1. G.R. No.

L-12610
BACOLOD-MURCIA,
PHILIPPINES

October 25, 1963; LABRADOR, J.:

MILLING

CO.,

INC., v.

CENTRAL

BANK

OF

THE

FACTS:

Plaintiff sold and exported to Olavarria & Co., Inc. of New York, United States of America
48,192 piculs (equivalent to 3,000 tons) of sugar for the total price of $416,640.00 U.S.
currency, and as a consequence drew against said Olavarria & Co., Inc. two (2) drafts for the
total sum of $336,995.40 U.S. currency, to cover an initial payment of 95% of said purchase
price.

Said drafts were then entrusted and delivered for collection to the Philippine Bank of
Commerce, which duly accepted the undertaking to collect the amount thereof for the
account of plaintiff, but called the attention of plaintiff that under existing rules and
regulations all exchange proceeds of the drafts must be sold to the Central Bank authorities at
the prevailing rate of exchange set up by the Central Bank creating a reserve supply of
dollars which the Cenral Bank thereafter disposed to parties in need thereof, but at the rate
also of 2 to 1.

Plaintiff brought this special civil action for prohibition in order to stop the defendant Central
Bank from taking further action to enforce Circular No. 20.

Plaintiff says that the forced sale of foreign to the Central Bank required in Circular No. 20 is
"ultra vires"; and that the practice of the central Bank in paying for such exchange only at a
the legal party rate with the purpose of reselling the same to other private parties at the same
rate is a confiscation of private property not for public use nor for just compensation.
Respondent contends the contrary.

The defenses presented by the respondent-appellee in its answer are: (1) that Circular No. 20
is presumed to be valid; (2) that the Philippines is a signatory member of the International
Monetary Fund Agreement and as such is bound to respect or to maintain the par value of the
Philippine currency; (3) that Circular No. 20 was approved in an exchange crisis in
accordance with Section 74 of the Central Bank Act and said circular was approved by the
President of the Philippines and by the International Monetary Fund; (4) that the powers of
the Central Bank to curtail, regulate and license the use of foreign exchange include the right
to require that all foreign exchange be surrendered and that the plaintiff has not exhausted all
the administrative remedies available in the ordinary course of law, etc.

ISSUE: WON the circular is a valid act.

HELD:
Yes. The provisions of Republic Act 265 are so broad and encompassing with respect to the
Bank's powers that it is difficult to believe that exchange control was not authorized within the
scope of the Charter. The fact that the Charter does not expressly grant the Bank the power to
require the forcible sale of foreign exchange is no reason,per se, for holding that the Bank may
not do so; the inquiry should be whether the Act contains sufficient standards on which the
exercise of a power could be premised. On this score Republic Act No. 265 is not wanting.
The Central Bank is charged with the duty "to administer the monetary and banking system of
the Republic; to maintain monetary stability in the Philippines; to preserve the international
value of the peso; and to promote in rising level of production, employment and real income in
the Philippines.
Dealing on the international reserve, Section 68 enjoins the Central Bank to maintain an
international reserve "adequate to meet any foreseeable net demands on the Bank for foreign
currencies."
The forcible sale of foreign exchange to the Central Bank, in relation to the powers and
responsibilities given to it in Sees. 2, 14, 64, 68, 70, 74 and other sections of R.A. No. 265 can
be regarded as falling within the category of "implied powers", as those necessary for the
effective discharge of its responsibilities.
Implied powers flow from a grant of expressed powers and are those powers necessary or
incidental to the exercise of the expressed powers. (Shelby Oil Co. vs. Pruitt & McCrory, 221
P. 709, 710, 94 Okl. 232). Implied powers are such as are necessary to carry into effect those
which are expressly granted, and which must therefore be presumed to have been within the
intention of the legislative grant." (City of Madison vs. Daley, 58 F. 751, 755); ... incidental
powers are such as are necessary in order to enable a corporation to carry into execution that
specific powers conferred upon it by its Charter.

2. 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 defendant-appellee.

REYES, J.B.L., J.:

FACTS: Plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited copartnership Gonzaga and Company, had been and are sugar planters adhered to the defendantappellee'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.
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.
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 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: WON the directors of the appellee company had authority to modify the proposed terms
of the Amended Milling Contract.
HELD: YES.
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

3. CIR V CA
FACTS: Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total
shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 shares which were
of original issue when the corporation was founded and 134,659 shares as stock dividend
declarations. So in 1964 when Soriano died, half of the shares he held went to his wife as her
conjugal share (wifes legitime) and the other half (92,577 shares, which is further broken
down to 25,247.5 original issue shares and 82,752.5 stock dividend shares) went to the estate.

For sometime after his death, his estate still continued to receive stock dividends from ASC until
it grew to at least 108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of shares from Sorianos
estate purportedly for the planned Filipinization of ASC. Eventually, 108,000 shares were
redeemed from the Soriano Estate. In 1973, a tax audit was conducted. Eventually, the
Commissioner of Internal Revenue (CIR) issued an assessment against ASC for deficiency
withholding tax-at-source. The CIR explained that when the redemption was made, the estate
profited (because ASC would have to pay the estate to redeem), and so ASC would have
withheld tax payments from the Soriano Estate yet it remitted no such withheld tax to the
government.
ASC averred that it is not duty bound to withhold tax from the estate because it redeemed the
said shares for purposes of Filipinization of ASC and also to reduce its remittance abroad.
ISSUE: Whether or not ASCs arguments are tenable.
HELD: No. The reason behind the redemption is not material. The proceeds from a redemption
is taxable and ASC is duty bound to withhold the tax at source. The Soriano Estate definitely
profited from the redemption and such profit is taxable, and again, ASC had the duty to withhold
the tax. There was a total of 108,000 shares redeemed from the estate. 25,247.5 of that was
original issue from the capital of ASC. The rest (82,752.5) of the shares are deemed to have been
from stock dividend shares. Sale of stock dividends is taxable. It is also to be noted that in the
absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate
property, in whole or in part, is made out of corporate profits such as stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of ASC and that
the latter is merely redeeming them as such. The capital cannot be distributed in the form of
redemption of stock dividends without violating the trust fund doctrine wherein the capital
stock, property and other assets of the corporation are regarded as equity in trust for the payment
of the corporate creditors. Once capital, it is always capital. That doctrine was intended for the
protection of corporate creditors.

4. Fisher v. Trinidad
Facts: Fisher was a stockholder in Phil-Am Drug Company. The company declared a stock
dividend with Fishers share of the dividend amounting to P24,800. Collector of Internal
Revenue Trinidad demanded P889 income tax on said dividend, which Fisher protested against
but voluntarily paid. Issue: WON stock dividends can be classified as income and taxable under

Act No. 2833 providing for tax upon income? Held: No, the receipt of stock dividends merely
represents an increase in value of the assets of a corporation. The court defines stock dividends
as increase in capital of corps, firms, partnerships, etc for a particular period. They represent
the increase in the proportional share of each stockholder in the companys capital. It is not a
distribution of the corps profits to the stockholder. It only increases the stockholders SOURCE
of income (capital), but does not increase income itself.
Issue: Definition of income tax
Held: Act No. 2833 taxed any distribution by a corporation out of its earnings or profits. From
the various definitions of income tax cited, an income tax is a tax on the yearly profits arising
from property, salary, private revenue, capital invested, and all other sources of income. What is
taxed is the profit, not the source. Issue: When is income realized (Test of Realization) Held:
Stock dividend in this case is not taxable for income because the stockholder has received
nothing out of the company's assets for his separate use and benefit. Instead, his original
investment along with whatever gains which resulted from the use of his and other stockholders
money remains property of the company. The fact that it is not yet his means the capital is still
subject to business risks that can wipe out his entire investment. All he has received is a stock
certificate indicating the increase in his capital in the company. Thus we can say that income has
been realized when there has been a separation of the interest of the stockholder from the general
capital of the corporation. This separation of interest happens when the company declares a cash
dividend on the shares of shareholders.
5. WISE & CO. vs. BIBIANO L. MEER, Collector of Internal Revenue
G.R. No. 48231

June 30, 1947

By: Karen P. Lustica

FACTS: Manila Wine Merchants, Ltd., a Hongkong company, was liquidated and its capital
stock was distributed to its stockholders. One of the stockholders was the petitioner.

The corporation was sold to Manila Wine Merchants Inc. P 400,000. The said earnings
were distributed to its stockholders and declared as dividends. Manila Wine paid the
income tax for the entire earnings. Because of the sale of its business and assets, a surplus
was realized by Manila Wine after deducting the dividends.

This surplus was also distributed to its stockholders. Manila Wine also paid the income tax
for the said surplus. The petitioners then filed their respective income tax returns.

Meer made a deficiency assessment charging the individual stockholders for taxes on the
shares distributed to them despite the fact that income tax was already paid by the Manila
Wine. The petitioners paid the assessed amount in protest.

ISSUES:

1. WON the surplus received by the petitioners were ordinary dividends

2. WON the dividends are taxable.
3. WON the profits made by the non-resident individual aliens are income from the
Philippines since the sale took place outside the country.

HELD / RATIO:

1. NO. The Court held that the dividends are liquidating dividends or payments for the
surrendered or relinquished stock in a corporation in a complete liquidation. The
deed of sale stipulated that the sale and transfer of the HongKong Company shall take
effect on June 1, 1937. The distribution took place on June 8. They could not consistently
deem all the business and assets of the corporation sold as of June 1, 1937, and still say
that said corporation, as a going concern, distributed ordinary dividends to them
thereafter.

2. YES. Liquidating dividends are taxable. Income tax law states that, Where a
corporation, partnership, association, joint-account, or insurance company distributes
all of its assets in complete liquidation or dissolution, the gain realized or loss

sustained by the stockholder, whether individual or corporation, is a taxable income

or a deductible loss as the case may be.

Such distributions under the law were subject to both the normal and the additional tax
provided for. Loosely speaking, the distribution to the stockholders of a corporation's
assets, upon liquidation, might be termed a dividend; but this is not what is generally
meant and understood by that word. As generally understood and used, a dividend is a
return upon the stock of its stockholders, paid to them by a going corporation without
reducing their stockholdings, leaving them in a position to enjoy future returns upon
the same stock . . .. In other words, it is earnings paid to him by the corporation upon his
invested capital therein, without wiping out his capital. On the other hand, when a solvent
corporation dissolves and liquidates, it distributes to its stockholders not only any
earnings it may have on hand, but it also pays to them their invested capital, namely, the
amount which they had paid in for their stocks, thus wiping out their interest in the
company.

3. YES. Manila Wine Merchants Ltd. was at the time of the sale of its business in the
Philippines, and the Manila Wine Merchants Inc. was a domestic corporation
domiciled and doing business also in the Philippines. It is clear that said
distributions were income from Philippine sources.

DISPOSITIVE: Motion denied.

6. G.R. No. 118043 July 23, 1998

LINCOLN PHILIPPINE LIFE INSURANCE COMPANYvs.COURT OF APPEALS
FACTS:
Petitioner is a domestic corporation engaged in a life insurance business. It issued 50,000
shares of stock as stock dividends with par value of P100 or a total of P5,000,000 and
paiddocumentary stamp taxes on each certificate on the basis of its par value. The CIRstated that
Lincolnthe book value of the shares amounting to P19,307,500.00 should be used as basis for
determining the amount of the documentary stamp tax. Thus, it issued a deficiency documentary
stamp tax assessmentin the amount of P78,991.25 in excess of the par value of the stock

dividends. On the appeal, CTA held that the amount of the documentary stamp tax should be
based on the parvalue stated on each certificate of stock. CA reversed the CTA's decision.Hence,
this petition.
ISSUE:
WON the par value of the certificates of stocks should be the basis for determining the
amount to be paid as documentary stamp tax.
HELD:
Yes. The par value of the certificates of stock should be the basis for determining the
amountto be paid as documentary stamp tax. The NIRC Sec. 224 provides that on every original
issue, whether on organization, reorganization or for any lawful purpose, of certificates of stock
by any association, company or corporation, there shall be collected a documentary stamp tax of
one peso and ten centavos on each two hundred pesos, or fractional part thereof, of the par value
of such certificates.
Stock dividends are shares of stock and not certificates of stock which merely represent
them. Thus, there is no basis for considering stock dividends as a distinct class from ordinary
shares of stock since under this provision only certificates of stock are required to be
distinguishedinto either one with par value or one withoutpar rather than the classes of shares
themselves.
7. ATRIUM MANAGEMENT VS CA
Doctrine: Ultra Vires Act, When corporate officers may be held personally liable
Facts: In 1981, Hi-Cement Corporation through Lourdes De Leon (its Treasurer) and Antonio
De Las Alas (its Chairman, now deceased) issued four postdated checks to E.T. Henry and Co.
The checks amount to P2 million. The checks are crossed checks and are only made payable to
E.T. Henrys account. However, E.T. Henry still indorsed the checks to Atrium Management
Corporation (AMC). AMC then made sure that the checks were validly issued by requesting E.T.
Henry to get some confirmation from Atrium. Interestingly, De Leon confirmed the checks and
advised that the checks are okay to be rediscounted by AMC notwithstanding the fact that the
checks are crossed checks payable to no other accounts but that of E.T. Henry. So when AMC
presented the check, it was dishonored because Hi-Cement stopped payment. Eventually, AMC
sued Hi-Cement, E.T. Henry, and De Leon. The trial court ruled in favor of AMC and made all
the respondents liable.
On appeal, Hi-Cement averred that De Leons act in signing the check was ultra vires hence De
Leon should be personally liable for the check. De Leon, on the other hand, insisted that the
checks were authorized by the corporation.
Issue: WON De Leons act of signing the check constitutes an ultra vires act hence making her
personally liable.

Ruling: No, the act is not ultra vires but De Leon is still personally liable. The act is not ultra
vires because the act of issuing the checks was well within the ambit of a valid corporate act. De
Leon as treasurer is authorized to sign checks. When the checks were issued, Hi-Cement has
sufficient funds to cover the P2 million.

ultra vires act - committed outside the object for which a corporation is created as defined
by the law of its organization and therefore beyond the power conferred upon it by law
ultra vires is distinguished from an illegal act for the former is merely voidable which
may be enforced by performance, ratification, or estoppel, while the latter is void and cannot
be validated.

As a rule, there are four instances that will make a corporate director, trustee or officer along
(although not necessarily) with the corporation personally liable to certain obligations. They are:
1.

He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;

2.

He consents to the issuance of watered down stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;

3.

He agrees to hold himself personally and solidarily liable with the corporation; or

4.

He is made, by a specific provision of law, to personally answer for his corporate action.
In the case at bar, De Leon is negligent. She was aware that the checks were only payable to E.T.
Henrys account yet she sent a confirmation to Atrium to the effect that the checks can be
negotiated to them (Atrium) by E.T. Henry. Therefore, she may be held personally liable along
with E.T. Henry (but not with Hi-Cement where she is an officer). Her negligence resulted in
damage to the corporation.

8. Pirovano v s dela rama

FACTS:
Enrico Pirovano, president of the defendant company, managed the companyuntil it became a
multi-million corporation by the time Pirovano was executed by the Japanese during the
occupation.
BOD Resolution: Out of the proceeds, the sum of P400,000 be set aside for equal division among
the 4 minor children, convertible into shares of stock of the De la Rama Steamship Company, at
par and, for that purpose, that the present registered stockholders of the corporation be requested
to waive their preemptive right to 4,000 shares of the unissued stock of the company in order to
enable each of the 4 minor heirs to obtain 1,000 shares at par if the Pirovano children would

given shares of stock, the voting strength of the 5 daughters of Don Esteban would be adversely
affected - Mrs. Pirovano would have a voting power twice that of her sisters Lourdes de la Rama
wrote secretary of the corporation, Atty. Marcial Lichauco, asking him to cancel the waiver she
supposedly gave of her pre-emptive rights.
The company ammended the resolution turning it into a loan with 5% interest payable when the
obligation can be met
The company revoked its donation of the life premium proceeds since it is not in compliance
with the SEC
Minor children of the late Enrico represented by their mother and judicial guardian demanded the
payment of the credit due them as of December 31, 1951, amounting to P564,980.89
RTC: contract or donation is not ultra vires
ISSUE:
W/N corporation donation of the proceeds of insurance policies is an ultra vires act
HELD: NO. valid and binding remunerative donation
That which is made to a person in consideration of his merits or for services rendered to the
donor, provided they do not constitute recoverable debts, or that in which a burden less than the
value of the thing given is imposed upon the donee, is also a donation." (Art. 619, old Civil
Code)
In donations made to a person for services rendered to the donor, the donor's will is moved by
acts which directly benefit him. The motivating cause is gratitude, acknowledgment of a favor, a
desire to compensate. (Sinco and Capistrano, The Civil Code, Vol. 1, p. 676; Manresa, 5th ed.,
pp. 72-73.)
donation has reached the stage of perfection which is valid and binding upon the corporation and
as such cannot be rescinded unless there is exists legal grounds for doing so.
donation was embodied in a resolution duly approved by the Board of Directors on January 6,
1947
July 25, 1949: BOD approved the proposal of Mrs. Pirovano to buy the house at New Rochelle,
New York, owned by a subsidiary of the corporation at the costs of S75,000
2 reasons given for the rescission of donation in the resolution of the corporation adopted on
March 8, 1951 - valid and legal as to justify the rescission corporation failed to comply with the
conditions to which the above donation was made subject in the opinion of the Securities and
Exchange Commission said donation is ultra vires articles of incorporation contain:
To invest and deal with the moneys of the company and immediately required, in such manner as
from time to time may be determined.
To aid in any other manner any person, association, or corporation of which any obligation or in
which any interest is held by this corporation or in the affairs or prosperity of which this
corporation has a lawful interest.

By ratification the infirmity of the corporate act has been obliterated thereby making it perfectly
valid and enforceable. This is specially so if the donation is not merely executory but executed
and consummated and no creditors are prejudice, or if there are creditors affected, the latter has
expressly given their confirmity.

9. Bitong vs. CA [292 SCRA 503 (July 13 1998)]

Ownership of Corporate Shares/ Stock Certificates: Valid Issuance
Facts: Bitong was the treasurer and member of the BoD of Mr. & Mrs. Corporation. She filed a
complaint with the SEC to hold respondent spouses Apostol liable for fraud, misrepresentation,
disloyalty, evident bad faith, conflict of interest and mismanagement in directing the affairs of
the corporation to the prejudice of the stockholders. She alleges that certain transactions entered
into by the corporation were not supported by any stockholders resolution.
The complaint sought to enjoin Apostol from further acting as president-director of the
corporation and from disbursing any money or funds. Apostol contends that Bitong was merely
a holder-in-trust of the JAKA shares of the corporation, hence, not entitled to the relief she prays
for. SEC Hearing Panel issued a writ enjoining Apostol.
After hearing the evidence, SEC Hearing Panel dissolved the writ and dismissed the complaint
filed by Bitong. Bitong appealed to the SEC en banc. The latter reversed SEC Hearing Panel
decision. Apostol filed petition for review with the CA. CA reversed SEC en banc ruling
holding that Bitong was not the owner of any share of stock in the corporation and therefore, not
a real party in interest to prosecute the complaint. Hence, this petition with the SC.
Issue: Whether or not Bitong was the real party in interest.
Held: Based on the evidence presented, it could be gleaned that Bitong was not a bona fide
stockholder of the corporation. Several corporate documents disclose that the true party in
interest was JAKA.
Although her buying of the shares were recorded in the Stock and Transfer Book of the
corporation, and as provided by Sec. 63 of the Corp Code that no transfer shall be valid except as
between the parties until the transfer is recorded in the books of the corporation, and upon its
recording the corporation is bound by it and is estopped to deny the fact of transfer of said
shares, this provision is not conclusive even against the corporation but are prima facie evidence
only. Parol evidence may be admitted to supply the omissions in the records, explain
ambiguities, or show what transpired where no records were kept, or in some cases where such
records were contradicted. Besides, the provision envisions a formal certificate of stock which
can be issued only upon compliance with certain requisites: (1) certificates must be signed by
the president or vice president, countersigned by the secretary or assistant secretary, and sealed

with the seal of the corporation, (2) delivery of the certificate; (3) the par value, as to par value
shares, or the full subscription as to no par value shares, must be first fully paid; (4) the original
certificate must be surrendered where the person requesting the issuance of a certificate is a
transferee from a stockholder.
These considerations are founded on the basic principle that stock issued without authority and in
violation of the law is void and confers no rights on the person to whom it is issued and subjects
him to no liabilities. Where there is an inherent lack of power in the corporation to issue the
stock, neither the corporation nor the person to whom the stock is issued is estopped to question
its validity since an estoppel cannot operate to create stock which under the law cannot have
existence.

10. SAN MIGUEL V. KAHN

Facts: 14 corporations initially acquired shares of outstanding capital stock of San Miguel
Corporation andconstituted a Voting Trust thereon in favor of Andres Soriano, Jr. When the latter
died Eduardo Cojuanco was electedas the substitute trustee. However, after the EDSA revolution,
Cojuanco fled out of the country, and subsequently anagreement was entered into between the 14
corporations and Andres Soriano III (as an agent of several persons) forthe purchase of the shares
held by the former.Actually the buyer of the shares was Neptunia Corporation, a foreign
corporation and wholly-owned subsidiary ofanother subsidiary wholly owned by San Miguel
Corporation. Neptunia paid the downpayment from the proceeds ofcertain loans. PCGG then
sequestered the shares subject of the sale so San Miguel suspended all the otherinstallments of
the price to the sellers. The 14 corporations then sued for recission and damages.Meanwhile,
PCGG directed San Miguel to issue qualifying shares to seven (7) individuals including Eduardo
de losAngeles from the sequestered shares for them to hold in trust.Then, the San Miguel board
of directors passed a resolution assuming the loans incurred by Neptunia for thedownpayment.
De los Angeles assailed the resolution alleging that it was not passed by the board aside from
itsdelitorious effects on the corporations interest. When his efforts to obtain relief within the
corporation proved futile, hefiled this action with the SEC.Respondent directors alleged that de
los Angeles has no legal standing having been merely imposed by the PCGGand that the
twenty (20) shares owned by him personally cannot fairly and adequately represent the interest
of theminority.
Ruling: The requisites of a derivative suit are:1. the party bringing the suit should be a
stockholder as of the time ofthe act or transactions complained of, the number of shares not

being material;2. exhaustion of intra-corporateremedies (has made a demand on the board of

directors for the appropriate relief but the latter has failed or refusedto heed his plea); and3. the
cause of action actually devolves on the corporation and not to the particular stockholderbringing
the suit.The bona fide ownership by a stockholder in his own right suffices to invest him with the
standing to bring a derivativesuit for the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf,or for the protection or vindication of his own
particular right, or the redress of a wrong committed against himindividually but in behalf and
for the benefit of the corporation. It is undisputed that apart from the qualifying sharesgiven to
him by the PCGG, he owns 20 shares in his own right, as regards which he cannot from any
aspect bedeemed to be beholden to the PCGG, his ownership of his shares being precisely what
he invokes as the source ofhis authority to bring the derivative suit. Furthermore, it was not
necessary for de los Angeles to be a director in orderto bring a derivative suit.De los Angeles
complaint is confined to the issue of the validity of the assumption by the corporation of
theindebtedness of Neptunia, allegedly for the benefit of certain of its officers and stockholders
and is distinct from theownership of the sequestered shares. The dispute concerns the acts of the
board of directors claimed to amount tofraud and misrepresentation which may be detrimental to
the interest of the stockholders, or is one arising out ofintra-corporate relations between and
among stockholders, or between any or all of them and the corporation ofwhich they are
stockholders (meaning that the cause of action still belongs to the corporation).Class notes: In
effect the result of the acts of the directors of San Miguel is the use of corporate assets for the
benefitof certain directors/stockholders to the extent that the corporation will not be able to
devote its assets in acquiring itsown shares. But even without the presence of a self-interested
director, still the transaction would result to apremature retirement of the shares (meaning a
reduction of capital).In a derivative suit, the number of shares of a suing stockholder is
immaterial.Even assuming that the suing stockholder had only qualifying shares, the law requires
only one share without anydistinction or qualification. besides, it is precisely within the scope
of PCGGs duty to preserve the assets of thecorporation.

11. Tam Wing Tak v Makasiar

Business Organization Corporation Law Ultra Vires Acts of Corporate Officers Derivative
Suit
Sometime before November 1992, Vic AngSiong issued a check to Concord-World Properties,
Inc. The check amounted to P83.5 million. The check however bounced. In November 1992,
Tam Wing Tak filed an affidavit-complaint for violation of the Anti-Bouncing Checks Law
against AngSiong. The fiscal did not file a criminal information against AngSiong because

apparently Concord-World and AngSiong are settling out of court (in fact AngSiong already paid
P19 million); and that Tam Wing Tak was not authorized by the Board of Directors of ConcordWorld to sue AngSiong. Tam Wing Tak then filed a petition for mandamus to compel the fiscal to
file the information. Judge Ramon Makasiar dismissed the petition.
ISSUE: Whether or not the petition should be granted.
HELD: No. The petition for mandamus shall not lie. There was no grave abuse of discretion
when the fiscal refused to file the information. Concord-World is the named payee in the check
that bounced. As payee, Concord-World is the injured party hence only Concord-World can file
the criminal case against AngSiong but it did not do so because it chose to amicably settle the
issue with AngSiong. Where a corporation is an injured party, its power to sue is lodged with its
board of directors or trustees. This can be delegated but Tam Wing Tak never proved that he was
authorized by the Board of Concord-World.
But may the suit be considered a derivative suit where the Boards authorization may not be
had?
No. For a derivative suit to prosper, it is required that the minority stockholder suing for and on
behalf of the corporation must allege in his complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other stockholders similarly situated who may wish to
join him in the suit. In this case, this was not complied with. Hence, Tam Wing Tak cannot sue
AngSiong.
12. G.R. No. 117604. March 26, 1997; Kapunan
CHINA BANKING CORPORATION v. COURT OF APPEALS, and VALLEY GOLF and
COUNTRY CLUB, INC.,
FACTS:
Galicano Calapatia, Jr. a stockholder of private respondent Valley Golf & Country Club, Inc.
pledged his Stock Certificate to petitioner China Banking Corporation.
Petitioner wrote VGCCI requesting that the aforementioned pledge agreement be recorded in its
books.
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for
extrajudicial foreclosure.

 Notary Public de Vera held a public auction. Petitioner emerged as the highest bidder
at P20,000.00 for the pledged stock. Consequently, petitioner was issued the corresponding
certificate of sale.
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of
auction sale of a number of its stock certificates.
Petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No. 1219 by
virtue of being the highest bidder in the 17 September 1985 auction and requested that a new
certificate of stock be issued in its name.
VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction
held on 10 December 1986 for P25,000.00.
Petitioner filed a complaint with the Securities and Exchange Commission (SEC) for the
nullification of the sale of Calapatia's stock by VGCCI; The Commission en banc believes that
appellant-petitioner has a prior right over the pledged share and because of pledgor's failure to
pay the principal debt upon maturity, appellant-petitioner can proceed with the foreclosure of
the pledged share.
ISSUE: WON the sale is of stock is valid. Hence the new owner is the petitioner.
HELD:
YES. The validity of the pledge agreement between petitioner and Calapatia cannot thus be held
suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983
in the amount of P20,000.00 was but a renewal of the first promissory note covered by the
same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the
right to sell the share in question in accordance with the express provision found in its by-laws.
It is significant to note that VGCCI began sending notices of delinquency to Calapatia after it
was informed by petitioner (through its letter dated 14 May 1985) of the foreclosure
proceedings initiated against Calapatia's pledged share, although Calapatia has been delinquent
in paying his monthly dues to the club since 1975. Stranger still, petitioner, whom VGCCI had
officially recognized as the pledgee of Calapatia's share, was neither informed nor furnished
copies of these letters of overdue accounts until VGCCI itself sold the pledged share at another
public auction. By doing so, VGCCI completely disregarded petitioner's rights as pledgee. It
even failed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie
its claim of good faith.

 In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at
the time the transaction or agreement between said third party and the shareholder was entered
into, in this case, at the time the pledge agreement was executed. VGCCI could have easily
informed petitioner of its by-laws when it sent notice formally recognizing petitioner as
pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said
by-laws at the time of foreclosure will not suffice.
Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except
when they have knowledge of the provisions either actually or constructively. In the case of
Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the
transfer of shares cannot have any effect on the the transferee of the shares in question as he
"had no knowledge of such by-law when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a privy to the contract created by the
by-law between the shareholder x x x and the Botica Nolasco, Inc. Said by-law cannot operate
to defeat his right as a purchaser." (Underscoring supplied.)
By analogy of the above-cited case, the Commission en banc is of the opinion that said case is
applicable to the present controversy. Appellant-petitioner bank as a third party can not be
bound by appellee-respondent's by-laws. It must be recalled that when appellee-respondent
communicated to appellant-petitioner bank that the pledge agreement was duly noted in the
club's books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript
of stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent
only in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement was
contracted.

13. G.R. No. 91478

February 7, 1991

ROSITA PEA petitioner,

vs.
THE COURT OF APPEALS, SPOUSES RISING T. YAP and CATALINA YAP,
PAMPANGA BUS CO., INC., JESUS DOMINGO, JOAQUIN BRIONES, SALVADOR
BERNARDEZ, MARCELINO ENRIQUEZ and EDGARDO A. ZABAT,respondents.
FACTS: PAMPANGA BUS CO., INC. (PAMBUSCO) is the owner of the three lots in dispute.
PAMBUSCO mortgaged the lots to the Development Bank of the Philippines (DBP), which were
later on foreclosed.
Rosita Pea was awarded the lots in a foreclosure sale for being the highest bidder. The
certificate of sale was later issued to her and registered in her name.

Subsequently, the Board of Directors of PAMBUSCO, through three out of its five directors,
issued a resolution to assign its right of redemption over the lots in favor of any interested party.
The right of redemption was later on assigned to Marcelino Enriquez, who redeemed the
property.
Enriquez then sold the lots to spouses Rising T. Yap and Catalina Lugue-Yap.
Meanwhile, a case involving the validity of the sale to the spouses Yap was pending, and despite
the protestations of Pea as to validity of the PAMBUSCO's assignment of the right of
redemption, the lots were somehow registered in the name of spouses Yap. Despite the
registration of the lots to spouses Yap, Pea retained possession of the property.
The antecedents of the present petition are as follows:
Spouses Yap sought to recover the possession of the lots from Pea. The latter countered that she
is now the legitimate owner of the subject lands for having purchased the same in a foreclosure
proceeding instituted by the DBP against PAMBUSCO and no valid redemption having been
effected within the period provided by law.
The defense was that since the deed of assignment executed by PAMBUSCO in favor of
Enriquez was void ab initio for being an ultra vires act of its board of directors and for being
without any valuable consideration, it could not have had any legal effect.
(It should be noted that the by-laws of PAMBUSCO provide that four out of five directors must
be present in a special meeting of the board to constitute a quorum, and that the corporation has
already ceased to operate.)
CFI ruled in favor of Petitioner Pea, but the same was overturned by the CA.
ISSUE: WON respondents Yap spouses are stockholders or officers of PAMBUSCO.
HELD: NO.
In this case, neither petitioner nor respondents Yap spouses are stockholders or officers of
PAMBUSCO. Consequently, the issue of the validity of the series of transactions resulting in the
subject properties being registered in the names of respondents Yap may be resolved only by the
regular courts.
Respondent court held that petitioner being a stranger to the questioned resolution and series of
succeeding transactions has no legal standing to question their validity.

There can be no question in this case that the questioned resolution and series of transactions
resulting in the registration of the properties in the name of respondent Yap spouses adversely
affected the rights of petitioner to the said properties. Consequently, petitioner has the legal
standing to question the validity of said resolution and transactions.
The by-laws of a corporation are its own private laws which substantially have the same effect as
the laws of the corporation. They are in effect, written, into the charter. In this sense they become
part of the fundamental law of the corporation with which the corporation and its directors and
officers must comply. 11
Apparently, only three (3) out of five (5) members of the board of directors of respondent
PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of a special meeting.
There was no quorum to validly transact business since, under Section 4 of the amended by-laws
hereinabove reproduced, at least four (4) members must be present to constitute a quorum in a
special meeting of the board of directors of respondent PAMBUSCO.
Under Section 25 of the Corporation Code of the Philippines, the articles of incorporation or bylaws of the corporation may fix a greater number than the majority of the number of board
members to constitute the quorum necessary for the valid transaction of business. Any number
less than the number provided in the articles or by-laws therein cannot constitute a quorum and
any act therein would not bind the corporation; all that the attending directors could do is to
adjourn. 12
Moreover, the records show that respondent PAMBUSCO ceased to operate as of November 15,
1949 as evidenced by a letter of the SEC to said corporation dated April 17, 1980. 13 Being a
dormant corporation for several years, it was highly irregular, if not anomalous, for a group of
three (3) individuals representing themselves to be the directors of respondent PAMBUSCO to
pass a resolution disposing of the only remaining asset of the corporation in favor of a former
corporate officer.
As a matter of fact, the three (3) alleged directors who attended the special meeting on
November 19, 1974 were not listed as directors of respondent PAMBUSCO in the latest general
information sheet of respondent PAMBUSCO filed with the SEC dated 18 March
1951. 14 Similarly, the latest list of stockholders of respondent PAMBUSCO on file with the SEC
does not show that the said alleged directors were among the stockholders of respondent
PAMBUSCO. 1
Under Section 30 of the then applicable Corporation Law, only persons who own at least one (1)
share in their own right may qualify to be directors of a corporation. Further, under Section 28
1/2 of the said law, the sale or disposition of an and/or substantially all properties of the
corporation requires, in addition to a proper board resolution, the affirmative votes of the

stockholders holding at least two-thirds (2/3) of the voting power in the corporation in a meeting
duly called for that purpose. No doubt, the questioned resolution was not confirmed at a
subsequent stockholders meeting duly called for the purpose by the affirmative votes of the
stockholders holding at least two-thirds (2/3) of the voting power in the corporation. The same
requirement is found in Section 40 of the present Corporation Code.
It is also undisputed that at the time of the passage of the questioned resolution, respondent
PAMBUSCO was insolvent and its only remaining asset was its right of redemption over the
subject properties. Since the disposition of said redemption right of respondent PAMBUSCO by
virtue of the questioned resolution was not approved by the required number of stockholders
under the law, the said resolution, as well as the subsequent assignment executed on March 8,
1975 assigning to respondent Enriquez the said right of redemption, should be struck down as
null and void.
Respondent court, in upholding the questioned deed of assignment, which appears to be without
any consideration at all, held that the consideration thereof is the liberality of the respondent
PAMBUSCO in favor of its former corporate officer, respondent Enriquez, for services rendered.
Assuming this to be so, then as correctly argued by petitioner, it is not just an ordinary deed of
assignment, but is in fact a donation. Under Article 725 of the Civil Code, in order to be valid,
such a donation must be made in a public document and the acceptance must be made in the
same or in a separate instrument. In the latter case, the donor shall be notified of the acceptance
in an authentic form and such step must be noted in both instruments. 1

14. Salafranca vs philamlife village

FACTS:
In 1981, Enrique Salafranca was hired as an administrative officer by the Philamlife Village
Homeowners Associaiton, Inc. (PVHAI). Salafranca was tasked to manage the villages day to
day activities. His employment was originally for 6 months only but his contract was renewed
multiple times until 1983. But even after 1983, he was still allowed to continue work even
without a renewed contract. In 1987, PVHAI amended its by-laws. Among the amendment was a
provision that the administrative officer (Salafranca) shall have a tenure which is co-terminus
with the Board of Directors which appointed him. In 1992, the tenure of said Board of Directors
expired and so Salafranca was terminated.
ISSUE: Whether or not Salafranca was illegally dismissed.
HELD: Yes. At that time, Salafranca already enjoys security of tenure because he is already a
regular employee. It is true that PVHAI has the right to amend its by-laws but such amendment
must not impair existing contracts or rights. In this case, the provision that Salafrancas position

shall be co-terminus with the appointing Board impairs his right to security of tenure which has
already vested even prior to the amendment of the by-laws in 1987.

15. G.R. No. 93695 February 4, 1992

RAMON C. LEE and ANTONIO DM. LACDAO vsTHE HON. COURT OF APPEALS
FACTS:
A third party complaint was filedagainst Alfa Integrated Textile Mills, Ramon Lee,
President of Alfa, and Antonio Lacdao, VP of Alfa. The petitioners filed a motion to dismiss the
third party complaint which was denied.On the answer to the third party complaint, petitioners
alleged that the summons for Alfa was erroneously served upon them considering that the
management of Alfa had been transferred to the DBP due to the voting trust agreement executed
between Alfa and DBP. On the other hand, DBP claimed that it was not authorized to receive
summons on behalf of Alfa since DBP had not taken over the company which has a separate and
distinct corporate personality and existence. Thus, the trial court issued an order advising the
private respondents to take the appropriate steps to serve the summons to Alfa and grants the
Manifestation and Motion for the Declaration of Proper Service of Summons filed by the
respondents.
The petitioners filed a motion for reconsideration. On comment, the private respondents
argued that the voting trust agreementdid not divest the petitioners of their positions as president
and executive vice-president of Alfa so that service of summons upon Alfa through the
petitioners as corporate officers was proper.
The trial court upheld the validity of the service of summons on Alfa. On 2 nd MR,
petitioners reiterate their stand that by virtue of the voting trust agreement they ceased to be
officers and directors of Alfa, hence, they could no longer receive summons or any court
processes for or on behalf of Alfa. The trial court ruled in favor of the petitioners. CA reversed its
decision. Hence, this petition.
ISSUE:
WON the creation of voting trust agreement divests the petitioners of their positions as
president and executive vice-president of Alfa.
HELD:
Yes. A voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends, the right to inspect the
books of the corporation, the right to sell certain interests in the assets of the corporation and
other rights to which a stockholder may be entitled until the liquidation of the corporation.
However, in order to distinguish a voting trust agreement from proxies and other voting pools
and agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock
are separated from the other attributes of ownership; (2) that the voting rights granted are
intended to be irrevocable for a definite period of time; and (3) that the principal purpose of the
grant of voting rights is to acquire voting control of the corporation.

Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a party to its
execution from legal titleholder or owner of the shares subject of the voting trust agreement,
he becomes the equitable or beneficial owner.
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be
adversely affected by the simple act of such director being a party to a voting trust agreement
inasmuch as he remains owner (although beneficial or equitable only) of the shares subject of the
voting trust agreement pursuant to which a transfer of the stockholder's shares in favor of the
trustee is required (section 36 of the old Corporation Code). No disqualification arises by virtue
of the phrase "in his own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other
persons who in fact are not beneficial owners of the shares registered in their names on the books
of the corporation becomes formally legalized. Hence, this is a clear indication that in order to be
eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock
as appearing on the books of the corporation.
The facts of this case show that the petitioners, by virtue of the voting trust agreement
executed disposed of all their shares through assignment and delivery in favor of the DBP, as
trustee. Consequently, the petitioners ceased to own at least one share standing in their names on
the books of Alfa as required under Section 23 of the new Corporation Code. They also ceased to
have anything to do with the management of the enterprise. The petitioners ceased to be
directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their
respective positions as directors of Alfa.