accurate record which is the basic tool in maintaining
and controlling all the bills in her possession. Then in case the collectors do not return
the bills uncollected and do not make a report of the collected bills in a day, as Bill
Custodian, it is also her duty to require the collectors to return the bills and make a report
of the collected bills. If the collector still failed to do such, the custodian should report
the matter to the immediate supervisor or Area Manager. But sad to say Ms. Estacio failed
to perform all the above stated duties which resulted to the accumulation of unremitted
bills (86) amounting to P123,807.14.

12
 If only Ms. Estacio is performing her duties as Bill Custodian in accordance with what is
prescribed on the job description these unremitted collections could have been discovered
earlier and did not accumulate to a bigger amount.

Petitioner Estacio, despite the opportunities given to her, did not offer any satisfactory explanation or
evidence in her defense. Her only reason for failing to comply with the requisite daily accounting and
reporting of the bill collections was the terrible weather condition during the month of July 2002, which
resulted in the flooding of the San Luis and Candaba area in Pampanga, hence, keeping her from going
to work. Like the investigating committee, the Labor Arbiter, and the Court of Appeals, this Court is
unconvinced. Petitioner Estacio was on leave for only five days of July 2002. She had the occasion to
update her records on the bill collections during the other days of July and August 2002, when the
weather was fine and she was able to report for work; yet, she still did not do so. She waited until her
infraction was discovered during the conduct of the internal audit, only to proffer a feeble excuse.

Petitioner Estacios failure to make a complete accounting and reporting of the bill collections plainly
demonstrated her disregard for one of her fundamental duties as a bill custodian. It was an omission
repeated by petitioner Estacio for several days, spanning several billing periods for July and August
2002; thus, she allowed, during the said period, the accumulation of the amounts unremitted by bill
collectors to respondent PELCO I, until these reached the substantial amount of P123,807.14. All the
foregoing considered, the Court can only conclude that there was valid cause to dismiss petitioner
Estacio for gross and habitual negligence.

Similarly, the Court rules that there is valid cause for petitioner Manliclics dismissal from service.

To recall, petitioner Manliclic, a bill collector, admitted to having used the amount of P4,813.11
from his collection, lending P3,719.75 thereof to a Joselito Ocampo and presumably keeping the rest
to himself. This qualifies as an offense against properties of respondent PELCO I, which may be
committed by any of the means described in Section 2.1 of Board Policy No.01-04 dated 23 July 2001,
to wit:

2.1.1. Malversation of Coop funds or other financial securities and such other funds or
other financial securities in the care and custody of or entrusted to the Coop for which it
maybe held liable.

2.1.2. Failure to remit collection and/or failure to turn-over materials/equipments due the
Coop within the required period of time pursuant to Coop policies and rules and
regulations. (Depending on the gravity as a result of the offense.)

2.1.3. Malversing/misappropriating or withholding Coop funds or any attempt/frustration

thereof.[55]

13
In Piedad v. Lanao del Norte,[56] Warlito Piedad was a bill collector with the Lanao del Norte Electric
Cooperative. Upon audit, Piedad was found to have incurred a shortage in his cash collection in the
amount of P300.00. He acknowledged having used said amount. The Court affirmed Piedads
termination from service on account of such shortage, despite his having rendered nine years of
unblemished service and being awarded as Collector of the Year. We expostulated in that case that it
was neither with rhyme nor reason that the petitioner was dismissed from employment.His acts need
not have resulted in material damage or prejudice before his dismissal on grounds of loss of confidence
may be effected. Being charged with the handling of company funds, the petitioners position, though
generally described as menial, was, nonetheless, a position of trust and confidence. No company can
afford to have dishonest bill collectors.
In Garcia v. National Labor Relations Commission,[57] Evelyn Garcia, a cashier at a school, committed
several irregularities in handling school funds. The Court upheld her dismissal from service on the
ground of breach of trust. Bearing in mind that the position of cashier is a highly sensitive position,
requiring as it does the attributes of absolute trust and honesty because of the temptations attendant
to the daily handling of money, it could not be helped that Garcia's acts would sow mistrust and loss
of confidence on the part of respondent employer.

Petitioner Manliclics honesty and integrity are the primary considerations for his position as a bill
collector because, as such, he has in his absolute control and possession -- prior to remittance -- a
highly essential property of the cooperative, i.e., its collection. Respondent PELCO I, as the employer,
must be able to have utmost trust and confidence in its bill collectors.

The amount misappropriated by petitioner Manliclic is irrelevant. More than the resulting material
damage or prejudice, it is petitioner Manliclics very act of misappropriation that is offensive to
respondent PELCO I. If taxes are the lifeblood of the state, then, by analogy, the payment collection is
the lifeblood of the cooperative.The collection provides respondent PELCO I with the financial resources
to continue its operations. Respondent PELCO I cannot afford to continue in its employ dishonest bill
collectors.

By his own admission, petitioner Manliclic committed a breach of the trust reposed in him by his
employer, respondent PELCO I. This constitutes valid cause for his dismissal from service.

WHEREFORE, premises considered, the instant Petition is DENIED and the Decision dated 29 May
2008 of the Court of Appeals in CA-G.R. SP No. 93971 is AFFIRMED. No costs.

SO ORDERED.

14
FIRST DIVISION

PAUL LEE TAN, ANDREW G.R. No. 153468

LIUSON, ESTHER WONG,
STEPHEN CO, JAMES TAN, Present:
JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO, PANGANIBAN, CJ.,Chairperson,
VIRGINIA KHOO, SABINO YNARES-SANTIAGO,
PADILLA JR., EDUARDO P. AUSTRIA-MARTINEZ,
LIZARES and GRACE CALLEJO, SR., and
CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ.
Petitioners,
- versus -
PAUL SYCIP and MERRITTO
LIM, Promulgated:
Respondents. August 17, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, CJ.:
For stock corporations, the quorum referred to in Section 52 of the Corporation Code is based on the
number of outstanding voting stocks. For nonstock corporations, only those who are actual,
living members with voting rights shall be counted in determining the existence of a quorum during
members meetings. Dead members shall not be counted.

The Case
The present Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court seeks the reversal
of the January 23[2] and May 7, 2002,[3]Resolutions of the Court of Appeals (CA) in CA-GR SP No.
68202. The first assailed Resolution dismissed the appeal filed by petitioners with the CA. Allegedly,
without the proper authorization of the other petitioners, the Verification and Certification of Non-

15
Forum Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The second Resolution
denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with
fifteen (15) regular members, who also constitute the board of trustees.[4] During the annual members
meeting held on April 6, 1998, there were only eleven (11)[5] living member-trustees, as four (4) had
already died. Out of the eleven, seven (7)[6]attended the meeting through their respective proxies. The
meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C.
Pacis, who argued that there was no quorum.[7] In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo,
Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.When the
controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the
deceased member-trustees should not be counted in the computation of the quorum because, upon
their death, members automatically lost all their rights (including the right to vote) and interests in the
corporation.SEC Hearing Officer Malthie G. Militar declared the April 6, 1998meeting null and void for
lack of quorum. She held that the basis for determining the quorum in a meeting of members should
be their number as specified in the articles of incorporation, not simply the number
of livingmembers.[8] She explained that the qualifying phrase entitled to vote in Section 24 [9] of the
Corporation Code, which provided the basis for determining a quorum for the election of directors or
trustees, should be read together with Section 89.[10]
The hearing officer also opined that Article III (2)[11] of the By-Laws of GCHS, insofar as it prescribed
the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section
29[12] of the Corporation Code. The SEC en banc denied the appeal of petitioners and affirmed the
Decision of the hearing officer in toto.[13] It found to be untenable their contention that the word
members, as used in Section 52[14] of the Corporation Code, referred only to the living members of a
nonstock corporation.[15]
As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification
of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney
had been attached to show his authority to sign for the rest of the petitioners.

Hence, this Petition.[16]

Issues

Petitioners state the issues as follows:

Petitioners principally pray for the resolution of the legal question of whether or not in
NON-STOCK corporations, dead members should still be counted in determination of
quorum for purposed of conducting the Annual Members Meeting.
Petitioners have maintained before the courts below that the DEAD members should no
longer be counted in computing quorum primarily on the ground that members rights

16
 are personal and non-transferable as provided in Sections 90 and 91 of the Corporation
Code of the Philippines.
The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did
not even involve a non-stock corporation as petitioner GCHS.
The Honorable Court of Appeals on the other hand simply refused to resolve this
question and instead dismissed the petition for review on a technicality the failure to
timely submit an SPA from the petitioners authorizing their co-petitioner Padilla, their
counsel and also a petitioner before the Court of Appeals, to sign the petition on behalf
of the rest of the petitioners.
Petitioners humbly submit that the action of both the SEC and the Court of Appeals are
not in accord with law particularly the pronouncements of this Honorable Court
in Escorpizo v. University of Baguio (306 SCRA 497), Robern Development Corporation v.
Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183). Due course
should have been given the petition below and the merits of the case decided in
petitioners favor.[17]
In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the Petition
below, on the basis of a defective Verification and Certification; and 2) whether dead members should
still be counted in the determination of the quorum, for purposes of conducting the annual members
meeting.
The Courts Ruling
The present Petition is partly meritorious.

Procedural Issue:
Verification and Certification
of Non-Forum Shopping
The Petition before the CA was initially flawed, because the Verification and Certification of Non-
Forum Shopping were signed by only one, not by all, of the petitioners; further, it failed to show proof
that the signatory was authorized to sign on behalf of all of them. Subsequently, however, petitioners
submitted a Special Power of Attorney, attesting that Atty. Padilla was authorized to file the action on
their behalf.[18]
In the interest of substantial justice, this initial procedural lapse may be excused. [19] There
appears to be no intention to circumvent the need for proper verification and certification, which are
aimed at assuring the truthfulness and correctness of the allegations in the Petition for Review and at
discouraging forum shopping.[20] More important, the substantial merits of petitioners case and the
purely legal question involved in the Petition should be considered special circumstances [21] or
compelling reasons that justify an exception to the strict requirements of the verification and the
certification of non-forum shopping.[22]
Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called for the purpose of electing directors or
trustees[23] and transacting some other business calling for or requiring the action or consent of the
17
shareholders or members,[24] such as the amendment of the articles of incorporation and bylaws, sale
or disposition of all or substantially all corporate assets, consolidation and merger and the like, or any
other business that may properly come before the meeting.
Under the Corporation Code, stockholders or members periodically elect the board of directors or
trustees, who are charged with the management of the corporation.[25] The board, in turn, periodically
elects officers to carry out management functions on a day-to-day basis. As owners, though, the
stockholders or members have residual powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive profits, the management
and direction of the corporation are lodged with their representatives and agents -- the board of
directors or trustees.[26] In other words, acts of management pertain to the board; and those of
ownership, to the stockholders or members. In the latter case, the board cannot act alone, but must
seek approval of the stockholders or members.[27]
Conformably with the foregoing principles, one of the most important rights of a qualified shareholder
or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the corporate
affairs.[28] The right to choose the persons who will direct, manage and operate the corporation is
significant, because it is the main way in which a stockholder can have a voice in the management of
corporate affairs, or in which a member in a nonstock corporation can have a say on how the purposes
and goals of the corporation may be achieved.[29] Once the directors or trustees are elected, the
stockholders or members relinquish corporate powers to the board in accordance with law.

In the absence of an express charter or statutory provision to the contrary, the general rule is that
every member of a nonstock corporation, and every legal owner of shares in a stock corporation, has
a right to be present and to vote in all corporate meetings. Conversely, those who are not stockholders
or members have no right to vote.[30] Voting may be expressed personally, or through proxies who
vote in their representative capacities.[31] Generally, the right to be present and to vote in a meeting is
determined by the time in which the meeting is held.[32]

Section 52 of the Corporation Code states:

Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in the by-
laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations.

In stock corporations, the presence of a quorum is ascertained and counted on the basis of
the outstanding capital stock, as defined by the Code thus:

SECTION 137. Outstanding capital stock defined. The term outstanding capital stock as used in
this Code, means the total shares of stock issued under binding subscription agreements
to subscribers or stockholders, whether or not fully or partially paid, except treasury
shares. (Underscoring supplied)
The Right to Vote in
Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate stocks.[33] It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders meeting, or whether a requisite proportion of the stock of the corporation is voted to
18
adopt a certain measure or act. Only stock actually issued and outstanding may be voted.[34] Under
Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in
the articles of incorporation or declared delinquent[35] under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or represent shares that have never passed to
the ownership of stockholders; or, having so passed, have again been purchased by the
corporation.[36] These shares are not to be taken into consideration in determining majorities. When
the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have passed from the
corporation, and that may be voted.[37]

Section 6 of the Corporation Code, in part, provides:

Section 6. Classification of shares. The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have
such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as preferred or redeemable shares, unless otherwise provided in this
Code: Provided, further, that there shall always be a class or series of shares which have
complete voting rights.

xxxxxxxxx

Where the articles of incorporation provide for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be entitled to vote on the following
matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks
with voting rights.

Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention
of the lawmakers was to base the quorum mentioned in Section 52 on the number
of outstanding voting stocks.[38]

The Right to Vote in

19
Nonstock Corporations

In nonstock corporations, the voting rights attach to membership.[39]Members vote as persons, in

accordance with the law and the bylaws of the corporation. Each member shall be entitled to one vote
unless so limited, broadened, or denied in the articles of incorporation or bylaws.[40] We hold that when
the principle for determining the quorum for stock corporations is applied by analogy to nonstock
corporations, only those who are actual members with voting rights should be counted.

Under Section 52 of the Corporation Code, the majority of the members representing
the actual number of voting rights, not
the number or numerical constant that may originally be specified in the articles of incorporation,
constitutes the quorum.[41]

The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses the phrase majority vote of
the members; likewise Section 48 of the Corporation Code refers to 50 percent of 94 (the number of
registeredmembers of the association mentioned therein) plus one. The best evidence of who are
the present members of the corporation is the membership book; in the case of stock corporations, it
is the stock and transfer book.[43]

Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the
articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless the
articles of incorporation or the bylaws provide for a greater majority). If the intention of the lawmakers
was to base the quorum in the meetings of stockholders or members on their absolute number as fixed
in the articles of incorporation, it would have expressly specified so. Otherwise, the only logical
conclusion is that the legislature did not have that intention.

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members meeting is to be reckoned as

the actual number of members of the corporation, the next question to resolve is what happens in the
event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares.Thus, on the death of a
shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to
the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of
the decedent are held by the administrator or executor.[44]

On the other hand, membership in and all rights arising from a nonstock corporation are personal and
non-transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise.[45] In other words, the determination of whether or not dead members are entitled to

20
exercise their voting rights (through their executor or administrator), depends on those articles of
incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the
death of the member.[46] Section 91 of the Corporation Code further provides that termination
extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of
incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the
membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be
counted in determining the requisite vote in corporate matters or the requisite quorum for the annual
members meeting. With 11 remaining members, the quorum in the present case should be
6. Therefore, there being a quorum, the annual members meeting, conducted with six [47] members
present, was valid.

Vacancy in the
Board of Trustees

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

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still
constitute a quorum. The phrase may be filled in Section 29 shows that the filling of vacancies in the
board by the remaining directors or trustees constituting a quorum is merely permissive, not
mandatory.[48] Corporations, therefore, may choose how vacancies in their respective boards may be
filled up -- either by the remaining directors constituting a quorum, or by the stockholders or members
in a regular or special meeting called for the purpose.[49]

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of
directors; that is, by a majority vote of the remaining members of the board.[50]

21
 While a majority of the remaining corporate members were present, however, the election of
the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting
of the members, not of the board of trustees. We are not unmindful of the fact that the members of
GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which
specifically prescribes that vacancies in the board must be filled up by the remaining trustees. In other
words, these remaining member-trustees must sit as a board in order to validly elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to be done by the board and that
by the constituent members of the corporation.The board of trustees must act, not individually or
separately, but as a body in a lawful meeting. On the other hand, in their annual meeting, the members
may be represented by their respective proxies, as in the contested annual members meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the Court of Appeals
are hereby REVERSED AND SET ASIDE. The remaining members of the board of trustees of Grace
Christian High School (GCHS) may convene and fill up the vacancies in the board, in accordance with
this Decision. No pronouncement as to costs in this instance.

SO ORDERED.

G.R. No. 69999 April 30, 1991

LUZVIMINDA VISAYAN, BENJAMIN BORJA, PABLO AJERO, LORETO DEDOYCO, NESTOR

GORGOLLO, DOMINGO METRAN, LITO MONTERON, ROMEO OMAGBON, BOMBOM
PAUSAMOS, CIRILO RAMOS, MARCOS SISON, ERIC BONDOLO, REY ZAMORA, TERESA
ANAVISO, EVELYN BACULINAO, MARIBEL BASAG, VIOLETA DAGUISA, ADELAIDA
CANALDA, LAILA DIMLA, MACHAELA LUCERO, DIVINA MARIANO, EPIFANIA OBLIGADO,
RAQUEL PONCIANO, ELLEN SACRAMENTO, GRACE SULLETA FELY TAPAY, SUSAN
VILLAMOR, ANAINO AMPLAYO, MARIO CHIONG NESTOR ESTARES, ALELI ALEJO, ELVIE
BAUTISTA, JANINA ESTARES NORMA MENDOZA, LIGAYA SYDUA and JANETTE
VILLAREAL, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION) and FUJIYAMA
RESTAURANT AND HOTEL, INC. and its MANAGER/OPERATOR, respondents.

Danilo S. Lorredo for petitioners.

King, Capuchino, Banico & Associates for private respondent.

PARAS, J.:

Assailed in the instant petition is the Resolution of public respondent National Labor Relations
Commission (NLRC, for brevity) promulgated January 15, 1985 for being contrary to law and
jurisprudence and arrived at in grave abuse of discretion amounting to lack or in excess of jurisdiction.

22
The facts are briefly stated as follows:

Private respondent Fujiyama Hotel & Restaurant, Inc. was formally organized in April, 1978 with
Aquilino Rivera holding a majority interest in the corporation. The rest of the four (4) incorporators
composed the minority stockholders of respondent corporation.

Upon organization in 1978, respondent corporation immediately opened a Japanese establishment,

known as Fujiyama Hotel & Restaurant, located at 1413 M. Adriatico St., Ermita, Manila. In order to
fully offer an authentic Japanese cuisine and traditional Japanese style of service, private respondent
hired the services of Isamu Akasako as its chef and restaurant supervisor. (Private respondent's
memorandum, p. 4).

In June, 1980, Lourdes Jureidini and Milagros Tsuchiya, allegedly pretending to be stockholders of the
corporation, filed a case with the then Court of First Instance of Manila, Branch XXXVI against Rivera
and Akasako to wrest control over the establishment. In June, 1981, the said court issued a writ of
preliminary mandatory injunction transferring possession of all the assets of the company and the
management thereof to Jureidini and Tsuchiya. The stockholders and directors of the corporation were
thereby excluded from the management and operation of the restaurant.

Upon assuming management, Jureidini and Tsuchiya replaced almost all of the existing employees with
new ones, majority of whom are the present petitioners in the instant case. Apparently, the new
employees were extended probationary appointments for six (6) months from December 15, 1981 to
June 1 5, 1982.

In the meantime, Rivera and the rest of the stockholders elevated the civil case to the Supreme Court
through a petition for certiorari assailing the ground for the issuance of the writ of preliminary
mandatory injunction by the said Court of First Instance, which case was entitled Aquilino Rivera, et
al. vs. Hon. Alfredo C. Florendo, et al., docketed as G.R. No. 57586. On motion of Rivera, et al. in the
said case, this Court on August 21, 1981 issued a writ of preliminary injunction to enjoin enforcement
of the June 23, 1981 writ of preliminary mandatory injunction issued by the said Court of First Instance.
Since Jureidini and Tsuchiya disregarded the writ We had previously issued, We issued another
resolution on May 26, 1982 directing both Jureidini and Tsuchiya to strictly and immediately comply
with the Court's injunction. Thus, this Court ordered Jureidini and Tsuchiya, "their agents,
representatives, and/or any person or persons acting upon their orders or in their place or stead to
refrain from further managing and/or interfering with the management of the business and assets of
petitioner corporation and . . . . to turn over all assets and the management of petitioner corporation,
Fujiyama Hotel & Restaurant, Inc., to Aquilino Rivera and Isamu Akasako." (NLRC, Resolution, p.
4; Rollo, p. 116).

Pursuant to the above-quoted resolution, Rivera and Akasako regained control and management of
Fujiyama Hotel & Restaurant, Inc. Immediately upon assumption of the management of the
corporation, Rivera et al., refused to recognize as employees of the corporation all persons that were
hired by Jureidini and Tsuchiya during the one-year period that the latter had operated the company
and reinstated the employees previously hired by them. This gave rise to the filing of the present case
by the dismissed employees hired by Jureidini and Tsuchiya (some of whom had allegedly been hired
by Rivera and Akasako even before Jureidini and Tsuchiya assumed management of the corporation)
against Fujiyama Hotel & Restaurant, Inc. for illegal dismissal, which case was docketed as NLRC-NCR
Case No. 6-4110-82. On motion of private respondent corporation, the Labor Arbiter included Jureidini
23
and Tsuchiya as third-party respondents therein. Thereafter, the parties, except Jureidini and Tsuchiya,
submitted their respective position papers and affidavits in support of their contentions. On the basis
of said position papers and affidavits, the Labor Arbiter rendered a decision on September 21, 1982
ordering respondent company and/or Akasako, Jureidini and Tsuchiya to reinstate all the complainants
to their former positions plus backwages and to pay jointly and severally the complainants their unpaid
wages plus their share in the service charges. (NLRC Decision, pp. 4-5; Rollo, pp. 25-26).

On October 12, 1982, the aforesaid decision of the Labor Arbiter was received by private respondent's
counsel. Ten (10) days thereafter, or on October 22, 1982, said counsel filed a notice of appeal with
an accompanying supersedeas bond in the sum of P80,000.00 as fixed by the Labor Arbiter. Notably,
the memorandum of appeal was not filed until November 24, 1982 when the attention of private
respondent's counsel was called by the filing on November 19, 1982 of a motion for execution of the
September 21, 1982 decision by the complainants. Thus, upon motion of private respondent, the NLRC
temporarily stayed execution and directed the Labor Arbiter to transmit the entire record of the case
to the NLRC for appropriate action.

On December 28, 1983, the NLRC resolved to deny the appeal of private respondent for having been
filed out of time.1âwphi1 Subsequently, a motion for reconsideration was seasonably filed by private
respondent which became the basis of another resolution dated January 15, 1985 issued by the NLRC
setting aside its previous resolution of December 28, 1983 as well as the Labor Arbiter's decision dated
September 21, 1982. The decretal portion of the January 15, 1982 NLRC Resolution is quoted, thus:

WHEREFORE, the Resolution sought to be reconsidered and the Decision appealed from are
hereby SET ASIDE and a new Decision is entered, declaring respondents Lourdes Jureidini and
Mila Tsuchiya as the previous employer of the complainants hired by them while operating the
Fujiyama Restaurant & Hotel, Inc. Consequently, the establishment and its present operator,
Isamu Akasako, is absolved of any liability to them but the entire record is remanded for further
appropriate proceedings to determine who are the complainants hired by said Jureidini and
Tsuchiya.

SO ORDERED.

(NLRC Resolution, pp. 19-20; Rollo, p. 7-8)

The legal issues in the instant case are: (1) whether or not there is privity of contract between
petitioners and private respondent as to establish an employer-employee relationship between the
parties, and (2) whether or not the respondent NLRC erred in giving due course to private respondent's
appeal and in reversing the September 21, 1982 decision of the Labor Arbiter.

Section 23 of B.P. 68, otherwise known as the "Corporation Code of the Philippines," expressly provides
as follows:

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

24
It is clear from the above-quoted provision that a corporation can act only through its board of directors.
"The law is settled that contracts between a corporation and third persons must be made by or under
the authority of its board of directors and not by its stockholders. Hence, the action of the stockholders
in such matters is only advisory and not in any wise binding on the corporation." (De Leon, The
Corporation Code of the Philippines, 1989 edition, p. 168, citing the case of Barreto vs. La Previsora
Filipina, 57 Phil. 649).

A corporation, like a natural person who may authorize another to do certain acts for and in his behalf,
through its board of directors, may legally delegate some of its functions and powers to its officers,
committees or agents appointed by it. (Campos & Campos, The Corporation Code-Comments, Notes,
and Selected cases, 1981 ed., p. 253). In the absence of an authority from the board of directors, no
person, not even the officers of the corporation, can validly bind the corporation. Thus, the Supreme
Court, has made the following pronouncement in the case of Vicente vs. Geraldez, L-32473, 53 SCRA
210:

. . . Whatever authority the officers or agents of a corporation may have is derived from the
board of directors or other governing body, unless conferred by the charter of the corporation.
A corporate officer's power as an agent of the corporation must therefore be sought from the
statute, the charter, the by-laws, or in a delegation of authority to such officer, from the acts of
the board of directors, formally expressed or implied from a habit or custom of doing business.
In the case at bar no provision of the charter and by-laws of the corporation or any resolution
or any other act of the board of directors has been cited from which we could reasonably infer
that the administration trative manager had been granted expressly or impliedly the power to
bind the corporation or the authority to compromise the case. The signature of Atty. Cardenas
on the Agreement would therefore be legally ineffectual". (Vicente vs. Geraldez, L-32473, 52
SCRA 210, p. 227). (Respondent's Memorandum, p. 11)

Applying the aforesaid doctrines in the case at bar, We hold that all acts done solely by Jureidini and
Tsuchiya allegedly, for and in behalf of private respondent during the period from June, 1981 up to
May 31, 1982 were not binding upon respondent corporation.

It is not denied by both parties that the operation and management of the Fujiyama Hotel & Restaurant
Corporation, including the control and possession of all its assets, were forcibly taken by Jureidini and
Tsuchiya from the owners thereof by virtue of a writ of preliminary mandatory injunction issued by
then Court of First Instance of Manila, Branch XXXVI These owners, the Rivera-Akasako group,
composed the board of directors of respondent corporation during the one (1) year period that Jureidini
and Tsuchiya controlled the respondent corporation, the former managed and operated the latter
apparently without any authority from the latter's board of directors. As alleged by Rivera, et al.,
Jureidini and Tsuchiya were not even officers of respondent corporation as to be considered its agents,
which act prompted this tribunal to order said persons, under pain of contempt, to turn over the
management and assets of respondent corporation to Rivera et al., as shown by this Court's resolution
of May 26, 1982. Thus, all acts done by Jureidini and Tsuchiya for and in behalf of respondent
corporation, having been made without the requisite authority from the board of directors, were not
binding upon the said corporation. One of these unauthorized acts was the unwarranted termination
of the original employees of respondent corporation who were validly hired by its board of directors, vis-
a-vis, the hiring of new employees, the petitioners in the case at bar, to replace the said original
employees. Since said acts were not binding upon the corporation, no employer-employee existed
between the Fujiyama Hotel & Restaurant, Inc. and the herein petitioners.
25
We agree with private respondent that the act of the Rivera-Akasako group in admitting the original
employees of respondent corporation after regaining control and management of the latter on May 31,
1982, having been made by the corporation's board of directors, was valid. Even if Jureidini and
Tsuchiya took over the management and control of respondent corporation, the employer-employee
relationship between the corporation and its original employees has not been severed for lack of
authority on the part of Jureidini and Tsuchiya to dismiss said employees.

Consequently, petitioners' claim of illegal dismissal is entirely mistaken as they were not hired by
respondent corporation or its duly authorized officers or agents, hence, no employer-employee
relationship ever existed between them. Jureidini and Tsuchiya, the persons who hired petitioners'
services, are to be considered their employer, and not the private respondents.

Neither may petitioners claim good faith or ignorance of the lack of authority on the part of Jureidini
and Tsuchiya to legally hire them and bind the corporation because they were all informed by Isamu
Tatewaki respondent corporation's Assistant Manager, of such fact at the time they were hired. (Reply
Brief of Isamu Tatewaki Annex "10"). Besides, it was clearly shown that the appointments of the
petitioners were on a probationary basis.

Further, it will be recalled that on August 21, 1981, this Court issued a writ of preliminary injunction in
the case of Rivera, et al. vs. Judge Alfredo C. Florendo, et al., G.R. No. 57586, promulgated October
8, 1986, enjoining the enforcement of the writ of preliminary mandatory injunction issued by
respondent judge therein. Despite the issuance of said writ, Jureidini and Tsuchiya refused to return
the management of the corporation but continued managing and operating respondent corporation
and in fact terminated the original employees of respondent corporation and hired new ones in place
of those dismissed. The appointment papers of these new employees would show that they were hired
only in one day, i.e., December 15, 1981, and that they were hired on a probationary basis. It follows
that only Jureidini and Tsuchiya, being the ones who hired the petitioners, should be the ones
responsible for the petitioners' claims.

Since it would be most unfair and unjust to hold the respondent corporation liable for the claims of
petitioners, even if respondent corporation's memorandum was filed beyond the 10 day reglementary
period (note that the notice of appeal had been filed on time), We rule that the NLRC did not commit
grave abuse of discretion in giving due course to respondent corporation's appeal and in reversing the
Labor Arbiter's decision dated September 21, 1982.

The NLRC is vested with broad powers by the Labor Code, particularly Art. 218 thereof, to correct,
amend or waive any error, injustice, defect or irregularity whether in substance or in form; and in
adjudicating all cases brought before it, the NLRC is likewise empowered to use every and all reasonable
means to ascertain the facts in each case expeditiously and objectively without regard to procedural
technicalities. Thus, Art. 221 of the Labor Code provides as follows:

In any proceeding before the Commission or any of the Labor Arbiters, the rules of evidence
prevailing in Courts of Law or equity shall not be controlling and it is the spirit and intention of
this Code that the Commission and its members and the Labor Arbiters shall use every and all
reasonable means to ascertain the facts in each case speedily and objectively and without regard
to technicalities of law or procedure, all in the interest of due process. In any proceeding before
the Commission or any Labor Arbiter to exercise complete control of the proceedings at all
stages.
26
The factual circumstances and substantial merits of the instant case justify the NLRC's exercise of its
reserve powers granted by the aforequoted provision. Private respondent's appeal should be granted
and entertained in order to prevent a manifest injustice upon said respondent.

While it is true that an appeal within the meaning of the Labor Code must include the assignments of
error, memorandum of arguments in support thereof and the reliefs prayed for such that a mere notice
of appeal will not toll the running of the period for perfecting an appeal, and the general rule is that
after a judgment has become final the appellate court loses jurisdiction to entertain the appeal, the
aforementioned rules admit of exceptions too, because it is also well-settled that such rules of
procedure are used only to help secure and not override substantial justice.

Litigations should, as much as possible, be decided on their merits and not on technicality, and
under the circumstances obtaining in this case, We are reminded of what We said in the case of
Gregorio vs. CA, 72 SCRA 120, –– "Dismissal of appeals purely on technical grounds is frowned
upon where the policy of the courts is to encourage hearings of appeals on their merits and the
rules of procedure ought not to be applied in a very rigid, technical sense; rules of procedure
are used only to help secure, not override substantial justice. If a technical and rigid enforcement
of the rules is made, their aim would be defeated. (American Home Insurance Co. vs. Court of
Appeals, 109 SCRA 180)

In the case at bar, the finding of the Labor Arbiter that there is an employer-employee relationship
existing between petitioners and private respondent counter-acts the provisions of the Corporation
Code such that to strictly apply the procedural rules on appeal under the Labor Code would obviously
result in patent and gross injustice upon private respondent's substantive rights. In relation to the
peculiar factual background of the instant case, private respondent's defense of lack of privity of
contract with petitioners merits greater consideration in the interest of substantial justice.

It will be recalled that the Labor Arbiter's finding of illegal dismissal and order of reinstatement were
anchored on an erroneous premise that Jureidini and Tsuchiya were duly authorized and legitimate
officers of the corporation. The enforcement of said erroneous ruling will cause serious injustice, not
only upon respondent corporation but also upon the corporation's original employees who were taken
back by the Aquilino Rivera group when they regained possession and management of the corporation.
If petitioners are reinstated, that would result in an absurd situation wherein the corporation will have
employees very much more in excess of what the business would require.

Besides, it is quite evident that private respondent seriously intended to appeal the Labor Arbiter's
decision and We hereby quote a portion of the herein assailed NLRC Resolution:

. . . In fact, it even filed an urgent petition for reduction of supersedeas bond, praying that it be
allowed to file a P50,000.00 bond but it was fixed at P80,000.00 by the Labor Arbiter which it
filed with its notice of appeal. In the conference on 15 October 1982 called by the Labor Arbiter
issuing his decision for the purpose of settling the case amicably, the respondent again
manifested after no settlement was arrived at that it will file its appeal. With these in mind, We
are convinced that respondent's failure to file its memorandum on appeal with its notice of
appeal was through excusable mistake only on the part of the messenger-clerk. Otherwise, it
would not have gone through the burden of going through the rigors of having the supersedeas
bond reduced and abiding with the amount fixed which entailed expenses. Consequently, in the
interest of substantial justice and in line with the repeated rulings of the Supreme Court lately
27
 which abhors dismissal of cases based solely on technicalities, We set aside the Resolution
sought to be reconsidered and give due course to the appeal. (pp. 15-16, Rollo)

Finally' it is clear that petitioners were not abandoned by the NLRC as the latter ordered that the case
be remanded to the Arbitration Branch for further proceedings to determine who among the petitioners
were really hired by respondent corporation or by Jureidini, et al., in order to ultimately determine who
is responsible for the settlement of petitioners' claims. Thus, petitioners are not without recourse
relative to their claims.

ACCORDINGLY, the instant petition is hereby DISMISSED for lack of merit and the assailed decision of
the National Labor Relations Commission dated January 15, 1985 is AFFIRMED in toto.

SO ORDERED.

[G.R. No. L-58468. February 24, 1984.]

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, MANILA, ANTONIO M.

MAGTALAS, JOSE ARANAS, JUAN D. LIM, JOSE F. PERALTA and BENJAMIN P.
PAULINO, Petitioners, v. LABOR ARBITER LACANDOLA S. LEANO of the National Labor
Relations Commission and RUFINO R. TAN, Respondents.

De Santos, Balgos and Perez Law Office, for Petitioners.

The Solicitor General for respondent Arbiter.

Caparas, Ilagan, Alcantara & Gatmaytan Law Office for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; CORPORATION LAW; SECURITIES AND EXCHANGE COMMISSION;

JURISDICTION THEREOF VIS-A-VIS THE NATIONAL LABOR RELATIONS COMMISSION; CASE AT BAR.
— The jurisdiction of the Securities and Exchange Commission (SEC) vis-a-vis the National Labor
Relations Commission (NLRC) is in issue. An intracorporate controversy would call for SEC jurisdiction.
A labor dispute, that of the NLRC.

2. ID.; ID.; INTRA-CORPORATE CONTROVERSIES; LEGALITY OF ELECTION OF CORPORATE

DIRECTORS, IN THE NATURE OF; CASE AT BAR. — Basically, therefore, the question is whether the
election of directors on August 1, 1981 and the election of officers on September 5, 1981, which
resulted in TAN’s failure to be re-elected, were validly held. This is the crux of the question that TAN
has raised before the SEC. Even in his position paper before the NLRC, TAN alleged that the election
on August 1, 1981 of the three directors was in contravention of the PSBA By-Laws providing that any
vacancy in the Board shall be filled by a majority vote of the stockholders at a meeting specially called
for the purpose. Thus, he concludes, the Board meeting on September 5, 1981 was tainted with
irregularity on account of the presence of illegally elected directors without whom the results could
have been different. TAN invoked the same allegations in his complaint filed with the SEC. So much
so, that on December 17, 1981, the SEC (Case No. 2145) rendered a Partial Decision annulling the
28
election of the three directors and ordered the convening of a stockholders’ meeting for the purpose
of electing new members of the Board. 9 The correctness of said conclusion is not for us to pass upon
in this case. TAN was present at said meeting and again sought the issuance of injunctive relief from
the SEC. The foregoing indubitably show that, fundamentally, the controversy is intra-corporate in
nature.

3. ID.; ID.; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION; ORIGINAL AND EXCLUSIVE
OVER INTRA-CORPORATE CONTROVERSIES UNDER PRESIDENTIAL DECREE NO. 902-A; CASE AT BAR.
— Presidential Decree No. 902-A vests in the Securities and Exchange Commission original and
exclusive jurisdiction to hear and decide controversies involving the election of directors, officers, or
managers of corporations registered with the Commission, the relation between and among its
stockholders, and between them and the corporation. The instant case is not a case of dismissal. The
situation is that of a corporate office having been declared vacant, and of TAN’s not having been elected
thereafter. The matter of whom to elect is a prerogative that belongs to the Board, and involves the
exercise of deliberate choice and the faculty of discriminative selection. Generally speaking, the
relationship of a person to a corporation, whether as officer or as agent or employee, is not determined
by the nature of the services performed, but by the incidents of the relationship as they actually exist.
(Bruce v. Travelers Ins. Co., 266 F2d 781, cited in 19 Am. Jur. 2d 526).

DECISION

MELENCIO-HERRERA, J.:

This Petition for Certiorari questions the jurisdiction of respondent Labor Arbiter over the present
controversy (No. NCR-9-20-81) involving private respondent-complainant, Rufino R. Tan (TAN), and
petitioners, the Philippine School of Business Administration (PSBA), a domestic corporation, and
majority of its Directors.chanrobles lawlibrary : rednad

TAN is one of the principal stockholders of PSBA. Before September 5, 1981, he was a Director and
the Executive Vice President enjoying salaries and allowances.

On August 1, 1981, at the PSBA Board of Directors’ regular meeting, three members were elected to
fill vacancies in the seven-man body.

On September 5, 1981, also during a regular meeting, the Board declared all corporate positions
vacant except those of the Chairman and President, and at the same time elected a new set of
officers. TAN was not re-elected as Executive Vice-President. 1

On September 16, 1981, TAN filed with the National Labor Relations Commission (NLRC) (National
Capital Region) a complaint for Illegal Dismissal against petitioners alleging that he was "summarily,
illegally, irregularly and improperly removed from his position as Executive Vice-President . . . without
cause, investigation or notice" (NLRC Case No. NCR-9-20-81) (the Labor Case, in brief).

On September 21, 1981, TAN also filed a one-million-peso damage suit against petitioners before the
then Court of First Instance of Rizal, Quezon City, for illegal and oppressive removal (Civil Case No.
29
Q-33444).

And, on September 28, 1981, TAN lodged before the Securities and Exchange Commission (SEC)
another complaint against petitioners essentially questioning the validity of the PSBA elections of
August 1, 1981 and September 5, 1981, and of his "ouster" as Executive Vice-President (SEC Case
No. 2145).chanrobles lawlibrary : rednad

On October 13, 1981, SEC issued a subpoena duces tecum commanding the production of corporate
documents, books and records. 2

On October 15, 1981, respondent Labor Arbiter also issued a subpoena duces tecum to submit the
same books and documents. 3

Before the NLRC, petitioners moved for the dismissal of TAN’s complaint, invoking the principle
against split jurisdiction.

On October 22, 1981, petitioners availed of this Petition contending mainly

that:jgc:chanrobles.com.ph

"1. The respondent labor arbiter illegally assumed jurisdiction over the complaint for ‘Illegal Dismissal’
because the failure of the private respondent to be re-elected to the corporate position of Executive
Vice-President was an intra-corporate question over which the Securities and Exchange Commission
had already assumed jurisdiction.

"2. The issuance by the respondent labor arbiter of a subpoena duces tecum was likewise without
jurisdiction especially if considered in the light of procedural and substantial requirements therefor
such that it is imperative that the supervising authority of this Honorable Court should be exercised to
prevent a substantial wrong and to do substantial justice." 4

TAN counter-argues that his sole and exclusive cause of action is illegal dismissal, falling within the
jurisdiction of the NLRC, for he was dismissed suddenly and summarily without cause in violation of
his constitutional rights to due process and security of tenure. He prays that his dismissal be declared
illegal and that his reinstatement be ordered with full backwages and without loss of other
benefits.chanroblesvirtualawlibrary

We issued a Temporary Restraining Order, enjoining respondent Labor Arbiter from proceeding in
any manner with the Labor Case, and subsequently gave due course to the Petition.

The jurisdiction of the SEC vis-a-vis the NLRC is in issue. An intracorporate controversy would call for
SEC jurisdiction. A labor dispute, that of the NLRC.

Relevant and pertinent it is to note that the PSBA is a domestic corporation duly organized and
existing under our laws. General management is vested in a Board of seven directors elected annually
by the stockholders entitled to vote, who serve until the election and qualification of their successors.
Any vacancy in the Board of Directors is filled by a majority vote of the subscribed capital stock
entitled to vote at a meeting specially called for the purpose, and the director or directors so chosen
hold office for the unexpired term. 5 Corporate officers are provided for, among them, the Executive
Vice-President, who is elected by the Board of Directors from their own number. 6 The officers
30
receive such salaries or compensation as the Board of Directors may fix. 7 The By-Laws likewise
provide that should the position of any officer of the corporation become vacant by reason of death,
resignation, disqualification, or otherwise, the Board of Directors, by a majority vote, may choose a
successor or successors who shall hold office for the expired term of his predecessor. 8

It was at a board regular monthly meeting held on August 1, 1981, that three directors were elected
to fill vacancies. And, it was at the regular Board Meeting of September 5, 1981 that all corporate
positions were declared vacant in order to effect a reorganization, and at the ensuing election of
officers, TAN was not re-elected as Executive Vice-President.

Basically, therefore, the question is whether the election of directors on August 1, 1981 and the
election of officers on September 5, 1981, which resulted in TAN’s failure to be re-elected, were
validly held. This is the crux of the question that TAN has raised before the SEC. Even in his position
paper before the NLRC, TAN alleged that the election on August 1, 1981 of the three directors was in
contravention of the PSBA By-Laws providing that any vacancy in the Board shall be filled by a
majority vote of the stockholders at a meeting specially called for the purpose. Thus, he concludes,
the Board meeting on September 5, 1981 was tainted with irregularity on account of the presence of
illegally elected directors without whom the results could have been different.

TAN invoked the same allegations in his complaint filed with the SEC. So much so, that on December
17, 1981, the SEC (Case No. 2145) rendered a Partial Decision annulling the election of the three
directors and ordered the convening of a stockholders’ meeting for the purpose of electing new
members of the Board. 9 The correctness of said conclusion is not for us to pass upon in this case.
TAN was present at said meeting and again sought the issuance of injunctive relief from the SEC.

The foregoing indubitably show that, fundamentally, the controversy is intra-corporate in nature. It
revolves around the election of directors, officers or managers of the PSBA, the relation between and
among its stockholders, and between them and the corporation. Private respondent also contends
that his "ouster" was a scheme to intimidate him into selling his shares and to deprive him of his just
and fair return on his investment as a stockholder received through his salary and allowances as
Executive Vice-President. Vis-a-vis the NLRC, these matters fall within the jurisdiction of the SEC.
Presidential Decree No. 902-A vests in the Securities and Exchange
Commission:jgc:chanrobles.com.ph

". . . original and exclusive jurisdiction to hear and decide cases involving:jgc:chanrobles.com.ph

"a) Devices or schemes employed by or any acts, of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or stockholders, partners, members of associations or organizations
registered with the Commission.

"b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise
or right to exist as such entity;

"c) Controversies in the election or appointments of directors, trustees, officers or managers of such
31
corporations, partnerships or associations. 10

This is not a case of dismissal. The situation is that of a corporate office having been declared vacant,
and of TAN’s not having been elected thereafter. The matter of whom to elect is a prerogative that
belongs to the Board, and involves the exercise of deliberate choice and the faculty of discriminative
selection. Generally speaking, the relationship of a person to a corporation, whether as officer or as
agent or employee, is not determined by the nature of the services performed, but by the incidents
of the relationship as they actually exist. 11

With the foregoing conclusion, it follows that the issuance of a subpoena duces tecum by the Labor
Arbiter will have to be set aside.

WHEREFORE, judgment is hereby rendered (1) ordering respondent Labor Arbiter to dismiss the
complaint in NLRC Case No. NCR-9-20-81 for lack of jurisdiction; (2) nullifying the subpoena duces
tecum issued by him in said case; and (3) declaring the Temporary Restraining Order heretofore
issued permanent.

No costs.

SO ORDERED.

SECOND DIVISION

WESTMONT BANK (formerly G.R. No. 123650

ASSOCIATED CITIZENS BANK and
now UNITED OVERSEAS BANK, Present:
PHILS.) AND THE PROVINCIAL
SHERIFF OF RIZAL, QUISUMBING, J., Chairperson,
Petitioners, CARPIO MORALES,
VELASCO, JR.
NACHURA,* and
- versus - BRION, JJ.

INLAND CONSTRUCTION AND

DEVELOPMENT CORP.,
Respondent.

x-------------------------x

WESTMONT BANK (formerly

ASSOCIATED CITIZENS BANK and G.R. No. 123822
now UNITED OVERSEAS BANK,
PHILS.),
Petitioner,
Promulgated:
March 23, 2009
- versus -

32
COURT OF APPEALS andINLAND
CONSTRUCTION AND DEVELOPMENT
CORP.,
Respondents.

DECISION

CARPIO MORALES, J.:

Inland Construction and Development Corp. (Inland) obtained various loans and other credit
accommodations from petitioner, then known as Associated Citizens Bank ([the bank] which later
became United Overseas Bank, Phils., and still later Westmost Bank) in 1977.

To secure the payment of its obligations, Inland executed real estate mortgages over three real
properties in Pasig City covered by Transfer Certificates of Title Nos. 4820, 4821 and 4822.[1]

Inland likewise issued promissory notes in favor of the bank, viz:

Promissory Note No. BD-2739-77

Amount: P155,000.00
Due Date: January 2, 1978[2]

Promissory Note No. BD-2884-77

Amount: P880,000.00
Due Date: February 23, 1978[3]

Promissory Note No. BD-2997

Amount: P60,000.00
Due Date: March 22, 1978[4] (Emphasis supplied)

When the first and second promissory notes fell due, Inland defaulted in its payments. It,
however, authorized the bank to debit P350,000 from its savings account to partially satisfy its
obligations.[5]

It appears that by a Deed of Assignment, Conveyance and Release dated May 2, 1978, Felix Aranda,
President of Inland, assigned and conveyed all his rights and interests at Hanil-Gonzales Construction
& Development (Phils.) Corporation (Hanil-Gonzales Corporation) in favor of Horacio Abrantes
(Abrantes), Executive Vice-President and General Manager of Hanil-Gonzales Corporation. Under the
33
same Deed of Assignment, it appears that Abrantes assumed, among other obligations of Inland and
Aranda, Promissory Note No. BD-2884-77 in the amount of P800,000 as shown in the May 26,
1978 Deed of Assignment of Obligation in which Aranda and Inland, on one hand, and Abrantes and
Hanil-Gonzales Corporation, on the other, forged as follows:

x x x x.

WHEREAS, among the obligations assumed by Mr. HORACIO C. ABRANTES [in

the May 2, 1978 Deed] is the account of the FIRST PARTY (Aranda and Inland) in favor
of the ASSOCIATED CITIZENS BANK as evidenced by Promissory Note No. BD-2884-
77 in the amount of EIGHT HUNDRED EIGHTY THOUSAND (P880,000.00) PESOS, x x x
x;

WHEREAS, the parties herein have agreed to obtain the conformity of the
ASSOCIATED CITIZENS BANK to the foregoing arrangement x x x x;

NOW, THEREFORE, the herein parties have mutually agreed that the SECOND
PARTY (Abrantes and Hanil-Gonzalez) shall assume full and complete liability and
responsibility for the payment to ASSOCIATED CITIZENS BANK Promissory Note No. BD-
2884-77 x x x x.

THE SECOND PARTY shall make such necessary arrangements with the
ASSOCIATED CITIZENS BANK for the full liquidation of said account, x x x x.

x x x x. (Emphasis and underscoring supplied)

The banks Account Officer, Lionel Calo Jr. (Calo), signed for its conformity to the deed.[6]

On December 14, 1979, Inland was served a Notice of Sheriffs Sale foreclosing the real estate
mortgages over its real properties, prompting it to file a complaint for injunction against the bank and
the Provincial Sheriff of Rizal at the Regional Trial Court (RTC) of Pasig City.[7] This complaint was later
amended.[8]

Answering the amended complaint, the bank underscored that it had no knowledge, much less
did it give its conformity to the alleged assignment of the obligation covered by PN# BD-2884 [-77].[9]

The trial court found that the bank ratified the act of its account officer Calo, thus:

x x x x. Culled from the evidence on record, the Court finds that the defendant
Bank ratified the act of Calo when its Executive Committee failed to
repudiate the assignment within a reasonable time and even approved the
request for a restructuring of Liberty Const. & Dev. Corp./Hanil-Gonzales
34
 Construction & Development Corp.s obligations, which included
the P880,000.00 loan (Exhibit U to X, and its submarkings). Clearly, the assumption
of the loan was very well known to the defendant Bank and the latter posed no objection
to it. In fact, the positive act on the part of the defendant in restructuring the loan of the
assignee attest to its consent in the said transaction. The evidence on record conveys the
fact that the Hanil-Gonzales Const. and Development Corp. assumed the obligation of the
plaintiff on the SECOND NOTE. Later, it asked the defendant for a restructuring of its
loan, including the P880,000.00 loan. Thereafter, payments were made by the assignee
to the defendant Bank. The preponderance of evidence tilts heavily in favor of the plaintiff
claiming that a case of delegacionoccurs.[10] (Emphasis and italics supplied; Underscoring
in the original)

It accordingly rendered judgment in favor of Inland by Decision[11] of March 31, 1992, the dispositive
portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, permanently, perpetually and forever restraining and enjoining the
defendants Associated Citizens Bank and the Sheriff of this Court from proceeding with
the foreclosure of and conducting an auction sale on the real estate covered by
and embraced in Transfer Certificates of Title Nos. 4820, 4821 and 4822 of the Register
of Deeds of Rizal (now Pasig, Metro Manila) and to refund to plaintiff the amount
of P8,866.89, with legal interest thereon from the filing of the complaint until full
payment, with costs.

SO ORDERED. (Emphasis and underscoring supplied)

The bank appealed the trial courts decision to the Court of Appeals which, by Decision[12] of May
31, 1995, modified the same, disposing as follows:[13]

WHEREFORE, the decision appealed from is hereby AFFIRMED only insofar as it

finds appellant Associated Bank to have ratified the Deed of Assignment (Exhibit O),
but REVERSED in all other respects, and judgment is accordingly rendered ordering the
plaintiff-appellee Inland Construction and Development Corporation to pay defendant-
appellant Associated Bank the sum of One Hundred Eighty Six Thousand Two Hundred
Forty One Pesos and Eighty Six Centavos (P186,241.86) with legal interest thereon
computed from December 21, 1979 until the same is fully paid.

No pronouncement as to costs.

SO ORDERED. (Underscoring supplied)

In affirming the observation of the trial court that the bank ratified the assignment of Inlands
Promissory Note No. BD-2884-77, the appellate court discoursed as follows:

35
 In the instant case, both the assignors (Aranda and Inland) and
assignees (Abrantes and Hanil-Gonzales) in the subject deed of assignment have been
major clients of Associated Bank for several years with accounts amounting to millions of
pesos. For several years, Associated Bank had, either intentionally or
negligently, been habitually clothing Calo with the apparent powers to
perform acts in behalf of the bank. x x x x.

x x x x.

Calo signed the subject deed of assignment on or about May 26, 1978. The
principal obligation covered by the deed involved a hefty sum of eight hundred eighty
thousand pesos (P880,000.00). Despite the enormity of the amount
involved, Associated Bank never made any attempt to repudiate the act of Calo
until almost seven (7) years later, when Mitos C. Olivares, Manager of the Cash
Department of Associated Bank, issued an INTER-OFFICE MEMORANDUM dated May
20, 1985 which pertinently reads:

2) Conforme of Associated Bank signed by Lionel Calo Jr. has no bearing since he
has no authority to sign for the bank as he was only an account officer with no signing
authority;

x x x x.

5) I suggest, Mr. Calo be asked to be present at court hearings to explain why he

signed for the bank, knowing his limitations

The abovequoted inter-office memorandum is addressed internally to

the other offices within Associated Bank. It is not addressed to Inland or any
outsider for that matter. Worse, it was not even offered in evidence by
Associated Bank to give Inland the opportunity to object to or comment on the
said document, but was merely attached as one of the annexes to the banks
MEMORANDUM FOR DEFENDANTS. Obviously, no evidentiary weight may be attached to
said inter-office memorandum, which is even self serving. In fact, it ought not to be
considered at all. (Emphasis and underscoring supplied)

The appellate court, however, specifically mentioned that the lower court erred when it rendered
a decision which permanently, perpetually and forever restrains the sheriff from proceeding with the
threatened foreclosure auction sale of the subject mortgage properties.[14]
The bank moved for partial reconsideration of the appellate courts decision on the aspect of its
ratification of the Deed of Assignment but the same was denied by Resolution[15] of January 24, 1996.

The bank, via two different counsels,[16] filed before this Court separate petitions for review,
G.R. No. 123650, Associated Citizens Bank, et al. v. Court of Appeals, et al; and G.R. No.
123822, Westmont Bank (formerly Associated Bank) v. Inland Construction & Development
36
Corp., assailing the same appellate courts decision. Owing to a series of oversight,[17] the petition in
G.R. 123650 was initially dismissed but was later reinstated by Resolution of June 21, 1999.

The records[18] show that Inland failed to file its comment and memorandum on the petitions.

Both petitions for review impute error on the part of the appellate court in

AFFIRMING THE FINDING OF THE TRIAL COURT THAT PETITIONER HAVE [SIC]
RATIFIED THE DEED OF ASSIGNMENT (EXH. O).

The bank, which had, as reflected early on, become known as Westmont Bank (petitioner),
maintains that Calo had no authority to bind it in the Deed of Assignment and that a single, isolated
unauthorized act of its agent is not sufficient to establish that it clothed him with apparent
authority. Petitioner adds that the records fail to disclose evidence of similar acts of Calo executed
either in its favor or in favor of other parties.[19] Moreover, petitioner reasserts that the unauthorized
act of Calo never came to its knowledge, hence, it is not estopped from repudiating the Deed of
Assignment.[20]

The petitions fail.

The general rule remains that, in the absence of authority from the board of directors, no person,
not even its officers, can validly bind a corporation.[21] If a corporation, however, consciously lets one
of its officers, or any other agent, to act within the scope of an apparent authority, it will be estopped
from denying such officers authority.[22]

The records show that Calo was the one assigned to transact on petitioners behalf respecting
the loan transactions and arrangements of Inland as well as those of Hanil-Gonzales and
Abrantes. Since it conducted business through Calo, who is an Account Officer, it is presumed that he
had authority to sign for the bank in the Deed of Assignment.

Petitioner cannot feign ignorance of the May 26, 1978 Deed of Assignment, the pertinent portion
of which was quoted above. Notably, assignee Abrantes notified petitioner about his assumption of
Inlands obligation. Thus, in his July 26, 1979 letter to petitioner, he wrote:

This refers to the accounts of Liberty Construction and Development Corporation

(LCDC) and our sister-company, Hanil-Gonzalez Construction & Development Corporation
(HGCDC) which as of July 31, 1979 was computed at P1,814,442.40, inclusive of interest,
penalties and fees, net of marginal deposits.This includes the account of

37
 Inland Construction & Development Corporation which had been assumed by
HGCDC.[23] (Emphasis and underscoring supplied)

That petitioner sent the following reply-letter, dated November 29, 1982, to the above-quoted letter to
it of assignee Abrantes indicates that it had full and complete knowledge of the assumption by Abrantes
of Inlands obligation:

We are pleased to advise you that our Executive Committee in its meeting last
November 25, 1982, has approved your request for the restructuring of your outstanding
obligations x x x x.[24] (Underscoring supplied)

Respecting this reply-letter of the bank granting Hanil-Gonzales request to restructure its loans,
petitioner, as a banking institution, is expected to have exercised the highest degree of diligence and
meticulousness in the conduct of its business.When it received the loan restructuring request, with
specific mention of Inlands Promissory Note No. BD-2884-77, petitioner-bank was under obligation to
fastidiously scrutinize such loan account. And since it clearly approved the request for restructuring,
any uncertainty that its reply-letter approving such request may not thus work to prejudice Hanil-
Gonzales or Inland.

Petitioner relies heavily, however, on the Courts pronouncement in Yao Ka Sin Trading that it
was incumbent upon, in this case, Inland to prove that petitioner had clothed its account officer with
apparent power to conform to the Deed of Assignment.[25]

Petitioners simplistic reading of Yao Ka Sin Trading v. Court of Appeals[26]does not

impress. In Yao Ka Sin Trading, the therein respondent cement company had shown by clear and
convincing evidence that its president was not authorized to undertake a particular transaction. It
presented its by-laws stating that only its board of directors has the power to enter into an agreement
or contract of any kind. The companys board of directors even forthwith issued a resolution to repudiate
the contract. Thus, it was only after the company successfully discharged its burden that the other
party, the therein petitioner Yao Ka Sin Trading, had to prove that indeed the cement company had
clothed its president with the apparent power to execute the contract by evidence of similar acts
executed in its favor or in favor of other parties.
Unmistakably, the Courts directive in Yao Ka Sin Trading is that a corporation should first prove
by clear evidence that its corporate officer is not in fact authorizedto act on its behalf before the
burden of evidence shifts to the other party to prove, by previous specific acts, that an officer was
clothed by the corporation with apparent authority.

38
 It bears noting that in Westmont Bank v. Pronstroller,[27] the therein petitioner Westmont Bank,
through a management committee, proved that it rejected the letter-agreement entered into by its
assistant vice-president. Consequently, the therein respondent had to prove by citing other instances of
the said officers apparent authority to bind the bank-therein petitioner.

In the present petitions, petitioner-bank failed to discharge its primary burden of proving that
Calo was not authorized to bind it, as it did not present proof that Calo was unauthorized. It did not
present, much less cite, any Resolution from its Board of Directors or its Charter or By-laws from which
the Court could reasonably infer that he indeed had no authority to sign in its behalf or bind it in the
Deed of Assignment.The May 20, 1985 inter-office memorandum[28] stating that Calo had no signing
authority remains self-serving as it does not even form part of petitioners body of evidence.
Thus, the assertion that the petitioner cannot be faulted for its delay in repudiating the apparent
authority of Calo is similarly flawed, there being no evidence on record that it had actually repudiated
such apparent authority. It should be noted that it was the bank which pleaded that defense in the
first place. What is extant in the records is a reasonable certainty that the bank had ratified the Deed
of Assignment.

The assumption that a ruling on the issue of ratification would affect any and all foreclosure
proceedings on the mortgaged properties remains unfounded. For the challenged appellate courts
Decision[29] still mentioned the possibility of foreclosing on the mortgaged properties as Inland was still
indebted to the bank in the amount of P186, 241.86 covering the other two promissory notes (No. BD-
2739-77 and No. BD-2997) and other obligations that Inland was not able to satisfy upon maturity.

Both the trial courts and the appellate courts inferences and conclusion that petitioner ratified
its account officers act are thus rationally based on evidence and circumstances duly highlighted in
their respective decisions. Absent any serious abuse or evident lack of basis or capriciousness of any
kind, the lower courts findings of fact are conclusive upon this Court.[30]

WHEREFORE, the petitions are DENIED. The decision of the Court of Appeals in CA-G.R. CV
No. 39634 is AFFIRMED.

Costs against petitioner.

SO ORDERED.

[G.R. No. 144661 and 144797. June 15, 2005]

39
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. SPOUSES FRANCISCO ONG and
LETICIA ONG, respondents.

DECISION
GARCIA, J.:

Appealed to this Court by way of a petition for review on certiorari are the Decision[1]dated
March 5, 1999 and Resolution dated July 19, 2000 of the Court of Appeals in CA-G.R. CV No.
54919, affirming in toto an earlier decision of the Regional Trial Court at Cagayan de Oro City, Branch
23, which ruled in favor of herein respondents, the Spouses Francisco Ong and Leticia Ong, in a
suit for breach of contract and/or specific performance with prayer for writ of preliminary injunction
and damages thereat commenced by them against petitioner Development Bank of the Philippines
(DBP).
Petitioner filed by registered mail a motion for extension time to submit petition, paying the
corresponding docket fees therefor by money order. Upon receipt of the motion, the Court docketed
the case as G.R. No. 144797. Before actual receipt of said motion, however, petitioner personally filed
its petition, which was docketed with a lower number as G.R. No. 144661. What then appears to be
two (2) cases before us are actually just one, now the subject of this decision.
The facts are simple and undisputed:
Petitioners foreclosed asset, formerly owned by one Enrique Abada under TCT No. T-4786 and
located at Corrales Extension, Cagayan de Oro City is the subject of this controversy. On May 25, 1988,
respondent Francisco Ong with the conformity of his wife Leticia Ong, addressed a written offer to
petitioner thru its branch manager at Cagayan de Oro City to buy the subject property on a negotiated
sale basis and submitted his best and last offer to purchase[2] under the following terms:

PURCHASE PRICE P136,000.00

DOWNPAYMENT .. 14,000.00
BALANCE P122,000.00
TERM: C A S H MODE OF PAYMENT: Payable upon ejection of occupants on the
property subject of my offer.

I/We am/are depositing the amount of P14,000.00 in cash/check to accompany my/our offer, it being
expressly understood, however, that the same does not bind the DBP to the offer until after my/our
receipt of its approval by the higher authorities of the bank. Should the bank receive an offer from a
third-party buyer higher by more than 5% or at more advantageous term accompanied by a deposit of
at least 10% of the offered price, or a higher offer from the former-owner for at least the updated
Total Claim of the Bank accompanied by a minimum deposit of 20% of the purchase price, the Bank
may favorably consider the higher offer and thereafter refund my/our deposit within three (3) working
days after the determination of the most advantageous offer.

The foregoing offer was duly NOTED by petitioners branch head at its Cagayan de Oro City Branch,
Jose Z. Lagrito (Lagrito, for brevity), and Official Receipt No. 3081947 was issued for the amount
of P14,000.00 as respondents deposit.
In a letter dated October 21, 1988[3], sent to respondents via registered mail, Lagrito informed the
spouses that the bank recently received an offer from another interested third-party-buyer of the same

40
property at the same price and term, but better and more advantageous to the Bank considering that
the buyer will assume the responsibility at her expense for the ejectment of present occupants in the
said property. Nonetheless, respondents were given in the same letter three (3) days within which to
match the said offer, failing in which the Bank will immediately award the said property to the other
buyer, in which event respondents deposit of P14,000.00 shall be refunded to them upon surrender of
O.R. No. 3081947.
In yet another written offer dated October 28, 1988 [4], respondents matched the said offer of the
second interested buyer by assuming the responsibility at my/our own expense for the ejection of
squatters/occupants, if any, on the property.
On April 7, 1989, there was a conference between respondents, together with their counsel, and
the bank whereat respondents were informed why the sale could not be awarded to them. Thereafter,
in a letter dated September 6, 1990[5], respondents were notified that the property would instead be
offered for public bidding on September 24, 1990 at ten 10:00 oclock in the morning.
Feeling aggrieved by such turn of events, respondents filed with the Regional Trial Court at
Cagayan de Oro City a complaint for breach of contract and/or specific performance against petitioner.
Thereat, the complaint was docketed as Civil Case No. 90-422 which was raffled to Branch 23 of the
court.
After pre-trial, the parties agreed to submit the case for judgment based on the pleadings.
Accordingly, the trial court required them to submit simultaneously their respective memoranda within
thirty (30) days. Only petitioner filed its memorandum.
In a decision[6] dated April 25, 1995, the trial court dismissed the complaint finding that there was
no perfected contract of sale between the parties, hence, there is no breach to speak of since there
was no contract from the very beginning. However, upon respondents motion for reconsideration, the
trial court vacated its judgment and set the case for the reception of evidence. This time, only the
respondents adduced their evidence consisting of the lone testimony of respondent Francisco Ong and
the documents identified by him in the course thereof.
In his testimony, Ong gave the respondents version of what supposedly transpired in their
transaction with petitioner. According to him, he and his wife went to the bank branch at Cabayan de
Oro City and looked for Roy Palasan, a bank clerk thereat and told the latter that they were interested
to buy two (2) lots. Palasan went to talk to Lagrito, the branch manager. Palasan returned to the
spouses and informed them that the branch manager agreed to sell the property to them. Palasan
further told them that they will be required to pay ten (10%) percent of the purchase price as
downpayment, adding that if they were to pay the purchase price in cash, they would be entitled to a
ten (10%) percent discount. After some computations, respondents rounded up the purchase price
at P136,000.00 and pegged the downpayment therefor at P14,000.00. They were then required by
Palasan to sign a bank form supposedly to express their firm offer to purchase the subject property.
But since the form signed by them contains the statement that the approval of higher authorities of
the bank is required to close the deal, respondents queried Palasan about it. Palasan, however, told
them that the documents were only for formality purposes, and further assured them that the branch
manager has already agreed to sell the subject property to them.
Having completed the presentation of their evidence, respondents rested their case. For its part,
petitioner no longer adduced any evidence but merely opted to formally offer its documentary exhibits.
Thereafter, the case was submitted for resolution.

41
 On September 26, 1996, the trial court came out with a new decision, [7] this time rendering
judgment for the respondents, as follows:

WHEREFORE, by reason of preponderance of evidence, the Court hereby finds in favor of the plaintiffs
as against the defendant and hereby orders the defendant:

1. To execute a final sale of the lot subject matter of the contract of sale at the original agreed
price of P136,000.00;

2. Defendant to accept the balance of the purchase price from the plaintiffs;

3. Defendant to pay moral damages in the amount of P30,000.00;

4. Defendant to refund the amount of P10,000.00 actual litigation expenses; and to pay
attorneys fees in the amount of P20,000.00.

SO ORDERED.

Therefrom, petitioner went on appeal to the Court of Appeals in CA-G.R. CV No. 54919, and, on
March 5, 1999, the appellate court rendered the herein assailed decision [8]affirming in toto that of the
trial court, thus:

ACCORDINGLY, the foregoing premises considered, the appealed decision is hereby AFFIRMED in toto.

SO ORDERED.

With its motion for reconsideration of the same decision having been denied by the Court of Appeals
in its equally challenged resolution of July 19, 2000,[9] petitioner is now with us thru the present
recourse on the following grounds:
A.

THAT THE RESPONDENTS INTRODUCTION OF PAROL EVIDENCE TO PROVE THE ALLEGED MEETING
OF MINDS BETWEEN THE PARTIES WAS NOT SANCTIONED BY RULE 130, SEC. 9, RULES OF COURT,
CONTRARY TO THE FINDINGS OF THE LOWER COURTS, CONSIDERING THAT THERE WAS NO
WRITTEN CONTRACT THAT WAS EVER EXECUTED BY THE PARTIES IN THIS CASE, BUT MERELY
UNILATERAL WRITTEN COMMUNICATIONS, AT BEST CONSTITUTING OFFERS AND COUNTER-
OFFERS.

B.

THAT THE QUANTUM OF PROOF IS WANTING TO PROVE THE ALLEGED PERFECTION OF CONTRACT
OF SALE BETWEEN THE PARTIES BASED ON THE SOLE, UNCORROBORATED, ORAL TESTIMONY THUS
FAR PRESENTED BY THE RESPONDENTS.

C.

THAT THE BURDEN OF PROOF THAT THERE WAS PERFECTION OF THE CONTRACT OF SALE BETWEEN
THE PARTIES BASICALLY REST WITH THE RESPONDENTS, NOTWITHSTANDING THE NON-
42
OBJECTION ON THE PART OF HEREIN PETITIONER DURING THE INTRODUCTION OF THAT PAROL
EVIDENCE; THE ADMISSIBILITY OF PETITIONERS (sic.) PAROL EVIDENCE DOES NOT
AUTOMATICALLY RIPEN THE TESTIMONY AS A TRUTH RESPECTING A MATTER OF FACT AS ITS
CREDIBILITY AND TRUSTWORTHINESS AND WEIGHT ARE STILL SUBJECT TO JUDICIAL SCRUTINY
AND APPRECIATION.

D.

THAT THERE WAS ACTUALLY OPPOSITION ON THE PART OF THE PETITIONER TO THE CONTENTS
OF THE ORAL TESTIMONY OF THE RESPONDENT REGARDING THE ALLEGED PERFECTION OF
CONTRACT OF SALE BECAUSE THE PETITIONER HAD ALREADY INTERPOSED THEIR DEFENSES WHEN
IT FILED A MEMORANDUM ATTACHING THEREIN THE DOCUMENTARY AS WELL AS DECLARATIONS
IN ITS PLEADINGS ON THE NON-PERFECTION OF SUCH CONTRACT WHEN THE CASE WAS THEN
SUBMITTED FOR JUDGMENT ON THE PLEADINGS, AS AGREED BY THE PARTIES DURING THE PRE-
TRIAL, AND SUCH EVIDENCES WERE ALREADY PASSED UPON BY THE COURT WHEN IT RENDERED A
JUDGMENT DATED APRIL 25, 1995.

We GRANT the petition.

At the very core of the controversy is the question of whether or not there actually was a perfected
contract of sale between petitioner and respondents, for which the Court may compel petitioner to
issue a board resolution approving the sale and to execute the final deed of sale in respondents favor,
and/or hold petitioner liable for a breach thereof. Needless to state, without a perfected contract of
sale, there could be no cause of action for specific performance or breach thereof.
The trial court went on one direction by ruling in its earlier decision of April 25, 1995 that there
was no perfected contract, but upon respondents motion for reconsideration, went exactly the opposite
path by completely reversing itself in its herein challenged decision of September 26, 1996.
Apparently, the trial courts ruling that there was already a perfected contract of sale was premised
on its following factual findings:

1. That plaintiff [respondents] made a downpayment in a check that was subsequently

encashed by the defendant [petitioner] bank;

2. That the sister-in-law of plaintiff [respondents] entered into the same arrangement and was
able to buy the property she wanted to buy from defendant [petitioner] bank;

3. That defendant [petitioner] never presented any witness to rebut the positive and clear
testimony of plaintiff [respondents] that it was a perfected contract of sale entered into by
the former with the defendant [petitioner] bank.[10]

Sustaining the foregoing factual findings of the trial court, the appellate court wrote in its assailed
decision of March 5, 1999:

This positive and clear testimony of [respondent] Ong was not objected to nor rebutted by the
[petiotioner]. Notably, the bank personnel involved in the transaction, namely, Roy Palasan and the
Branch Manager of the [petitioners] Cagayan de Oro Branch, Joe Lagrito, were never presented to
refute the testimony of the [respondents] that the bank has agreed to sell the property to the

43
[respondents]. Suffice it to state that [respondents] were entitled to rely on the representation of
Lagrito who, after all, is the banks manager. Under the premise that a bank is bound by the obligation
contracted by its officers, the contract of sale between [petitioner] and the [respondents] was perfected
when Palasan and Lagrito communicated the approval of the sale of the lot to the [respondents].

Significantly, the unrebutted testimony of Francisco Ong reveals that Norma Silfavan, [respondents]
sister, made a similar offer to the [petitioner] under the same terms and conditions as to that of the
[respondents], and was likewise assured by the same bank personnel that her offer, along with the
[respondents] offer was already approved. Eventually, the transaction resulted in a consummated sale
between Silfavan and DBP. Under these premises, We can not see any reason why the [petitioner] did
not accord the same treatment to the [respondents] who were similarly situated.

Evidently, the two (2) courts below were convinced that the actuation of Palasan, a mere bank
clerk, upon which respondents relied in believing that their offer to purchase was already approved by
the bank manager, would bind the bank to a perfected contract of sale between the parties in this
case. The Court of Appeals further added that the acceptance of the offer to purchase was sufficiently
established from the parol evidenceadduced by respondents during the trial.
We do not agree.
Concededly, in petitions for review on certiorari, our task is not to review once again the factual
findings of the Court of Appeals and the trial court, but to determine if, on the basis of the facts thus
found, the conclusions of law reached are correct or not.
Judging from the findings of the two (2) courts below and the testimony of respondent Francisco
Ong himself, it appears clear to us that the transaction between the respondents and the petitioner
was limited to Palasan, one of the clerks of petitioners branch in Cagayan de Oro City. Lagrito, the
branch manager, had no personal or direct communication with respondents to express his alleged
consent to the sale transaction. Thus, the undisputed evidence showed that it was Palasan, a mere
bank clerk, and not the branch manager himself who assured respondents that theirs was a closed
deal.
We are very much aware of our pronouncement in Rural Bank of Milaor vs. Ocfemia,[11] involving
a mandamus suit where the supposed buyer of a foreclosed property from a bank sought a court order
to compel the bank to issue the required board resolution confirming the sale between the parties
therein. There, this Court, speaking thru Mr. Justice Artemio Panganiban, stated:

Notwithstanding the putative authority of the manager to bind the bank in the Deed of Sale, petitioner
has failed to file an answer to the Petition below within the reglementary period, let alone present
evidence controverting such authority. Indeed, when one of herein respondents, Marife S. Nio, went
to the bank to ask for the board resolution, she was merely told to bring the receipts. The bank failed
to categorically declare that Tena had no authority. This Court stresses the following:

. . . Corporate transactions would speedily come to a standstill were every person dealing with a
corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular
they should appear on their face. This Court has observed in Ramirez vs. Orientalist Co., 38 Phil. 634,
654-655, that

In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the
situation as it presents itself to the third party with whom the contract is made. Naturally he can have
44
little or no information as to what occurs in corporate meetings; and he must necessarily rely upon the
external manifestation of corporate consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance
with law; and we would be sorry to announce a doctrine which would permit the property of man in
the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without
recourse against the corporation whose name and authority had been used in the manner disclosed in
this case. As already observed, it is familiar doctrine that 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 any one 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.[12]

In this light, the bank is estopped from questioning the authority of the bank manager to enter into
the contract of sale. If a corporation knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, it holds the agent out to the public as possessing the power
to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agent's authority.[13]

Unquestionably, petitioner has authorized Tena to enter into the Deed of Sale. Accordingly, it has a
clear legal duty to issue the board resolution sought by respondents. Having authorized her to sell the
property, it behooves the bank to confirm the Deed of Sale so that the buyers may enjoy its full use.

There is, however, a striking and very material difference between the aforecited case and the one
at bar. For, unlike in Milaor where it was the branch manager who approved the sale for and in
behalf of the bank, here, there is absolutely no approval whatsoever by any responsible bank officer
of the petitioner. True it is that the signature of branch manager Lagrito appears below the typewritten
word NOTED at the bottom of respondents offer to purchase dated May 25, 1988. [14] By no stretch of
imagination, however, can the mere NOTING of such an offer be taken to mean an approval of the
supposed sale. Quite the contrary, the very circumstance that the offer to purchase was merely NOTED
by the branch manager and not approved, is a clear indication that there is no perfected contract of
sale to speak of.
The representation of Roy Palasan, a mere clerk at petitioners Cagayan de Oro City branch, that
the manager had already approved the sale, even if true, cannot bind the petitioner bank to a contract
of sale with respondents, it being obvious to us that such a clerk is not among the bank officers upon
whom such putative authority may be reposed by a third party. There is, thus, no legal basis to bind
petitioner into any valid contract of sale with the respondents, given the absolute absence of any
approval or consent by any responsible officer of petitioner bank.
And because there is here no perfected contract of sale between the parties, respondents action
for breach of contract and/or specific performance is simply without any leg to stand on and must
therefore fall.
We also disagree with the Court of Appeals that the encashment of the check representing
the P14,000.00 deposit in relation to respondents offer to purchase is an indication or proof of
perfection of a contract of sale. It must be noted that the very documents[15] signed by the respondents
as their offer to purchase unmistakably state that the deposit shall only form part of the purchase price
if the offer to purchase is approved, it being expressly understood xxx that the same (i.e., the deposit)
45
does not bind DBP to the offer until my/our receipt of its approval by higher authorities of the bank. It
may be so that the official receipt issued therefor by the petitioner termed such deposit as a
downpayment. But the very written offers of the respondents unequivocably and invariably speak of
such amount as deposit, above deposit, we are depositing the amount of P14,000.00. Since there never
was any approval or acceptance by the higher authorities of petitioner of respondents offer to purchase,
the encashment of the check can not in any way represent partial payment of any purchase price.
With the hard reality that no approval or acceptance of respondents offer to buy exists in this case,
any independent transaction between petitioner and another third-party, like the one involving
respondents sister, would be irrelevant and immaterial insofar as respondents own transaction with the
petitioner is concerned. Besides, apart from saying that respondents sister made a similar offer to the
[petitioner] under the same terms and conditions as to that of the [respondents], and was likewise
assured by the same bank personnel that her offer xxx was already approved, which eventually resulted
into a consummated sale between (the sister) and DBP, the Court of Appeals made no finding that the
sisters transaction with the petitioner was made exactly under the same circumstances obtaining in the
present case. In any event, petitioners favorable action on the offer of respondents sister is hardly, if
ever, relevant and determinative in the resolution of the legal issue presented in this case.
In sum, we cannot, in law, sustain the herein challenged issuances of the Court of Appeals.
WHEREFORE, the instant petition is GRANTED and the assailed decision and resolution of the
Court of Appeals REVERSED and SET ASIDE. The complaint filed in this case is accordingly DISMISSED.
No pronouncement as to costs.
SO ORDERED.
[G.R. No. 117847. October 7, 1998]
PEOPLES AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs. COURT OF APPEALS and
STEFANI SAO, respondents.

DECISION
PANGANIBAN, J.:

Contracts entered into by a corporate president without express prior board approval bind the
corporation, when such officers apparent authority is established and when these contracts are ratified
by the corporation.

The Case

This principle is stressed by the Court in rejecting the Petition for Review of the February 28, 1994
Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV No. 30670.
In a collection case[1] filed by Stefani Sao against Peoples Aircargo and Warehousing Co., Inc., the
Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision [2]dated October 26, 1990,
the dispositive portion of which reads:[3]

WHEREFORE, in light of all the foregoing, judgment is hereby rendered, ordering [petitioner] to pay
[private respondent] the amount of sixty thousand (P60,000.00) pesos representing payment of
46
[private respondents] services in preparing the manual of operations and in the conduct of a seminar
for [petitioner]. The Counterclaim is hereby dismissed.

Aggrieved by what he considered a minuscule award of P60,000, private respondent appealed to

the Court of Appeals[4] (CA) which, in its Decision promulgated February 28, 1994, granted his prayer
for P400,000, as follows:[5]

WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby MODIFIED in that [petitioner]
is ordered to pay [private respondent] the amount of four hundred thousand pesos (P400,000.00)
representing payment of [private respondents] services in preparing the manual of operations and in
the conduct of a seminar for [petitioner].

As no new ground was raised by petitioner, reconsideration of the above-mentioned Decision was
denied in the Resolution promulgated on October 28, 1994.

The Facts

Petitioner is a domestic corporation, which was organized in the middle of 1986 to operate a
customs bonded warehouse at the old Manila International Airport in Pasay City.[6]
To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the
corporation president, solicited a proposal from private respondent for the preparation of a feasibility
study.[7] Private respondent submitted a letter-proposal dated October 17, 1986 (First Contract
hereafter) to Punsalan, which is reproduced hereunder:[8]

Dear Mr. Punsalan:

With reference to your request for professional engineering consultancy services for your proposed
MIA Warehousing Project may we offer the following outputs and the corresponding rate and terms
of agreement:

====================================

Project Feasibility Study consisting of

Market Study

Technical Study

Financial Feasibility Study

Preparation of pertinent documentation requirements for the application

=====================================================

The above services will be provided for a fee of [p]esos 350,000.00 payable according to
the following schedule:
47
=====================================================

Fifty percent (50%) .upon confirmation of the agreement

Twenty-five percent (25%)..15 days after the confirmation of the agreement

Twenty-five percent (25%)..upon submission of the specified outputs

The outputs will be completed and submitted within 30 days upon confirmation of the
agreement and receipt by us of the first fifty percent payment.

---------------------------------------------------------------------------------------------

Thank you.

Yours truly, CONFORME:

(S)STEFANI C. SAO (S)ANTONIO C. PUNSALAN, JR.

(T)STEFANI C. SAO (T)ANTONIO C. PUNSALAN, JR.

Consultant for President, PAIRCARGO

Industrial Engineering

Initially, Cheng Yong, the majority stockholder of petitioner, objected to private respondents offer,
as another company priced a similar proposal at only P15,000.[9]However, Punsalan preferred private
respondents services because of the latters membership in the task force, which was supervising the
transition of the Bureau of Customs from the Marcos government to the Aquino administration.[10]
On October 17, 1986, petitioner, through Punsalan, sent private respondent a letter, confirming
their agreement as follows:

Dear Mr. Sao:

With regard to the services offered by your company in your letter dated 13 October 1986, for the
preparation of the necessary study and documentations to support our Application for Authority to
Operate a public Customs Bonded Warehouse located at the old MIA Compound in Pasay City, please
be informed that our company is willing to hire your services and will pay the amount of THREE
HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows:

P100,000.00 - upon signing of the agreement;

150,000.00 - on or before October 31, 1986, with the favorable Recommendation of the
CBW on our application.

100,000.00 - upon receipt of the study in final form.

Very truly yours,

48
 (S)ANTONIO C. PUNSALAN

(T)ANTONIO C. PUNSALAN

President

CONFORME & RECEIVED from PAIRCARGO, the

amount of ONE HUNDRED THOUSAND PESOS

(P100,000.00), this 17th day of October,

1986 as 1st installment payment of the

service agreement dated October 13, 1986.

(S)STEFANI C. SAO

(T)STEFANI C. SAO

Accordingly, private respondent prepared a feasibility study for petitioner which eventually paid
him the balance of the contract price, although not according to the schedule agreed upon.[11]
On December 4, 1986, upon Punsalans request, private respondent sent petitioner another letter-
proposal (Second Contract hereafter), which reads:

Peoples Air Cargo & Warehousing Co., Inc.

Old MIA Compound, Metro Manila

Attention: Mr. ANTONIO PUN[S]ALAN, JR.

President

Dear Mr. Pun[s]alan:

This is to formalize our proposal for consultancy services to your company the scope of which is
defined in the attached service description.

The total service you have decided to avail xxx would be available upon signing of the conforme
below and would come [in] the amount of FOUR HUNDRED THOUSAND PESOS (P400,000.00)
payable at the schedule defined as follows (with the balance covered by post-dated cheques):

Downpayment upon signing conforme . . . P80,000.00

15 January 1987 . . . . . . . . . . . . . 53,333.00

30 January 1987 . . . . . . . . . . . . . 53,333.00

49
15 February 1987 . . . . . . . . . . . . . 53,333.00

28 February 1987 . . . . . . . . . . . . . 53,333.00

15 March1987 . . . . . . . . . . . . . 53,333.00

30 March 1987 . . . . . . . . . . . . . 53,333.00

With this package, you are assured of the highest service quality as our performance record shows
we always deliver no less.

Thank you very much.

Yours truly,

(S)STEFANI C. SAO

(T)STEFANI C. SAO

Industrial Engineering Consultant

CONFORME:

(S)ANTONIO C. PUNSALAN JR.

(T)PAIRCARGO CO. INC.

During the trial, the lower court observed that the Second Contract bore, at the lower right portion
of the letter, the following notations in pencil:

1. Operations Manual

2. Seminar/workshop for your employees

P400,000 - package deal

50% upon completion of seminar/workshop

50% upon approval by the Commissioner

The Manual has already been approved by the Commissioner but payment has not yet been made."

The lower left corner of the letter also contained the following notations:

1st letter - 4 Dec. 1986

2nd letter - 15 June 1987 with

50
 Hinanakit.

On January 10, 1987, Andy Villaceren, vice president of petitioner, received the operations manual
prepared by private respondent.[12] Petitioner submitted said operations manual to the Bureau of
Customs in connection with the formers application to operate a bonded warehouse; thereafter, in May
1987, the Bureau issued to it a license to operate, enabling it to become one of the three public customs
bonded warehouses at the international airport.[13] Private respondent also conducted, in the third week
of January 1987 in the warehouse of petitioner, a three-day training seminar for the latters
employees.[14]
On March 25, 1987, private respondent joined the Bureau of Customs as special assistant to then
Commissioner Alex Padilla, a position he held until he became technical assistant to then Commissioner
Miriam Defensor-Santiago on March 7, 1988.[15]Meanwhile, Punsalan sold his shares in petitioner-
corporation and resigned as its president in 1987.[16]
On February 9, 1988, private respondent filed a collection suit against petitioner. He alleged that
he had prepared an operations manual for petitioner, conducted a seminar-workshop for its employees
and delivered to it a computer program; but that, despite demand, petitioner refused to pay him for
his services.
Petitioner, in its answer, denied that private respondent had prepared an operations manual and a
computer program or conducted a seminar-workshop for its employees. It further alleged that the
letter-agreement was signed by Punsalan without authority, in collusion with [private respondent] in
order to unlawfully get some money from [petitioner], and despite his knowledge that a group of
employees of the company had been commissioned by the board of directors to prepare an operations
manual.[17]
The trial court declared the Second Contract unenforceable or simulated. However, since private
respondent had actually prepared the operations manual and conducted a training seminar for
petitioner and its employees, the trial court awarded P60,000 to the former, on the ground that no one
should be unjustly enriched at the expense of another (Article 2142, Civil Code). The trial court
determined the amount in light of the evidence presented by defendant on the usual charges made by
a leading consultancy firm on similar services.[18]

The Ruling of the Court of Appeals

To Respondent Court, the pivotal issue of private respondents appeal was the enforceability of the
Second Contract. It noted that petitioner did not appeal the Decision of the trial court, implying that it
had agreed to pay the P60,000 award. If the contract was valid and enforceable, then petitioner should
be held liable for the full amount stated therein, not P60,000 as held by the lower court.
Rejecting the finding of the trial court that the December 4, 1986 contract was simulated or
unenforceable, the CA ruled in favor of its validity and enforceability.According to the Court of Appeals,
the evidence on record shows that the president of petitioner-corporation had entered into the First
Contract, which was similar to the Second Contract. Thus, petitioner had clothed its president with
apparent authority to enter into the disputed agreement. As it had also become the practice of the
petitioner-corporation to allow its president to negotiate and execute contracts necessary to secure its
license as a customs bonded warehouse without prior board approval, the board itself, by its acts and
through acquiescence, practically laid aside the normal requirement of prior express approval. The
51
Second Contract was declared valid and binding on the petitioner, which was held liable to private
respondent in the full amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before us.[19]

The Issues

Instead of alleging reversible errors, petitioner imputes grave abuse of discretion to the Court of
Appeals, viz.:[20]

I. xxx [I]n ruling that the subject letter-agreement for services was binding on the corporation simply
because it was entered into by its president[;]

II. xxx [I]n ruling that the subject letter-agreement for services was binding on the corporation
notwithstanding the lack of any board authority since it was the purported practice to allow the
president to enter into contracts of said nature (citing one previous instance of a similar contract)[;]
and

III. xxx [I]n ruling that the subject letter-agreement for services was a valid contract and not merely
simulated."

The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its ground
for seeking a reversal of the assailed Decision. Although the Rules of Court specify reversible errors as
grounds for a petition for review under Rule 45, the Court will lay aside for the nonce this procedural
lapse and consider the allegations of grave abuse as statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the amount of such accountability. Hence,
the resolution of this petition rests on the sole issue of the enforceability and validity of the Second
Contract, more specifically: (1) whether the president of the petitioner-corporation had apparent
authority to bind petitioner to the Second Contract; and (2) whether the said contract was valid and
not merely simulated.

The Courts Ruling

The petition is not meritorious.

First Issue: Apparent Authority of a Corporate President

Petitioner argues that the disputed contract is unenforceable, because Punsalan, its president, was
not authorized by its board of directors to enter into said contract.
The general rule is that, in the absence of authority from the board of directors, no person, not
even its officers, can validly bind a corporation.[21] A corporation is a juridical person, separate and
distinct from its stockholders and members, having xxx powers, attributes and properties expressly
authorized by law or incident to its existence.[22]
52
 Being a juridical entity, a corporation may act through its board of directors, which exercises almost
all corporate powers, lays down all corporate business policies and is responsible for the efficiency of
management,[23] as provided in Section 23 of the Corporation Code of the Philippines:

SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees x x x.

Under this provision, the power and the responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law.[24] However, just as a natural person may authorize
another to do certain acts for and on his behalf, the board of directors may validly delegate some of
its functions and powers to officers, committees or agents. The authority of such individuals to bind
the corporation is generally derived from law, corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of business, viz.: [25]

A corporate officer or agent may represent and bind the corporation in transactions with third persons
to the extent that [the] authority to do so has been conferred upon him, and this includes powers
which have been intentionally conferred, and also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally conferred, powers added
by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers
as the corporation has caused persons dealing with the officer or agent to believe that it has conferred.

Accordingly, the appellate court ruled in this case that the authority to act for and to bind a
corporation may be presumed from acts of recognition in other instances, wherein the power was in
fact exercised without any objection from its board or shareholders.Petitioner had previously allowed
its president to enter into the First Contract with private respondent without a board resolution
expressly authorizing him; thus, it had clothed its president with apparent authority to execute the
subject contract.
Petitioner rebuts, arguing that a single isolated agreement prior to the subject contract does not
constitute corporate practice, which Webster defines as frequent or customary action. It cites Board of
Liquidators v. Kalaw,[26] in which the practice of NACOCO allowing its general manager to negotiate
and execute contract in its copra trading activities for and on its behalf, without prior board approval,
was inferred from sixty contracts not one, as in the present case -- previously entered into by the
corporation without such board resolution.
Petitioners argument is not persuasive. Apparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words, the apparent authority to act in general,
with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope of his ordinary powers.[27] It
requires presentation of evidence of similar act(s) executed either in its favor or in favor of other
parties.[28] It is not the quantity of similar acts which establishes apparent authority, but the vesting of
a corporate officer with the power to bind the corporation.
In the case at bar, 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

53
corporation. The grant of apparent authority to Punsalan is evident in the testimony of Yong -- senior
vice president, treasurer and major stockholder of petitioner. Testifying on the First Contract, he
said:[29]
A: Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr. Sao is very influential with the
Collector of Customs[s]. Because the Collector of Custom[s] will be the one to approve our
project study and I objected to that, sir. And I said it [was an exorbitant] price. And Mr. Punsalan
he is the [p]resident, so he [gets] his way.
Q: And so did the company eventually pay this P350,000.00 to Mr. Sao?
A: Yes, sir.
The First Contract was consummated, implemented and paid without a hitch.
Hence, private respondent should not be faulted for believing that Punsalans conformity to the
contract in dispute was also binding on petitioner. It is familiar doctrine that 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 do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from denying the
agents authority.[30]
Furthermore, private respondent prepared an operations manual and conducted a seminar for the
employees of petitioner in accordance with their contract. Petitioner accepted the operations manual,
submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result of its
aforementioned actions, petitioner was given by the Bureau of Customs a license to operate a bonded
warehouse. Granting arguendothen that the Second Contract was outside the usual powers of the
president, petitioners ratification of said contract and acceptance of benefits have made it binding,
nonetheless.The enforceability of contracts under Article 1403(2) is ratified by the acceptance of
benefits under them under Article 1405.
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.[31] 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.[32]
Hence, it has been held in other jurisdictions that the president of a corporation possesses the
power to enter into a contract for the corporation, when the conduct on the part of both the president
and the corporation [shows] that he had been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act and had recognized, approved and ratified
his former and similar actions.[33]Furthermore, a party dealing with the president of a corporation is
entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that
are within the scope of the powers of said corporation and that do not violate any statute or rule on
public policy.[34]

Second Issue: Alleged Simulation of the First Contract

54
 As an alternative position, petitioner seeks to pare down its liabilities by limiting its exposure
from P400,000 to only P60,000, the amount awarded by the RTC. Petitioner capitalizes on the badges
of fraud cited by the trial court in declaring said contract either simulated or unenforceable, viz.:

xxx The October 1986 transaction with [private respondent] involved P350,000. The same was
embodied in a letter which bore therein not only the conformity of [petitioners] then President
Punsalan but also drew a letter-confirmation from the latter for, indeed, he was clothed with
authority to enter into the contract after the same was brought to the attention and consideration
of [petitioner]. Not only that, a [down payment] was made. In the alleged agreement of December
4, 1986 subject of the present case, the amount is even bigger-P400,000.00. Yet, the alleged
letter-agreement drew no letter of confirmation. And no [down payment] and postdated checks
were given. Until the filing of the present case in February 1988, no written demand for payment
was sent to [petitioner]. [Private respondents] claim that he sent one in writing, and one was sent
by his counsel who manifested that [h]e was looking for a copy in [his] files fails in light of his
failure to present any such copy. These and the following considerations, to wit:

1) Despite the fact that no [down payment] and/or postdated checks [partial payments] (as purportedly
stipulated in the alleged contract) [was given, private respondent] went ahead with the services[;]

2) [There was a delay in the filing of the present suit, more than a year after [private respondent]
allegedly completed his services or eight months after the alleged last verbal demand for payment
made on Punsalan in June 1987;

3) Does not Punsalans writing allegedly in June 1987 on the alleged letter-agreement of your
employees[,] when it should have been our employees, as he was then still connected with [petitioner],
indicate that the letter-agreement was signed by Punsalan when he was no longer connected with
[petitioner] or, as claimed by [petitioner], that Punsalan signed it without [petitioners] authority and
must have been done in collusion with plaintiff in order to unlawfully get some money from [petitioner]?

4) If, as [private respondent] claims, the letter was returned by Punsalan after affixing thereon his
conformity, how come xxx when Punsalan allegedly visited [private respondent] in his office at the
Bureau of Customs, in June 1987, Punsalan brought (again?) the letter (with the pencil [notation] at
the left bottom portion allegedly already written)?

5) How come xxx [private respondent] did not even keep a copy of the alleged service contract
allegedly attached to the letter-agreement?

6) Was not the letter-agreement a mere draft, it bearing the corrections made by Punsalan of his name
(the letter n is inserted before the last letter o in Antonio) and of the spelling of his family name
(Punsalan, not Punzalan)?

7) Why was not Punsalan impleaded in the case?

The issue of whether the contract is simulated or real is factual in nature, and the Court eschews
factual examination in a petition for review under Rule 45 of the Rules of Court.[35] This rule, however,
admits of exceptions, one of which is a conflict between the factual findings of the lower and of the
appellate courts[36] as in the case at bar.

55
 After judicious deliberation, the Court agrees with the appellate court that the alleged badges of
fraud mentioned earlier have not affected in any manner the perfection of the Second Contract or
proved the alleged simulation thereof. First, the lack of payment (whether down, partial or full
payment), even after completion of private respondents obligations, imports only a defect in the
performance of the contract on the part of petitioner. Second, the delay in the filing of action was not
fatal to private respondents cause. Despite the lapse of one year after private respondent completed
his services or eight months after the alleged last demand
for payment in June 1987, the action was stillfiled within the allowable period, considering that an
action based on a written contract prescribes only after ten years from the time the right of action
accrues.[37] Third, a misspelling in the contract does not establish vitiation of consent, cause or object
of the contract. Fourth, a confirmation letter is not an essential element of a contract; neither is it
necessary to perfect one. Fifth, private respondents failure to implead the corporate president does not
establish collusion between them. Petitioner could have easily filed a third-party claim against Punsalan
if it believed that it had recourse against the latter. Lastly, the mere fact that the contract price was
six times the alleged going rate does not invalidate it.[38] In short, these badges do not establish
simulation of said contract.
A fictitious and simulated agreement lacks consent which is essential to a valid and enforceable
contract.[39] A contract is simulated if the parties do not intend to be bound at all (absolutely
simulated),[40] or if the parties conceal their true agreement (relatively simulated).[41] In the case
at bar, petitioner received from private respondent a letter-offer containing the terms of the former,
including a stipulation of the consideration for the latters services. Punsalans conformity, as well as the
receipt and use of the operations manual, shows petitioners consent to or, at the very least, ratification
of the contract. To repeat, petitioner even submitted the manual to the Bureau of Customs and allowed
private respondent to conduct the seminar for its employees. Private respondent heard no objection
from the petitioner, until he claimed payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal factors in the determination of the will of
the contracting parties.[42] The circumstances outlined above do not establish any intention to simulate
the contract in dispute. On the contrary, the legal presumption is always on the validity of contracts. A
corporation, by accepting benefits of a transaction entered into without authority, has ratified the
agreement and is, therefore, bound by it.[43]
WHEREFORE, the petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.
SO ORDERED.
[G.R. No. 126200. August 16, 2001]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. HONORABLE COURT OF
APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION, respondents.

DECISION
KAPUNAN, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking
a review of the Decision of the Court of Appeals dated October 6, 1995 and the Resolution of the same
court dated August 29, 1996.
The facts are as follows:
56
 Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation engaged in the
manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides, copper ore/concentrates,
cement and pyrite conc., obtained from the Philippine National Bank (PNB) various loan
accommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of Real
Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of Marinduque
Minings real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo, Rizal,
including the improvements thereon. As of November 20, 1980, the loans extended by PNB amounted
to P4 Billion, exclusive of interest and charges.[1]
On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the
Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining
mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also covered all of
Marinduque Minings chattels, as well as assets of whatever kind, nature and description which
Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and Chattel Mortgage dated October 7,
1978.Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of
interest and charges.[2]
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to
Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP
all other real and personal properties and other real rights subsequently acquired by Marinduque
Mining.[3]
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime
on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition, as follows:

In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and were
declared the highest bidders over the foreclosed real properties, buildings, mining claims, leasehold
rights together with the improvements thereon as well as machineries [sic] and equipments [sic] of
MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of P14,238,048,150.00
[and] [o]ver the foreclosed chattels of MMIC located at Nonoc Refinery Plant at Surigao del Norte, PNB
and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. 5 to 5-A, 6, 7 to 7-AA- PNB/DBP). For
the foreclosed real properties together with all the buildings, major machineries & equipment and other
improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold to PNB
and DBP as highest bidders in the sum ofP1,107,167,950.00 (Exhs. 10 to 10-X- PNB/ DBP).

At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties, buildings,
& machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold to PNB and DBP,
as highest bidders, in the amount of P2,383,534,000.00 and P543,040,000.00 respectively (Exhs. 8 to
8-BB, 9 to 90-GGGGGGPNB/DBP).

Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal
properties of MMIC, the same were sold to PNB and DBP as the highest bidder in the sum of
P678,772,000.00 (Exhs. 11 and12-QQQQQPNB).

PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to ensure
the continued operation of the Nickel refinery plant and to prevent the deterioration of the assets
57
foreclosed, assigned and transferred to Nonoc Mining and Industrial Corporation all their rights, interest
and participation over the foreclosed properties of MMIC located at Nonoc Island, Surigao del Norte for
an initial consideration of P14,361,000,000.00 (Exh. 13-PNB).

Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferred in
favor of Maricalum Mining Corp. all its rights, interest and participation over the foreclosed properties
of MMIC at Sipalay, Negros Occidental for an initial consideration of P325,800,000.00 (Exh.
14PNB/DBP).

On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again assigned,
transferred and conveyed to the National Government thru [sic] the Asset Privatization Trust (APT) all
its existing rights and interest over the assets of MMIC, earlier assigned to Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation and Island Cement Corporation (Exh. 15 & 15-
APNB/DBP).[4]

In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and
caused to be delivered construction materials and other merchandise from Remington Industrial Sales
Corporation (Remington) worth P921,755.95. The purchases remained unpaid as of August 1, 1984
when Remington filed a complaint for a sum of money and damages against Marinduque Mining for
the value of the unpaid construction materials and other merchandise purchased by Marinduque Mining,
as well as interest, attorneys fees and the costs of suit.
On September 7, 1984, Remingtons original complaint was amended to include PNB and DBP as
co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the real and
personal properties, chattels, mining claims, machinery, equipment and other assets of Marinduque
Mining.[5]
On September 13, 1984, Remington filed a second amended complaint to include as additional
defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the assignee
of all real and personal properties, chattels, machinery, equipment and all other assets of Marinduque
Mining at its Nonoc Nickel Factory in Surigao del Norte.[6]
On March 26, 1986, Remington filed a third amended complaint including the Maricalum Mining
Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-
defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining
and Island Cement must be treated in law as one and the same entity by disregarding the veil of
corporate fiction since:

1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are practically
owned wholly by defendants PNB and DBP, and managed by their officers, aside from the fact that the
aforesaid co-defendants NMIC, Maricalum and Island Cement were organized in such a hurry and in
such suspicious circumstances by co-defendants PNB and DBP after the supposed extra-judicial
foreclosure of MMICs assets as to make their supposed projects assets, machineries and equipment
which were originally owned by co-defendant MMIC beyond the reach of creditors of the latter.

2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC,
Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of co-
defendant MMIC such that x x x practically there has only been a change of name for all legal purpose
and intents.

58
3. The places of business not to mention the mining claims and project premises of co-defendants
NMIC, Maricalum and Island Cement likewise used to be the places of business, mining claims and
project premises of co-defendant MMIC as to make the aforesaid co-defendants NMIC, Maricalum and
Island Cement mere adjuncts and subsidiaries of co-defendants PNB and DBP, and subject to their
control and management.

On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all
corporations created by the government in the pursuit of business ventures should not be allowed to
ignore, x x x or obliterate with impunity nay illegally, the financial obligations of x x x MMIC whose
operations co-defendants PNB and DBP had highly financed before the alleged extrajudicial foreclosure
of defendant MMICs assets, machineries and equipment to the extent that major policies of co-
defendant MMIC were being decided upon by co-defendants PNB and DBP as major financiers who
were represented in its board of directors forming part of the majority thereof which through the
alleged extrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and DBP
bringing about the organization of their co-defendants NMIC, Maricalum and Island Cement to which
were transferred all the assets, machineries and pieces of equipment of co-defendant MMIC used in its
nickel mining project in Surigao del Norte, copper mining operation in Sipalay, Negros Occidental and
cement factory in Antipolo, Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff
Remington Industrial Sales Corporation whose stockholders, officers and rank-and-file workers in the
legitimate pursuit of its business activities, invested considerable time, sweat and private money to
supply, among others, co-defendant MMIC with some of its vital needs for its operation, which co-
defendant MMIC during the time of the transactions material to this case became x x x co-defendants
PNB and DBPs instrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary
corporation, by virtue of which it becomes doubly necessary to disregard the corporation fiction that
co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement, six (6) distinct and separate
entities, when in fact and in law, they should be treated as one and the same at least as far as plaintiffs
transactions with co-defendant MMIC are concerned, so as not to defeat public convenience, justify
wrong, subvert justice, protect fraud or confuse legitimate issues involving creditors such as plaintiff,
a fact which all defendants were as (sic) still are aware of during all the time material to the transactions
subject of this case.[7]

On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint impleading
the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint was admitted by
the lower court in its Order dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington, the
dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants
Marinduque Mining & Industrial Corporation, Philippine National Bank, Development Bank of the
Philippines, Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation, Island Cement
Corporation and Asset Privatization Trust to pay, jointly and severally, the sum of P920,755.95,
representing the principal obligation, including the stipulated interest as of June 22, 1984, plus ten
percent (10%) surcharge per annum by way of penalty, until the amount is fully paid; the sum
equivalent to 10% of the amount due as and for attorneys fees; and to pay the costs.[8]

59
 Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the Court of
Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC.Petitioner filed a Motion
for Reconsideration, which was denied in the Resolution dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB, nor
against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the transfer of the properties was
made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of
the corporate veil such that Marinduque Mining and its transferees could be considered as one and the
same corporation. The transferees, therefore, are also liable for the value of Marinduque Minings
purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,[9] cited by the Court of Appeals in its
decision,[10] this Court declared:

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be connected. However,
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 of persons or in case of two
corporations, merge them into one. (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher
Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs. Milwaukee Refrigeration Transit
Co., 142 Fed., 247, 255 per Sanborn, J.) xxx

In accordance with the foregoing rule, this Court has disregarded the separate personality of the
corporation where the corporate entity was used to escape liability to third parties. [11] In this case,
however, we do not find any fraud on the part of Marinduque Mining and its transferees to warrant the
piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past
due account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1
of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:

It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the
issuance of this decree, to foreclose the collateral and/or securities for any loan, credit accommodation,
and/or guarantees granted by them whenever the arrearages on such account, including accrued
interest and other charges, amount to at least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as appearing in the books of account and/or related
records of the financial institution concerned. This shall be without prejudice to the exercise by the
government financial institution of such rights and/or remedies available to them under their respective
contracts with their debtors, including the right to foreclose on loans, credits, accomodations and/or
guarantees on which the arrearages are less than twenty (20%) percent.

Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the
subject properties. The banks had no choice but to obey the statutory command.
The import of this mandate was lost on the Court of Appeals, which reasoned that under Article 19
of the Civil Code, Every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith. The appellate court,
however, did not point to any fact evidencing bad faith on the part of the Marinduque Mining and its

60
transferees. Indeed, it skirted the issue entirely by holding that the question of actual fraudulent intent
on the part of the interlocking directors of DBP and Marinduque Mining was irrelevant because:

As aptly stated by the appellee in its brief, x x x where the corporations have directors and officers in
common, there may be circumstances under which their interest as officers in one company may
disqualify them in equity from representing both corporations in transactions between the two.Thus,
where one corporation was insolvent and indebted to another, it has been held that the directors of
the creditor corporation were disqualified, by reason of self-interest, from acting as directors of the
debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such
indebtedness x x x (page 105 of the Appellees Brief). In the same manner that x x x when the
corporation is insolvent, its directors who are its creditors can not secure to themselves any advantage
or preference over other creditors. They can not thus take advantage of their fiduciary relation and
deal directly with themselves, to the injury of others in equal right. If they do, equity will set aside the
transaction at the suit of creditors of the corporation or their representatives, without reference to the
question of any actual fraudulent intent on the part of the directors, for the right of the creditors does
not depend upon fraud in fact, but upon the violation of the fiduciary relation to the
directors. xxx. (page 106 of the Appellees Brief.)

We also concede that x x x directors of insolvent corporation, who are creditors of the company, can
not secure to themselves any preference or advantage over other creditors in the payment of their
claims. It is not good morals or good law. The governing body of officers thereof are charged with the
duty of conducting its affairs strictly in the interest of its existing creditors, and it would be a breach of
such trust for them to undertake to give any one of its members any advantage over any other creditors
in securing the payment of his debts in preference to all others. When validity of these mortgages, to
secure debts upon which the directors were indorsers, was questioned by other creditors of the
corporation, they should have been classed as instruments rendered void by the legal principle which
prevents directors of an insolvent corporation from giving themselves a preference over outside
creditors. x x x (page 106-107 of the Appellees Brief.)[12]

The Court of Appeals made reference to two principles in corporation law. The first pertains to
transactions between corporations with interlocking directors resulting in the prejudice to one of the
corporations. This rule does not apply in this case, however, since the corporation allegedly prejudiced
(Remington) is a third party, not one of the corporations with interlocking directors (Marinduque Mining
and DBP).
The second principle invoked by respondent court involves directors who are creditors which is also
inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque
Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum
and Island Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in
the mining business.[13] The creation of the three corporations was necessary to manage and operate
the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. In
the absence of any entity willing to purchase these assets from the bank, what else would it do with
these properties in the meantime? Sound business practice required that they be utilized for the
purposes for which they were intended.

61
 Remington also asserted in its third amended complaint that the use of Nonoc Mining, Maricalum
and Island Cement of the premises of Marinduque Mining and the hiring of the latters officers and
personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those acquired by DBP in the
foreclosure sale, convenience and practicality dictated that the corporations so created occupy the
premises where these assets were found instead of relocating them. No doubt, many of these assets
are heavy equipment and it may have been impossible to move them. The same reasons of
convenience and practicality, not to mention efficiency, justified the hiring by Nonoc Mining, Maricalum
and Island Cement of Marinduque Minings personnel to manage and operate the properties and to
maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. [14] To
disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.[15] In this case, the Court finds that Remington failed
to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the
mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil.
The Court of Appeals also held that there exists in Remingtons favor a lien on the unpaid purchases
of Marinduque Mining, and as transferee of these purchases, DBP should be held liable for the value
thereof.
In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced
against DBP. Article 2241 of the Civil Code provides:

Article 2241. With reference to specific movable property of the debtor, the following claims or liens
shall be preferred:

xxx

(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession
of the debtor, up to the value of the same; and if the movable has been resold by the debtor and the
price is still unpaid, the lien may be enforced on the price; this right is not lost by the immobilization
of the thing by destination, provided it has not lost its form, substance and identity, neither is the right
lost by the sale of the thing together with other property for a lump sum, when the price thereof can
be determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon the things pledged or mortgaged, up to the value
thereof;

xxx
In Barretto vs. Villanueva,[16] the Court had occasion to construe Article 2242, governing claims or
liens over specific immovable property. The facts that gave rise to the case were summarized by this
Court in its resolution as follows:

x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot
herein involved to Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in advance, and

62
executed a promissory note for the balance of P17,500.00. However, the buyer could only pay P5,500
on account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the
meantime, the buyer Villanueva was able to secure a clean certificate of title (No. 32626), and
mortgaged the property to appellant Magdalena C. Barretto, married to Jose C. Baretto, to secure a
loan of P30,000.03, said mortgage having been duly recorded.

Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage
in her favor, obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On
14 August 1958, Cruzado filed a motion for recognition for her "vendor's lien" in the amount of
P12,000.00, plus legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code. After
hearing, the court below ordered the "lien" annotated on the back of Certificate of Title No. 32526,
with the proviso that in case of sale under the foreclousre decree the vendor's lien and the mortgage
credit of appellant Barretto should be paid pro rata from the proceeds. Our original decision affirmed
this order of the Court of First Instance of Manila.

In its decision upholding the order of the lower court, the Court ratiocinated thus:

Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an
encumbrance on specific immovable property, and among them are:

"(2) For the unpaid price of real property sold, upon the immovable sold"; and

"(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied pro-rata, after the payment of the taxes and
assessments upon the immovable property or real rights."

Application of the above-quoted provisions to the case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with
the appellants the proceeds of the foreclosure sale.

xxx

As to the point made that the articles of the Civil Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such
limitation. If we are to interpret this portion of the Code as intended only for insolvency cases, then
other creditor-debtor relationships where there are concurrence of credits would be left without any
rules to govern them, and it would render purposeless the special laws on insolvency.[17]

Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes,
speaking for the Court, explained the reasons for the reversal:

A. The previous decision failed to take fully into account the radical changes introduced by the Civil
Code of the Philippines into the system of priorities among creditors ordained by the Civil Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property
under Article 1923 were to be resolved according to an order of priorities established by Article 1927,
63
whereby one class of creditors could exclude the creditors of lower order until the claims of the former
were fully satisfied out of the proceeds of the sale of the real property subject of the preference, and
could even exhaust proceeds if necessary.

Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority
among themselves, but must be paid pro rata, i.e., in proportion to the amount of the respective
credits. Thus, Article 2249 provides:

"If there are two or more credits with respect to the same specific real property or real rights, they
shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable
property or real rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14
of Article 2242 (or such of them as have credits outstanding) must necessarily be convened, and the
import of their claims ascertained. It is thus apparent that the full application of Articles 2249 and 2242
demands that there must be first some proceeding where the claims of all the preferred creditors may
be bindingly adjudicated, such as insolvency, the settlement of decedent's estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of similar import.

This explains the rule of Article 2243 of the new Civil Code that -

"The claims or credits enumerated in the two preceding articles shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions governing
insolvency xxx (Italics supplied).

And the rule is further clarified in the Report of the Code Commission, as follows:

"The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by
this Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be
enforced in accordance with the Insolvency Law." (Italics supplied)

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure
sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of
preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy
absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the
Court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditors
likewise enjoying preference under Article 2242 can not be ascertained.Wherefore, the order of the
Court of First Instance of Manila now appealed from, decreeing that the proceeds of the foreclosure
sale be apportioned only between appellant and appellee, is incorrect, and must be
reversed. [Underscoring supplied]

The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,[18]and in
two cases both entitled Development Bank of the Philippines vs. NLRC.[19]
Although Barretto involved specific immovable property, the ruling therein should apply equally in
this case where specific movable property is involved. As the extra-judicial foreclosure instituted by

64
PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim
its pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6,
1995 and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The original
complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED.
SO ORDERED.

G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR.,
and EDUARDO R. VISAYA, respondents.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos

Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a
preliminary injunction" against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano,
Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel
Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent corporation
was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000
preferred shares at P100.00 per share. At the time of the amendment, the outstanding and paid up
65
shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended that according
to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation, the power to
amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by the
affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital
stock of the corporation, which 2/3 should have been computed on the basis of the capitalization at
the time of the amendment. Since the amendment was based on the 1961 authorization, petitioner
contended that the Board acted without authority and in usurpation of the power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the authority of the Board ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of Directors had
changed since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all
the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof;
that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to
vote and to be voted upon in the election of directors; and that in amending the by-laws, respondents
purposely provided for petitioner's disqualification and deprived him of his vested right as afore-
mentioned hence the amended by-laws are null and void. 1

As additional causes of action, it was alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void;
that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with respondent corporation, which was allowed
because the questioned amendment gave the Board itself the prerogative of determining whether they
or other persons are engaged in competitive or antagonistic business; that the portion of the amended
bylaws which states that in determining whether or not a person is engaged in competitive business,
the Board may consider such factors as business and family relationship, is unreasonable and
oppressive and, therefore, void; and that the portion of the amended by-laws which requires that "all
nominations for election of directors ... shall be submitted in writing to the Board of Directors at least
five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of
filing thereof be cancelled, and that individual respondents be made to pay damages, in specified
amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that
the Secretary of respondent corporation refused to allow him to inspect its records despite request
made by petitioner for production of certain documents enumerated in the request, and that
respondent corporation had been attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b)
copy of the management contract between San Miguel Corporation and A. Soriano Corporation
(ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the stockholders
to invest the funds of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries,

66
allowances, bonuses, and other compensation, if any, received by Andres M. Soriano, Jr. and/or its
successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents,
alleging, among others that the motion has no legal basis; that the demand is not based on good faith;
that the motion is premature since the materiality or relevance of the evidence sought cannot be
determined until the issues are joined, that it fails to show good cause and constitutes continued
harrasment, and that some of the information sought are not part of the records of the corporation
and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde,
Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action taken by the Board of Directors on
September 18, 1976 resulting in the ... amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto
has never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid
delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total
subscribed capital stock at the time the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of the stockholders representing
a majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII,
section I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of authority of the
Board. since he failed, to object to other amendments made on the basis of the same 1961
authorization: that the power of the corporation to amend its by-laws is broad, subject only to the
condition that the by-laws adopted should not be respondent corporation inconsistent with any existing
law; that respondent corporation should not be precluded from adopting protective measures to
minimize or eliminate situations where its directors might be tempted to put their personal interests
over t I hat of the corporation; that the questioned amended by-laws is a matter of internal policy and
the judgment of the board should not be interfered with: That the by-laws, as amended, are valid and
binding and are intended to prevent the possibility of violation of criminal and civil laws prohibiting
combinations in restraint of trade; and that the petition states no cause of action. It was, therefore,
prayed that the petition be dismissed and that petitioner be ordered to pay damages and attorney's
fees to respondents. The application for writ of preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying
the material averments thereof and stating, as part of their affirmative defenses, that in August 1972,
the Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise
began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of
Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort to secure for himself
and in representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to
secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive
67
business and his securing a seat would have subjected respondent corporation to grave disadvantages;
that "petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual
meeting; that thereafter the Board of Directors amended the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection
of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors
and they accordingly filed their oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for production
and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:

Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing, by
or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel Corporation held on March 13, 1961,
which are in the possession, custody and control of the said corporation, it appearing that
the same is material and relevant to the issues involved in the main case. Accordingly,
the respondents should allow petitioner-movant entry in the principal office of the
respondent Corporation, San Miguel Corporation on January 14, 1977, at 9:30 o'clock in
the morning for purposes of enforcing the rights herein granted; it being understood that
the inspection, copying and photographing of the said documents shall be undertaken
under the direct and strict supervision of this Commission. Provided, however, that other
documents and/or papers not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose M.
Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-
in- interest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-
movant is not a stockholder of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976,

withdrawing his request to copy and inspect the management contract between San
Miguel Corporation and A. Soriano Corporation and the renewal and amendments thereof
for the reason that he had already obtained the same, the Commission takes note thereof;
and

4. Finally, the Commission holds in abeyance the resolution on the matter of production
and inspection of the authority of the stockholders of San Miguel Corporation to invest
the funds of respondent corporation in San Miguel International, Inc., until after the
hearing on the merits of the principal issues in the above-entitled case.
68
 This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation
issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws", setting such meeting for February 10, 1977. This prompted petitioner to
ask respondent Commission for a summary judgment insofar as the first cause of action is concerned,
for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of September 18, 1976. The motion for
summary judgment was opposed by private respondents. Pending action on the motion, petitioner filed
an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending the
determination of petitioner's application for the issuance of a preliminary injunction and/or petitioner's
motion for summary judgment, a temporary restraining order be issued, restraining respondents from
holding the special stockholder's meeting as scheduled. This motion was duly opposed by respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.

A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed
by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time
of the filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise,
the motion for reconsideration of the order granting in part and denying in part petitioner's motion for
production of record had not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled
for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended
to run for the position of director of respondent corporation. Thereafter, respondents filed a
Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of
respondent corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications
specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof,
petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ
of injunction, alleging that private respondents were seeking to nullify and render ineffectual the
exercise of jurisdiction by the respondent Commission, to petitioner's irreparable damage and
prejudice, Allegedly despite a subsequent Manifestation to prod respondent Commission to act,
petitioner was not heard prior to the date of the stockholders' meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act
hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
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corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent Commission,
on January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose
M. Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to
account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4,
1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to
dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on
April 29 and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the
following:

6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the

meeting on March 20, 1972 to invest corporate funds in other companies or businesses
or for purposes other than the main purpose for which the Corporation has been
organized, and ratification of the investments thereafter made pursuant thereto.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of
the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May
3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission,
however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17,
1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the Commission
to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has
been taken up to the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on
the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his
rights as stockholder of respondent corporation, and that respondent are acting oppressively against
petitioner, in gross derogation of petitioner's rights to property and due process. He prayed that this
Court direct respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from
disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court
or until the Securities and Ex-change Commission acts on the matters complained of in the instant
petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had
been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner
copies of the following orders:

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(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration,
with its supplement, of the order of the Commission denying in part petitioner's motion for production
of documents, petitioner's motion for reconsideration of the order denying the issuance of a temporary
restraining order denying the issuance of a temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the stockholders' meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of the
Agenda for the annual stockholders' meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration
of the order of respondent Commission denying petitioner's motion for summary judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void
and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings
relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the
merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:

(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic
to that of respondent San Miguel Corporation, it appearing that the owns and controls a greater portion
of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which
corporations are engaged in business directly and substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and
Robina had accumulated investments. Further, when CFC and Robina had accumulated shares in SMC,
the Board of Directors of SMC realized the clear and present danger that competitors or antagonistic
parties may be elected directors and thereby have easy and direct access to SMC's business and trade
secrets and plans;

(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear
and present danger that business competitors, if allowed to become directors, will illegally and unfairly
utilize their direct access to its business secrets and plans for their own private gain to the irreparable
prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership
of a competitor in the Board of Directors is a blatant disregard of no less that the Constitution and
pertinent laws against combinations in restraint of trade;

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(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve
and protect itself by excluding competitors and antogonistic parties, under the law of self-preservation,
and it should be allowed a wide latitude in the selection of means to preserve itself;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May
3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was
not given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has become moot and academic
because respondent Commission has acted on the pending incidents, complained of. It was, therefore,
prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition
has become moot and academic for the reason, among others that the acts of private respondent
sought to be enjoined have reference to the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the
order of respondent Commission, petitioner was allowed to run and be voted for as director; and that
in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further
it was averred that the questions and issues raised by petitioner are pending in the Securities and
Exchange Commission which has acquired jurisdiction over the case, and no hearing on the merits has
been had; hence the elevation of these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions
for the determination of this Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court;
(2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to
the bylaws which specifically bars petitioner from being a director is void since it deprives him of his
vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did
not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case
No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation,
took into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977
which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason
given for denial of deferment was that "such action is within the authority of the corporation as well as
falling within the sphere of stockholders' right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their investments are the ones directly
affected." It was alleged that the main petition has, therefore, become moot and academic.

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On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent Commission
are now before this Honorable Court which has the authority and the competence to act on them as it
may see fit." (Reno, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item
6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the
investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of
the Corporation Law.

Whether or not amended by-laws are valid is purely a legal question which public interest requires to
be resolved —

It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for
an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle
of exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to
what the provisions are and evidence is not necessary to determine whether such amended by-laws
are valid as framed and approved ... "; second: "it is for the interest and guidance of the public that
an immediate and final ruling on the question be made ... "; third: "petitioner was denied due process
by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather than serve the
ends of justice."

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal
issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should
always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear
the seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel
Corporation that this Court resolve on the merits the validity of its amended by laws and the rights and
obligations of the parties thereunder, otherwise "the time spent and effort exerted by the parties
concerned and, more importantly, by this Honorable Court, would have been for naught because the
main question will come back to this Honorable Court for final resolution." Respondent Eduardo R.
Visaya submits a similar appeal.

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It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing
and decision of the issues involved, invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the ends of justice would not be
subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et
al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v. Central Surety
and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for
further proceedings, citing precedent where this Court, in similar situations resolved to decide the cases
on the merits, instead of remanding them to the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public interest demand an early disposition of the
case; or (c) where the trial court had already received all the evidence presented by both parties and
the Supreme Court is now in a position, based upon said evidence, to decide the case on its merits. 8 It
is settled that the doctrine of primary jurisdiction has no application where only a question of law is
involved. 8a Because uniformity may be secured through review by a single Supreme Court, questions
of law may appropriately be determined in the first instance by courts. 8b In the case at bar, there are
facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors
of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly
pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held
specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders
of record; that the foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing
company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders'
annual meeting held in 1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.

II

Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election
to the Board of Directors of SMC are valid and reasonable —

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the
by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon
which reasonable minds must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-laws and who have
exercised their authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored
to suppress the minority and prevent them from having representation in the Board", at the same time
depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as
director.

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Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation
content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation;
that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of
reasonable protective from the unrestrained self-interest of those charged with the promotion of the
corporate enterprise; that access to confidential information by a competitor may result either in the
promotion of the interest of the competitor at the expense of the San Miguel Corporation, or the
promotion of both the interests of petitioner and respondent San Miguel Corporation, which may,
therefore, result in a combination or agreement in violation of Article 186 of the Revised Penal Code
by destroying free competition to the detriment of the consuming public. It is further argued that there
is not vested right of any stockholder under Philippine Law to be voted as director of a corporation. It
is alleged that petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned
or controlled by him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John
Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c) CFC
Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of
San Miguel Corporation, as of the present date, is represented by 33,139,749 shares with a par value
of P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total
outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the president
and substantial stockholder of Universal Robina Corporation and CFC Corporation, both of which are
allegedly controlled by petitioner and members of his family. It is also claimed that both the Universal
Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially
competing with the alleged businesses of San Miguel Corporation, and of corporations in which SMC
has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL

CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board
the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total

1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product
sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly,
the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog
feeds ice cream, instant coffee and woven fabrics would result in a position of such dominance as to
affect the prevailing market factors.

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It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines
which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was
directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented
sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton
Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc.,
subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition
between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than
P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total
outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they
"realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On
September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10,
1977, these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945
shares, or more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005
shares, opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10,
1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares,
rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him.
On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million
shares, or more than 90% of the total outstanding shares. voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY

CONFERRED BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the
clear and present danger that the election of a business competitor to the Board may cause upon the
corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is
the issue — whether or not respondent San Miguel Corporation could, as a measure of self- protection,
disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for
its internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. 12 At common law,
the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of
its necessary and inseparable legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this inherent power
as one of its necessary and inseparable legal incidents, independent of any specific enabling provision
in its charter or in general law, such power of self-government being essential to enable the corporation
to accomplish the purposes of its creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws
"the qualifications, duties and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of the capital stock of the
stock corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the
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validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their
action, on the ground that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated
by a majorityof the stockholders and that he impliedly contracts that the will of the majority shall govern
in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden
by law." 15 To this extent, therefore, the stockholder may be considered to have "parted with his
personal right or privilege to regulate the disposition of his property which he has invested in the capital
stock of the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It
cannot therefore be justly said that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation
by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital
stock of the corporation If the amendment changes, diminishes or restricts the rights of the existing
shareholders then the disenting minority has only one right, viz.: "to object thereto in writing and
demand payment for his share." Under section 22 of the same law, the owners of the majority of the
subscribed capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that petitioner has a vested right to be elected director, in the face of the fact that the law
at the time such right as stockholder was acquired contained the prescription that the corporate charter
and the by-law shall be subject to amendment, alteration and modification. 17

It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is whether the disqualification of a competitor from being elected
to the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the corporation
and the stockholders as a body are concerned. As agents entrusted with the management of the
corporation for the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this
sense the relation is one of trust." 18 "The ordinary trust relationship of directors of a corporation and
stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs
from the fact that directors have the control and guidance of corporate affairs and property and hence
of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of
the corporate interests and are ultimately the only beneficiaries thereof * * *.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the
directors of corporations, thus:

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary
position cannot serve himself first and his cestuis second. ... He cannot manipulate the
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 affairs of his corporation to their detriment and in disregard of the standards of common
decency. He cannot by the intervention of a corporate entity violate the ancient precept
against serving two masters ... He cannot utilize his inside information and strategic
position for his own preferment. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He cannot violate rules of fair
play by doing indirectly though the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the detriment of the stockholders
and creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all times subject
to the equitable limitation that it may not be exercised for the aggrandizement, preference
or advantage of the fiduciary to the exclusion or detriment of the cestuis.

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can a
director. Human nature is too weak -for this. Take whatever statute provision you please
giving power to stockholders to choose directors, and in none will you find any express
prohibition against a discretion to select directors having the company's interest at heart,
and it would simply be going far to deny by mere implication the existence of such a
salutary power

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from
being a director, the same reasoning would apply to disqualify the wife and immediate member of the
family of such stockholder, on account of the supposed interest of the wife in her husband's affairs,
and his suppose influence over her. It is perhaps true that such stockholders ought not to be
condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So
it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of control in this corporation as in many others
is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test that we
can apply is as to whether or not the action of the Board is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases.23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO

BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION
WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power
to make by-laws declaring a person employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24This is based upon the principle that where the director
is so employed in the service of a rival company, he cannot serve both, but must betray one or the
other. Such an amendment "advances the benefit of the corporation and is good." An exception exists
in New Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the
only qualification, and therefore the corporation was not empowered to add additional
qualifications. 25 This is the exact opposite of the situation in the Philippines because as stated
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heretofore, section 21 of the Corporation Law expressly provides that a corporation may make by-laws
for the qualifications of directors. Thus, it has been held that an officer of a corporation cannot engage
in a business in direct competition with that of the corporation where he is a director by utilizing
information he has received as such officer, under "the established law that a director or officer of a
corporation may not enter into a competing enterprise which cripples or injures the business of the
corporation of which he is an officer or director. 26

It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign firm for exclusive sale
of its products, the court held that equity would regard the new contract as an offshoot of the old
contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the
fruits of his misconduct to the exclusion of his principal. 28

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing interests.
This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director
taking advantage of an opportunity for his own personal profit when the interest of the corporation
justly calls for protection. 30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure;
(b) budget for expansion and diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the
information which he acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-
laws was made. Certainly, where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above his personal
concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors,
officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or
subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:

... A bank director has access to a great deal of information concerning the business and
plans of a bank which would likely be injurious to the bank if known to another bank, and
it was reasonable and prudent to enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests of the corporation
as a legitimate object of by-law protection. With respect to attorneys or persons
associated with a firm which is attorney for another bank, in addition to the direct conflict
79
 or potential conflict of interest, there is also the danger of inadvertent leakage of
confidential information through casual office discussions or accessibility of files.
Defendant's directors determined that its welfare was best protected if this opportunity
for conflicting loyalties and potential misuse and leakage of confidential information was
foreclosed.

In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:

(1) A director shall not be directly or indirectly interested as a stockholder in any other
firm, company, or association which competes with the subject corporation.

(2) A director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation,

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other
firm, company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding

office.

(5) No person who is an attorney against the corporation in a law suit is eligible for service
on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience — that a person cannot serve
two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his
position as director of San Miguel Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the validity and reasonableness of the
by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in running for board membership — which is to
protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct
would be against all accepted principles underlying a director's duty of fidelity to the corporation, for
the policy of the law is to encourage and enforce responsible corporate management. As explained by
Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty to control and
supervise the day to day business activities of the company or to promulgate definite policies and rules
of guidance with a vigilant eye toward seeing to it that these policies are carried out. It is only then
that directors may be said to have fulfilled their duty of fealty to the corporation."

Sound principles of corporate management counsel against sharing sensitive information with a director
whose fiduciary duty of loyalty may well require that he disclose this information to a competitive
arrival. These dangers are enhanced considerably where the common director such as the petitioner is
a controlling stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his own corporation
the corporate plans and policies of the corporation where he sits as director.

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Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the strategies for the development
of existing or new markets of existing or new products could enable said competitor to utilize such
knowledge to his advantage. 32

There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair
competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or
prohibit private monopolies when the public interest so requires. No combinations in restraint of trade
or unfair competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or commerce, or
shall combine with any other person or persons to monopolize said merchandise or object
in order to alter the price thereof by spreading false rumors or making use of any other
artifice to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any merchandise or

object of commerce or an importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or object of commerce or
with any other persons not so similarly engaged for the purpose of making transactions
prejudicial to lawful commerce, or of increasing the market price in any part of the
Philippines, or any such merchandise or object of commerce manufactured, produced,
processed, assembled in or imported into the Philippines, or of any article in the
manufacture of which such manufactured, produced, processed, or imported
merchandise or object of commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint
of trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter in
free markets. These laws are designed to preserve free and unfettered competition as the rule of trade.
"It rests on the premise that the unrestrained interaction of competitive forces will yield the best
allocation of our economic resources, the lowest prices and the highest quality ... ." 34 they operate to
forestall concentration of economic power. 35 The law against monopolies and combinations in restraint
81
of trade is aimed at contracts and combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly restraining competition or unduly obstructing
the course of trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a
well defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general sense, or to control prices to the detriment
of the public. 37 In short, it is the concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when desired. 38 Further, it must
be considered that the Idea of monopoly is now understood to include a condition produced by the
mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression
of competition by the qualification of interest or management, or it may be thru agreement and concert
of action. It is, in brief, unified tactics with regard to prices. 39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination or
conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what the parties actually
did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition between them
would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition
of the anti-competitive dangers which may arise when an individual simultaneously acts as a director
of two or more competing corporations. A common director of two or more competing corporations
would have access to confidential sales, pricing and marketing information and would be in a position
to coordinate policies or to aid one corporation at the expense of another, thereby stifling competition.
This situation has been aptly explained by Travers, thus:

The argument for prohibiting competing corporations from sharing even one director is
that the interlock permits the coordination of policies between nominally independent
firms to an extent that competition between them may be completely eliminated. Indeed,
if a director, for example, is to be faithful to both corporations, some accommodation
must result. Suppose X is a director of both Corporation A and Corporation B. X could
hardly vote for a policy by A that would injure B without violating his duty of loyalty to B
at the same time he could hardly abstain from voting without depriving A of his best
judgment. If the firms really do compete — in the sense of vying for economic advantage
at the expense of the other — there can hardly be any reason for an interlock between
competitors other than the suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of
men have been able to dominate and control a great number of corporations ... to the detriment of the
small ones dependent upon them and to the injury of the public. 44

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Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the
prices of his products or vary its marketing strategies by region or by brand in order to get the most
out of the consumers. Where the two competing firms control a substantial segment of the market this
could lead to collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry between the corporations, to
seek out ways of compromising opposing interests, and thus eliminate competition. As respondent SMC
aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in the country
win enable the former to practice price discrimination. CFC-Robina can segment the entire consuming
population by geographical areas or income groups and change varying prices in order to maximize
profits from every market segment. CFC-Robina could determine the most profitable volume at which
it could produce for every product line in which it competes with SMC. Access to SMC pricing policy by
CFC-Robina would in effect destroy free competition and deprive the consuming public of opportunity
to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the
election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in
section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than
one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but
waived in the case of another, then it could be reasonably claimed that the by-law was being applied
in a discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal
protection clause of the Constitution requires only that the by-law operate equally upon all persons of
a class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing
and evidence must be submitted to bring his case within the ambit of the disqualification. Sound
principles of public policy and management, therefore, support the view that a by-law which disqualifies
a competition from election to the Board of Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to
the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment
of those who are authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the
terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or
83
more forces, each possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more persons to obtain
the business patronage of a third by offering more advantageous terms as an inducement to secure
trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an
indirect and highly unsubstantial duplication of an isolated or non-characteristics activity. 47 It is,
therefore, obvious that not every person or entity engaged in business of the same kind is a competitor.
Such factors as quantum and place of business, Identity of products and area of competition should
be taken into consideration. It is, therefore, necessary to show that petitioner's business covers a
substantial portion of the same markets for similar products to the extent of not less than 10% of
respondent corporation's market for competing products. While We here sustain the validity of the
amended by-laws, it does not follow as a necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due process, there must be due hearing at which
the petitioner must be given the fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of directors
to act with fairness to the stockholders.48Pursuant to this obligation and to remove any suspicion that
this power may be utilized by the incumbent members of the Board to perpetuate themselves in power,
any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by
the Securities behind Exchange Commission en banc and its decision shall be final unless reversed by
this Court on certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors
is an abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a
fraud upon minority stockholders or creditors, or will result in waste, dissipation or misapplication of
the corporation assets, a court of equity has the power to grant appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was
denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over
a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a
complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes
of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in
associated companies and other companies as of December 31, 1975; (5) a listing of the salaries,
allowances, bonuses and other compensation or remunerations received by the directors and corporate
officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies
of the minutes of all meetings of the Board of Directors from January 1975 to May 1976, with deletions
of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976;
(1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in
Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948 with
an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank
under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of
December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that the total
cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from
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1972-1975, SMI did not declare cash or stock dividends, all earnings having been used in line with a
program for the setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of
the afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of
the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection.
It is generally held by majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other
words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular
Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest
purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial
opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court
to inquire into and consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused
when the information is not sought in good faith or is used to the detriment of the corporation." 57 But
the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively
if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take
from the stockholder the burden of showing propriety of purpose and place upon the corporation the
burden of showing impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the corporation and the manner
of expenditure of its funds, and to inspection to obtain such information, especially where it appears
that the company is being mismanaged or that it is being managed for the personal benefit of officers
or directors or certain of the stockholders to the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose
is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different thing.

Some state courts recognize the right under certain conditions, while others do not. Thus, it has been
held that where a corporation owns approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60 and that a writ of mandamus, may
be granted, as the records of the subsidiary were, to all incontents and purposes, the records of the
parent even though subsidiary was not named as a party. 61 mandamus was likewise held proper to
inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or
dominion by the parent showing the relation of principal or agent or something similar thereto. 62
85
On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation
is a separate and distinct corporation domiciled and with its books and records in another jurisdiction,
and is not legally subject to the control of the parent company, although it owned a vast majority of
the stock of the subsidiary. 63Likewise, inspection of the books of an allied corporation by stockholder
of the parent company which owns all the stock of the subsidiary has been refused on the ground that
the stockholder was not within the class of "persons having an interest." 64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect corporation's
subsidiaries' books and records which were in corporation's possession and control in its office in New
York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and directors.

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner
contended that respondent corporation "had been attempting to suppress information for the
stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of
some documents which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the books and records of
a corporation in order to investigate the conduct of the management, determine the financial condition
of the corporation, and generally take an account of the stewardship of the officers and directors. 68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and
fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records
of the corporation as extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent
corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for ratification is a
sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation
or business or for any purpose other than the main purpose for which it was organized" provided that
its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares
entitling them to exercise at least two-thirds of the voting power. If the investment is made in
pursuance of the corporate purpose, it does not need the approval of the stockholders. It is only when
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the purchase of shares is done solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at
least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is to
manufacture and market beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free
reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears
relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central
Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting
power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar
bags. The lower court said that "there is more logic in the stand that if the investment is made in a
corporation whose business is important to the investing corporation and would aid it in its purpose,
to require authority of the stockholders would be to unduly curtail the power of the Board of Directors."
This Court affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara,
said:

"j. Power to acquire or dispose of shares or securities. — 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. In any case,
the purchase of such shares or securities must be subject to the limitations established
by the Corporations law; namely, (a) that no agricultural or mining corporation shall be
restricted to own not more than 15% of the voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall be solely for investment and not for the
purpose of bringing about a monopoly in any line of commerce of combination in restraint
of trade." The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89)
(Emphasis supplied.)

40. Power to invest corporate funds. — A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the
main purpose for which it was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural
or mining corporation. When the investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
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Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby render
binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because
the questioned investment is neither contrary to law, morals, public order or public policy. It is a
corporate transaction or contract which is within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the requirement
was enacted may, therefore, ratify the investment and its ratification by said stockholders obliterates
any defect which it may have had at the outset. "Mere ultra vires acts", said this Court in
Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within the scope of
the articles of incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted
the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977
cannot be construed as an admission that respondent corporation had committed an ultra vires act,
considering the common practice of corporations of periodically submitting for the gratification of their
stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this
Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned
amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the
validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing
by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise
concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a
separate opinion, wherein they voted against the validity of the questioned amended bylaws and that
this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They
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concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in
the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing by
the respondent's Board of Directors and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the
petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as
specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and the
ratification of the foreign investment of respondent corporation, for lack of necessary votes, is hereby
DISMISSED. No costs.

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