D I G E S T S // C O R P O R A T I O N L A W

I. II. Republic v. Sun Life, G.R. No. 158085, 14 October 2005 [re: power to invest corporate funds in another corporation or business] Gokongwei v. SEC, 89 SCRA 337 (1979) [re: nature and functions of by-laws]

CASE I: REPUBLIC v. SUN LIFE

FACTS: Sun Life Assurance Company of Canada (Sun Life) is a mutual life insurance company organized and existing under the laws of Canada Sun Life is registered and authorized by the Securities and Exchange Commission (SEC) and the Insurance Commission (IC) to engaged in business in the Philippines as a mutual life insurance company Sun Life filed with the Commissioner of Internal Revenue (CIR) its insurance premium tax return for the third quarter of 1997, and paid the necessary premium taxes Sun Life also filed with the CIR its documentary stamp tax (DST) declaration returns and paid the total amount therefor the Court of Tax Appeals (CTA) held in one case that mutual life insurance companies are purely cooperative companies and are exempt from payment of premium tax and DST Sun Life filed with the CIR an administrative claim for tax credit of its alleged erroneously paid premium tax and DST CIR failed to act upon the claim for tax credit Sun Life filed with the CTA a petition for review, praying for the issuance of a tax credit certificate, contending that it is a mutual life insurance company vested with all the characteristic features and elements of a cooperative company/association (see Sec. 121, NIRC): (1) management and affairs, conducted by members; (2) operated with money collected from members; (3) purpose = mutual protection of members, and not profit or gain CTA ruled in Sun Life's favor CIR filed a motion for reconsideration, arguing that Sun Life (1) should have registered with the Cooperative Development Authority before it could enjoy the exemptions from premium tax and DST extended to purely cooperative companies or associations under the NIRC; and (2) failed to prove that ownership of the company was vested in its members who are entitled to vote and elect the Board of Trustees among them CTA denied the motion for reconsideration CIR appealed to the CA w/c affirmed the CTA's ruling hence this petition ISSUE: Was Sun Life a purely cooperative company/association under Sec. 121, NIRC, organized and conducted solely by the members thereof for the exclusive benefit of each member and not for profit, and thus exempt from having to pay premium tax and DST? RULING: YES

 NIRC's definition of a "cooperative": association conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit SC: Sun Life is a cooperative engaged in a mutual life insurance business -- (1) it is managed by its members, its management and affairs are conducted by member-policyholders; (2) it is operated with money collected from its members[-policyholders]; and (3) it is licensed for the mutual protection of its members, not for the profit of anyone NOTE: it does not follow that because respondent is registered as a non-stock corporation and thus exists for a purpose other than profit, the company can no longer make any profits earning profits is merely its secondary, not primary, purpose in fact, it may not lawfully engage in any business activity for profit, for to do so would change or contradict its nature as a non-profit entity it may, however, invest its corporate funds in order to earn additional income for paying its operating expenses and meeting benefit claims any excess profit it obtains as an incident to its operations can only be used, whenever necessary or proper, for the furtherance of the purpose for which it was organized under the Tax Code, although respondent is a cooperative, registration with the Cooperative Development Authority (CDA) is not necessary in order for it to be exempt from premium tax and DST

CASE II: GOKONGWEI v. SEC

FACTS: John Gokongwei = stockholder of San Miguel Corporation (SMC) Gokongwei filed a petition with the SEC for the declaration of nullity of the amendment of by-laws, etc., against the majority of the members of the SMC's Board of Directors and SMC itself the by-laws provide that amendments/modifications thereof may only be delegated to the BOD upon affirmative vote of stockholders representing not less than 2/3 of the corporation's subscribed and paid-up capital stock (to be computed on the basis of the capitalization at the time of the amendment) Gokongwei, in alleging that the amended by contends that: 1. since the amendment was based on the 1961 authorization, the BOD acted w/o authority and in usurpation of the stockholders' power in amending the by-laws in 1976 2. the 1961 authorization was already used in 1962 and 1963 3. the amendment deprived him (Gokongwei) of his right to vote and be voted upon as a stockholder (since the amendment disqualified competitors from nomination and election in the BOD of SMC) ... thus the amended by-laws were null and void while the petition was pending, SMC called for a stockholders meeting for the ratification of the amendment to the by-laws the matter prompted Gokongwei to seek for summary judgment, w/c was denied by the SEC from the SEC, Gokongwei brought the matter before the SC via instant petition for certiorari, mandamus, and injunction + prayer for issuance of writ of prelim. injunction ISSUE: Are the amendments in question VALID?

RULING: petition DISMISSED w/o prejudice as to WON Gokongwei's disqualification to run and sit as director of SMC is proper, after a new and proper hearing by SMC's BOD, appealable to the SEC en banc, and ultimately, back to the SC again GR: The validity and reasonableness of a by-law is purely a question of law; whether the by-law is in conflict with the law of the land, or whether the charter of the corporation or is in legal sense unreasonable and therefore unlawful is a question of law. 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 exercised authority.

XPN:

a corporation: 1. has authority prescribed by law to prescribe the qualifications of directors 2. 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 3. may prescribe in its by-laws the qualifications, duties and compensation of directors, officers, and employees any person who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and he impliedly contracts that the will of the majority shall govern in all matters within the limits of the acts of incorporation and lawfully enacted by-laws and not forbidden by law any corporation may amend its by-laws by the owners of the majority of the subscribed stock therefore it cannot be said that Gokongwei has the vested right, as a stock holder, 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 an amendment to the corporate by-laws 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 based upon the principle that where the director is employed in the service of a rival company, he cannot serve both, but must betray one or the other the amendment in this case serves to advance the benefit of the corporation and is good doctrine of corporate opportunity: corporate officers are also not permitted to use their position of trust and confidence to further their private needs, and the act done in furtherance of private needs is deemed to be for the benefit of the corporation