Mead vs McCullough

Charles Mead, Edwin McCullough and three others organized the corporation called The Philippine
Engineering and Construction Company (PECC). The 4 organizers, except Mead, contributed to
the majority of the capital stock of PECC, the remaining shares were offered to the public. Mead
contributed some personal properties. Mead was assigned as a manager but he resigned as such
when he accepted an engineering job in China. But even so, he remained as one of the five
directors (the organizers).
At that time, PECC was already incurring losses. McCullough, the president, proposed that he
shall buy the assets of the corporation. The three other directors then voted in favor of this
proposal hence the assets were transferred to McCullough. Mead learned of this and so he
opposed it because the personal properties he contributed were also transferred to McCullough.
Mead also argued that under the articles of incorporation of PECC, the board of directors only
have ordinary powers; that the authorization made by the three directors to allow the sale of
company assets to McCullough constitutes an act of agency which is invalid at that because no
express commission was made, i.e., no power of attorney was made in favor of the directors. The
requirement for a commission can be inferred from Article 1713 of the Civil Code which provides:
An agency stated in general terms only includes acts of administration.
In order to compromise, alienate, mortgage, or execute any other act of strict
ownership an express commission is required. (Emphasis supplied).
Mead also insists that under their charter, no resolution affecting the administration of the affairs
of PECC should be binding upon the corporation unless the unanimous consent of the entire board
was first obtained
ISSUE: Whether or not the three directors had the authority to allow the sale/transfer of the
company assets to McCullough.
HELD: Yes. Several factors have to be considered. First is the fact that Mead abandoned his post
when he took the job offer to work in China. He knew for a fact that the nature of the job offered
is permanent. Second, a close reading of the articles of incorporation of PECC shows that there
is no such intention for unanimity when it comes to votes affecting matters of administration. The
only requirement is that At least three of said board must be present in order to constitute a
legal meeting. Which was complied with when the other four directors were present when the
decision to transfer the company assets was made.
Third is the fact that PECC was in a downhill situation. A corporation is essentially a partnership,
except in form. The directors are the trustees or managing partners, and the stockholders are
the cestui que trust and have a joint interest in all the property and effects of the corporation.
McCullough as a director himself and the president can be considered an agent but not the agent
contemplated in Article 1713 of the Civil Code. Article 1713 deals with the broad aspect of agency
and in ordinary cases but not in the case of a corporation and its directors. In the case at bar,
the more appropriate analogy is that PECC, being a losing corporation, has its directors as the
trustees. The 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.
 Mead vs. McCullough, 21 Phil 95

Business Organization; Corporation Law The Corporation and Its Members

FACTS: Mead, McCullough and three others organized the corporation called The Philippine
Engineering and Construction Company (PECC). The 4 organizers, except Mead, contributed to
the majority of the capital stock of PECC, the remaining shares were offered to the public while
Mead, however, contributed some personal properties. Mead was assigned as a manager but he
resigned as such when he accepted an engineering job in China. But even so, he remained as
one of the five directors/ organizers. At that time, PECC was already incurring losses. McCullough
(president) proposed that he shall buy the assets of the corporation. The three other directors
then voted in favor of this proposal hence the assets were transferred to McCullough. Mead
learned of this and so he opposed it because the personal properties he contributed were also
transferred to McCullough. Mead also argued that under the articles of incorporation of PECC, the
board of directors only have ordinary powers; that the authorization made by the three directors
to allow the sale of company assets to McCullough constitutes an act of agency which is invalid
at that because no express commission was made, i.e., no power of attorney was made in favor
of the directors.

The requirement for a commission can be inferred from Article 1713 of the Civil Code which
provides:

An agency stated in general terms only includes acts of administration. In order to compromise,
alienate, mortgage, or execute any other act of strict ownership an express commission is
required.

Mead also insists that under their charter, no resolution affecting the administration of the affairs
of PECC should be binding upon the corporation unless the unanimous consent of the entire board
was first obtained

ISSUE: Whether or not the three directors had the authority to allow the sale/transfer of the
company assets to McCullough.

HELD: Yes. Several factors have to be considered.

First- 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- 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.

Harden vs Benguet Consolidated Mining

In 1927, Benguet Consolidated Mining Company, registered as a sociedad anonima under the
Spanish Law, agreed to invest and build capital equipments in favor of Balatoc Mining Company,
a corporation registered under the then relatively new Corporation Law of 1925. In exchange,
Balatoc Mining agreed to give Benguet Mining 600,000 shares.
The venture proved to be profitable and Balatoc Mining earned and so did its stockholders, and
of course, Benguet Mining was earning big too because it now owns 600k shares. This prompted,
Fred Harden a stockholder of Balatoc Mining who also owns thousands of shares to sue Benguet
Mining on the ground that under the Corporation Law a corporation like Benguet Mining which is
engaged in the mining industry is prohibited from being interested in other corporations which
are also engaged in the mining industry like Balatoc Mining.
ISSUE: Whether or not Hardens suit should prosper.
HELD: No. The Corporation Law of 1925 subjects sociedades anonimas to its provisions so far
as such provisions may be applicable. In 1929, the Corporation Law was amended and the
prohibition cited by Harden was so modified as merely to prohibit any such corporation from
holding more than fifteen per centum of the outstanding capital stock of another such corporation.
Further and more importantly, the Corporation Law of 1925 provides that if the person who
allegedly violated the provisions of said law is a corporation, the proper action is a quo warranto
which should be initiated by the Attorney-General or its deputized provincial fiscal and not a
private action as the one filed by Harden.