PONCE VS ENCARNACION

ISSUE:

WON under the corporation code, the TC can validly call for a stockholders
meeting? / Are the officers deprived of due process in the action of the TC? (YES!)

HELD:

***Whenever, from any cause, there is no person authorized to call a

meeting, or when the officer authorized to do so refuses, fails or
neglects to call a meeting, any judge of a Court of First Instance on the
showing of good cause therefor, may issue an order to any stockholder
or member of a corporation, directing him to call a meeting of the
corporation by giving the proper notice required by this Act or by-laws;
and if there be no person legally authorized to preside at such meeting,
the judge of the Court of First Instance may direct the person calling the
meeting to preside at the same until a majority of the members or
stockholders representing a majority of the stock members or
stockholders presenting a majority of the stock present and permitted
by law to be voted have chosen one of their number to act as presiding
officer for the purposes of the meeting.

***On the showing of good cause therefor, the court may authorize a
stockholder to call a meeting and to preside threat until the majority
stockholders representing a majority strockholders representing a
majority of the stock present and permitted to be voted shall have
chosen one among them to preside it. And this showing of good cause
therefor exists when the court is apprised of the fact that the by-laws of
the corporation require the calling of a general meeting of the
stockholders to elect the board of directors but call for such meeting has
not been done.

Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides:

The Board of Directors shall compose of five (5) members who shall be elected by
the stockholders in a general meeting called for that purpose which shall be held
every even year during the month of January.

Article 20 of the by-laws in part provides:

. . . Regular general meetings are those which shall be called for every even
year, . . . .

*****The requirement that "on the showing of good cause therefor," the
court may grant to a stockholder the authority to call such meeting and
to preside thereat does not mean that the petition must be set for
hearing with notice served upon the board of directors. The respondent
court was satisfied that there was a showing of good cause for
authorizing the respondent Potenciano Gapol to call a meeting of the
stockholders for the purpose of electing the board of directors as
required and provided for in the by-laws, because the chairman of the
board of directors called upon to do so had failed, neglected, or refused
to perform his duty. It may be likened to a writ of preliminary injunction
or of attachment which may be issued ex-parte upon compliance with
the requirements of the rules and upon the court being satisfied that the
same should be issue. Such provisional reliefs have not been deemed
and held as violative of the due process of law clause of the
Constitution.
That the relief granted by the respondent court lies within its jurisdiction is not
disputed. Having the authority to grant the relief, the respondent court did not
exceed its jurisdiction; nor did it abuse its discretion in granting it.

With persistency petitioners claim that they have been deprived of their right
without due process of law. They had no right to continue as directors of the
corporation unless reflected by the stockholders in a meeting called for that
purpose every even year. They had no right to a hold-over brought about by the
failure to perform the duty incumbent upon one of them. If they felt that they
were sure to be reelected, why did they fail, neglect, or refuse to call the meeting
to elect the members of the board? Or, why did they not seek their reelection at
the meeting called to elect the directors pursuant to the order of the respondent
court.

The alleged illegality of the election of one member of the board of

directors at the meeting called by the respondent Potenciano Gapol as
authorized by the court being subsequent to the order complained of
cannot affect the validity and legality of the order. If it be true that one
of the directors elected at the meting called by the respondent
Potenciano Gapol, as authorized by the order of the court complained of,
was not qualified in accordance with the provisions of the by-laws, the
remedy of an aggrieved party would be quo a warranto. Also, the alleged
previous agreement to dissolve the corporation does not affect or render
illegal the order issued by the respondent court.

ROXAS VS DELA ROSA

ISSUE:

WON IT IS BEYOND THE POWERS OF THE COURT TO ISSUE AN ORDER THAT

RESTRAINS THE MEETING INITIATED BY THE TRUSTEES (NO!)

HELD:

We are of the opinion that ***this contention is untenable and that the
respondent judge acted within his legitimate powers in making the order
against which relief is sought. In order to expose the true inwardness of the
situation before us it is necessary to take not of the fact that under the law the
directors of a corporation can only be removed from office by a vote of
the stockholders representing at least two-thirds of the subscribed
capital stock entitled to vote (Act No. 1459, sec. 34); while vacancies in the
board, when they exist, can be filled by mere majority vote, (Act No. 1459,
sec. 25). Moreover, the law requires that when action is to be taken at a
special meeting to remove the directors, such purpose shall be indicated
in the call (Act No. 1459, sec. 34).

Now, ***upon examining into the number of shares controlled by the

voting trust, it will be seen that, while the trust controls a majority of
the stock, it does not have a clear two-thirds majority. It was therefore
impolitic for the petitioners, in forcing the call for the meeting of August
16, to come out frankly and say in the notice that one of the purpose of
the meeting was to removed the directors of the corporation from office.
Instead, the call was limited to the election of the board of directors, it
being the evident intention of the voting trust to elect a new board as if
the directorate had been then vacant.

But the complaint in civil No. 3840 directly asserts that the members of the
present directorate were regularly elected at the general annual meeting held in
February, 1926; and if that assertion be true, the proposal to elect, another
directorate, as per the call of August 2, if carried into effect, would result in the
election of a rival set of directors, who would probably need the assistance of
judgment of court in an independent action of quo warranto to get them installed
into office, even supposing that their title to the office could be maintained. That
the trial judge had jurisdiction to forestall that step and enjoin the contemplated
election is a matter about which there cannot be the slightest doubt. The law
contemplates and intends that there will be one of directors at a time and that
new directors shall be elected only as vacancies occur in the directorate by death,
resignation, removal, or otherwise. lawphil.net

It is instituted that there was some irregularity or another in the

election of the present directorate. We see nothing upon which this
suggestion can be safely planted; And at any rate the present board of
directors are de facto incumbents of the office whose acts will be valid
until they shall be lawfully removed from the office or cease from the
discharge of their functions. In this case it is not necessary for us to
agitate ourselves over the question whether the respondent judge
properly exercised his judicial discretion in granting the order
complained of. If suffices to know that in making the order he was acting
within the limits of his judicial powers.

It will be noted that the order in question enjoins the defendants from holding the
meeting called for August 16; and said order must not be understood as
constituting any obstacle for the holding of the regular meeting at the time
appointed in the by-laws of the corporation.

EXPERT TRAVEL AND TOURS VS CA

ISSUE:

WON THE RESOLUTION ALLEGEDLY PASSED THROUGH A TELECONFERENCE IS

VALID (NO!)

HELD:

Teleconferencing is interactive group communication (three or more

people in two or more locations) through an electronic medium. In
general terms, teleconferencing can bring people together under one
roof even though they are separated by hundreds of miles.[18] This type
of group communication may be used in a number of ways, and have
three basic types: (1) video conferencing - television-like communication
augmented with sound; (2) computer conferencing - printed
communication through keyboard terminals, and (3) audio-conferencing-
verbal communication via the telephone with optional capacity for
telewriting or telecopying.[19]

A teleconference represents a unique alternative to face-to-face (FTF) meetings. It

was first introduced in the 1960s with American Telephone and Telegraphs
Picturephone. At that time, however, no demand existed for the new technology.
Travel costs were reasonable and consumers were unwilling to pay the monthly
service charge for using the picturephone, which was regarded as more of a
novelty than as an actual means for everyday communication.[20] In time, people
found it advantageous to hold teleconferencing in the course of business and
corporate governance, because of the money saved, among other advantages

In the Philippines, teleconferencing and videoconferencing of members

of board of directors of private corporations is a reality, in light of
Republic Act No. 8792. The Securities and Exchange Commission issued
SEC Memorandum Circular No. 15, on November 30, 2001, providing the
guidelines to be complied with related to such conferences.[24] Thus, the
Court agrees with the RTC that persons in the Philippines may have a
teleconference with a group of persons in South Korea relating to business
transactions or corporate governance.

Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a
teleconference along with the respondents Board of Directors, the Court is not
convinced that one was conducted; even if there had been one, the
Court is not inclined to believe that a board resolution was duly passed
specifically authorizing Atty. Aguinaldo to file the complaint and execute
the required certification against forum shopping.

The records show that the petitioner filed a motion to dismiss the
complaint on the ground that the respondent failed to comply with
Section 5, Rule 7 of the Rules of Court. The respondent opposed the
motion on December 1, 1999, on its contention that Atty. Aguinaldo, its
resident agent, was duly authorized to sue in its behalf. The respondent,
however, failed to establish its claim that Atty. Aguinaldo was its
resident agent in the Philippines. Even the identification card[25] of
Atty. Aguinaldo which the respondent appended to its pleading merely
showed that he is the company lawyer of the respondents Manila
Regional Office.

The respondent, through Atty. Aguinaldo, announced the holding of the

teleconference only during the hearing of January 28, 2000; Atty. Aguinaldo then
prayed for ten days, or until February 8, 2000, within which to submit the board
resolution purportedly authorizing him to file the complaint and execute the
required certification against forum shopping. The court granted the motion.[26]
The respondent, however, failed to comply, and instead prayed for 15
more days to submit the said resolution, contending that it was with its
main office in Korea. The court granted the motion per its Order[27] dated
February 11, 2000. The respondent again prayed for an extension within which to
submit the said resolution, until March 6, 2000.[28] It was on the said date
that the respondent submitted an affidavit of its general manager Suk
Kyoo Kim, stating, inter alia, that he and Atty. Aguinaldo attended the
said teleconference on June 25, 1999, where the Board of Directors
supposedly approved the following resolution

***But then, in the same affidavit, Suk Kyoo Kim declared that the
respondent do[es] not keep a written copy of the aforesaid Resolution
because no records of board resolutions approved during
teleconferences were kept. This belied the respondents earlier
allegation in its February 10, 2000 motion for extension of time to
submit the questioned resolution that it was in the custody of its main
office in Korea. The respondent gave the trial court the impression that it
needed time to secure a copy of the resolution kept in Korea, only to allege later
(via the affidavit of Suk Kyoo Kim) that it had no such written copy. Moreover, Suk
Kyoo Kim stated in his affidavit that the resolution was embodied in the
Secretarys/Resident Agents Certificate signed by Atty. Aguinaldo. However, no
such resolution was appended to the said certificate.

The respondents allegation that its board of directors conducted a

teleconference on June 25, 1999 and approved the said resolution (with
Atty. Aguinaldo in attendance) is incredible, given the additional fact
that no such allegation was made in the complaint. If the resolution had
indeed been approved on June 25, 1999, long before the complaint was
filed, the respondent should have incorporated it in its complaint, or at
least appended a copy thereof. The respondent failed to do so. It was
only on January 28, 2000 that the respondent claimed, for the first time,
that there was such a meeting of the Board of Directors held on June 25,
1999; it even represented to the Court that a copy of its resolution was
with its main office in Korea, only to allege later that no written copy
existed. It was only on March 6, 2000 that the respondent alleged, for the first
time, that the meeting of the Board of Directors where the resolution was
approved was held via teleconference.

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had
signed a Secretarys/Resident Agents Certificate alleging that the board of
directors held a teleconference on June 25, 1999. No such certificate was
appended to the complaint, which was filed on September 6, 1999. More
importantly, the respondent did not explain why the said certificate was signed by
Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one year later
(on January 10, 2000); it also did not explain its failure to append the said
certificate to the complaint, as well as to its Compliance dated March 6, 2000. It
was only on January 26, 2001 when the respondent filed its comment in the CA
that it submitted the Secretarys/Resident Agents Certificate[30] dated January 10,
2000.

The Court is, thus, more inclined to believe that the alleged teleconference on
June 25, 1999 never took place, and that the resolution allegedly approved by the
respondents Board of Directors during the said teleconference was a mere
concoction purposefully foisted on the RTC, the CA and this Court, to avert the
dismissal of its complaint against the petitioner.

WESTERN INSTITUTE OF TECHNOLOGY VS SALAS

ISSUE:

WON THE RESOLUTION FOR COMPENSATION OF SALAS IS VALID (YES!)

HELD:

We cannot sustain the petitioners. The pertinent section of the Corporation Code
provides:

Sec. 30. Compensation of directors In the absence of any provision in the by-
laws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per diems:
Provided, however, That any such compensation (other than per diems)
may be granted to directors by the vote of the stockholders representing
at least a majority of the outstanding capital stock at a regular or
special stockholders' meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent
of the net income before income tax of the corporation during the
preceding year. [Emphasis ours]

****There is no argument that directors or trustees, as the case may be,

are not entitled to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their office. This rule
is founded upon a presumption that directors/trustees render service
gratuitously, and that the return upon their shares adequately furnishes
the motives for service, without compensation. 9 Under the foregoing
section, there are only two (2) ways by which members of the board can
be granted compensation apart from reasonable per diems: (1) when
there is a provision in the by-laws fixing their compensation; and (2)
when the stockholders representing a majority of the outstanding
capital stock at a regular or special stockholders' meeting agree to give
it to them.

This proscription, however, against granting compensation to directors/trustees of

a corporation is not a sweeping rule. Worthy of note is the clear phraseology of
Section 30 which states: ". . . [T]he directors shall not receive any compensation,
as such directors, . . . ." The phrase as such directors is not without significance
for it delimits the scope of the prohibition to compensation given to them for
services performed purely in their capacity as directors or trustees. ***The
unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render
services to the corporation in a capacity other than as
directors/trustees. 10 In the case at bench, Resolution No. 48, s. 1986
granted monthly compensation to private respondents not in their
capacity as members of the board, but rather as officers of the
corporation, more particularly as Chairman, Vice-Chairman, Treasurer
and Secretary of Western Institute of Technology.

Clearly, therefore, the prohibition with respect to granting compensation to

corporate directors/trustees as such under Section 30 is not violated in this
particular case. Consequently, the last sentence of Section 30 which provides:

. . . . . . . In no case shall the total yearly compensation of directors, as such

directors, exceed ten (10%) percent of the net income before income tax of the
corporation during the preceding year. (Emphasis ours]

does not likewise find application in this case since the compensation is
being given to private respondents in their capacity as officers of WIT
and not as board members.

ONGKINGCO VS NLRC

ISSUE:

WON THE JURISDICTION OVER THE DISPUTE BELONGS TO THE NLRC OR SEC (THE
SEC HAS JURISDICTION!!)

HELD:

The president, vice-president, secretary and treasurer are commonly regarded as

the principal or executive officers of a corporation, and modern corporation
statutes usually designate them as the officers of the corporation. However,
other offices are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under the by-
laws of a corporation to create additional offices as may be necessary.

***It has been held that an "office" is created by the charter of the
corporation and the officer is elected by the directors or stockholders.
On the other hand, an "employee" usually occupies no office and
generally is employed not by action of the directors or stockholders but
by the managing officer of the corporation who also determines the
compensation to be paid to such employee.

In the case at bar, considering that herein ***petitioner, unlike an ordinary

employee, was appointed by respondent corporation's Board of Trustees
in its memorandum of October 30, 1990, she is deemed an officer of the
corporation. Perforce, Section 5(c) of Presidential Decree No. 902-A,
which provides that the SEC exercises exclusive jurisdiction over
controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships or associations,
applies in the present dispute. Accordingly, jurisdiction over the same is
vested in the SEC, and not in the Labor Arbiter or the NLRC.

Supplementing the afore-quoted ruling, in Lozon v. NLRC[11] and Espino v. NLRC,

[12] citing Fortune Cement Corp. v. NLRC,[13] we declared that:

***A corporate officer's dismissal is always a corporate act and/or an

intra-corporate controversy and that nature is not altered by the reason
or wisdom which the Board of Directors may have in taking such action.

Based on the foregoing, we must rule that private respondent was indeed a
corporate officer. He was appointed directly by the Board of Directors not by
any managing officer of the corporation and his salary was, likewise, set by the
same Board. Having thus determined, his dismissal or non-appointment is clearly
an intra-corporate matter and jurisdiction, therefore, properly belongs to the SEC
and not the NLRC.

TABANG VS NLRC

ISSUE:

WON THE NLRC HAS JURISDICTION OVER THE CASE (NO! THE SEC HAS
JURISDICTION)

HELD:

We agree with the findings of the NLRC that it is the SEC which has
jurisdiction over the case at bar. The charges against herein private
respondent partake of the nature of an intra-corporate controversy.
Similarly, the determination of the rights of petitioner and the concomitant
liability of private respondent arising from her ouster as a medical director and/or
hospital administrator, which are corporate offices, is an intra-corporate
controversy subject to the jurisdiction of the SEC.

***Contrary to the contention of petitioner, a medical director and a

hospital administrator are considered as corporate officers under the by-
laws of respondent corporation. Section 2(i), Article I thereof states that one
of the powers of the Board of Trustees is (t)o appoint a Medical Director,
Comptroller/Administrator, Chiefs of Services and such other officers as it may
deem necessary and prescribe their powers and duties. [4]

The president, vice-president, secretary and treasurer are commonly regarded as

the principal or executive officers of a corporation, and modern corporation
statutes usually designate them as the officers of the corporation.[5] However,
other offices are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under the by-
laws of a corporation to create additional offices as may be necessary.[6]

***It has been held that an office is created by the charter of the
corporation and the officer is elected by the directors or stockholders.[7]
On the other hand, an employee usually occupies no office and generally
is employed not by action of the directors or stockholders but by the
managing officer of the corporation who also determines the
compensation to be paid to such employee.[8]

***In the case at bar, considering that herein petitioner, unlike an

ordinary employee, was appointed by respondent corporations Board of
Trustees in its memorandum of October 30, 1990,[9] she is deemed an
officer of the corporation. Perforce, Section 5(c) of Presidential Decree
No. 902-A, which provides that the SEC exercises exclusive jurisdiction
over controversies in the election or appointment of directors, trustees,
officers or managers of corporations, partnerships or associations,
applies in the present dispute. Accordingly, jurisdiction over the same is
vested in the SEC, and not in the Labor Arbiter or the NLRC.

Moreover, the allegation of petitioner that her being a member of the Board of
Trustees was not one of the considerations for her appointment is belied by the
tenor of the memorandum itself. It states: We hope that you will uphold and
promote the mission of our foundation,[10] and this cannot be construed other
than in reference to her position or capacity as a corporate trustee.

A corporate officers dismissal is always a corporate act, or an intra-

corporate controversy, and the nature is not altered by the reason or
wisdom with which the Board of Directors may have in taking such
action.[11] Also, an intra-corporate controversy is one which arises between a
stockholder and the corporation. There is no distinction, qualification, nor any
exemption whatsoever. The provision is broad and covers all kinds of
controversies between stockholders and corporations. [12]

GURREA VS LEZAMA

ISSUE:

WON plaintiff could be legally removed as manager of the corporation merely by

resolution of the board of directors. (YES!)

HELD:

Section 33 of the Corporation Law provides: "Immediately after the election, the
directors of a corporation must organize by the election of a president, who must
be one of their number, a secretary or clerk who shall be a resident of the
Philippines . . . and such other officers as may be provided for in the by-laws." The
by-laws of the instant corporation in turn provide that in the board of directors
there shall be a president, a vice-president, a secretary and a treasurer.*** These
are the only ones mentioned therein as officers of the corporation. The
manager is not included although the latter is mentioned as the person
in whom the administration of the corporation is vested, and with the
exception of the president, the by-laws provide that the officers of the
corporation may be removed or suspended by the affirmative vote of 2/3
of the paid-up shares of the corporation (Exhibit A).

From the above ****the following conclusion is clear: that we can only
regard as officers of a corporation those who are given that character
either by the Corporation Law or by its by-laws. The rest can be
considered merely as employees or subordinate officials. And
considering that plaintiff has been appointed manager by the board of
directors and as such does not have the character of an officer, the
conclusion is inescapable that he can be suspended or removed by said
board of directors under such terms as it may see fit and not as provided
for in the by-laws. Evidently, the power to appoint carries with it the
power to remove, and it would be incongruous to hold that having been
appointed by the board of directors he could only be removed by the
stockholders.

The above interpretation finds also support in the American authorities. Fletcher,
in his treatise, states the rule in the following wise: "It is sometimes important to
determine whether a person representing a corporation is to be classed as an
officer of the company or merely as an agent or employee, especially in
construing statutes relating only to officers of corporations. Generally the
officers of a corporation are enumerated in its charter or by-laws, and
include a president, vice-president, secretary, treasurer and sometimes
others. The statutes in most of the states expressly provide for the
election of a president, secretary and treasurer, and then provide that
there shall be such other officers, agents and factors as the corporation
shall authorize for that purpose. If the charter expressly enumerates
who shall be officers of the company, a person whose position is not
enumerated is not an officer as to members of the corporation, since the
charter is conclusive upon them" (Fletcher, Cyclopedia of the Law of
Private Corporations, Vol. II, p. 19). It has been likewise held "that the
offices pertaining to a private corporation are defined in its charter and
by-laws, and that no other positions in the service of the corporation are
offices" (Ann. 53 A.L.R., 599).

Indeed, there are authorities galore that hold that a general manager is not an
officer of a corporation, even if his powers and influence may be as great as those
of any officer in said organization.

****"One distinction between officers and agents of a corporation lies in

the manner of their creation. An officer is created by the charter of the
corporation, and the officer is elected by the directors or the
stockholders. An agency is usually created by the officers, or one or
more of them, and the agent is appointed by the same authority. It is
clear that the two terms officers and agents are by no means
interchangeable. One, deriving its existence from the other, and being
dependent upon that other for its continuation, is necessarily restricted
in its powers and duties, and such powers and duties are not necessarily
the same as those pertaining to the authority creating it. The officers, as
such, are the corporation. An agent is an employee.A mere employment,
however liberally compensated, does not rise to the dignity of an office.
21 Am. & Eng. Enc. Law (2d Ed.) 836. In Wheeler & Wilson Mfg. Co. v. Lawson, 57
Wis. 400, 15 N. W. 398, it was held that under a statute requiring an affidavit to be
made by an officer of a corporation, the general agent or managing agent, within
the state, of a foreign corporation is not an officer. In Farmers Loan & Trust Co. v.
Warring, 20 Wis. 305, service was made upon the principal agent of a
corporation holding in trust a railroad, when the statute required service upon a
principal officer. In answering the question whether or not the agent was a
principal officer the court said: It is evident he was not, and must be regarded
only as an agent, not as an officer of any kind, much less a principal officer. A
ruling that a general manager of a corporation was not authorized to verify
pleadings, under a statute requiring verification by an officer was made in Meton
v. Isham Wagon Co. (Sup.) 4 N. Y. Supp. 215. In Raleigh, etc. R. Co. v. Pullman Co.,
122 Ga. 704, 50 S.E. 1008 (4), it was held that the term general manager
as applied to one representing a corporation, and especially a railroad
corporation, imported an agent of a very extensive authority; but it was
not ruled that even the term general manager would import that the
person holding that position was necessarily an officer of the company.
One distinction between an officer and an agent suggested in
Commonwealth v. Christian, 9 Phila. (Pa.) 558, is that an officer of a
corporation, if illegally excluded from his office, may by mandamus
compel the corporation to reinstate him; while an agent may be
dismissed without cause, and his only remedy would be compensation in
damages. It would not be contended that the general agent of the
defendant at Columbus, in the event of his discharge, could be
reinstated by mandamus. We do not think the general agent at
Columbus was an officer of the defendant company. Therefore his
alleged waiver of a condition in the policy was not binding upon the
company." (Vardeman v. Penn. Mut. Life Ins. Co., 125 Ga. 117, 54 S.E. p. 66;
Emphasis supplied.)

"The plaintiff predicates this action on said contract, and claims that the
same being signed by the defendant through its general manager if
admitted in evidence, would show sufficient authority prima facie to do
any act which the directors could authorize or ratify. The instrument in
question being signed by James W. Codle, General Manager, and no
evidence on the trial being produced showing the duties of said manager
or what kind of an office he was general manager of, the words general
manager without proof as to the nature of services performed by the
person called general manager, have no meaning in law, excepting that
the person bearing the title is an employee who has been designated
with a title. It does not make him an officer of the company employing
him." (Studebaker Bros. Co. v. R. M. Rose Co., 119 N.Y.S. pp. 970, 97;
Emphasis supplied.)

We therefore hold that plaintiff has been properly removed when the
board of directors of the instant corporation approved its Resolution No.
65 on June 3, 1948.

PSBA VS LEANO

ISSUE:

WON THE SUBPOENA ISSUED BY NLRC IS VALID (NO! SINCE NLRC HAS NO
JURISDICTION OVER THE CASE; SEC HAS THE JURISDICTION!!!)

HELD:

The foregoing indubitably show that, fundamentally, the controversy is

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

". . . original and exclusive jurisdiction to hear and decide cases involving:

"a) Devices or schemes employed by or any acts, of the board of directors,

business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or
stockholders, partners, members of associations or organizations registered with
the Commission.

"b) Controversies arising out of intra-corporate or partnership relations, between

and among stockholders, members, or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership
or association and the state insofar as it concerns their individual franchise or
right to exist as such entity;

"c) Controversies in the election or appointments of directors, trustees,

officers or managers of such corporations, partnerships or associations.
10
This is not a case of dismissal. The situation is that of a corporate office
having been declared vacant, and of TANs not having been elected
thereafter. The matter of whom to elect is a prerogative that belongs to
the Board, and involves the exercise of deliberate choice and the faculty
of discriminative selection. Generally speaking, the relationship of a
person to a corporation, whether as officer or as agent or employee, is
not determined by the nature of the services performed, but by the
incidents of the relationship as they actually exist. 11

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

PEARSON VS NLRC

ISSUE:

whether it is the SEC or the NLRC which has jurisdiction over the complaint for
illegal dismissal which the private respondent had filed with the NLRC. (THE SEC
HAS JURISDICTION)

HELD:

We agree with both the petitioner and the Office of the Solicitor General
that the removal of Llorente as Managing Director is purely an intra-
corporate dispute which falls within the exclusive jurisdiction of the SEC
and not of the NLRC.

***In reality, Llorente was not dismissed. If he lost the position of

Managing Director, it was primarily because he was not reelected as
Director during the regular stockholders' meeting on 5 March 1990. The
office of Managing Director presupposes that its occupant is a Director;
hence, one who is not a Director of the petitioner or who has ceased to
be a Director cannot be elected or appointed as a Managing Director.
Elsewise stated, the holding of the position of Director is a prerequisite
for the election, appointment, or designation of Managing Director. If a
Managing Director should lose his position because he ceased to be a
Director for any reason, such as non-reelection as in the case of
Llorente, such loss is not dismissal but failure to qualify or to maintain a
prerequisite for that position. Then too, the position of Managing
Director was abolished.

Any question relating or incident to the election of the new Board of

Directors, the non-reelection of Llorente as a Director, his loss of the
position of Managing Director, or the abolition of the said office are
intra-corporate matters. Disputes arising therefrom are intra-corporate
disputes which, if unresolved within the corporate structure of the petitioner, may
be resolved in an appropriate action only by the SEC pursuant to its authority
under paragraphs (b) and (c), Section 5 of P.D. No. 902-A,4 which provide as
follows:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities

and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

xxx xxx xxx

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

(c) Controversies in the election or appointments of directors, trustees,

officers or managers of such corporations, partnership or associations.

Thus, in Philippine School of Business Administration vs. Leano,5 we ruled that a

complaint for illegal dismissal arising from a Board of Directors' action declaring
vacant all corporate positions except that of Chairman and President, and from
the non-reelection of the former Executive Vice-President during the ensuing
election of officers is not cognizable by the NLRC.

REAHS CORPORATION VS NLRC

ISSUE:

whether or not individual petitioners Castulo, Pascua and Valenzuela should be

held liable in solidum with the corporation (REAH's) in the payment to private
respondents of separation pay and labor standard benefits. (YES!!)

HELD:

***As a general rule established by legal fiction, the corporation has a

personality separate and distinct from its officers, stockholders and
members. Hence, officers of a corporation are not personally liable for
their official acts unless it is shown that they have exceeded their
authority. This fictional veil, however, can be pierced by the very same
law which created it when "the notion of the legal entity is used as a
means to perpetrate fraud, an illegal act, as a vehicle for the evasion of
an existing obligation, and to confuse legitimate issues". Under the
Labor Code, for instance, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon the
guilty officer or officers of the corporation.[7]

The Solicitor General, in behalf of private respondents, argues that the doctrine
laid down in the case of A.C. Ransom Labor Union - CCLU v. NLRC[8] should be
applied to the case at bar. In that case, a judgment against a corporation (A.C.
Ransom) to reinstate its dismissed employees with back wages was declared to
be a continuing solidary liability of the company president and all who may have
thereafter succeeded to said office after the records failed to identify the officer or
agents directly responsible for failure to pay the back wages of its employees. The
Court noted Ransom's subterfuge in organizing another family corporation while
the case was on litigation with the intent to phase out the existing corporation in
case of an adverse decision, as what actually happened when it ceased
operations a few months after the labor arbiter ruled in favor of Ransom's
employees.

The basis, said the Court, is found in Article 212(c) of the Labor Code which
provides that "an employer includes any person acting in the interest of an
employer, directly or indirectly." "Since Ransom is an artificial person, it must
have an officer who can be presumed to be the employer, x x x. The corporation
only in the technical sense is the employer."
This ruling was eventually applied by the Court in the following cases: Maglutac v.
NLRC[9] an illegal dismissal case, where the most ranking officer of Commart,
petitioner therein, was held solidarily liable with the corporation which thereafter
became insolvent and suspended operations; Chua v. NLRC,[10] also an illegal
dismissal case, where the vice-president of a corporation was held solidarily liable
with the corporation for the payment of the unpaid salaries of its president; and in
Gudez v. NLRC,[11] where the president and treasurer were held solidarily liable
with the corporation which had ceased operations but failed to pay the wage and
money claims of its employees.

These cases, however, should be construed still as exceptions to the

doctrine of separate personality of a corporation which should remain as
the guiding rule in determining corporate liability to its employees. At
the very least, as what we held in Pabalan v. NLRC,[12]*** to justify
solidary liability, "there must be an allegation or showing that the
officers of the corporation deliberately or maliciously designed to evade
the financial obligation of the corporation to its employees", or a
showing that the officers indiscriminately stopped its business to
perpetrate an illegal act, as a vehicle for the evasion of existing
obligations, in circumvention of statutes, and to confuse legitimate
issues.

***In the case at bar, the thrust of petitioners' arguments was aimed at
confining liability solely to the corporation, as if the entity were an
automaton designed to perform functions at the push of a button. The
issue, however, is not limited to payment of separation pay under Article 283 but
also payment of labor standard benefits such as underpayment of wages, holiday
pay and 13th month pay to two of the private respondents. While there is no
sufficient evidence to conclude that petitioners have indiscriminately
stopped the entity's business, at the same time, petitioners have opted
to abstain from presenting sufficient evidence to establish the serious
and adverse financial condition of the company.

As the NLRC aptly stated:

"Neither did respondents (petitioners) present any evidence to prove

that Reah's closure was really due to SERIOUS business losses or
financial reverses. We only have respondents mere say-so on the
matter."[13]

This uncaring attitude on the part of the officers of Reah's gives

credence to the supposition that they simply ignored the side of the
workers who, more or less, were only demanding what is due them in
accordance with law. In fine, these officers were conscious that the
corporation was violating labor standard provisions but they did not act
to correct these violations; instead, they abruptly closed business.
Neither did they offer separation pay to the employees as they
conveniently resorted to a lame excuse that they suffered serious
business losses, knowing fully well that they had no substantial proof in
their hands to prove such losses.

The findings of the NLRC did not indicate whether or not Reah's Corporation has
continued its personality after it had stopped operations when it closed its sing-
along, coffee shop, and massage clinic in November 1990. But in its petition,
petitioners aver, among others, that the "company totally folded for lack of
patrons, (disconnection of) light and discontinuance of the leased premises [sic]
for failure to pay the increased monthly rentals from P8,000 to P20,000."[14]
Under the Rules of Evidence, petitioners are bound by the allegations
contained in their pleading. Since petitioners themselves have admitted
that they have dissolved the corporation de facto, the Court presumes
that Reah's Corporation had become insolvent and therefore would be
unable to satisfy the judgment in favor of its employees. Under these
circumstances, we cannot allow labor to go home with an empty victory.
Neither would it be oppressive to capital to hold petitioners Castulo,
Pascua and Valenzuela solidarily liable with Reah's Corporation because
the law presumes that they have acted in the latter's interest when they
obstinately refused to grant the labor standard benefits and separation
pay due private respondent-employees.

SMITH VS VAN GORKOM

ISSUE:

WON THE DIRECTORS ARE PROTECTED BY THE BUSINESS JUDGEMENT RULE (NO!
THEY WERE FOUND TO BE GROSSLY NEGLIGENT WHICH IS THE TEST ON WON THE
BUSINESS JUDGEMENT RULE SHOULD APPLY)

HELD:

The business judgment rule exists to protect and promote the full and
free exercise of the managerial power granted to directors. Zapata Corp.
v. Maldonado, supra at 782. The rule itself "is a presumption that in making
a business decision, the directors of a corporation acted on an informed
basis, in good faith and in the honest belief that the action taken was in
the best interests of the company." Aronson, supra at 812. ***Thus, the
party attacking a board decision as uninformed must rebut the
presumption that its business judgment was an informed one. Id.

***The determination of whether a business judgment is an informed one

turns on whether the directors have informed themselves "prior to
making a business decision, of all material information reasonably
available to them." Id.[12]

Under the business judgment rule there is no protection for directors

who have made "an unintelligent or unadvised judgment." Mitchell v.
Highland-Western Glass, Del.Ch., 167 A. 831, 833 (1933). A director's duty to
inform himself in preparation for a decision derives from the fiduciary
capacity in which he serves the corporation and its stockholders. Lutz v.
Boas, Del.Ch., 171 A.2d 381 (1961). See Weinberger v. UOP, Inc., supra; Guth v.
Loft, supra. ***Since a director is vested with the responsibility for the
management of the affairs of the corporation, he must execute that duty
with the recognition that he acts on behalf of others. Such obligation
does not tolerate faithlessness or self-dealing. But fulfillment of the
fiduciary function requires more than the mere absence of bad faith or
fraud. Representation of the financial interests of others imposes on a
director an affirmative duty to protect those interests and to proceed
with a critical eye in assessing information of the type and under the
circumstances present here. See Lutz v. Boas, supra; Guth v. Loft, supra at
510. Compare Donovan v. Cunningham, 5th Cir., 716 F.2d 1455, 1467 (1983);
Doyle v. Union Insurance Company, Neb.Supr., 277 N.W.2d 36 (1979); Continental
Securities Co. v. Belmont, N.Y. App., 99 N.E. 138, 141 (1912).

*****Thus, a director's duty to exercise an informed business judgment is

in *873 the nature of a duty of care, as distinguished from a duty of
loyalty. Here, there were no allegations of fraud, bad faith, or self-
dealing, or proof thereof. Hence, it is presumed that the directors
reached their business judgment in good faith, Allaun v. Consolidated Oil
Co., Del. Ch., 147 A. 257 (1929), and considerations of motive are irrelevant to the
issue before us.

The standard of care applicable to a director's duty of care has also been recently
restated by this Court. In Aronson, supra, we stated:

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

***We again confirm that view. We think the concept of gross negligence
is also the proper standard for determining whether a business
judgment reached by a board of directors was an informed one.[13]

In the specific context of a proposed merger of domestic corporations, a director

has a duty under 8 Del.C. 251(b),[14] along with his fellow directors, to act in an
informed and deliberate manner in determining whether to approve an agreement
of merger before submitting the proposal to the stockholders. Certainly in the
merger context, a director may not abdicate that duty by leaving to the
shareholders alone the decision to approve or disapprove the agreement. See
Beard v. Elster, Del.Supr., 160 A.2d 731, 737 (1960). Only an agreement of merger
satisfying the requirements of 8 Del.C. 251(b) may be submitted to the
shareholders under 251(c). See generally Aronson v. Lewis, supra at 811-13; see
also Pogostin v. Rice, supra.

It is against those standards that the conduct of the directors of Trans Union must
be tested, as a matter of law and as a matter of fact, regarding their exercise of
an informed business judgment in voting to approve the Pritzker merger proposal.

(GROSS NEGLIGENCE!!) The directors' unfounded reliance on both the

premium and the market test as the basis for accepting the Pritzker
proposal undermines the defendants' remaining contention that the
Board's collective experience and sophistication was a sufficient basis
for finding that it reached its September 20 decision with informed,
reasonable deliberation.[21]Compare Gimbel v. Signal Companies, Inc., Del.
Ch., 316 A.2d 599 (1974), aff'd per curiam, Del. Supr., 316 A.2d 619 (1974). There,
the Court of Chancery preliminary enjoined a board's sale of stock of its wholly-
owned subsidiary for an alleged grossly inadequate price. It did so based on a
finding that ****the business judgment rule had been pierced for failure of
management to give its board "the opportunity to make a reasonable
and reasoned decision." 316 A.2d at 615. The Court there reached this result
notwithstanding the board's sophistication and experience; the company's need of
immediate cash; and the board's need to act promptly due to the impact of an
energy crisis on the value of the underlying assets being sold all of its subsidiary's
oil and gas interests. The Court found those factors denoting competence
to be outweighed by evidence of gross negligence; that management in
effect sprang the deal on the board by negotiating the asset sale
without informing the board; that the buyer intended to "force a quick
decision" by the board; that the board meeting was called on only one-
and-a-half days' notice; that its outside directors were not notified of the
meeting's purpose; that during a meeting spanning "a couple of hours" a
sale of assets worth $480 million was approved; and that the Board
failed to obtain a current appraisal of its oil and gas interests. The
analogy of Signal to the case at bar is significant.

MONTELIBANO VS BACOLOD MURCIA

ISSUE:

WON the board resolution is an ultra vires act and in effect a donation from the
board of directors? (NO!)

HELD:

There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract
for the purpose of making its terms more acceptable to the other
contracting parties. The rule is that

***It is a question, therefore, in each case of the logical relation of the

act to the corporate purpose expressed in the charter. If that act is one
which is lawful in itself, and not otherwise prohibited, is done for the
purpose of serving corporate ends, and is reasonably tributary to the
promotion of those ends, in a substantial, and not in a remote and
fanciful sense, it may fairly be considered within charter powers. The
test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to
the express powers and reasonably necessary to their exercise. If so, the
corporation has the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol.
6, Rev. Ed. 1950, pp. 266-268)

***As the resolution in question was passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses
or decrease the profits of the central, the court has no authority to
review them.

They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be
controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss during
depression, or close down at a smaller loss, is a purely business and economic
problem to be determined by the directors of the corporation and not by the
court. It is a well-known rule of law that questions of policy or of
management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the
business manager of the corporation, and so long as it acts in good faith
its orders are not reviewable by the courts. (Fletcher on Corporations, Vol. 2,
p. 390).

And it appearing undisputed in this appeal that sugar centrals of La Carlota,

Hawaiian Philippines, San Carlos and Binalbagan (which produce over one-third of
the entire annual sugar production in Occidental Negros) have granted
progressively increasing participations to their adhered planter at an average rate
of

BOARD OF LIQUIDATORS VS KALAW

ISSUE:

WON THE DIRECTORS ARE LIABLE. (NO!)

HELD:

It would be difficult, even with hostile eyes, to read the record in terms
of "bad faith and/or breach of trust" in the board's ratification of the
contracts without prior approval of the board. For, in reality, all that we
have on the government's side of the scale is that the board knew that
the contracts so confirmed would cause heavy losses.

***As we have earlier expressed, Kalaw had authority to execute the

contracts without need of prior approval. Everybody, including Kalaw
himself, thought so, and for a long time. Doubts were first thrown on the way only
when the contracts turned out to be unprofitable for NACOCO.

***Rightfully had it been said that bad faith does not simply connote bad
judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of wrong; it means breach of a known duty
thru some motive or interest or ill will; it partakes of the nature of
fraud.34 Applying this precept to the given facts herein, we find that
there was no "dishonest purpose," or "some moral obliquity," or
"conscious doing of wrong," or "breach of a known duty," or "Some
motive or interest or ill will" that "partakes of the nature of fraud."

***Nor was it even intimated here that the NACOCO directors acted for
personal reasons, or to serve their own private interests, or to pocket
money at the expense of the corporation. 35 We have had occasion to
affirm that bad faith contemplates a "state of mind affirmatively
operating with furtive design or with some motive of self-interest or ill
will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149,
35 L. ed. 662, 669, quotes with approval from Judge Sharswood (in Spering's App.,
71 Pa. 11), the following: "Upon a close examination of all the reported cases,
although there are many dicta not easily reconcilable, yet I have found no
judgment or decree which has held directors to account, except when they have
themselves been personally guilty of some fraud on the corporation, or have
known and connived at some fraud in others, or where such fraud might have
been prevented had they given ordinary attention to their duties. . . ." Plaintiff did
not even dare charge its defendant-directors with any of these malevolent acts.

Obviously, the board thought that to jettison Kalaw's contracts would contravene
basic dictates of fairness. They did not think of raising their voice in protest
against past contracts which brought in enormous profits to the corporation. By
the same token, fair dealing disagrees with the idea that similar contracts, when
unprofitable, should not merit the same treatment. Profit or loss resulting from
business ventures is no justification for turning one's back on contracts entered
into. The truth, then, of the matter is that in the words of the trial court
the ratification of the contracts was "an act of simple justice and
fairness to the general manager and the best interest of the corporation
whose prestige would have been seriously impaired by a rejection by the
board of those contracts which proved disadvantageous." 37

The directors are not liable."

MEAD VS MCCULLOUGH

ISSUE:

Whether or not the three directors had the authority to allow the sale/transfer of
the company assets to McCullough. (YES!)

HELD:

Yes. Several factors have to be considered. First is the fact that Mead abandoned
his post when he took the job offer to work in China. He knew for a fact that the
nature of the job offered is permanent. Second, a close reading of the articles of
incorporation of PECC shows that there is no such intention for unanimity when it
comes to votes affecting matters of administration. The only requirement is that
At least three of said board must be present in order to constitute a legal
meeting. Which was complied with when the other four directors were present
when the decision to transfer the company assets was made.

Third is the fact that PECC was in a downhill situation. ***A corporation is
essentially a partnership, except in form. The directors are the trustees
or managing partners, and the stockholders are the cestui que trust and
have a joint interest in all the property and effects of the corporation.
McCullough as a director himself and the president can be considered an
agent but not the agent contemplated in Article 1713 of the Civil
Code. Article 1713 deals with the broad aspect of agency and in ordinary
cases but not in the case of a corporation and its directors. In the case
at bar, the more appropriate analogy is that PECC, being a losing
corporation, has its directors as the trustees. The trustees-directors hold
the company assets in trust for the beneficiaries, which are the
creditors. As trustees, they decided that it is beneficial to sell the
company assets to McCullough to at least recover some cash equivalents
in the winding up of the corporate affairs. Besides, there is no
prohibition against the selling of company assets to one of its directors
either from law or from PECCs articles of incorporation.

////when the sale or transfer under consideration took place, there were three
directors present, and all voted in favor of making this sale. It was not necessary
for the president, McCullough, to vote. There was a quorum without him: a
quorum of the directors, and at the same time a majority of the stockholders.

A corporation is essentially a partnership, except in form. The directors are the

trustees or managing partners, and the stockholders are the cestui que trust and
have a joint interest in all the property and effects of the corporation. (Per
Walworth, Ch., in Robinson vs. Smith, 3 Paige, 222, 232; 5 idem, 607; Slee vs.
Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld., 320.)

The Philippine Engineering and Construction Company was an artificial person,

owning its property and necessarily acting by its agents; and these agents were
the directors. McCullough was then an agent or a trustee, and the stockholders
the principal. Or say (as corporation was insolvent) that he was an agent or
trustee and the creditors were the beneficiaries. This being the true relation, then
the rules of the law (Art. 1713 of the Civil Code) applicable to sales and purchases
by agents and trustees would not apply to the purchase in question for the reason
that there was a quorum without McCullough, and for the further reason that an
officer or director of a corporation, being an agent of an artificial person and
having a joint interest in the corporate property, is not such an agent as that
treated of in Article 1713 of the Civil Code.

****Again, McCullough did not represent the corporation in this

transaction. It was represented by a quorum of the board of directors,
who were at the same time a majority of the stockholders. Ordinarily,
McCulloughs duties as president were to preside at the meetings, rule
on questions of order, vote in case of a tie, etc. He could not have voted
in this transaction because there was no tie.

The acts of Hilbert, Green, Hartigan, and McCullough in this transaction,

in view of the relations which they bore to the corporation, are subject
to the most severe scrutiny. They are obliged to establish that they
acted with the utmost candor and fair dealing for the interest of the
corporation, and without taint motives. We have subjected their conduct
to this test, and, under the evidence, we believe it has safely emerged
from the ordeal.

Transaction which only accomplish justice, which are done in good faith
and operate legal injury to no one, lack the characteristics of fraud and
are not to be upset because the relations of the parties give rise to
suspicions which are fully cleared away. (Hancock vs. Holbrook, supra.)

We therefore conclude that the sale or transfer made by the quorum of

the board of directors a majority of the stockholders is valid and
binding upon the majority-the plaintiff. This conclusion is not in violation
of the articles of incorporation of the Philippine Engineering and
Construction Company. Nor do we here announce a doctrine contrary to that
announced by the Supreme Court of Spain in its decisions dated April 2, 1862, and
July 8, 1903.

PRIME WHITE CEMENT VS IAC

ISSUE:

WON THE GOODWILL OF THE CORP IS DESTROYED BY THE DEALINGS OF (TE)

DIRECTOR (YES!!)

HELD:

The situation is quite different where a director or officer is dealing with

his own corporation. In the instant case respondent Te was not an
ordinary stockholder; he was a member of the Board of Directors and
Auditor of the corporation as well. He was what is often referred to as a
self-dealing director.

A director of a corporation holds a position of trust and as such, he owes

a duty of loyalty to his corporation. 9 In case his interests conflict with
those of the corporation, he cannot sacrifice the latter to his own
advantage and benefit. As corporate managers, directors are committed
to seek the maximum amount of profits for the corporation. This trust
relationship is not a matter of statutory or technical law. It springs
from the fact that directors have the control and guidance of corporate
affairs and property and hence of the property interests of the
stockholders.

a directors contract with his corporation is not in all instances void or voidable.
****f the contract is fair and reasonable under the circumstances, it may
be ratified by the stockholders provided a full disclosure of his adverse
interest is made. Section 32 of the Corporation Code provides, thus:

****SEC. 32. Dealings of directors, trustees or officers with the

corporation. - A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in

which the contract was approved was not necessary to constitute a
quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the
approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been
previously authorized by the Board of Directors.

********Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or
of 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.

Although the old Corporation Law which governs the instant case did not contain a
similar provision, yet the cited provision substantially incorporates well-settled
principles in corporate law. 12

Granting arguendo that the dealership agreement involved here would be valid
and enforceable if entered into with a person other than a director or officer of the
corporation, the fact that the other party to the contract was a Director and
Auditor of the petitioner corporation changes the whole situation. First of all, We
believe that the contract was neither fair nor reasonable. The
dealership agreement entered into in July, 1969, was to sell and
supply to respondent Te 20,000 bags of white cement per month, for five
years starting September, 1970, at the fixed price of P9.70 per bag.
Respondent Te is a businessman himself and must have known, or at
least must be presumed to know, that at that time, prices of
commodities in general, and white cement in particular, were not stable
and were expected to rise. At the time of the contract, petitioner
corporation had not even commenced the manufacture of white cement,
the reason why delivery was not to begin until 14 months later. He must
have known that within that period of six years, there would be a
considerable rise in the price of white cement. In fact, respondent Tes
own Memorandum shows that in September, 1970, the price per bag was
P14.50, and by the middle of 1975, it was already P37.50 per bag.
Despite this, no provision was made in the dealership agreement to
allow for an increase in price mutually acceptable to the parties.
Instead, the price was pegged at P9.70 per bag for the whole five years
of the contract. Fairness on his part as a director of the corporation from whom
he was to buy the cement, would require such a provision. In fact, this
unfairness in the contract is also a basis which renders a contract
entered into by the President, without authority from the Board of
Directors, void or voidable, although it may have been in the ordinary
course of business. We believe that the fixed price of P9.70 per bag for a
period of five years was not fair and reasonable. Respondent Te, himself,
when he subsequently entered into contracts to resell the cement to his new
dealers Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in no case

shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with
Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio Lim
was made on December 29, 1969. 15 All of these contracts were entered into
soon after his dealership agreement with petitioner corporation, and in each
one of them he protected himself from any increase in the market price of white
cement. Yet, except for the contract with Henry Wee, the contracts were for only
two years from October, 1970. Why did he not protect the corporation in the same
manner when he entered into the dealership agreement? For that matter, why
did the President and the Chairman of the Board not do so either? As director,
specially since he was the other party in interest, respondent Tes bounden duty
was to act in such manner as not to unduly prejudice the corporation. ***In the
light of the circumstances of this case, it is to Us quite clear that he was
guilty of disloyalty to the corporation; he was attempting in effect, to
enrich himself at the expense of the corporation. There is no showing
that the stockholders ratified the dealership agreement or that they
were fully aware of its provisions. The contract was therefore not valid
and this Court cannot allow him to reap the fruits of his disloyalty.

As a result of this action which has been proven to be without legal

basis, petitioner corporations reputation and goodwill have been
prejudiced. However, there can be no award for moral damages under
Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title
XVIII of the Civil Code in favor of a corporation.