Duties

of
Directors
and Officers

Smith v. Van Gorkom

488 A.2d 858 (Del. 1985)

Before HERRMANN, C.J., and MCNEILLY, HORSEY, MOORE and CHRISTIE, JJ., constituting the
Court en banc.
HORSEY, J. (for the majority):
This appeal from the Court of Chancery involves a class action brought by shareholders
of the defendant Trans Union Corporation (Trans Union or the Company), originally
seeking rescission of a cash-out merger of Trans Union into the defendant New T Company
(New T), a wholly-owned subsidiary of the defendant, Marmon Group, Inc. (Marmon).
Alternate relief in the form of damages is sought against the defendant members of the Board
of Directors of Trans Union, New T, and Jay A. Pritzker and Robert A. Pritzker, owners of
Marmon.
Following trial, the former Chancellor granted judgment for the defendant directors by
unreported letter opinion dated July 6, 1982. Judgment was based on two findings: (1) that the
Board of Directors had acted in an informed manner so as to be entitled to protection of the
business judgment rule in approving the cash-out merger; and (2) that the shareholder vote
approving the merger should not be set aside because the stockholders had been fairly
informed by the Board of Directors before voting thereon. The plaintiffs appeal.
Speaking for the majority of the Court, we conclude that both rulings of the Court of
Chancery are clearly erroneous. Therefore, we reverse and direct that judgment be entered in
favor of the plaintiffs and against the defendant directors for the fair value of the plaintiffs
stockholdings in Trans Union, in accordance with Weinberger v. UOP, Inc., 457 A.2d 701 (Del.
1983)
We hold: (1) that the Boards decision, reached September 20, 1980, to approve the
proposed cash-out merger was not the product of an informed business judgment; (2) that the
Boards subsequent efforts to amend the Merger Agreement and take other curative action
were ineffectual, both legally and factually; and (3) that the Board did not deal with complete
candor with the stockholders by failing to disclose all material facts, which they knew or should
have known, before securing the stockholders approval of the merger.
I.
The nature of this case requires a detailed factual statement. The following facts are
essentially uncontradicted:
-ATrans Union was a publicly-traded, diversified holding company, the principal earnings
of which were generated by its railcar leasing business. During the period here involved, the
Company had a cash flow of hundreds of millions of dollars annually. However, the Company
had difficulty in generating sufficient taxable income to offset increasingly large investment tax
credits (ITCs). Accelerated depreciation deductions had decreased available taxable income
against which to offset accumulating ITCs. The Company took these deductions, despite their

2
effect on usable ITCs, because the rental price in the railcar leasing market had already
impounded the purported tax savings.
In the late 1970s, together with other capital-intensive firms, Trans Union lobbied in
Congress to have ITCs refundable in cash to firms which could not fully utilize the credit.
During the summer of 1980, defendant Jerome W. Van Gorkom, Trans Unions Chairman and
Chief Executive Officer, testified and lobbied in Congress for refundability of ITCs and against
further accelerated depreciation. By the end of August, Van Gorkom was convinced that
Congress would neither accept the refundability concept nor curtail further accelerated
depreciation.
Beginning in the late 1960s, and continuing through the 1970s, Trans Union pursued a
program of acquiring small companies in order to increase available taxable income. In July
1980, Trans Union Management prepared the annual revision of the Companys Five Year
Forecast. This report was presented to the Board of Directors at its July, 1980 meeting. The
report projected an annual income growth of about 20%. The report also concluded that Trans
Union would have about $195 million in spare cash between 1980 and 1985, with the surplus
growing rapidly from 1982 onward. The report referred to the ITC situation as a nagging
problem and, given that problem, the leasing company would still appear to be constrained to
a tax breakeven. The report then listed four alternative uses of the projected 1982-1985 equity
surplus: (1) stock repurchase; (2) dividend increases; (3) a major acquisition program; and (4)
combinations of the above. The sale of Trans Union was not among the alternatives. The report
emphasized that, despite the overall surplus, the operation of the Company would consume all
available equity for the next several years, and concluded: As a result, we have sufficient time
to fully develop our course of action.
-BOn August 27, 1980, Van Gorkom met with Senior Management of Trans Union. Van
Gorkom reported on his lobbying efforts in Washington and his desire to find a solution to the
tax credit problem more permanent than a continued program of acquisitions. Various
alternatives were suggested and discussed preliminarily, including the sale of Trans Union to a
company with a large amount of taxable income.
Donald Romans, Chief Financial Officer of Trans Union, stated that his department had
done a very brief bit of work on the possibility of a leveraged buy-out. This work had been
prompted by a media article which Romans had seen regarding a leveraged buy-out by
management. The work consisted of a preliminary study of the cash which could be
generated by the Company if it participated in a leveraged buy-out. As Romans stated, this
analysis was very first and rough cut at seeing whether a cash flow would support what might
be considered a high price for this type of transaction.
On September 5, at another Senior Management meeting which Van Gorkom attended,
Romans again brought up the idea of a leveraged buy-out as a possible strategic alternative to
the Companys acquisition program. Romans and Bruce S. Chelberg, President and Chief
Operating Officer of Trans Union, had been working on the matter in preparation for the
meeting. According to Romans: They did not come up with a price for the Company. They
merely ran the numbers at $50 a share and at $60 a share with the rough form of their cash
figures at the time. Their figures indicated that $50 would be very easy to do but $60 would be
very difficult to do under those figures. This work did not purport to establish a fair price for
either the Company or 100% of the stock. It was intended to determine the cash flow needed to
service the debt that would probably be incurred in a leveraged buy-out, based on rough

3
calculations without any benefit of experts to identify what the limits were to that, and so
forth. These computations were not considered extensive and no conclusion was reached.
At this meeting, Van Gorkom stated that he would be willing to take $55 per share for
his own 75,000 shares. He vetoed the suggestion of a leveraged buy-out by Management,
however, as involving a potential conflict of interest for Management. Van Gorkom, a certified
public accountant and lawyer, had been an officer of Trans Union for 24 years, its Chief
Executive Officer for more than 17 years, and Chairman of its Board for 2 years. It is
noteworthy in this connection that he was then approaching 65 years of age and mandatory
retirement.
For several days following the September 5 meeting, Van Gorkom pondered the idea of a
sale. He had participated in many acquisitions as a manager and director of Trans Union and
as a director of other companies. He was familiar with acquisition procedures, valuation
methods, and negotiations; and he privately considered the pros and cons of whether Trans
Union should seek a privately or publicly-held purchaser.
Van Gorkom decided to meet with Jay A. Pritzker, a well-known corporate takeover
specialist and a social acquaintance. However, rather than approaching Pritzker simply to
determine his interest in acquiring Trans Union, Van Gorkom assembled a proposed per share
price for sale of the Company and a financing structure by which to accomplish the sale. Van
Gorkom did so without consulting either his Board or any members of Senior Management
except one: Carl Peterson, Trans Unions Controller. Telling Peterson that he wanted no other
person on his staff to know what he was doing, but without telling him why, Van Gorkom
directed Peterson to calculate the feasibility of a leveraged buy-out at an assumed price per
share of $55. Apart from the Companys historic stock market price,5 and Van Gorkoms long
association with Trans Union, the record is devoid of any competent evidence that $55
represented the per share intrinsic value of the Company.
Having thus chosen the $55 figure, based solely on the availability of a leveraged buyout, Van Gorkom multiplied the price per share by the number of shares outstanding to reach a
total value of the Company of $690 million. Van Gorkom told Peterson to use this $690 million
figure and to assume a $200 million equity contribution by the buyer. Based on these
assumptions, Van Gorkom directed Peterson to determine whether the debt portion of the
purchase price could be paid off in five years or less if financed by Trans Unions cash flow as
projected in the Five Year Forecast, and by the sale of certain weaker divisions identified in a
study done for Trans Union by the Boston Consulting Group (BCG study). Peterson reported
that, of the purchase price, approximately $50-80 million would remain outstanding after five
years. Van Gorkom was disappointed, but decided to meet with Pritzker nevertheless.
Van Gorkom arranged a meeting with Pritzker at the latters home on Saturday,
September 13, 1980. Van Gorkom prefaced his presentation by stating to Pritzker: Now as far
as you are concerned, I can, I think, show how you can pay a substantial premium over the
present stock price and pay off most of the loan in the first five years. * * * If you could pay $55
for this Company, here is a way in which I think it can be financed.
Van Gorkom then reviewed with Pritzker his calculations based upon his proposed price
of $55 per share. Although Pritzker mentioned $50 as a more attractive figure, no other price
5

The common stock of Trans Union was traded on the New York Stock Exchange. Over the five year period from
1975 through 1979, Trans Unions stock had traded within a range of a high of $39 1/2 and a low of $24 1/4 . Its
high and low range for 1980 through September 19 (the last trading day before announcement of the merger) was
$38 1/4 -$29 1/2 .

4
was mentioned. However, Van Gorkom stated that to be sure that $55 was the best price
obtainable, Trans Union should be free to accept any better offer. Pritzker demurred, stating
that his organization would serve as a stalking horse for an auction contest only if Trans
Union would permit Pritzker to buy 1,750,000 shares of Trans Union stock at market price
which Pritzker could then sell to any higher bidder. After further discussion on this point,
Pritzker told Van Gorkom that he would give him a more definite reaction soon.
On Monday, September 15, Pritzker advised Van Gorkom that he was interested in the
$55 cash-out merger proposal and requested more information on Trans Union. Van Gorkom
agreed to meet privately with Pritzker, accompanied by Peterson, Chelberg, and Michael
Carpenter, Trans Unions consultant from the Boston Consulting Group. The meetings took
place on September 16 and 17. Van Gorkom was astounded that events were moving with such
amazing rapidity.
On Thursday, September 18, Van Gorkom met again with Pritzker. At that time, Van
Gorkom knew that Pritzker intended to make a cash-out merger offer at Van Gorkoms
proposed $55 per share. Pritzker instructed his attorney, a merger and acquisition specialist, to
begin drafting merger documents. There was no further discussion of the $55 price. However,
the number of shares of Trans Unions treasury stock to be offered to Pritzker was negotiated
down to one million shares; the price was set at $38--75 cents above the per share price at the
close of the market on September 19. At this point, Pritzker insisted that the Trans Union
Board act on his merger proposal within the next three days, stating to Van Gorkom: We have
to have a decision by no later than Sunday [evening, September 21] before the opening of the
English stock exchange on Monday morning. Pritzkers lawyer was then instructed to draft the
merger documents, to be reviewed by Van Gorkoms lawyer, sometimes with discussion and
sometimes not, in the haste to get it finished.
On Friday, September 19, Van Gorkom, Chelberg, and Pritzker consulted with Trans
Unions lead bank regarding the financing of Pritzkers purchase of Trans Union. The bank
indicated that it could form a syndicate of banks that would finance the transaction. On the
same day, Van Gorkom retained James Brennan, Esquire, to advise Trans Union on the legal
aspects of the merger. Van Gorkom did not consult with William Browder, a Vice-President
and director of Trans Union and former head of its legal department, or with William Moore,
then the head of Trans Unions legal staff.
On Friday, September 19, Van Gorkom called a special meeting of the Trans Union
Board for noon the following day. He also called a meeting of the Companys Senior
Management to convene at 11:00 a.m., prior to the meeting of the Board. No one, except
Chelberg and Peterson, was told the purpose of the meetings. Van Gorkom did not invite Trans
Unions investment banker, Salomon Brothers or its Chicago-based partner, to attend.
Of those present at the Senior Management meeting on September 20, only Chelberg
and Peterson had prior knowledge of Pritzkers offer. Van Gorkom disclosed the offer and
described its terms, but he furnished no copies of the proposed Merger Agreement. Romans
announced that his department had done a second study which showed that, for a leveraged
buy-out, the price range for Trans Union stock was between $55 and $65 per share. Van
Gorkom neither saw the study nor asked Romans to make it available for the Board meeting.
Senior Managements reaction to the Pritzker proposal was completely negative. No
member of Management, except Chelberg and Peterson, supported the proposal. Romans

5
objected to the price as being too low;6 he was critical of the timing and suggested that
consideration should be given to the adverse tax consequences of an all-cash deal for low-basis
shareholders; and he took the position that the agreement to sell Pritzker one million newlyissued shares at market price would inhibit other offers, as would the prohibitions against
soliciting bids and furnishing inside information to other bidders. Romans argued that the
Pritzker proposal was a lock up and amounted to an agreed merger as opposed to an offer.
Nevertheless, Van Gorkom proceeded to the Board meeting as scheduled without further delay.
Ten directors served on the Trans Union Board, five inside (defendants Bonser, OBoyle,
Browder, Chelberg, and Van Gorkom) and five outside (defendants Wallis, Johnson,
Lanterman, Morgan and Reneker). All directors were present at the meeting, except OBoyle
who was ill. Of the outside directors, four were corporate chief executive officers and one was
the former Dean of the University of Chicago Business School. None was an investment banker
or trained financial analyst. All members of the Board were well informed about the Company
and its operations as a going concern. They were familiar with the current financial condition
of the Company, as well as operating and earnings projections reported in the recent Five Year
Forecast. The Board generally received regular and detailed reports and was kept abreast of the
accumulated investment tax credit and accelerated depreciation problem.
Van Gorkom began the Special Meeting of the Board with a twenty-minute oral
presentation. Copies of the proposed Merger Agreement were delivered too late for study
before or during the meeting. He reviewed the Companys ITC and depreciation problems and
the efforts theretofore made to solve them. He discussed his initial meeting with Pritzker and
his motivation in arranging that meeting. Van Gorkom did not disclose to the Board, however,
the methodology by which he alone had arrived at the $55 figure, or the fact that he first
proposed the $55 price in his negotiations with Pritzker.
Van Gorkom outlined the terms of the Pritzker offer as follows: Pritzker would pay $55
in cash for all outstanding shares of Trans Union stock upon completion of which Trans Union
would be merged into New T Company, a subsidiary wholly-owned by Pritzker and formed to
implement the merger; for a period of 90 days, Trans Union could receive, but could not
actively solicit, competing offers; the offer had to be acted on by the next evening, Sunday,
September 21; Trans Union could only furnish to competing bidders published information,
and not proprietary information; the offer was subject to Pritzker obtaining the necessary
financing by October 10, 1980; if the financing contingency were met or waived by Pritzker,
Trans Union was required to sell to Pritzker one million newly-issued shares of Trans Union at
$38 per share.
Van Gorkom took the position that putting Trans Union up for auction through a 90day market test would validate a decision by the Board that $55 was a fair price. He told the
Board that the free market will have an opportunity to judge whether $55 is a fair price. Van
Gorkom framed the decision before the Board not as whether $55 per share was the highest
price that could be obtained, but as whether the $55 price was a fair price that the stockholders
should be given the opportunity to accept or reject.
Attorney Brennan advised the members of the Board that they might be sued if they
failed to accept the offer and that a fairness opinion was not required as a matter of law.

Van Gorkom asked Romans to express his opinion as to the $55 price. Romans stated that he thought the price
was too low in relation to what he could derive for the company in a cash sale, particularly one which enabled us
to realize the values of certain subsidiaries and independent entities.

6
Romans attended the meeting as chief financial officer of the Company. He told the
Board that he had not been involved in the negotiations with Pritzker and knew nothing about
the merger proposal until the morning of the meeting; that his studies did not indicate either a
fair price for the stock or a valuation of the Company; that he did not see his role as directly
addressing the fairness issue; and that he and his people were trying to search for ways to
justify a price in connection with such a [leveraged buy-out] transaction, rather than to say
what the shares are worth. Romans testified:
I told the Board that the study ran the numbers at 50 and 60, and then the subsequent study at 55 and
65, and that was not the same thing as saying that I have a valuation of the company at X dollars. But
it was a way--a first step towards reaching that conclusion.

Romans told the Board that, in his opinion, $55 was in the range of a fair price, but at
the beginning of the range.
Chelberg, Trans Unions President, supported Van Gorkoms presentation and
representations. He testified that he participated to make sure that the Board members
collectively were clear on the details of the agreement or offer from Pritzker; that he
participated in the discussion with Mr. Brennan, inquiring of him about the necessity for
valuation opinions in spite of the way in which this particular offer was couched; and that he
was otherwise actively involved in supporting the positions being taken by Van Gorkom before
the Board about the necessity to act immediately on this offer, and about the adequacy of the
$55 and the question of how that would be tested.
The Board meeting of September 20 lasted about two hours. Based solely upon Van
Gorkoms oral presentation, Chelbergs supporting representations, Romans oral statement,
Brennans legal advice, and their knowledge of the market history of the Companys stock, the
directors approved the proposed Merger Agreement. However, the Board later claimed to have
attached two conditions to its acceptance: (1) that Trans Union reserved the right to accept any
better offer that was made during the market test period; and (2) that Trans Union could share
its proprietary information with any other potential bidders. While the Board now claims to
have reserved the right to accept any better offer received after the announcement of the
Pritzker agreement (even though the minutes of the meeting do not reflect this), it is
undisputed that the Board did not reserve the right to actively solicit alternate offers.
The Merger Agreement was executed by Van Gorkom during the evening of September
20 at a formal social event that he hosted for the opening of the Chicago Lyric Opera. Neither
he nor any other director read the agreement prior to its signing and delivery to Pritzker.
On Monday, September 22, the Company issued a press release announcing that Trans
Union had entered into a definitive Merger Agreement with an affiliate of the Marmon
Group, Inc., a Pritzker holding company. Within 10 days of the public announcement, dissent
among Senior Management over the merger had become widespread. Faced with threatened
resignations of key officers, Van Gorkom met with Pritzker who agreed to several modifications
of the Agreement. Pritzker was willing to do so provided that Van Gorkom could persuade the
dissidents to remain on the Company payroll for at least six months after consummation of the
merger.
Van Gorkom reconvened the Board on October 8 and secured the directors approval of
the proposed amendments--sight unseen. The Board also authorized the employment of
Salomon Brothers, its investment banker, to solicit other offers for Trans Union during the
proposed market test period.

7
The next day, October 9, Trans Union issued a press release announcing: (1) that
Pritzker had obtained the financing commitments necessary to consummate the merger with
Trans Union; (2) that Pritzker had acquired one million shares of Trans Union common stock
at $38 per share; (3) that Trans Union was now permitted to actively seek other offers and had
retained Salomon Brothers for that purpose; and (4) that if a more favorable offer were not
received before February 1, 1981, Trans Unions shareholders would thereafter meet to vote on
the Pritzker proposal.
It was not until the following day, October 10, that the actual amendments to the Merger
Agreement were prepared by Pritzker and delivered to Van Gorkom for execution. As will be
seen, the amendments were considerably at variance with Van Gorkoms representations of the
amendments to the Board on October 8; and the amendments placed serious constraints on
Trans Unions ability to negotiate a better deal and withdraw from the Pritzker agreement.
Nevertheless, Van Gorkom proceeded to execute what became the October 10 amendments to
the Merger Agreement without conferring further with the Board members and apparently
without comprehending the actual implications of the amendments.
Salomon Brothers efforts over a three-month period from October 21 to January 21 produced
only one serious suitor for Trans Union--General Electric Credit Corporation (GE Credit), a
subsidiary of the General Electric Company. However, GE Credit was unwilling to make an
offer for Trans Union unless Trans Union first rescinded its Merger Agreement with Pritzker.
When Pritzker refused, GE Credit terminated further discussions with Trans Union in early
January.
In the meantime, in early December, the investment firm of Kohlberg, Kravis, Roberts &
Co. (KKR), the only other concern to make a firm offer for Trans Union, withdrew its offer
under circumstances hereinafter detailed.
On December 19, this litigation was commenced and, within four weeks, the plaintiffs
had deposed eight of the ten directors of Trans Union, including Van Gorkom, Chelberg and
Romans, its Chief Financial Officer. On January 21, Managements Proxy Statement for the
February 10 shareholder meeting was mailed to Trans Unions stockholders. On January 26,
Trans Unions Board met and, after a lengthy meeting, voted to proceed with the Pritzker
merger. The Board also approved for mailing, on or about January 27, a Supplement to its
Proxy Statement. The Supplement purportedly set forth all information relevant to the Pritzker
Merger Agreement, which had not been divulged in the first Proxy Statement.
On February 10, the stockholders of Trans Union approved the Pritzker merger
proposal. Of the outstanding shares, 69.9% were voted in favor of the merger; 7.25% were
voted against the merger; and 22.85% were not voted.
II.
We turn to the issue of the application of the business judgment rule to the September
20 meeting of the Board.
The Court of Chancery concluded from the evidence that the Board of Directors
approval of the Pritzker merger proposal fell within the protection of the business judgment
rule. The Court found that the Board had given sufficient time and attention to the transaction,
since the directors had considered the Pritzker proposal on three different occasions, on
September 20, and on October 8, 1980 and finally on January 26, 1981. On that basis, the
Court reasoned that the Board had acquired, over the four-month period, sufficient
information to reach an informed business judgment on the cash-out merger proposal. The
Court ruled:

... that given the market value of Trans Unions stock, the business acumen of the members of the
board of Trans Union, the substantial premium over market offered by the Pritzkers and the ultimate
effect on the merger price provided by the prospect of other bids for the stock in question, that the
board of directors of Trans Union did not act recklessly or improvidently in determining on a course
of action which they believed to be in the best interest of the stockholders of Trans Union.

The Court of Chancery made but one finding; i.e., that the Boards conduct over the
entire period from September 20 through January 26, 1981 was not reckless or improvident,
but informed. This ultimate conclusion was premised upon three subordinate findings, one
explicit and two implied. The Courts explicit finding was that Trans Unions Board was free to
turn down the Pritzker proposal not only on September 20 but also on October 8, 1980 and on
January 26, 1981. The Courts implied, subordinate findings were: (1) that no legally binding
agreement was reached by the parties until January 26; and (2) that if a higher offer were to be
forthcoming, the market test would have produced it, and Trans Union would have been
contractually free to accept such higher offer. However, the Court offered no factual basis or
legal support for any of these findings; and the record compels contrary conclusions.
Under Delaware law, the business judgment rule is the offspring of the fundamental
principle, codified in 141(a), that the business and affairs of a Delaware corporation are
managed by or under its board of directors. In carrying out their managerial roles, directors are
charged with an unyielding fiduciary duty to the corporation and its shareholders. The business
judgment rule exists to protect and promote the full and free exercise of the managerial power
granted to Delaware directors. The rule itself is a presumption that in making a business
decision, the directors of a corporation acted on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of the company. Aronson [v.
Lewis, 473 A.2d 805 (Del. 1984)] at 812. Thus, the party attacking a board decision as
uninformed must rebut the presumption that its business judgment was an informed one. Id.
The determination of whether a business judgment is an informed one turns on whether
the directors have informed themselves prior to making a business decision, of all material
information reasonably available to them. Id.
Under the business judgment rule there is no protection for directors who have made
an unintelligent or unadvised judgment. Mitchell v. Highland-Western Glass, 167 A. 831,
833 (Del. Ch. 1933). A directors duty to inform himself in preparation for a decision derives
from the fiduciary capacity in which he serves the corporation and its stockholders. Since a
director is vested with the responsibility for the management of the affairs of the corporation,
he must execute that duty with the recognition that he acts on behalf of others. Such obligation
does not tolerate faithlessness or self-dealing. But fulfillment of the fiduciary function requires
more than the mere absence of bad faith or fraud. Representation of the financial interests of
others imposes on a director an affirmative duty to protect those interests and to proceed with
a critical eye in assessing information of the type and under the circumstances present here.
Thus, a directors duty to exercise an informed business judgment is in the nature of a
duty of care, as distinguished from a duty of loyalty. Here, there were no allegations of fraud,
bad faith, or self-dealing, or proof thereof. Hence, it is presumed that the directors reached
their business judgment in good faith, and considerations of motive are irrelevant to the issue
before us.
The standard of care applicable to a directors duty of care has also been recently
restated by this Court. In Aronson, supra, we stated:

While the Delaware cases use a variety of terms to describe the applicable standard of care, our
analysis satisfies us that under the business judgment rule director liability is predicated upon
concepts of gross negligence. (footnote omitted)
473 A.2d at 812.

We again confirm that view. We think the concept of gross negligence is also the proper
standard for determining whether a business judgment reached by a board of directors was an
informed one.
In the specific context of a proposed merger of domestic corporations, a director has a
duty under 251(b), along with his fellow directors, to act in an informed and deliberate
manner in determining whether to approve an agreement of merger before submitting the
proposal to the stockholders. Certainly in the merger context, a director may not abdicate that
duty by leaving to the shareholders alone the decision to approve or disapprove the agreement.
Only an agreement of merger satisfying the requirements of 251(b) may be submitted to the
shareholders under 251(c).
It is against those standards that the conduct of the directors of Trans Union must be
tested, as a matter of law and as a matter of fact, regarding their exercise of an informed
business judgment in voting to approve the Pritzker merger proposal.
III.
The issue of whether the directors reached an informed decision to sell the Company
on September 20, 1980 must be determined only upon the basis of the information then
reasonably available to the directors and relevant to their decision to accept the Pritzker
merger proposal. This is not to say that the directors were precluded from altering their
original plan of action, had they done so in an informed manner. What we do say is that the
question of whether the directors reached an informed business judgment in agreeing to sell
the Company, pursuant to the terms of the September 20 Agreement presents, in reality, two
questions: (A) whether the directors reached an informed business judgment on September 20,
1980; and (B) if they did not, whether the directors actions taken subsequent to September 20
were adequate to cure any infirmity in their action taken on September 20. We first consider
the directors September 20 action in terms of their reaching an informed business judgment.
-AOn the record before us, we must conclude that the Board of Directors did not reach an
informed business judgment on September 20, 1980 in voting to sell the Company for $55
per share pursuant to the Pritzker cash-out merger proposal. Our reasons, in summary, are as
follows:
The directors (1) did not adequately inform themselves as to Van Gorkoms role in
forcing the sale of the Company and in establishing the per share purchase price; (2) were
uninformed as to the intrinsic value of the Company; and (3) given these circumstances, at a
minimum, were grossly negligent in approving the sale of the Company upon two hours
consideration, without prior notice, and without the exigency of a crisis or emergency.
As has been noted, the Board based its September 20 decision to approve the cash-out
merger primarily on Van Gorkoms representations. None of the directors, other than Van
Gorkom and Chelberg, had any prior knowledge that the purpose of the meeting was to
propose a cash-out merger of Trans Union. No members of Senior Management were present,

10
other than Chelberg, Romans and Peterson; and the latter two had only learned of the
proposed sale an hour earlier. Both general counsel Moore and former general counsel
Browder attended the meeting, but were equally uninformed as to the purpose of the meeting
and the documents to be acted upon.
Without any documents before them concerning the proposed transaction, the members
of the Board were required to rely entirely upon Van Gorkoms 20-minute oral presentation of
the proposal. No written summary of the terms of the merger was presented; the directors were
given no documentation to support the adequacy of $55 price per share for sale of the
Company; and the Board had before it nothing more than Van Gorkoms statement of his
understanding of the substance of an agreement which he admittedly had never read, nor
which any member of the Board had ever seen.
The defendants rely on the following factors to sustain the Trial Courts finding that the
Boards decision was an informed one: (1) the magnitude of the premium or spread between
the $55 Pritzker offering price and Trans Unions current market price of $38 per share; (2) the
amendment of the Agreement as submitted on September 20 to permit the Board to accept any
better offer during the market test period; (3) the collective experience and expertise of the
Boards inside and outside directors;17 and (4) their reliance on Brennans legal advice that
the directors might be sued if they rejected the Pritzker proposal. We discuss each of these
grounds seriatim:
(1)
A substantial premium may provide one reason to recommend a merger, but in the
absence of other sound valuation information, the fact of a premium alone does not provide an
adequate basis upon which to assess the fairness of an offering price. Here, the judgment
reached as to the adequacy of the premium was based on a comparison between the historically
depressed Trans Union market price and the amount of the Pritzker offer. Using market price
as a basis for concluding that the premium adequately reflected the true value of the Company
was a clearly faulty, indeed fallacious, premise, as the defendants own evidence demonstrates.
The record is clear that before September 20, Van Gorkom and other members of Trans
Unions Board knew that the market had consistently undervalued the worth of Trans Unions
stock, despite steady increases in the Companys operating income in the seven years preceding
the merger. The Board related this occurrence in large part to Trans Unions inability to use its
ITCs as previously noted. Van Gorkom testified that he did not believe the market price
accurately reflected Trans Unions true worth; and several of the directors testified that, as a
general rule, most chief executives think that the market undervalues their companies stock.
Yet, on September 20, Trans Unions Board apparently believed that the market stock price
accurately reflected the value of the Company for the purpose of determining the adequacy of
the premium for its sale.
The parties do not dispute that a publicly-traded stock price is solely a measure of the
value of a minority position and, thus, market price represents only the value of a single share.
Nevertheless, on September 20, the Board assessed the adequacy of the premium over market,
offered by Pritzker, solely by comparing it with Trans Unions current and historical stock
price.
17

We reserve for discussion under Part III hereof, the defendants contention that their judgment, reached on
September 20, if not then informed became informed by virtue of their review of the Agreement on October 8
and January 26.

11
Indeed, as of September 20, the Board had no other information on which to base a
determination of the intrinsic value of Trans Union as a going concern. As of September 20, the
Board had made no evaluation of the Company designed to value the entire enterprise, nor had
the Board ever previously considered selling the Company or consenting to a buy-out merger.
Thus, the adequacy of a premium is indeterminate unless it is assessed in terms of other
competent and sound valuation information that reflects the value of the particular business.
Despite the foregoing facts and circumstances, there was no call by the Board, either on
September 20 or thereafter, for any valuation study or documentation of the $55 price per
share as a measure of the fair value of the Company in a cash-out context. It is undisputed that
the major asset of Trans Union was its cash flow. Yet, at no time did the Board call for a
valuation study taking into account that highly significant element of the Companys assets.
We do not imply that an outside valuation study is essential to support an informed
business judgment; nor do we state that fairness opinions by independent investment bankers
are required as a matter of law. Often insiders familiar with the business of a going concern are
in a better position than are outsiders to gather relevant information; and under appropriate
circumstances, such directors may be fully protected in relying in good faith upon the valuation
reports of their management.
Here, the record establishes that the Board did not request its Chief Financial Officer,
Romans, to make any valuation study or review of the proposal to determine the adequacy of
$55 per share for sale of the Company. On the record before us: The Board rested on Romans
elicited response that the $55 figure was within a fair price range within the context of a
leveraged buy-out. No director sought any further information from Romans. No director
asked him why he put $55 at the bottom of his range. No director asked Romans for any details
as to his study, the reason why it had been undertaken or its depth. No director asked to see the
study; and no director asked Romans whether Trans Unions finance department could do a
fairness study within the remaining 36-hour period available under the Pritzker offer.
Had the Board, or any member, made an inquiry of Romans, he presumably would have
responded as he testified: that his calculations were rough and preliminary; and, that the study
was not designed to determine the fair value of the Company, but rather to assess the feasibility
of a leveraged buy-out financed by the Companys projected cash flow, making certain
assumptions as to the purchasers borrowing needs. Romans would have presumably also
informed the Board of his view, and the widespread view of Senior Management, that the
timing of the offer was wrong and the offer inadequate.
The record also establishes that the Board accepted without scrutiny Van Gorkoms
representation as to the fairness of the $55 price per share for sale of the Company--a subject
that the Board had never previously considered. The Board thereby failed to discover that Van
Gorkom had suggested the $55 price to Pritzker and, most crucially, that Van Gorkom had
arrived at the $55 figure based on calculations designed solely to determine the feasibility of a
leveraged buy-out.19 No questions were raised either as to the tax implications of a cash-out
merger or how the price for the one million share option granted Pritzker was calculated.

19

As of September 20 the directors did not know: that Van Gorkom had arrived at the $55 figure alone, and
subjectively, as the figure to be used by Controller Peterson in creating a feasible structure for a leveraged buy-out
by a prospective purchaser; that Van Gorkom had not sought advice, information or assistance from either inside
or outside Trans Union directors as to the value of the Company as an entity or the fair price per share for 100% of
its stock; that Van Gorkom had not consulted with the Companys investment bankers or other financial analysts;
that Van Gorkom had not consulted with or confided in any officer or director of the Company except Chelberg;

12
None of the directors, Management or outside, were investment bankers or financial
analysts. Yet the Board did not consider recessing the meeting until a later hour that day (or
requesting an extension of Pritzkers Sunday evening deadline) to give it time to elicit more
information as to the sufficiency of the offer, either from inside Management (in particular
Romans) or from Trans Unions own investment banker, Salomon Brothers, whose Chicago
specialist in merger and acquisitions was known to the Board and familiar with Trans Unions
affairs.
Thus, the record compels the conclusion that on September 20 the Board lacked
valuation information adequate to reach an informed business judgment as to the fairness of
$55 per share for sale of the Company.
(2)
This brings us to the post-September 20 market test upon which the defendants
ultimately rely to confirm the reasonableness of their September 20 decision to accept the
Pritzker proposal. In this connection, the directors present a two-part argument: (a) that by
making a market test of Pritzkers $55 per share offer a condition of their September 20
decision to accept his offer, they cannot be found to have acted impulsively or in an
uninformed manner on September 20; and (b) that the adequacy of the $17 premium for sale
of the Company was conclusively established over the following 90 to 120 days by the most
reliable evidence available--the marketplace. Thus, the defendants impliedly contend that the
market test eliminated the need for the Board to perform any other form of fairness test
either on September 20, or thereafter.
Again, the facts of record do not support the defendants argument. There is no
evidence: (a) that the Merger Agreement was effectively amended to give the Board freedom to
put Trans Union up for auction sale to the highest bidder; or (b) that a public auction was in
fact permitted to occur. The minutes of the Board meeting make no reference to any of this.
Indeed, the record compels the conclusion that the directors had no rational basis for expecting
that a market test was attainable, given the terms of the Agreement as executed during the
evening of September 20.
[N]otwithstanding what several of the outside directors later claimed to have thought
occurred at the meeting, the record compels the conclusion that Trans Unions Board had no
rational basis to conclude on September 20 or in the days immediately following, that the
Boards acceptance of Pritzkers offer was conditioned on (1) a market test of the offer; and
(2) the Boards right to withdraw from the Pritzker Agreement and accept any higher offer
received before the shareholder meeting.
(3)
The directors unfounded reliance on both the premium and the market test as the basis
for accepting the Pritzker proposal undermines the defendants remaining contention that the
Boards collective experience and sophistication was a sufficient basis for finding that it
reached its September 20 decision with informed, reasonable deliberation.21
and that Van Gorkom had deliberately chosen to ignore the advice and opinion of the members of his Senior
Management group regarding the adequacy of the $55 price.
21

Trans Unions five inside directors had backgrounds in law and accounting, 116 years of collective employment
by the Company and 68 years of combined experience on its Board. Trans Unions five outside directors
included four chief executives of major corporations and an economist who was a former dean of a major school of

13

(4)
Part of the defense is based on a claim that the directors relied on legal advice rendered
at the September 20 meeting by James Brennan, Esquire, who was present at Van Gorkoms
request. Unfortunately, Brennan did not appear and testify at trial even though his firm
participated in the defense of this action. There is no contemporaneous evidence of the advice
given by Brennan on September 20, only the later deposition and trial testimony of certain
directors as to their recollections or understanding of what was said at the meeting. Since
counsel did not testify, and the advice attributed to Brennan is hearsay received by the Trial
Court over the plaintiffs objections, we consider it only in the context of the directors present
claims. In fairness to counsel, we make no findings that the advice attributed to him was in fact
given. We focus solely on the efficacy of the defendants claims, made months and years later,
in an effort to extricate themselves from liability.
Several defendants testified that Brennan advised them that Delaware law did not
require a fairness opinion or an outside valuation of the Company before the Board could act
on the Pritzker proposal. If given, the advice was correct. However, that did not end the matter.
Unless the directors had before them adequate information regarding the intrinsic value of the
Company, upon which a proper exercise of business judgment could be made, mere advice of
this type is meaningless; and, given this record of the defendants failures, it constitutes no
defense here.
We conclude that Trans Unions Board was grossly negligent in that it failed to act with
informed reasonable deliberation in agreeing to the Pritzker merger proposal on September
20; and we further conclude that the Trial Court erred as a matter of law in failing to address
that question before determining whether the directors later conduct was sufficient to cure its
initial error.
A second claim is that counsel advised the Board it would be subject to lawsuits if it
rejected the $55 per share offer. It is, of course, a fact of corporate life that today when faced
with difficult or sensitive issues, directors often are subject to suit, irrespective of the decisions
they make. However, counsels mere acknowledgement of this circumstance cannot be
rationally translated into a justification for a board permitting itself to be stampeded into a
patently unadvised act. While suit might result from the rejection of a merger or tender offer,
Delaware law makes clear that a board acting within the ambit of the business judgment rule
faces no ultimate liability. Thus, we cannot conclude that the mere threat of litigation,
acknowledged by counsel, constitutes either legal advice or any valid basis upon which to
pursue an uninformed course.
Since we conclude that Brennans purported advice is of no consequence to the defense
of this case, it is unnecessary for us to invoke the adverse inferences which may be attributable
to one failing to appear at trial and testify.

business and chancellor of a university. The outside directors had 78 years of combined experience as chief
executive officers of major corporations and 50 years of cumulative experience as directors of Trans Union. Thus,
defendants argue that the Board was eminently qualified to reach an informed judgment on the proposed sale of
Trans Union notwithstanding their lack of any advance notice of the proposal, the shortness of their deliberation,
and their determination not to consult with their investment banker or to obtain a fairness opinion.

14
-BWe now examine the Boards post-September 20 conduct for the purpose of
determining whether it was informed and not grossly negligent.
(1)
First, as to the Board meeting of October 8: Its purpose arose in the aftermath of the
September 20 meeting: (1) the September 22 press release announcing that Trans Union had
entered into definitive agreements to merge with an affiliate of Marmon Group, Inc.; and (2)
Senior Managements ensuing revolt.
Trans Unions press release stated:
FOR IMMEDIATE RELEASE:
CHICAGO, IL--Trans Union Corporation announced today that it had entered into definitive
agreements to merge with an affiliate of The Marmon Group, Inc. in a transaction whereby Trans
Union stockholders would receive $55 per share in cash for each Trans Union share held. The
Marmon Group, Inc. is controlled by the Pritzker family of Chicago.
The merger is subject to approval by the stockholders of Trans Union at a special meeting
expected to be held sometime during December or early January.
Until October 10, 1980, the purchaser has the right to terminate the merger if financing that is
satisfactory to the purchaser has not been obtained, but after that date there is no such right.
In a related transaction, Trans Union has agreed to sell to a designee of the purchaser one
million newly-issued shares of Trans Union common stock at a cash price of $38 per share. Such
shares will be issued only if the merger financing has been committed for no later than October 10,
1980, or if the purchaser elects to waive the merger financing condition. In addition, the New York
Stock Exchange will be asked to approve the listing of the new shares pursuant to a listing application
which Trans Union intends to file shortly.
Completing of the transaction is also subject to the preparation of a definitive proxy statement
and making various filings and obtaining the approvals or consents of government agencies.

The press release made no reference to provisions allegedly reserving to the Board the
rights to perform a market test and to withdraw from the Pritzker Agreement if Trans Union
received a better offer before the shareholder meeting. The defendants also concede that Trans
Union never made a subsequent public announcement stating that it had in fact reserved the
right to accept alternate offers, the Agreement notwithstanding.
The public announcement of the Pritzker merger resulted in an en masse revolt of
Trans Unions Senior Management. The head of Trans Unions tank car operations (its most
profitable division) informed Van Gorkom that unless the merger were called off, fifteen key
personnel would resign.
Instead of reconvening the Board, Van Gorkom again privately met with Pritzker,
informed him of the developments, and sought his advice. Pritzker then made the following
suggestions for overcoming Managements dissatisfaction: (1) that the Agreement be amended
to permit Trans Union to solicit, as well as receive, higher offers; and (2) that the shareholder
meeting be postponed from early January to February 10, 1981. In return, Pritzker asked Van
Gorkom to obtain a commitment from Senior Management to remain at Trans Union for at
least six months after the merger was consummated.
Van Gorkom then advised Senior Management that the Agreement would be amended
to give Trans Union the right to solicit competing offers through January, 1981, if they would

15
agree to remain with Trans Union. Senior Management was temporarily mollified; and Van
Gorkom then called a special meeting of Trans Unions Board for October 8.
Thus, the primary purpose of the October 8 Board meeting was to amend the Merger
Agreement, in a manner agreeable to Pritzker, to permit Trans Union to conduct a market
test. Van Gorkom understood that the proposed amendments were intended to give the
Company an unfettered right to openly solicit offers down through January 31. Van Gorkom
presumably so represented the amendments to Trans Unions Board members on October 8. In
a brief session, the directors approved Van Gorkoms oral presentation of the substance of the
proposed amendments, the terms of which were not reduced to writing until October 10. But
rather than waiting to review the amendments, the Board again approved them sight unseen
and adjourned, giving Van Gorkom authority to execute the papers when he received them.
Thus, the Court of Chancerys finding that the October 8 Board meeting was convened to
reconsider the Pritzker proposal is clearly erroneous.
The next day, October 9, and before the Agreement was amended, Pritzker moved
swiftly to off-set the proposed market test amendment. First, Pritzker informed Trans Union
that he had completed arrangements for financing its acquisition and that the parties were
thereby mutually bound to a firm purchase and sale arrangement. Second, Pritzker announced
the exercise of his option to purchase one million shares of Trans Unions treasury stock at $38
per share--75 cents above the current market price. Trans Unions Management responded the
same day by issuing a press release announcing: (1) that all financing arrangements for
Pritzkers acquisition of Trans Union had been completed; and (2) Pritzkers purchase of one
million shares of Trans Unions treasury stock at $38 per share.
The next day, October 10, Pritzker delivered to Trans Union the proposed amendments
to the September 20 Merger Agreement. Van Gorkom promptly proceeded to countersign all
the instruments on behalf of Trans Union without reviewing the instruments to determine if
they were consistent with the authority previously granted him by the Board. The amending
documents were apparently not approved by Trans Unions Board until a much later date,
December 2. The record does not affirmatively establish that Trans Unions directors ever read
the October 10 amendments.
In our view, the record compels the conclusion that the directors conduct on October 8
exhibited the same deficiencies as did their conduct on September 20. The Board permitted its
Merger Agreement with Pritzker to be amended in a manner it had neither authorized nor
intended. The Court of Chancery, in its decision, overlooked the significance of the October 810 events and their relevance to the sufficiency of the directors conduct. The Trial Courts
letter opinion ignores: the October 10 amendments; the manner of their adoption; the effect of
the October 9 press release and the October 10 amendments on the feasibility of a market test;
and the ultimate question as to the reasonableness of the directors reliance on a market test in
recommending that the shareholders approve the Pritzker merger.
We conclude that the Board acted in a grossly negligent manner on October 8; and that
Van Gorkoms representations on which the Board based its actions do not constitute reports
under 141(e) on which the directors could reasonably have relied. Further, the amended
Merger Agreement imposed on Trans Unions acceptance of a third party offer conditions more
onerous than those imposed on Trans Unions acceptance of Pritzkers offer on September 20.
After October 10, Trans Union could accept from a third party a better offer only if it were
incorporated in a definitive agreement between the parties, and not conditioned on financing
or on any other contingency.

16
The October 9 press release, coupled with the October 10 amendments, had the clear
effect of locking Trans Unions Board into the Pritzker Agreement. Pritzker had thereby
foreclosed Trans Unions Board from negotiating any better definitive agreement over the
remaining eight weeks before Trans Union was required to clear the Proxy Statement
submitting the Pritzker proposal to its shareholders.
(2)
Next, as to the curative effects of the Boards post-September 20 conduct, we review in
more detail the reaction of Van Gorkom to the KKR proposal and the results of the Boardsponsored market test.
The KKR proposal was the first and only offer received subsequent to the Pritzker
Merger Agreement. The offer resulted primarily from the efforts of Romans and other senior
officers to propose an alternative to Pritzkers acquisition of Trans Union. In late September,
Romans group contacted KKR about the possibility of a leveraged buy-out by all members of
Management, except Van Gorkom. By early October, Henry R. Kravis of KKR gave Romans
written notice of KKRs interest in making an offer to purchase 100% of Trans Unions
common stock.
Thereafter, and until early December, Romans group worked with KKR to develop a
proposal. It did so with Van Gorkoms knowledge and apparently grudging consent. On
December 2, Kravis and Romans hand-delivered to Van Gorkom a formal letter-offer to
purchase all of Trans Unions assets and to assume all of its liabilities for an aggregate cash
consideration equivalent to $60 per share.
Van Gorkoms reaction to the KKR proposal was completely negative; he did not view
the offer as being firm because of its financing condition. It was pointed out, to no avail, that
Pritzkers offer had not only been similarly conditioned, but accepted on an expedited basis.
Van Gorkom refused Kravis request that Trans Union issue a press release announcing KKRs
offer, on the ground that it might chill any other offer. Romans and Kravis left with the
understanding that their proposal would be presented to Trans Unions Board that afternoon.
Within a matter of hours and shortly before the scheduled Board meeting, Kravis
withdrew his letter-offer. He gave as his reason a sudden decision by the Chief Officer of Trans
Unions rail car leasing operation to withdraw from the KKR purchasing group. Van Gorkom
had spoken to that officer about his participation in the KKR proposal immediately after his
meeting with Romans and Kravis. However, Van Gorkom denied any responsibility for the
officers change of mind.
At the Board meeting later that afternoon, Van Gorkom did not inform the directors of
the KKR proposal because he considered it dead. Van Gorkom did not contact KKR again
until January 20, when faced with the realities of this lawsuit, he then attempted to reopen
negotiations. KKR declined due to the imminence of the February 10 stockholder meeting.
In the absence of any explicit finding by the Trial Court as to the reasonableness of
Trans Unions directors reliance on a market test and its feasibility, we may make our own
findings based on the record. Our review of the record compels a finding that confirmation of
the appropriateness of the Pritzker offer by an unfettered or free market test was virtually
meaningless in the face of the terms and time limitations of Trans Unions Merger Agreement
with Pritzker as amended October 10, 1980.

17
(3)
Finally, we turn to the Boards meeting of January 26, 1981. The defendant directors rely
upon the action there taken to refute the contention that they did not reach an informed
business judgment in approving the Pritzker merger. The defendants contend that the Trial
Court correctly concluded that Trans Unions directors were, in effect, as free to turn down the
Pritzker proposal on January 26, as they were on September 20.
The Boards January 26 meeting was the first meeting following the filing of the
plaintiffs suit in mid-December and the last meeting before the previously-noticed shareholder
meeting of February 10. All ten members of the Board and three outside attorneys attended the
meeting. At that meeting the following facts, among other aspects of the Merger Agreement,
were discussed:
(a) The fact that prior to September 20, 1980, no Board member or member of Senior
Management, except Chelberg and Peterson, knew that Van Gorkom had discussed a possible
merger with Pritzker;
(b) The fact that the price of $55 per share had been suggested initially to Pritzker by
Van Gorkom;
(c) The fact that the Board had not sought an independent fairness opinion;
(d) The fact that, at the September 20 Senior Management meeting, Romans and several
members of Senior Management indicated both concern that the $55 per share price was
inadequate and a belief that a higher price should and could be obtained;
(e) The fact that Romans had advised the Board at its meeting on September 20, that he
and his department had prepared a study which indicated that the Company had a value in the
range of $55 to $65 per share, and that he could not advise the Board that the $55 per share
offer made by Pritzker was unfair.
[T]he defendants argue that whatever information the Board lacked to make a deliberate
and informed judgment on September 20, or on October 8, was fully divulged to the entire
Board on January 26. Hence, the argument goes, the Boards vote on January 26 to again
approve the Pritzker merger must be found to have been an informed and deliberate
judgment.
On the basis of this evidence, the defendants assert: (1) that the Trial Court was legally
correct in widening the time frame for determining whether the defendants approval of the
Pritzker merger represented an informed business judgment to include the entire four-month
period during which the Board considered the matter from September 20 through January 26;
and (2) that, given this extensive evidence of the Boards further review and deliberations on
January 26, this Court must affirm the Trial Courts conclusion that the Boards action was not
reckless or improvident.
We cannot agree. We find the Trial Court to have erred, both as a matter of fact and as a
matter of law, in relying on the action on January 26 to bring the defendants conduct within
the protection of the business judgment rule.
[T]estimony and the Board Minutes of January 26 are remarkably consistent. Both
clearly indicate recognition that the question of the alternative courses of action, available to
the Board on January 26 with respect to the Pritzker merger, was a legal question, presenting
to the Board (after its review of the full record developed through pre-trial discovery) three
options: (1) to continue to recommend the Pritzker merger; (2) to recommend that the
stockholders vote against the Pritzker merger; or (3) to take a noncommittal position on the
merger and simply leave the decision to [the] shareholders.

18
We must conclude from the foregoing that the Board was mistaken as a matter of law
regarding its available courses of action on January 26, 1981. Options (2) and (3) were not
viable or legally available to the Board under 251(b). The Board could not remain committed
to the Pritzker merger and yet recommend that its stockholders vote it down; nor could it take
a neutral position and delegate to the stockholders the unadvised decision as to whether to
accept or reject the merger. Under 251(b), the Board had but two options: (1) to proceed with
the merger and the stockholder meeting, with the Boards recommendation of approval; or (2)
to rescind its agreement with Pritzker, withdraw its approval of the merger, and notify its
stockholders that the proposed shareholder meeting was cancelled. There is no evidence that
the Board gave any consideration to these, its only legally viable alternative courses of action.
But the second course of action would have clearly involved a substantial risk--that the
Board would be faced with suit by Pritzker for breach of contract based on its September 20
agreement as amended October 10. As previously noted, under the terms of the October 10
amendment, the Boards only ground for release from its agreement with Pritzker was its entry
into a more favorable definitive agreement to sell the Company to a third party. Thus, in
reality, the Board was not free to turn down the Pritzker proposal as the Trial Court found.
Indeed, short of negotiating a better agreement with a third party, the Boards only basis for
release from the Pritzker Agreement without liability would have been to establish
fundamental wrongdoing by Pritzker. Clearly, the Board was not free to withdraw from its
agreement with Pritzker on January 26 by simply relying on its self-induced failure to have
reached an informed business judgment at the time of its original agreement.
Therefore, the Trial Courts conclusion that the Board reached an informed business
judgment on January 26 in determining whether to turn down the Pritzker proposal on that
day cannot be sustained. The Courts conclusion is not supported by the record; it is contrary to
the provisions of 251(b) and basic principles of contract law; and it is not the product of a
logical and deductive reasoning process.
Upon the basis of the foregoing, we hold that the defendants post-September conduct
did not cure the deficiencies of their September 20 conduct; and that, accordingly, the Trial
Court erred in according to the defendants the benefits of the business judgment rule.
IV.
Whether the directors of Trans Union should be treated as one or individually in terms
of invoking the protection of the business judgment rule and the applicability of 141(c) are
questions which were not originally addressed by the parties in their briefing of this case. This
resulted in a supplemental briefing and a second rehearing en banc on two basic questions: (a)
whether one or more of the directors were deprived of the protection of the business judgment
rule by evidence of an absence of good faith; and (b) whether one or more of the outside
directors were entitled to invoke the protection of 141(e) by evidence of a reasonable, good
faith reliance on reports, including legal advice, rendered the Board by certain inside
directors and the Boards special counsel, Brennan.
The parties response, including reargument, has led the majority of the Court to
conclude: (1) that since all of the defendant directors, outside as well as inside, take a unified
position, we are required to treat all of the directors as one as to whether they are entitled to
the protection of the business judgment rule; and (2) that considerations of good faith,
including the presumption that the directors acted in good faith, are irrelevant in determining
the threshold issue of whether the directors as a Board exercised an informed business
judgment. For the same reason, we must reject defense counsels ad hominem argument for

19
affirmance: that reversal may result in a multi-million dollar class award against the
defendants for having made an allegedly uninformed business judgment in a transaction not
involving any personal gain, self-dealing or claim of bad faith.
V.
The defendants ultimately rely on the stockholder vote of February 10 for exoneration.
The defendants contend that the stockholders overwhelming vote approving the Pritzker
Merger Agreement had the legal effect of curing any failure of the Board to reach an informed
business judgment in its approval of the merger.
The parties tacitly agree that a discovered failure of the Board to reach an informed
business judgment in approving the merger constitutes a voidable, rather than a void, act.
Hence, the merger can be sustained, notwithstanding the infirmity of the Boards action, if its
approval by majority vote of the shareholders is found to have been based on an informed
electorate.
The settled rule in Delaware is that where a majority of fully informed stockholders
ratify action of even interested directors, an attack on the ratified transaction normally must
fail. Gerlach v. Gillam, 139 A.2d 591, 593 (Del.Ch. 1958). The question of whether
shareholders have been fully informed such that their vote can be said to ratify director action,
turns on the fairness and completeness of the proxy materials submitted by the management
to the ... shareholders. Michelson v. Duncan, supra at 220.
In Lynch v. Vickers Energy Corp., supra, this Court held that corporate directors owe to
their stockholders a fiduciary duty to disclose all facts germane to the transaction at issue in an
atmosphere of complete candor. We defined germane in the tender offer context as all
information such as a reasonable stockholder would consider important in deciding whether
to sell or retain stock. Id. at 281.
Applying this standard to the record before us, we find that Trans Unions stockholders
were not fully informed of all facts material to their vote on the Pritzker Merger and that the
Trial Courts ruling to the contrary is clearly erroneous. We list the material deficiencies in the
proxy materials:
(1) The fact that the Board had no reasonably adequate information indicative of the
intrinsic value of the Company, other than a concededly depressed market price, was without
question material to the shareholders voting on the merger.
Accordingly, the Boards lack of valuation information should have been disclosed.
Instead, the directors cloaked the absence of such information in both the Proxy Statement and
the Supplemental Proxy Statement. Through artful drafting, noticeably absent at the
September 20 meeting, both documents create the impression that the Board knew the
intrinsic worth of the Company.
What the Board failed to disclose to its stockholders was that the Board had not made
any study of the intrinsic or inherent worth of the Company; nor had the Board even discussed
the inherent value of the Company prior to approving the merger on September 20, or at either
of the subsequent meetings on October 8 or January 26. Neither in its Original Proxy
Statement nor in its Supplemental Proxy did the Board disclose that it had no information
before it, beyond the premium-over-market and the price/earnings ratio, on which to
determine the fair value of the Company as a whole.
(2) We find false and misleading the Boards characterization of the Romans report in
the Supplemental Proxy Statement.

20
Nowhere does the Board disclose that Romans stated to the Board that his calculations
were made in a search for ways to justify a price in connection with a leveraged buy-out
transaction, rather than to say what the shares are worth, and that he stated to the Board that
his conclusion thus arrived at was not the same thing as saying that I have a valuation of the
Company at X dollars. Such information would have been material to a reasonable
shareholder because it tended to invalidate the fairness of the merger price of $55.
Furthermore, defendants again failed to disclose the absence of valuation information, but still
made repeated reference to the substantial premium.
(3) We find misleading the Boards references to the substantial premium offered. The
Board gave as their primary reason in support of the merger the substantial premium
shareholders would receive. But the Board did not disclose its failure to assess the premium
offered in terms of other relevant valuation techniques, thereby rendering questionable its
determination as to the substantiality of the premium over an admittedly depressed stock
market price.
(4) We find the Boards recital in the Supplemental Proxy of certain events preceding
the September 20 meeting to be incomplete and misleading. It is beyond dispute that a
reasonable stockholder would have considered material the fact that Van Gorkom not only
suggested the $55 price to Pritzker, but also that he chose the figure because it made feasible a
leveraged buy-out. The directors disclosed that Van Gorkom suggested the $55 price to
Pritzker.
Although by January 26, the directors knew the basis of the $55 figure, they did not
disclose that Van Gorkom chose the $55 price because that figure would enable Pritzker to both
finance the purchase of Trans Union through a leveraged buy-out and, within five years,
substantially repay the loan out of the cash flow generated by the Companys operations.
(5) The Boards Supplemental Proxy Statement, mailed on or after January 27, added
significant new matter, material to the proposal to be voted on February 10, which was not
contained in the Original Proxy Statement. Some of this new matter was information which
had only been disclosed to the Board on January 26; much was information known or
reasonably available before January 21 but not revealed in the Original Proxy Statement. Yet,
the stockholders were not informed of these facts. Included in the new matter first disclosed
in the Supplemental Proxy Statement were the following:
(a) The fact that prior to September 20, 1980, no Board member or member of Senior
Management, except Chelberg and Peterson, knew that Van Gorkom had discussed a possible
merger with Pritzker;
(b) The fact that the sale price of $55 per share had been suggested initially to Pritzker
by Van Gorkom;
(c) The fact that the Board had not sought an independent fairness opinion;
(d) The fact that Romans and several members of Senior Management had indicated
concern at the September 20 Senior Management meeting that the $55 per share price was
inadequate and had stated that a higher price should and could be obtained; and
(e) The fact that Romans had advised the Board at its meeting on September 20 that he
and his department had prepared a study which indicated that the Company had a value in the
range of $55 to $65 per share, and that he could not advise the Board that the $55 per share
offer which Pritzker made was unfair.
In this case, the Boards ultimate disclosure as contained in the Supplemental Proxy
Statement related either to information readily accessible to all of the directors if they had
asked the right questions, or was information already at their disposal. In short, the

21
information disclosed by the Supplemental Proxy Statement was information which the
defendant directors knew or should have known at the time the first Proxy Statement was
issued. The defendants simply failed in their original duty of knowing, sharing, and disclosing
information that was material and reasonably available for their discovery. They compounded
that failure by their continued lack of candor in the Supplemental Proxy Statement. While we
need not decide the issue here, we are satisfied that, in an appropriate case, a completely
candid but belated disclosure of information long known or readily available to a board could
raise serious issues of inequitable conduct.
The burden must fall on defendants who claim ratification based on shareholder vote to
establish that the shareholder approval resulted from a fully informed electorate. On the record
before us, it is clear that the Board failed to meet that burden.
For the foregoing reasons, we conclude that the director defendants breached their
fiduciary duty of candor by their failure to make true and correct disclosures of all information
they had, or should have had, material to the transaction submitted for stockholder approval.
VI.
To summarize: we hold that the directors of Trans Union breached their fiduciary duty
to their stockholders (1) by their failure to inform themselves of all information reasonably
available to them and relevant to their decision to recommend the Pritzker merger; and (2) by
their failure to disclose all material information such as a reasonable stockholder would
consider important in deciding whether to approve the Pritzker offer.
We hold, therefore, that the Trial Court committed reversible error in applying the
business judgment rule in favor of the director defendants in this case.
On remand, the Court of Chancery shall conduct an evidentiary hearing to determine
the fair value of the shares represented by the plaintiffs class, based on the intrinsic value of
Trans Union on September 20, 1980. Thereafter, an award of damages may be entered to the
extent that the fair value of Trans Union exceeds $55 per share.
REVERSED and REMANDED for proceedings consistent herewith.
MCNEILLY, J., dissenting:
The majority opinion reads like an advocates closing address to a hostile jury. And I say
that not lightly. Throughout the opinion great emphasis is directed only to the negative, with
nothing more than lip service granted the positive aspects of this case. In my opinion
Chancellor Marvel (retired) should have been affirmed. The Chancellors opinion was the
product of well reasoned conclusions, based upon a sound deductive process, clearly supported
by the evidence and entitled to deference in this appeal. Because of my diametrical opposition
to all evidentiary conclusions of the majority, I respectfully dissent.
The first and most important error made is the majoritys assessment of the directors
knowledge of the affairs of Trans Union and their combined ability to act in this situation
under the protection of the business judgment rule.
Trans Unions Board of Directors consisted of ten men, five of whom were inside
directors and five of whom were outside directors. The inside directors were Van Gorkom,
Chelberg, Bonser, William B. Browder, Senior Vice-President-Law, and Thomas P. OBoyle,
Senior Vice-President-Administration. At the time the merger was proposed the inside five
directors had collectively been employed by the Company for 116 years and had 68 years of

22
combined experience as directors. The outside directors were A.W. Wallis, William B.
Johnson, Joseph B. Lanterman, Graham J. Morgan and Robert W. Reneker. With the
exception of Wallis, these were all chief executive officers of Chicago based corporations that
were at least as large as Trans Union. The five outside directors had 78 years of combined
experience as chief executive officers, and 53 years cumulative service as Trans Union
directors.
The inside directors wear their badge of expertise in the corporate affairs of Trans Union
on their sleeves. But what about the outsiders? Dr. Wallis is or was an economist and math
statistician, a professor of economics at Yale University, dean of the graduate school of
business at the University of Chicago, and Chancellor of the University of Rochester. Dr. Wallis
had been on the Board of Trans Union since 1962. He also was on the Board of Bausch & Lomb,
Kodak, Metropolitan Life Insurance Company, Standard Oil and others.
William B. Johnson is a University of Pennsylvania law graduate, President of Railway
Express until 1966, Chairman and Chief Executive of I.C. Industries Holding Company, and
member of Trans Unions Board since 1968.
Joseph Lanterman, a Certified Public Accountant, is or was President and Chief
Executive of American Steel, on the Board of International Harvester, Peoples Energy, Illinois
Bell Telephone, Harris Bank and Trust Company, Kemper Insurance Company and a director
of Trans Union for four years.
Graham Morgan is achemist, was Chairman and Chief Executive Officer of U.S.
Gypsum, and in the 17 and 18 years prior to the Trans Union transaction had been involved in
31 or 32 corporate takeovers.
Robert Reneker attended University of Chicago and Harvard Business Schools. He was
President and Chief Executive of Swift and Company, director of Trans Union since 1971, and
member of the Boards of seven other corporations including U.S. Gypsum and the Chicago
Tribune.
Directors of this caliber are not ordinarily taken in by a fast shuffle. I submit they were
not taken into this multi-million dollar corporate transaction without being fully informed and
aware of the state of the art as it pertained to the entire corporate panoroma of Trans Union.
True, even directors such as these, with their business acumen, interest and expertise, can go
astray. I do not believe that to be the case here. These men knew Trans Union like the back of
their hands and were more than well qualified to make on the spot informed business
judgments concerning the affairs of Trans Union including a 100% sale of the corporation. Lest
we forget, the corporate world of then and now operates on what is so aptly referred to as the
fast track. These men were at the time an integral part of that world, all professional business
men, not intellectual figureheads.
I have no quarrel with the majoritys analysis of the business judgment rule. It is the
application of that rule to these facts which is wrong. An overview of the entire record, rather
than the limited view of bits and pieces which the majority has exploded like popcorn,
convinces me that the directors made an informed business judgment which was buttressed by
their test of the market.
At the time of the September 20 meeting the 10 members of Trans Unions Board of
Directors were highly qualified and well informed about the affairs and prospects of Trans
Union. These directors were acutely aware of the historical problems facing Trans Union which
were caused by the tax laws. They had discussed these problems ad nauseam. In fact, within
two months of the September 20 meeting the board had reviewed and discussed an outside
study of the company done by The Boston Consulting Group and an internal five year forecast

23
prepared by management. At the September 20 meeting Van Gorkom presented the Pritzker
offer, and the board then heard from James Brennan, the companys counsel in this matter,
who discussed the legal documents. Following this, the Board directed that certain changes be
made in the merger documents. These changes made it clear that the Board was free to accept a
better offer than Pritzkers if one was made. The above facts reveal that the Board did not act in
a grossly negligent manner in informing themselves of the relevant and available facts before
passing on the merger. To the contrary, this record reveals that the directors acted with the
utmost care in informing themselves of the relevant and available facts before passing on the
merger.
The majority finds that Trans Union stockholders were not fully informed and that the
directors breached their fiduciary duty of complete candor to the stockholders required by
Lynch v. Vickers Energy Corp., 383 A.2d 278 (Del. 1978) [Lynch I], in that the proxy materials
were deficient in five areas.
Here again is exploitation of the negative by the majority without giving credit to the
positive. To respond to the conclusions of the majority would merely be unnecessary prolonged
argument. But briefly what did the proxy materials disclose? The proxy material informed the
shareholders that projections were furnished to potential purchasers and such projections
indicated that Trans Unions net income might increase to approximately $153 million in 1985.
That projection, what is almost three times the net income of $58,248,000 reported by Trans
Union as its net income for December 31, 1979 confirmed the statement in the proxy materials
that the Board of Directors believes that, assuming reasonably favorable economic and
financial conditions, the Companys prospects for future earnings growth are excellent. This
material was certainly sufficient to place the Companys stockholders on notice that there was a
reasonable basis to believe that the prospects for future earnings growth were excellent, and
that the value of their stock was more than the stock market value of their shares reflected.
Overall, my review of the record leads me to conclude that the proxy materials
adequately complied with Delaware law in informing the shareholders about the proposed
transaction and the events surrounding it.
ON MOTIONS FOR REARGUMENT
Following this Courts decision, Thomas P. OBoyle, one of the director defendants,
sought, and was granted, leave for change of counsel. Thereafter, the individual director
defendants, other than OBoyle, filed a motion for reargument and director OBoyle, through
newly-appearing counsel, then filed a separate motion for reargument. Plaintiffs have
responded to the several motions and this matter has now been duly considered.
The Court, through its majority, finds no merit to either motion and concludes that both
motions should be denied. We are not persuaded that any errors of law or fact have been made
that merit reargument.
However, defendant OBoyles motion requires comment. Although OBoyle continues to
adopt his fellow directors arguments, OBoyle now asserts in the alternative that he has
standing to take a position different from that of his fellow directors and that legal grounds
exist for finding him not liable for the acts or omissions of his fellow directors. Specifically,
OBoyle makes a two-part argument: (1) that his undisputed absence due to illness from both
the September 20 and the October 8 meetings of the directors of Trans Union entitles him to
be relieved from personal liability for the failure of the other directors to exercise due care at

24
those meetings; and (2) that his attendance and participation in the January 26, 1981 Board
meeting does not alter this result given this Courts precise findings of error committed at that
meeting.
We reject defendant OBoyles new argument as to standing because not timely asserted.
Our reasons are several. One, in connection with the supplemental briefing of this case in
March, 1984, a special opportunity was afforded the individual defendants, including OBoyle,
to present any factual or legal reasons why each or any of them should be individually treated.
Thereafter, at argument before the Court on June 11, 1984, the following colloquy took place
between this Court and counsel for the individual defendants at the outset of counsels
argument:
COUNSEL: Ill make the argument on behalf of the nine individual defendants against whom the
plaintiffs seek more than $100,000,000 in damages. That is the ultimate issue in this case, whether or
not nine honest, experienced businessmen should be subject to damages in a case where-JUSTICE MOORE: Is there a distinction between Chelberg and Van Gorkom vis-a-vis the other
defendants?
COUNSEL: No, sir.
JUSTICE MOORE: None whatsoever?
COUNSEL: I think not.

Two, in this Courts Opinion dated January 29, 1985, the Court relied on the individual
defendants as having presented a unified defense. We stated:
The parties response, including reargument, has led the majority of the Court to conclude: (1) that
since all of the defendant directors, outside as well as inside, take a unified position, we are required
to treat all of the directors as one as to whether they are entitled to the protection of the business
judgment rule ...

Three, previously OBoyle took the position that the Boards action taken January 26,
1981--in which he fully participated--was determinative of virtually all issues. Now OBoyle
seeks to attribute no significance to his participation in the January 26 meeting. Nor does
OBoyle seek to explain his having given before the directors meeting of October 8, 1980 his
consent to the transaction of such business as may come before the meeting. It is the view of
the majority of the Court that OBoyles change of position following this Courts decision on
the merits comes too late to be considered. He has clearly waived that right.
The Motions for Reargument of all defendants are denied.

Smith vs. Gorkom

Synopsis of Rule of Law.
Under the business judgment rule, a business judgment is presumed to be an informed
judgment, but the judgment will not be shielded under the rule if the decision was
unadvised.

Facts
Trans Union had large investment tax credits (ITCs) coupled with accelerated depreciation
deductions with no offsetting taxable income. Their short term solution was to acquire
companies that would offset the ITCs, but the Chief Financial Officer, Donald Romans,
suggested that Trans Union should undergo a leveraged buyout to an entity that could offset
the ITCs. The suggestion came without any substantial research, but Romans thought that a
$50-60 share price (on stock currently valued at a high of $39 ) would be acceptable. Van
Gorkom did not demonstrate any interest in the suggestion, but shortly thereafter pursued
the idea with a takeover specialist, Jay Pritzker. With only Romans unresearched numbers
at his disposal, Van Gorkom set up an agreement with Pritzker to sell Pritzker Trans Union
shares at $55 per share. Van Gorkom also agreed to sell Pritzker one million shares of Trans
Union at $39 per share if Pritzker was outbid. Van Gorkom also agreed not to solicit other
bids and agreed not to provide proprietary information to other bidders. Van Gorkom only
included a couple people in the negotiations with Pritzker, and most of the senior
management and the Board of Directors found out about the deal on the day they had to vote
to approve the deal. Van Gorkom did not distribute any information at the voting, so the
Board had only the word of Van Gorkom, the word of the President of Trans Union (who
was privy to the earlier discussions with Pritzker), advice from an attorney who suggested
that the Board might be sued if they voted against the merger, and vague advice from
Romans who told them that the $55 was in the beginning end of the range he calculated. Van
Gorkom did not disclose how he came to the $55 amount. On this advice, the Board
approved the merger, and it was also later approved by shareholders.
Issue.
The issue is whether the business judgment by the Board to approve the merger was an
informed decision.
Held
The Delaware Supreme Court held the business judgment to be gross negligence, which is
the standard for determining whether the judgment was informed. The Board has a duty to

give an informed decision on an important decision such as a merger and can not escape the
responsibility by claiming that the shareholders also approved the merger. The directors are
protected if they relied in good faith on reports submitted by officers, but there was no report
that would qualify as a report under the statute. The directors can not rely upon the share
price as it contrasted with the market value. And because the Board did not disclose a lack
of valuation information to the shareholders, the Board breached their fiduciary duty to
disclose all germane facts.

Additional:

Dissent. The dissent believed that the majority mischaracterized the ability of the directors
to act soundly on the information provided at the meeting wherein the merger vote took
place. The credentials of the directors demonstrated that they gave an intelligent business
judgment that should be shielded by the business judgment rule.

The court noted that a directors duty to exercise an informed business judgment is a duty of
care rather than a duty of loyalty. Therefore, the motive of the director can be irrelevant, so
there is no need to prove fraud, conflict of interests or dishonesty.

Facts
The case involved a proposed leveraged buy-out merger of TransUnion by Marmon Group
which was controlled by Jay Pritzker. [1] Defendant Jerome W. Van Gorkom, who was the
TransUnion's chairman and CEO, chose a proposed price of $55 without consultation with
outside financial experts. He only consulted with the company's CFO, and that consultation
was to determine a per share price that would work for a leveraged buyout. [1] Van Gorkom
and the CFO did not determine an actual total value of the company. [1] The court was
highly critical of this decision, writing that "the record is devoid of any competent evidence
that $55 represented the per share intrinsic value of the Company." The proposed merger
was subject to Board approval. At the Board meeting, a number of items were not disclosed,
including the problematic methodology that Van Gorkom used to arrive at the proposed
price. Also, previous objections by management were not discussed. The Board approved
the proposal.
Held:
The Court found that the directors were grossly negligent, because they quickly approved
the merger without substantial inquiry or any expert advice. For this reason, the board of
directors breached the duty of care that it owed to the corporation's shareholders. As such,
the protection of the business judgment rule was unavailable. The Court stated,The rule
itself
"is a presumption that in making a business decision, the directors of a corporation acted on
an informed basis, in good faith and in the honest belief that the action taken was in the best
interests of the company." ... Thus, the party attacking a board decision as uninformed must
rebut the presumption that its business judgment was an informed one.
488 A.2d at 872. Furthermore, the court rejected defendant's argument that the substantial
premium paid over the market price indicated that it was a good deal. In so doing, the court
noted the irony that the board stated that the decision to accept the offer was based on their
expertise, while at the same time asserting that it was proper because the price offered was a
large premium above market value. The decision also clarified the directors' duty of
disclosure, stating that corporate directors must disclose all facts germane to a transaction
that is subject to a shareholder vote.

Republic of the Philippines SUPREME COURT Manila

EN BANC
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants, vs. BACOLOD-MURCIA
MILLING CO., INC., defendant-appellee.
Taada, Teehankee and Carreon for plaintiffs-appellants. Hilado and Hilado for defendantappellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental
Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel the
defendant Milling Company to increase plaintiff's share in the sugar produced from their
cane, from 60% to 62.33%, starting from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and
the Limited co-partnership Gonzaga and Company, had been and are sugar planters adhered
to the defendant-appellee's sugar central mill under identical milling contracts. Originally
executed in 1919, said contracts were stipulated to be in force for 30 years starting with the
1920-21 crop, and provided that the resulting product should be divided in the ratio of 45%
for the mill and 55% for the planters. Sometime in 1936, it was proposed to execute
amended milling contracts, increasing the planters' share to 60% of the manufactured sugar
and resulting molasses, besides other concessions, but extending the operation of the milling
contract from the original 30 years to 45 years. To this effect, a printed Amended Milling
Contract form was drawn up. On August 20, 1936, the Board of Directors of the appellee
Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No. 11, Acuerdo No. 1)
granting further concessions to the planters over and above those contained in the printed
Amended Milling Contract. The bone of contention is paragraph 9 of this resolution, that
reads as follows:
ACTA No. 11 SESSION DE LA JUNTA DIRECTIVA AGOSTO 20, 1936
xxxxxxxxx
Acuerdo No. 1. Previa mocion debidamente secundada, la Junta en consideracion a una
peticion de los plantadores hecha por un comite nombrado por los mismos, acuerda
enmendar el contrato de molienda enmendado medientelas siguentes:
xxxxxxxxx

9.a Que si durante la vigencia de este contrato de Molienda Enmendado, lascentrales

azucareras, de Negros Occidental, cuya produccion anual de azucar centrifugado sea mas de
una tercera parte de la produccion total de todas lascentrales azucareras de Negros
Occidental, concedieren a sus plantadores mejores condiciones que la estipuladas en el
presente contrato, entonces esas mejores condiciones se concederan y por el presente se
entenderan concedidas a los platadores que hayan otorgado este Contrato de Molienda
Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10,
1936, but a copy of the resolution of August 10, 1936, signed by the Central's General
Manager, was not attached to the printed contract until April 17, 1937; with the notation
Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado,
otorgado por y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar
centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%) to their planters, and that under paragraph
9 of the resolution of August 20, 1936, heretofore quoted, the appellee had become obligated
to grant similar concessions to the plaintiffs (appellants herein). The appellee BacolodMurcia Milling Co., inc., resisted the claim, and defended by urging that the stipulations
contained in the resolution were made without consideration; that the resolution in question
was, therefore, null and void ab initio, being in effect a donation that was ultra vires and
beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant Milling
company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not stand. It must be remembered
that the controverted resolution was adopted by appellee corporation as a supplement to, or
further amendment of, the proposed milling contract, and that it was approved on August 20,
1936, twenty-one days prior to the signing by appellants on September 10, of the Amended
Milling Contract itself; so that when the Milling Contract was executed, the concessions
granted by the disputed resolution had been already incorporated into its terms. No reason
appears of record why, in the face of such concessions, the appellants should reject them or
consider them as separate and apart from the main amended milling contract, specially
taking into account that appellant Alfredo Montelibano was, at the time, the President of the
Planters Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the
resolution of August 20, 1936. That the resolution formed an integral part of the amended
milling contract, signed on September 10, and not a separate bargain, is further shown by the
fact that a copy of the resolution was simply attached to the printed contract without special
negotiations or agreement between the parties.

It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
were supported by the same causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken thereunder by the planters, and,
particularly, the extension of its operative period for an additional 15 years over and beyond
the 30 years stipulated in the original contract. Hence, the conclusion of the court below that
the resolution constituted gratuitous concessions not supported by any consideration is
legally untenable.
All disquisition concerning donations and the lack of power of the directors of the
respondent sugar milling company to make a gift to the planters would be relevant if the
resolution in question had embodied a separate agreement after the appellants had already
bound themselves to the terms of the printed milling contract. But this was not the case.
When the resolution was adopted and the additional concessions were made by the
company, the appellants were not yet obligated by the terms of the printed contract, since
they admittedly did not sign it until twenty-one days later, on September 10, 1936. Before
that date, the printed form was no more than a proposal that either party could modify at its
pleasure, and the appellee actually modified it by adopting the resolution in question. So that
by September 10, 1936 defendant corporation already understood that the printed terms were
not controlling, save as modified by its resolution of August 20, 1936; and we are satisfied
that such was also the understanding of appellants herein, and that the minds of the parties
met upon that basis. Otherwise there would have been no consent or "meeting of the minds",
and no binding contract at all. But the conduct of the parties indicates that they assumed, and
they do not now deny, that the signing of the contract on September 10, 1936, did give rise
to a binding agreement. That agreement had to exist on the basis of the printed terms as
modified by the resolution of August 20, 1936, or not at all. Since there is no rational
explanation for the company's assenting to the further concessions asked by the planters
before the contracts were signed, except as further inducement for the planters to agree to
the extension of the contract period, to allow the company now to retract such concessions
would be to sanction a fraud upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be no
novation unless two distinct and successive binding contracts take place, with the later
designed to replace the preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of statutory
forms or solemn agreements (and it is not claimed that this is one), it is the assent and
concurrence (the "meeting of the minds") of the parties, and not the setting down of its
terms, that constitutes a binding contract. And the fact that the addendum is only signed by
the General Manager of the milling company emphasizes that the addition was made solely
in order that the memorial of the terms of the agreement should be full and complete.

Much is made of the circumstance that the report submitted by the Board of Directors of the
appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the
planters having agreed to the 60-40 sharing of the sugar set forth in the printed "amended
milling contracts", and did not make any reference at all to the terms of the resolution of
August 20, 1936. But a reading of this report shows that it was not intended to inventory all
the details of the amended contract; numerous provisions of the printed terms are alao
glossed over. The Directors of the appellee Milling Company had no reason at the time to
call attention to the provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major change was paragraph 9
heretofore quoted; but when the report was made, that paragraph was not yet in effect, since
it was conditioned on other centrals granting better concessions to their planters, and that did
not happen until after 1950. There was no reason in 1936 to emphasize a concession that
was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify the
proposed terms of the Amended Milling Contract for the purpose of making its terms more
acceptable to the other contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to the corporate
purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to
the promotion of those ends, in a substantial, and not in a remote and fanciful sense, it may
fairly be considered within charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the corporation's business, fairly incident
to the express powers and reasonably necessary to their exercise. If so, the corporation has
the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central, the
court has no authority to review them.
They hold such office charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation should be operated at a loss
during depression, or close down at a smaller loss, is a purely business and economic
problem to be determined by the directors of the corporation and not by the court. It is a
well-known rule of law that questions of policy or of management are left solely to the
honest decision of officers and directors of a corporation, and the court is without authority
to substitute its judgment of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not reviewable by the courts.
(Fletcher on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian

Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual
sugar production in Occidental Negros) have granted progressively increasing participations
to their adhered planter at an average rate of
62.333% for the 1951-52 crop year; 64.2% for 1952-53; 64.3% for 1953-54; 64.5% for
1954-55; and 63.5% for 1955-56, the appellee Bacolod-Murcia Milling Company is, under
the terms of its Resolution of August 20, 1936, duty bound to grant similar increases to
plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed
sentencing the defendant-appellee to pay plaintiffs-appellants the differential or increase of
participation in the milled sugar in accordance with paragraph 9 of the appellee Resolution
of August 20, 1936, over and in addition to the 60% expressed in the printed Amended
Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having
received an additional 2% corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants
thereafter 4.2% for the 1952-1953 crop year; 4.3% for the 1953-1954 crop year; 4.5% for
the 1954-1955 crop year; 3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional increases
as they may be entitled to for the crop years subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes and Dizon, JJ., concur.
The Lawphil Project - Arellano Law Foundation

Facts:
Plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited copartnership Gonzaga and Company, had been and are sugar planters adhered to the
defendant-appellee's sugar central mill under identical milling contracts.
The contracts were stipulated to be in force for 30 years and that the resulting product
should be divided in the ratio of 45% for the mill and 55% for the planters. It was later
proposed to execute amended milling contracts, increasing the planters' share to 60% of the
manufactured sugar and resulting molasses, besides other concessions, but extending the
operation of the milling contract from the original 30 years to 45 years.
The Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a
resolution granting further concessions to the planters over and above those contained in the
printed Amended Milling Contract. Appellants signed and executed the printed Amended
Milling Contract but a copy of the resolution was not attached to the printed contract.
In 1953, the appellants initiated the present action, contending that three Negros sugar
centrals had already granted increased participation to their planters, and that under
paragraph 9 of the abovementioned resolution, the appellee had become obligated to grant
similar concessions to the plaintiffs (appellants herein).
However, the appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended
by urging that the stipulations contained in the resolution were made without consideration;
that the resolution in question was, therefore, null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant Milling
company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.
Issue: Whether or not the resolution is valid and binding between the corporation and
planters.
Held: The Supreme Court held in the affirmative. There can be no doubt that the directors of
the appellee company had authority to modify the proposed terms of the Amended Milling
Contract for the purpose of making its terms more acceptable to the other contracting
parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to the corporate
purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to
the promotion of those ends, in a substantial, and not in a remote and fanciful sense, it may
fairly be considered within charter powers. The test to be applied is whether the act in

question is in direct and immediate furtherance of the corporation's business, fairly incident
to the express powers and reasonably necessary to their exercise. If so, the corporation has
the power to do it; otherwise, not.
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central, the
court has no authority to review them.
It is a well-known rule of law that questions of policy or of management are left solely to the
honest decision of officers and directors of a corporation, and the court is without authority
to substitute its judgment of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith its orders are not reviewable by the courts.
Hence, the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution,
duty bound to grant similar increases to plaintiffs-appellants herein.

Today is Tuesday, March 17, 2015

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18805

August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES,
plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO GARCIA,3 and
LEONOR MOLL, defendants-appellees.
Simeon M. Gopengco and Solicitor General for plaintiff-appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna, Montecillo and
Belo for defendants-appellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental organization on
May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation and development of the coconut
industry in the Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that
corporation the express power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra, and
dessicated coconut, as well as their by-products, and to act as agent, broker or commission merchant of the
producers, dealers or merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve
coconut producers by securing advantageous prices for them, to cut down to a minimum, if not altogether eliminate,
the margin of middlemen, mostly aliens.4
General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were
members of the Board; defendant Leonor Moll became director only on December 22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the scores of
contracts executed by general manager Kalaw are the disputed contracts, for the delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b., delivery: August
and September, 1947. This contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton, f.o.b., Philippine
ports, to be shipped: September-October, 1947. This contract was also assigned to Louis Dreyfus & Co.
(Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los Angeles,
California, delivery: November, 1947.
(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long tons, $164,00
per ton, c.i.f., New York, to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per ton, f.o.b., 3
Philippine ports, delivery: November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery: November and
December, 1947. This contract was assigned to Pacific Vegetable Co.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery:
December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery:
January, 1948. This contract was assigned to Pacific Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature supervened. Four
devastating typhoons visited the Philippines: the first in October, the second and third in November, and the fourth in
December, 1947. Coconut trees throughout the country suffered extensive damage. Copra production decreased.
Prices spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export facilities increased
the time necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a problem.
When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval. It
was not until December 22, 1947 when the membership was completed. Defendant Moll took her oath on that date.
A meeting was then held. Kalaw made a full disclosure of the situation, apprised the board of the impending heavy
losses. No action was taken on the contracts. Neither did the board vote thereon at the meeting of January 7, 1948
following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO head did his best to
avert the losses, emphasized that government concerns faced the same risks that confronted private companies,
that NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter, that is, on
January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously
approved the contracts hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the contracts, as follows:
Buyers
Pacific Vegetable Oil

Tons Delivered Undelivered

2,386.45

4,613.55

Spencer Kellog

None

1,000

Franklin Baker

1,000

500

800

2,200

Louis Dreyfus (Adamson contract of July 30, 1947)

1,150

850

Louis Dreyfus (Adamson Contract of August 14, 1947)

1,755

245

7,091.45

9,408.55

Louis Dreyfus

TOTALS

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in copra
delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons,
P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of Manila,
upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459); P287,028.00; for the
balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per the September 12 contract reduced to
judgment (Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-ofcourt amicable settlement when the Kalaw management was already out. The corporation thereunder paid Dreyfus
P567,024.52 representing 70% of the total claims. With particular reference to the Dreyfus claims, NACOCO put up
the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to
do business here; and (2) failure to deliver was due to force majeure, the typhoons. To project the utter
unreasonableness of this compromise, we reproduce in haec verba this finding below:
x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd.] against
Santiago Syjuco for non-delivery of copra also involving a claim of P345,654.68 wherein defendant set up
same defenses as above, plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the
same proportion, the claim of Dreyfus against NACOCO should have been compromised for only P10,000.00,
if at all. Now, why should defendants be held liable for the large sum paid as compromise by the Board of
Liquidators? This is just a sample to show how unjust it would be to hold defendants liable for the readiness
with which the Board of Liquidators disposed of the NACOCO funds, although there was much possibility of
successfully resisting the claims, or at least settlement for nominal sums like what happened in the Syjuco
case.5

All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from general
manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It
charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and
defendant board members, including Kalaw, with bad faith and/or breach of trust for having approved the contracts.
The fifth amended complaint, on which this case was tried, was filed on July 2, 1959. Defendants resisted the action
upon defenses hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint without costs as well as defendants'
counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid
salaries and cash deposit due the deceased Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.
Right at the outset, two preliminary questions raised before, but adversely decided by, the court below, arrest our
attention. On appeal, defendants renew their bid. And this, upon established jurisprudence that an appellate court
may base its decision of affirmance of the judgment below on a point or points ignored by the trial court or in which
said court was in error.6
1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has lost its legal
personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under Section 3,
Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation Law]7 whereby, upon voluntary
dissolution of a corporation, the court may direct "such disposition of its assets as justice requires, and may appoint
a receiver to collect such assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation Law,
whereby a corporation whose corporate existence is terminated, "shall nevertheless be continued as a body
corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of continuing the business for which it was
established;" and (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the three
year period just mentioned, "is authorized and empowered to convey all of its property to trustees for the benefit of
members, stockholders, creditors, and others interested."8
It is defendants' pose that their case comes within the coverage of the second method. They reason out that suit
was commenced in February, 1949; that by Executive Order 372, dated November 24, 1950, NACOCO, together
with other government-owned corporations, was abolished, and the Board of Liquidators was entrusted with the
function of settling and closing its affairs; and that, since the three year period has elapsed, the Board of Liquidators
may not now continue with, and prosecute, the present case to its conclusion, because Executive Order 372
provides in Section 1 thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation, the National
Tobacco Corporation, the National Food Producer Corporation and the former enemy-owned or controlled
corporations or associations, . . . are hereby abolished. The said corporations shall be liquidated in
accordance with law, the provisions of this Order, and/or in such manner as the President of the Philippines
may direct; Provided, however, That each of the said corporations shall nevertheless be continued as a body
corporate for a period of three (3) years from the effective date of this Executive Order for the purpose of
prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle
and close its affairs, to dispose of and, convey its property in the manner hereinafter provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible within the 3 year
period to reduce disputed claims to judgment, nonetheless, "suits by or against a corporation abate when it ceases
to be an entity capable of suing or being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-391).
Corpus Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its
existence so that there must be statutory authority for prolongation of its life even for purposes of pending litigation"9
and that suit "cannot be continued or revived; nor can a valid judgment be rendered therein, and a judgment, if
rendered, is not only erroneous, but void and subject to collateral attack." 10 So it is, that abatement of pending
actions follows as a matter of course upon the expiration of the legal period for liquidation, 11 unless the statute
merely requires a commencement of suit within the added time. 12 For, the court cannot extend the time alloted by

statute. 13
We, however, express the view that the executive order abolishing NACOCO and creating the Board of Liquidators
should be examined in context. The proviso in Section 1 of Executive Order 372, whereby the corporate existence of
NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of prosecuting
and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs,
to dispose of and convey its property in the manner hereinafter provided", is to be read not as an isolated provision
but in conjunction with the whole. So reading, it will be readily observed that no time limit has been tacked to the
existence of the Board of Liquidators and its function of closing the affairs of the various government owned
corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of the various corporations were abolished, their
powers and functions and duties under existing laws were to be assumed and exercised by the Board of Liquidators.
The President thought it best to do away with the boards of directors of the defunct corporations; at the same time,
however, the President had chosen to see to it that the Board of Liquidators step into the vacuum. And nowhere in
the executive order was there any mention of the lifespan of the Board of Liquidators. A glance at the other
provisions of the executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators may, under
section 1, proceed in accordance with law, the provisions of the executive order, "and/or in such manner as the
President of the Philippines may direct." By Section 4, when any property, fund, or project is transferred to any
governmental instrumentality "for administration or continuance of any project," the necessary funds therefor shall
be taken from the corresponding special fund created in Section 5. Section 5, in turn, talks of special funds
established from the "net proceeds of the liquidation" of the various corporations abolished. And by Section, 7, fifty
per centum of the fees collected from the copra standardization and inspection service shall accrue "to the special
fund created in section 5 hereof for the rehabilitation and development of the coconut industry." Implicit in all these,
is that the term of life of the Board of Liquidators is without time limit. Contemporary history gives us the fact that the
Board of Liquidators still exists as an office with officials and numerous employees continuing the job of liquidation
and prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed to the final determination of the present case
is without jurisprudential support. The first judicial test before this Court is National Abaca and Other Fibers
Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already dissolved, commenced suit
within the three-year extended period for liquidation. That suit was for recovery of money advanced to defendant for
the purchase of hemp in behalf of the corporation. She failed to account for that money. Defendant moved to
dismiss, questioned the corporation's capacity to sue. The lower court ordered plaintiff to include as co-party
plaintiff, The Board of Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372.
Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence, in that its counsel prepared the amended complaint, as directed, and instructed the board's
incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court
and a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to send the original to the
court. This motion was rejected below. Plaintiff came to this Court on appeal. We there said that "the rule appears to
be well settled that, in the absence of statutory provision to the contrary, pending actions by or against a corporation
are abated upon expiration of the period allowed by law for the liquidation of its affairs." We there said that "[o]ur
Corporation Law contains no provision authorizing a corporation, after three (3) years from the expiration of its
lifetime, to continue in its corporate name actions instituted by it within said period of three (3) years." 14 However,
these precepts notwithstanding, we, in effect, held in that case that the Board of Liquidators escapes from the
operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's corporate existence after the
expiration of the period of three (3) years for the settlement of its affairs is what impelled the President to create a
Board of Liquidators, to continue the management of such matters as may then be pending." 15 We accordingly
directed the record of said case to be returned to the lower court, with instructions to admit plaintiff's amended
complaint to include, as party plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its assets in the
hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of the government. It
was an express trust. The legal interest became vested in the trustee the Board of Liquidators. The beneficial
interest remained with the sole stockholder the government. At no time had the government withdrawn the
property, or the authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we
cannot stay the hand of the Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions
of Section 78 of the Corporation Law the third method of winding up corporate affairs find application.
We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this case.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their nineteenth special
defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and may not be deemed to have
survived after his death.18 They say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of Court.19
which provides that "[a]ll claims for money against the decedent, arising from contract, express or implied", must be
filed in the estate proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts
without prior approval of the board of directors, to the damage and prejudice of plaintiff; and is against Kalaw and
the other directors for having subsequently approved the said contracts in bad faith and/or breach of trust." Clearly
then, the present case is not a mere action for the recovery of money nor a claim for money arising from contract.
The suit involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for an injury to
person or property, real or personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There, plaintiffs
sought to recover damages from defendant Llemos. The complaint averred that Llemos had served plaintiff by
registered mail with a copy of a petition for a writ of possession in Civil Case 4824 of the Court of First Instance at
Catbalogan, Samar, with notice that the same would be submitted to the Samar court on February 23, 1960 at 8:00
a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said court of Samar from their residence
in Manila accompanied by their lawyers, only to discover that no such petition had been filed; and that defendant
Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be in vain,
causing them mental anguish and undue embarrassment. Defendant died before he could answer the complaint.
Upon leave of court, plaintiffs amended their complaint to include the heirs of the deceased. The heirs moved to
dismiss. The court dismissed the complaint on the ground that the legal representative, and not the heirs, should
have been made the party defendant; and that, anyway, the action being for recovery of money, testate or intestate
proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there
declared:
Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of Court,
those concerning claims that are barred if not filed in the estate settlement proceedings (Rule 87, sec. 5) and
those defining actions that survive and may be prosecuted against the executor or administrator (Rule 88,
sec. 1), it is apparent that actions for damages caused by tortious conduct of a defendant (as in the case at
bar) survive the death of the latter. Under Rule 87, section 5, the actions that are abated by death are: (1)
claims for funeral expenses and those for the last sickness of the decedent; (2) judgments for money; and (3)
"all claims for money against the decedent, arising from contract express or implied." None of these includes
that of the plaintiffs-appellants; for it is not enough that the claim against the deceased party be for money, but
it must arise from "contract express or implied", and these words (also used by the Rules in connection with
attachments and derived from the common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189194,
"to include all purely personal obligations other than those which have their source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that survive against a decedent's executors or
administrators, and they are: (1) actions to recover real and personal property from the estate; (2) actions to
enforce a lien thereon; and (3) actions to recover damages for an injury to person or property. The present
suit is one for damages under the last class, it having been held that "injury to property" is not limited to
injuries to specific property, but extends to other wrongs by which personal estate is injured or diminished
(Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a party to incur
unnecessary expenses, as charged in this case, is certainly injury to that party's property (Javier vs. Araneta,
L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts comparable to those of the present. No cogent reason
exists why we should break away from the views just expressed. And, the conclusion remains: Action against the
Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the controversy.
3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted
contracts without the prior approval of the corporation's directorate. Plaintiff leans heavily on NACOCO's corporate
by-laws. Article IV (b), Chapter III thereof, recites, as amongst the duties of the general manager, the obligation: "(b)
To perform or execute on behalf of the Corporation upon prior approval of the Board, all contracts necessary and
essential to the proper accomplishment for which the Corporation was organized."

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general manager's
position in the corporate structure. A rule that has gained acceptance through the years is that a corporate officer
"intrusted with the general management and control of its business, has implied authority to make any contract or do
any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. 21 As
such officer, "he may, without any special authority from the Board of Directors perform all acts of an ordinary
nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters
arising in the usual course of business. 22
The problem, therefore, is whether the case at bar is to be taken out of the general concept of the powers of a
general manager, given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO
contracts.
The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this enterprise are
copra sales for future delivery. The movement of the market requires that sales agreements be entered into, even
though the goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is
concededly the practice of the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was
much more conservative than the exporters with big capital. This short-selling was inevitable at the time in the light
of other factors such as availability of vessels, the quantity required before being accepted for loading, the labor
needed to prepare and sack the copra for market. To NACOCO, forward sales were a necessity. Copra could not
stay long in its hands; it would lose weight, its value decrease. Above all, NACOCO's limited funds necessitated a
quick turnover. Copra contracts then had to be executed on short notice at times within twenty-four hours. To be
appreciated then is the difficulty of calling a formal meeting of the board.
Such were the environmental circumstances when Kalaw went into copra trading.
Long before the disputed contracts came into being, Kalaw contracted by himself alone as general manager
for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for the
sale of copra to divers parties. During that period, from those copra sales, NACOCO reaped a gross profit of
P3,631,181.48. So pleased was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it
voted to grant him a special bonus "in recognition of the signal achievement rendered by him in putting the
Corporation's business on a self-sufficient basis within a few months after assuming office, despite numerous
handicaps and difficulties."
These previous contract it should be stressed, were signed by Kalaw without prior authority from the board. Said
contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to
prove one thing: Obviously, NACOCO board met the difficulties attendant to forward sales by leaving the adoption of
means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by NACOCO's general manager and submitted
to the board after their consummation, not before. These agreements were not Kalaw's alone. One at least was
executed by a predecessor way back in 1940, soon after NACOCO was chartered. It was a contract of lease
executed on November 16, 1940 by the then general manager and board chairman, Maximo Rodriguez, and A.
Soriano y Cia., for the lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general
manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22,
1947, when the controversy over the present contract cropped up, the board voted to approve a lease contract
previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On the
same date, the board gave its nod to a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also on
that date, the board requested Kalaw to report for action all copra contracts signed by him "at the meeting
immediately following the signing of the contracts." This practice was observed in a later instance when, on January
7, 1948, the board approved two previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and
a certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of Smith, Bell and
Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such ratification was necessary
because, as stated by Kalaw in that same meeting, "under an existing resolution he is authorized to give a
brokerage fee of only 1% on sales of copra made through brokers." On January 15, 1947, the brokerage fee
agreements of 1-1/2% on three export contracts, and 2% on three others, for the sale of copra were approved by the
board with a proviso authorizing the general manager to pay a commission up to the amount of 1-1/2% "without
further action by the Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of
2,000 tons of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage commission was
similarly approved by the board for Pacific Trading Corporation on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the board, not

the sales contracts themselves. And even those fee agreements were submitted only when the commission
exceeded the ceiling fixed by the board.
Knowledge by the board is also discernible from other recorded instances.

1wph1.t

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow downward
trend but belief was entertained that the nadir might have already been reached and an improvement in prices was
expected. In view thereof, Kalaw informed the board that "he intends to wait until he has signed contracts to sell
before starting to buy copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: The copra market
appeared to have become fairly steady; it was not expected that copra prices would again rise very high as in the
unprecedented boom during January-April, 1947; the prices seemed to oscillate between $140 to $150 per ton; a
radical rise or decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has been
closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:
521. In connection with the buying and selling of copra the Board inquired whether it is the practice of the
management to close contracts of sale first before buying. The General Manager replied that this practice is
generally followed but that it is not always possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying even when
it does not have actual contracts of sale since the suspension of buying by the Nacoco will result in
middlemen taking advantage of the temporary inactivity of the Corporation to lower the prices to the detriment
of the producers.
(2) The movement of the market is such that it may not be practical always to wait for the consummation of
contracts of sale before beginning to buy copra.
The General Manager explained that in this connection a certain amount of speculation is unavoidable.
However, he said that the Nacoco is much more conservative than the other big exporters in this respect.25
Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general
practice, custom, and policy, the general manager may bind the company without formal authorization of the board
of directors. 26 In varying language, existence of such authority is established, by proof of the course of business,
the usage and practices of the company and by the knowledge which the board of directors has, or must be
presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. 27 So also,
x x x authority to act for and bind a corporation may be presumed from acts of recognition in other instances
where the power was in fact exercised. 28
x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in his official
capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in
which he has been permitted by the directors to manage its business.29
In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute
contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were
to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board
itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on January 30,
1948, though it is our (and the lower court's) belief that ratification here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract
by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;"
and that " [t]he corporation and the other party to the transaction are in precisely the same position as if the act or
contract had been authorized at the time." 30 The language of one case is expressive: "The adoption or ratification
of a contract by a corporation is nothing more or less than the making of an original contract. The theory of
corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is
equivalent to a grant of prior authority." 31

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the moment it was
constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus purged of whatever vice or
defect they may have. 33
In sum, a case is here presented whereunder, even in the face of an express by-law requirement of prior approval,
the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations. And,
the conclusion inevitably is that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach of trust" in the
board's ratification of the contracts without prior approval of the board. For, in reality, all that we have on the
government's side of the scale is that the board knew that the contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior approval.
Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first thrown on the way only when
the contracts turned out to be unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive
or interest or ill will; it partakes of the nature of fraud.34 Applying this precept to the given facts herein, we find that
there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known
duty," or "Some motive or interest or ill will" that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their own private
interests, or to pocket money at the expense of the corporation. 35 We have had occasion to affirm that bad faith
contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will
or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval
from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all the reported
cases, although there are many dicta not easily reconcilable, yet I have found no judgment or decree which has held
directors to account, except when they have themselves been personally guilty of some fraud on the corporation, or
have known and connived at some fraud in others, or where such fraud might have been prevented had they given
ordinary attention to their duties. . . ." Plaintiff did not even dare charge its defendant-directors with any of these
malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of fairness. They did
not think of raising their voice in protest against past contracts which brought in enormous profits to the corporation.
By the same token, fair dealing disagrees with the idea that similar contracts, when unprofitable, should not merit
the same treatment. Profit or loss resulting from business ventures is no justification for turning one's back on
contracts entered into. The truth, then, of the matter is that in the words of the trial court the ratification of the
contracts was "an act of simple justice and fairness to the general manager and the best interest of the corporation
whose prestige would have been seriously impaired by a rejection by the board of those contracts which proved
disadvantageous." 37
The directors are not liable." 38
6. To what then may we trace the damage suffered by NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions. Result: Copra
production was impaired, prices spiralled, warehouses destroyed. Quick turnovers could not be expected. NACOCO
was not alone in this misfortune. The record discloses that private traders, old, experienced, with bigger facilities,
were not spared; also suffered tremendous losses. Roughly estimated, eleven principal trading concerns did run
losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department of
NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in the trade." 39 NACOCO
was not immune from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus & Co. by pleading in
its answers force majeure as an affirmative defense and there vehemently asserted that "as a result of the said
typhoons, extensive damage was caused to the coconut trees in the copra producing regions of the Philippines and
according to estimates of competent authorities, it will take about one year until the coconut producing regions will
be able to produce their normal coconut yield and it will take some time until the price of copra will reach normal
levels;" and that "it had never been the intention of the contracting parties in entering into the contract in question
that, in the event of a sharp rise in the price of copra in the Philippine market produce by force majeure or by caused
beyond defendant's control, the defendant should buy the copra contracted for at exorbitant prices far beyond the

buying price of the plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from permitting plaintiff
to stray away therefrom, to charge now that the damage suffered was because of Kalaw's negligence, or for that
matter, by reason of the board's ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual obligations. Stock
accessibility was no problem. NACOCO had 90 buying agencies spread throughout the islands. It could purchase
2,000 tons of copra a day. The various contracts involved delivery of but 16,500 tons over a five-month period.
Despite the typhoons, NACOCO was still able to deliver a little short of 50% of the tonnage required under the
contracts.
As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and wrong is
here absent. There cannot be an actionable wrong if either one or the other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented which would link Kalaw's acts
ratified by the board to a matrix for defraudation of the government. Kalaw is clear of the stigma of bad faith.
Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he had authority to enter into the
contracts, that he did so in the best interests of the corporation; that he entered into the contracts in pursuance of an
overall policy to stabilize prices, to free the producers from the clutches of the middlemen. The prices for which
NACOCO contracted in the disputed agreements, were at a level calculated to produce profits and higher than those
prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to think that
one would sign (a) contract when you are going to lose money" and that no contract was executed "at a price unsafe
for the Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO envisioned a profit of around
P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with NACOCO's Chief
Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and quotations from abroad were
guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the coming of
unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He exerted efforts
to stave off losses. He asked the Philippine National Bank to implement its commitment to extend a P400,000.00
loan. The bank did not release the loan, not even the sum of P200,000.00, which, in October, 1947, was approved
by the bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained
about the bank's short-sighted policy. In the end, nothing came out of the negotiations with the bank. NACOCO
eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem to be supported
by the fact that even as the contracts were being questioned in Congress and in the NACOCO board itself,
President Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas expressed his desire
"that the Board of Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut
Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly disputed, the
board, at its regular meeting, appointed Maximo M. Kalaw as acting general manager of the corporation.
Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-15092, May
18, 1962:
"They (the directors) hold such office charged with the duty to act for the corporation according to their best
judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss during a business depression, or closed down at
a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation, and
not by the court. It is a well known rule of law that questions of policy of management are left solely to the honest
decision of officers and directors of a corporation, and the court is without authority to substitute its judgment 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." (Fletcher on Corporations, Vol. 2, p. 390.) 48
Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49
Viewed in the light of the entire record, the judgment under review must be, as it is hereby, affirmed.
Without costs. So ordered.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.
Fernando, J., took no part.
Concepcion, C.J. and Dizon, J., are on leave.
Footnotes
1Original plaintiff, National Coconut Corporation, was dissolved on November 24, 1950 by the President's

Executive Order 372, which created the Board of Liquidators. Hence, the substitution of party plaintiff.
2Defendant Maximo M. Kalaw died in March of 1955 before trial.
3Substituted for defendant Casimiro Garcia, deceased.
4Explanatory Note of House Bill 295, 1st Session, 2nd Congress, later Republic Act 5; Congressional Record,

House of Representatives, July 22, 1946; Minutes of the NACOCO Directors' Meeting of July 2, 1946, Exh. 4Heirs.
5R.A., p. 238; Emphasis supplied.
6Garcia Valdez vs. Tuason, 40 Phil. 943, 951-952; Lucero vs. Guzman, 45 Phil. 852, 879; Relative vs. Castro,

76 Phil. 563, 567-568.

7III Agbayani, Corporation Law, 1964 ed., p. 1679.
8Government vs. Wise & Co., Ltd. (C.A.), 37 O.G. No. 26, pp. 545, 546.
910 C.J.S., p. 1503; emphasis supplied.
101 C.J.S., p. 141.
11Id., p. 143; 16 Fletcher, p. 901.
1216 Fletcher, p. 902.
13Service & Wright Lumber Co. vs. Sumpter Valley Ry. Co., 152 P. 262, 265.
14Citing Sumera vs. Valencia, 67 Phil. 721, 726-727.
15Emphasis ours.
16See: Section 3, Rule 3, Rules of Court.
17Record on Appeal, pp. 21-25.
18Id., p. 154.
19Now Section 5, Rule 86.
20Section 1, Rule 88 of the 1940 Rules of Court; now Section 1 Rule 87, Revised Rules of Court.
212 Fletcher Cyclopedia Corporations, p. 607. See: Yu Chuck vs. Kong Li Po, 46 Phil. 608, 614.
22Sparks vs. Dispatch Transfer Co., 15 S.W. 417, 419; Pacific Concrete Products Corporation vs. Dimmick,

289 P. 2d 501, 504; Massachusetts Bonding & Ins. Co. vs. Transamerican Freight Lines, 281 N.W. 584, 588589; Sealy Oil Mill & Mfg. Co. vs. Bishop Mfg. Co., 235 S.W. 850, 852.
23Emphasis supplied.
24Emphasis supplied.
25Emphasis supplied.

26Harris vs. H. C. Talton Wholesale Grocery Co., 123 So. 480.

27Van Denburgh vs. Tungsten Reef Mines Co., 67 P. (2d) 360, 361, citing First National Fin. Corp. vs. Five-O

Drilling Co., 289 P. 844, 845.

28McIntosh vs. Dakota Trust Co., 204 N.W. 818. 824.
29Murphy vs. W. H. & F. W. Cane, 82 Atl. 854, 856. See Martin vs. Webb, 110 U.S. 7, 14-15, 28 L. ed. 49, 52.

See also Victory Investment Corporation vs. Muskogee Electric T. CO., 150 F. 2d. 889, 893.
302 Fletcher, p. 858, citing cases.
31Kridelbaugh vs. Aldrehn Theatres Co., 191 N.W. 803, 804, citing cases; emphasis supplied.
32Article 1313, old Civil Code; now Article 1396, new Civil Code.
33Tagaytay Development Co. vs. Osorio, 69 Phil. 180, 184.
34Spiegel vs. Beacon Participations, 8 N.E. (2d) 895, 907, citing cases.
35See: 3 Fletcher, Sec. 850, pp. 162-165.
36Air France vs. Carrascoso, L-21438, September 28, 1966.
37R.A., pp. 234-235.
383 Fletcher, pp. 450-452, citing cases. Cf. Angeles vs. Santos, 64 Phil. 697, 707.
39Tr., p. 30, August 29, 1960.
40See Exhibit 29-Heirs, NACOCO's Second Amended Answer in Civil Case 4322, Court of First instance of

Manila, entitled "Louis Dreyfus & Co. (Overseas) Limited, plaintiff vs. National Coconut Corporation,
defendant."
41Section 2, Rule 129, Rules of Court; 20 Am. Jur., pp. 469-470.
42The time for delivery of copra under the July 30, 1947 contract was extended. Fifth Amended Complaint,

R.A., P. 15. See also Exhibit 26- Heirs.

43Churchill and Tait vs. Rafferty 32 Phil. 580, 605; Ladrera vs Secretary of Agriculture and Natural Resources,

L-13385, April 28, 1960.

44Memorandum of Government Corporate Counsel Marcial P. Lichauco dated February 9, 1949, addressed

to the Secretary of Justice, 8 days after the original complaint herein was filed in court. R.A., pp. 69, 90-112.
45Tr., pp. 18, 29, August 29, 1960.
46See Exhibit 20-Heirs.
47Exhibit 25-Heirs.
48Emphasis supplied.
493 Fletcher, pp. 450-452, supra.

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EN BANC
G.R. No. 6217 December 26, 1911
CHARLES W. MEAD, plaintiff-appellant, vs. E. C. McCULLOUGH, ET AL., and THE
PHILIPPINE ENGINEERING AND CONSTRUCTION COMPANY, defendant-appellants.
Haussermann, Cohn & Fisher and A. D. Gibbs for plaintiff. James J. Peterson and O'Brien &
DeWitt for defendant McCullough.
TRENT, J.:
This action was originally brought by Charles W. Mead against Edwin C. McCullough,
Thomas L. Hartigan, Frank E. Green, and Frederick H. Hilbert. Mead has died since the
commencement of the action and the case is now going forward in the name of his
administrator as plaintiff.
The complaint contains three causes of action, which are substantially as follows: The first,
for salary; the second, for profits; and the third, for the value of the personal effects alleged
to have been left Mead and sold by the defendants.
A joint and several judgment was rendered by default against each and all of the defendants
for the sum of $3,450.61 gold. The defendant McCullough alone having made application to
have this judgment set aside, the court granted this motion, vacating the judgment as to him
only, the judgment as to the other three defendants remaining undisturbed.1awphi1.net
At the new trial, which took place some two or three years later and after the death of Mead,
the judgment was rendered upon merits, dismissing the case as to the first and second causes
of action and for the sum of $1,200 gold in the plaintiff's favor on the third cause of action.
From this judgment both parties appealed and have presented separate bills of exceptions.
No appeal was taken by the defendant McCullough from the ruling of the court denying a
recovery on his cross complaint.
On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this opinion
unless it is otherwise stated) and the defendant organized the "Philippine Engineering and
Construction Company," the incorporators being the only stockholders and also the directors
of said company, with general ordinary powers. Each of the stockholders paid into the
company $2,000 mexican currency in cash, with the exception of Mead, who turned over to
the company personal property in lieu of cash.
Shortly after the organization, the directors held a meeting and elected the plaintiff as
general manager. The plaintiff held this position with the company for nine months, when he
resigned to accept the position of engineer of the Canton and Shanghai Railway Company.

Under the organization the company began business about April 1, 102.itc-alf
The contract and work undertaken by the company during the management of Mead were
the wrecking contract with the Navy Department at Cavite for the raising of the Spanish
ships sunk by Admiral Dewey; the contract for the construction of certain warehouses for
the quartermaster department; the construction of a wharf at Fort McKinley for the
Government; The supervision of the construction of the Pacific Oriental Trading Company's
warehouse; and some other odd jobs not specifically set out in the record.
Shortly after the plaintiff left the Philippine Islands for China, the other directors, the
defendants in this case, held a meeting on December 24, 1903, for the purpose of discussing
the condition of the company at that time and determining what course to pursue. They did
on that date enter into the following contract with the defendant McCullough, to
wit:1awphil.net
For value received, this contract and all the rights and interests of the Philippine Engineering
and construction Company in the same are hereby assigned to E. C. McCullough of Manila,
P. I.
(Sgd.) E. C. McCULLOUGH, President, Philippine Engineering and Construction
Company.
(Sgd.) F. E. GREEN, Treasurer. (Sgd.) THOMAS L. HARTIGAN, Secretary.
The contract reffered to in the foregoing document was known as the wrecking contract with
the naval authorities.
On the 28th of the same month, McCullough executed and signed the following
instrumental:
For value received, and having the above assignment from my associates in the Philippine
Engineering and Construction Company, I hereby transfer my right, title, and interest in the
within contract, with the exception of one sixth, which I hereby retain, to R. W. Brown, H.
D. C. Jones, John T. Macleod, and T. H. Twentyman.
The assignees of the wrecking contract, including McCullough, formed was not known as
the "Manila Salvage Association." This association paid to McCullough $15,000 Mexican
Currency cash for the assignment of said contract. In addition to this payment, McCullough
retained a one-sixth interest in the new company or association.
The plaintiff insists that he was received as general manager of the first company a salary
which was not to be less than $3,500 gold (which amount he was receiving as city engineer
at the time of the corporation of the company), plus 20 per cent of the net profits which
might be derived from the business; while McCullough contends that the plaintiff was to

receive only his necessary expenses unless the company made a profit, when he could
receive $3,500 per year and 20 per cent of the profits. The contract entered into between the
board of directors and the plaintiffs as to the latter's salary was a verbal one. The plaintiff
testified that this contract was unconditional and that his salary, which was fixed at $3,500
gold, was not dependent upon the success of the company, but that his share of the profits
was to necessarily depend upon the net income. On the other hand, McCullough, Green and
Hilbert testify that the salary of the plaintiff was to be determined according to whether or
not the company was successful in its operations; that if the company made gains, he was to
receive $3,5000 gold, and a percentage, but that if the company did not make any profits, he
was to receive only his necessary living expenses.
It is strongly urged that the plaintiff would not have accepted the management of the
company upon such conditions, as he was receiving from the city of Manila a salary of
$3,500 gold. This argument is not only answered by the positive and direct testimony of
three of the defendants, but also by the circumstances under which this company was
organized and principal object, which was the raising of the Spanish ships. The plaintiff put
no money into the organization, the defendants put but little: just sufficient to get the work
of raising the wrecks under way. This venture was a risky one. All the members of the
company realized that they were undertaking a most difficult and expensive project. If they
were successful, handsome profits would be realized; while if they were unsuccessful, all the
expenses for the hiring of machinery, launches, and labor would be a total loss. The plaintiff
was in complete charge and control of this work and was to receive, according to the great
preponderance of the evidence, in case the company made no profits, sufficient amount to
cover his expenses, which included his room, board, transportation, etc. The defendants
were to furnish money out of their own private funds to meet these expenses, as the original
$8,000 Mexican currency was soon exhausted in the work thus undertaken. So the contract
entered into between the directors and the plaintiff as to the latter's salary was a contingent
one.
It is admitted that the plaintiff received $1.500 gold for his services, and whether he is
entitled to receive an additional amount depends upon the result of the second cause of
action.
The second cause of action is more difficult to determine. On this point counsel for the
plaintiff has filed a very able and exhaustive brief, dealing principally with the facts.
It is urged that the net profits accruing to the company after the completion of all the
contracts (except the salvage contract) made before the plaintiff resigned as manager and up
to the time the salvage contract was transferred to McCullough and from him to the new
company, amounted to $5,628.37 gold. This conclusion is reached, according to the
memorandum of counsel for the plaintiff which appears on pages 38 and 39 of the record, in
the following manner:

Profits from the construction of warehouses for the Government $6,962.54 Profits from the
construction of the wall at Fort McKinley 500.00 Profits from the inspection of the
construction of the P. O. T. warehouse 1,000.00 Profits obtained from the projects
(according to Mead's calculations) 1,000.00 Total
9,462.54
In this same memorandum, the expense for the operation of the company during Mead's
management, consisting of rents, the hire of one muchacho, the publication of various
notices, the salary of an engineer for four months, and plaintiff's salary for nine months,
amounts to $3,834.17 gold. This amount, deducted from the sum total of profits, leaves
$5,628.37 gold.
Counsel for the plaintiff, in order to show conclusively as they assert that the company, after
paying all expenses and indebtedness, had a considerable balance to its credit, calls attention
to Exhibit K. This balance reads as follows:
Abstract copy of ledger No. 3, folios 276-277. Philippine Engineering and Construction
Company.
Then follow the debits and credits, with a balance in favor of the company of $10,728.44
Mexican currency. This account purports to cover the period from July 1, 1902, to April 1,
1903. Ledger No. 3, above mentioned, is that the defendant McCullough and not one of the
books of the company.
It was this exhibit that the lower court based its conclusion when it found that on January 25,
1903, after making the transfer of the salvage contract to McCullough, the company was in
debt $2,278.30 gold. The balance of $10,728.44 Mexican currency deducted from the
$16,439.40 Mexican currency (McCullough's losses in the Manila Salvage Association)
leaves $2,278.30 United States currency at the then existing rate of exchange. In Exhibit K,
McCullough charged himself with the $15,000 Mexican currency which he received from
his associates in the new company, but did not credit himself with the $16,439.40 Mexican
currency, losses in said company, for the reason that on April 1, 1903, said losses had not
occurred. It must be borne in mind that Exhibit K is an abstract from a ledger.
The defendant McCullough, in order to show in detail his transactions with the old company,
presented Exhibits 1 and 2. These accounts read as follows:
Detailed account of the receipts and disbursements of E. C. McCullough and the Philippine
Engineering and Construction Company.
Then follow the debits ad credits. These two accounts cover the period from March 5 1902,
to June 9, 1905. According to Exhibit No. 1, the old company was indebted to McCullough
in the sum of $14,918.75 Mexican currency, and according to Exhibit No. 2 he indebtedness

amounted to $6,358.15 Mexican currency. The debits and credits in these two exhibits are
exactly the me with the following exceptions; I Exhibit No. 1, McCullough credits himself
with the $10,000 Mexican currency (the amount borrowed from the bank and deposited with
the admiral as a guarantee for the faithful performance of the salvage contract); while in
Exhibit No. 2 he credits himself with this $10,000 and at he same time charges himself with
this amount. In the same exhibit (No. 2) he credits himself with $16,439.40 Mexican
currency, his losses in the new company, received from said company. Eliminating entirely
from these two exhibits the $10,000 Mexican currency, the $15,000 Mexican currency, and
the $16,39.40 Mexican currency, the balance shown in McCullough's favor is exactly the
same in both exhibits. This balance amounts to $4,918.75 Mexian currency.
According to McCullough's accounts in Exhibits 1 and 2 the profits derived from the
construction of the Government warehouse amounted to $4,005.02 gold, while the plaintiff
contends that these profits amounted to $6,962.54 gold. The plaintiff, during his
management of the old company, made a contract with the Government for the construction
of these are house and commenced work. After he resigned and left for China, McCullough
took charge of and completed the said warehouse. McCullough gives a complete, detailed
statements of express for the completion of this work, showing the dates, to whom paid, and
for what purpose. He also gives the various amounts he received from the Government with
the amounts of the receipt of the same. On the first examination, McCullough testified that
the total amount received from the Government for the construction of these warehouse was
$1,123 gold. The case was suspended for the purpose of examination the records of the
Auditor and the quater master, to determine the exact amount paid for this work. As a result
of this examination, the vouchers show an additional amount of about $5,000 gold, paid in
checks. These checks show that the same were endorsed by the plaintiff and collected by
him from the Hongkong and Shanghai Banking Corporation. This money was not handled
by McCullough and as it was collected by the plaintiff, it must be presumed, in the absence
of proof, that it was disbursed by him. McCullough did not charge himself with the $2,5000
gold, alleged to have been profits from the construction of the wall at Fort McKinley, the
inspection of the construction of the P. O. T. warehouse, and other projects. This work was
done under the management of the plaintiff and it is not shown that the profits from these
contracts ever reached the ands of McCullough. McCullough was not the treasurer of the
company at that time. The other items which the plaintiff insist that McCullough had no
right to credit himself with are the following:
Date To whom paid. Amount (Mex. currency). Jan. 30, 1903 Green $2,000.00 Feb. 2, 1903
McCullough 1,300.00 Feb. 2, 1903 Green 1,027.92 Feb. 19, 1905 P. O. T. Co. note 2,236.80
May 23, 1905 Hilbert 1,856.02 June 9, 1905 Hartigan 1,225.00
McCullough says that these amounts represents cash borrowed from the evidence parties to
carry on the operations of the old company while it was trying to raise the sunken vessels.
There is no proof to the contrary, and McCullough's testimony on this point is strongly

corroborated by the fact that the work done by the company in attempting to raise theses
vessels was it first undertaking. The company had made no profits while tat work was going
on under the management of the plaintiff, but its expenses greatly exceeded that of the
original $8,000 Mexican currency. It was necessary to borrow money to continue that work.
These amounts, having been borrowed, were outstanding debts when McCullough took
charge for the purpose of completing the warehouses and winding up the business of the old
company. These amounts do not represent payments or refunds of the original capital.
McCullough did not credit himself with any amount for his services for supervising the
completion of the warehouses, nor for liquidating or winding up the company's affairs. We
think that the amount of $4,918.75 Mexican currency, balance in McCullough's favor up to
this point, represents a fair, equitable, and just settlement.
So far we have referred to the Philippine Engineering and Construction Company as the
"company," without any attempt to define its legal status.
The plaintiff and defendants organized this company with a capital stock of $100,000
Mexican currency, each paying in on the organization $2,000 Mexican currency. The
remainder, $9,000, according to the articles of agreement, were to be offered to the public in
shares of $100 Mexican currency, each. The names of all the organizers appear in the
articles of agreement, which articles were duly inscribed in the commercial register. The
purpose for which this organization was affected were to engage in general engineering and
construction work, and operating under the name of the "Philippine Engineering and
Construction Company." during its active existence, it engaged in the business of attempting
to rise the sunken Spanish fleet, constructing under contract warehouses and a wharf for the
United States Government, supervising the construction of a warehouse for a private firm,
and some assay work. It was, therefore, an industrial civil partnership, as distinguished from
a commercial one; a civil partnership in the mercantile form, an anonymous partnership
legally constituted in the city of Manila.
The articles of agreement appeared in a public document and were duly inscribed in the
commercial register. To the extent of this inscription the corporation partook of the form of a
mercantile one and as such must e governed by articles 151 to 174 of the Code of
Commerce, in so far as these provisions are not in conflict with the Civil Code (art. 1670,
Civil Code); but the direct and principal law applicable is the Civil Code. Those provisions
of the Code of Commerce are applicable subsidiary.
This partnership or stock company (sociedad anonima) upon the execution of the public
instrument in which is articles of agreement appear, and the contribution of funds and
personal property, became a juridicial person an artificial being, invisible, intangible and
existing only in contemplation of law with the power to hold, buy, and ell property, and
to use and be sued a corporation not a general copartnership nor a limited
copartnership. (Arts. 37, 38,1656 of the Civil Code; Compania Agricola de Ultimar vs.

Reyes et al., 4 Phil. Rep., 2; and Chief Justice Marshall's definition of a corporation, 17 U.
S., 518.)
The inscribing of its articles of agreement in the commercial register was not necessary to
make it a juridicial person a corporation. Such inscription only operated to show that it
partook of the form of a commercial corporation. (Compania Agricola de Ultimar vs. Reyes
et al., supra.)
Did a majority of the stockholders, who were at the same time a majority of the directors of
this corporation, have the power under the law and its articles of agreement, to sell or
transfer to one of its members the assets of said corporation?
In the first article of the statutes of incorporation it is stated tat by virtue of a public
document the organizers, whose names are given in full, agreed to form a sociedad anonima.
Article II provides that the organizers should be the directors an administrators until the
second general meeting, and until their successors were duly elected and installed. The third
provides that the sociedad should run for ninety-nine years from the date of the execution of
its articles of agreement. Article IV sets forth the object or purpose of the organization.
Article V makes the capital $100,000 Mexican currency, divided into one thousand shares at
$100 Mexican currency each. Article VI provides that each shareholder should be
considered as a coowner in the assets of the company and entitled to participate in the profits
in proportion to the amount of his stock. Article VII fixed the time of holding general
meetings and the manner of calling special meetings of the stockholders. Article VIII
provides that the board of directors shall be elected annually. Article IX provides for the
filing of vacancies in the board of directors. Article X provides that "the board of directors
shall elect the officers of the sociedad and have under is charge the administration of the said
sociedad." Article XI: "In all the questions with reference to the administration of the affairs
of the sociedad, it shall be necessary to secure the unanimous vote of the board of directors,
and at least three of said board must be provides that all of the stock, except that which was
divided among the organizers should remain in the treasury subject to the disposition of the
board of directors. Article XIII reads: "In all the meetings of the stockholders, a majority
vote of the stockholders present shall be necessary to determine any question discussed."
The fourteenth articles authorizes the board of directors to adopt such rules and regulations
for the government of the sociedad as it should deem proper, which were not in conflict with
its statutes.
When the sale or transfer heretofore mentioned took place, there were present four directors,
all of whom gave their consent to that sale or transfer. The plaintiff was then about and his
express consent to make this transfer or sale was not obtained. He was, before leaving, one
of the directors in this corporation, and although he had resigned as manager, he had not
resigned as a director. He accepted the position of engineer of the Canton and Shanghai
Railway Company, knowing that his duties as such engineer would require his whole time

and attention and prevent his returning to the Philippine Islands for at least a year or more.
The new position which he accepted in China was incompatible with his position as director
in the Philippine Engineering and Construction Company, a corporation whose sphere of
operations was limited to the Philippine Islands. These facts are sufficient to constitute an
abandoning or vacating of hid position as director in said corporation. (10 Cyc., 741.)
Consequently, the transfer or sale of the corporation's assets to one of its members was made
by the unanimous consent of all the directors in the corporation at that time.
There were only five stockholders in this corporation at any time, four of whom were the
directors who made the sale, and the other the plaintiff, who was absent in China when the
said sale took place. The sale was, therefore, made by the unanimous consent of four-fifths
of all the stockholders. Under the articles of incorporation, the stockholders and directors
had general ordinary powers. There is nothing in said articles which expressly prohibits the
sale or transfer of the corporate property to one of the stockholders of said corporation.
Is there anything in the law which prohibits such a sale or transfer? To determine this
question, it is necessary to examine, first, the provisions of the Civil Code, and second, those
provisions (art. 151 to 174) of the Code o ] Commerce.
Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a corporation.
There is nothing in these articles which expressly or impliedly prohibits the sale of corporate
property to one of its members, nor a dissolution of a corporation in this manner. Neither is
there anything in articles 151 to 174 of the Code of Commerce which prohibits the
dissolution of a corporation by such sale or transfer.
The articles of incorporation must include:
xxxxxxxxx
The submission to the vote of the majority of the meeting of members, duly called and held,
of such matters as may properly be brought before the same. (No. 10, art. 151, Code of
Commerce.)
Article XIII of the corporation's statutes expressly provides that "in all the meetings of the
stockholders, a majority vote of the stockholders present shall be necessary to determine any
question discussed."
The sale or transfer to one of its members was a matter which a majority of the stockholders
could very properly consider. But it i said that if the acts and resolutions of a majority of the
stockholders in a corporation are binding in every case upon the minority, the minority
would be completely wiped out and their rights would be wholly at the mercy of the abuses
of the majority.

Generally speaking, the voice of a majority of the stockholders is the law of the corporation,
but there are exceptions to this rule. There must necessarily be a limit upon the power of the
majority. Without such a limit the will of the majority would be absolute and irresistible and
might easily degenerate into an arbitrary tyranny. The reason for these limitations is that in
every contract of partnership (and a corporation can be something fundamental and
unalterable which is beyond the power of the majority of the stockholders, and which
constitutes the rule controlling their actions. this rule which must be observed is to be found
in the essential compacts of such partnership, which gave served as a basis upon which the
members have united, and without which it is not probable that they would have entered not
the corporation. Notwithstanding these limitations upon the power of the majority of the
stockholders, their (the majority's) resolutions, when passed in good faith and for a just
cause, deserve careful consideration and are generally binding upon the minority.
Eixala, in his work entitled "Instituciones del Derecho Mercantil de Espaa," speaking of
sociedades anonimas, says:
The resolutions of the boards passed by a majority vote are valid . . . and authority for
passing such resolutions is unlimited, provided that the original contract is not broken by
them, the partnership funds not devoted to foreign purposes, or the partnerships transformed,
or changes made which are against public policy or which infringe upon the rights of third
persons.
The supreme court of Spain, in its decision dated June 30, 1888, said:
In order to be valid and binding upon dissenting members, it s an indispensable requisite that
resolutions passed by a general meeting of stockholders conform absolutely to the contracts
and conditions of the articles of the association, which are to be strictly construed.
That resolutions passed within certain limitations by a majority of the stockholders of a
corporation are binding upon the minority, is therefore recognized by the Spanish
authorities.
Power of private corporation to alienate property. This power of absolute alienability of
corporate property applies especially to private corporations that are established solely for
the purpose of trade or manufacturing and in which he public has no direct interest. While
this power is spoken of as belonging to the corporation it must be observed that the
authorities point out that the trustees or directors of a corporation do not possess the power
to dispose of the corporate property so as to virtually end the existence of the corporation
and prevent it from carrying on the business for which it was incorporated. (Thompson on
Corporation, second edition, sec. 2416, and cases cited thereunder.)
Power to dispose of all property. Where there are no creditors, and no stockholder
objects, a corporation, as against all other persons but the state, may sell and dispose of all

its property. The state in its sovereign capacity may question the power of the corporation to
do so, but with these exceptions such as a sale is void. A rule of general application is that a
corporation of a purely private business character, one which owes no special duty to the
public, and is not given the right of eminent domain, where exigencies of its business require
it or when the circumstances are such that it can no longer continue the business with profit,
may sell and dispose of all its property, pay its debts, divide the remaining assets and wind
up the affairs of the corporation. (Id., sec. 2417.)
When directors or officers may dispose of all the property. It is within the dominion of
the managing officers and agents of the corporation to dispose of all the corporate property
under certain circumstances; and this may be done without reference to the assent or
authority of the stockholders. This disposition of the property may be temporarily by lease,
or permanently by absolute conveyance. But it can only be done in the course of the
corporate business and for the furtherance of the purposes of the incorporation. The board of
directors possess this power when the corporation becomes involved and by reason of its
embarrassed or insolvent condition is unable either to pay its debts or to secure capital and
funds for the further prosecution of its enterprise, and especially where creditors are pressing
their claims and demands and are threatening to or have instituted actions to enforce their
claims. This power of the directors to alienate the property is conceded where it is regarded
as of imperative necessity. (If., sec. 2418, and case cited.)
When majority stockholder may dispose of all corporate property. Another rule that
permits a majority of the stockholders to dispose of all the corporate property and wind up
the business, is where the corporation has became insolvent, and the disposition of the
property is necessary to pay the debt; or where from any cause the business is a failure, and
the best interest of the corporation and all the stockholders require it, then the majority have
clearly the power to dispose of all the property even as against the protests of a minority. It
would be a harsh rule that could permit one stockholder, or any minority of the stockholders,
to hold the majority to their investment where the continuation of the business would be at a
loss and where there was no prospect or hope that the enterprise could be made profitable.
The rule as stated by some courts is that the majority stockholders may dispose of the
property when just cause exists; and this just cause is usually defined to be the
unprofitableness of the business and where its continuation would be ruinous to the
corporation and against the interest of stockholders. (Id., sec. 2424, and cases cited.)
Nothing is better settled in the law of corporations than the doctrine that a corporation has
the same capacity and power as a natural person to dispose of the convey its property, real or
personal, provided it does not do so for a purpose which is foreign to the objects for which it
was created, and provided, further, it violates no charter or statutory restriction, on rule of
law based upon public policy. . . .This power need not be expressly conferred upon a
corporation by its charter. It is implied as an incident to its ownership of property, unless
there is some clear restriction in this charter or in some statute. (Clark and Marshall's Private

10

Corporations, sec. 152, and cases cited.)

A purely private business corporation, like a manufacturing or trading company, which is not
given the right of eminent domain, and which owes no special duties to the public, may
certainly sell and convey absolutely the whole of its property, when the exigencies of its
business require it to do so, or when the circumstances are such that it can no longer
profitably continue its business, provided the transaction is not in fraud of the rights of
creditors, or in violation of charter or statutory restrictions. And, by the weight of authority,
this may be done a majority of the stockholders against the dissent of the minority. (Id., sec.
160, and cases cited.)
The above citations are taken from the works of the most eminent writers on corporation
law. The citation of cases in support of the rules herein announced are too numerous to
insert.
From these authorities it appears to be well settled, first, that a private corporation, which
owes no special duty to the public and which has not been given the right of eminent
domain, has the absolute right and power as against the whole world except the state, to sell
and dispose of all of its property; second, that the board of directors, has the power, without
referrence to the assent or authority of the stockholders, when the corporation is in failing
circumstances or insolvent or when it can no longer continue the business with profit, and
when it is regarded as an imperative necessity; third, that a majority of the stockholders or
directors, even against the protest of the minority, have this power where, from any cause,
the business is a failure and the best interest of the corporation and all the stockholders
require it.
May officer or directors of the corporation purchase the corporate property? The authorities
are not uniform on this question, but on the general proposition whether a director or an
officer may deal with the corporation, we think the weight of authority is that he may.
(Merrick vs. Peru Coal Co., 61 Ill., 472; Harts et al. vs. Brown et al., 77 Ill., 226; Twin-Lick
Oil Company vs. Marbury, 91 U.S., 587; Whitwell vs, Warner, 20 Vt., 425; Smith vs.
Lansing, 22 N.Y., 520; City of St. Loius vs. Alexander, 23 Mo., 483; Beach et al vs. Miller,
130 Ill., 162.)
While a corporation remains solvent, we can see no reason why a director or officer, by the
authority of a majority of the stockholders or board of managers, may not deal with the
corporation, loan it money or buy property from it, in like manner as a stranger. So long as a
purely private corporation remains solvent, its directors are agents or trustees for the
stockholders. They owe no duties or obligations to others. But the moment such a
corporation becomes insolvent, its directors are trustees of all the creditors, whether they are
members of the corporation or not, and must manage its property and assets with strict
regard to their interest; and if they are themselves creditors while the insolvent corporation
is under their management, they will not be permitted to secure to themselves by purchasing

11

the corporate property or otherwise any personal advantage over the other creditors.
Nevertheless, a director or officer may in good faith and for an adequate consideration
purchase from a majority of the directors or stockholders the property even of an insolvent
corporation, and a sale thus made to him is valid and binding upon the minority. (Beach et
al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury, supra; Drury vs. Cross, 7 Wall.,
299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New Hamphshire Insurance
Company, 43 N. H., 263; Morawetz on Corporations (first edition), sec. 579; Haywood vs.
Lincoln Lumber Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs.
Shaw Carriage Company, 21 Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, supra, the complaint was a
corporation organized under the laws of West Virginia, engaged in the business of raising
and selling petroleum. It became very much embarrased and a note was given secured by a
deed of trust, conveying all the property rights, and franchise of the corporation to William
Thomas to secure the payment of said note, with the usual power of sale in default of
payment. The property was sold under the deed of trust; was bought in by defendant's agent
for his benefit, and conveyed to him the same year. The defendant was at the time of these
transactions a stockholder and director in the company. At the time the defendant's money
became due there was no apparent possibility of the corporation's paying it at any time. The
corporation was then insolvent. The property was sold by the trustee and bough in by the
defendant at a fair and open sale and at a reasonable price. The sale and purchase was the
only mode left to the defendant to make his money. The court said:
That a director of a joint-stock corporation occupies one of those fiduciary relations where
his dealings with the subject-matter of his trust or agency, and with the beneficiary or party
whose interest is confided to his care, is viewed with jealousy by the courts, and may be set
aside on slight grounds, is a doctrine founded on the soundest morality, and which has
received the clearest recognition in this court and others. (Koehler vs. Iron., 2 Black, 715;
Drury vs. Cross, 7 Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs.
Sherman, 30 Barb., 553; Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The
general doctrine, however, in regard to contracts of this class, is, not that they are absolutely
void, but that they are voidable at the election of the party whose interest has been so
represented by the party claiming under it. We say, this is the general rule; for there may be
cases where such contracts would be void ab initio; as when an agent to sell buys of himself,
and by his power of attorney conveys to himself that which he was authorized to sell. but
even here, acts which amount t a ratification by the principal may validate the sale.
The present case is not one of that class. While it is true that the defendant, a s a director of
the corporation, was bound by all those rules of conscientious fairness which courts of
equity have imposed as the guides for dealing in such cases, it can not be maintained that
any rule forbids one director among several from loaning money to the corporation when the
money is needed, and the transaction is open, and otherwise free from blame. No adjudged

12

case has gone so far as this. Such a doctrine, while it would afford little protection to the
corporation against actual fraud or oppression, would deprive it of the air of those most
interested in giving aid judiciously, and best qualified to judge of the necessity of that aid,
and of the extent to which it may safely be given.
There are in such a transaction three distinct parties whose interest is affected by it; namely,
the lender, the corporation, and the stockholders of the corporation.
The directors are the officers or agents of the corporation, and represent the interests of the
abstract legal entity, and of those who own the shares of its stock. One of the objects of
creating a corporation by law is to enable it to make contracts; and these contracts may be
made with its stockholders as well as with others. In some classes of corporations, as in
mutual insurance companies, the main object of the act of the incorporation is to enable the
company to make contracts which its stockholders, or with persons who become
stockholders by the very act of making the contract of insurance. It is very true, that as a
stockholder, in making a contract of any kind with the corporation of which he is a member,
is in some sense dealing with a creature of which he is a part, and holds a common interest
with the other stockholders, who, with him, constitute the whole of that artificial entity, he is
properly held to a larger measure of candor and good faith than if he were not a stockholder.
So, when the lender is a director, charged, with others, with the control and management of
the affairs of the corporation, representing in this regard the aggregated interest of all the
stockholders, his obligation, if he becomes a party to a contract with the company, to candor
and fair dealing, is increased in the precise degree that his representative character has given
him power and control derived from the confidence reposed in him by the stockholders who
appointed him their agent. If he should be a sole director, or one of a smaller number vested
with certain powers, this obligation would be still stronger, and his acts subject to more
severe scrutiny, and their validity determined by more rigid principles of morality, and
freedom from motives of selfishness. All this falls far short, however, of holding that no
such contract can be made which will be valid; . . . .
In the case of Hancock vs. Holbrook et al. (40 La. Ann., 53), the court said:
As a strictly legal question, the right of a board of directors of a corporation to apply it
property to the payment of its debts, and the right of the majority of stockholders present at a
meeting called for the purpose to ratify such action and to dissolve the corporation, can not
be questioned.
But were such action is taken at the instance, and through the influence of the president of
the corporation, and were the debt to which the property is applied is one for which he is
himself primarily liable, and specially where he subsequently acquires, in his personal right,
the proerty thus disposed of, such circumstances undoubtedly subject his acts to severe
scrutiny, and oblige him to establish that he acted with the utmost candor and fair-dealing for
the interest of the corporation, and without taint of selfish motive.

13

The sale or transfer of the corporate property in the case at bar was made by three directors
who were at the same time a majority of stockholders. If a majority of the stockholders have
a clear and a better right to sell the corporate property than a majority of the directors, then it
can be said that a majority of the stockholders made this sale or transfer to the defendant
McCullough.
What were the circumstances under which said sale was made? The corporation had been
going from bad to worse. The work of trying to raise the sunken Spanish fleet had been for
several months abandoned. The corporation under the management of the plaintiff had
entirely failed in this undertaking. It had broken its contract with the naval authorities and
the $10,000 Mexican currency deposited had been confiscated. It had no money. It was
considerably in debt. It was a losing concern and a financial failure. To continue its
operation meant more losses. Success was impossible. The corporation was civilly dead and
had passed into the limbo of utter insolvency. The majority of the stockholders or directors
sold the assets of this corporation, thereby relieving themselves and the plaintiff of all
responsibility. This was only the wise and sensible thing for them to do. They acted in
perfectly good faith and for the best interests of all the stockholders. "It would be a harsh
rule that would permit one stockholder, or any minority of stockholders to hold a majority to
their investment where a continuation of the business would be at a loss and where there was
no prospect or hope that the enterprise would be profitable."
The above sets forth the condition of this insolvent corporation when the defendant
McCullough proposed to the majority of stockholders to take over the assets and assume all
responsibility for the payment of the debts and the completion of the warehouses which had
been undertaken. The assets consisted of office furniture of a value of less than P400, the
uncompleted contract for the construction of the Government warehouses, and the wrecking
contract. The liabilities amounted to at least $19,645.74 Mexican currency. $9,645.74
Mexican currency of this amount represented borrowed money, and $10,000 Mexican
currency was the deposit with the naval authorities which had been confiscated and which
was due the bank. McCullough's profits on the warehouse contract amounted to almost
enough to the pay the amounts which the corporation had borrowed from its members. The
wrecking contract which had been broken was of no value to the corporation for the reason
that the naval authorities absolutely refused to have anything further to do with the
Philippine Engineering and Construction Company. They the naval authorities) had declined
to consider the petition of the corporation for an extension in which to raise the Spanish
fleet, and had also refused to reconsider their action in confiscating the deposit. They did
agree, however, that if the defendant McCullough would organize a new association, that
they would give the new concern an extension of time and would reconsider the question of
forfeiture of the amount deposited. Under these circumstances and conditions, McCullough
organized the Manila Salvage Company, sold five-sixth of this wrecking contract to the new
company for $15,000 Mexican currency and retained one-sixth as his share of the stock in
the new concern. The Manila Salvage company paid to the bank the $10,000 Mexican

14

currency which had been borrowed to deposit with the naval authorities, and began
operations. All of the $10,000 Mexican currency so deposited was refund to the new
company except P2,000. The new association failed and McCullough, by reason of this
failure, lost over $16,000 Mexican currency. These facts show that McCullough acted in
good faith in purchasing the old corporation's assets, and that he certainly paid for the same
a valuable consideration.
But cancel for the plaintiff say: "The board of directors possessed only ordinary powers of
administration (Article X of the Articles of incorporation), which in no manner empowered
it either to transfer or to authorize the transfer of the assets of the company to McCullough
(art. 1773, Civil Code; decisions of the supreme court of Spain of April 2, 1862, and July 8,
1903)."
Article X of the articles of incorporation above referred to provides that the board of
directors shall elect the officers of the corporation and "have under its charge the
administration of the said corporation." Articles XI reads: "In all the questions with
reference to the administration of the affairs of the corporation, it shall be necessary to
secure the unanimous vote of the board of directors, and at least three of said board must be
present in order to constitute a legal meeting." It will be noted that article X statute a legal
meeting." It will be noted that Article X placed the administration of the affairs of the
corporation in the hands of the board of directors. If Article XI had been omitted, it is clear
that under the rules which govern business of that character, and in view of the fact that
before the plaintiff left this country and abandoned his office as director, there were only
five directors in the corporation, then three would have been sufficient to constitute a
quorum and could perform all the duties and exercise all the powers conferred upon the
board under this article. It would not have been necessary to obtain the consent of all three
of such members which constituted the quorum in order that a solution affecting the
administration of the corporation should be binding, as two votes a majority of the
quorum would have been sufficient for this purpose. (Buell vs. Buckingham & Co., 16
Iowa, 284; 2 Kent. Com., 293; Cahill vs. Kalamazoo Mutual Insurance Company, 2 Doug.
(Mich.), 124; Sargent vs. Webster, 13 Met., 497; In re Insurance Company, 22 Wend., 591;
Ex parte Wilcox, 7 Cow., 402; id., 527, note a.)
It might appear on first examination that the organizers of this corporation when they
asserted the first part of Article XI intended that no resolution affecting the administration of
the affairs should be binding upon the corporation unless the unanimous consent of the
entire board was first obtained; but the reading of the last part of this same article shows
clearly that the said organizers had no such intention, for they said: "At least three of said
board must be present in order to constitute a legal meeting." Now, if three constitute a legal
meeting, three were sufficient to transact business, three constituted the quorum, and, under
the above-cited authorities, two of the three would be sufficient to pass binding resolutions
relating to the administration of the corporation.

15

If the clause "have under in charge and administer the affairs of the corporation" refers to the
ordinary business transactions of the corporation and does not include the power to sell the
corporate property and to dissolve the corporation when it becomes insolvent a change
we admit organic and fundamental then the majority of the stockholders in whom the
ultimate and controlling power lies must surely have the power to do so.
Article 1713 of the Civil Code reads:
An agency stated in general terms only includes acts of administration.
In order to compromise, alienate, mortgage, or execute any other act of strict ownership an
express commission is required.
This article appears in title 9, chapter 1 of the Civil Code, which deals with the character,
form, and kind of agency. Now, were the positions of Hilbert, Green, Hartigan, and
McCullough that the agents within the meaning of the article above quoted when the assets
of the corporation were transferred or sold to McCullough? If so, it would appear from said
article that in order to make the sale valid, an express commission would be required. This
provision of law is based upon the broad principles of sound reason and public policy. There
is a manifest impropriety in allowing the same person to act as the agent of the seller and to
become himself the buyer. In such cases, there arises so often a conflict between duty and
interest. "The wise policy of the law put the sting of a disability into the temptation, as a
defensive weapon against the strength of the danger which lies in the situation."
Hilbert, Green, and Hartigan were not only all creditors at the time the sale or transfer of the
assets of the insolvent corporation was made, but they were also directors and stockholders.
In addition to being a creditor, McCullough sustained the corporation the double relation of
a stockholder and president. The plaintiff was only a stockholder. He would have been a
creditor to the extent of his unpaid salary if the corporation had been a profitable instead of a
losing concern.
But as we have said when the sale or transfer under consideration took place, there were
three directors present, and all voted in favor of making this sale. It was not necessary for
the president, McCullough, to vote. There was a quorum without him: a quorum of the
directors, and at the same time a majority of the stockholders.
A corporation is essential a partnership, except in form. "The directors are the trustees or
managing partners, and the stockholders are the cestui que trust and have a joint interest in
all the property and effects of the corporation." (Per Walworth, Ch., in Robinson vs. Smith, 3
Paige, 222, 232; 5 idem, 607; Slee vs. Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld.,
320.)
The Philippine Engineering and Construction Company was an artificial person, owning its

16

property and necessarily acting by its agents; and these agents were the directors.
McCullough was then an agent or a trustee, and the stockholders the principal. Or say (as
corporation was insolvent) that he was an agent or trustee and the creditors were the
beneficiaries. This being the true relation, then the rules of the law (art. 1713 of the Civil
Code) applicable to sales and purchases by agents and trustees would not apply to the
purchase in question for the reason that there was a quorum without McCullough, and for
the further reason that an officer or director of a corporation, being an agent of an artificial
person and having a joint interest in the corporate property, is not such an agent as that
treated of in article 1713 of the Civil Code.
Again, McCullough did not represent the corporation in this transaction. It was represented
by a quorum of the board of directors, who were at the same time a majority of the
stockholders. Ordinarily, McCullough's duties as president were to preside at the meetings,
rule on questions of order, vote in case of a tie, etc. He could not have voted in this
transaction because there was no tie.
The acts of Hilbert, Green, Hartigan, and McCullough in this transaction, in view of the
relations which they bore to the corporation, are subject to the most severe scrutiny. They
are obliged to establish that they acted with the utmost candor and fair dealing for the
interest of the corporation, and without taint motives. We have subjected their conduct to
this test, and, under the evidence, we believe it has safely emerged from the ordeal.
Transaction which only accomplish justice, which are done in good faith and operate legal
injury to no one, lack the characteristics of fraud and are not to be upset because the
relations of the parties give rise to suspicions which are fully cleared away. (Hancock vs.
Holbrook, supra.)
We therefore conclude that the sale or transfer made by the quorum of the board of directors
a majority of the stockholders is valid and binding upon the majority-the plaintiff.
This conclusion is not in violation of the articles of incorporation of the Philippine
Engineering and Construction Company. Nor do we here announce a doctrine contrary to
that announced by the supreme court of Spain in its decisions dated April 2, 1862, and July
8, 1903.
As to the third cause of action, it is insisted: First, that the court erred in holding the
defendant McCullough responsible for the personal effects of the plaintiff; and second, that
the court erred in finding that the effects left by the plaintiff were worth P2,400.
As we have said, the plaintiff was the manager of the Philippine Engineering Company from
April 1, 1902, up to January 1, 1903. Sometimes during the previous month of December he
resigned to accept a position in China, but did not leave Manila until about January 20. He
remained in Manila about twenty days after he severed his connection with the company. He
lived in rooms in the same building which was rented by the company and were the

17

company had its offices. When he started for China he left his personal effects in those
rooms, having turned the same over to one Paulsen. Testifying on this point the plaintiff
said:
Q. To whom did you turn over these personal effects on leaving here? A. To Mr. Paulsen.
Q. Have you demanded payment of this sum [referring to the value of his personal effects]?
A. On leaving for China I gave Mr. Haussermann power of attorney to represent me in
this case and demand payment.
Q. Please state whether or not you have an inventory of these effects. A. I had an
inventory which was in my possession but it was lost when the company took all of the
books and carried them away from the office.
Q. Can you give a list or a partial list of your effect? A. I remember some of the items.
There was a complete bedroom set, two marble tables, one glass bookcase, chairs, all of the
household effects I used when I was living in the Botanical Garden as city engineer, one
theodolite, which I bought after commencing work with the company.
Q. How much do you estimate to be the total reasonable value of these effects? A. The
total would not be less than $1,200 gold.
Counsel for the plaintiff, on page 56 of their brief, say:
Mr. McCullough, in his testimony (pp. 39 and 40) admits full knowledge of and
participation in the removal and sale of the effects and states that he took the proceeds and
considered them part of the assets of the company. He further admits that Mr. Haussermann
made a demand for the proceeds of Mr. Mead's personal effects (p. 44).
McCullough's testimony, referred by the counsel, is as follows:
Q. At the time Mr. Mead left for China, in the building where the office was and in the
office, there were left some of the personal effects of Mr. Mead. What do you know about
these effects, a list of which is Exhibit B? A. Nothing appearing in this Exhibit B was
never delivered to the Philippine Engineering and Construction Company, according to my
list.
Q. Do you know what became of these effects? A. No, sir. I have no idea. I never saw
them. I never heard these effects talked about. I only heard something said about certain
effects which Mr. Mead had in his living room.
Q. Do you know what became of the bed of Mr. Mead? A. I know there were effects,
such as a bed, washstand, chairs, table, and other things, which are used in a living room,
and that they were in Mr. Mead's room. These effects were sent to the warehouse of the

18

Pacific Oriental Trading Company, together with the office furniture. We had to vacate the
building where the offices were and we had to take out everything therein. These things
were deposited in the warehouse of the Pacific Oriental Trading Company and were finally
sold by that company and the money turned over to me.
Q. How much? A. P49.97.
Q. What did you do with this money? A. I took it and considered it part of the assets of
the company. All of the other effects of the office were sold at the same time and brought
P347.16.
Q. Did Mr. Mead leave anyone in charge of his effects when he left Manila? A. I think he
left Paulsen in charge, but Paulsen did not take these effects, so when we vacated the office
we had to move them.
Q. Did Paulsen continue occupying the living room where these effects were and did he use
these effects? A. I do not know because I was in the office for three months before we
vacated.
Q. Don't you know that it is a fact that Mr. Haussermann, as representative of Mr. Mead,
demanded of you and the company the payment of the salary which was due Mr. Mead and
the value of his personal effects? A. Yes, sir.
As to the value of these personal effects, Hartigan, testifying as witness for the defendant,
said:
I think the personal effects were sold for P50. His personal effects consisted of ordinary
articles, such as a person would use who had to be going from one place to another all the
time, as Mr. Mead. I know that all those effects were sold for less than P100, if I am not
mistaken.
The foregoing is the material testimony with reference to the defendant McCullough's
responsibility and the value of the personal effects of the plaintiff.
McCullough was a member of the company and was responsible as such for the rents where
the offices were located. The company had no further use for the building after the plaintiff
resigned. The vacating of the building was the proper thing to do. The office furniture was
removed and stored in a place where it cost nothing for rents. When Hilbert, member of the
company, went to the office to remove the company's office furniture, he found no one in
charge of the plaintiff's personal effects. He took them and stored them in the same place
and later sold them, together with the office furniture, and turned the entire amount over to
defendant McCullough.
Paulsen, in whose charge Mead left his effects, apparently took no interest in caring for

19

them. Was the company to leave Mead's personal effects in that building and take the
chances of having to continue to pay rents, solely on account of the plaintiff's property
remaining there? The company had reason to believe that it would have to continue paying
these rents, as they had rented the building and authorized the plaintiff to occupy rooms
therein.
The plaintiff knew when he left for China that he would be away a long time. He had
accepted a position of importance, and which he knew would require his personal attention.
He did not gather up his personal effects, but left them in the room in charge of Paulsen.
Paulsen took no interest in caring for them, but apparently left these effects to take care of
them selves. The plaintiff did not even carry with him an inventory of these effects, but
attempted on the trial to give a list of them and did give a partial list of the things he left in
his room; but it is not shown that all this things were there when Herbert removed the office
furniture and some of the plaintiff's effects. The fact that the plaintiff remained in Manila
some twenty days after resigning and never cared for his own effects but left them in the
possession of an irresponsible person, shows extreme negligence on his part. He exhibited a
reckless indifference to the consequences of leaving his effects in the lease premises. The
law imposes on every person the duty of using ordinary care against injury or damages.
What constitutes ordinary care depends upon the circumstances of each particular case and
the danger reasonably to be apprehended.
McCullough did not have anything personally to do with these effects at any time. He only
accepted the money which Herbert turned over to him. He, personally, did not contribute in
any way whatsoever to the loss of the property, neither did he as a member of the
corporation do so.
The plaintiff gave an estimate of the value of the effects which he left in his rooms and
placed this value at P2,400. He did not give a complete list of the effects so left, neither did
he give the value of a single item separately. The plaintiff's testimony is so indefinite and
uncertain that i t is impossible to determine with any degree of certainty just what these
personal effects consisted of and their values, especially when we take into consideration the
significant fact that these effects were abondoned by Paulsen. On the other hand, w have
before us the positive testimony of Hilbert as to the amount received for the plaintiff's
personal effects, the testimony of Hartigan that the same were sold for less than P100, and
the testimony of McCullough as to the amount turned over to him by Herbert.
So we conclude that the great preponderance of evidence as to the value of these effects is in
the favor of the contention of the defendant. Their value therefore be fixed at P49.97.
For these reasons the judgment appealed from as to the first and second causes of action is
hereby affirmed. Judgment appealed from as to the third cause of action is reduced to
P49.97, without costs.

20

Arellano, C.J., Torres, Mapa, Carson and Moreland, JJ., concur.

21

MEAD v. McCULLOUGH

Charles Mead, Edwin McCullough and three others organized the corporation called The
Philippine Engineering and Construction Company (PECC). The 4 organizers, except
Mead, contributed to the majority of the capital stock of PECC, the remaining shares
were offered to the public. Mead contributed some personal properties. Mead was
assigned as a manager but he resigned as such when he accepted an engineering job in
China. But even so, he remained as one of the five directors (the organizers).
At that time, PECC was already incurring losses. McCullough, the president, proposed
that he shall buy the assets of the corporation. The three other directors then voted in
favor of this proposal hence the assets were transferred to McCullough. Mead learned of
this and so he opposed it because the personal properties he contributed were also
transferred to McCullough.
Mead also argued that under the articles of incorporation of PECC, the board of directors
only have ordinary powers; that the authorization made by the three directors to allow the
sale of company assets to McCullough constitutes an act of agency which is invalid at
that because no express commission was made, i.e., no power of attorney was made in
favor of the directors. The requirement for a commission can be inferred from Article
1713 of the Civil Code which provides:
An agency stated in general terms only includes acts of administration.
In order to compromise, alienate, mortgage, or execute any other act of strict ownership
an express commission is required. (Emphasis supplied).
Mead also insists that under their charter, no resolution affecting the administration of the
affairs of PECC should be binding upon the corporation unless the unanimous consent of
the entire board was first obtained
ISSUE: Whether or not the three directors had the authority to allow the sale/transfer of
the company assets to McCullough.

HELD:
Yes. Several factors have to be considered. First is the fact that Mead abandoned his post
when he took the job offer to work in China. He knew for a fact that the nature of the job
offered is permanent. Second, a close reading of the articles of incorporation of PECC

shows that there is no such intention for unanimity when it comes to votes affecting
matters of administration. The only requirement is that At least three of said board must
be present in order to constitute a legal meeting. Which was complied with when the
other four directors were present when the decision to transfer the company assets was
made.
Third is the fact that PECC was in a downhill situation. A corporation is essentially a
partnership, except in form. The directors are the trustees or managing partners, and the
stockholders are the cestui que trust and have a joint interest in all the property and
effects of the corporation. McCullough as a director himself and the president can be
considered an agent but not the agent contemplated in Article 1713 of the Civil Code.
Article 1713 deals with the broad aspect of agency and in ordinary cases but not in the
case of a corporation and its directors. In the case at bar, the more appropriate analogy is
that PECC, being a losing corporation, has its directors as the trustees. The trusteesdirectors hold the company assets in trust for the beneficiaries, which are the creditors.
As trustees, they decided that it is beneficial to sell the company assets to McCullough to
at least recover some cash equivalents in the winding up of the corporate affairs. Besides,
there is no prohibition against the selling of company assets to one of its directors either
from law or from PECCs articles of incorporation.

SECOND DIVISION
G.R. No. L-68555 March 19, 1993
PRIME WHITE CEMENT CORPORATION, petitioner, vs. HONORABLE
INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.
De Jesus & Associates for petitioner.
Padlan, Sutton, Mendoza & Associates for private respondent.
CAMPOS, JR., J.:
Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement
Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court,
the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in
toto. 1
The facts, as found by the trial court and as adopted by the respondent Court are hereby
quoted, to wit:
On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President,
Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership
agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive dealer
and/or distributor of the said defendant corporation of its cement products in the entire
Mindanao area for a term of five (5) years and proving (sic) among others that:
a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as
dealer with 20,000 bags (94 lbs/bag) of white cement per month;
b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of
white cement, FOB Davao and Cagayan de Oro ports;
c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open
with any bank or banking institution a confirmed, unconditional, and irrevocable letter of
credit in favor of the corporation and that upon certification by the boat captain on the bill of
lading that the goods have been loaded on board the vessel bound for Davao the said bank or
banking institution shall release the corresponding amount as payment of the goods so
shipped.
Right after the plaintiff entered into the aforesaid dealership agreement, he placed an

advertisement in a national, circulating newspaper the fact of his being the exclusive dealer
of the defendant corporation's white cement products in Mindanao area, more particularly, in
the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even
congratulated by his business associates, so much so, he was asked by some of his
businessmen friends and close associates if they can be his sub-dealer in the Mindanao area.
Relying heavily on the dealership agreement, plaintiff sometime in the months of
September, October, and December, 1969, entered into a written agreement with several
hardware stores dealing in buying and selling white cement in the Cities of Davao and
Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular
supply of the said commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q1 and Q-2). After the plaintiff was assured by his supposed buyer that his allocation of
20,000 bags of white cement can be disposed of, he informed the defendant corporation in
his letter dated August 18, 1970 that he is making the necessary preparation for the opening
of the requisite letter of credit to cover the price of the due initial delivery for the month of
September, 1970 (Exhibit B), looking forward to the defendant corporation's duty to comply
with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the defendant
corporation thru its corporate secretary, replied that the board of directors of the said
defendant decided to impose the following conditions:
a. Delivery of white cement shall commence at the end of November, 1970;
b. Only 8,000 bags of white cement per month for only a period of three (3) months will be
delivered;
c. The price of white cement was priced at P13.30 per bag;
d. The price of white cement is subject to readjustment unilaterally on the part of the
defendant;
e. The place of delivery of white cement shall be Austurias (sic);
f. The letter of credit may be opened only with the Prudential Bank, Makati Branch;
g. Payment of white cement shall be made in advance and which payment shall be used by
the defendant as guaranty in the opening of a foreign letter of credit to cover costs and
expenses in the procurement of materials in the manufacture of white cement. (Exhibit C).
xxx xxx xxx
Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N)
were made by the plaintiff to the defendant, however, defendant refused to comply with the
same, and plaintiff by force of circumstances was constrained to cancel his agreement for
the supply of white cement with third parties, which were concluded in anticipation of, and

pursuant to the said dealership agreement.

Notwithstanding that the dealership agreement between the plaintiff and defendant was in
force and subsisting, the defendant corporation, in violation of, and with evident intention
not to be bound by the terms and conditions thereof, entered into an exclusive dealership
agreement with a certain Napoleon Co for the marketing of white cement in Mindanao
(Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2
After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of
P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and
for attorney's fees and costs. The appellate court affirmed the said decision mainly on the
following basis, and We quote:
There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership
agreement Exhibit "A", they were the President and Chairman of the Board, respectively, of
defendant-appellant corporation. Neither is the genuineness of the said agreement contested.
As a matter of fact, it appears on the face of the contract itself that both officers were duly
authorized to enter into the said agreement and signed the same for and in behalf of the
corporation. When they, therefore, entered into the said transaction they created the
impression that they were duly clothed with the authority to do so. It cannot now be said that
the disputed agreement which possesses all the essential requisites of a valid contract was
never intended to bind the corporation as this avoidance is barred by the principle of
estoppel. 3
In this petition for review, petitioner Prime White Cement Corporation made the following
assignment of errors. 4
I
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT
ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED PRINCIPLE THAT
CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE
CORPORATION ONLY WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.
II
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT
ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE, PRINCIPLE AND
RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE
CORPORATION.
III
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT

DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE AND RULE

ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE
NEW CIVIL CODE.
IV
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT
DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD OF
ACTUAL AND MORAL DAMAGES IS PROPER.
V
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS
ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH COUNTERCLAIM
THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE
ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS.
There is only one legal issue to be resolved by this Court: whether or not the "dealership
agreement" referred by the President and Chairman of the Board of petitioner corporation is
a valid and enforceable contract. We do not agree with the conclusion of the respondent
Court that it is.
Under the Corporation Law, which was then in force at the time this case arose, 5 as well as
under the present Corporation Code, all corporate powers shall be exercised by the Board of
Directors, except as otherwise provided by law. 6 Although it cannot completely abdicate its
power and responsibility to act for the juridical entity, the Board may expressly delegate
specific powers to its President or any of its officers. In the absence of such express
delegation, a contract entered into by its President, on behalf of the corporation, may still
bind the corporation if the board should ratify the same expressly or impliedly. Implied
ratification may take various forms like silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom. 7 Furthermore, even in the absence of express or implied authority by
ratification, the President as such may, as a general rule, bind the corporation by a contract
in the ordinary course of business, provided the same is reasonable under the circumstances.
8 These rules are basic, but are all general and thus quite flexible. They apply where the
President or other officer, purportedly acting for the corporation, is dealing with a third
person, i. e., a person outside the corporation.
The situation is quite different where a director or officer is dealing with his own
corporation. In the instant case respondent Te was not an ordinary stockholder; he was a
member of the Board of Directors and Auditor of the corporation as well. He was what is
often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to
his corporation. 9 In case his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As corporate managers, directors are
committed to seek the maximum amount of profits for the corporation. This trust
relationship "is not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property and hence of the
property interests of the stockholders." 10 In the case of Gokongwei v. Securities and
Exchange Commission, this Court quoted with favor from Pepper v. Litton, 11 thus:
. . . He cannot by the intervention of a corporate entity violate the ancient precept against
serving two masters. . . . He cannot utilize his inside information and his strategic position
for his own preferment. He cannot violate rules of fair play by doing indirectly through the
corporation what he could not do 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. . . . .
On the other hand, a director's contract with his corporation is not in all instances void or
voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by
the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the
Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the corporation. A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option
of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been previously
authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of twothirds (2/3) of the members in a meeting called for the purpose: Provided, That full

disclosure of the adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable under the
circumstances.
Although the old Corporation Law which governs the instant case did not contain a similar
provision, yet the cited provision substantially incorporates well-settled principles in
corporate law. 12
Granting arguendo that the "dealership agreement" involved here would be valid and
enforceable if entered into with a person other than a director or officer of the corporation,
the fact that the other party to the contract was a Director and Auditor of the petitioner
corporation changes the whole situation. First of all, We believe that the contract was neither
fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and
supply to respondent Te 20,000 bags of white cement per month, for five years starting
September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman
himself and must have known, or at least must be presumed to know, that at that time, prices
of commodities in general, and white cement in particular, were not stable and were
expected to rise. At the time of the contract, petitioner corporation had not even commenced
the manufacture of white cement, the reason why delivery was not to begin until 14 months
later. He must have known that within that period of six years, there would be a considerable
rise in the price of white cement. In fact, respondent Te's own Memorandum shows that in
September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already
P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow
for an increase in price mutually acceptable to the parties. Instead, the price was pegged at
P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of
the corporation from whom he was to buy the cement, would require such a provision. In
fact, this unfairness in the contract is also a basis which renders a contract entered into by
the President, without authority from the Board of Directors, void or voidable, although it
may have been in the ordinary course of business. We believe that the fixed price of P9.70
per bag for a period of five years was not fair and reasonable. Respondent Te, himself, when
he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee
13 and Gaudencio Galang 14 stipulated as follows:
The price of white cement shall be mutually determined by us but in no case shall the same
be less than P14.00 per bag (94 lbs).
The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang,
on October 13, 1967. A similar contract with Prudencio Lim was made on December 29,
1969. 15 All of these contracts were entered into soon after his "dealership agreement" with
petitioner corporation, and in each one of them he protected himself from any increase in the
market price of white cement. Yet, except for the contract with Henry Wee, the contracts
were for only two years from October, 1970. Why did he not protect the corporation in the

same manner when he entered into the "dealership agreement"? For that matter, why did the
President and the Chairman of the Board not do so either? As director, specially since he
was the other party in interest, respondent Te's bounden duty was to act in such manner as
not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to
Us quite clear that he was guilty of disloyalty to the corporation; he was attempting in effect,
to enrich himself at the expense of the corporation. There is no showing that the
stockholders ratified the "dealership agreement" or that they were fully aware of its
provisions. The contract was therefore not valid and this Court cannot allow him to reap the
fruits of his disloyalty.
As a result of this action which has been proven to be without legal basis, petitioner
corporation's reputation and goodwill have been prejudiced. However, there can be no award
for moral damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of
Title XVIII of the Civil Code in favor of a corporation.
In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court
dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private
respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of
P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.

PRIME WHITE CEMENT v. IAC

Corporation Code Award of Moral Damages to Corporations Self-Dealing Director
In July 1969, Zosimo Falcon and Justo Trazo entered into an agreement with Alejandro Te
whereby it was agreed that from 1970 to 1976, Te shall be the sole dealer of 20,000 bags
Prime White cement in Mindanao. Falcon was the president of Prime White Cement
Corporation (PWCC) and Trazo was a board member thereof. Te was likewise a board
member of PWCC. It was agreed that the selling price for a bag of cement shall be P9.70.
Before the bags of cement can be delivered, Te already made known to the public that he is
the sole dealer of cements in Mindanao. Various hardwares then approached him to be his
sub-dealers, hence, Te entered into various contracts with them. But then apparently, Falcon
and Trazo were not authorized by the Board of PWCC to enter into such contract.
Nevertheless, the Board wished to retain the contract but they wanted some amendment
which includes the increase of the selling price per bag to P13.30 and the decrease of the
total amount of cement bags from 20k to 8k only plus the contract shall only be effective for
a period of three months and not
Te then sued PWCC for damages. PWCC filed a counterclaim and in said counterclaim, it is
claiming for moral damages the basis of which is the claim that Tes filing of a civil case
against PWCC destroyed the companys goodwill. The lower court ruled in favor Te.
ISSUE: Whether or not the ruling of the lower court is correct.
HELD: No. Te is what can be called as a self-dealing director he deals business with the
same corporation in which he is a director. There is nothing wrong per se with that.
However, Sec. 32 provides that:
SEC. 32. Dealings of directors, trustees or officers with the corporation. - A contract of
the corporation with one or more of its directors or trustees or officers is voidable, at the
option of such corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previously
authorized by the Board of Directors.
In this particular case, the Supreme Court focused on the fact that the contract between
PWCC and Te through Falcon and Trazo was not reasonable. Hence, PWCC has all the
rights to void the contract and look for someone else, which it did. The contract is
unreasonable because of the very low selling price. The Price at that time was at least
P13.00 per bag and the original contract only stipulates P9.70. Also, the original contract
was for 6 years and theres no clause in the contract which protects PWCC from inflation.
As a director, Te in this transaction should protect the corporations interest more than his
personal interest. His failure to do so is disloyalty to the corporation.
Anent the issue of moral damages, there is no question that PWCCs goodwill and
reputation had been prejudiced due to the filing of this case. However, there can be no award
for moral damages under Article 2217 of the Civil Code in favor of a corporation.
NOTE: In a later case, Coastal Pacific Trading, Inc. vs Southern Rolling Mills Co., Inc.
(July 28, 2006), it was ruled that a corporation may be entitled to moral damages provided
that its good reputation was debased resulting in its humiliation in the business realm.

Fundamental
Changes

THIRD DIVISION

[G.R. No. 142936. April 17, 2002]

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT

CORPORATION, petitioners, vs. ANDRADA ELECTRIC & ENGINEERING
COMPANY, respondent.
DECISION
PANGANIBAN, J.:

Basic is the rule that a corporation has a legal personality distinct and separate from the
persons and entities owning it. The corporate veil may be lifted only if it has been used to shield
fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate
injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been
foreclosed and purchased at the resulting public auction by the Development Bank of the
Philippines (DBP), will not make PNB liable for the PASUMILs contractual debts to respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision[1] of the Court of
Appeals (CA) in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads as
follows:
WHEREFORE, the judgment appealed from is hereby AFFIRMED.[2]

The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized, existing, and
operating under the laws of the Philippines, with office and principal place of business at Nos. 794-812 Del
Monte [A]venue, Quezon City, while the defendant [herein petitioner] Philippine National Bank (herein
referred to as PNB), is a semi-government corporation duly organized, existing and operating under the laws
of the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas,
the other defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semigovernment corporation and the sugar arm of the PNB, with office and principal place of business at the 2nd
Floor, Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills (PASUMIL in
short), is a corporation organized, existing and operating under the 1975 laws of the Philippines, and had its
business office before 1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the
business of general construction for the repairs and/or construction of different kinds of machineries and
buildings; that on August 26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL that
were earlier foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that the
defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession
of the assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills;
that prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical
rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid
accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL
entered into a contract for the plaintiff to perform the following, to wit
(a)

Construction of one (1) power house building;

(b)

Construction of three (3) reinforced concrete foundation for three (3) units 350 KW
diesel engine generating set[s];

(c)

Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250
KW turbo generator sets;

(d)

Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel
engine generating set[s];

(e)

Installation of turbine and diesel generating sets including transformer, switchboard,

electrical wirings and pipe provided those stated units are completely supplied with
their accessories;

(f)

Relocating of 2,400 V transmission line, demolition of all existing concrete

foundation and drainage canals, excavation, and earth fillings all for the total amount
of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached
as Annex A and made an integral part of this complaint;

that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to perform
extra work, and provide electrical equipment and spare parts, such as:
(a)

Supply of electrical devices;

(b)

Extra mechanical works;

(c)

Extra fabrication works;

(d)

Supply of materials and consumable items;

(e)

Electrical shop repair;

(f)

Supply of parts and related works for turbine generator;

(g)

Supply of electrical equipment for machinery;

(h)

Supply of diesel engine parts and other related works including fabrication of parts.

that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving
an unpaid balance, as of June 27, 1973, amounting to P527,263.80, as shown in the Certification of the chief
accountant of the PNB, a machine copy of which is appended as Annex C of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to the plaintiff of
P14,000.00, in broken amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an
unpaid balance of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant
NASUDECO, failed and refused to pay the plaintiff their just, valid and demandable obligation; that the
President of the NASUDECO is also the Vice-President of the PNB, and this official holds office at the 10th
Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the outstanding obligation of the
defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the
assets of the defendant PASUMIL, and these defendants all benefited from the works, and the electrical, as
well as the engineering and repairs, performed by the plaintiff; that because of the failure and refusal of the
defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual damages in the total
amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the
professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount
of the obligation due by way of attorneys fees. Accordingly, the plaintiff prayed that judgment be rendered
against the defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit:
(1)
Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14%
from the time the obligation falls due and demandable;
(2)

Condemning the defendants to pay attorneys fees amounting to 25% of the amount claim;

(3)

Ordering the defendants to pay the costs of the suit.

The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground
that the complaint failed to state sufficient allegations to establish a cause of action against both defendants,
inasmuch as there is lack or want of privity of contract between the plaintiff and the two defendants, the PNB
and NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case law ruling in
Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20
SCRA 1214.
The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order,
that court directed the defendants to file their answer to the complaint within 15 days.

In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit:
That the complaint does not state a sufficient cause of action against the defendant NASUDECO because:
(a) NASUDECO is not x x x privy to the various electrical construction jobs being sued upon by the plaintiff
under the present complaint; (b) the taking over by NASUDECO of the assets of defendant PASUMIL was
solely for the purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial law
powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No. 311)
authorized or commanded the PNB or its subsidiary corporation, the NASUDECO, to assume the corporate
obligations of PASUMIL as that being involved in the present case; and, (d) all that was mentioned by the
said letter of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its
subsidiary corporation the NASUDECO, to make a study of, and submit [a] recommendation on the
problems concerning the same.
By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present
suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was constrained to litigate and
incur litigation expenses in the amount of P50,000.00, which plaintiff should be sentenced to pay.
Accordingly, NASUDECO prayed that the complaint be dismissed and on its counterclaim, that the plaintiff
be condemned to pay P50,000.00 in concept of attorneys fees as well as exemplary damages.
In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the
complaint states no cause of action against the defendant PNB; (2) that PNB is not a party to the contract
alleged in par. 6 of the complaint and that the alleged services rendered by the plaintiff to the defendant
PASUMIL upon which plaintiffs suit is erected, was rendered long before PNB took possession of the assets
of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of the assets of the defendant
PASUMIL under LOI 189-A was solely for the purpose of reconditioning the sugar central so that PASUMIL
may resume its operations in time for the 1974-75 milling season, and that nothing in the said LOI No. 189A, as well as in LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of PASUMIL,
let alone that for which the present action is brought; (4) that PNBs management and operation under LOI
No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter [manage], but
only to those which were foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5)
that conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank of the
Philippines (DBP) entered into a Redemption Agreement whereby DBP sold, transferred and conveyed in
favor of the PNB, by way of redemption, all its (DBP) rights and interest in and over the foreclosed real
and/or personal properties of PASUMIL, as shown in Annex C which is made an integral part of the
answer; (6) that again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated
October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in favor of NASUDECO, a
distinct and independent corporation, all its (PNB) rights and interest in and under the above Redemption
Agreement. This is shown in Annex D which is also made an integral part of the answer; [7] that as a
consequence of the said Deed of Assignment, PNB on October 21, 1975 ceased to managed and operate the
above-mentioned assets of PASUMIL, which function was now actually transferred to NASUDECO. In
other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the
execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to
assume the corporate obligations of PASUMIL, including the alleged obligation upon which this present suit
was brought; and [9] that, at most, what was granted to PNB in this respect was the authority to make a
study of and submit recommendation on the problems concerning the claims of PASUMIL creditors, under
sub-par. 5 LOI No. 311.
In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses

in this case, hence it is entitled to claim attorneys fees in the amount of at least P50,000.00. Accordingly,
PNB prayed that the complaint be dismissed; and that on its counterclaim, that the plaintiff be sentenced to
pay defendant PNB the sum of P50,000.00 as attorneys fees, aside from exemplary damages in such amount
that the court may seem just and equitable in the premises.
Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at
371 Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was thereafter declared in
default as shown in the August 7, 1981 Order issued by the Trial Court.
After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation,
Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO)
and PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the former
the following:
1.

The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed
from September 25, 1980 until fully paid;

2.

The sum of P102,724.76 as attorneys fees; and,

3.

Costs.

SO ORDERED.
Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO
Judge[3]

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and
equity for a corporation to take over and operate the business of another corporation, while
disavowing or repudiating any responsibility, obligation or liability arising therefrom.[4]
Hence, this Petition.[5]

Issues
In their Memorandum, petitioners raise the following errors for the Courts consideration:
I

The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid
corporate debts of PASUMIL, a corporation whose corporate existence has not been legally extinguished
or terminated, simply because of petitioners[] take-over of the management and operation of PASUMIL
pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311.
II

The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in
Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415.[6]
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for
the unpaid debts of PASUMIL to respondent.

This Courts Ruling

The Petition is meritorious.

Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of
the Rules of Court.[7] To this rule, however, there are some exceptions enumerated in Fuentes v.
Court of Appeals.[8] After a careful scrutiny of the records and the pleadings submitted by the
parties, we find that the lower courts misappreciated the evidence presented.[9] Overlooked by the
CA were certain relevant facts that would justify a conclusion different from that reached in the
assailed Decision.[10]
Petitioners posit that they should not be held liable for the corporate debts of PASUMIL,
because their takeover of the latters foreclosed assets did not make them assignees. On the
other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity and,
as such, jointly and severally held liable for PASUMILs unpaid obligation.
As a rule, a corporation that purchases the assets of another will not be liable for the debts of
the selling corporation, provided the former acted in good faith and paid adequate consideration for
such assets, except when any of the following circumstances is present: (1) where the purchaser
expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a
consolidation or merger of the corporations, (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in
order to escape liability for those debts.[11]

Piercing the Corporate

Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or incident to
its existence.[12] It has a personality separate and distinct from the persons composing it, as well as
from any other legal entity to which it may be related.[13] This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation.[14] For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled[15]
only when it becomes a shield for fraud, illegality or inequity committed against third persons.[16]
Hence, any application of the doctrine of piercing the corporate veil should be done with
caution.[17] A court should be mindful of the milieu where it is to be applied.[18] It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights.[19] The wrongdoing must be clearly and
convincingly established; it cannot be presumed.[20] Otherwise, an injustice that was never
unintended may result from an erroneous application.[21]
This Court has pierced the corporate veil to ward off a judgment credit,[22] to avoid inclusion of
corporate assets as part of the estate of the decedent,[23] to escape liability arising from a debt,[24]
or to perpetuate fraud and/or confuse legitimate issues[25] either to promote or to shield unfair
objectives[26] or to cover up an otherwise blatant violation of the prohibition against forum-shopping.
[27]

Only in these and similar instances may the veil be pierced and disregarded.[28]

The question of whether a corporation is a mere alter ego is one of fact.[29] Piercing the veil of
corporate fiction may be allowed only if the following elements concur: (1) control -- not mere stock
control, but complete domination -- not only of finances, but of policy and business practice in
respect to the transaction attacked, must have been such that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; (2) such control must
have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a
statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiffs
legal right; and (3) the said control and breach of duty must have proximately caused the injury or
unjust loss complained of.[30]
We believe that the absence of the foregoing elements in the present case precludes the
piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of
PASUMIL, there is no showing that their control over it warrants the disregard of corporate
personalities.[31] Second, there is no evidence that their juridical personality was used to commit a
fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter
ego, business conduit or instrumentality of another entity or person.[32] Third, respondent was not
defrauded or injured when petitioners acquired the assets of PASUMIL.[33]
Being the party that asked for the piercing of the corporate veil, respondent had the burden of
presenting clear and convincing evidence to justify the setting aside of the separate corporate
personality rule.[34] However, it utterly failed to discharge this burden;[35] it failed to establish by
competent evidence that petitioners separate corporate veil had been used to conceal fraud,

illegality or inequity.[36]
While we agree with respondents claim that the assets of the National Sugar Development
Corporation (NASUDECO) can be easily traced to PASUMIL,[37] we are not convinced that the
transfer of the latters assets to petitioners was fraudulently entered into in order to escape liability
for its debt to respondent.[38]
A careful review of the records reveals that DBP foreclosed the mortgage executed by
PASUMIL and acquired the assets as the highest bidder at the public auction conducted.[39] The
bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred
arrearages of more than 20 percent of the total outstanding obligation.[40] Thus, DBP had not only a
right, but also a duty under the law to foreclose the subject properties.[41]
Pursuant to LOI No. 189-A[42] as amended by LOI No. 311,[43] PNB acquired PASUMILs assets
that DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise tasked
to manage temporarily the operation of such assets either by itself or through a subsidiary
corporation.[44]
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant
to Section 6 of Act No. 3135.[45] These assets were later conveyed to PNB for a consideration, the
terms of which were embodied in the Redemption Agreement.[46] PNB, as successor-in-interest,
stepped into the shoes of DBP as PASUMILs creditor.[47] By way of a Deed of Assignment,[48] PNB
then transferred to NASUDECO all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,[49] we had the occasion to resolve
a similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque
Minings unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two
banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to
discharge its burden of proving bad faith on the part of Marinduque Mining to justify the piercing of
the corporate veil.
In the instant case, the CA erred in affirming the trial courts lifting of the corporate mask.[50]
The CA did not point to any fact evidencing bad faith on the part of PNB and its transferee.[51] The
corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend
crime.[52] None of the foregoing exceptions was shown to exist in the present case.[53] On the
contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot allow.

No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the unpaid obligations of
PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to
merge or consolidate. On the other hand, petitioners contend that their takeover of the operations
of PASUMIL did not involve any corporate merger or consolidation, because the latter had never
lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new entity called the
consolidated corporation. A merger, on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and continues the combined
business.[54]

The merger, however, does not become effective upon the mere agreement of the constituent
corporations.[55] Since a merger or consolidation involves fundamental changes in the corporation,
as well as in the rights of stockholders and creditors, there must be an express provision of law
authorizing them.[56] For a valid merger or consolidation, the approval by the Securities and
Exchange Commission (SEC) of the articles of merger or consolidation is required.[57] These
articles must likewise be duly approved by a majority of the respective stockholders of the
constituent corporations.[58]
In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL
and PNB. The procedure prescribed under Title IX of the Corporation Code[59] was not followed.
In fact, PASUMILs corporate existence, as correctly found by the CA, had not been legally
extinguished or terminated.[60] Further, prior to PNBs acquisition of the foreclosed assets,
PASUMIL had previously made partial payments to respondent for the formers obligation in the
amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and,
from January 5, 1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to
respondent.[61] LOI No. 11 explicitly provides that PNB shall study and submit recommendations on
the claims of PASUMILs creditors.[62] Clearly, the corporate separateness between PASUMIL and
PNB remains, despite respondents insistence to the contrary.[63]
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No
pronouncement as to costs.
SO ORDERED.
Vitug, (Acting Chairman), Sandoval-Gutierrez, and Carpio, JJ., concur.
Melo, (Chairman), J., Abroad, on official leave.

[1] Rollo, pp. 30-39. Penned by Justice Renato C. Dacudao, with the concurrence of Justices Quirino D. Abad Santos Jr.

(Division chairman) and B. A. Adefuin de la Cruz (member).

[2] Assailed Decision, p. 11; rollo, p. 39.
[3] Ibid., pp. 1-7; ibid., pp. 30-35.
[4] Id., p. 9; id., p. 37.
[5] The case was deemed submitted for decision on February 12, 2001, upon this Courts receipt of petitioners

Memorandum, signed by Atty. Salvador A. Luy. Respondents Memorandum, which was filed on February 9,
2001, was signed by Atty. Renecio R. Espiritu.
[6] Petitioners Memorandum, pp. 7-8; rollo, pp. 73-74. Original in upper case and italicized.
[7] Cordial v. Miranda, 348 SCRA 158, December 14, 2000.
[8] 268 SCRA 703, February 26, 1997.
[9] Baricuatro Jr. v. Court of Appeals, 325 SCRA 137, February 9, 2000.
[10] Ibid.
[11] Jose C. Campos Jr. and Maria Clara Lopez-Campos, The Corporation Code: Comments, Notes and Selected Cases,

Vol. 2, 1990 ed., p. 465, citing Edward J. Nell Company v. Pacific Farms, Inc., 15 SCRA 415, November 29, 1965;

West Texas Refining & Dev. Co. v. Comm. of Int. Rev., 68 F. 2d 77.
[12] 2, Corporation Code.
[13] Yu v. National Labor Relations Commission, 245 SCRA 134, June 16, 1995.
[14] Lim v. Court of Appeals, 323 SCRA 102, January 24, 2000.
[15] Francisco Motors Corporation v. Court of Appeals, 309 SCRA 72, June 25, 1999.
[16] San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, September 29, 1998.
[17] Reynoso IV v. Court of Appeals, 345 SCRA 335, November 22, 2000.
[18] Francisco Motors Corporation v. Court of Appeals, supra.
[19] Traders Royal Bank v. Court of Appeals, 269 SCRA 15, March 3, 1997.
[20] Matuguina Integrated Wood Products, Inc. v. Court of Appeals, 263 SCRA 491, October 24, 1996.
[21] Francisco Motors Corporation v. Court of Appeals, supra.
[22] Sibagat Timber Corp. v. Garcia, 216 SCRA 470, December 11, 1992.
[23] Cease v. Court of Appeals, 93 SCRA 483, October 18, 1979.
[24] Arcilla v. Court of Appeals, 215 SCRA 120, October 23, 1992.
[25] Jacinto v. Court of Appeals, 198 SCRA 211, June 6, 1991.
[26] Villanueva v. Adre, 172 SCRA 876, April 27, 1989
[27] First Philippine International Bank v. Court of Appeals, 252 SCRA 259, January 24, 1996.
[28] ARB Construction Co., Inc. v. Court of Appeals, 332 SCRA 427, May 31, 2000.
[29] Heirs of Ramon Durano Sr. v. Uy, 344 SCRA 238, October 24, 2000.
[30] Lim v. Court of Appeals, supra.
[31] Traders Royal Bank, v. Court of Appeals, supra.
[32] Umali v. Court of Appeals, 189 SCRA 529, September 13, 1990.
[33] Traders Royal Bank, v. Court of Appeals, supra.
[34] Republic v. Sandiganbayan, 346 SCRA 760, December 4, 2000.
[35] Lim v. Court of Appeals, supra.
[36] San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, supra.
[37] Respondents Memorandum, p. 6; rollo, p. 60.
[38] Edward J. Nell Company v. Pacific Farms Inc., supra, p. 417, per Concepcion, J.
[39] See Redemption Agreement, Annex C; records, p. 56.
[40] Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:

Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the
issuance of this Decree, to foreclose the collaterals 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 institutions of such rights and/or remedies

available to them under their respective contracts with their debtors, including the right to foreclosure on loans,
credits, accommodations and/or guarantees on which the arrearages are less than twenty percent (20%).
[41] Development Bank of the Philippines v. Court of Appeals, supra.
[42] Annex A; records, p. 50.
[43] Annex B; ibid., p. 52.
[44] Ibid.; id., p. 53.
[45] This article provides:

Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the
debtor, his successor in interest or any judicial creditor or judgment creditor of said debtor, or any person having a
lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem
the same at any time within the term of one year from and after the date of the sale; and such redemption shall be
governed by the provisions of sections four hundred and sixty-four to four hundred and sixty six, inclusive, of the
Code of Civil Procedure (now Rule 39, Section 28 of the 1997 Revised Rules of Civil Procedure), in so far as
these are not inconsistent with the provisions of this Act.
[46] See Redemption Agreement Annex C; records, p. 56.
[47] Litonjua v. L &R Corporation, 320 SCRA 405, December 9, 1999.
[48] Annex PNB-2; records, p. 61.
[49] GR No. 126200, August 16, 2001.
[50] Francisco Motors Corporation v. Court of Appeals, supra.
[51] Development Bank of the Philippines v. Court of Appeals, supra.
[52] Union Bank of the Philippines v. Court of Appeals, 290 SCRA 198, May 19, 1998.
[53] Vlason Enterprises Corporation v. Court of Appeals, 310 SCRA 26, July 6, 1999.
[54] Campos Jr. and Lopez-Campos, The Corporation Code: Comments, Notes and Selected Cases, supra, pp. 440-441.
[55] Associated Bank v. Court of Appeals, 291 SCRA 511, June 29, 1998.
[56] Campos Jr. and Lopez-Campos, The Corporation Code: Comments, Notes and Selected Cases, supra, p. 441.
[57] 79 Corporation Code.
[58] 77 Corporation Code.
[59] Title IX MERGER AND CONSOLIDATION

SEC. 76.
Plan of merger or consolidation. Two or more corporations may merge into a single
corporation which shall be one of the constituent corporations or may consolidate into a new single corporation
which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve
a plan of merger or consolidation setting forth the following:
1.
The names of the corporations proposing to merge or consolidate, hereinafter referred
to as the constituent corporations;
2.

The terms of the merger or consolidation and the mode of carrying the same into effect;

3.
A statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and, with respect to the consolidated corporation in case of
consolidation, all the statements required to be set forth in the articles of incorporation for corporations
organized under this Code; and

4.
Such other provisions with respect to the proposed merger or consolidation as are
deemed necessary or desirable.
SEC. 77.
Stockholders or members approval. Upon approval by majority vote of each of the board
of directors or trustees of the constituent corporations of the plan of merger or consolidation, the same shall be
submitted for approval by the stockholders or members of each of such corporations at separate corporate
meetings duly called for the purpose. Notice of such meetings shall be given to all stockholders or members of
the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by
registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the
plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the
members in the case of non-stock corporations shall be necessary for the approval of such plan. Any
dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code:
Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon
the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such amendment is
approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and
ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital
stock or of two thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any
amendment, shall be considered as the agreement of merger or consolidation.
SEC. 78. Articles of merger or consolidation. - After the approval by the stockholders or members as
required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the
constituent corporations, to be signed by the president or vice-president and certified by the secretary or
assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or in
corporations, the number of members, and

the case of non-stock

3. As to each corporation, the number of shares or members voting for and against such plan,
respectively.
SEC. 79. Effectivity of merger or consolidation. - The articles of merger or of consolidation, signed and
certified as herein above required, shall be submitted to the Securities and Exchange Commission in
quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking
institutions, building and loan associations, trust companies, insurance companies, public utilities, educational
institutions and other special corporations governed by special laws, the favorable recommendation of the
appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or
consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing
laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be
effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed
merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set
a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and
place of hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The
Commission shall thereafter proceed as provided in this Code.
SEC. 80. Effects of merger or consolidation. - The merger or consolidation shall have the following
effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall
be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be
the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation organized
under this Code;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of each of the constituent corporations; and all property,
real or personal, and all receivables due on whatever account, including subscriptions to shares and
other choses in action, and all and every other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of
the constituent corporations in the same manner as if such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of
such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The
right of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such
merger or consolidation.
[60] Associated Bank v. Court of Appeals, supra.
[61] Edward J. Nell Company v. Pacific Farms, Inc., supra.
[62] Annex B; records, p. 53.
[63] Traders Royal Bank, v. Court of Appeals, supra.

PNB, NASUDECO vs. Andrada Electric and Engineering Company (2002)

Doctrine: Basic is the rule that a corporation has a legal personality distinct and
separate from the persons and entities owning it. The corporate veil may be lifted only if
it has been used to shield fraud, defend crime, justify a wrong, defeat public
convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that the
Philippine National Bank (PNB) acquired ownership or management of some assets of
the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased
at the resulting public auction by the Development Bank of the Philippines (DBP), will
not make PNB liable for the PASUMILs contractual debts to respondent.
Facts:
1. PASUMIL (Pampanga Sugar Mills) engaged the services of Andrada Electric for
electrical rewinding, repair, the construction of a power house building,
installation of turbines, transformers, among others. Most of the services were
partially paid by PASUMIL, leaving several unpaid accounts.
2. On August 1975, PNB, a semi-government corporation, acquired the assets of
PASUMILassets that were earlier foreclosed by the DBP.
3. On September 1975, PNB organized NASUDECO (National Sugar Development
Corporation), under LOI No. 311 to take ownership and possession of the assets
and ultimately, to nationalize and consolidate its interest in other PNB controlled
sugar mills. NASUDECO is a semi-government corporation and the sugar arm of
the PNB.
4. Andrada Electric alleges that PNB and NASUDECO should be liable for
PASUMILs unpaid obligation amounting to 500K php, damages, and attorneys
fees, having owned and possessed the assets of PASUMIL.
Issue:
Whether PNB and NASUDECO may be held liable for PASUMILs liability to Andrada
Electric and Engineering Company.
Held: NO.
Basic is the rule that a corporation has a legal personality distinct and separate from the
persons and entities owning it. The corporate veil may be lifted only if it has been used
to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad
faith or perpetuate injustice.
Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier
been foreclosed and purchased at the resulting public auction by the Development Bank
of the Philippines (DBP), will not make PNB liable for the PASUMIL's contractual
debts to Andrada Electric & Engineering Company (AEEC).

Piercing the veil of corporate fiction may be allowed only if the following elements
concur: (1) control not mere stock control, but complete domination not only of
finances, but of policy and business practice in respect to the transaction attacked, must
have been such that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own; (2) such control must have been used by the
defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or
other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff's
legal right; and (3) the said control and breach of duty must have proximately caused
the injury or unjust loss complained of.
The absence of the foregoing elements in the present case precludes the piercing of the
corporate veil.
First, other than the fact that PNB and NASUDECO acquired the assets of PASUMIL,
there is no showing that their control over it warrants the disregard of corporate
personalities. Second, there is no evidence that their juridical personality was used to
commit a fraud or to do a wrong; or that the separate corporate entity was farcically
used as a mere alter ego, business conduit or instrumentality of another entityor person.
Third, AEEC was not defrauded or injured when PNB and NASUDECO acquired the
assets of PASUMIL. Hence, although the assets of NASUDECO can be easily traced to
PASUMIL, the transfer of the latter's assets to PNB and NASUDECO was not
fraudulently entered into in order to escape liability for its debt to AEEC.
There was NO merger or consolidation with respect to PASUMIL and PNB.
Respondent further claims that petitioners should be held liable for the unpaid
obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly
authorized PASUMIL and PNB to merge or consolidate (allegedly).
On the other hand, petitioners contend that their takeover of the operations of PASUMIL
did not involve any corporate merger or consolidation, because the latter had never lost
its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new entity called
the consolidated corporation. A merger, on the other hand, is a union whereby one or
more existing corporations are absorbed by another corporation that survives and
continues the combined business.
The merger, however, does not become effective upon the mere agreement of the
constituent corporations. Since a merger or consolidation involves fundamental changes
in the corporation, as well as in the rights of stockholders and creditors, there must be
an express provision of law authorizing them.
For a valid merger or consolidation, the approval by the SEC of the articles of merger or
consolidation is required. These articles must likewise be duly approved by a majority of
the respective stockholders of the constituent corporations.

In the case at bar, there is no merger or consolidation with respect to PASUMIL and
PNB. The procedure prescribed under Title IX of the Corporation Code was not
followed.
In fact, PASUMILs corporate existence, as correctly found by the CA, had not been
legally extinguished or terminated. Further, prior to PNBs acquisition of the foreclosed
assets, PASUMIL had previously made partial payments to respondent for the formers
obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL had
paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974,
another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to
respondent. LOI No. 11 explicitly provides that PNB shall study and submit
recommendations on the claims of PASUMILs creditors. Clearly, the corporate
separateness between PASUMIL and PNB remains, despite respondents insistence to
the contrary.

FIRST DIVISION
[ G.R. No. 123793, June 29, 1998 ]
ASSOCIATED BANK, PETITIONER,
VS.
COURT OF APPEALS AND LORENZO SARMIENTO JR., RESPONDENTS.
DECISION
PANGANIBAN, J.:
In a merger, does the surviving corporation have a right to enforce a contract entered into by
the absorbed company subsequent to the date of the merger agreement, but prior to the
issuance of a certificate of merger by the Securities and Exchange Commission?
The Case
This is a petition for review under Rule 45 of the Rules of Court seeking to set aside the
1
2
Decision
of the Court of Appeals
in CA-GR CV No. 26465 promulgated on January 30,
1996, which answered the above question in the negative. The challenged Decision reversed
3
and set aside the October 17, 1986 Decision
in Civil Case No. 85-32243, promulgated by
the Regional Trial Court of Manila, Branch 48, which disposed of the controversy in favor of
4
herein petitioner as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff Associated Bank. The
defendant Lorenzo Sarmiento, Jr. is ordered to pay plaintiff:
The amount of P4,689,413.63 with interest thereon at 14% per annum until fully paid;
The amount of P200,000.00 as and for attorneys fees; and
The costs of suit.
On the other hand, the Court of Appeals resolved the case in this wise:

WHEREFORE, premises considered, the decision appealed from, dated October 17, 1986 is
REVERSED and SET ASIDE and another judgment rendered DISMISSING plaintiff-appellees
complaint, docketed as Civil Case No. 85-32243. There is no pronouncement as to costs.

The Facts
The undisputed factual antecedents, as narrated by the trial court and adopted by public
respondent, are as follows: 6
x x x [O]n or about September 16, 1975 Associated Banking Corporation and Citizens Bank
and Trust Company merged to form just one banking corporation known as Associated
Citizens Bank, the surviving bank. On or about March 10, 1981, the Associated Citizens Bank
changed its corporate name to Associated Bank by virtue of the Amended Articles of
Incorporation. On September 7, 1977, the defendant executed in favor of Associated Bank a
promissory note whereby the former undertook to pay the latter the sum of P2,500,000.00
payable on or before March 6, 1978. As per said promissory note, the defendant agreed to
pay interest at 14% per annum, 3% per annum in the form of liquidated damages,
compounded interests, and attorneys fees, in case of litigation equivalent to 10% of the
amount due. The defendant, to date, still owes plaintiff bank the amount of P2,250,000.00
exclusive of interest and other charges. Despite repeated demands the defendant failed to pay
the amount due.
xxx xxx xxx
x x x [T]he defendant denied all the pertinent allegations in the complaint and alleged as
affirmative and[/]or special defenses that the complaint states no valid cause of action; that the
plaintiff is not the proper party in interest because the promissory note was executed in favor
of Citizens Bank and Trust Company; that the promissory note does not accurately reflect the
true intention and agreement of the parties; that terms and conditions of the promissory note
are onerous and must be construed against the creditor-payee bank; that several partial
payments made in the promissory note are not properly applied; that the present action is
premature; that as compulsory counterclaim the defendant prays for attorneys fees, moral
damages and expenses of litigation.
On May 22, 1986, the defendant was declared as if in default for failure to appear at the PreTrial Conference despite due notice.
A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22, 1986 was
filed by defendants counsel which was denied by the Court in [an] order dated September 16,
1986 and the plaintiff was allowed to present its evidence before the Court ex-parte on
October 16, 1986.
At the hearing before the Court ex-parte, Esteban C. Ocampo testified that x x x he is an
accountant of the Loans and Discount Department of the plaintiff bank; that as such, he
supervises the accounting section of the bank, he counterchecks all the transactions that
transpired during the day and is responsible for all the accounts and records and other things
that may[ ]be assigned to the Loans and Discount Department; that he knows the [D]efendant
Lorenzo Sarmiento, Jr. because he has an outstanding loan with them as per their records;
that Lorenzo Sarmiento, Jr. executed a promissory note No. TL-2649-77 dated September 7,
Page 2

1977 in the amount of P2,500,000.00 (Exhibit A); that Associated Banking Corporation and the
Citizens Bank and Trust Company merged to form one banking corporation known as the
Associated Citizens Bank and is now known as Associated Bank by virtue of its Amended
Articles of Incorporation; that there were partial payments made but not full; that the defendant
has not paid his obligation as evidenced by the latest statement of account (Exh. B); that as
per statement of account the outstanding obligation of the defendant is P5,689,413.63 less
P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a demand letter dated June 6, 1985 was
sent by the bank thru its counsel (Exh. C) which was received by the defendant on November
12, 1985 (Exh. C, C-1, C-2, C-3); that the defendant paid only P1,000,000.00 which is
reflected in the Exhibit C.
Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento
to pay the bank his remaining balance plus interests and attorneys fees. In his appeal,
7
Sarmiento assigned to the trial court several errors, namely:
I The [trial court] erred in denying appellants motion to dismiss appellee banks complaint on
the ground of lack of cause of action and for being barred by prescription and laches.
II The same lower court erred in admitting plaintiff-appellee banks amended complaint while
defendant-appellants motion to dismiss appellee banks original complaint and using/availing
[itself of] the new additional allegations as bases in denial of said appellants motion and in the
interpretation and application of the agreement of merger and Section 80 of BP Blg. 68,
Corporation Code of the Philippines.
III The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in default
orders dated May 22, 1986 and September 16, 1986 and in not reconsidering the same upon
technical grounds which in effect subvert the best primordial interest of substantial justice and
equity.
IV The court a quo erred in issuing the orders dated May 22, 1986 and September 16, 1986
declaring appellant as if in default due to non-appearance of appellants attending counsel
who had resigned from the law firm and while the parties [were] negotiating for settlement of
the case and after a one million peso payment had in fact been paid to appellee bank for
appellants account at the start of such negotiation on February 18, 1986 as act of earnest
desire to settle the obligation in good faith by the interested parties.
V The lower court erred in according credence to appellee banks Exhibit B statement of
account which had been merely requested by its counsel during the trial and bearing date of
September 30, 1986.
VI The lower court erred in accepting and giving credence to appellee banks 27-year-old
witness Esteban C. Ocampo as of the date he testified on October 16, 1986, and therefore, he
was merely an eighteen-year-old minor when appellant supposedly incurred the foisted
obligation under the subject PN No. TL-2649-77 dated September 7, 1977, Exhibit A of
appellee bank.
Page 3

VII The [trial court] erred in adopting appellee banks Exhibit B dated September 30, 1986 in
its decision given in open court on October 17, 1986 which exacted eighteen percent (18%)
per annum on the foisted principal amount of P2.5 million when the subject PN, Exhibit A,
stipulated only fourteen percent (14%) per annum and which was actually prayed for in
appellee banks original and amended complaints.
VIII The appealed decision of the lower court erred in not considering at all appellants
affirmative defenses that (1) the subject PN No. TL-2649-77 for P2.5 million dated September
7, 1977, is merely an accommodation pour autrui bereft of any actual consideration to
appellant himself and (2) the subject PN is a contract of adhesion, hence, [it] needs [to] be
strictly construed against appellee bank -- assuming for granted that it has the right to enforce
and seek collection thereof.
IX The lower court should have at least allowed appellant the opportunity to present
countervailing evidence considering the huge amounts claimed by appellee bank (principal
sum of P2.5 million which including accrued interests, penalties and cost of litigation totaled
P4,689,413.63) and appellants affirmative defenses -- pursuant to substantial justice and
equity.
The appellate court, however, found no need to tackle all the assigned errors and limited itself
to the question of whether [herein petitioner had] established or proven a cause of action
against [herein private respondent]. Accordingly, Respondent Court held that the Associated
Bank had no cause of action against Lorenzo Sarmiento Jr., since said bank was not privy to
the promissory note executed by Sarmiento in favor of Citizens Bank and Trust Company
(CBTC). The court ruled that the earlier merger between the two banks could not have vested
Associated Bank with any interest arising from the promissory note executed in favor of CBTC
after such merger.
Thus, as earlier stated, Respondent Court set aside the decision of the trial court and
8
dismissed the complaint. Petitioner now comes to us for a reversal of this ruling.
Issues
In its petition, petitioner cites the following reasons:

I The Court of Appeals erred in reversing the decision of the trial court and in declaring that
petitioner has no cause of action against respondent over the promissory note.
II The Court of Appeals also erred in declaring that, since the promissory note was executed in
favor of Citizens Bank and Trust Company two years after the merger between Associated
Banking Corporation and Citizens Bank and Trust Company, respondent is not liable to
petitioner because there is no privity of contract between respondent and Associated Bank.
III The Court of Appeals erred when it ruled that petitioner, despite the merger between
petitioner and Citizens Bank and Trust Company, is not a real party in interest insofar as the
Page 4

promissory note executed in favor of the merger.

In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may
enforce the promissory note made by private respondent in favor of CBTC, the absorbed
company, after the merger agreement had been signed.
The Courts Ruling
The petition is impressed with merit.
The Main Issue:
Associated Bank Assumed
All Rights of CBTC
Ordinarily, in the merger of two or more existing corporations, one of the combining
corporations survives and continues the combined business, while the rest are dissolved and
10
all their rights, properties and liabilities are acquired by the surviving corporation.
Although
there is a dissolution of the absorbed corporations, there is no winding up of their affairs or
liquidation of their assets, because the surviving corporation automatically acquires all their
11
rights, privileges and powers, as well as their liabilities.
The merger, however, does not become effective upon the mere agreement of the constituent
corporations. The procedure to be followed is prescribed under the Corporation Code. 12
Section 79 of said Code requires the approval by the Securities and Exchange Commission
(SEC) of the articles of merger which, in turn, must have been duly approved by a majority of
the respective stockholders of the constituent corporations. The same provision further states
that the merger shall be effective only upon the issuance by the SEC of a certificate of merger.
The effectivity date of the merger is crucial for determining when the merged or absorbed
corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass
on to the surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of
13
Merger,
which Associated Banking Corporation (ABC) and Citizens Bank and Trust
Company (CBTC) entered into, provided that its effectivity shall, for all intents and purposes,
be the date when the necessary papers to carry out this [m]erger shall have been approved by
14
the Securities and Exchange Commission.
As to the transfer of the properties of CBTC to
ABC, the agreement provides:
10. Upon effective date of the Merger, all rights, privileges, powers, immunities, franchises,
assets and property of [CBTC], whether real, personal or mixed, and including [CBTCs]
goodwill and tradename, and all debts due to [CBTC] on whatever act, and all other things in
action belonging to [CBTC] as of the effective date of the [m]erger shall be vested in [ABC],
the SURVIVING BANK, without need of further act or deed, unless by express requirements of
Page 5

law or of a government agency, any separate or specific deed of conveyance to legally effect
the transfer or assignment of any kind of property [or] asset is required, in which case such
document or deed shall be executed accordingly; and all property, rights, privileges, powers,
immunities, franchises and all appointments, designations and nominations, and all other
rights and interests of [CBTC] as trustee, executor, administrator, registrar of stocks and
bonds, guardian of estates, assignee, receiver, trustee of estates of persons mentally ill and in
every other fiduciary capacity, and all and every other interest of [CBTC] shall thereafter be
effectually the property of [ABC] as they were of [CBTC], and title to any real estate, whether
by deed or otherwise, vested in [CBTC] shall not revert or be in any way impaired by reason
thereof; provided, however, that all rights of creditors and all liens upon any property of [CBTC]
shall be preserved and unimpaired and all debts, liabilities, obligations, duties and
undertakings of [CBTC], whether contractual or otherwise, expressed or implied, actual or
contingent, shall henceforth attach to [ABC] which shall be responsible therefor and may be
enforced against [ABC] to the same extent as if the same debts, liabilities, obligations, duties
and undertakings have been originally incurred or contracted by [ABC], subject, however, to all
rights, privileges, defenses, set-offs and counterclaims which [CBTC] has or might have and
15
which shall pertain to [ABC].
The records do not show when the SEC approved the merger. Private respondents theory is
that it took effect on the date of the execution of the agreement itself, which was September
16, 1975. Private respondent contends that, since he issued the promissory note to CBTC on
September 7, 1977 -- two years after the merger agreement had been executed -- CBTC
could not have conveyed or transferred to petitioner its interest in the said note, which was not
yet in existence at the time of the merger. Therefore, petitioner, the surviving bank, has no
right to enforce the promissory note on private respondent; such right properly pertains only to
CBTC.
Assuming that the effectivity date of the merger was the date of its execution, we still cannot
agree that petitioner no longer has any interest in the promissory note. A closer perusal of the
merger agreement leads to a different conclusion. The provision quoted earlier has this other
clause:
Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or
other papers of whatever kind or nature and wherever found shall be deemed for all intents
and purposes, references to [ABC], the SURVIVING BANK, as if such references were direct
16
references to [ABC]. x x x
(Underscoring supplied)
Thus, the fact that the promissory note was executed after the effectivity date of the merger
does not militate against petitioner. The agreement itself clearly provides that all contracts -irrespective of the date of execution -- entered into in the name of CBTC shall be understood
as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier
aforequoted provision, the latter clause no longer specifically refers only to contracts existing
at the time of the merger, no distinction should be made. The clause must have been
deliberately included in the agreement in order to protect the interests of the combining banks;
Page 6

specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading
fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the reference to
CBTC in the note shall be construed, under the very provisions of the merger agreement, as a
reference to petitioner bank, as if such reference [was a] direct reference to the latter for all
intents and purposes.
No other construction can be given to the unequivocal stipulation. Being clear, plain and free
of ambiguity, the provision must be given its literal meaning 17 and applied without a
convoluted interpretation. Verba legis non est recedendum. 18
In light of the foregoing, the Court holds that petitioner has a valid cause of action against
private respondent. Clearly, the failure of private respondent to honor his obligation under the
promissory note constitutes a violation of petitioners right to collect the proceeds of the loan it
extended to the former.
Secondary Issues:
Prescription, Laches, Contract
Pour Autrui, Lack of Consideration
No Prescription or Laches
Private respondents claim that the action has prescribed, pursuant to Article 1149 of the Civil
Code, is legally untenable. Petitioners suit for collection of a sum of money was based on a
written contract and prescribes after ten years from the time its right of action arose. 19
Sarmientos obligation under the promissory note became due and demandable on March 6,
1978. Petitioners complaint was instituted on August 22, 1985, before the lapse of the tenyear prescriptive period. Definitely, petitioner still had every right to commence suit against the
payor/obligor, the private respondent herein.
Neither is petitioners action barred by laches. The principle of laches is a creation of equity,
which is applied not to penalize neglect or failure to assert a right within a reasonable time, but
rather to avoid recognizing a right when to do so would result in a clearly inequitable situation
20
or in an injustice. 21 To require private respondent to pay the remaining balance of his
loan is certainly not inequitable or unjust. What would be manifestly unjust and inequitable is
his contention that CBTC is the proper party to proceed against him despite the fact, which he
himself asserts, that CBTCs corporate personality has been dissolved by virtue of its merger
with petitioner. To hold that no payee/obligee exists and to let private respondent enjoy the
fruits of his loan without liability is surely most unfair and unconscionable, amounting to unjust
enrichment at the expense of petitioner. Besides, this Court has held that the doctrine of
laches is inapplicable where the claim was filed within the prescriptive period set forth under
the law. 22
Page 7

No Contract
Pour Autrui
Private respondent, while not denying that he executed the promissory note in the amount of
P2,500,000 in favor of CBTC, offers the alternative defense that said note was a contract pour
autrui.
A stipulation pour autrui is one in favor of a third person who may demand its fulfillment,
provided he communicated his acceptance to the obligor before its revocation. An incidental
benefit or interest, which another person gains, is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person. 23
24

Florentino vs. Encarnacion Sr.

enumerates the requisites for such contract: (1) the
stipulation in favor of a third person must be a part of the contract, and not the contract itself;
(2) the favorable stipulation should not be conditioned or compensated by any kind of
obligation; and (3) neither of the contracting parties bears the legal representation or
authorization of the third party. The fairest test in determining whether the third persons
interest in a contract is a stipulation pour autrui or merely an incidental interest is to examine
25
the intention of the parties as disclosed by their contract.
We carefully and thoroughly perused the promissory note, but found no stipulation at all that
would even resemble a provision in consideration of a third person. The instrument itself does
not disclose the purpose of the loan contract. It merely lays down the terms of payment and
the penalties incurred for failure to pay upon maturity. It is patently devoid of any indication
that a benefit or interest was thereby created in favor of a person other than the contracting
parties. In fact, in no part of the instrument is there any mention of a third party at all. Except
for his barefaced statement, no evidence was proffered by private respondent to support his
argument. Accordingly, his contention cannot be sustained. At any rate, if indeed the loan
actually benefited a third person who undertook to repay the bank, private respondent could
26
have availed himself of the legal remedy of a third-party complaint.
That he made no effort
to implead such third person proves the hollowness of his arguments.
Consideration
Private respondent also claims that he received no consideration for the promissory note and,
in support thereof, cites petitioners failure to submit any proof of his loan application and of
his actual receipt of the amount loaned. These arguments deserve no merit. Res ipsa loquitur.
The instrument, bearing the signature of private respondent, speaks for itself. Respondent
Sarmiento has not questioned the genuineness and due execution thereof. No further proof is
necessary to show that he undertook to pay P2,500,000, plus interest, to petitioner bank on or
before March 6, 1978. This he failed to do, as testified to by petitioners accountant. The latter
presented before the trial court private respondents statement of account 27 as of September
30, 1986, showing an outstanding balance of P4,689,413.63 after deducting P1,000,000.00
Page 8

paid seven months earlier. Furthermore, such partial payment is equivalent to an express
acknowledgment of his obligation. Private respondent can no longer backtrack and deny his
liability to petitioner bank. A person cannot accept and reject the same instrument. 28
WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the
Decision of RTC-Manila, Branch 48, in Civil Case No. 26465 is hereby REINSTATED.
SO ORDERED.
Davide Jr. (Chairman), Bellosillo, Vitug, and Quisumbing, JJ., concur.
1

Rollo, pp. 38-48.

Eighth Division, composed of JJ. Eduardo G. Montenegro, ponente; Jaime M. Lantin,

chairman; and Jose C. de la Rama, concurring.
3

Penned by Judge Bonifacio A. Cacdac Jr.

RTC Decision, p. 2; records, p. 129.

Assailed Decision, p. 11; rollo, p. 48.

RTC Decision, pp. 1-2; assailed Decision, pp. 2-3; Petition for Review, pp. 1-4.

CA rollo, pp. 35-38. (Upper case in the original.)

This case was deemed submitted for decision upon receipt by this Court of private
respondents Memorandum on October 10, 1997.
9

Petition, p. 5; rollo, p. 24. (Upper case in the original.)

10

Jose C. Campos Jr. and Maria Clara Lopez-Campos, The Corporation Code: Comments,
Notes and Selected Cases, Vol. 2, 1990 ed., p. 441; 80, Corporation Code.
11

Campos and Campos, ibid., p. 447.

12

Pertinent provisions of the Corporation Code read:

SEC. 76. Plan of merger or consolidation. -- Two or more corporations may merge into a
single corporation which shall be one of the constituent corporations or may consolidate into a
new single corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger of consolidation,
shall approve a plan of merger or consolidation setting forth the following:
The names of the corporations proposing to merge or consolidate, hereinafter referred to as
the constituent corporations;
Page 9

The terms of the merger or consolidation and the mode of carrying the same into effect;
A statement of the changes, if any, in the articles of incorporation of the surviving corporation
in case of merger; and, with respect to the consolidated corporation in case of consolidation,
all the statements required to be set forth in the articles of incorporation for corporations
organized under this Code; and
Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable.
SEC. 77. Stockholders or members approval. -- Upon approval by a majority vote of each of
the board of directors or trustees of the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the stockholders or members of
each of such corporations at separate corporate meetings duly called for the purpose. Notice
of such meetings shall be given to all stockholders or members of the respective corporations,
at least two (2) weeks prior to the date of the meeting, either personally or by registered mail.
Said notice shall state the purpose of the meeting and shall include a copy or a summary of
the plan of merger or consolidation, as the case may be. The affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in
case of stock corporations or at least two thirds (2/3) of the members in case of non-stock
corporations, shall be necessary for the approval of such plan. Any dissenting stockholder in
stock corporations may exercise his appraisal right in accordance with the Code: Provided,
That if after the approval by the stockholders of such plan, the board of directors should
decide to abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided such
amendment is approved by majority vote of the respective boards of directors or trustees of all
the constituent corporations and ratified by the affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members of
each of the constituent corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
SEC. 78. Articles of merger or consolidation. -- After the approval by the stockholders or
members as required by the preceding section, articles of merger or articles of consolidation
shall be executed by each of the constituent corporations, to be signed by the president or
vice-president and certified by the secretary or assistant secretary of each corporation setting
forth: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the
number of shares outstanding, or in the case of non-stock corporations, the number of
members; and 3. As to each corporation, the number of shares or members voting for and
against such plan, respectively.
SEC. 79. Securities and Exchange Commissions approval and effectivity of merger or
Page 10

consolidation. -- The articles of merger or of consolidation, signed and certified as hereinabove

required, shall be submitted to the Securities and Exchange Commission in quadruplicate for
its approval: Provided, That in the case of merger or consolidation of banks or banking
institutions, building and loan associations, trust companies, insurance companies, public
utilities, educational institutions and other special corporations governed by special laws, the
favorable recommendation of the appropriate government agency shall first be obtained.
Where the commission is satisfied that the merger or consolidation of the corporations
concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a
certificate of merger or of consolidation, as the case may be, at which time the merger or
consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code
or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be
heard. Written notice of the date, time and place of said hearing shall be given to each
constituent corporations at least two (2) weeks before said hearing. The Commission shall
thereafter proceed as provided in this Code.
SEC. 80. Effects of merger or consolidation. -- The merger or consolidation, as provided in the
preceding sections, shall have the following effects:
The constituent corporations shall become a single corporation which, in case of merger, shall
be the surviving corporation designated in the plan of merger; and, in case of consolidation,
shall be the consolidated corporation designated in the plan of consolidation;
The separate existence of the constituent corporations shall cease, except that of the surviving
or the consolidated corporation;
The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a corporation
organized under this Code;
The surviving or the consolidated corporation shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of each of the constituent corporations; and all
property, real or personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be taken and deemed to be
transferred to and vested in such surviving or consolidated corporation without further act or
deed; and
The surviving or consolidated corporation shall be responsible and liable for all the liabilities
and obligations of each of the constituent corporations in the same manner as if such surviving
or consolidated corporation had itself incurred such liabilities or obligations; and any claim,
Page 11

action or proceeding pending by or against any of such constituent corporations may be

prosecuted by or against the surviving or consolidated corporation, as the case may be. The
rights of creditors or any lien upon the property of any of such constituent corporation shall not
be impaired by such merger or consolidation.
13

Records, pp. 33-40.

14

No. 14, p. 8, Agreement of Merger; records, p. 40.

15

Agreement of Merger, pp. 5-6; records, pp. 37-38.

16

Ibid., pp. 6-7; records, pp. 38-39.

17

Art. 1370, Civil Code.

18

Ruben E. Agpalo, Statutory Construction, 1990 ed., p. 94.

19

Art. 1144, Civil Code.

20

Catholic Bishop of Balanga vs. Court of Appeals, 264 SCRA 181, 193, November 14, 1996.

21

Olizon vs. Court of Appeals, 236 SCRA 148, 157, September 1, 1994.

22

Chavez vs. Bonto-Perez, 242 SCRA 73, 80-81, March 1, 1995.

23

Art. 1311, par. 2, Civil Code.

24

79 SCRA 192, 201, September 30, 1977, per Guerrero, J.

25

Ibid., p. 202.

26

11, Rule 6, Rules of Court.

27

Exh. B; records, p. 130.

28

Ducasse v. American Yellow Taxi Operators, Inc., 224 App. Div. 516, 231 NY Supp. 51
(1928), citing Chipman v. Montgomery, 63 NY 211; in Campos and Campos, supra.

Page 12

ASSOCIATED BANK vs. CA and LORENZO SARMIENTO JR

G.R. No. 123793 June 29, 1998

FACTS: On or about September 16, 1975 Associated Banking Corporation and Citizens Bank
and Trust Company merged to form just one banking corporation known as Associated Citizens
Bank, the surviving bank. On or about March 10, 1981, the Associated Citizens Bank changed
its corporate name to Associated Bank by virtue of the Amended Articles of Incorporation. On
September 7, 1977, defendant LORENZO SARMIENTO JR., executed in favor of Associated
Bank a promissory note whereby the former undertook to pay the latter the sum of
P2,500,000.00 payable on or before March 6, 1978. As per said promissory note, the defendant
agreed to pay interest at 14% per annum, 3% per annum in the form of liquidated damages,
compounded interests, and attorney's fees, in case of litigation equivalent to 10% of the amount
due. The defendant, to date, still owes plaintiff bank the amount of P2,250,000.00 exclusive of
interest and other charges. Despite repeated demands the defendant failed to pay the amount
due. However defendant denied all the allegations of petitioner and alleged as affirmative and/or
special defenses, inter alia, that the complaint states no valid cause of action and the plaintiff is
not the proper party in interest because the promissory note was executed in favor of Citizens
Bank and Trust Company. On October 17, 1986, the RTC ordered Respondent Sarmiento to
pay the bank his remaining balance plus interests and attorney's fees. On appeal, Respondent
Court held that the Associated Bank had no cause of action against Lorenzo Sarmiento Jr.,
since said bank was not privy to the promissory note executed by Sarmiento in favor of Citizens
Bank and Trust Company. The court ruled that the earlier merger between the two banks could
not have vested Associated Bank with any interest arising from the promissory note executed in
favor of CBTC after such merger. Hence the instant petition for review.
ISSUE: Whether or not Associated Bank, the surviving corporation, may enforce the promissory
note made by private respondent in favor of CBTC, the absorbed company, after the merger
agreement had been signed.
RULING: Ordinarily, in the merger of two or more existing corporations, one of the combining
corporations survives and continues the combined business, while the rest are dissolved and all
their rights, properties and liabilities are acquired by the surviving corporation. Although there is
a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of
their assets, because the surviving corporation automatically acquires all their rights, privileges
and powers, as well as their liabilities.
The merger, however, does not become effective upon the mere agreement of the constituent
corporations. The procedure to be followed is prescribed under the Corporation Code. Section
79 of said Code requires the approval by the Securities and Exchange Commission of the
articles of merger which, in turn, must have been duly approved by a majority of the respective
stockholders of the constituent corporations. The same provision further states that the merger
shall be effective only upon the issuance by the SEC of a certificate of merger. The effectivity
date of the merger is crucial for determining when the merged or absorbed corporation ceases
to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving
corporation.

Assuming that the effectivity date of the merger was the date of its execution, we still cannot
agree that petitioner no longer has any interest in the promissory note. A closer perusal of the
merger agreement leads to a different conclusion. The provision of the merger agreement has
this clause:
Upon the effective date of the merger, all references to [CBTC] in any deed, documents,
or other papers of whatever kind or nature and wherever found shall be deemed for all
intents and purposes, references to [ABC], the SURVIVING BANK, as if such references
were direct references to [ABC]. . . (Emphasis supplied)
Thus, the fact that the promissory note was executed after the effectivity date of the merger
does not militate against petitioner. The agreement itself clearly provides that all contracts
irrespective of the date of execution entered into in the name of CBTC shall be understood
as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier
aforequoted provision, the latter clause no longer specifically refers only to contracts existing at
the time of the merger, no distinction should be made. The clause must have been deliberately
included in the agreement in order to protect the interests of the combining banks; specifically,
to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a
due obligation.
Thus, although the subject promissory note names CBTC as the payee, the reference to CBTC
in the note shall be construed, under the very provisions of the merger agreement, as a
reference to petitioner bank, "as if such reference [was a] direct reference to" the latter "for all
intents and purposes."
No other construction can be given to the unequivocal stipulation. Being clear, plain and free of
ambiguity,
the
provision
must
be
given
its
literal
meaning and applied without a convoluted interpretation. Verba lelegis non est recedendum.
In light of the foregoing, the Court holds that petitioner has a valid cause of action against
private respondent. Clearly, the failure of private respondent to honor his obligation under the
promissory note constitutes a violation of petitioner's right to collect the proceeds of the loan it
extended to the former.

EN BANC
[ G.R. No. 97237, August 16, 1991 ]
FILIPINAS PORT SERVICES, INC., PETITIONER,
VS.
NATIONAL LABOR RELATIONS COMMISSION, PATERNO LIBOON, SEGUNDO AQUINO,
JOVITO BULAY, DOMINGO NAVOA, DELFIN BERMEJO, CELEDONIO MANGUBAT,
ALBERTO MAHINAY, SR., TEODULO SILAYA, SANTOS ARGUIDO, JUANITO LABANON,
FLORENCIO MIRANTES, LUCIO BARRERA, VICENTE GILDORE, LEON FUENTES,
CASIMIRO MAGSAYO, FERNANDO MORIENTE, MATIAS ORBITA, SR., FRANCISCO
PARDILLO, ILDEFONSO JUMILLA AND JOSE CANTONJOS, RESPONDENTS.
DECISION
PARAS, J.:
This is a petition for clarification with prayer for preliminary injunction filed by Filipinas Port
Services, Inc. (hereinafter referred to as Filport) seeking to clarify two conflicting decisions
rendered by this Court in cases involving identical or similar parties, facts and issues.
The antecedent facts of the case are as follows:
In view of the government policy which ordained that cargo handling operations should be
limited to only one cargo handling operator-contractor for every port (under Customs
Memorandum Order 28075, later on superseded by General Ports Regulations of the
Philippine Ports Authority) the different stevedoring and arrastre corporations operating in the
Port of Davao were integrated into a single dockhandlers corporation, known as the Davao
Dockhandlers, Inc., which was registered with the Securities and Exchange Commission on
July 13, 1976.
Due to the late receipt of its permit to operate at the Port of Davao from the Bureau of
Customs, Davao Dockhandlers, Inc., which was subsequently renamed Filport, actually
started its operation on February 16, 1977.
As a result of the merger, Section 118, Article X of the General Guidelines on The Integration
of Stevedoring/Arrastre Services (PPA Administrative Order No. 13-77) mandated Filport to
draw its personnel complements from the merging operators, as follows:
"Sec. 118. Absorption of labor - Subject to the provisions of the immediate preceding section,

and consistent with the actual operational requirements of the new management, all labor
force together with its necessary personnel complement, of the merging operators shall be
absorbed by the merged or integrated organization to constitute its labor force." (Emphasis
supplied)
Thus, Filport's labor force was mostly taken from the integrating corporations, among them the
private respondents.
On February 4, 1987, private respondent Paterno Liboon and 18 others filed a complaint with
the Department of Labor and Employment Regional Office in Davao City, alleging that they
were employees of Filport since 1955 through 1958 up to December 31, 1986 when they
retired; that they were paid retirement benefits computed from February 16, 1977 up to
December 31, 1986 only; and that taking into consideration their continuous length of service,
they are entitled to be paid retirement benefits differentials from the time they started working
with the predecessors of Filport up to the time they were absorbed by the latter in 1977 (p. 15,
Rollo).
Finding Filport a mere alter ego of the different integrating corporations, the Labor Arbiter held
Filport liable for retirement benefits due private respondents for services rendered prior to
February 16, 1977. Said decision was affirmed by the NLRC on appeal.
Filport filed a petition for certiorari with the Supreme Court docketed as G.R. No. 85704,
claiming that it is an entirely new corporation with a separate juridical personality from the
integrating corporations; and that Filport is not a successoremployer, liable for the obligations
of private respondents' previous employers, as shown clearly in the memorandum dated
November 21, 1978 of PPA Assistant General Manager Maximo S. Dumlao, Jr., to wit:
"21 November 1978
"MEMORANDUM
"TO : The Officer-in-Charge
PMU Davao
"FROM : The ACM for Operations
"SUBJECT : Clarification of Sec. 116 of PPA Administrative Order No. 13-77 of New
Organization 's Liability
"In reply to your telegram dated November 16, 1978, Sec. 116 of PPA Administrative Order
#13-77 is hereby quoted for clarification:
"New Organization's Liability - The integrated cargo-handling organization shall be absolutely
Page 2

free from any liability or obligation of the merging operators who shall continue to be
individually liable for their respective liabilities or obligations, if any." (underscoring supplied) x
xx
"The new organization's liability shall be the payment of salaries, benefits and all other money
due the employee as a result of his employment, starting on the date of his service in the
newly integrated organization.
"In answer to your query, therefore, the absorption of an employee into a newly integrated
organization does not include the carry over of his length of service.
s/t MAXIMO S. DUMLAO, JR.
Asst. General Manager"
While G.R. No. 85704 was still pending decision by this Court, Josefino Silva, another
employee of Filport, instituted a suit against Filport and Damasticor (one of the defunct
stevedoring firms) claiming for retirement benefits for services rendered prior to February 19,
1977. The labor arbiter found for Josefino Silva and said decision was affirmed by the NLRC.
Filport filed a petition for certiorari with the Supreme Court docketed as G.R. No. 86026. On
August 31, 1989, this Court, through the First Division, rendered a decision, holding that:
"Petitioner (Filport) cannot be held liable for the payment of the retirement pay of private
respondent (Josefino Silva) while in the employ of DAMASTICOR x x x who is held
responsible for the same as the labor contract is in personam and cannot be passed on to the
petitioner." (Rollo, p. 7)
In so ruling, the First Division relied heavily on the case of Fernando v. Angat Labor Union (5
SCRA 248) where it was held that unless expressly assumed, labor contracts are not
enforceable against a transferee of an enterprise, labor contracts being in personam.
Per entry of judgment, the aforesaid decision became final and executory on November 24,
1989 (p. 87, Rollo).
On September 3, 1990, however, this Court, through the Second Division, dismissed the
petition in G.R. No. 85704 "for failure to sufficiently show that the questioned judgment is
tainted with grave abuse of discretion."
Per entry of judgment, said resolution became final and executory on December 4, 1990 (p.
108, Rollo).
Hence, the instant petition for clarification with prayer for preliminary injunction to enjoin the
respondents from enforcing the decision in G.R. No. 85704 until further orders of this Court.

Page 3

We see no reason to disturb the findings of fact of the public respondent, supported as they
are by substantial evidence in the light of the well established principle that findings of
administrative agencies which have acquired expertise because their jurisdiction is confined to
specific matters are generally accorded not only respect but at times even finality, and that
judicial review by this Court on labor cases does not go so far as to evaluate the sufficiency of
the evidence upon which the Labor Arbiter and the NLRC based their determinations but are
limited to issues of jurisdiction or grave abuse of discretion. (National Federation of Labor
Union v. Ople, 143 SCRA 129).
In the case filed by private respondent Paterno Liboon et al against Filport, the findings of the
NLRC in its November 27, 1987 decision are categorical:
"In resolving the issues, the Labor Arbiter concludes as follows:
"The eventual incorporation of the arrastre/stevedoring firms and their subsequent registration
with the Securities and Exchange Commission on July 13, 1975 brought to the fore the
interlocking ownership of the new corporation.
xxxxxxxxx
"Subsequent amendment of its Articles of Incorporation highlighted by the renaming of the
Davao Dockhandlers, Inc. to Filipinas Port Services, Inc. did not diminish the fact that the
ownership and constituency of the new corporation are basically identical with the previous
owners.
"It is, therefore, the considered view of this Office that respondent Filport being a mere alter
ego of the different merging companies has at the very least, the obligation not only to absorb
into its employ workers of the dissolved companies, but also to absorb the length of service
earned by the absorbed employees from their former employers.
xxxxxxxxx
"We are in full accord with, and hereby sustain, the findings and conclusions of the Labor
Arbiter. Under the circumstances, respondent-appellant is a successoremployer. As a
successor entity, it is answerable to the lawful obligations of the predecessor employers,
herein integrees. This Commission has so held under the principle of 'substitution' that the
successor firm is liable to (sic) the obligations of the predecessor employer, notwithstanding
the change in management or even personality, of the new contracting employer." (Lakas Ng
Manggagawang Filipino [LAKAS] v. Tarlac Electrical Cooperative, Inc. et al., NLRC Case No.
RB III-157-75, January 28, 1978, En Banc). x x x The Supreme Court earlier upheld the
"Substitutionary" doctrine in the case of Benguet Consolidated, Inc. vs. BOI Employees &
Workers Union, (G.R. L-24711, April 30, 1968, 23 SCRA 465). (pp. 35 & 37, Rollo)
Said findings were reiterated in the case filed by Josefino Silva against Filport where the
Page 4

NLRC, in its decision dated January 19, 1988, further ruled that:
"x x x As We have ruled in the similar case involving herein appellant, the latter is deemed a
survivor entity because it continued in an essentially unchanged manner the business
operators of the predecessor arrastre and port service operators, hiring substantially the same
workers, including herein appellee, of the integree predecessors, using substantially the same
facilities, with similar working conditions and line of business, and employing the same
corporate control, although under a new management and corporate personality." (G.R. No.
86026, p. 35, Rollo)
Thus, granting that Filport had no contract whatsoever with the private respondents regarding
the services rendered by them prior to February 16, 1977, by the fact of the merger, a
succession of employment rights and obligations had occurred between Filport and the private
respondents. The law enforced at the time of the merger was Section 3 of Act No. 2772 which
took effect on March 6, 1918. Said law provides:
"Sec. 3. Upon the perfecting, as aforesaid, of a consolidation made in the manner herein
provided, the several corporations parties thereto shall be deemed and taken as one
corporation, upon the terms and conditions set forth in said agreement; or, upon the perfecting
of a merger, the corporation merged shall be deemed and taken as absorbed by the other
corporation and incorporated in it; and all and singular rights, privileges, and franchises of
each of said corporations, and all property, real and personal, and all debts due on whatever
account, belonging to each of such corporations, shall be taken and deemed as transferred to
and vested in the new corporation formed by the consolidation, or in the surviving corporation
in case of merger, without further act or deed; and the title to real estate, either by deed or
otherwise, under the laws of the Philippine Islands vested in either corporation, shall not be
deemed in any way impaired by reason of this Act: Provided, however, That the rights of
creditors and all liens upon the property of either of said corporations shall be preserved
unimpaired; and all debts, liabilities, and duties of said corporations shall thenceforth attach to
the new corporation in case of a consolidation, or to the surviving corporation in case of a
merger, and be enforced against said new corporation or surviving corporation as if said debts,
liabilities, and duties had been incurred or contracted by it."
As earlier stated, it was mandated that Filport shall absorb all labor force and necessary
personnel complement of the merging operators, thus, clearly indicating the intention to
continue the employer-employee relationships of the individual companies with its employees
through Filport.
The alleged memorandum of the PPA Assistant General exonerating Filport from any liability
arising from and as a result of the merger is contrary to public policy and is violative of the
workers' right to security of tenure. Said memorandum was issued in response to a query of
the PMU Officer-in-Charge and was not even published nor made known to the workers who
came to know of its existence only at the hearing before the NLRC. (G.R. No. 86026, pp. 9394, Rollo)
Page 5

The principle involved in the case cited by the First Division (Fernando v. Angat Labor Union
[supra]) applies only when the transferee is an entirely new corporation with a distinct
personality from the integrating firms and NOT where the transferee was found to be merely
an alter ego of the different merging firms, as in this case. Thus, Filport has the obligation not
only to absorb the workers of the dissolved companies but also to include the length of service
earned by the absorbed employees with their former employers as well. To rule otherwise
would be manifestly less than fair, certainly, less than just and equitable.
Finally, to deny the private respondents the fruits of their labor corresponding to the time they
worked with their previous employers would render at naught the constitutional provisions on
labor protection. In interpreting the protection to labor and social justice provisions of the
Constitution and the labor laws, and rules and regulations implementing the constitutional
mandate, the Supreme Court has always adopted the liberal approach which favors the
exercise of labor rights. (Euro-Linea, Phils., Inc. v. NLRC, 156 SCRA 83).
WHEREFORE, the Resolution of the Second Division of this Court in G.R. No. 85704 dated
September 3, 1990 is hereby REITERATED.
SO ORDERED.
Fernan, C.J., Melencio-Herrera, Gutierrez, Jr., Cruz, Feliciano, Padilla, Bidin, Sarmiento,
Grio-Aquino, Medialdea, Regalado, and Davide, Jr., JJ., concur.
Narvasa, and Gancayco, JJ., in the result.

Page 6

Notes:

Rehabilitation

FIRST DIVISION
[ G.R. No. 105364, June 28, 2001 ]
PHILIPPINE VETERANS BANK EMPLOYEES UNION-N.U.B.E. AND PERFECTO V.
FERNANDEZ, PETITIONERS,
VS.
HONORABLE BENJAMIN VEGA, PRESIDING JUDGE OF BRANCH 39 OF THE
REGIONAL TRIAL COURT OF MANILA, THE CENTRAL BANK OF THE PHILIPPINES AND
THE LIQUIDATOR OF THE PHILIPPINE VETERANS BANK, RESPONDENTS
DECISION
KAPUNAN, J.:
May a liquidation court continue with liquidation proceedings of the Philippine Veterans Bank
(PVB) when Congress had mandated its rehabilitation and reopening?
This is the sole issue raised in the instant Petition for Prohibition with Petition for Preliminary
Injunction and application for Ex Parte Temporary Restraining Order.
The antecedent facts of the case are as follows:
Sometime in 1985, the Central Bank of the Philippines (Central Bank, for brevity) filed with
Branch 39 of the Regional Trial Court of Manila a Petition for Assistance in the Liquidation of
the Philippine Veterans Bank, the same docketed as Case No. SP-32311. Thereafter, the
Philipppine Veterans Bank Employees Union-N.U.B.E., herein petitioner, represented by
petitioner Perfecto V. Fernandez, filed claims for accrued and unpaid employee wages and
benefits with said court in SP-32311. 1
After lengthy proceedings, partial payment of the sums due to the employees were made.
2
However, due to the piecemeal hearings on the benefits, many remain unpaid.
On March 8, 1991, petitioners moved to disqualify the respondent judge from hearing the
above case on grounds of bias and hostility towards petitioners. 3
On January 2, 1992, the Congress enacted Republic Act No. 7169 providing for the
4
rehabilitation of the Philippine Veterans Bank.
Thereafter, petitioners filed with the labor tribunals their residual claims for benefits and for
reinstatement upon reopening of the bank. 5

Sometime in May 1992, the Central Bank issued a certificate of authority allowing the PVB to
6
reopen.
Despite the legislative mandate for rehabilitation and reopening of PVB, respondent judge
continued with the liquidation proceedings of the bank. Moreover, petitioners learned that
respondents were set to order the payment and release of employee benefits upon motion of
another lawyer, while petitioners' claims have been frozen to their prejudice.
Hence, the instant petition.
Petitioners argue that with the passage of R.A. 7169, the liquidation court became functus
officio, and no longer had the authority to continue with liquidation proceedings.
In a Resolution, dated June 8, 1992, the Supreme Court resolved to issue a Temporary
Restraining Order enjoining the trial court from further proceeding with the case.
On June 22, 1992, VOP Security & Detective Agency (VOPSDA) and its 162 security guards
filed a Motion for Intervention with prayer that they be excluded from the operation of the
Temporary Restraining Order issued by the Court. They alleged that they had filed a motion
before Branch 39 of the RTC of Manila, in SP-No. 32311, praying that said court order PVB to
pay their backwages and salary differentials by authority of R.A. No 6727, Wage Orders No.
NCR-01 and NCR-01-Ad and Wage Orders No. NCR-02 and NCR-02-A; and, that said court,
in an Order dated June 5, 1992, approved therein movants' case and directed the bank
liquidator or PVB itself to pay the backwages and differentials in accordance with the
computation incorporated in the order. Said intervenors likewise manifested that there was an
error in the computation of the monetary benefits due them.
On August 18, 1992, petitioners, pursuant to the Resolution of this Court, dated July 6, 1992,
filed their Comment opposing the Motion for Leave to File Intervention and for exclusion from
the operation of the T.R.O. on the grounds that the movants have no legal interest in the
subject matter of the pending action; that allowing intervention would only cause delay in the
proceedings; and that the motion to exclude the movants from the T.R.O. is without legal basis
and would render moot the relief sought in the petition.
On September 3, 1992, the PVB filed a Petition-In-Intervention praying for the issuance of the
writs of certiorari and prohibition under Rule 65 of the Rules of Court in connection with the
issuance by respondent judge of several orders involving acts of liquidation of PVB even after
the effectivity of R.A. No. 7169. PVB further alleges that respondent judge clearly acted in
excess of or without jurisdiction when he issued the questioned orders.
We find for the petitioners.
Republic Act No. 7169 entitled "An Act To Rehabilitate The Philippine Veterans Bank Created
Under Republic Act No. 3518, Providing The Mechanisms Therefor, And For Other Purposes",
which was signed into law by President Corazon C. Aquino on January 2, 1992 and which was
Page 2

published in the Official Gazette on February 24, 1992, provides in part for the reopening of
the Philippine Veterans Bank together with all its branches within the period of three (3) years
from the date of the reopening of the head office. 7 The law likewise provides for the creation
of a rehabilitation committee in order to facilitate the implementation of the provisions of the
same. 8
Pursuant to said R.A. No. 7169, the Rehabilitation Committee submitted the proposed
Rehabilitation Plan of the PVB to the Monetary Board for its approval. Meanwhile, PVB filed a
Motion to Terminate Liquidation of Philippine Veterans Bank dated March 13, 1992 with the
respondent judge praying that the liquidation proceedings be immediately terminated in view
of the passage of R.A. No. 7169.
On April 10, 1992, the Monetary Board issued Monetary Board Resolution No. 348 which
approved the Rehabilitation Plan submitted by the Rehabilitaion Committee.
Thereafter, the Monetary Board issued a Certificate of Authority allowing PVB to reopen.
On June 3, 1992, the liquidator filed A Motion for the Termination of the Liquidation
Proceedings of the Philippine Veterans Bank with the respondent judge.
As stated above, the Court, in a Resolution dated June 8, 1992, issued a temporary
restraining order in the instant case restraining respondent judge from further proceeding with
the liquidation of PVB.
On August 3, 1992, the Philippine Veterans Bank opened its doors to the public and started
regular banking operations.
Clearly, the enactment of Republic Act No. 7169, as well as the subsequent developments has
rendered the liquidation court functus officio. Consequently, respondent judge has been
stripped of the authority to issue orders involving acts of liquidation.
9

Liquidation, in corporation law, connotes a winding up or settling with creditors and debtors.
It is the winding up of a corporation so that assets are distributed to those entitled to receive
them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or
loss.
On the opposite end of the spectrum is rehabilitation which connotes a reopening or
reorganization. Rehabilitation contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former position of successful operation and
solvency. 10
It is crystal clear that the concept of liquidation is diametrically opposed or contrary to the
concept of rehabilitation, such that both cannot be undertaken at the same time. To allow the
liquidation proceedings to continue would seriously hinder the rehabilitation of the subject
bank.
Page 3

Anent the claim of respondents Central Bank and Liquidator of PVB that R.A. No. 7169
became effective only on March 10, 1992 or fifteen (15) days after its publication in the Official
Gazette; and, the contention of intervenors VOP Security, et. al. that the effectivity of said law
is conditioned on the approval of a rehabilitation plan by the Monetary Board, among others,
the Court is of the view that both contentions are bereft of merit.
While as a rule, laws take effect after fifteen (15) days following the completion of their
publication in the Official Gazette or in a newspaper of general circulation in the Philippines,
the legislature has the authority to provide for exceptions, as indicated in the clause "unless
otherwise provided."
In the case at bar, Section 10 of R.A. No. 7169 provides:
Sec. 10. Effectivity. - This Act shall take effect upon its approval.
Hence, it is clear that the legislature intended to make the law effective immediately upon its
approval. It is undisputed that R.A. No. 7169 was signed into law by President Corazon C.
Aquino on January 2, 1992. Therefore, said law became effective on said date.
Assuming for the sake of argument that publication is necessary for the effectivity of R.A. No.
7169, then it became legally effective on February 24, 1992, the date when the same was
published in the Official Gazette, and not on March 10, 1992, as erroneously claimed by
respondents Central Bank and Liquidator.
WHEREFORE, in view of the foregoing, the instant petition is hereby GIVEN DUE COURSE
and GRANTED. Respondent Judge is hereby PERMANENTLY ENJOINED from further
proceeding with Civil Case No. SP- 32311.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

* This case was transferred to the ponente pursuant to the resolution in AM No. 00-9-03-SC.
Re: Creation of Special Committee on Case Backlog dated February 27, 2001.
1

Rollo, p. 5.

Ibid.

Id.

Id., at 6.

Id.
Page 4

Id.

Sec. 5, Republic Act No. 7169, Official Gazette, February 24, 1992, p. 963.

Sec. 7, Ibid.

Wilson vs. Superior Court in and for Santa Clara County, 2 Cal.2d 632, 43 P.2d 286, 288.

10

Ruby Industrial Corporation vs. Court of Appeals, 284 SCRA 445 (1998).

Page 5

PHILIPPINE VETERANS BANK EMPLOYEES

UNION-N.U.B.E.
and
PERFECTO
V.
FERNANDEZ,
petitioners,
vs.
HONORABLE
BENJAMIN VEGA, Presiding Judge of Branch 39 of
the REGIONAL TRIAL COURT of Manila, the
CENTRAL BANK OF THE PHILIPPINES and THE
LIQUIDATOR OF THE PHILIPPINE VETERANS
BANK, respondents.
Perfecto V. Fernandez for petitioner.
Carpio Villaraza & Cruz for petitioner-in-intervention.
Augusto del Rosario for himself as intervenor.
Bonifacio A. Tavera, Jr. for intervenor VOPSDA.
Emma G. Salmani for respondents.
SYNOPSIS
During the pendency of Case No. SP-32311, a petition for
assistance in the liquidation of the Philippine Veterans Bank
(PVB). Republic Act No. 7169 providing for the rehabilitation
of the bank, was passed into law. It was approved by the
President on January 2, 1992 and published in the Official
Gazette on February 24, 1992. Meanwhile, PVB filed a motion
to terminate liquidation proceedings with respondent judge in
view of the passage of R.A. No. 7169. Another motion of the
same character was filed by the liquidator, but respondent judge
continued with the proceedings. August 3, 1992, the PVB
opened its doors to the public and started regular banking
operations.
The enactment of Republic Act No. 7169 has rendered the
liquidation court functus officio and respondent judge has been
stripped of the authority to issue orders involving acts of
liquidation. Liquidation connotes a winding up or settling with
the creditors and debtors while rehabilitation connotes a
reopening or reorganization. Both are diametrically opposed to
each other, such that both cannot be undertaken at the same
time.
DECISION

KAPUNAN, J p:
May a liquidation court continue with liquidation proceedings of
the Philippine Veterans Bank (PVB) when Congress had
mandated its rehabilitation and reopening?
This is the sole issue raised in the instant Petition for Prohibition
with Petition for Preliminary Injunction and application for Ex
Parte Temporary Restraining Order.
The antecedent facts of the case are as follows:
Sometime in 1985, the Central Bank of the Philippines (Central
Bank, for brevity) filed with Branch 39 of the Regional Trial
Court of Manila a Petition for Assistance in the Liquidation of
the Philippine Veterans Bank, the same docketed as Case No.
SP-32311. Thereafter, the Philippine Veterans Bank Employees
Union-N.U.B.E., herein petitioner, represented by petitioner
Perfecto V. Fernandez, filed claims for accrued and unpaid
employee wages and benefits with said court in SP-32311. 1
After lengthy proceedings, partial payment of the sums due to
the employees were made. However, due to the piecemeal
hearings on the benefits, many remain unpaid. 2
On March 8, 1991, petitioners moved to disqualify the
respondent judge from hearing the above case on grounds of
bias and hostility towards petitioners. 3
On January 2, 1992, the Congress enacted Republic Act No.
7169 providing for the rehabilitation of the Philippine Veterans
Bank. 4
Thereafter, petitioners filed with the labor tribunals their residual
claims for benefits and for reinstatement upon reopening of the
bank. 5
Sometime in May 1992, the Central Bank issued a certificate of
authority allowing the PVB to reopen. 6
Despite the legislative mandate for rehabilitation and reopening
of PVB, respondent judge continued with the liquidation
proceedings of the bank. Moreover, petitioners learned that
respondents were set to order the payment and release of
employee benefits upon motion of another lawyer, while
petitioners' claims have been frozen to their prejudice.
Hence, the instant petition.
Petitioners argue that with the passage of R.A. 7169, the
liquidation court became functus officio, and no longer had the
authority to continue with liquidation proceedings.
In a Resolution, dated June 8, 1992, the Supreme Court resolved
to issue a Temporary Restraining Order enjoining the trial court

from further proceeding with the case.

On June 22, 1992, MOP Security & Detective Agency
(VOPSDA) and its 162 security guards filed a Motion for
Intervention with prayer that they be excluded from the
operation of the Temporary Restraining Order issued by the
Court. They alleged that they had filed a motion before Branch
39 of the RTC of Manila, in SP-No. 32311, praying that said
court order PVB to pay their backwages and salary differentials
by authority of R.A. No 6727, Wage Orders No. NCR-01 and
NCR-01-A and Wage Orders No. NCR-02 and NCR-02-A; and,
that said court, in an Order dated June 5, 1992, approved therein
movants' case and directed the bank liquidator or PVB itself to
pay the backwages and differentials in accordance with the
computation incorporated in the order. Said intervenors likewise
manifested that there was an error in the computation of the
monetary benefits due them.
On August 18, 1992, petitioners, pursuant to the Resolution of
this court, dated July 6, 1992, filed their Comment opposing the
Motion for Leave to File Intervention and for exclusion from the
operation of the T.R.O. on the grounds that the movants have no
legal interest in the subject matter of the pending action; that
allowing intervention would only cause delay in the
proceedings; and that the motion to exclude the movants from
the T.R.O. is without legal basis and would render moot the
relief sought in the petition.
On September 3, 1992, the PVB filed a Petition-In-Intervention
praying for the issuance of the writs of certiorari and prohibition
under Rule 65 of the Rules of Court in connection with the
issuance by respondent judge of several orders involving acts of
liquidation of PVB even after the effectivity of R.A. No. 7169.
PVB further alleges that respondent judge clearly acted in
excess of or without jurisdiction when he issued the questioned
orders.
We find for the petitioners.
Republic Act No. 7169 entitled "An Act To Rehabilitate The
Philippine Veterans Bank Created Under Republic Act No.
3518, Providing The Mechanisms Therefor, And For Other
Purposes," which was signed into law by President Corazon C.
Aquino on January 2, 1992 and which was published in the
Official Gazette on February 24, 1992, provides in part for the
reopening of the Philippine Veterans Bank together with all its
branches within the period of three (3) years from the date of the
reopening of the head office. 7 The law likewise provides for the
creation of a rehabilitation committee in order to facilitate the

implementation of the provisions of the same. 8

Pursuant to said R.A. No. 7169, the Rehabilitation Committee
submitted the proposed Rehabilitation Plan of the PVB to the
Monetary Board for its approval. Meanwhile, PVB filed a
Motion to Terminate Liquidation of Philippine Veterans Bank
dated March 13, 1992 with the respondent judge praying that the
liquidation proceedings be immediately terminated in view of
the passage of R.A. No. 7169.
On April 10, 1992, the Monetary Board issued Monetary Board
Resolution No. 348 which approved the Rehabilitation Plan
submitted by the Rehabilitation Committee.
Thereafter, the Monetary Board issued a Certificate of Authority
allowing PVB to reopen.
On June 3, 1992, the liquidator filed A Motion for the
Termination of the Liquidation Proceedings of the Philippine
Veterans Bank with the respondent judge.
As stated above, the Court, in a Resolution dated June 8, 1992,
issued a temporary restraining order in the instant case
restraining respondent judge from further proceeding with the
liquidation of PVB.
On August 3, 1992, the Philippine Veterans Bank opened its
doors to the public and started regular banking operations.
Clearly, the enactment of Republic Act No. 7169, as well as the
subsequent developments has rendered the liquidation
court functus officio. Consequently, respondent judge has been
stripped of the authority to issue orders involving acts of
liquidation.
Liquidation, in corporation law, connotes a winding up or
settling with creditors and debtors. 9 It is the winding up of a
corporation so that assets are distributed to those entitled to
receive them. It is the process of reducing assets to cash,
discharging liabilities and dividing surplus or loss.
On the opposite end of the spectrum is rehabilitation which
connotes a reopening or reorganization. Rehabilitation
contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former
position of successful operation and solvency. 10
It is crystal clear that the concept of liquidation is diametrically
opposed or contrary to the concept of rehabilitation, such that
both cannot be undertaken at the same time. To allow the
liquidation proceedings to continue would seriously hinder the
rehabilitation of the subject bank.

Anent the claim of respondents Central Bank and Liquidator of

PVB that R.A. No. 7169 became effective only on March 10,
1992 or fifteen (15) days after its publication in the Official
Gazette; and, the contention of intervenors VOP Security, et al.,
that the effectivity of said law is conditioned on the approval of
a rehabilitation plan by the Monetary Board, among others, the
Court is of the view that both contentions are bereft of merit.
While as a rule, laws take effect after fifteen (15) days following
the completion of their publication in the Official Gazette or in a
newspaper of general circulation in the Philippines, the
legislature has the authority to provide for exceptions, as
indicated in the clause "unless otherwise provided."
In the case at bar, Section 10 of R.A. No. 7169
provides: CDAEHS
Sec. 10.Effectivity. This Act shall take effect upon
its approval.
Hence, it is clear that the legislature intended to make the law
effective immediately upon its approval. It is undisputed that
R.A. No. 7169 was signed into law by President Corazon C.
Aquino on January 2, 1992. Therefore, said law became
effective on said date.
Assuming for the sake of argument that publication is necessary
for the effectivity of R.A. No. 7169, then it became legally
effective on February 24, 1992, the date when the same was
published in the Official Gazette and not on March 10, 1992, as
erroneously claimed by respondents Central Bank and
Liquidator.
WHEREFORE, in view of the foregoing, the instant petition is
hereby GIVEN DUE COURSE and GRANTED. Respondent
Judge is hereby PERMANENTLY ENJOINED from further
proceeding with Civil Case No. SP- 32311.
SO ORDERED.
Davide, Jr., C.J., Puno, Pardo and Ynares-Santiago, JJ., concur.
Footnotes
1.Rollo, p. 5
2.Ibid.
3.Id.
4.Id., at 6.
5.Id.
6.Id.
7.Sec. 5, Republic Act No. 7169, Official Gazette, February 24,

1992, p. 963.
8.Sec. 7, Ibid.
9.Wilson vs. Superior Court in and for Santa Clara County, 2
Cal. 2d 632, 43 P.2d 286, 288.
10.Ruby Industrial Corporation vs. Court of Appeals, 284
SCRA 445 (1998).
CASE DIGEST
Facts: Sometime in 1985, the Central Bank of the Philippines
filed with Branch 39 of the Regional Trial Court of Manila a
Petition for Assistance in the Liquidation of the Philippine
Veterans Bank (Case SP-32311). Thereafter, the Philippine
Veterans Bank Employees Union-N.U.B.E. (PVBEU-NUBE),
represented by Perfecto V. Fernandez, filed claims for accrued
and unpaid employee wages and benefits with said court in SP3231. After lengthy proceedings, partial payment of the sums
due to the employees were made. However, due to the piecemeal
hearings on the benefits, many remain unpaid. On 8 March
1991, petitioners moved to disqualify the Judge Benjamin Vega,
Presiding Judge of Branch 39 of the Regional Trial Court of
Manila, from hearing the above case on grounds of bias and
hostility towards petitioners. On 2 January 1992, the Congress
enacted Republic Act 7169 providing for the rehabilitation of
the Philippine Veterans Bank. Thereafter, PVBEU-NUBE and
Fernandez filed with the labor tribunals their residual claims for
benefits and for reinstatement upon reopening of the bank.
Republic Act 7169 entitled "An Act To Rehabilitate The
Philippine Veterans Bank Created Under Republic Act 3518,
Providing The Mechanisms Therefor, And For Other Purposes",
which was signed into law by President Corazon C. Aquino on 2
January 1992 and which was published in the Official Gazette
on 24 February 1992, provides in part for the reopening of the
Philippine Veterans Bank together with all its branches within
the period of 3 years from the date of the reopening of the head
office. The law likewise provides for the creation of a
rehabilitation committee in order to facilitate the implementation
of the provisions of the same.
Pursuant to said RA 7169, the Rehabilitation Committee
submitted the proposed Rehabilitation Plan of the PVB to the
Monetary Board for its approval. Meanwhile, PVB filed a
Motion to Terminate Liquidation of Philippine Veterans Bank
dated 13 March 1992 with Judge Vega praying that the
liquidation proceedings be immediately terminated in view of
the passage of RA 7169. On 10 April 1992, the Monetary Board

issued Monetary Board Resolution 348 which approved the

Rehabilitation Plan submitted by the Rehabilitation Committee.
Thereafter, the Monetary Board issued a Certificate of Authority
allowing PVB to reopen. Sometime in May 1992, the Central
Bank issued a certificate of authority allowing the PVB to
reopen. Despite the legislative mandate for rehabilitation and
reopening of PVB, Judge Vega continued with the liquidation
proceedings of the bank. Moreover, PVBEU-NUBE and
Fernandez learned that the Central Bank was set to order the
payment and release of employee benefits upon motion of
another lawyer, while PVBEU-NUBE's and Fernandez's claims
have been frozen to their prejudice.
On 3 June 1992, the liquidator filed A Motion for the
Termination of the Liquidation Proceedings of the Philippine
Veterans Bank with Judge Vega. PVBEU-NUBE and Fernandez,
on the other hand, filed the petition for Prohibition with Petition
for Preliminary Injunction and application for Ex Parte
Temporary Restraining Order. In a Resolution, dated 8 June
1992, the Supreme Court resolved to issue a Temporary
Restraining Order enjoining the trial court from further
proceeding with the case. On 22 June 1992, MOP Security &
Detective Agency (VOPSDA) and its 162 security guards filed a
Motion for Intervention with prayer that they be excluded from
the operation of the Temporary Restraining Order issued by the
Court. On 3 August 1992, the Philippine Veterans Bank opened
its doors to the public and started regular banking operations.
Issue: Whether or not a liquidation court can continue with
liquidation proceedings of the Philippine Veterans Bank (PVB)
when Congress had mandated its rehabilitation and reopening.
Ruling: Clearly, the enactment of Republic Act No. 7169, as
well as the subsequent developments has rendered the
liquidation court functus officio. Consequently, respondent
judge has been stripped of the authority to issue orders involving
acts of liquidation. Liquidation, in corporation law, connotes a
winding up or settling with creditors and debtors. It is the
winding up of a corporation so that assets are distributed to
those entitled to receive them. It is the process of reducing assets
to cash, discharging liabilities and dividing surplus or loss. On
the opposite end of the spectrum is rehabilitation which
connotes a reopening or reorganization. Rehabilitation
contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former

position of successful operation and solvency. It is crystal clear

that the concept of liquidation is diametrically opposed or
contrary to the concept of rehabilitation, such that both cannot
be undertaken at the same time. To allow the liquidation
proceedings to continue would seriously hinder the
rehabilitation of the subject bank.

FIRST DIVISION

[G.R. No. 146698. September 24, 2002]

PHILIPPINE AIRLINES, petitioner, vs. SPOUSES SADIC AND AISHA

KURANGKING and SPOUSES ABDUL SAMAD T. DIANALAN AND
MORSHIDA L. DIANALAN, respondents.
DECISION
VITUG, J.:

In April 1997, respondents, all Muslim Filipinos, returned to Manila from their pilgrimage to the
Holy City of Mecca, Saudi Arabia, on board a Philippines Airlines (PAL) flight. Respondents
claimed that they were unable to retrieve their checked-in luggages. On 05 January 1998,
respondents filed a complaint with the Regional Trial Court (RTC) of Marawi City against PAL for
breach of contract resulting in damages due to negligence in the custody of the missing luggages.
On 02 March 1998, PAL filed its answer invoking, among its defenses, the limitations under the
Warsaw Convention. On 19 June 1998, before the case could be heard on pre-trial, PAL, claiming
to have suffered serious business losses due to the Asian economic crisis, followed by a massive
strike by its employees, filed a petition for the approval of a rehabilitation plan and the appointment
of a rehabilitation receiver before the Securities and Exchange Commission (SEC). On 23 June
1998, the SEC issued an order granting the prayer for an appointment of a rehabilitation receiver,
and it constituted a three-man panel to oversee PALs rehabilitation. On 25 September 1998, the
SEC created a management committee conformably with Section 6(d) of Presidential Decree
(P.D.) 902, as amended, declaring the suspension of all actions for money claims against PAL
pending before any court, tribunal, board or body. Thereupon, PAL moved for the suspension of the
proceedings before the Marawi City RTC. On 11 January 1999, the trial court issued an order
denying the motion for suspension of the proceedings on the ground that the claim of respondents
was only yet to be established. PALs motion for reconsideration was denied by the trial court.
PAL went to the Court of Appeals via a petition for certiorari. On 16 April 1999, the appellate
court dismissed the petition for the failure of PAL to serve a copy of the petition on respondents.
PAL moved for a reconsideration. In its resolution, dated 08 October 1999, the appellate court
denied the motion but added that a second motion for reconsideration before the trial court could
still be feasible inasmuch as the assailed orders of the trial court were merely interlocutory in
nature. Consonantly, PAL filed before the trial court a motion for leave to file a second motion for
reconsideration. The trial court, however, denied leave of court to admit the second motion for
reconsideration. Again, PAL filed a motion for reconsideration which sought reconsideration of the
denial of the prayed leave to file a second motion for reconsideration. In an order, dated 28
December 2000, the trial court denied the motion.
On the thesis that there was no other plain, speedy and adequate remedy available to it, PAL
went to this Court via a petition for review on certiorari under Rule 45 of the Rules of Court, raising
the question of -

"Whether or not the proceedings before the trial court should have been suspended after the court was
informed that a rehabilitation receiver was appointed over the petitioner by the Securities and Exchange
Commission under Section 6(c) of Presidential Decree No. 902-A.[1]
In their comment to the petition, private respondents posited (a) that the instant petition under
Rule 45 would not lie, the assailed orders of the court a quo being merely interlocutory; (b) that PAL
was already operational and thus claims and actions against it should no longer be suspended; (c)
that the SEC, not the RTC, should have the prerogative to determine the necessity of suspending
the proceedings; and (d) that the only claims or actions that could be suspended under P.D. 902-A
were those pending with the SEC.
While a petition for review on certiorari under Rule 45 would ordinarily be inappropriate to
assail an interlocutory order, in the interest, however, of arresting the perpetuation of an apparent
error committed below that could only serve to unnecessarily burden the parties, the Court has
resolved to ignore the technical flaw and, also, to treat the petition, there being no other plain,
speedy and adequate remedy, as a special civil action for certiorari. Not much, after all, can be
gained if the Court were to refrain from now making a pronouncement on an issue so basic as that
submitted by the parties.
On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC, adopted the Interim
Rules of Procedure on Corporate Rehabilitation and directed to be transferred from the SEC to
Regional Trial Courts,[2] all petitions for rehabilitation filed by corporations, partnerships, and
associations under P.D. 902-A in accordance with the amendatory provisions of Republic Act No.
8799. The rules require trial courts to issue, among other things, a stay order in the enforcement
of all claims, whether for money or otherwise, and whether such enforcement is by court action or
otherwise, against the corporation under rehabilitation, its guarantors and sureties not solidarily
liable with it. Specifically, Section 6, Rule 4, of the Interim Rules of Procedure On Corporate
Rehabilitation, provides:
SEC. 6. Stay Order. - If the court finds the petition to be sufficient in form and substance, it shall, not later
than five (5) days from the filing of the petition, issue an Order (a) appointing a Rehabilitation Receiver and
fixing his bond; (b) staying enforcement of all claims, whether for money or otherwise and whether such
enforcement is by court action or otherwise, against the debtor, its guarantors and sureties not solidarily
liable with the debtor; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any
manner any of its properties except in the ordinary course of business; (d) prohibiting the debtor from
making any payment of its liabilities outstanding as at the date of filing of the petition; (e) prohibiting the
debtors suppliers of goods or services from withholding supply of goods and services in the ordinary course
of business for as long as the debtor makes payments for the services and goods supplied after the issuance of
the stay order; (f) directing the payment in full of all administrative expenses incurred after the issuance of
the stay order; (g) fixing the initial hearing on the petition not earlier than forty-five (45) days but not later
than sixty (60) days from the filing thereof; (h) directing the petitioner to publish the Order in a newspaper of
general circulation in the Philippines once a week for two (2) consecutive weeks; (I) directing all creditors
and all interested parties (including the Securities and Exchange Commission) to file and serve on the debtor
a verified comment on or opposition to the petition, with supporting affidavits and documents, not later than
ten (10) days before the date of the initial hearing and putting them on notice that their failure to do so will
bar them from participating in the proceedings; and (j) directing the creditors and interested parties to secure
from the court copies of the petition and its annexes within such time as to enable themselves to file their
comment on or opposition to the petition and to prepare for the initial hearing of the petition.

The stay order is effective from the date of its issuance until the dismissal of the petition or the
termination of the rehabilitation proceedings.[3]
The interim rules must likewise be read and applied along with Section 6(c) of P.D. 902-A, as
so amended, directing that upon the appointment of a management committee, rehabilitation
receiver, board or body pursuant to the decree, all actions for claims against the distressed
corporation pending before any court, tribunal, board or body shall be suspended accordingly.
Paragraph (c) of Section 6 of the law reads:
Section 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:
xxx xxx

xxx.

c) To appoint one or more receivers of the property, real or personal, which is the subject of the action
pending before the Commission in accordance with the pertinent provisions of the Rules of Court in such
other cases whenever necessary in order to preserve the rights of the parties-litigants and/or protect the
interest of the investing public and creditors: x x x Provided, finally, That upon appointment of a
management committee, the rehabilitation receiver, board or body, pursuant to this Decree, all actions for
claims against corporations, partnerships, or associations under management or receivership pending before
any court, tribunal, board or body shall be suspended accordingly.
A claim is said to be a right to payment, whether or not It is reduced to judgment, liquidated
or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, legal or
equitable, and secured or unsecured.[4] In Finasia Investments and Finance Corporation[5] this
Court has defined the word claim, contemplated in Section 6(c) of P.D. 902-A, as referring to
debts or demands of a pecuniary nature and the assertion of a right to have money paid as well.
Verily, the claim of private respondents against petitioner PAL is a money claim for the missing
luggages, a financial demand, that the law requires to be suspended pending the rehabilitation
proceedings.[6] In B.F. Homes, Inc. vs. Court of Appeals,[7] the Court has ratiocinated:
x x x (T)he reason for suspending actions for claims against the corporation should not be difficult to
discover. it is not really to enable the management committee or the rehabilitation receiver to substitute the
defendant in any pending action against it before any court, tribunal, board or body. Obviously, the real
justification is to enable the management committee or rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extra-judicial interference that might unduly hinder or prevent the rescue
of the debtor company. To allow such other action to continue would only add to the burden of the
management committee or rehabilitation receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed toward its restructuring and
rehabilitation.[8]
WHEREFORE, the petition is GRANTED. The assailed orders of the Regional Trial Court,
Branch 9, of Marawi City, are SET ASIDE. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, and Carpio, JJ., concur.

[1] Rollo, p. 12.

[2] SEC. 2. Applicability to Rehabilitation Cases Transferred from the Securities and Exchange Commission. - Cases for

rehabilitation transferred from the Securities and Exchange Commission to the Regional Trial Courts pursuant to Republic
Act No. 8799, otherwise known as The Securities Regulation Code, shall likewise be governed by these Rules.
[3]

SEC. 11. Period of the Stay Order. - The stay order shall be effective from the date of its issuance until the dismissal of
the petition or the termination of the rehabilitation proceedings.
The petition shall be dismissed if no rehabilitation plan is approved by the court upon the lapse of one hundred eighty
(180) days from date of the initial hearing. The court may grant an extension beyond this period only if it appears by
convincing and compelling evidence that the debtor may successfully be rehabilitated. In no Instance, however, shall the
period for approving or disapproving a rehabilitation plan exceed eighteen (18) months from the date of filing of the
petition.
[4] Blacks Law Legal Dictionary, p. 224, 5th ed., as cited in the case of Finasia Investments and Finance Corp. vs. Court

of Appeals, 837 SCRA 446.

[5] 237 SCRA 446.
[6] Barotac Sugar Mills, Inc. vs. Court of Appeals, 275 SCRA 497; Rubberworld (Phils.) Inc. vs. NLRC, 305 SCRA 721,

among others.
[7] 190 SCRA 262.
[8] At p. 269.

EN BANC

[G.R. No. 74851. December 9, 1999]

RIZAL
COMMERCIAL
BANKING
CORPORATION,
petitioner,
vs.
INTERMEDIATE APPELLATE COURT AND BF HOMES, INC., respondents.
RESOLUTION
MELO, J.:

On September 14, 1992, the Court passed upon the case at bar and rendered its decision, dismissing the
petition of Rizal Commercial Banking Corporation (RCBC), thereby affirming the decision of the Court of
Appeals which canceled the transfer certificate of title issued in favor of RCBC, and reinstating that of
respondent BF Homes.
This will now resolve petitioners motion for reconsideration which, although filed in 1992 was not
deemed submitted for resolution until in late 1998. The delay was occasioned by exchange of pleadings, the
submission of supplemental papers, withdrawal and change of lawyers, not to speak of the case having been
passed from one departing to another retiring justice. It was not until May 3, 1999, when the case was reraffled to herein ponente, but the record was given to him only sometime in the late October 1999.
By way of review, the pertinent facts as stated in our decision are reproduced herein, to wit:
On September 28, 1984, BF Homes filed a Petition for Rehabilitation and for Declaration of Suspension of
Payments (SEC Case No. 002693) with the Securities and Exchange Commission (SEC).
One of the creditors listed in its inventory of creditors and liabilities was RCBC.
On October 26, 1984, RCBC requested the Provincial Sheriff of Rizal to extra-judicially foreclose its real
estate mortgage on some properties of BF Homes. A notice of extra-judicial foreclosure sale was issued by
the Sheriff on October 29, 1984, scheduled on November 29, 1984, copies furnished both BF Homes
(mortgagor) and RCBC (mortgagee).
On motion of BF Homes, the SEC issued on November 28, 1984 in SEC Case No. 002693 a temporary
restraining order (TRO), effective for 20 days, enjoining RCBC and the sheriff from proceeding with the
public auction sale. The sale was rescheduled to January 29, 1985.
On January 25, 1985, the SEC ordered the issuance of a writ of preliminary injunction upon petitioners
filing of a bond. However, petitioner did not file a bond until January 29, 1985, the very day of the auction
sale, so no writ of preliminary injunction was issued by the SEC. Presumably, unaware of the filing of the
bond, the sheriffs proceeded with the public auction sale on January 29, 1985, in which RCBC was the
highest bidder for the properties auctioned.
On February 5, 1985, BF Homes filed in the SEC a consolidated motion to annul the auction sale and to cite
RCBC and the sheriff for contempt. RCBC opposed the motion.

Because of the proceedings in the SEC, the sheriff withheld the delivery to RCBC of a certificate of sale
covering the auctioned properties.
On February 13, 1985, the SEC in Case No. 002693 belatedly issued a writ of preliminary injunction
stopping the auction sale which had been conducted by the sheriff two weeks earlier.
On March 13, 1985, despite SEC Case No. 002693, RCBC filed with the Regional Trial Court, Br. 140, Rizal
(CC 10042) an action for mandamus against the provincial sheriff of Rizal and his deputy to compel them to
execute in its favor a certificate of sale of the auctioned properties.
In answer, the sheriffs alleged that they proceeded with the auction sale on January 29, 1985 because no writ
of preliminary injunction had been issued by SEC as of that date, but they informed the SEC that they would
suspend the issuance of a certificate of sale to RCBC.
On March 18, 1985, the SEC appointed a Management Committee for BF Homes.
On RCBCs motion in the mandamus case, the trial court issued on May 8, 1985 a judgment on the
pleadings, the dispositive portion of which states:
WHEREFORE, petitioners Motion for Judgment on the pleadings is granted and judgement is hereby
rendered ordering respondents to execute and deliver to petitioner the Certificate of the Auction Sale of
January 29, 1985, involving the properties sold therein, more particularly those described in Annex C of
their Answer. (p. 87, Rollo.)
On June 4, 1985, B.F. Homes filed an original complaint with the IAC pursuant to Section 9 of B.P. 129
praying for the annulment of the judgment, premised on the following:
x x x: (1) even before RCBC asked the sheriff to extra-judicially foreclose its mortgage on petitioners
properties, the SEC had already assumed exclusive jurisdiction over those assets, and (2) that there was
extrinsic fraud in procuring the judgment because the petitioner was not impleaded as a party in the
mandamus case, respondent court did not acquire jurisdiction over it, and it was deprived of its right to be
heard. (CA Decision, p. 88, Rollo).
On April 8, 1986, the IAC rendered a decision, setting aside the decision of the trial court, dismissing the
mandamus case and suspending issuance to RCBC of new land titles, until the resolution of case by SEC in
Case No. 002693, disposing as follows:
WHEREFORE, the judgment dated May 8, 1985 in Civil Case No. 10042 is hereby annulled and set aside
and the case is hereby dismissed. In view of the admission of respondent Rizal Commercial Banking
Corporation that the sheriffs certificate of sale has been registered on BF Homes TCTs . . . (here the TCTs
were enumerated) the Register of Deeds for Pasay City is hereby ordered to suspend the issuance to the
mortgagee-purchaser, Rizal Commercial Banking Corporation, of the owners copies of the new land titles
replacing them until the matter shall have been resolved by the Securities and Exchange Commission in SEC
Case No. 002693.
(p. 257-260, Rollo; also pp. 832-834, 213 SCRA 830[1992]; Emphasis in the original.)
On June 18, 1986, RCBC appealed the decision of the then Intermediate Appellate Court (now, back to
its old revered name, the Court of Appeals) to this Court, arguing that:

1. Petitioner did not commit extrinsic fraud in excluding private respondent as party defendant in Special
Civil Case No. 10042 as private respondent was not indispensable party thereto, its participation not being
necessary for the full resolution of the issues raised in said case.
2. SEC Case No. 2693 cannot be invoked to suspend Special Civil Case No. 10042, and for that matter, the
extra-judicial foreclosure of the real estate mortgage in petitioners favor, as these do not constitute actions
against private respondent contemplated under Section 6(c) of Presidential Decree No. 902-A.
3. Even assuming arguendo that the extra-judicial sale constitute an action that may be suspended under
Section 6(c) of Presidential Decree No. 902-A, the basis for the suspension thereof did not exist so as to
adversely affect the validity and regularity thereof.
4. The Regional Trial court had jurisdiction to take cognizance of Special Civil Case No. 10042.
5. The Regional Trial court had jurisdiction over Special Civil Case No. 10042.
(p. 5, Rollo.)
On November 12, 1986, the Court gave due course to the petition. During the pendency of the case,
RCBC brought to the attention of the Court an order issued by the SEC on October 16, 1986 in Case
No.002693, denying the consolidated Motion to Annul the Auction Sale and to cite RCBC and the Sheriff for
Contempt, and ruling as follows:
WHEREFORE, the petitioners Consolidated Motion to Cite Sheriff and Rizal Commercial Banking
Corporation for Contempt and to Annul Proceedings and Sale, dated February 5, 1985, should be as is,
hereby DENIED.
While we cannot direct the Register of Deeds to allow the consolidation of the titles subject of the Omnibus
Motion dated September 18, 1986 filed by the Rizal Commercial banking Corporation, and therefore, denies
said Motion, neither can this Commission restrain the said bank and the Register of Deeds from effecting the
said consolidation.
SO ORDERED.

(p. 143, Rollo.)

By virtue of the aforesaid order, the Register of Deeds of Pasay City effected the transfer of title over
subject pieces of property to petitioner RCBC, and the issuance of new titles in its name. Thereafter, RCBC
presented a motion for the dismissal of the petition, theorizing that the issuance of said new transfer
certificates of title in its name rendered the petition moot and academic.
In the decision sought to be reconsidered, a greatly divided Court (Justices Gutierrez, Nocon, and Melo
concurred with the ponente, Justice Medialdea; Chief Justice Narvasa, Justices Bidin, Regalado, and
Bellosillo concurred only in the result; while Justice Feliciano dissented and was joined by Justice Padilla,
then Justice, now Chief Justice Davide, and Justice Romero; Justices Grio-Aquino and Campos took no
part) denied petitioners motion to dismiss, finding basis for nullifying and setting aside the TCTs in the
name of RCBC. Ruling on the merits, the Court upheld the decision of the Intermediate Appellate Court
which dismissed the mandamus case filed by RCBC and suspended the issuance of new titles to RCBC.
Setting aside RCBCs acquisition of title and nullifying the TCTs issued to it, the Court held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred
creditors may no longer assert such preference, but . . . stand on equal footing with other creditors.
Foreclosure shall be disallowed so as not to prejudice other creditors, or cause discrimination among them.
If foreclosure is undertaken despite the fact that a petition for rehabilitation has been filed, the certificate of
sale shall not be delivered pending rehabilitation. Likewise, if this has also been done, no transfer of title
shall be effected also, within the period of rehabilitation. The rationale behind PD 902-A, as amended, is to
effect a feasible and viable rehabilitation. This cannot be achieved if one creditor is preferred over the
others.
In this connection, the prohibition against foreclosure attaches as soon as a petition for rehabilitation is filed.
Were it otherwise, what is to prevent the petitioner from delaying the creation of a Management Committee
and in the meantime dissipate all its assets. The sooner the SEC takes over and imposes a freeze on all the
assets, the better for all concerned.
(pp. 265-266, Rollo; also p. 838, 213 SCRA 830[1992].)
Then Justice Feliciano (joined by three other Justices), dissented and voted to grant the petition. He
opined that the SEC acted prematurely and without jurisdiction or legal authority in enjoining RCBC and the
sheriff from proceeding with the public auction sale. The dissent maintain that Section 6 (c) of Presidential
Decree 902-A is clear and unequivocal that, claims against the corporations, partnerships, or associations
shall be suspended only upon the appointment of a management committee, rehabilitation receiver, board or
body. Thus, in the case under consideration, only upon the appointment of the Management Committee for
BF Homes on March 18, 1985, should the suspension of actions for claims against BF Homes have taken
effect and not earlier.
In support of its motion for reconsideration, RCBC contends:
The restraining order and the writ of preliminary injunction issued by the Securities and Exchange
Commission enjoining the foreclosure sale of the properties of respondent BF Homes were issued without or
in excess of its jurisdiction because it was violative of the clear provision of Presidential Decree No. 902-A,
and are therefore null and void; and
Petitioner, being a mortgage creditor, is entitled to rely solely on its security and to refrain from joining the
unsecured creditors in SEC Case No. 002693, the petition for rehabilitation filed by private respondent.

We find the motion for reconsideration meritorious.

The issue of whether or not preferred creditors of distressed corporations stand on equal footing with all
other creditors gains relevance and materiality only upon the appointment of a management committee,
rehabilitation receiver, board, or body. Insofar as petitioner RCBC is concerned, the provisions of
Presidential Decree No. 902-A are not yet applicable and it may still be allowed to assert its preferred status
because it foreclosed on the mortgage prior to the appointment of the management committee on March 18,
1985. The Court, therefore, grants the motion for reconsideration on this score.
The law on the matter, Paragraph (c), Section 6 of Presidential Decree 902-A, provides:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:
c) To appoint one or more receivers of the property, real and personal, which is the subject of the action
pending before the Commission in accordance with the pertinent provisions of the Rules of Court in such
other cases whenever necessary to preserve the rights of the parties-litigants to and/or protect the interest of
the investing public and creditors; Provided, however, that the Commission may, in appropriate cases,
appoint a rehabilitation receiver of corporations, partnerships or other associations not supervised or
regulated by other government agencies who shall have, in addition to the powers of a regular receiver under
the provisions of the Rules of Court, such functions and powers as are provided for in the succeeding
paragraph (d) hereof: Provided, finally, That upon appointment of a management committee, rehabilitation
receiver, board or body, pursuant to this Decree, all actions for claims against corporations, partnerships or
associations under management or receivership pending before any court, tribunal, board or body shall be
suspended accordingly. (As amended by PDs No. 1673, 1758 and by PD No. 1799. Emphasis supplied.)
It is thus adequately clear that suspension of claims against a corporation under rehabilitation is counted
or figured up only upon the appointment of a management committee or a rehabilitation receiver. The
holding that suspension of actions for claims against a corporation under rehabilitation takes effect as soon as
the application or a petition for rehabilitation is filed with the SEC may, to some, be more logical and wise
but unfortunately, such is incongruent with the clear language of the law. To insist on such ruling, no matter
how practical and noble, would be to encroach upon legislative prerogative to define the wisdom of the law
plainly judicial legislation.
It bears stressing that the first and fundamental duty of the Court is to apply the law. When the law is
clear and free from any doubt or ambiguity, there is no room for construction or interpretation. As has been
our consistent ruling, where the law speaks in clear and categorical language, there is no occasion for
interpretation; there is only room for application (Cebu Portland Cement Co. vs. Municipality of Naga, 24
SCRA 708 [1968]).
Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the court has no
choice but to see to it that its mandate is obeyed (Chartered Bank Employees Association vs. Ople, 138
SCRA 273 [1985]; Luzon Surety Co., Inc. vs. De Garcia, 30 SCRA 111 [1969]; Quijano vs. Development
Bank of the Philippines, 35 SCRA 270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its true
intent. Ambiguity is a condition of admitting two or more meanings, of being understood in more than one
way, or of referring to two or more things at the same time. A statute is ambiguous if it is admissible of two
or more possible meanings, in which case, the Court is called upon to exercise one of its judicial functions,
which is to interpret the law according to its true intent.

Furthermore, as relevantly pointed out in the dissenting opinion, a petition for rehabilitation does not
always result in the appointment of a receiver or the creation of a management committee. The SEC has to
initially determine whether such appointment is appropriate and necessary under the circumstances. Under
Paragraph (d), Section 6 of Presidential Decree No. 902-A, certain situations must be shown to exist before a
management committee may be created or appointed, such as;
1. when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties;
or
2. when there is paralization of business operations of such corporations or entities which may be
prejudicial to the interest of minority stockholders, parties-litigants or to the general public.

On the other hand, receivers may be appointed whenever:

1. necessary in order to preserve the rights of the parties-litigants; and/or
2. protect the interest of the investing public and creditors. (Section 6 (c), P.D. 902-A.)

These situations are rather serious in nature, requiring the appointment of a management committee or a
receiver to preserve the existing assets and property of the corporation in order to protect the interests of its
investors and creditors. Thus, in such situations, suspension of actions for claims against a corporation as
provided in Paragraph (c) of Section 6, of Presidential Decree No. 902-A is necessary, and here we borrow
the words of the late Justice Medialdea, so as not to render the SEC management Committee irrelevant and
inutile and to give it unhampered rescue efforts over the distressed firm (Rollo, p. 265).
Otherwise, when such circumstances are not obtaining or when the SEC finds no such imminent danger
of losing the corporate assets, a management committee or rehabilitation receiver need not be appointed and
suspension of actions for claims may not be ordered by the SEC. When the SEC does not deem it necessary
to appoint a receiver or to create a management committee, it may be assumed, that there are sufficient assets
to sustain the rehabilitation plan and, that the creditors and investors are amply protected.
Petitioner additionally argues in its motion for reconsideration that, being a mortgage creditor, it is
entitled to rely on its security and that it need not join the unsecured creditors in filing their claims before the
SEC-appointed receiver. To support its position, petitioner cites the Courts ruling in the case of Philippine
Commercial International Bank vs. Court of Appeals, (172 SCRA 436 [1989]) that an order of suspension of
payments as well as actions for claims applies only to claims of unsecured creditors and cannot extend to
creditors holding a mortgage, pledge, or any lien on the property.
Ordinarily, the Court would refrain from discussing additional matters such as that presented in RCBCs
second ground, and would rather limit itself only to the relevant issues by which the controversy may be
settled with finality.
In view, however, of the significance of such issue, and the conflicting decisions of this Court on the
matter, coupled with the fact that our decision of September 14, 1992, if not clarified, might mislead the
Bench and the Bar, the Court resolved to discuss further.
It may be recalled that in the herein en banc majority opinion (pp. 256-275, Rollo, also published as
RCBC vs. IAC, 213 SCRA 830 [1992]), we held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred
creditors may no longer assert such preference, but . . . stand on equal footing with other creditors.
Foreclosure shall be disallowed so as not to prejudice other creditors, or cause discrimination among them.
If foreclosure is undertaken despite the fact that a petition for rehabilitation has been filed, the certificate of
sale shall not be delivered pending rehabilitation. Likewise, if this has also been done, no transfer of title

shall be effected also, within the period of rehabilitation. The rationale behind PD 902-A, as amended, is to
effect a feasible and viable rehabilitation. This cannot be achieved if one creditor is preferred over the
others.
In this connection, the prohibition against foreclosure attaches as soon as a petition for rehabilitation is
filed. Were it otherwise, what is to prevent the petitioner from delaying the creation of a Management
Committee and in the meantime dissipate all its assets. The sooner the SEC takes over and imposes a freeze
on all the assets, the better for all concerned.
(pp. 265-266, Rollo; also p. 838, 213 SCRA 830[1992]. Emphasis supplied.)
The foregoing majority opinion relied upon BF Homes, Inc. vs. Court of Appeals (190 SCRA 262 [1990]
per Cruz, J.: First Division) where it was held that when a corporation threatened by bankruptcy is taken
over by a receiver, all the creditors should stand on an equal footing. Not anyone of them should be given
preference by paying one or some of them ahead of the others. This is precisely the reason for the
suspension of all pending claims against the corporation under receivership. Instead of creditors vexing the
courts with suits against the distressed firm, they are directed to file their claims with the receiver who is a
duly appointed officer of the SEC (pp. 269-270; emphasis in the original). This ruling is a reiteration of
Alemars Sibal & Sons, Inc. vs. Hon. Jesus M. Elbinias (pp. 99-100;186 SCRA 94 [1990] per Fernan, C.J.:
Third Division).
Taking the lead from Alemars Sibal & Sons, the Court also applied this same ruling in Araneta vs. Court
of Appeals (211 SCRA 390 [1992] per Nocon, J.: Second Division).
All the foregoing cases departed from the ruling of the Court in the much earlier case of PCIB vs. Court
of Appeals (172 SCRA 436 [1989] per Medialdea, J.: First Division) where the Court categorically ruled
that:
SECs order for suspension of payments of Philfinance as well as for all actions of claims against Philfinance
could only be applied to claims of unsecured creditors. Such order can not extend to creditors holding a
mortgage, pledge or any lien on the property unless they give up the property, security or lien in favor of all
the creditors of Philfinance. . .

(p. 440. Emphasis supplied)

Thus, in BPI vs. Court of Appeals (229 SCRA 223 [1994] per Bellosillo, J.: First Division) the Court
explicitly stated that . . . the doctrine in the PCIB Case has since been abrogated. In Alemars Sibal & Sons
v. Elbinias, BF Homes, Inc. v. Court of Appeals, Araneta v. Court of Appeals and RCBC v. Court of Appeals,
we already ruled that whenever a distressed corporation asks SEC for rehabilitation and suspension of
payments, preferred creditors may no longer assert such preference, but shall stand on equal footing with
other creditors. . . (pp. 227-228).
It may be stressed, however, that of all the cases cited by Justice Bellosillo in BPI, which abandoned the
Courts ruling in PCIB, only the present case satisfies the constitutional requirement that no doctrine or
principle of law laid down by the court in a decision rendered en banc or in division may be modified or
reversed except by the court sitting en banc (Sec 4, Article VIII, 1987 Constitution). The rest were division
decisions.
It behooves the Court, therefore, to settle the issue in this present resolution once and for all, and for the
guidance of the Bench and the Bar, the following rules of thumb shall are laid down:
1. All claims against corporations, partnerships, or associations that are pending before any court,
tribunal, or board, without distinction as to whether or not a creditor is secured or unsecured, shall be
suspended effective upon the appointment of a management committee, rehabilitation receiver, board, or
body in accordance with the provisions of Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of such preference
is equally suspended upon the appointment of a management committee, rehabilitation receiver, board, or
body. In the event that the assets of the corporation, partnership, or association are finally liquidated,
however, secured and preferred credits under the applicable provisions of the Civil Code will definitely have
preference over unsecured ones.
In other words, once a management committee, rehabilitation receiver, board or body is appointed
pursuant to P.D. 902-A, all actions for claims against a distressed corporation pending before any court,
tribunal, board or body shall be suspended accordingly.
This suspension shall not prejudice or render ineffective the status of a secured creditor as compared to a
totally unsecured creditor. P.D. 902-A does not state anything to this effect. What it merely provides is that
all actions for claims against the corporation, partnership or association shall be suspended. This should
give the receiver a chance to rehabilitate the corporation if there should still be a possibility for doing so.
(This will be in consonance with Alemars, BF Homes, Araneta, and RCBC insofar as enforcing liens by
preferred creditors are concerned.)
However, in the event that rehabilitation is no longer feasible and claims against the distressed
corporation would eventually have to be settled, the secured creditors shall enjoy preference over the
unsecured creditors (still maintaining PCIB ruling), subject only to the provisions of the Civil Code on
Concurrence and Preferences of Credit (our ruling in State Investment House, Inc. vs. Court of Appeals, 277
SCRA 209 [1997]).
The majority ruling in our 1992 decision that preferred creditors of distressed corporations shall, in a
way, stand on equal footing with all other creditors, must be read and understood in the light of the foregoing
rulings. All claims of both a secured or unsecured creditor, without distinction on this score, are suspended
once a management committee is appointed. Secured creditors, in the meantime, shall not be allowed to
assert such preference before the Securities and Exchange Commission. It may be stressed, however, that

this shall only take effect upon the appointment of a management committee, rehabilitation receiver, board,
or body, as opined in the dissent.
In fine, the Court grants the motion for reconsideration for the cogent reason that suspension of actions
for claims commences only from the time a management committee or receiver is appointed by the SEC.
Petitioner RCBC, therefore, could have rightfully, as it did, move for the extrajudicial foreclosure of its
mortgage on October 26, 1984 because a management committee was not appointed by the SEC until March
18, 1985.
WHEREFORE, petitioners motion for reconsideration is hereby GRANTED. The decision dated
September 14, 1992 is vacated, the decision of Intermediate Appellate Court in AC-G.R. No. SP-06313
REVERSED and SET ASIDE, and the judgment of the Regional Trial Court National Capital Judicial
Region, Branch 140, in Civil Case No. 10042 REINSTATED.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Puno, Vitug, Kapunan, Mendoza, Quisumbing, Pardo, Buena, GonzagaReyes, Ynares-Santiago, and De Leon, Jr., JJ., concur.
Panganiban, J., see separate opinion.
Purisima, J., no part.

Rizal Commercial Banking Corpora2on vs. Intermediate Appellate Court and BF Homes
G.R. No. 74851 (December 9, 1999)
Facts:
Petitioner RCBC is a mortgagor-creditor of the party respondent BF Homes. BF Homes, being
a distressed firm, filed before the Securities and Exchange Commission a Petition for
Rehabilitation and for Declaration of Suspension of Payments. Consequently, RCBC requested
the sheriff of Rizal to levy on execution the properties of party respondent, and consequently
obtained favorable judgment. RCBC being the highest bidder during the public auction is now
seeking for the transfer certificate of titles from the Register of Deeds issued in its name. It is
worthy to note that it was on October 26, 1984 that RCBC obtained favor over the execution of
the respondents properties, and it was only on March 18, 1985 that a Management Committee
was organized by the SEC for BF Homes.
Issue:
Whether or not the Court may depart from the words of the law which clearly provides that a
creditor may levy execution on a firms properties when such execution precedes SECs
organization of a Management Committee to act as its receiver.
Held:
PD 209-A states that suspension of claims against a corporation under rehabilitation is counted
or figured up only upon the appointment of a management committee or a rehabilitation
receiver. The holding that suspension of actions for claims against a corporation under
rehabilitation takes effect as soon as the application or a petition for rehabilitation is filed with
the SEC may, to some, be more logical and wise but unfortunately, such is incongruent with
the clear language of the law. Suspension of actions for claims commences only from the time
a management committee or receiver is appointed by the SEC. Petitioner RCBC rightfully
moved for the extrajudicial foreclosure of its mortgage on October 26, 1984 because a
management committee was not appointed by the SEC until March 18, 1985.
Reasoning:
No matter how practical and noble a reason would be, in order to depart from the words of the
law stated in clear and unambiguous manner, would be to encroach upon legislative
prerogative to define the wisdom of the law. Such is plainly judicial legislation.
Policy:
Paragraph C Section 6 of PD 209-A states that upon appointment of a management committee
rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against
corporations, partnerships or associations under management or receivership, pending before
any court, tribunal, board or body shall be suspended accordingly.

Notes:

Dissolution