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SECTION 2

1.

ARTIFICIAL PERSON
FILIPINAS BROADCASTING vs. AGO MEDICAL CENTER

A juridical person is generally not entitled to moral damages


because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious anxiety,
mental anguish or moral shock. The CA cites Mambulao Lumber Co.
v. PNB, et al. to justify the award of moral damages. However, the
Courts statement in Mambulao that a corporation may have a good
reputation which, if besmirched, may also be a ground for the award
of moral damages is an obiter dictum.
Nevertheless, AMECs claim for moral damages falls under item 7 of
Article 2219 of the Civil Code. This provision expressly authorizes
the recovery of moral damages in cases of libel, slander or any other
form of defamation. Article 2219(7) does not qualify whether the
plaintiff is a natural or juridical person. Therefore, a juridical person
such as a corporation can validly complain for libel or any other
form of defamation and claim for moral damages.

SEPARATE JUDICIAL PERSONALITY


2.1. STOCKHOLDERS OF F. GUANZON AND SONS, INC. vs. REGISTER
OF DEEDS OF MANILA
A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the corporation
are owned by it as an entity separate and distinct from its members.
While shares of stock constitute personal property they do not
represent property of the corporation. The corporation has property
of its own which consists chiefly of real estate.
A share of stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent when
distributed according to law and equity, but its holder is not the
owner of any part of the capital of the corporation. Nor is he entitled
to the possession of any definite portion of its property or assets. The
stockholder is not a co-owner or tenant in common of the corporate
property.
On the basis of the foregoing authorities, it is clear that the act of
liquidation made by the stockholders of the F. Guanzon and Sons, Inc.
of the latter's assets is not and cannot be considered a partition of
community property, but rather a transfer or conveyance of the title
of its assets to the individual stockholders. Indeed, since the purpose
of the liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to the
stockholders in proportion to their shareholdings, and this is in
effect the purpose which they seek to obtain from the Register of
Deeds of Manila, that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the
stockholders. It is, therefore, fair and logical to consider the
certificate of liquidation as one in the nature of a transfer or
conveyance.

2.2 LAPERAL DEVELOPMENT CORPORATION and SUNBEAMS


CONVENIENCE FOOD CORPORATION vs. HON. CA and THE HEIRS OF
FILOTEO

It is settled that a corporation is clothed with a personality separate


and distinct from that of the persons composing it. It may not
generally be held liable for the personal indebtedness of its
stockholders or those of the entities connected with it. Conversely,
a stockholder cannot be made to answer for any of its financial
obligations even if he should be its president. There is no evidence
that Sunbeams and Laperal are one and the same person. While it is
true that Laperal is a stockholder, director and officer of Sunbeams,
that status alone does not make him answerable for the liabilities of
the said corporation. Such liabilities include Banzon's attorney's fees
for representing it in the case of Republic v. Sunbeams Convenience
Foods, Inc. The Compromise Agreement upon which the decision of
the court was based was between plaintiff Atty. Banzon and the
defendants represented by OliverioLaperal. To repeat, Sunbeams was
not a party to this agreement and so could not be affected by it.

2.3 OFFICE OF THE COURT ADMINISTRATOR, vs. DE GUZMAN, JR..


Under Section 24, Rule 14 of the Rules of Court, the notice of
lispendens may be cancelled only upon order of the court, after
proper showing that the notice is for the purpose of molesting the
adverse party, or that it is not necessary to protect the rights of the
party who caused it to be recorded. The cancellation order of
respondent was issued pursuant to the second ground, that is, the
notice of lispendens was not necessary to protect the right of Norvic
which caused it to be recorded. A cautious reading of the records of
the instant case reveals that never was Norvic the owner of the Yakal
property. It was Overseas Superintendence Corporation (OSC) that
owned the Yakal property prior to its transfer to SMIRM. The fact that
Norvic was the majority stockholder of OSC would not legally clothe
it (Norvic) with personality to cause the notice of lispendens
affecting the property of the corporation (OSC) specially so when
the corporation was not even one of the parties to the case. Well
settled is the rule that properties registered in the name of the
corporation are owned by it as an entity separate and distinct from
its members. A stockholder is not the owner of any part of the
capital of the corporation, nor is he entitled to the possession of any
definite portion of its property or assets; he is not a co-owner or
tenant in common of the corporate property.

2.4. STRONGHOLD INSURANCE COMPANY, INC. vs. TOMAS CUENCA,


MARCELINA CUENCA, MILAGROS CUENCA, BRAMIE T. TAYACTAC,
and MANUEL D. MARANON, JR.
The personality of a corporation is distinct and separate from the
personalities of its stockholders. Hence, its stockholders are not
themselves the real parties in interest to claim and recover
compensation for the damages arising from the wrongful
attachment of its assets. Only the corporation is the real party in
interest for that purpose.
There is no dispute that the properties subject to the levy on
attachment belonged to Arc Cuisine, Inc. alone, not to the Cuencas
and Tayactac in their own right. They were only stockholders of Arc
Cuisine, Inc., which had a personality distinct and separate from that
of any or all of them. The damages occasioned to the properties by
the levy on attachment, wrongful or not, prejudiced Arc Cuisine, Inc.,
not them. As such, only Arc Cuisine, Inc. had the right under the
substantive law to claim and recover such damages. This right could
not also be asserted by the Cuencas and Tayactac unless they did so
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in the name of the corporation itself. But that did not happen herein,
because Arc Cuisine, Inc. was not even joined in the action either as
an original party or as an intervenor.
The Cuencas and Tayactac were clearly not vested with any direct
interest in the personal properties coming under the levy on
attachment by virtue alone of their being stockholders in Arc Cuisine,
Inc. Their stockholdings represented only their proportionate or
aliquot interest in the properties of the corporation, but did not vest
in them any legal right or title to any specific properties of the
corporation. Without doubt, Arc Cuisine, Inc. remained the owner as
a distinct legal person.
Given the separate and distinct legal personality of Arc Cuisine, Inc.,
the Cuencas and Tayactac lacked the legal personality to claim the
damages sustained from the levy of the formers properties.
According to Asset Privatization Trust v. CA, even when the
foreclosure on the assets of the corporation was wrongful and done
in bad faith the stockholders had no standing to recover for
themselves moral damages; otherwise, they would be appropriating
and distributing part of the corporations assets prior to the
dissolution of the corporation and the liquidation of its debts and
liabilities. Moreover, in Evangelista v. Santos, the Court, resolving
WON the minority stockholders had the right to bring an action for
damages against the principal officers of the corporation for their
own benefit, said:
x x x The injury complained of is thus primarily to the
corporation, so that the suit for the damages claimed should be
by the corporation rather than by the stockholders (3 Fletcher,
Cyclopedia of Corporation pp. 977-980). The stockholders may
not directly claim those damages for themselves for that would
result in the appropriation by, and the distribution among them
of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section 16 of
the Corporation Law x x x
It is true, too, that the Cuencas and Tayactac could bring in behalf of
Arc Cuisine, Inc. a proper action to recover damages resulting from
the attachment. Such action would be one directly brought in the
name of the corporation. Yet, that was not true here, for, instead, the
Cuencas and Tayactac presented the claim in their own names.

PIERCING CORPORATE VEIL


3.1 PHILIPPINE NATIONAL BANK vs. HYDRO RESOURCES
CONTRACTORS CORPORATION
A corporation is an artificial entity created by operation of law. It has
a personality separate and distinct from that of its stockholders and
from that of other corporations to which it may be connected. As a
consequence of its status as a distinct legal entity and as a result of
a conscious policy decision to promote capital formation, a
corporation incurs its own liabilities and is legally responsible for
payment of its obligations. In other words, by virtue of the separate
juridical personality of a corporation, the corporate debt or credit is
not the debt or credit of the stockholder. This protection from
liability for shareholders is the principle of limited liability.
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. For reasons of


public policy and in the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.
However, any application of the doctrine of piercing the corporate
veil should be done with caution. A court should be mindful of the
milieu where it is to be applied. 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. The
wrongdoing must be clearly and convincingly established; it cannot
be presumed.
Scope of application of the doctrine of piercing the corporate veil:
The doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely:
1) defeat of public convenience as when the corporate fiction is used
as a vehicle for the evasion of an existing obligation;
2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or
3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation. (Citation omitted.)
Alter Ego Theory
In this connection, case law lays down a three-pronged test to
determine the application of the alter ego theory, which is also
known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so 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 fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act
in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained
of. (Emphases omitted.)
The first prong is the "instrumentality" or "control" test. This test
requires that the subsidiary be completely under the control and
domination of the parent. It examines the parent corporations
relationship with the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate
entity will be ignored. It seeks to establish whether the subsidiary
corporation has no autonomy and the parent corporation, though
acting through the subsidiary in form and appearance, "is operating
the business directly for itself."
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The second prong is the "fraud" test. This test requires that the
parent corporations conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. It examines the relationship of the
56
plaintiff to the corporation. It recognizes that piercing is appropriate
only if the parent corporation uses the subsidiary in a way that harms
57
the plaintiff creditor. As such, it requires a showing of "an element
of injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to
show that the defendants control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the harm suffered. A
causal connection between the fraudulent conduct committed
through the instrumentality of the subsidiary and the injury suffered
or the damage incurred by the plaintiff should be established. The
plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendants exercise of control and
improper use of the corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego
theory requires the concurrence of three elements: control of the
corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of the
corporation. The absence of any of these elements prevents piercing
the corporate veil.
Where two banks foreclosed mortgages on certain properties of a
mining company and resumed business operations thereof by
organizing a different company to which the banks transferred the
foreclosed assets, the banks are not liable to a contractor which was
engaged by the re-organized mining company even though the latter
is wholly-owned by the two banks and they have interlocking
directors, officers and stockholders. While ownership by one
corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by
themselves and without more, however, these circumstances are
insufficient to establish an alter ego relationship or connection
between the two banks and the new mining company on the other
hand, that will justify the puncturing of the latters corporate cover.
Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality.
Likewise, the existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of corporate
fiction in the absence of fraud or other public policy considerations.

3.2 APEX MINING CO., INC. vs. SOUTHEAST MINDANAO GOLD


MINING CORP., et al.
We cannot lend recognition to the CA theory that SEM, being a
100% subsidiary of MMC, is automatically an agent of MMC.
A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes, and
properties expressly authorized by law or incident to its existence. It
is an artificial being invested by law with a personality separate and
distinct from those of the persons composing it as well as from that
of any other legal entity to which it may be related. Resultantly,
absent any clear proof to the contrary, SEM is a separate and
distinct entity from MMC.

The CA pathetically invokes the doctrine of piercing the corporate


veil to legitimize the prohibited transfer or assignment of EP 133. It
stresses that SEM is just a business conduit of MMC, hence, the
distinct legal personalities of the two entities should not be
recognized. True, the corporate mask may be removed when the
corporation is just an alter ego or a mere conduit of a person or of
another corporation.For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against a
third person.However, this Court has made a caveat in the application
of the doctrine of piercing the corporate veil. Courts should be
mindful of the milieu where it is to be applied. Only in cases where
the corporate fiction was misused to such an extent that injustice,
fraud or crime was committed against another, in disregard of its
rights may the veil be pierced and removed. Thus, a subsidiary
corporation may be made to answer for the liabilities and/or
illegalities done by the parent corporation if the former was
organized for the purpose of evading obligations that the latter may
have entered into. In other words, this doctrine is in place in order to
expose and hold liable a corporation which commits illegal acts and
use the corporate fiction to avoid liability from the said acts. The
doctrine of piercing the corporate veil cannot therefore be used as a
vehicle to commit prohibited acts because these acts are the ones
which the doctrine seeks to prevent.
xxx the application of the foregoing doctrine is unwarranted. The
assignment of the permit in favor of SEM is utilized to circumvent the
condition of non-transferability of the exploration permit. To allow
SEM to avail itself of this doctrine and to approve the validity of the
assignment is tantamount to sanctioning illegal act which is what the
doctrine precisely seeks to forestall.

3.3 PALAY, INC. and ALBERT ONSTOTT vs. JACOBO C. CLAVE,


Presidential Executive Assistant NATIONAL HOUSING AUTHORITY
and NAZARIO DUMPIT
It is basic that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as when
as from that of any other legal entity to which it may be related. As a
general rule, a corporation may not be made to answer for acts or
liabilities of its stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of corporate
fiction may be pierced when it is used as a shield to further an end
subversive of justice; or for purposes that could not have been
intended by the law that created it; or to defeat public convenience,
justify wrong, protect fraud, or defend crime; or to perpetuate fraud
or confuse legitimate issues; or to circumvent the law or perpetuate
deception; or as an alter ego, adjunct or business conduit for the
sole benefit of the stockholders.
In this case, petitioner Onstott was made liable because he was then
the President of the corporation and the controlling stockholder. No
sufficient proof exists on record that said petitioner used the
corporation to defraud private respondent. He cannot, therefore, be
made personally liable just because he "appears to be the controlling
stockholder". Mere ownership by a single stockholder or by another
corporation is not of itself sufficient ground for disregarding the
separate corporate personality. In this respect then, a modification of
the Resolution under review is called for.

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3.4 LIDDELL & CO., INC. vs. THE COLLECTOR OF INTERNAL REVENUE
It is of course accepted that the mere fact that one or more
corporations are owned and controlled by a single stockholder is not
of itself sufficient ground for disregarding separate corporate
entities. Authorities support the rule that it is lawful to obtain a
corporation charter, even with a single substantial stockholder, to
engage in a specific activity, and such activity may co-exist with other
private activities of the stockholder. If the corporation is a
substantial one, conducted lawfully and without fraud on another,
its separate identity is to be respected. Accordingly, the mere fact
that Liddell & Co. and Liddell Motors, Inc. are corporations owned
and controlled by Frank Liddell directly or indirectly is not by itself
sufficient to justify the disregard of the separate corporate identity of
one from the other. There is, however, in this instant case, a peculiar
consequence of the organization and activities of Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering, "the legal right of a
taxpayer to decrease the amount of what otherwise would be his
taxes, or altogether avoid them by means which the law permits,
cannot be doubted." But, as held in another case, "where a
corporation is a dummy, is unreal or a sham and serves no business
purpose and is intended only as a blind, the corporate form may be
ignored for the law cannot countenance a form that is bald and a
mischievous fiction." Consistently with this view, the United States
Supreme Court held that "a taxpayer may gain advantage of doing
business thru a corporation if he pleases, but the revenue officers in
proper cases, may disregard the separate corporate entity where it
serves but as a shield for tax evasion and treat the person who
actually may take the benefits of the transactions as the person
accordingly taxable."

3.5 GREGORIO PALACIO, vs. FELY TRANSPORTATION COMPANY


The Court agrees with this contention of the plaintiffs. Isabelo
Calingasan and defendant Fely Transportation may be regarded as
one and the same person. It is evident that IsabeloCalingasan's main
purpose in forming the corporation was to evade his subsidiary civil
liability resulting from the conviction of his driver, Alfredo Carillo. This
conclusion is borne out by the fact that the incorporators of the Fely
Transportation are Isabelo Calingasan, his wife, his son, Dr.
Calingasan, and his two daughters. We believe that this is one case
where the defendant corporation should not be heard to say that it
has a personality separate and distinct from its members when to
allow it to do so would be to sanction the use of the fiction of
corporate entity as a shield to further an end subversive of justice.
Furthermore, the failure of the defendant corporation to prove that it
has other property than the jeep (AC-687) strengthens the conviction
that its formation was for the purpose above indicated.

3.6 MARVEL BUILDING CORPORATION, ET AL. vs. SATURNINO


DAVID, in his capacity as Collector, Bureau of Internal Revenue
In general the evidence offered by the plaintiffs is testimonial and
direct evidence, easy of fabrication; that offered by defendant,
documentary and circumstantial, not only difficult of fabrication but
in most cases found in the possession of plaintiffs. There is very little
room for choice as between the two. The circumstantial evidence is
not only convincing; it is conclusive. The existence of endorsed

certificates, discovered by the internal revenue agents between 1948


and 1949 in the possession of the Secretary-Treasurer, the fact that
twenty-five certificates were signed by the president of the
corporation, for no justifiable reason, the fact that two sets of
certificates were issued, the undisputed fact that Maria B. Castro had
made enormous profits and, therefore, had a motive to hide them to
evade the payment of taxes, the fact that the other subscribers had
no incomes of sufficient magnitude to justify their big subscriptions,
the fact that the subscriptions were not receipted for and deposited
by the treasurer in the name of the corporation but were kept by
Maria B. Castro herself, the fact that the stockholders or the directors
never appeared to have ever met to discuss the business of the
corporation, the fact that Maria B. Castro advanced big sums of
money to the corporation without any previous arrangement or
accounting, and the fact that the books of accounts were kept as if
they belonged to Maria B. Castro alone these facts are of patent
and potent significance. What are their necessary implications? Maria
B. Castro would not have asked them to endorse their stock
certificates, or be keeping these in her possession, if they were really
the owners. They never would have consented that Maria B. Castro
keep the funds without receipts or accounting, nor that she manages
the business without their knowledge or concurrence, were they
owners of the stocks in their own rights. Each and every one of the
facts all set forth above, in the same manner, is inconsistent with the
claim that the stockholders, other than Maria B. Castro, own their
shares in their own right. On the other hand, each and every one of
them, and all of them, can point to no other conclusion than that
Maria B. Castro was the sole and exclusive owner of the shares and
that they were only her dummies.

3.7 CALVIN S. ARCILLA vs. THE HONORABLE CA and EMILIO


RODULFO
By its clear and unequivocal language, it is the petitioner who was
declared liable therefor and consequently made to pay. That the
latter was ordered to do so as president of the corporation would not
free him from the responsibility of paying the due amount simply
because according to him, he had ceased to be corporate president;
such conclusion stems from the fact that the public respondent, in
resolving his motion for clarificatory judgment, pierced the veil of
corporate fictional and cast aside the contention that both he and the
corporation have separate and distinct personalities. In short, even if
We are to assume arguendo that the obligation was incurred in the
name of the corporation, the petitioner would still be personally
liable therefor because for all legal intents and purposes, he and the
corporation are one and the same. Csar Marine Resources, Inc. is
nothing more than his business conduit and alter ego. The fiction of a
separate juridical personality conferred upon such corporation by law
should be disregarded. Significantly, petitioner does not seriously
challenge the public respondent's application of the doctrine which
permits the piercing of the corporate veil and the disregarding of the
fiction of a separate juridical personality; this is because he knows
only too well that from the very beginning, he merely used the
corporation for his personal purposes.
It must be noted that In his motion to reconsider the public
respondent's original decision, petitioner becomes more candid in his
admissions that indeed, the transaction with the private respondent
and the loan obtained previously were for his personal account.

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SECTION 6
LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG vs. SOCIAL
SECURITY SYSTEM, and HON. PACIFICO DE CASTRO
We uphold the lower court's finding that the Purchase Agreement is,
indeed, a debt instrument. Its terms and conditions unmistakably
show that the parties intended the repurchase of the preferred
shares on the respective scheduled dates to be an absolute
obligation which does not depend upon the financial ability of
petitioner corporation. This absolute obligation on the part of
petitioner corporation is made manifest by the fact that a surety was
required to see to it that the obligation is fulfilled in the event of the
principal debtor's inability to do so. The unconditional undertaking of
petitioner corporation to redeem the preferred shares at the
specified dates constitutes a debt which is defined "as an obligation
to pay money at some fixed future time, or at a time which becomes
definite and fixed by acts of either party and which they expressly or
impliedly, agree to perform in the contract.
A stockholder sinks or swims with the corporation and there is no
obligation to return the value of his shares by means of repurchase
if the corporation incurs losses and financial reverses, much less
guarantee such repurchase through a surety.

SECTION 8
REPUBLIC PLANTERS BANK vs.HON. ENRIQUE A. AGANA, SR., as
Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay
City, ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION
and ADALIA F. ROBES
A preferred share of stock, on one hand, is one which entitles the
holder thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to subscribe
for shares of a corporation. Preferred shares take a multiplicity of
forms. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to
dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in case
of liquidation; the latter is a share the holder of which is entitled to
receive dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock. There is no
guaranty, however, that the share will receive any dividends. Under
the old Corporation Law in force at the time the contract between the
petitioner and the private respondents was entered into, it was
provided that "no corporation shall make or declare any dividend
except from the surplus profits arising from its business, or distribute
its capital stock or property other than actual profits among its
members or stockholders until after the payment of its debts and the
termination of its existence by limitation or lawful dissolution."
Similarly, the present Corporation Code provides that the board of
directors of a stock corporation may declare dividends only out of
unrestricted retained earnings. xxx the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be. Preferences granted to
preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the
corporation, the right of the former being always subordinate to the
latter. Dividends are thus payable only when there are profits earned
by the corporation and as a general rule, even if there are existing

profits, the board of directors has the discretion to determine WON


dividends are to be declared. Shareholders, both common and
preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts
and liabilities are fully paid.
Redeemable shares, on the other hand, are shares usually preferred,
which by their terms are redeemable at a fixed date, or at the
option of either issuing corporation, or the stockholder, or both at a
certain redemption price. A redemption by the corporation of its
stock is, in a sense, a repurchase of it for cancellation. The present
Code allows redemption of shares even if there are no unrestricted
retained earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the
corporation cannot purchase its own shares except out of current
retained earnings. However, while redeemable shares may be
redeemed regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the corporation has,
after such redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption, therefore, may not
be made where the corporation is insolvent or if such redemption will
cause insolvency or inability of the corporation to meet its debts as
they mature.
We agree. Respondent judge, in ruling that petitioner must redeem
the shares in question, stated that:
xxxThus, except as otherwise provided in the stock certificate, the
redemption rests entirely with the corporation and the stockholder is
without right to either compel or refuse the redemption of its stock.
Furthermore, the terms and conditions set forth therein use the word
"may".xxx
The redemption of said shares cannot be allowed. As pointed out by
the petitioner, the Central Bank made a finding that said petitioner
has been suffering from chronic reserve deficiency, and that such
finding resulted in a directive, issued on January, 1973 by then Gov.
G.S. Licaros of the Central Bank, to the President and Acting Chairman
of the Board of the petitioner bank prohibiting the latter from
redeeming any preferred share, on the ground that said redemption
would reduce the assets of the Bank to the prejudice of its depositors
and creditors. Redemption of preferred shares was prohibited for a
just and valid reason. The directive issued by the Central Bank
Governor was obviously meant to preserve the status quo, and to
prevent the financial ruin of a banking institution that would have
resulted in adverse repercussions, not only to its depositors and
creditors, but also to the banking industry as a whole. The directive,
in limiting the exercise of a right granted by law to a corporate entity,
may thus be considered as an exercise of police power. The
respondent judge insists that the directive constitutes an impairment
of the obligation of contracts. It has, however, been settled that the
Constitutional guaranty of non-impairment of obligations of contract
is limited by the exercise of the police power of the state, the reason
being that public welfare is superior to private rights.

SECTION 9
COMMISSIONER OF INTERNAL REVENUE vs. JOHN L. MANNING,
W.D. McDONALD, E.E. SIMMONS and THE COURT OF TAX APPEALS
xxx after a careful study of the trust agreement, that the said shares
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were not, on December 22, 1958 or at anytime before or after that


date, treasury shares. xxx
Although authorities may differ on the exact legal and accounting
status of so-called "treasury shares," they are more or less in
agreement that treasury shares are stocks issued and fully paid for
and re-acquired by the corporation either by purchase, donation,
forfeiture or other means. Treasury shares are therefore issued
shares, but being in the treasury they do not have the status of
outstanding shares. Consequently, although a treasury share, not
having been retired by the corporation re-acquiring it, may be reissued or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in dividends,
because dividends cannot be declared by the corporation to itself, nor
in the meetings of the corporation as voting stock, for otherwise
equal distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate their
control of the corporation, though it still represents a paid-for
interest in the property of the corporation. The foregoing essential
features of a treasury stock are la king in the questioned shares.
The manifest intention of the parties to the trust agreement was, in
sum and substance, to treat the 24,700 shares of Reese as absolutely
outstanding shares of Reeses estate until they were fully paid. Such
being the true nature of the 24,700 shares, their declaration as
treasury stock dividend in 1958 was a complete nullity and plainly
violative of public policy. A stock dividend, being one payable in
capital stock, cannot be declared out of outstanding corporate stock,
but only from retained earnings.

SECTION 13
ONG YONG, et al. v. TIU, et al.
The distribution of corporate assets and property cannot be made to
depend on the whims and caprices of the stockholders, officers or
directors of the corporation, or even, for that matter, on the earnest
desire of the court a quo "to prevent further squabbles and future
litigations" unless the indispensable conditions and procedures for the
protection of corporate creditors are followed. Otherwise, the
"corporate peace" laudably hoped for by the court will remain nothing
but a dream because this time, it will be the creditors' turn to engage
in "squabbles and litigations" should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.
xxx the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs.
Since these were unissued shares, the parties' Pre-Subscription
Agreement was in fact a subscription contract as defined under
Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed
a subscription within the meaning of this Title, notwithstanding
the fact that theparties refer to it as a purchase or some other
contract.
A subscription contract necessarily involves the corporation as one of
the contracting parties since the subject matter of the transaction is
property owned by the corporation its shares of stock. Thus, the
subscription contract (denominated by the parties as a PreSubscription Agreement) whereby the Ongs invested P100 million for
1,000,000 shares of stock was, from the viewpoint of the law, one
between the Ongs and FLADC, not between the Ongs and the Tius.

Otherwise stated, the Tius did not contract in their personal


capacities with the Ongs since they were not selling any of their own
shares to them. It was FLADC that did.
Considering therefore that the real contracting parties to the
subscription agreement were FLADC and the Ongs alone, a civil case
for rescission on the ground of breach of contract filed by the Tius in
their personal capacities will not prosper.
However, although the Tius were adversely affected by the Ongs'
unwillingness to let them assume their positions, rescission due to
breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules of
Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, especially if the party asking for it has no
legal personality to do so and the requirements of the law therefor
have not been met.
Hence, the Tius, in their personal capacities, cannot seek the ultimate
and extraordinary remedy of rescission of the subject agreement
based on a less than substantial breach of subscription contract.
All this notwithstanding, granting but not conceding that the Tius
possess the legal standing to sue for rescission based on breach of
contract, said action will nevertheless still not prosper since rescission
will violate the Trust Fund Doctrine and the procedures for the valid
distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, provides that subscriptions to the capital
stock of a corporation constitute a fund to which the creditors have a
right to look for the satisfaction of their claims. This doctrine is the
underlying principle in the procedure for the distribution of capital
assets, embodied in the Corporation Code, which allows the
distribution of corporate capital only in three instances: (1)
amendment of the Articles of Incorporation to reduce the authorized
capital stock, (2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained earnings, and (3)
dissolution and eventual liquidation of the corporation. Furthermore,
the doctrine is articulated in Section 41 on the power of a corporation
to acquire its own shares and in Section 122 on the prohibition
against the distribution of corporate assets and property unless the
stringent requirements therefor are complied with.
In the instant case, the rescission of the Pre-Subscription Agreement
will effectively result in the unauthorized distribution of the capital
assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution
of capital assets and property of the corporation is allowed.

SECTION 14
MSCI-NACUSIP LOCAL CHAPTER vs. NATIONAL WAGES AND
PRODUCTIVITY COMMISSION and MONOMER SUGAR CENTRAL, INC.
The submission of the Board that the value of the assets of Asturias
Sugar Central, Inc. transferred to MSCI on March 28, 1990, as well as
the loans or advances made by MTII to MSCI should have been taken
into consideration in computing the paid-up capital of MSCI is
unmeritorious, at best, and betrays the Board's sheer lack of grasp of
a basic concept in Corporation Law, at worst. Not all funds or assets
received by the corporation can be considered paid-up capital, for
this term has a technical signification in Corporation Law. Such must
6|N B S

form part of the authorized capital stock of the corporation,


subscribed and then actually paid up.
Furthermore, the Commission aptly observed that the loans and
advances of MTII to respondent MSCI cannot be treated as
investments, unless the corresponding shares of stocks are issued.
But as it turned out, such loans and advances were in fact treated as
liabilities of MSCI to MTII as shown in its 1990 audited financial
statements. The treatment by the Board of these loans as part of
MSCI's capital stock without satisfying certain mandatory
requirements is proscribed under Section 38 of the Corporation Code
which provides:"Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. No corporation shall
increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the
board of directors and, at a stockholders' meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor
the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written notice
of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of
the time and place of the stockholders' meeting at which the
proposed increase or diminution of the capital stock or the incurring
or increasing of any bonded indebtedness is to be considered, must
be addressed to each stockholders at his place of residence as
shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally."
The above requirements, which are condition precedents before the
capital stock of a corporation may be increased, were unquestionably
not observed in this case.

SECTION 15
WILSON P. GAMBOA vs. FINANCE SECRETARY MARGARITO B. TEVES,
et al.
In short, the term capital in Section 11, Article XII of the Constitution
refers only to shares of stock that can vote in the election of directors.
To construe broadly the term capital as the total outstanding capital
stock, including both common and non-voting preferred shares,
grossly contravenes the intent and letter of the Constitution that the
State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos. A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily
equates to control of the public utility.
Considering that common shares have voting rights which translate to
control, as opposed to preferred shares which usually have no voting
rights, the term "capital" in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term
"capital" shall include such preferred shares because the right to
participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In
short, the term "capital" in Section 11, Article XII of the Constitution
refers only to shares of stock that can vote in the election of
directors.

Thus, 60 percent of the "capital" assumes, or should result in,


"controlling interest" in the corporation. Reinforcing this
interpretation of the term "capital," as referring to controlling
interest or shares entitled to vote, is the definition of a "Philippine
national" in the Foreign Investments Act of 1991.
Mere legal title is insufficient to meet the 60 percent Filipino-owned
"capital" required in the Constitution. Full beneficial ownership of
60 percent of the outstanding capital stock, coupled with 60 percent
of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands
of Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine
national[s]."

HEIRS OF WILSON P. GAMBOA* vs. FINANCE SECRETARY


MARGARITO B. TEVES
Since the constitutional requirement of at least 60 percent Filipino
ownership applies not only to voting control of the corporation but
also to the beneficial ownership of the corporation, it is therefore
imperative that such requirement applies uniformly and across the
board to all classes of shares, regardless of nomenclature and
category, comprising the capital of a corporation. Since a specific class
of shares may have rights and privileges or restrictions different from
the rest of the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also
to shares without voting rights.
The avowed purpose of the Constitution is to place in the hands of
Filipinos the exploitation of our natural resources. Necessarily,
therefore, the Rule interpreting the constitutional provision should
not diminish that right through the legal fiction of corporate
ownership and control. But the constitutional provision, as
interpreted and practiced via the 1967 SEC Rules, has favored
foreigners contrary to the command of the Constitution. Hence, the
Grandfather Rule must be applied to accurately determine the
actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.
Lastly, it was the intent of the framers of the 1987 Constitution to
adopt the Grandfather Rule.
SEC en banc ruling conforms to our 28 June 2011 Decision that the
60-40 ownership requirement in favor of Filipino citizens in the
Constitution to engage in certain economic activities applies not
only to voting control of the corporation, but also to the beneficial
ownership of the corporation. Thus, in our 28 June 2011 Decision we
stated:
Mere legal title is insufficient to meet the 60 percent Filipino
owned capital required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals in
accordance with the constitutional mandate. Otherwise, the
corporation is considered as non-Philippine national*s+.
(Emphasis supplied)
7|N B S

Both the Voting Control Test and the Beneficial Ownership Test
must be applied to determine whether a corporation is a Philippine
national.
xxxThe 1987 Constitution reserves the ownership and operation of
public utilities exclusively to (1) Filipino citizens, or (2) corporations or
associations at least 60 percent of whose capital is owned by
Filipino citizens. Hence, in the case of individuals, only Filipino citizens
can validly own and operate a public utility. In the case of
corporations or associations, at least 60 percent of their capital
must be owned by Filipino citizens. In other words, under Section 11,
Article XII of the 1987 Constitution, to own and operate a public
utility a corporations capital must at least be 60 percent owned
by Philippine nationals.
In support of this State policy, the Supreme Court, in the case of Heirs
of Gamboa v. Teves, G.R. No.176579 dated 28 June 2011 and in a
resolution dated Oct. 9, 2012, interpreted the term capital for the
first time. In this case, the Supreme Court ruled that capital under
the 1987 Constitution and the Foreign Investments Act of 1991 refers
to shares with voting rights, as well as full beneficial ownership, and
not to the total outstanding capital stock. Simply put, the 60-40
ownership requirement in favor of the Filipino citizens must apply
separately to each class of shares, whether common, preferred nonvoting, preferred voting or any other class of shares.
In arriving at this judgment, the Supreme Court reasoned that the
foreign ownership limitation also applies to non-voting preferred
stocks, that, although denied the voting rights in the election of
directors, are nevertheless entitled to vote on certain fundamental
corporate acts like amendment of the articles of incorporation;
adoption and amendment of by-laws; sale, lease, exchange,
mortgage, pledge or other disposition of all or substantially all of
the corporate property; incurring, creating or increasing bonded
indebtedness; increase or decrease of capital stock; merger or
consolidation of the corporation with another corporation or other
corporations; investment of corporate funds in another corporation
or business; and dissolution of the corporation.
SECTION 17
SAMAHAN NG OPTOMETRISTS SA PILIPINAS, ILOCOS SUR-ABRA
CHAPTER, EDUARDO MA. GUIRNALDA, DANTE G. PACQUING and
OCTAVIO DE PERALTA vs. ACEBEDO INTERNATIONAL CORPORATION
and CA
A corporation created and organized for the purpose of conducting
the business of selling optical lenses or eyeglasses is not engaged in
the practice of optometry because the determination of the proper
lenses to sell to private respondent's clients entails the employment of
optometrists who have been precisely trained for that purpose.
Private respondent's business, rather, is the buying and importing of
eyeglasses and lenses and other similar or allied instruments from
suppliers thereof and selling the same to consumers.
For petitioners' argument to hold water, there need be clear showing
that RA 1998 prohibits a corporation from hiring optometrists, for
only then would it be undeniably evident that the intention of the
legislature is to preclude the formation of the so-called optometry
corporations because such is tantamount to the practice of the
profession of optometry which is legally exercisable only by natural
persons and professional partnerships. We have carefully reviewed

RA 1998 however, and we find nothing therein that supports


petitioner's insistent claims. xxx even under RA 8050, known as the
Revised Optometry Law, we find no prohibition against the hiring by
corporations of optometrists. All told, there is no law that prohibits
the hiring by corporations of optometrists or considers the hiring by
corporations of optometrists as a practice by the corporation itself of
the profession of optometry.

SECTION 20
C. ARNOLD HALL and BRADLEY P. HALL vs. EDMUNDO S. PICCIO,
Judge of the CFI of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA
CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber
and Commercial Co., Inc.
All the parties are informed that the SEC has not, so far, issued the
corresponding certificate of incorporation. All of them know, or
sought to know, that the personality of a corporation begins to exist
only from the moment such certificate is issued not before (sec.
11, Corporation Law). The complaining associates have not
represented to the others that they were incorporated any more than
the latter had made similar representations to them. And as nobody
was led to believe anything to his prejudice and damage, the principle
of estoppel does not apply. Obviously this is not an instance requiring
the enforcement of contracts with the corporation through the rule of
estoppel.
X the Far Eastern Lumber and Commercial Co., is a de facto
corporation, thus, section 19 of the Corporation Law applies, and
therefore the court had no jurisdiction. Section 19 (20) reads as
follows:. . . The due incorporation of any corporations claiming in
good faith to be a corporation under this Act and its right to exercise
corporate powers shall not be inquired into collaterally in any private
suit to which the corporation may be a party, but such inquiry may be
had at the suit of the Insular Government on information of the
Attorney-General.xxx
Under (Corporation Law, sec. 11), it is the issuance of a certificate of
incorporation by the Director of the Bureau of Commerce and
Industry which calls a corporation into being. The immunity if
collateral attack is granted to corporations "claiming in good faith to
be a corporation under this act." Such a claim is compatible with the
existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident
attempt to comply with the law the claim to be a corporation
"under this act" could not be made "in good faith." (Fisher on the
Philippine Law of Stock Corporations, p. 75. See also Humphreys vs.
Drew, 59 Fla., 295; 52 So., 362.)
There can be no claim of attempt in good faith to incorporate if no
Certificate of Incorporation is issued by the SEC. All incorporators
know or ought to know that the personality of a corporation begins to
exists only from the time the certificate is issued.
Second, this is not a suit in which the corporation is a party. This is a
litigation between stockholders of the alleged corporation, for the
purpose of obtaining its dissolution. Even the existence of a de jure
corporation may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the state.

8|N B S

SECTION 21
ALBERT vs. UNIVERSITY PUBLISHING CO., INC.
As far as this case is concerned, therefore, University Publishing Co.,
Inc. must be deemed as unregistered, since by defendant-appellee's
choice the record shows it to be so. Defendant-appellee apparently
sought to delay the execution by remaining unregistered per the
certification of the Securities and Exchange Commission. It was only
when execution was to be carried out, anyway, against it and/or its
president and almost 19 years after the approval of the law
authorizing reconstitution that it reconstituted its records to show
its registration, thereby once more attempting to delay the payment
of plaintiff's claim, long since adjudged meritorious. Deciding,
therefore, as this Court must, this particular case on its record as
submitted by the parties, defendant-appellee's proffered evidence of
its corporate existence cannot at this stage be considered to alter the
decision reached herein.
When the President of a non-existent principal entered into a contract
and failed to pay its obligation, he shall be the one liable to the
aggrieved party. A person acting as a representative of a non-existent
principal is the real party to the contract sued upon, being the one
who reaped the benefits resulting from it.

REYNALDO M. LOZANO vs. HON. ELIEZER R. DE LOS SANTOS,


Presiding Judge, RTC, Br. 58, Angeles City; and ANTONIO ANDA
The plan of the parties to consolidate their respective jeepney drivers'
and operators' associations into a single common association, if not
yet approved by the SEC, neither had its officers and members
submitted their articles of consolidation in accordance with Sections
78 and 79 of the Corporation Code, is a mere proposal to form a
unified association. Any dispute arising out of the election of officers
of said unified association is therefore not an intra-corporate dispute.

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC.,vs. HON.


CA, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION,
It is a basic postulate that before a corporation may acquire juridical
personality, the State must give its consent either in the form of a
special law or a general enabling act. We cannot agree with the view
of the appellate court and the private respondent that the Philippine
Football Federation came into existence upon the passage of these
laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision
creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided
the manner by which these entities may acquire juridical personality.
Thus being said, it follows that private respondent Henry Kahn should
be held liable for the unpaid obligations of the unincorporated
Philippine Football Federation. It is a settled principal in corporation
law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges
and becomes personally liable for contract entered into or for other
acts performed as such agent. As president of the Federation, Henri
Kahn is presumed to have known about the corporate existence or
non-existence of the Federation. We cannot subscribe to the position
taken by the appellate court that even assuming that the Federation

was defectively incorporated, the petitioner cannot deny the


corporate existence of the Federation because it had contracted and
dealt with the Federation in such a manner as to recognize and in
effect admit its existence. The doctrine of corporation by estoppel is
mistakenly applied by the respondent court to the petitioner. The
application of the doctrine applies to a third party only when he
tries to escape liability on a contract from which he has benefited on
the irrelevant ground of defective incorporation. In the case at bar,
the petitioner is not trying to escape liability from the contract but
rather is the one claiming from the contract.
When the petitioner is not trying to escape liability from the contract
but rather the one claiming from the contract, the doctrine of
corporation by estoppel is not applicable. This doctrine applies to a
third party only when he tries to escape liability on a contract from
which he has benefited on the irrelevant ground of defective
incorporation.
ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS ALBANO,
LILY REYES, JANET BAY, JESUS R. GALANG, AND RANDY HAGOS vs.
FRANCISCO R. CO, JR.
The Court does not sustain petitioners contention that AbanteTonite
could not be sued as a defendant due to its not being either a natural
or a juridical person. In rejecting their contention, the CA categorized
AbanteTonite as a corporation by estoppel as the result of its having
represented itself to the reading public as a corporation despite its
not being incorporated. Thereby, the CA concluded that the RTC did
not gravely abuse its discretion in holding that the non-incorporation
of AbanteTonite with the Securities and Exchange Commission was of
no consequence, for, otherwise, whoever of the public who would
suffer any damage from the publication of articles in the pages of its
tabloids would be left without recourse. We cannot disagree with the
CA, considering that the editorial box of the daily tabloid disclosed
that basis, nothing in the box indicated that Monica Publishing
Corporation had owned AbanteTonite.

PEOPLE OF THE PHILIPPINES vs. ENGR. CARLOS GARCIA y PINEDA,


PATRICIO BOTERO y VALES, LUISA MIRAPLES (at large), PATRICIO
BOTERO y VALES
The persons who illegally recruited workers for overseas employment
by representing themselves to be officers of a corporation which they
knew had not been incorporated are liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof.
For engaging in recruitment of workers without obtaining the
necessary license from the POEA, Boteros should suffer the
consequences of Ricorn's illegal act for "(i)f the offender is a
corporation, partnership, association or entity, the penalty shall be
imposed upon the officer or officers of the corporation, partnership,
association or entity responsible for violation; . . . " The evidence
shows that appellant Botero was one of the incorporators of Ricorn.
For reasons that cannot be discerned from the records, Ricorn's
incorporation was not consummated. Even then, appellant cannot
avoid his liabilities to the public as an incorporator of Ricorn. He and
his co-accused Garcia held themselves out to the public as officers of
Ricorn. They received money from applicants who availed of their
services. They are thus estopped from claiming that they are not
liable as corporate officials of Ricorn. Section 25 of the Corporation
9|N B S

Code provides that "(a)ll persons who assume to act as a corporation


knowing it to be without authority to do so shall be liable as general
partners for all the debts, liabilities and damages incurred or arising
as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality."

SECTION 23
MANAGEMENT
TRADERS ROYAL BANK Vs. CA, FILRITERS GUARANTY ASSURANCE
CORPORATION and CENTAL BANK of the PHILIPPINES
Petitioner cannot put up the excuse of piercing the veil of corporate
entity , as this is merely an equitable remedy and may be awarded
only in cases when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime or where
a corporation is a mere alter ego or business conduit of a person.
The corporate separateness between Filriters and Philfinance
remains despite the petitioners insistence on the contrary. For
one, other than the allegation that Filriters is 90% owned by
Philfinance, and the identity of one shall be maintained as to the
other, there is nothing else which could lead the court under the
circumstances to disregard their corporate personalities.
The fact that Philfinance owns majority shares in Filriters is not by
itself a ground to disregard the independent corporate status of
Filriters.
In the case at bar, there is sufficient showing that the petitioner was
not defrauded at all when it acquired the subject certificate of
indebtedness from Philfinance.
Petitioner knew that Philfinance is not the registered owner of
CBCI. The fact that a non - owner was disposing of the registered
CBCI owned by another entity was a good reason for petitioner to
verify or inquire as to the title of Philfinance to dispose of the CBCI.
Moreover, CBCI No D891 is governed by CB Circular No 769 series of
1980 known as the Rules and Regulations Governing Central Bank
Certificates of Indebtedness , Section 3 Article V of which provides
that :
SECTION 3 . Assignment of Registered Certificates . Assignment of registered certificates shall not be valid unless
made at the office where the same have been issued and
registered or at the Securities Servicing Department, Central
Bank of the Philippines , and by the registered owner thereof in
person or by his representative, duly authorized in writing. For
this purpose, the transferee may be designated as the
representative of the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of
Central Bank Circular 769, and its requirements. An entity which
deals with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the
corporation liable. This is only fair, as everyone must, in the exercise
of his rights and in the performance of his duties, act with
justice, give everyone his due , and observe honesty and good
faith .

The transfer made by Filriters to Philfinance did not conform to the


said Central Bank Circular, which for all intents, is considered part of
the law . As found by the courts a quo, Alfredo Banaria, who had
signed
the
deed
of
assignment
from
Filriters
to
Philfinance, purportedly for and in favor of Filriters, did not have the
necessary written authorization from the BOD of Filriters to act for
the latter. As it is , the sale from Filriters to Philfinance was
fictitious, and therefore void and inexistent , as there was no
consideration for the same. This is fatal to the petitioner s
cause for then, Philfinance had no title over the subject certificate to
convey to Traders Royal Bank . Nemopotest nisi quod de jure
potest - no man can do anything except what he can do
lawfully. The unauthorized use or distribution of the same by a
corporate officer of Filriters cannot bind the said corporation, not
without the approval of its BOD, and the maintenance of the
required reserve fund.

RATIFICATION
J. ANTONIO AGUENZA vs. METROPOLITAN BANK & TRUST CO.,
VITALIADO P. ARRIETA, LILIA PEREZ, PATRICIO PEREZ and IAC
The principal reason for CAs reversal of the trial court's absolution of
petitioner is its finding that the loan made by private respondent
Arrieta and Lilia Perez were admitted by Intertrade to be its own
obligation. After a careful scrutiny of the records, however, we find
and we so rule that there is neither factual nor legal basis for such a
finding by respondent CA.
xxx As correctly found by the trial court, the alleged admission made
in the answer by the counsel for Intertrade was "without any enabling
act or attendant ratification of corporate act," as would authorize or
even ratify such admission. In the absence of such ratification or
authority, such admission does not bind the corporation.
xxx the respondent CA likewise adjudged Intertrade liable because of
the two letters emanating from the office of Mr. Arrieta which the CA
considered "as indicating the corporate liability of the corporation."
These documents and admissions cannot have the effect of a
ratification of an unauthorized act. As we elucidated in the case of
Vicente v. Geraldez, "ratification can never be made on the part of
the corporation by the same persons who wrongfully assume the
power to make the contract, but the ratification must be by the
officer as governing body having authority to make such contract."
In other words, the unauthorized act of respondent Arrieta can only
be ratified by the action of the BOD and/or petitioner Aguenza
jointly with private respondent Arrieta.
We must emphasize that Intertrade has a distinct personality
separate from its members. The corporation transacts its business
only through its officers or agents. Whatever authority these
officers or agents may have is derived from the BOD or other
governing body unless conferred by the charter of the corporation.
As round by the trial court, the records of this case is bereft of any
evidence that Intertrade through its BOD, conferred upon Arrieta and
Lilia Perez the authority to contract a loan with Metrobank and
execute the promissory note as a security therefor. Neither a board
resolution nor a stockholder's resolution was presented by
Metrobank to show that Arrieta and Lilia Perez were empowered by
Intertrade to execute the promissory note.
10 | N B S

The respondents may argue that the actuation of Arrieta and Liliah
Perez was in accordance with the ordinary course of business usages
and practices of Intertrade. However, this contention is devoid of
merit because the prevailing practice in Intertrade was to explicitly
authorize an officer to contract loans in behalf of the corporation.
This is evidenced by the fact that previous to the controversy, the
Intertrade BOD, through a board resolution, jointly empowered and
authorized petitioner and respondent Arrieta to negotiate, apply for,
and open credit lines with Metrobank's. The participation of these
two was mandated to be joint and not separate and individual.

MWSS vs. CA, et al.


RE: Prescription
Petitioner MWSS also theorizes that the MWSS-SILHOUTTE
Agreement and the Supplemental Agreement were void ab
initio because the "initial agreement" from which these agreements
emanated was executed "without the knowledge, much less the
approval" of petitioner MWSS through its Board of Trustees.
By the terms thereof, it refers only to an "agreement in
principle". It must be noted that presidential approval had yet to be
obtained. Thus, the "initial agreement" was not a sale as it did not in
any way transfer ownership over the property. The proposed terms
had yet to be approval by the President and the agreement in
principle still had to be formalized in a deed of sale. Written authority
as is required under Art. 1834 of the New Civil Code, was not needed
at the point of the "initial agreement".
RE: Ratification
Petitioner MWSS misses the point. The perceived infirmity
in the "initial agreement" can be cured by RATIFICATION. So settled
is the precept that ratification can be made by the corporate board
either 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. Both modes of ratification have been made in this
case.
There was express ratification made by the Board of
petitioner MWSS when it passed Resolution No. 36-83 approving the
sale of the subject property to respondent SILHOUETTE and
authorizing Mr. Ilustre, as General Manager, "to sign for and in behalf
of the MWSS the contract papers and other pertinent documents
relative thereto."Implied ratification by "silence or acquiescence" is
revealed from the acts of petitioner MWSS in (a) sending three (3)
demand letters for the payment of the purchase price, (b) accepting
P25 Million as downpayment, and (c) accepting a letter of credit for
the balance, as hereinbefore mentioned.

OFFICERS
PAMDICO (MANILA) INC. vs. ALTO ELECTRONICS CORPORATION
xxx even on the basis of the power supposedly given to the general
manager to have active and immediate charge and control of the
business of the company, the acceptance of a purchase order for
merchandise in which the defendant was dealing in the ordinary

course of its business was within his authority. The proviso the he
shall be under the general control and supervision of the president
and BOD does not change the situation at all, because the said
proviso does not mean that before the general manager may act in
every individual instance involving the usual, ordinary business of
defendant, he must first obtain the consent and approval of these
officers of the corporation.
In any event WON defendants general manager had authority to
enter into the questioned transaction, it is an undisputed fact that the
checks issued by plaintiff were drawn in favor of defendant Alto
Electronics Corporation. It received the benefits of the transaction
and thereby ratified the acts of its general manager.

THE BOARD OF LIQUIDATORS vs. HEIRS OF MAXIMO M. KALAW


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 BOD. 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 BOD has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. 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.
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.
When 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 behalf of the corporation without prior board
approval, the board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval. 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.

SAN MIGUEL BREWERY, INC. vs. LIFETIME ENTERPRISE, INC. & THE
HOUSE OF INSURANCE, INC.
xxx the lack of express power or authority in the general manager to
enter into the contracts in question is not the decisive factor that is
determinative of the binding effect of such contracts upon appellant
corporation. For, under the theory of implied authority, an officer or
agent of a private corporation, entrusted with the general
management and control of its business and affairs, implied or
apparent authority to so acts or make any contracts in its behalf
falling within the scope of the ordinary and usual business of the
company, and limitations and restrictions placed upon his express or
implied authority, of which persons dealing with him have neither
actual nor constructive notice, will not serve to restrict such powers
11 | N B S

to the prejudice of innocent third persons. However, the theory of


implied authority in a general manager of a corporation will be
sustained only where the subject matter of his act is something that
arises in the conduct of the ordinary business of the corporation.

a holdover director did not change the nature of the vacancy; the
vacancy due to the expiration of Makalintals term had been created
long before his resignation.
The powers of the corporations BOD emanate from its stockholders

Consequently, a contract executed by a general manager of a


corporation, apparently within the course and scope of his duties and
powers and in line of the companys business, is prima facie binding
on the company, without authorization from the BOD, irrespective of
what the express authority of such an agent may be, and this is
especially true where he has executed similar contracts before
without objection. But it is the undisputed rule that a corporation is
not bound by any agreement of its general manager or
superintendent if it is not shown to be within the scope of his express
or implied authority and is not in the course of the ordinary business
of the corporation. Accordingly, whether a particular contract made
by a general manager is within his implied powers depends on
whether its execution is reasonably necessary to, and customary and
usual in, the performance of the duties to be discharged by managers.
The test, therefore, seems to be whether the act is within the scope
of the ordinary business of the corporation. If it is, then, as already
stated, the manager has power. On the other hand, his authority
does not extend to any matters or transactions which are not
properly incident to the management of the ordinary business.

SECTION 29
VALLE VERDE COUNTRY CLUB, INC., et al. vs. VICTOR AFRICA
When an incumbent member of the board of directors continues to
serve in a holdover capacity, it implies that the office has a fixed term,
which has expired, and the incumbent is holding the succeeding term.
A vacancy resulting from the resignation of an officer in a hold-over
capacity, by the terms of Section 29 of the Corporation Code, must be
filled by the stockholders in a regular or special meeting called for the
purpose
The holdover period is not part of the term of office of a member of
the BOD
Based on the above discussion, when Section 239 of the Corporation
Code declares that "the BODshall hold office for one (1) year until
their successors are elected and qualified," we construe the provision
to mean that the term of the members of the BOD shall be only for
one year; their term expires one year after election to the office. The
holdover period that time from the lapse of one year from a
members election to the Board and until his successors election
and qualification is not part of the directors original term of
office, nor is it a new term; the holdover period, however,
constitutes part of his tenure. Corollary, when an incumbent
member of the BOD continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has expired, and the
incumbent is holding the succeeding term.
With the expiration of Makalintals term of office, a vacancy resulted
which, by the terms of Section 2911 of the Corporation Code, must be
filled by the stockholders of VVCC in a regular or special meeting
called for the purpose. To assume as VVCC does that the vacancy
is caused by Makalintals resignation in 1998, not by the expiration of
his term in 1997, is both illogical and unreasonable. His resignation as

This theory of delegated power of the BOD similarly explains why,


under Section 29 of the Corporation Code, in cases where the vacancy
in the corporations BOD is caused not by the expiration of a
members term, the successor "so elected to fill in a vacancy shall be
elected only for the unexpired term of the his predecessor in office."
The law has authorized the remaining members of the board to fill in
a vacancy only in specified instances, so as not to retard or impair the
corporations operations; yet, in recognition of the stockholders right
to elect the members of the board, it limited the period during which
the successor shall serve only to the "unexpired term of his
predecessor in office.
It also bears noting that the vacancy referred to in Section 29
contemplates a vacancy occurring within the directors term of office.
When a vacancy is created by the expiration of a term, logically, there
is no more unexpired term to speak of. Hence, Section 29 declares
that it shall be the corporations stockholders who shall possess the
authority to fill in a vacancy caused by the expiration of a members
term.

JOSE A. BERNAS et.al vs. JOVENCIO F. CINCO, et.al.


The Corporation Code laid down the rules on the removal of the
Directors of the corporation by providing, inter alia, the persons
authorized to call the meeting and the number of votes required for
the purpose of removal, thus:
Sec. 28. Removal of directors or trustees. - Any director or trustee of a
corporation may be removed from office by a vote of the stockholders
holding or representing at least two-thirds (2/3) of the outstanding
capital stock, or if the corporation be a non-stock corporation, by a vote
of at least two-thirds (2/3) of the members entitled to vote: Provided,
That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a corporation for
the purpose of removal of directors or trustees, or any of them, must
be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority
of the outstanding capital stock, or, if it be a non-stock corporation, on
the written demand of a majority of the members entitled to vote.
Should the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary, the
call for the meeting may be addressed directly to the stockholders or
members by any stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as well as of the
intention to propose such removal, must be given by publication or by
written notice prescribed in this Code. Removal may be with or without
cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to
which they may be entitled under Section 24 of this Code. (Emphasis
supplied)

Relative to the powers of the BOD, nowhere in the Corporation Code


or in the MSC by-laws can it be gathered that the Oversight
Committee is authorized to step in wherever there is breach of
fiduciary duty and call a special meeting for the purpose of removing
12 | N B S

the existing officers and electing their replacements even if such call
was made upon the request of shareholders. Needless to say, the
MSCOC is neither empowered by law nor the MSC by-laws to call a
meeting and the subsequent ratification made by the stockholders
did not cure the substantive infirmity, the defect having set in at the
time the void act was done. The defect goes into the very authority
of the persons who made the call for the meeting. It is apt to recall
that illegal acts of a corporation which contemplate the doing of an
act which is contrary to law, morals or public order, or contravenes
some rules of public policy or public duty, are, like similar transactions
between individuals, void. They cannot serve as basis for a court
action, nor acquire validity by performance, ratification or estoppel.
The same principle can apply in the present case. The void election of
17 December 1997 cannot be ratified by the subsequent Annual
Stockholders Meeting.
Consequently, such Special Stockholders Meeting called by the
Oversight Committee cannot have any legal effect. The removal of
the Bernas Group, as well as the election of the Cinco Group, effected
by the assembly in that improperly called meeting is void, and since
the Cinco Group has no legal right to sit in the board, their
subsequent acts of expelling Bernas from the club and the selling of
his shares at the public auction, are likewise invalid.

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 BOD, it
is valid and binding, and WON 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 BOD; 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).

TRAMAT MERCANTILE, INC. and ONG vs. CA and DE LA CUESTA


SECTION 31
ALFREDO MONTELIBANO, et al. vs. BACOLOD-MURCIA MILLING CO.,
INC.
It follows from the foregoing that the terms embodied in the
resolution 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. xx
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,

xxx It was, nevertheless, an error to hold David Ong jointly and


severally liable with TRAMAT to de la Cuesta under the questioned
transaction. Ong had there so acted, not in his personal capacity, but
as an officer of a corporation, TRAMAT, with a distinct and separate
personality. As such, it should only be the corporation, not the
person acting for and on its behalf, that properly could be made liable
thereon.
Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly
attach, as a rule, only when
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 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.

C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,


Incorporated vs. GREGORIO VELASCO, ET AL.
xxx the corporation did not then have an actual bona fide surplus
from which the dividends could be paid, and that the payment of
them in full at the time would affect the financial condition of the
corporation.
13 | N B S

xxx the directors were permitted to resign so that they could sell their
stock to the corporation. xxx it is very apparent that the directors did
not act in good faith or that they were grossly ignorant of their duties.
xxx the rule is well stated in Ruling Case Law, vol. 7, p. 473, section
454 where it is said:
General Duty to Exercise Reasonable Care. The directors of a
corporation are bound to care for its property and manage its
affairs in good faith, and for a violation of these duties resulting
in waste of its assets or injury to the property they are liable to
account the same as other trustees. Are there can be no doubt
that if they do acts clearly beyond their power, whereby loss
ensues to the corporation, or dispose of its property or pay away
its money without authority, they will be required to make good
the loss out of their private estates. This is the rule where the
disposition made of money or property of the corporation is one
either not within the lawful power of the corporation, or, if
within the authority of the particular officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. It has been said
that directors are not liable for losses resulting to the
corporation from want of knowledge on their part; or for
mistake of judgment, provided they were honest, and provided
they are fairly within the scope of the powers and discretion
confided to the managing body. But the acceptance of the office
of a director of a corporation implies a competent knowledge of
the duties assumed, and directors cannot excuse imprudence on
the ground of their ignorance or inexperience; and if they
commit an error of judgment through mere recklessness or want
of ordinary prudence or skill, they may be held liable for the
consequences. Like a mandatory, to whom he has been likened,
a director is bound not only to exercise proper care and
diligence, but ordinary skill and judgment. As he is bound to
exercise ordinary skill and judgment, he cannot set up that he
did not possess them.
Creditors of a corporation have the right to assume that so long as
there are outstanding debts and liabilities, the board of directors will
not use the assets of the corporation to purchase its own stock, and
that it will not declare dividends to stockholders when the
corporation is insolvent.

THE CONSOLIDATED BANK AND TRUST CORPORATION vs. CA |


ANTONIO M. ANDAL AND ANTONIO ROXAS CHUA, JR., vs. CA and
THE CONSOLIDATED BANK AND TRUST CORPORATION,
It has been hypothetically admitted that Solidbank has been
prejudiced in the amount of P16,381,889.53, which represents the
total obligation under the various promissory notes UPLFC executed
in its favor. This obligation is legally demandable. Moreover, although
it is conceded to be a corporate debt for which the corporate
officers and stockholders cannot ordinarily be held personally liable,
the complaint contained the allegation that the officers of UPLFC
had fraudulently collected from their debtors the accounts which
they had previously assigned to Solidbank and failed to remit the
same to the latter. If this is true, then they can be held personally
liable in accordance with Sec. 31 of the Corporation Code, which

states that: Sec. 31. Liability of directors, trustees or officers.


Directors or trustees who wilfully and knowingly vote for or assent
to patently unlawful acts of the corporation, or who are guilty of
gross negligence or bad faith in directing the affair of the
corporation or acquire any personal or pecuniary interest or conflict
with their duty as such directors or trustees shall be liable jointly
and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

COASTAL PACIFIC TRADING, INC. vs. SOUTHERN ROLLING MILLS, CO.,


INC. et al.
Directors owe loyalty and fidelity to the corporation they serve and to
its creditors. When these directors sit on the board as representatives
of shareholders who are also major creditors, they cannot be allowed
to use their offices to secure undue advantage for those shareholders,
in fraud of other creditors who do not have a similar representation in
the board of directors.
Consortium Banks as Directors
As directors of VISCO, the officials of the Consortium were in a
position of trust; thus, they owed it a duty of loyalty. This trust
relationship sprang from the fact that they had control and guidance
over its corporate affairs and property. Their duty was more stringent
when it became insolvent or without sufficient assets to meet its
outstanding obligations that arose. Because they were
deemed trustees of the creditors in those instances, they should have
managed the corporation's assets with strict regard for the creditors'
interests. When these directors became corporate creditors in their
own right, they should not have permitted themselves to secure any
undue advantage over other creditors. In the instant case, the
Consortium miserably failed to observe its duty of fidelity towards
VISCO and its creditors.
Duty of the Consortium Banks to VISCO's Creditors
xxx the Consortium, through its directors on the board of VISCO, had
already assumed management and control over the latter. Hence,
when VISCO recognized its outstanding liability to petitioner xxx and
offered a Compromise Agreement, respondent banks were already at
the helm of the debtor corporation. The members of the Consortium,
therefore, cannot deny that they were aware of those claims against
the corporation. Nonetheless, they did not adopt any measure to
protect petitioner's credit.
Assignment of Mortgage in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the
earmarks of fraud. Initially, respondent banks had agreed that VISCO
should sell two of its generator sets, so that the proceeds could be
utilized to pay DBP. This plan was direct, simple, and would extinguish
the encumbrance in favor of the bank.
In the end, by collecting the money from VISCO, respondent banks
recovered what they had ostensibly remitted to DBP. Moreover, the
primary lien that respondent banks acquired allowed them, as
unsecured creditors of VISCO, to foreclose on the assets of the
corporation without regard to its inferior claims. It was a clever ruse
14 | N B S

that would have worked, were it not done by creditors who were
duty-bound, as directors, not to take clever advantage of other
creditors.
To be sure, there was undue advantage. The payment scheme
devised by the Consortium continued the efficacy of the primary lien,
this time in its favor, to the detriment of the other creditors. When
one considers its knowledge that VISCO's assets might not be enough
to meet its obligations to several creditors, the intention to defraud
the other creditors is even more striking. Fraud is present when the
debtor knows that its actions would cause injury.
The assignment in favor of the Consortium was a rescissible contract
for having been undertaken in fraud of creditors.

ANGELES P. BALINGHASAY, et al. vs. CECILIA CASTILLO, et al.


As acknowledged by the petitioners and aptly pointed out by the
respondents, the existence of the circumstances and urgent hospital
necessity justifying the purchase and operation of the ultrasound unit
by the investors were not at the outset offered as evidence. Having
been belatedly raised, the aforesaid defenses were not scrutinized
during the trial and their truth or falsity was not uncovered. This is
fatal to the petitioners cause. The CA thus cannot be faulted for
ruling against the petitioners in the face of evidence showing that: (a)
there was no quorum when the Board meetings were held on August
14, 1998 and February 5, 1999; (b) the MOA was not ratified by a vote
of two-thirds of MCPIs outstanding capital stock; and (c) the Balance
Sheets for the years 1996 to 2000 indicated that MCPI was in a
financial position to purchase the ultrasound equipment.
The petitioners harp on their lofty purpose, which had supposedly
moved them to purchase and operate the ultrasound unit.
Unfortunately, their claims are not evident in the records. Further,
even if their claims were to be assumed as true for arguments sake,
the fact remains that the Board Directors, who approved the MOA,
did not outrightly inform the stockholders about it. The ultrasound
equipment was purchased and had been in operation since 1997,
but the matter was only brought up for ratification by the
stockholders in the annual meetings held in the years 2000 to 2003.
This circumstance lends no credence to the petitioners cause.

SECTION 32
PRIME WHITE CEMENT CORPORATION vs. HONORABLE
INTERMEDIATE CA and ALEJANDRO TE
Under the Corporation Law, all corporate powers shall be exercised
by the BOD, except as otherwise provided by law. 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. 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
b
circumstances. 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 BOD 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. 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.
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 BOD.
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 two-thirds (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.
First of all, the contract was neither fair nor reasonable. xxx In the
light of the circumstances of this case, it is 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

15 | N B S

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.

SECTION 33
DEVELOPMENT BANK OF THE PHILIPPINES vs. HONORABLE COURT
OF APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION
xxx we do not find any fraud on the part of Marinduque Mining and
its transferees to warrant the piercing of the corporate veil.
xxx PNB and DBP did not only have a right, but the duty under [the]
law, to foreclose upon the subject properties. The banks had no
choice but to obey the statutory command.
xxx The appellate court, however, did not point to any fact evidencing
bad faith on the part of the Marinduque Mining and its transferees.
Indeed, it skirted the issue entirely by holding that the question of
actual fraudulent intent on the part of the interlocking directors of
DBP and Marinduque Mining was irrelevant because:
x x x where the corporations have directors and officers in
common, there may be circumstances under which their interest
as officers in one company may disqualify them in equity from
representing both corporations in transactions between the two.
Thus, where one corporation was 'insolvent and indebted to
another, it has been held that the directors of the creditor
corporation were disqualified, by reason of self-interest, from
acting as directors of the debtor corporation in the
authorization of a mortgage or deed of trust to the former to
secure such indebtedness x x x". In the same manner that "x x x
when the corporation is insolvent, its directors who are its
creditors cannot secure to themselves any advantage or
preference over other creditors. They cannot thus take
advantage of their fiduciary relation and deal directly with
themselves, to the injury of others in equal right. If they do,
equity will set aside the transaction at the suit of creditors of
the corporation or their representatives, without reference to
the question of any actual fraudulent intent on the part of the
directors, for the right of the creditors does not depend upon
fraud in fact, but upon the violation of the fiduciary relation to
the directors." x x x
We also concede that "x x x directors of insolvent corporation,
who are creditors of the company, cannot secure to themselves
any preference or advantage over other creditors in the payment
of their claims. It is not good morals or good law. The governing
body of officers thereof are charged with the duty of conducting
its affairs strictly in the interest of its existing creditors, and it
would be a breach of such trust for them to undertake to give
any one of its members any advantage over any other creditors
in securing the payment of his debts in preference to all others.
When validity of these mortgages, to secure debts upon which
the directors were indorsers, was questioned by other creditors
of the corporation, they should have been classed as
instruments rendered void by the legal principle which prevents
directors of an insolvent corporation from giving themselves a
preference over outside creditors. x x x"

SECTION 34
STRATEGIC ALLIANCE DEVT. CORP. vs. RADSTOCK SEC. LTD. and
PHIL. NATIONAL CONSTRUCTION CORP. (ASIAVEST MERCHANT
BANKERS BERHAD
In this jurisdiction, the members of the BOD have a three-fold duty:
duty of OBEDIENCE, duty of DILIGENCE, and duty of
LOYALTY. Accordingly, the members of the BOD (1) shall direct the
affairs of the corporation only in accordance with the purposes for
which it was organized; (2) shall not willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or act in bad
faith or with gross negligence in directing the affairs of the
corporation; and (3) shall not acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees.
In the present case, the PNCC Board BLATANTLY VIOLATED ITS DUTY
OF DILIGENCE as it MISERABLY FAILED TO ACT IN GOOD FAITH IN
HANDLING THE AFFAIRS OF PNCC.
The act of the PNCC Board in issuing Board Resolution No.
BD-092-2000 expressly admitting liability for the Marubeni loans
demonstrates the PNCC Boards gross and willful disregard of the
requisite care and diligence in managing the affairs of PNCC,
amounting to bad faith and resulting in grave and irreparable injury to
PNCC and its stockholders. This reckless and treacherous move on the
part of the PNCC Board clearly constitutes a serious breach of its
fiduciary duty to PNCC and its stockholders, rendering the members
of the PNCC Board liable under Section 31 of the Corporation Code,
which provides:
SEC. 31. Liability of directors, trustees or officers. -- Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
persons.
When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect of
any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation.

Indisputably, funds held in trust by PNCC for the National


Government cannot be used by PNCC to pay a private debt of CDCP
Mining to Radstock, otherwise the PNCC Board will be liable for
malversation of public funds. xxx In giving priority and preference to
Radstock, the Compromise Agreement is certainly in fraud of PNCCs
other creditors, including the National Government, and violates the
provisions of the Civil Code on concurrence and preference of
credits.
This Court has held that while the Corporation Code allows the
transfer of all or substantially all of the assets of a corporation, the
transfer should not prejudice the creditors of the assignor
corporation. Assuming that PNCC may transfer all or substantially all
its assets, to allow PNCC to do so without the consent of its creditors
or without requiring Radstock to assume PNCCs debts will defraud
the other PNCC creditors since the assignment will place PNCCs
assets beyond the reach of its other creditors.
16 | N B S

Among the circumstances indicating fraud is a transfer of all or nearly


all of the debtors assets, especially when the debtor is greatly
embarrassed financially. Accordingly, neither a declaration of
insolvency nor the institution of insolvency proceedings is a condition
sine qua non for a transfer of all or nearly all of a debtors assets to be
regarded in fraud of creditors. It is sufficient that a debtor is greatly
embarrassed financially.
SECTION 36
GERALDINE COLEMAN vs. HOTEL DE FRANCE COMPANY
xxxAs was said by Justice Brewer in the case of Chicago, Rock Island
and Pacific R. R. Co. vs. Union Pacific Ry. Co. (47 Fed. Rep., 15, 22): It
is not seemly for a corporation, any more than for an individual, to
make a contract and then break it; to abide by it so long as it is
advantageous, and repudiate it when it becomes onerous. The courts
may well say to such corporation: "As you have called it a contract,
we will do the same. As you have enjoyed the benefits when it was
beneficial, you must bear the burden when it becomes onerous,
unless it clearly appears that that which you have assumed to do is
beyond your powers." In Railway Co. vs. McCarthy (96 U. S., 267), the
Supreme Court said: "When a contract is not on its face necessarily
beyond the scope of the power of the corporation by which it was
made, it will, in the absence of proof to the contrary, be presumed
to be valid. Corporations are presumed to contract within their
powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to previal where it would defeat
the ends of justice or work a legal wrong."
The evidence of record in this case falls far short of sustaining a
finding that under the articles of incorporation of the defendant, by
virtue of which it was engaged in the operation of hotels and weekend resorts in the city of Manila and its environs, it was beyond its
implied powers to enter into and to execute a contract which had for
its object the giving of vaudeville entertainments, including acrobatic
exhibitions, at the hotels operated by it, for the purpose of
entertaining its guests and attracting patronage. We incline rather to
believe that the execution of a contract for the employment of
vaudeville artists, bands, orchestras, and the like may fairly be held to
be included within the powers incidental to the express powers for
which the defendant corporation, engaged as it was in the conduct,
management, and operation of hotels in and about the city of Manila,
was created.

Y-1 LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD., AND Y-1


CLUBS AND RESORTS, INC. vs. JAMES YU
In the 1965 case of Nell v. Pacific Farms, Inc., the Court first
pronounced the rule regarding the transfer of all the assets of one
corporation to another (hereafter referred to as the Nell Doctrine) as
follows:ChanRoblesvirtualLawlibrary
Generally, where one corporation sells or otherwise transfers all of
its assets to another corporation, the latter is not liable for the
debts and liabilities of the transferor, except:
1.

Where the purchaser expressly or impliedly agrees to


assume such debts;

2.
3.
4.

Where the transaction amounts to a consolidation or


merger of the corporations;
Where the purchasing corporation is merely a continuation
of the selling corporation; and
Where the transaction is entered into fraudulently in order
to escape liability for such debts.

The Nell Doctrine states the general rule that the transfer of all the
assets of a corporation to another shall not render the latter liable
to the liabilities of the transferor. If any of the above-cited
exceptions are present, then the transferee corporation shall
assume the liabilities of the transferor.
Fraud is not an essential consideration in a business-enterprise
transfer
The exception of the Nell doctrine, which finds its legal basis under
Section 40, provides that the transferee corporation assumes the
debts and liabilities of the transferor corporation because it is
merely a continuation of the latter's business. A cursory reading of
the exception shows that it does not require the existence of fraud
against the creditors before it takes full force and effect. Indeed,
under the Nell Doctrine, the transferee corporation may inherit the
liabilities of the transferor despite the lack of fraud due to the
continuity of the latter's business.
Applicability of the business-enterprise transfer in the present case
xxx the business-enterprise transfer rule applies when two requisites
concur: (a) the transferor corporation sells all or substantially all of its
assets to another entity; and (b) the transferee corporation continues
the business of the transferor corporation. Both requisites are
present in this case.
Section 40 must apply.
While the Corporation Code allows the transfer of all or
substantially all of the assets of a corporation, the transfer should
not prejudice the creditors of the assignor corporation. Under the
business-enterprise transfer, the petitioners have consequently
inherited the liabilities of MADCI because they acquired all the assets
of the latter corporation. The continuity of MADCI's land
developments is now in the hands of the petitioners, with all its
assets and liabilities. There is absolutely no certainty that Yu can still
claim its refund from MADCI with the latter losing all its assets. To
allow an assignor to transfer all its business, properties and assets
without the consent of its creditors will place the assignor's assets
beyond the reach of its creditors. Thus, the only way for Yu to recover
his money would be to assert his claim against the petitioners as
transferees of the assets.

SECTION 42
RAMON DE LA RAMA vs. MA-AO SUGAR CENTRAL CO., INC., J.
AMADO ARANETA
The legal provision invoked by the plaintiffs, as appellants, Sec. 17-
of the Corporation Law, provides: No corporation organized under
this act shall invest its funds in any other corporation or business, or
for any purpose other than the main purpose for which it was
organized, unless its BOD has been so authorized in a resolution by
17 | N B S

the affirmative vote of stockholders holding shares in the corporation


entitling them to exercise at least two-thirds of the voting power on
such proposal at a stockholders' meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13,
par. 10 of the Corporation Law, which provides:
SEC. 13. Every corporation has the power: x x x
xxx

xxx

(9) To enter into any obligation or contract essential to the


proper administration of its corporate affairs or necessary for
the proper transaction of the business or accomplishment of the
purpose for which the corporation was organized;
(10) Except as in this section otherwise provided, and in order to
accomplish its purpose as stated in the articles of incorporation,
to acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities and other evidences of indebtedness of any domestic
or foreign corporation.
A reading of the two afore-quoted provisions shows that there is
need for interpretation of the apparent conflict. In his work entitled
"The Philippine Corporation Law," now in its 5th edition, Professor
Sulpicio S. Guevara of the University of the Philippines, College of
Law, a well-known authority in commercial law, reconciled these two
apparently conflicting legal provisions, as follows:
j. Power to acquire or dispose of shares or securities. A private
corporation, in order to accomplish its purpose as stated in its articles
of incorporation, and subject to the limitations imposed by the
Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidences of
indebtedness of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not need the
approval of the stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval of
the stockholders is necessary. In any case, the purchase of such
shares or securities must be subject to the limitations established by
the Corporation Law; namely, (a) that no agricultural or mining
corporation shall in anywise be interested in any other agricultural or
mining corporation; or (b) that a non-agricultural or non-mining
corporation shall be restricted to own not more than 15% of the
voting stock of any agricultural or mining corporation; and (c) that
such holdings shall be solely for investment and not for the purpose
of bringing about a monopoly in any line of commerce or combination
in restraint of trade. (The Philippine Corporation Law by Sulpicio S.
Guevara, 1967 Ed., p. 89.)
40. Power to invest corporate funds. A private corporation has the
power to invest its corporate funds in any other corporation or
business, or for any purpose other than the main purpose for which it
was organized, provided that 'its BOD has been so authorized in a
resolution by the affirmative vote of stockholders holding shares in
the corporation entitling them to exercise at least two-thirds of the
voting power on such a proposal at a stockholders' meeting called for
that purpose,' and provided further, that no agricultural or mining
corporation shall in anywise be interested in any other agricultural or
mining corporation. When the investment is necessary to accomplish
its purpose or purposes as stated in it articles of incorporation, the
approval of the stockholders is not necessary. (Id., p. 108.)

SECTION 45
LUNETA MOTOR COMPANY vs. A.D. SANTOS, INC., ET AL.
xxx under Section 13 (5) of the Corporation Law, a corporation
created thereunder may purchase, hold, etc., and otherwise deal in
such real and personal property is the purpose for which the
corporation was formed may permit, and the transaction of its
lawful business may reasonably and necessarily require. The issue
here is precisely whether the purpose for which petitioner was
organized and the transaction of its lawful business reasonably and
necessarily require the purchase and holding by it of a certificate of
public convenience like the one in question and thus give it additional
authority to operate thereunder as a common carrier by land.
We find nothing in the legal provision and the provisions of
petitioner's articles of incorporation relied upon that could justify
petitioner's contention in this case. To the contrary, they are precisely
the best evidence that it has no authority at all to engage in the
business of land transportation and operate a taxicab service. That it
may operate and otherwise deal in automobiles and automobile
accessories; that it may engage in the transportation of persons by
water does not mean that it may engage in the business of land
transportation an entirely different line of business. If it could not
thus engage in the line of business, it follows that it may not acquire
an certificate of public convenience to operate a taxicab service, such
as the one in question, because such acquisition would be without
purpose and would have no necessary connection with petitioner's
legitimate business.

ZOMER DEVELOPMENT COMPANY, INC. vs. INTERNATIONAL


EXCHANGE BANK and SHERIFF IV ARTHUR R. CABIGON
xxx. Since when is a private corporation, going to the aid of a sister
corporation, not for the best interest of both corporation? For in
doing so, the two (2) corporations are enhancing, boosting and
promoting a common interest, the interest of "family" having
ownership of both corporations. xxx
[U]nder the "Resolution" of the BOD, it authorized its Treasurer and
General Manager to execute a "Real Estate Mortgage" over its
properties as security for the "term loan and credit facility" of Prime
Aggregates. The maximum amounts of such term loan and credit
facility were not fixed in the "Resolution". xxx
xxx ratification and/or approval by the corporation of the acts of its
agents/officers may be ascertained through x x x the acquiescence in
his acts of a particular nature, with actual or constructive thereof,
whether within or beyond the scope of his ordinary powers.
The plea of "ultra vires" will not be allowed to prevail, whether
interposed for or against a corporation, when it will not advance
justice but, on the contrary, will accomplish a legal wrong to the
prejudice of another who acted in good faith.

SECTION 46
18 | N B S

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS,


and VALLEY GOLF and COUNTRY CLUB, INC., respondents.
CBC is not bound by the provision in the by-laws of the VGCCI granting
the VGCCI a preferred lien over the share of stock of a member for
unpaid dues. The by-law restricting the transfer of shares cannot
have any effect on the transferee of the shares in question as he had
no knowledge of such by-law when the shares were assigned to him.
The general rule really is that third persons are not bound by the bylaws of a corporation since they are not privy thereto (Fleischer v.
Botica Nolasco, 47 Phil. 584). The exception to this is when third
persons have actual or constructive knowledge of the same. In the
case at bar, Chinabank had actual knowledge of the by-laws of Valley
Golf when Chinabank foreclosed the pledge made by Calapatia and
when it purchased the share which was foreclosed. xxx Because of
this actual knowledge of such by-laws then the same bound the
petitioner as of the time when petitioner purchased the share. Since
the by-laws was already binding upon petitioner when the latter
purchased the share of Calapatia then the petitioner purchased the
said share subject to the right of the private respondent to sell the
said share for reasons of delinquency and the right of private
respondent to have a first lien on said shares as these rights are
provided for in the by-laws very very clearly.
xxx
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, VALLEY
GOLF could have easily informed Chinabank 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. The ruling of
the SEC en banc is particularly instructive: By-laws signifies the rules
and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns
and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it. In
other words, by-laws are the relatively permanent and continuing
rules of action adopted by the corporation for its own government
and that of the individuals composing it and having the direction,
management and control of its affairs, in whole or in part, in the
management and control of its affairs and activities. (9 Fletcher
4166. 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the
duties of the members towards the corporation and among
themselves. They are self-imposed and, although adopted pursuant
to statutory authority, have no status as public law. (Ibid.)
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.
Chinabank as a third party cannot be bound by Valley Golfs by-laws.
It must be recalled that when Valley Golf communicated to Chinabank
that the pledge agreement was duly noted in the club's books there
was no mention of the shareholder-pledgor's unpaid accounts. xxx
appellant-petitioner was in good faith when the pledge agreement
was contracted.
xxx
Finally, Sec. 63 of the Corporation Code which provides that "no
shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation" cannot
be utilized by VALLEY GOLF. The term "unpaid claim" refers to "any
unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the
corporation arising from any other transaction. In the case at bar,
the subscription for the share in question has been fully paid as
evidenced by the issuance of Membership Certificate No. 1219. What
Calapatia owed the corporation were merely the monthly dues.
Hence, the aforequoted provision does not apply.

SECTION 47
GOKONGWEI, JR. vs. SEC, et al.
Under section 21 of the Corporation Law, a corporation may prescribe
in its by-laws the qualifications, duties and compensation of directors,
officers and employees. A provision in the by-laws of the corporation
that no person shall qualify or be eligible for nomination for
elections to the board of directors if he is engaged in any business
which competes with that of the Corporation is valid, as long as due
process is observed.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
As agents entrusted with the management of the corporation for
the collective benefit of the stockholders, "they occupy a fiduciary
relation, and in this sense the relation is one of trust."
If the by-law is to be held reasonable in disqualifying a stockholder in
a competing company from being a director, the same reasoning
would apply to disqualify the wife and immediate member of the
family of such stockholder, on account of the supposed interest of the
wife in her husband's affairs, and his suppose influence over her. It is
perhaps true that such stockholders ought not to be condemned as
selfish and dangerous to the best interest of the corporation until
tried and tested. So it is also true that we cannot condemn as selfish
and dangerous and unreasonable the action of the board in passing
the by-law. The strife over the matter of control in this corporation as
in many others is perhaps carried on not altogether in the spirit of
brotherly love and affection. The only test that we can apply is as to
whether or not the action of the Board is authorized and sanctioned
by law.
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR
19 | N B S

IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH


THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher,
that corporations have the power to make by-laws declaring a
person employed in the service of a rival company to be ineligible
for the corporation's Board of Directors. That an amendment which
renders ineligible, or if elected, subjects to removal, a director if he
be also a director in a corporation whose business is in competition
with or is antagonistic to the other corporation is valid." This is
based upon the principle that where the director is so employed in
the service of a rival company, he cannot serve both, but must betray
one or the other. Such an amendment "advances the benefit of the
corporation and is good."
It is also well established that corporate officers "are not permitted to
use their position of trust and confidence to further their private
interests."
The doctrine of "corporate opportunity" is precisely a recognition by
the courts that the fiduciary standards could not be upheld where
the fiduciary was acting for two entities with competing interests.
This doctrine rests fundamentally on the unfairness, in particular
circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the
corporation justly calls for protection.
xxx It is obviously to prevent the creation of an opportunity for an
officer or director of San Miguel Corporation, who is also the officer
or owner of a competing corporation, from taking advantage of the
information which he acquires as director to promote his individual or
corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was
made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for
the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
These are not based on theorical abstractions but on human
experience that a person cannot serve two hostile masters
without detriment to one of them.

GRACE CHRISTIAN HIGH SCHOOL vs. THE COURT OF APPEALS, GRACE


VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO
L. GO

virtue of and for as long as they hold a particular office. But in the
case of petitioner, there is no reason at all for its representative to be
given a seat in the board. Nor does petitioner claim a right to such
seat by virtue of an office held. In fact it was not given such seat in
the beginning. It was only in 1975 that a proposed amendment to the
by-laws sought to give it one.
Since the provision in question is contrary to law, the fact that for
fifteen years it has not been questioned or challenged but, on the
contrary, appears to have been implemented by the members of the
association cannot forestall a later challenge to its validity. Neither
can it attain validity through acquiescence because, if it is contrary to
law, it is beyond the power of the members of the association to
waive its invalidity. For that matter the members of the association
may have formally adopted the provision in question, but their action
would be of no avail because no provision of the by-laws can be
adopted if it is contrary to law.

SECTION 63
MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS,
RODOLFO L. JOCSON, JR., MELVIN S. JURISPRUDENCIA, AUGUSTUS
CESAR AZURA and EDGARDO D. PABALAN vs.COURT OF APPEALS,
SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY &
DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA.
CRISTINA T. CARLOS, MA. LUISA T. MORALES and DANTE D.
MORALES
In the absence of any provision to the contrary, the corporate
secretary is the custodian of corporate records. The transferor, even
though he may be the controlling stockholder cannot take the law into
his hands and cause himself the recording of the transfers of the
qualifying shares to his nominee-directors in the stock and transfer
book of the corporation.
xxx Petitioners cannot use the flimsy excuse that it would have been a
vain attempt to force the incumbent corporate secretary to register
the aforestated assignments in the stock and transfer book because
the latter belonged to the opposite faction. It is the corporate
secretary's duty and obligation to register valid transfers of stocks
and if said corporate officer refuses to comply, the transferorstockholder may rightfully bring suit to compel performance. In
other words, there are remedies within the law that petitioners
could have availed of, instead of taking the law in their own hands,
as the cliche goes.
xxx Section 74 of the Corporation Code, as follows (Rollo, p. 45):

The board of directors of corporations must be elected from among


the stockholders or members. Thus, a provision in the by-laws of the
corporation stating that of the fifteen members of its Board of
Directors, only 14 members would be elected while the remaining
member would be the representative of an educational institution
located in the village of the homeowners, is invalid for being contrary
to law as it violates the one-year term limit of the directors.
These provisions of the former and present corporation law leave
no room for doubt as to their meaning: the board of directors of
corporations must be elected from among the stockholders or
members. There may be corporations in which there are unelected
members in the board but it is clear that in the examples cited by
petitioner the unelected members sit as ex officio members, i.e., by

In the absence of (any) provision to the contrary, the corporate


secretary is the custodian of corporate records. Corollarily, he keeps
the stock and transfer book and makes proper and necessary entries
therein.
xxx any entries made in the stock and transfer book xxx by
respondent Torres of an alleged transfer of nominal shares to Pabalan
and Co. cannot therefore be given any valid effect. Where the entries
made are not valid, Pabalan and Co. cannot therefore be considered
stockholders of record of TORMIL. Because they are not stockholders,
they cannot therefore be elected as directors of TORMIL. To rule
otherwise would not only encourage violation of clear mandate of
Sec. 74 of the Corporation Code that stock and transfer book shall be
20 | N B S

kept in the principal office of the corporation but would likewise open
the flood gates of confusion in the corporation as to who has the
proper custody of the stock and transfer book and who are the real
stockholders of records of a certain corporation as any holder of the
stock and transfer book, though not the corporate secretary, at
pleasure would make entries therein.
All corporations, big or small, must abide by the provisions of the
Corporation Code. Being a simple family corporation is not an
exemption. Such corporations cannot have rules and practices other
than those established by law.

SECTION 64
HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE, as
stockholders for an in behalf and for the benefit of the corporation,
Paraaque Rice Mill, Inc. and the other stockholders who may
desire to join, vs. TEODORICO B. SANTOS, ESTANISLAO MAYUGA,
APOLONIO PASCUAL, and BASILISA RODRIGUEZ
The board of directors of a corporation is a creation of the
stockholders and controls and directs the affairs of the corporation by
allegation of the stockholers. But the board of directors, or the
majority thereof, in drawing to themselves the power of the
corporation, occupies a position of trusteeship in relation to the
minority of the stock in the sense that the board should exercise good
faith, care and diligence in the administration of the affairs of the
corporation and should protect not only the interest of the majority
but also those of the minority of the stock. Where a majority of the
board of directors wastes or dissipates the funds of the corporation
or fraudulently disposes of its properties, or performs ultra vires
acts, the court, in the exercise of its equity jurisdiction, and upon
showing that intracorporate remedy is unavailing, will entertain a
suit filed by the minority members of the board of directors, for and
in behalf of the corporation, to prevent waste and dissipation and
the commission of illegal acts and otherwise redress the injuries of
the minority stockholders against the wrongdoing of the majority.
The action in such a case is said to be brought derivatively in behalf
of the corporation to protect the rights of the minority stockholers
thereof (7 R. C. L., pars. 293 and 294, and authority therein cited; 13
Fletcher, Cyc. of Corp., pars. 593, et seq., an authorities therein cite).
It is well settled in this jurisdiction that where corporate directors
are guilty of a breach of trust not of mere error of judgment or
abuse of discretion and intracorporate remedy is futile or useless,
a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholers. xxx
The action having been properly brought and by the lower court
entertained it was within its power, upon proper showing, to appoint
a receiver of the corporation pendente lite (secs. 173, 174, et seq.
Code of Civil Procedure). The appointment of a receiver upon
application of the minority stockholers is power to be exercised with
great caution. But this does not mean that right of the minority
stockholers may be entirely disregarded, and where the necessity has
arisen, the appointment of a receiver for a corporation is a matter
resting largely in the sound discretion of the trial court. xxx

ANTHONY S. YU, ROSITA G. YU and JASON G. YU,vs. JOSEPH S.


YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L.
YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf
and on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC.
The general rule is that where a corporation is an injured party, its
power to sue is lodged with its board of directors or trustees.
Nonetheless, an individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stocks
in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued,
or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as
the real party in interest. A derivative action is a suit by a shareholder
to enforce a corporate cause of action. The corporation is a necessary
party to the suit. And the relief which is granted is a judgment against
a third person in favor of the corporation. Similarly, if a corporation
has a defense to an action against it and is not asserting it, a
stockholder may intervene and defend on behalf of the corporation.
By virtue of Republic Act No. 8799, otherwise known as the Securities
Regulation Code, jurisdiction over intra-corporate disputes, including
derivative suits, is now vested in the Regional Trial Courts designated
by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21
November 2000.
Glaringly, a derivative suit is fundamentally distinct and
independent from liquidation proceedings. They are neither part of
each other nor the necessary consequence of the other. There is
totally no justification for the Court of Appeals to convert what was
supposedly a derivative suit instituted by respondents, on their own
behalf and on behalf of Winchester, Inc. against petitioners, to a
proceeding for the liquidation of Winchester, Inc.
The Court has recognized that a stockholders right to institute a
derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. Hence, a
stockholder may sue for mismanagement, waste or dissipation of
corporate assets because of a special injury to him for which he is
otherwise without redress. In effect, the suit is an action for specific
performance of an obligation owed by the corporation to the
stockholders to assist its rights of action when the corporation has
been put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection. The basis
of a stockholders suit is always one in equity. However, it cannot
prosper without first complying with the legal requisites for its
institution.
Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies lays down the following requirements which
a stockholder must comply with in filing a derivative suit:
Sec. 1. Derivative action. A stockholder or member may bring
an action in the name of a corporation or association, as the case
may be, provided, that:
(1) He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the
action was filed;
21 | N B S

(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he
desires;
(3) No appraisal rights are available for the act or acts
complained of; and
(4) The suit is not a nuisance or harassment suit.
The stockholder filing a derivative suit should have exerted all
reasonable efforts to exhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing the corporation to
obtain the relief he desires and to allege such fact with particularity in
the complaint. The allegation that the suing stockholder talked to the
other stockholder regarding the dispute hardly constitutes all
reasonable efforts to exhaust all remedies available . The complaint
should also allege the fact that there was no appraisal right available
under for the acts complained of and that the suit was not a nuisance
or harassment suit. The fact that the corporation involved is a family
corporation should not in any way exempt the suing stockholder from
the requirements and formalities for filing a derivative suit.

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS


ANGELES vs. ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA,
JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR.,
EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR.
xxx The dispute concerns acts of the board of directors claimed to
amount to fraud and misrepresentation which may be detrimental to
the interest of the stockholders, or is one arising out of intracorporate relations between and among stockholders, or between
any or all of them and the corporation of which they are stockholders.
xxx The implicit argument that a stockholder, to be considered as
qualified to bring a derivative suit, must hold a substantial or
significant block of stock finds no support whatever in the law. The
requisites for a derivative suitare as follows:
a) the party bringing suit should be a shareholder as of the time of the
act or transaction complained of, the number of his shares not being
material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the
latter has failed or refused to heed his plea; and

los Angeles to be a director in order to bring a derivative action; all


he had to be was a stockholder, and that he was owning in his own
right 20 shares of stock, a fact not disputed by the respondents.

BITONG vs. CA, et al.


The certificate of stock itself once issued is a continuing affirmation or
representation that the stock described therein is valid and genuine
and is at least prima facie evidence that it was legally issued in the
absence of evidence to the contrary. A mere typewritten statement
advising a stockholder of the extent of his ownership in a corporation
without qualification and/or authentication cannot be considered as a
formal certificate of stock.
Dividends are distributed to stockholders pursuant to their right to
share in corporate profits. When a dividend is declared, it belongs to
the person who is the substantial and beneficial owner of the stock at
the time regardless of when the distribution profit was earned.
xxx Sec. 63 of The Corporation Code xxx provides 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. xxx
xxx for a valid transfer of stocks, the requirements are as follows: (a)
There must be delivery of the stock certificate; (b) The certificate
must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and, (c) to be valid
against third parties, the transfer must be recorded in the books of
the corporation. At most, in the instant case, petitioner has satisfied
only the third requirement. Compliance with the first two requisites
has not been clearly and sufficiently shown.
xxx The power to sue and be sued in any court by a corporation even
as a stockholder is lodged in the board of directors that exercises its
corporate powers and not in the president or officer thereof.
The stockholder's right to institute a derivative suit is not based on
any express provision of The Corporation Code but is impliedly
recognized when the law makes corporate directors or officers liable
for damages suffered by the corporation and its stockholders for
violation of their fiduciary duties.

c) the cause of action actually devolves on the corporation, the


wrongdoing or harm having been, or being caused to the corporation
and not to the particular stockholder bringing the suit.

Hence, a stockholder may sue for mismanagement, waste or


dissipation of corporate assets because of a special injury to him for
which he is otherwise without redress. In effect, the suit is an action
for specific performance of an obligation owed by the corporation to
the stockholders to assist its rights of action when the corporation
has been put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection.

The bona fide ownership by a stockholder of stock in his own right


suffices to invest him with standing to bring a derivative action 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 him, individually, but in behalf and
for the benefit of the corporation.

The basis of a stockholder's suit is always one in equity. However, it


cannot prosper without first complying with the legal requisites for
its institution. The most important of these is the bona
fide ownership by a stockholder of a stock in his own right at the
time of the transaction complained of which invests him with
standing to institute a derivative action for the benefit of the
corporation.

As already more than plainly indicated, it was not necessary for de


22 | N B S

GILDA C. LIM, WILHELMINA V. JOVEN and DITAS A. LERIOS,


petitioners, vs. PATRICIA LIM-YU, in her capacity as a minority
stockholder of LIMPAN INVESTMENT CORPORATION
A suit to enforce pre-emptive right in a corporation is not a derivative
suit because it was not filed for the benefit of the coporation. The
petitioner was suing on her own behalf, and was merely praying that
she be allowed to subscribe to the additional issuances of stocks in
proportion to her shareholdings to enable her to preserve her
percentage of ownership in the corporation.
xxx a derivative suit, which has been defined as "an action brought
by minority shareholders in the name of the corporation to redress
wrongs committed against it, for which the directors refuse to sue.
It is a remedy designed by equity and has been the principal defense
of the minority shareholders against abuses by the majority." In a
derivative action, the real party in interest is the corporation itself, I
not the shareholder(s) who actually instituted it. "If the suit filed by
respondent was indeed derivative in character, then respondent
may not have the capacity to sue. The reason is that she would be
acting in representation of the corporation, an act which the TRO
enjoins her from doing. We hold, however, that the suit of
respondent cannot be characterized as derivative, because she was
complaining only of the violation of her preemptive right under
Section 39 of the Corporation Code. She was merely praying that she
be allowed to subscribe to the additional issuances of stocks in
proportion to her shareholdings to enable her to preserve her
percentage of ownership in the corporation. She was therefore not
acting for the benefit of the corporation. Quite the contrary, she was
suing on her own behalf, out of a desire to protect and preserve her
preemptive rights. Unquestionably, the TRO did not prevent her from
pursuing that action.

GOCHAN vs. YOUNG


As early as 1911, this Court has recognized the right of a single
stockholder to file derivative suits. In its words:
"[W]here corporate directors have committed a breach of trust
either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the
wrong, a single stockholder may institute that suit, suing on behalf
of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong done directly to
the corporation and indirectly to the stockholders."
In the present case, the Complaint alleges all the components of a
derivative suit. The allegations of injury to the Spouses Uy can coexist
with those pertaining to the corporation. The personal injury suffered
by the spouses cannot disqualify them from filing a derivative suit
on behalf of the corporation. It merely gives rise to an additional
cause of action for damages against the erring directors. This cause
of action is also included in the Complaint filed before the SEC.
The Spouses Uy have the capacity to file a derivative suit in behalf of
and for the benefit of the corporation. xxx the allegations of the
Complaint make them out as stockholders at the time the questioned
transaction occurred, as well as at the time the action was filed and
during the pendency of the action.

OSCAR C. REYES vs. HON. REGIONAL TRIAL COURT OF MAKATI,


Branch 142, ZENITH INSURANCE CORPORATION,
The bare claim that the complaint is a derivative suit will not suffice to
confer jurisdiction on the RTC (as a special commercial court) if he
cannot comply with the requisites for the existence of a derivative
suit. These requisites are: a.) the party bringing suit should be a
shareholder during the time of the act or transaction complained of,
the number of shares not being material; b.) the party has tried to
exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief, but the latter has failed
or refused to heed his plea; andc.) the cause of action actually
devolves on the corporation; the wrongdoing or harm having been or
being caused to the corporation and not to the particular stockholder
bringing the suit.
Not every allegation of fraud done in a corporate setting or
perpetrated by corporate officers will bring the case within the
special commercial courts jurisdiction. To fall within this
jurisdiction, there must be sufficient nexus showing that the
corporations nature, structure, or powers were used to facilitate
the fraudulent device or scheme. Contrary to this concept, the
complaint presented a reverse situation. No corporate power or
office was alleged to have facilitated the transfer of the shares;
rather, Oscar, as an individual and without reference to his corporate
personality, was alleged to have transferred the shares of Anastacia
to his name, allowing him to become the majority and controlling
stockholder of Zenith, and eventually, the corporations President.
Intra-Corporate Controversy
To determine whether a case involves an intra-corporate controversy,
and is to be heard and decided by the branches of the RTC specifically
designated by the Court to try and decide such cases, two elements
must concur: (a) the status or relationship of the parties; and (2) the
nature of the question that is the subject of their controversy.
In sum, we find that insofar as the subject shares of stock (i.e.,
Anastacias shares) are concerned Rodrigo cannot be considered a
stockholder of Zenith. Consequently, we cannot declare that an intracorporate relationship exists that would serve as basis to bring this
case within the special commercial courts jurisdiction under Section
5(b) of PD 902-A, as amended. Rodrigos complaint, therefore, fails
the relationship test.
Application of the Nature of Controversy Test
xxx the nature of the present controversy is not one which may be
classified as an intra-corporate dispute and is beyond the jurisdiction
of the special commercial court to resolve. In short, Rodrigos
complaint also fails the nature of the controversy test.
In summary, whether as an individual or as a derivative suit, the RTC
sitting as special commercial court has no jurisdiction to hear
Rodrigos complaint since what is involved is the determination and
distribution of successional rights to the shareholdings of Anastacia
Reyes. Rodrigos proper remedy, under the circumstances, is to
institute a special proceeding for the settlement of the estate of the
deceased Anastacia Reyes, a move that is not foreclosed by the
dismissal of his present complaint.
23 | N B S

SANTIAGO CUA, JR., et al. vs. MIGUEL OCAMPO TAN, et al.


The derivative suit, with respect to the Resolution dated 11 May
2007 of the PRCI Board of Directors, is similarly dismissible for lack of
cause of action. The basis of a stockholders suit is always one of
equity. However, it cannot prosper without first complying with the
legal requisites for its institution.
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate
Controversies (IRPICC) lays down the following requirements which a
stockholder must comply with in filing a derivative suit:
Sec. 1. Derivative action. A stockholder or member
may bring an action in the name of a corporation or
association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the
acts or transactions subject of the action occurred and
at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation,
by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts
complained of; and
(4) The suit is not a nuisance or harassment suit.
(Emphasis ours.)
xxx every derivative suit is necessarily grounded on an alleged
violation by the board of directors of its fiduciary duties, committed
by mismanagement, misrepresentation, or fraud, with the latter two
situations already implying bad faith. If the Court upholds the
position of respondents Miguel, et al. that the existence of
mismanagement, misrepresentation, fraud, and/or bad faith renders
the right of appraisal unavailable it would give rise to an absurd
situation. Inevitably, appraisal rights would be unavailable in any
derivative suit. xxx
The Court finds specious the averment of respondents Miguel, et al.,
that appraisal rights were not available to them, because appraisal
rights may only be exercised by stockholders who had voted against
the proposed corporate action; and that at the time respondents
Miguel, et al., instituted Civil Case No. 07-610, PRCI stockholders had
yet to vote on the intended property-for-shares exchange between
PRCI and JTH. Respondents Miguel, et al., themselves caused the
unavailability of appraisal rights by filing the Complaint in Civil Case
No. 07-610, in which they prayed that the 11 May 2007 Resolution of
the Board of Directors approving the property-for-shares exchange
between PRCI and JTH be declared null and void, even before the said
Resolution could be presented to the PRCI stockholders for approval
or rejection. More than anything, the argument of respondents
Miguel, et al., raises questions of whether their derivative suit was
prematurely filed for they had failed to exert all reasonable efforts to
exhaust all other remedies available under the articles of
incorporation, by-laws, laws, or rules governing the corporation or
partnership, as required by Rule 8, Section 1(2) of the IRPICC. The
obvious intent behind the rule is to make the derivative suit the final

recourse of the stockholder, after all other remedies to obtain the


relief sought have failed.

SIMNY G. GUY, GERALDINE G. GUY, GLADYS G. YAO, and the HEIRS


OF THE LATE GRACE G. CHEU vs. GILBERT G. GUY
We have made clear that GoodGold is a separate juridical entity
distinct from its stockholders and from its directors and officers. The
trial court, acting as a special commercial court, cannot settle the
issues with finality without impleading GoodGold as defendant. Like
Francisco, and for the same reasons, GoodGold is an indispensable
party which Gilbert should have impleaded as defendant in his
complaint.
With Gilberts failure to allege specific acts of fraud in his complaint
and his failure to rebut the NBI report, this Court pronounces, as a
consequence thereof, that the signatures appearing on the stock
certificates, including his blank endorsement thereon were authentic.
When a stock certificate is endorsed in blank by the owner thereof,
it constitutes what is termed as street certificate, so that upon its
face, the holder is entitled to demand its transfer into his name
from the issuing corporation. Such certificate is deemed quasinegotiable, and as such the transferee thereof is justified in
believing that it belongs to the holder and transferor. While there is
a contrary ruling, as an exception to the general rule enunciated
above, what the Court held in Neugene Marketing Inc., et al., v CA,62
where stock certificates endorsed in blank were stolen from the
possession of the beneficial owners thereof constraining this Court
to declare the transfer void for lack of delivery and want of value,
the same cannot apply to Gilbert because the stock certificates which
Gilbert endorsed in blank were in the undisturbed possession of his
parents who were the beneficial owners thereof and who themselves
as such owners caused the transfer in their names. Indeed, even if
Gilberts parents were not the beneficial owners, an endorsement in
blank of the stock certificates coupled with its delivery, entitles the
holder thereof to demand the transfer of said stock certificates in his
name from the issuing corporation.

SECTION 67
ERNESTO M. APODACA, vs. NLRC, JOSE M. MIRASOL and INTRANS
PHILS., INC.
xxx the NLRC has no jurisdiction to determine such intra-corporate
dispute between the stockholder and the corporation as in the
matter of unpaid subscriptions. This controversy is within the
exclusive jurisdiction of the Securities and Exchange Commission.
xxx assuming arguendo that the NLRC may exercise jurisdiction over
the said subject matter under the circumstances of this case, the
unpaid subscriptions are not due and payable until a call is made by
the corporation for payment. Private respondents have not
presented a resolution of the board of directors of respondent
corporation calling for the payment of the unpaid subscriptions. It
does not even appear that a notice of such call has been sent to
petitioner by the respondent corporation.
xxx, assuming further that there was a call for payment of the unpaid
subscription, the NLRC cannot validly set it off against the wages and
24 | N B S

other benefits due petitioner. Xxx

SECTION 74
RAMON A. GONZALES vs. THE PHILIPPINE NATIONAL BANK
xxx The former Corporation Law (Act No. 1459, as amended) has been
replaced by Batas Pambansa Blg. 68, otherwise known as the
"Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of
Act No. 1459 has been retained, but with some modifications. The
second and third paragraphs of Section 74 of Batas Pambansa Blg. 68
provide that with respect to the right of inspection granted to a
stockholder are the following the records must be kept at the
principal office of the corporation; the inspection must be made on
business days; the stockholder may demand a copy of the excerpts
of the records or minutes; and the refusal to allow such inspection
shall subject the erring officer or agent of the corporation to civil
and criminal liabilities. However, while seemingly enlarging the right
of inspection, the new Code has prescribed limitations to the same. It
is now expressly required as a condition for such examination that
the one requesting it must not have been guilty of using improperly
any information through a prior examination, and that the person
asking for such examination must be "acting in good faith and for a
legitimate purpose in making his demand."
Although the petitioner has claimed that he has justifiable motives in
seeking the inspection of the books of the respondent bank, he has
not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published
reports regarding certain transactions entered into by the respondent
bank and to inquire into their validity. The circumstances under which
he acquired one share of stock in the respondent bank purposely to
exercise the right of inspection do not argue in favor of his good faith
and proper motivation. Admittedly he sought to be a stockholder in
order to pry into transactions entered into by the respondent bank
even before he became a stockholder. His obvious purpose was to
arm himself with materials which he can use against the respondent
bank for acts done by the latter when the petitioner was a total
stranger to the same. He could have been impelled by a laudable
sense of civic consciousness, but it could not be said that his purpose
is germane to his interest as a stockholder.

ANG-ABAYA, et al. v. ANG


In Gokongwei, Jr. v. Securities and Exchange Commission, this Court
explained the rationale behind a stockholder's right to inspect
corporate books, to wit:
The stockholder's right of inspection of the corporation's books
and records is based upon their ownership of the assets and
property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or
interest be termed an equitable ownership, a beneficial
ownership, or a quasi-ownership. This right is predicated upon
the necessity of self-protection. It is generally held by majority
of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by

him with respect to his interest as a stockholder and for some


purpose germane thereto or in the interest of the corporation. In
other words, the inspection has to be germane to the
petitioner's interest as a stockholder, and has to be proper and
lawful in character and not inimical to the interest of the
corporation.
Thus, contrary to Eduardos insistence, the stockholders right to
inspect corporate books is not without limitations. While the right of
inspection was enlarged under the Corporation Code as opposed to
the old Corporation Law (Act No. 1459, as amended),
It is now expressly required as a condition for such examination
that the one requesting it must not have been guilty of using
improperly any information secured through a prior
examination, or that the person asking for such examination
must be acting in good faith and for a legitimate purpose in
making his demand.
In order therefore for the penal provision under Section 144 of the
Corporation Code to apply in a case of violation of a stockholder or
members right to inspect the corporate books/records as provided
for under Section 74 of the Corporation Code, the following elements
must be present:
First. A director, trustee, stockholder or member has made a
prior demand in writing for a copy of excerpts from the
corporations records or minutes;
Second. Any officer or agent of the concerned corporation shall
refuse to allow the said director, trustee, stockholder or member
of the corporation to examine and copy said excerpts;
Third. If such refusal is made pursuant to a resolution or order of
the board of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or trustees
who voted for such refusal; and,
Fourth. Where the officer or agent of the corporation sets up the
defense that the person demanding to examine and copy
excerpts from the corporations records and minutes has
improperly used any information secured through any prior
examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand, the contrary must be
shown or proved.
Thus, in a criminal complaint for violation of Section 74 of the
Corporation Code, the defense of improper use or motive is in the
nature of a justifying circumstance that would exonerate those who
raise and are able to prove the same. Accordingly, where the
corporation denies inspection on the ground of improper motive or
purpose, the burden of proof is taken from the shareholder and
placed on the corporation.
xxx Taken together, all these serve to justify petitioners allegation
that Eduardo was not acting in good faith and for a legitimate
purpose in making his demand for inspection of the corporate books.
Otherwise stated, there is lack of probable cause to support the
allegation that petitioners violated Section 74 of the Corporation
Code in refusing respondents request for examination of the
corporation books.
25 | N B S

JESUS V. LANUZA, et al. vs. COURT OF APPEALS, et al.


Articles of incorporation determines the stockholders shareholdings
and provides the basis for computing quorum
The articles of incorporation has been described as one that defines
the charter of the corporation and the contractual relationships
between the State and the corporation, the stockholders and the
State, and between the corporation and its stockholders. There is no
gainsaying that the contents of the articles of incorporation are
binding, not only on the corporation, but also on its shareholders. In
the instant case, the articles of incorporation indicate that at the time
of incorporation, the incorporators were bona fide stockholders of
seven hundred (700) founders shares and seventy-six (76) common
shares. Hence, at that time, the corporation had 776 issued and
outstanding shares.
On the other hand, a stock and transfer book is the book which
records the names and addresses of all stockholders arranged
alphabetically, the installments paid and unpaid on all stock for
which subscription has been made, and the date of payment
thereof; a statement of every alienation, sale or transfer of stock
made, the date thereof and by and to whom made; and such other
entries as may be prescribed by law. However, a stock and transfer
book, like other corporate books and records, is not in any sense a
public record, and thus is not exclusive evidence of the matters and
things which ordinarily are or should be written therein. In fact, it is
generally held that the records and minutes of a corporation are not
conclusive even against the corporation but are prima facie evidence
only, and may be impeached or even contradicted by other
competent evidence.
Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders shares or common
shares. xxx
To base the computation of quorum solely on the obviously deficient,
if not inaccurate stock and transfer book, and completely disregarding
the issued and outstanding shares as indicated in the articles of
incorporation would work injustice to the owners and/or successors
in interest of the said shares. xxx
One who is actually a stockholder cannot be denied his right to vote
by the corporation merely because the corporate officers failed to
keep its records accurately. A corporations records are not the only
evidence of the ownership of stock in a corporation. xxx to disregard
the contents of the articles of incorporation would be to pretend that
the basic document which legally triggered the creation of the
corporation does not exist and accordingly to allow great injustice to
be caused to the incorporators and their heirs.

TERELAY INVESTMENT DEVELOPMENT CORPORATION vs. CECILIA


TERESITA YULO
xxx petitioner-appellee has presented enough evidence that she is a
stockholder of TERELAY. The corporate documents presented support
her claim that she is a registered stockholder in TERELAYs stock and
transfer book thus giving her the right, under Section 74 par.2 and
Section 75 of the Philippine Corporation Law, to inspect TERELAYs

books, records, and financial statements. Section 74, par. 2 and


Section 75 of our Corporation Code reads as follows: x x x
Accordingly, Cecilia Yulo as the right to be fully informed of TERELAYs
corporate condition and the manner its affairs are being managed. It
is well-settled that the ownership of shares of stock gives
stockholders the right under the law to be protected from possible
mismanagement by its officers. This right is predicated upon selfpreservation. In any case, TERELAY did not adduce sufficient proof
that Cecilia Yulo was in bad faith or had an ulterior motive in
demanding her right under the law.
The petitioners submission that the respondents insignificant
holding of only .001% of the petitioners stockholding did not
justify the granting of her application for inspection of the corporate
books and records is unwarranted.
The Corporation Code has granted to all stockholders the right to
inspect the corporate books and records, and in so doing has not
required any specific amount of interest for the exercise of the right
to inspect. Ubi lex non distinguit nec nos distinguere debemos. When
the law has made no distinction, we ought not to recognize any
distinction.
Neither could the petitioner arbitrarily deny the respondents right to
inspect the corporate books and records on the basis that her
inspection would be used for a doubtful or dubious reason. Under
Section 74, third paragraph, of the Corporation Code, the only time
when the demand to examine and copy the corporations records
and minutes could be refused is when the corporation puts up as a
defense to any action that the person demanding had improperly
used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation,
or was not acting in good faith or for a legitimate purpose in making
his demand.
*Sec. 74 & Sec. 75
The right of the shareholder to inspect the books and records of the
petitioner should not be made subject to the condition of a showing
of any particular dispute or of proving any mismanagement or other
occasion rendering an examination proper, but if the right is to be
denied, the burden of proof is upon the corporation to show that the
purpose of the shareholder is improper, by way of defense.
xxx Among the purposes held to justify a demand for inspection are
the following: (1) To ascertain the financial condition of the company
or the propriety of dividends; (2) the value of the shares of stock for
sale or investment; (3) whether there has been mismanagement; (4)
in anticipation of shareholders meetings to obtain a mailing list of
shareholders to solicit proxies or influence voting; (5) to obtain
information in aid of litigation with the corporation or its officers as
to corporate transactions. Among the improper purposes which may
justify denial of the right of inspection are: (1) Obtaining of
information as to business secrets or to aid a competitor; (2) to
secure business prospects or investment or advertising lists; (3) to
find technical defects in corporate transactions in order to bring
"strike suits" for purposes of blackmail or extortion.
In general, however, officers and directors have no legal authority to
close the office doors against shareholders for whom they are only
agents, and withhold from them the right to inspect the books which
26 | N B S

furnishes the most effective method of gaining information which the


law has provided, on mere doubt or suspicion as to the motives of the
shareholder. While there is some conflict of authority, when an
inspection by a shareholder is contested, the burden is usually held to
be upon the corporation to establish a probability that the applicant
is attempting to gain inspection for a purpose not connected with his
interests as a shareholder, or that his purpose is otherwise improper.
The burden is not upon the petitioner to show the propriety of his
examination or that the refusal by the officers or directors was
wrongful, except under statutory provisions.

27 | N B S

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