Topic: Classification of Corporations

Case No. 19

Acebedo Optical Company, Inc., vs. The Honorable Court of Appeals, Hon. Mamindiara Mangotara,
et. al.,
G.R. No. 100152, March 31, 2000

Facts:

Acebedo Optical Company, Inc. (Acebedo) applied with the Office of the City Mayor of Iligan
for a business permit. Acebedo’s application and the opposition interposed thereto by local
optometrists, respondent City Mayor issued Business Permit. Private respondent Samahan ng
Optometrist Sa Pilipinas (SOPI), through its Acting President, Dr. Frances B. Apostol, lodged a
complaint against Acebedo before the Office of the City Mayor, alleging that Acebedo had violated
the conditions set forth in its business permit and requesting the cancellation and/or revocation of
such permit. City Legal Officer submitted a report to the City Mayor finding Acebedo guilty of
violating all the conditions of its business permit and recommending the disqualification of Acebedo
from operating its business.

Issue:

Is the act of the City Mayor lawful of disqualifying Acebedo from operating its business?

Held:

No. The authority of city mayors to issue or grant licenses and business permits is beyond
cavil. The business permit granted by respondent City Mayor to Acebedo was burdened with several
conditions. However, the power to grant or issue licenses or business permits must always be
exercised in accordance with law, with utmost observance of the rights of all concerned to due
process and equal protection of the law. Distinction must be made between the grant of a license or
permit to do business and the issuance of a license to engage in the practice of a particular
profession. The first is usually granted by the local authorities and the second is issued by the Board
or Commission tasked to regulate the particular profession. A business permit authorizes the person,
natural or otherwise, to engage in business or some form of commercial activity. A professional
license, on the other hand, is the grant of authority to a natural person to engage in the practice or
exercise of his or her profession.

In the case at bar, what is sought by Acebedo from respondent City Mayor is a permit to
engage in the business of running an optical shop. It does not purport to seek a license to engage in
the practice of optometry as a corporate body or entity, although it does have in its employ, persons
who are duly licensed to practice optometry by the Board of Examiners in Optometry. Hence, the act
of the respondent City Mayor was not lawful.
Topic: Doctrine of Separate Juridical Personality, Doctrine of Corporate Entity

Case No. 38

Ernesto Cease, et. al., vs. Honorable Court Of Appeals

G.R. No. L-33172, October 18, 1979
Facts:
Forrest Cease and five (5) other American citizens formed Tiaong Milling and Plantation
Company. Eventually, the shares of the other original incorporators were bought out by Cease with
his children. The company’s charter lapsed in June 1958. Forrest Cease died in August 1959. There
was no mention whether there were steps to liquidate the company. Some of his children wanted an
actual division while others wanted a reincorporation. In the Court of First Instance (CFI), Two of his
children, Benjamin and Florence, initiated Special Proceeding asking that the Tiaong Milling and
Plantation Corporation be declared identical to F. L, Cease Plantation Company, Inc., and that its
properties be divided among his children as intestate heirs. Defendants opposed the same but the
CFI ruled in favor of the plaintiffs.

Issue:
Is the Tiaong Milling and Plantation the same as F. L, Cease Plantation Company, Inc.?

Held:

No. they are separate and distinct. As a general rule, a corporation is vested by law with a
personality separate and distinct from the persons composing it as well as any other legal entity to
which it may be related. By virtue of this attribute, a corporation may not, generally, 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. This separate and distinct personality is, however, merely a fiction created
by law for convenience and to promote the ends of justice.

Such rule may not be used or invoked for ends subversive of the policy and purpose behind
its creation or which could not have been intended by law to which it owes its being. This is
particularly true where the fiction is used to defeat public convenience, justify wrong, protect fraud,
defend crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise
circumvent the law. This is likewise true where the corporate entity is being used as an alter ego,
adjunct, or business conduit for the sole benefit of the stockholders or of another corporate. In any
of these cases, the notion of corporate entity will be pierced or disregarded, and the corporation will
be treated merely as an association of persons or, where there are two corporations, they will be
merged as one, the one being merely regarded as part of the instrumentality of the other.

Were we sustain the theory of petitioners that the trial court acted in excess of jurisdiction or
abuse of discretion amounting to lack of jurisdiction in deciding Civil Case No. 6326 as a case for
partition when the defendant therein, Tiaong Milling and Plantation Company, Inc. as registered
owner asserted ownership of the assets and properties involved in the litigation, which theory must
necessarily be based on the assumption that said assets and properties of Tiaong Milling and
Plantation Company, Inc. now appearing under the name of F. L. Cease Plantation Company as
Trustee are distinct and separate from the estate of Forrest L. Cease to which petitioners and
respondents as legal heirs of said Forrest L. Cease are equally entitled share and share alike, then
that legal fiction of separate corporate personality shall have been used to delay and ultimately
deprive and defraud the respondents of their successional rights to the estate of their deceased
father. For Tiaong Milling and Plantation Company shall have been able to extend its corporate
existence beyond the period of its charter which lapsed in June, 1958 under the guise and cover of F.
L, Cease Plantation Company, Inc. as Trustee which would be against the law, and as Trustee shall
have been able to use the assets and properties for the benefit of the petitioners, to the great
prejudice and defraudation of private respondents. Hence, it becomes necessary and imperative to
pierce that corporate veil.
Topic: Doctrine of Piercing the Veil of Corporate Fiction

Case No. 57

Pantranco Employees Association (PEA-PTGWO) and Pantranco Retrenched Employees Association

(PANREA) vs. National Labor Relations Commission (NLRC), et al.,
G.R. No. 170689, March 17, 2009

Facts:

Gonzales family owned two (2) corporations, namely, the Pantranco North Express, Inc.
(PNEI) and Macris Realty Corporation (Macris). PNEI provided transportation services to the public.
They incurred huge financial losses and creditors took over the management of PNEI and Maricris.
Full ownership was transferred to one of their creditors, the National Investment Development
Corporation (NIDC), a subsidiary of the PNB.

PNEI applied with the Securities and Exchange Commission (SEC) for suspension of
payments. A management committee was thereafter created which recommended to the SEC the
sale of the company through privatization. As a cost-saving measure, the committee likewise
suggested the retrenchment of several PNEI employees. Eventually, PNEI ceased its operation. Along
with the cessation of business came the various labor claims commenced by the former employees
of PNEI where the latter obtained favorable decisions. PNB’s third-party claim – to nullify the writ on
the ground that it has an interest in the Pantranco properties being a creditor of PNB-Madecor, – on
the other hand, was denied because it only had an inchoate interest in the properties. Labor Arbiter
issued Writ of Execution commanding the National Labor Relations Commission (NLRC) Sheriffs to
levy on the assets of PNEI in order to satisfy the ₱722,727,150.22 due its former employees, as full and
final satisfaction of the judgment awards in the labor cases. On appeal to the NLRC, the same was
denied and the Labor Arbiter’s disposition was affirmed. The Court of Appeals (CA) pointed out that
PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from
PNEI. As such, there being no cogent reason to pierce the veil of corporate fiction, the separate
personalities of the above corporations should be maintained.

Issue:

Is the doctrine of piercing the veil of corporate fiction applied in the instant case?

Held:

No. The doctrine of piercing the veil of corporate fiction is not applied in this case. Under the
doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a mere
collection of individuals or an aggregation of persons undertaking business as a group, disregarding
the separate juridical personality of the corporation unifying the group. Another formulation of this
doctrine is that when two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat them as identical or as one and the
same. The rationale is that, since the corporation is an artificial person, it must have an officer who
can be presumed to be the employer, being the person acting in the interest of the employer. The
corporation, only in the technical sense, is the employer. In the instant case, what is being made
liable is another corporation (PNB) which acquired the debtor corporation (PNEI).

Clearly, what can be inferred from the earlier cases is that 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. In the
absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate liabilities.

Assuming arguendo, that PNB may be held liable for the debts of PNEI, petitioners still
cannot proceed against the Pantranco properties, the same being owned by PNB-Madecor,
notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The general rule remains that
PNB-Madecor has a personality separate and distinct from PNB. The mere fact that a corporation
owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being
treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall
be respected, and the liability of the parent corporation as well as the subsidiary will be confined to
those arising in their respective businesses.
Topic: Doctrine of Piercing the Veil of Corporate Fiction

Case No. 77

Sol Laguio, et. al., vs. National Labor Relations Commission, et. al.,
G.R. No. 108936, October 4, 1996
Facts:

Private respondent April Toy, Inc. (April) is a domestic corporation for the purpose of
manufacturing, importing, exporting, buying, selling, sub-contracting or otherwise dealing in, at
wholesale and retail, stuffed toys. April informed its employees of its dire financial
condition. April decided to shorten its corporate term and submitted a notice of dissolution to the
Securities and Exchange Commission (SEC). April also notified its employees, the Department of
Labor and Employment, the Social Security System, the Board of Investments, the Bureau of Internal
Revenue, and the Municipality of Paranaque of its dissolution.

Sol Laguio, et. al., filed a complaint for illegal shutdown/retrenchment/dismissal and unfair
labor practice. They implead private respondent Well World Toys, Inc. (Well World). Sol Laguio, et.
al., also insist that the two corporations are being managed by Mr. Jean Li Wang and that their
articles of incorporation, general information sheets and certificates of increase of capital stock were
notarized by the same Notary Public. The Labor Arbiter (LA) found as valid the closure of April, and
treated April and Well World as two distinct corporations.

Issue:

Is the doctrine of piercing the veil of corporate fiction applied in this case?

Held:

No. It is not applied in this case. What clearly appears therefrom is that the two corporations
have two different set of officers managing their respective affairs in two separate offices.

It is basic that a corporation is 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. Mere substantial identity of the incorporators of the two corporations does not necessarily
imply fraud, nor warrant the piercing of the veil of corporation fiction. In the absence of clear and
convincing evidence that April and Well Worlds corporate personalities were used to perpetuate
fraud, or circumvent the law said corporations were rightly treated as distinct and separate from
each other.

Hence, the LA correctly opined that the two corporations are separate and distinct from each
other, and that there is no basis for piercing the veil of corporate fiction.
Topic: Test in Determining Applicability

Case No. 95

Bank of America NT&SA, Bank of America International, Ltd., vs. Court of Appeals, Hon. Manuel
Padolina, Eduardo Litonjua, Sr., and Aurelio K. Litonjua, Jr.,
G.R. No. 120135, March 31, 2003

Facts:

Eduardo K. Litonjua, Sr. and Aurelio J. Litonjua (Litonjuas) filed a Complaint before the
Regional Trial Court (RTC) against the Bank of America NT&SA and Bank of America International,
Ltd. (banks) alleging simply that they were engaged in the shipping business and the operation and
the funds derived therefrom were placed under the complete and exclusive control and disposition
of the petitioners; and the possession the vessels was also placed by the banks in the hands of
persons selected and designated by them (banks).

The Litonjuas claimed that banks as trustees did not fully render an account of all the income
derived from the operation of the vessels as well as of the proceeds of the subsequent foreclosure
sale; The Litonjuas prayed for the accounting of the revenues derived in the operation of the vessels
and of the proceeds of the sale thereof at the foreclosure proceedings instituted by petitioners;
damages for breach of trust; exemplary damages and attorney’s fees.

Issue:

Is the separate personalities of the Litonjuas and the banks clearly support the proposition
that the Litonjuas have no personalities to sue.

Held:

No. Banks argue that the borrowers and the registered owners of the vessels are the foreign
corporations and not private respondents Litonjuas who are mere stockholders; and that the
revenues derived from the operations of all the vessels are deposited in the accounts of the
corporations. Hence, the banks maintain that these foreign corporations are the legal entities that
have the personalities to sue and not Litonjuas; Litonjuas, being mere shareholders, have no claim on
the vessels as owners since they merely have an inchoate right to whatever may remain upon the
dissolution of the said foreign corporations and after all creditors have been fully paid and
satisfied; and that while Litonjuas may have allegedly spent amounts equal to 10% of the acquisition
costs of the vessels in question, their 10% however represents their investments as stockholders in
the foreign corporations.
Topic: Incorporation and Organization Proper, Subscription Contract

Case No. 114

Sunset View Condominium Corporation vs. The Hon. Jose C. Campos, Jr. and Aguilar-Bernares
Realty
G.R. No. L-52361 April 27, 1981

Facts:

Aguilar-Bernares Realty (Aguilar-Bernas), a sole proprietorship with business name registered

with the Bureau of Commerce, owned and operated by the spouses Emmanuel G. Aguilar and
Zenaida B. Aguilar, is the assignee of a unit, "Solana", in the Sunset View Condominium Project with
La Perla Commercial, Incorporated, as assignor.

The La Perla Commercial, Incorporated bought the "Solana" unit on installment from the
Tower Builders, Inc. Sunset View Condominium Corporation (Sunset), filed for the collection of
assessments levied on the unit against Aguilar-Bernares.

Aguilar-Bernares filed a Motion to Dismiss. The Sunset filed its opposition thereto. The
motion to dismiss was granted. Pursuant to Section 2 of Republic Act No. 4726, a "holder of a
separate interest" and consequently, a shareholder of the plaintiff condominium corporation; and
that "the case should be properly filed with the Securities and Exchange Commission (SEC) which has
exclusive original jurisdiction on controversies arising between shareholders of the corporation."

Issue:

Does the SEC have jurisdiction over the case?

Held:

No. The SEC has no jurisdiction. Section 5 of the Condominium Act expressly provides that
the shareholding in the Condominium Corporation will be conveyed only in a proper case. It provides
that any transfer or conveyance of a unit or an apartment, office or other space therein, shall include
the transfer or conveyance of the undivided interests in the common areas or, in a proper case, the
membership or shareholding in the condominium corporation. It is clear then that not every
purchaser of a condominium unit is a shareholder of the condominium corporation. The
Condominium Act leaves to the Master Deed the determination of when the shareholding will be
transferred to the purchaser of a unit.

Pursuant to the above statutory provision, ownership of a unit is a condition sine qua non to
being a shareholder in the condominium corporation. The Aguilar-Bernares, therefore, who have not
fully paid the purchase price of their units and are consequently not owners of their units are not
members or shareholders of the petitioner condominium corporation.
 Inasmuch as the Aguilar-Bernares are not shareholders of the Senset condominium
corporation, the instant case for collection cannot be a controversy 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" which controversies are under the original and exclusive jurisdiction of the
Securities & Exchange Commission, pursuant to Section 5 (b) of P.D. No. 902- A. The subject matters
of the instant cases according to the allegations of the complaints are under the jurisdiction of the
regular courts.
Topic: Incorporation and Organization Proper, Primary Purpose

Case No. 133

Alicia E. Gala, et. al., vs. Ellice Agro-Industrial Corporation, et. al.,
G.R. No. 156819, December 11, 2003

Facts:

Gala et. al., formed and organized the Ellice Agro-Industrial Corporation (Ellice). The total
subscribed capital stock of the corporation was apportioned. The total subscribed capital stock of
the corporation was P3.5 Million with 35,000 shares. Additional shares were acquired and
subscribed from said corporation. Subsequently, the Margo Management and Development
Corporation (Margo) was incorporated. The total subscribed capital stock of Margo was 20,000
shares at P200, 000.00. Several transfers of shares of Ellice to Margo were made by the
stockholders and some payments of subscription were made by transferring parcels of land by the
Gala Spouses.

Gala et. al., want this Court to disregard the separate juridical personalities of Ellice and
Margo for the purpose of treating all property purportedly owned by said corporations as property
solely owned by the Gala spouses. The p Gala et. al., contention in support of this theory is that the
purposes for which Ellice and Margo were organized should be declared as illegal and contrary to
public policy. They claim that the private respondents never pursued exemption from land reform
coverage in good faith and instead merely used the corporations as tools to circumvent land reform
laws and to avoid estate taxes. Specifically, they point out that respondents have not shown that
the transfers of the land in favor of Ellice were executed in compliance with the requirements of
Section 13 of R.A. 3844. Furthermore, they alleged that respondent corporations were run without
any of the conventional corporate formalities.

Issue:

Is the creation of the two corporations is illegal and against public policy?

Held:

No. The creation of the two corporations is not illegal and against public policy. Impugning
the legality of the purposes for which Ellice and Margo were organized, amount to collateral attacks
which are prohibited in this jurisdiction. The best proof of the purpose of a corporation is its articles
of incorporation and by-laws. The articles of incorporation must state the primary and secondary
purposes of the corporation, while the by-laws outline the administrative organization of the
corporation, which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. A
perusal of the Articles of Incorporation of Ellice and Margo shows no sign of the allegedly illegal
purposes that petitioners are complaining of. If a corporation’s purpose, as stated in the Articles of
Incorporation, is lawful, then the SEC has no authority to inquire whether the corporation has
purposes other than those stated, and mandamus will lie to compel it to issue the certificate of
incorporation.
 With regard to their claim that Ellice and Margo were meant to be used as mere tools for the
avoidance of estate taxes, suffice it say that the legal right of a taxpayer to reduce the amount of
what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot
be doubted.

Thus, even if Ellice and Margo were organized for the purpose of exempting the properties
of the Gala spouses from the coverage of land reform legislation and avoiding estate taxes, the court
cannot disregard their separate juridical personalities.
Topic: Adoption of By-Laws

Case No. 152

Dily Dany Nacpil vs. International Broadcasting Corporation

G.R. No. 144767, March 21, 2002

Facts:

Dily Dany Nacpil (Nacpil) states that he was Assistant General Manager for
Finance/Administration and Comptroller of Intercontinental Broadcasting Corporation (IBC).
According to Nacpil, when Emiliano Templo (Templo) was appointed to replace IBC President Tomas
Gomez III, the former told the Board of Directors that as soon as he assumes the IBC presidency, he
would terminate the services of Nacpil. Templo blamed Nacpil, along with a certain Mr. Basilio and
Mr. Gomez, for the prior mismanagement of IBC. Upon his assumption of the IBC presidency, Templo
allegedly harassed, insulted, humiliated and pressured petitioner into resigning until the latter was
forced to retire. However, Templo refused to pay him his retirement benefits and refused to
recognize Nacpil employment. Hence Nacpil filed with the Labor Arbiter (LA) a complaint for illegal
dismissal and non-payment of benefits.

The Labor Arbiter (LA) rendered a Decision stating that Nacpil had been illegally
dismissed. IBC appealed to the National Labor Relations Commission (NLRC), but the same was
dismissedThe Court of Appeals (CA), however, reversed the decision of NLRC.

Issue:

Is the by-laws of the IBC does not include comptroller as one of its corporate officers?

Held:

The by-laws include the comptroller as one of its corporate officers. The Court has held that
in most cases the by-laws may and usually do provide for such other officers, and that where a
corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a
corporation, the board of directors may also be empowered under the by-laws to create additional
officers as may be necessary.

An office has been defined as a creation of the charter of a corporation, while an officer as a
person elected by the directors or stockholders. On the other hand, an employee occupies no office
and is generally employed not by action of the directors and stockholders but by the managing
officer of the corporation who also determines the compensation to be paid to such employee.

As Nacpil appointment as comptroller required the approval and formal action of the
IBCs Board of Directors to become valid, it is clear therefore holds that petitioner is a corporate
officer whose dismissal may be the subject of a controversy cognizable by the SEC under Section 5(c)
of P.D. 902-A which includes controversies involving both election and appointment of corporate
directors, trustees, officers, and managers. Had Nacpil been an ordinary employee, such board action
would not have been required.
Topic: Corporate Powers

Case No. 171

Special Services Corporation vs. Centro La Paz (SAMAHANG ESPIRITISTA SA LUNDUYANG LA PAZ),
A CHAPTER OF UNION ESPIRITISTA CRISTIANA DE FILIPINAS, INC.,
G.R. No. L-44100, April 28, 1983

Facts:

On October 10, 1972, judgment was rendered in favor of petitioner against one Alejandro
Estudillo in the amount of P94,727.52, in an action for Replevin with Sum of Money and a writ of
execution was thereafter issued but which has remained unsatisfied.

By virtue of an alias writ of execution issued on December 15, 1972, the Sheriff of Manila
caused the annotation of a notice of levy on Transfer Certificate of Title No. 51837, in respect of the
rights, interest and participation of said Alejandro Estudillo, one of the registered owners indicated in
said title.

On July 23, 1973, "Centro La Paz (Samahang Espiritista sa Lunduyang La Paz) a Chapter of
Union Espiritista Cristiana de Filipinas, Inc.," as plaintiff, instituted for Damages and Preliminary
Injunction against herein petitioner and the Sheriff of Manila with the Court of First Instance, Branch
IV, Manila, the same Court which rendered judgment in the replevin case. CENTRO reiterated
ownership of the properties in question and emphasized that the registered owners thereof had
publicly acknowledged their possession of said properties in the concept of trustees.

Issue:

Is Centro La Paz, which is merely a Chapter of Union Espiritista de Filipinas, Inc., has a juridical
personality of its own in accordance with the provisions of our laws.

RULING:

Yes. Centro La Paz has a juridical personality of its own. Although it was CENTRO that was
actively prosecuting the case, in substance, it was representing the mother organization, the Union
Espiritista Cristiana de Filipinas, Inc., which is the real party in interest and is itself named in the
Complaint. It is an organization that is duly registered with the Securities and Exchange Commission,
and thus possessed of a juridical personality to sue and be sued.

Admittedly, the trust was not registered in accordance with section 65 of Act 496 (the
former Land Registration Law). The absence of said registration, however, cannot be taken against
CENTRO inasmuch as, if the public auction sale had actually been held, with petitioner as the
successful buyer, petitioner could not have been considered a purchaser for value and in good faith
at said sale since it had knowledge of CENTRO's claim, particularly when the latter had filed a third-
party-claim with the Sheriff of Manila before the scheduled auction sale, which knowledge was
equivalent to registration of the several "Acknowledgments" in the Registry of Deeds.

The conclusion follows that inasmuch as Estudillo has no interest in the properties in
question, there is nothing that petitioner can levy upon. The power of a Court in the execution of its
judgment extends only over properties unquestionably belonging to the judgment debtor.
Topic: Specific Powers

Case No. 190

PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa Naval Filipina vs.
MARCIANO RIVERA
G.R. No. L-19761, January 29, 1923

Facts:

A case was instituted by the Philippine Trust Company (Philtrust), as assignee in insolvency
of La Cooperativa Naval Filipina (LCNF), against Marciano Rivera (Rivera), for recovering a balance of
P22,500, due to Rivera’s subscription to the capital stock of Philtrust. The trial judge ruled in favor of
the Philtrust. Among the incorporators of LCNF was numbered Rivera, who subscribed for 450
shares representing a value of P45,000, the remainder of the stock being taken by other persons. In
the course of time LCNF became insolvent and went into the hands of the Philtrust which instituted
to recover one-half of the stock subscription of the Rivera, which admittedly has never been paid.
The reason for the failure of the Rivera to pay the entire subscription is, that not long after
the LCNF had been incorporated, a meeting of its stockholders occurred, at which a resolution was
adopted to the effect that the capital should be reduced by 50 per centum and the subscribers
released from the obligation to pay any unpaid balance of their subscription in excess of 50 per
centum of the same.

Issue:

Is LCNF has power to release Rivera to its capital stock from the obligation of paying for his
shares, without a valuable consideration for such release.

Held:

No. A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in the manner an under the conditions
prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance
with the statutory regulations is necessary. In this case, the resolution releasing the shareholders
from their obligation to pay 50 per centum of their respective subscriptions was an attempted
withdrawal of so much capital from the fund upon which the company's creditors were entitled
ultimately to rely and, having been effected without compliance with the statutory requirements,
was wholly ineffectual.
Topic: Limitation on Retention of Surplus profits

Case No. 209

C. H. Steinberg vs. Gregorio Velasco, et al.,
G.R. No. L-30460, March 12, 1929

Facts:

C. H. Steinberg (Steinberg) is the receiver of the Sibuguey Trading Company (Trading

Company), a domestic corporation. It is alleged that the defendants, Gregorio Velasco, as president,
Felix del Castillo, as vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as
director of Trading Company, at a meeting of the board of directors, approved and authorized
various lawful purchases already made of a large portion of the capital stock of the company from its
various stockholders with total amount of the capital stock unlawfully purchased was P3, 300. At the
time of such purchase, the corporation had accounts payable amounting to P13, 807.50, most of
which were unpaid at the time petition for the dissolution of the corporation was its financial
condition, in contemplation of an insolvency and dissolution. That on September 11, 1923, when the
petition was filed for its dissolution upon the ground that it was insolvent, its accounts payable
amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over
and above its liabilities.

Issue:

Is Corporation act of acquiring its own shares of stocks done in bad faith?

Held:

Yes. The Corporation acted in bad faith. There is no stipulation or finding of facts as to what
was the actual cash value of its accounts receivable. Neither is there any stipulation that those
accounts or any part of them ever have been or will be collected and the receiver made a diligent
effort to collect them, and that he was unable to do so, and it also appears from the minutes of the
board of directors that the president and manager "recommended that P3, 000 out of the surplus
account to be set aside for dividends payable, and that payments be made in installments so as not
to effect the financial condition of the corporation."

It is very apparent that on June 24, 1922, the board of directors acted on assumption that,
because it appeared from the books of the corporation that it had accounts receivable of the face
value of P19, 126.02, therefore it had a surplus over and above its debts and liabilities. Thus, in the
purchase of its own stock to the amount of P3, 300 and in declaring the dividends to the amount of
P3, 000, the real assets of the corporation were diminished P6, 300. 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."

Creditors of a corporation have the right to assume 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.
Topic: Ultra Vires Acts

Case No. 225

Atrium Management Corporation vs. Court Of Appeals

G.R. No. 109491, February 28, 2001

Facts:

Hi-Cement Corporation (Hi-Cement) through its corporate signatories, petitioner Lourdes M.

de Leon (de Leon), treasurer, and the late Antonio de las Alas (de las Alas), Chairman, issued checks
in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., (E.T. Henry) in turn, endorsed
the four checks to petitioner Atrium Management Corporation (Atrium) for valuable consideration.
Upon presentment for payment, the drawee bank dishonored all four checks for the common reason
"payment stopped". Atrium instituted an action after its demand for payment of the value of the
checks was denied.

At the trial, Atrium presented as its witness Carlos C. Syquia (Syquia) testified that Enrique
Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four RCBC checks
in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to
discount the checks, provided it be allowed to confirm with Hi-Cement the fact that the checks
represented payment for petroleum products which E.T. Henry delivered to Hi-Cement. Carlos C.
Syquia identified two letters issued by Hi-Cement through Lourdes M. de Leon, as treasurer,
confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum products.

Lourdes M. de Leon claimed she is not solidarilly liable with Hi-Cement for the amount of the
check and that Atrium was an ordinary holder, not a holder in due course of the rediscounted checks.

Issue:

Is de Leon liable for the amount of the check which constitutes an ultra vires act?

Held:

Yes. De Leon is solidarily liable. Due to negligence of de Leon and de las Alas as treasurer and
Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent
when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry
for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the
checks were strictly endorsed for deposit only to the payee's account and not to be further
negotiated. What is more, the confirmation letter contained a clause that was not true, that is, "that
the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry".
Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally
liable therefor.
 "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: 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; He
consents to the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto; He agrees to hold himself
personally and solidarily liable with the corporation; or He is made, by a specific provision of law, to
personally answer for his corporate action.

However, as to the claim of Atrium, it cannot be upheld because it is not a holder of the
check in due course due to the fact that the same was crossed in favor of E.T. Henry, and therefore
only payable to the latter’s account.
Topic: Removal (Section 28)

Case No. 247

Jose A. Bernas, et. al., vs. Jovencio F. Cinco

G.R. Nos. 163356-57, July 10, 2015

Facts:
Makati Sports Club (MSC) is a domestic corporation for the primary purpose of establishing,
maintaining, and providing social, cultural, recreational and athletic activities among its members.
Jose A. Bernas (Bernas), Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T.
Macrohon and Paulino T. Lim (Bernas Group) were among the Members of the Board of Directors
and Officers of the corporation whose terms were to expire either in 1998 or 1999.

Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight
Committee (MSCOC) demanded from the Bernas Group to resign from their respective positions to
pave the way for the election of new set of officers. Bernas Group failed to secure an injunction
before the Securities Commission (SEC) the new officers were elected. Aggrieved, the Bernas Group
initiated an action before the Securities Investigation and Clearing Department (SICD) of the SEC
seeking for the nullification of the election. Citing Section 28 of the Corporation Code, the Bernas
Group argued that the authority to call a meeting lies with the Corporate Secretary and not with the
MSCOC which functions merely as an oversight body and is not vested with the power to call
corporate meetings.

Issue:

Is the removal of Bernas group valid under the corporation code?

Held:

No. The removal of Bernas group is invalid. In the instant case, there is no dispute that the
Special Stockholders' Meeting was called neither by the President nor by the Board of Directors but
by the MSCOC. While the MSCOC, as its name suggests, is created for the purpose of overseeing the
affairs of the corporation, nowhere in the by-laws does it state that it is authorized to exercise
corporate powers, such as the power to call a special meeting, solely vested by law and the MSC by-
laws on the President or the Board of Directors.

The board of directors is the directing and controlling body of the corporation. It is a creation
of the stockholders and derives its power to control and direct the affairs of the corporation from
them. The board of directors, in drawing to itself the power of the corporation, occupies a position
of trusteeship in relation to the stockholders, in the sense that the board should exercise not only
care and diligence, but utmost good faith in the management of the corporate affairs. The
underlying policy of the Corporation Code is that the business and affairs of a corporation must be
governed by a board of directors whose members have stood for election, and who have actually
been elected by the stockholders, on an annual basis. Only in that way can the continued
accountability to shareholders, and the legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise
of power by the directors or officers over the properties that they do not own.

A distinction should be made between corporate acts or contracts which are illegal and those
which are merely ultra vires. The former contemplates the doing of an act which are contrary to law,
morals or public policy or public duty, and are, like similar transactions between individuals, void:
They cannot serve as basis of a court action nor acquire validity by performance, ratification or
estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal or void ab initio, but
are not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders. The Meeting belongs to the
category of the latter, that is, it is void ab initio and cannot be validated.
Topic:Delegationof Authority to Corporate Officers

Case No. 266

Manila Metal Container Corporation, Reynaldo C. Tolentino vs. Philippine National Bank
G.R. No. 166862, December 20, 2006

Facts:

Reynaldo C. Tolentino (Tolentino) is the owner of a parcel of land. To secure a loan he

obtained from Philippine National Bank (PNB) he executed a Real Estate Mortgage (REM) over said
land. For failure to pay the loan, PNB sought the foreclosure of the REM. After the public auction, the
Tolentino requested PNB to grant him an extension to redeem the property. He failed to redeem the
property. Later on, the PNB agreed to let Manila Metal Container Corporation (MMCC) purchase the
property for a certain amount, and a downpayment was then given. Subsequently, however, the
PNB informed the Tolentino that it was increasing the purchase price. Hence, a case was filed by
Tolentino.

Issue:

Is the letter by PNB accepting the Tolentino’s offer valid.

Held:

No. There is no evidence that the Special Assets Management Department (SAMD) was
authorized by respondent's Board of Directors to accept petitioner's offer and sell the property. Any
acceptance by the SAMD of petitioner's offer would not bind PNB. A corporation can only execute its
powers and transact its business through its Board of Directors and through its officers and agents
when authorized by a board resolution or its by-laws. Absent such valid delegation/authorization, the
rule is that the declarations of an individual director relating to the affairs of the corporation, but not
in the course of, or connected with the performance of authorized duties of such director, is held not
binding on the corporation.
Topic: Qualifications and Disqualifications, Authority and Liabilities

Case No.285

The Board of Liquidators vs. Heirs Of Maximo M. Kalaw

G.R. No. L-18805, August 14, 1967

Facts:

National Coconut Corporation (NACOCO) is with Maximo Kalaw as its General Manager and
Chairman of the BOD. Under his tenure NACOCO entered into different contracts involving the trade
of coconuts. It failed, however, due to natural calamities that greatly affected the production of
coconuts. This led to some customers of NACOCO suing the corporation for undelivered coconuts
due to them under the contracts that they signed. This was settled by NACOCO by paying the
customers.

Thereafter, NACOCO seeks to recover the above sum of P1,343,274.52 from general manager
and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It
charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil
Code); and defendant board members, including Kalaw, with bad faith and/or breach trust for having
approved the contracts.

Issue:

Is Kalaw be held liable by NACOCO for the debts the corporation incurred under his
administration.

Held:

No. Kalaw will not be held liable.They were done with implied authority from the BOD. These
previous contracts, it should be stressed, were signed by Kalaw without prior authority from the
board. Said contracts were known all along to the board members. Nothing was said by them. The
aforesaid contracts stand to prove one thing. Obviously NACOCO board met the difficulties
attendant to forward sales by leaving the adoption of means to end, to the sound discretion of
NACOCO's general manager Maximo M. Kalaw.

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. In varying language, existence of such authority is
established, by proof of the course of business, the usages and practices of the company and by the
knowledge which the board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation.
 Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or contract
ratified, and is equivalent to original authority;" and that "[t]he corporation and the other party to
the transaction are in precisely the same position as if the act or contract had been authorized at the
time." The language of one case is expressive: "The adoption or ratification of a contract by a
corporation is nothing more nor less than the making of an original contract. The theory of corporate
ratification is predicated on the right of a corporation to contract, and any ratification or adoption is
equivalent to a grant of prior authority.
Topic: Executive Committee

Case No. 304

Filipinas Port Services, Inc., et. al., vs. Victoriano S. Go, et. al.,
G.R. No. 161886, March 16, 2007

Facts:

Eliodoro C. Cruz (Cruz), Filport’s president wrote a letter to the corporation’s Board of Directors
(BOD) questioning the creation and election of the following positions with a monthly remuneration
of P13, 050.00 each. Cruz requested the board to take necessary action/actions to recover from
those elected to the aforementioned positions the salaries they have received.

On the trial court, it ruled that the BOD have the power to create positions not in the by-laws and
can increase salaries. But Edgar C. Trinidad under the third and fourth causes of action to restore to
the corporation the total amount of salaries he received as assistant vice president for corporate
planning; and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua under the fourth
cause of action to restore to the corporation the salaries they each received as special assistants
respectively to the president and board chairman. In case of insolvency of any or all of them, the
members of the board who created their positions are subsidiarily liable.

Issue:

Is the creation of executive committee valid?

Held:

Yes. The creation of executive committee is valid. Unfortunately, the bylaws of the
corporation are silent as to the creation by its board of directors of an executive committee. Under
Section 35 of the Corporation Code, the creation of an executive committee must be provided for in
the bylaws of the corporation.

Notwithstanding the silence of Filport’s by-laws on the matter, we cannot rule that the
creation of the executive committee by the board of directors is illegal or unlawful. One reason is the
absence of a showing as to the true nature and functions of said executive committee considering
that the "executive committee," referred to in Section 35 of the Corporation Code which is as
powerful as the board of directors and in effect acting for the board itself, should be distinguished
from other committees which are within the competency of the board to create at any time and
whose actions require ratification and confirmation by the board. Another reason is that,
ratiocinated by both the two (2) courts below, the Board of Directors has the power to create
positions not provided for in Filport’s bylaws since the board is the corporation’s governing body,
clearly upholding the power of its board to exercise its prerogatives in managing the business affairs
of the corporation.
 As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz
himself, it was during his incumbency as Filport president that the executive committee in question
was created, and that he was even the one who moved for the creation of the positions of the AVPs
for Operations, Finance and Administration. By his acquiescence and/or ratification of the creation of
the aforesaid offices, Cruz is virtually precluded from suing to declare such acts of the board as
invalid or illegal. And it makes no difference that he sues in behalf of himself and of the other
stockholders. Indeed, as his voice was not heard in protest when he was still Filport’s president,
raising a hue and cry only now leads to the inevitable conclusion that he did so out of spite and
resentment for his non-reelection as president of the corporation.
Topic: Personal Liability of Directors and other Corporate Officers

Case No.323

Irene Martel Francisco vs. Numeriano Mallen, Jr.,

G.R. No. 173169, September 22, 2010

Facts:

Irene Martel Francisco is Vice-President of VIPS Coffee Shop and Restaurant. Numeriano
Mallen, Jr. (Mallen) was hired as a waiter for VIPS Coffee Shop and Restaurant, a fine dining
restaurant which used to operate at the Harrison Plaza Commercial Complex in Manila. Mallen took
an approved sick leave and after some time he took a vacation leave. Thereafter, he availed of
his paternity leave.

Mallen filed before the Department of Labor and Employment-National Capital Region
(DOLE-NCR) a complaint for underpayment of wages and non-payment of holiday pay. Mallen
reported back to work with a medical certificate stating he was fit to work but he was refused work.
Labor Arbiter (LA) rendered a decision in favor of respondent declaring the dismissal of the
complainant illegal.

Issue:

Is Irene Martel Francisco (Francisco) personally liable for the monetary awards granted in
favor of Mallen arising from his alleged illegal termination.

Held:

No. Petitioner Irene Martel Francisco was not liable for the monetary awards specified in the
reinstated LA’s Decision. A corporation is a juridical entity with legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people comprising it. The rule is that
obligations incurred by the corporation, acting through its directors, officers and employees are its
sole liabilities.

To hold a director or officer personally liable for corporate obligations, two requisites must
concur: (1) complainant must allege in the complaint that the director or officer assented to patently
unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and
(2) complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.

Mallen failed to allege either in his complaint or position paper that Francisco, as Vice-
President of VIPS Coffee Shop and Restaurant, acted in bad faith. Neither did respondent clearly and
convincingly prove that petitioner, as Vice-President of VIPS Coffee Shop and Restaurant, acted in
bad faith. In fact, there was no evidence whatsoever to show petitioner’s participation in
respondent’s alleged illegal dismissal. Clearly, the twin requisites of allegation and proof of bad faith,
necessary to hold petitioner personally liable for the monetary awards to Mallen, are lacking.
Topic: Disloyalty (Section 34)

Case No. 342

John Gokongwei, Jr., vs. Securities and Exchange Commission

G.R. No. L-45911, April 11, 1979
Facts:

John Gokongwei (Gokongwei) alleged that respondents amended by bylaws of San Miguel
Corporation (SMC), basing their authority to do so on a resolution of the stockholders when the
outstanding capital stock of respondent corporation was only P70,139.740.00, divided into 5,513,974
common shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time
of the amendment, the outstanding and paid up shares totalled 30,127,043, with a total par value of
P301,270,430.00. It was contended that according to section 22 of the Corporation Law and Article
VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws may
be delegated to the Board of Directors (BOD) only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up capital stock of the corporation, which
2/3 should have been computed on the basis of the capitalization at the time of the amendment.
Since the amendment was based on the 1961 authorization, Gokongwei contended that the BOD
acted without authority and in usurpation of the power of the stockholders.

It was claimed that prior to the questioned amendment, Gokongwei had all the qualifications
to be a director of respondent corporation, being a substantial stockholder thereof; that as a
stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote
and to be voted upon in the election of directors; and that in amending the by-laws, respondents
purposely provided for Gokongwei 's disqualification and deprived him of his vested right as afore-
mentioned, hence the amended by-laws are null and void.

Issue:

Is SMC’s BOD acted in bad faith in making the amendment which disqualified Gokongwei
from being elected as Director.

Held:

No. The BOD did not act in bad faith. SMC is merely protecting its interest from Gokongwei,
who owns companies in direct competition with SMC’s business. Although in the strict and technical
sense, directors of a private corporation are not regarded as trustees, there cannot be any doubt
that their character is that of a fiduciary insofar as the corporation and the stockholders as a body
are concerned. 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. It springs from the fact that directors have the control and guidance of corporate affairs and
property hence, of the property interests of the stockholders. Equity recognizes that stockholders
are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof
 It is obviously to prevent the creation of an opportunity for an officer or director of SMC,
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 SMC 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.
Topic: Derivative Suit, Remedies to EnforcePersonal Liability

Case No. 361

Virginia O. Gochan, et. al., vs. Richard G. Young, et. al.,

G.R. No. 131889, March 12, 2001

Fatcs:

Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with
the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa
Gochan, Esteban Gochan and Crispo Gochan as its incorporators. Felix Gochan Sr.'s daughter, Alice,
mother of respondents, inherited 50 shares of stock in Gochan Realty from the former. She died in
1955, leaving the 50 shares to her husband, John Young, Sr.

The Regional Trial Court adjudicated 6/14 of these shares to her children, Richard Young,
David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu and Alexander Thomas Young.
Having earned dividends, these stocks numbered 179 by 20 September 1979. Five days later (25
September), at which time all the children had reached the age of majority, their father John Sr.,
requested Gochan Realty to partition the shares of his late wife by cancelling the stock certificates in
his name and issuing in lieu thereof, new stock certificates in the names of the children.

Issue:

Is Richard G. Young, et. al., have the legal personality to file a derivative suit on behalf of the
corporation.

Held:

No. Young, et. al., do not have legal personality to file a derivative suit. Where 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 has the capacity to file a derivative suit in behalf of and for the benefit of the
corporation. The reason is that, as earlier discussed, 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.

As to the Intestate Estate of John Young, Sr., permitting an executor or administrator to

represent or to bring suits on behalf of the deceased, do not prohibit the heirs from representing the
deceased. These rules are easily applicable to cases in which an administrator has already been
appointed. But no rule categorically addresses the situation in which special proceedings for the
settlement of an estate have already been instituted, yet no administrator has been appointed. In
such instances, the heirs cannot be expected to wait for the appointment of an administrator; then
wait further to see if the administrator appointed would care enough to file a suit to protect the
rights and the interests of the deceased; and in the meantime do nothing while the rights and the
properties of the decedent are violated or dissipated.
Topic: Preemptive Right

Case No. 380

Majority Stockholders of Ruby Industrial Corporation vs. Miguel Lim

G.R. No. 165887, June 6, 2011
Facts:

Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass

manufacturing. Reeling from severe liquidity problems, RUBY filed a petition for suspension of
payments with the Securities and Exchange Commission (SEC). Then, SEC issued an order declaring
RUBY under suspension of payments and enjoining the disposition of its properties pending hearing
of the petition, except insofar as necessary in its ordinary operations, and making payments outside
of the necessary or legitimate expenses of its business.

The SEC Hearing Panel created the management committee (MANCOM) for RUBY. The
MANCOM was tasked to perform certain functions such as, to undertake the management of RUBY
and the like. Subsequently, two (2) rehabilitation plans were submitted to the SEC. Over ninety
percent (90%) of RUBYs creditors objected to the Revised BENHAR/RUBY Plan and the creation of a
new management committee. Instead, they endorsed the minority stockholders Alternative Plan. At
the hearing of the petition for the creation of a new management committee, three (3) members of
the original management committee opposed the Revised BENHAR/RUBY Plan on grounds that:(1) it
would legitimize the entry of BENHAR, a total stranger, to RUBY as BENHAR would become the
biggest creditor of RUBY;(2) it would put RUBYs assets beyond the reach of the unsecured creditors
and the minority stockholders; and (3) it was not approved by RUBYs stockholders in a meeting
called for the purpose.

Notwithstanding the objections of 90% of RUBYs creditors and three members of the
MANCOM, the SEC Hearing Panel approved on September 18, 1991the Revised BENHAR/RUBY Plan
and dissolved the existing management committee. It also created a new management committee
and appointed BENHAR as one of its members. In addition to the powers originally conferred to the
management committee under Presidential Decree (P.D.) No. 902-A, the new management
committee was tasked to oversee the implementation by the Board of Directors of the revised
rehabilitation plan for RUBY.

Issue:

Is the minority’s pre-emptive rights were violated

Held:

Yes. Pre-emptive rights were violated. Pre-emptive right under Sec. 39 of the Corporation
Code refers to the right of a stockholder of a stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to their respective shareholdings. The right may be
restricted or denied under the articles of incorporation, and subject to certain exceptions and
limitations. The stockholder must be given a reasonable time within which to exercise their
preemptive rights. Upon the expiration of said period, any stockholder who has not exercised such
right will be deemed to have waived it.

The validity of issuance of additional shares may be questioned if done in breach of trust by
the controlling stockholders. Thus, even if the pre-emptive right does not exist, either because the
issue comes within the exceptions in Section 39 or because it is denied or limited in the articles of
incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust
and their primary purpose is to perpetuate or shift control of the corporation, or to "freeze out" the
minority interest. In this case, the following relevant observations should have signaled greater
circumspection on the part of the SEC -- upon the third and last remand to it pursuant to our January
20, 1998 decision -- to demand transparency and accountability from the majority stockholders, in
view of the illegal assignments and objectionable features of the Revised BENHAR/RUBY Plan, as
found by the CA and as affirmed by this Court:

There can be no gainsaying the well-established rule in corporate practice and procedure
that the will of the majority shall govern in all matters within the limits of the act of incorporation
and lawfully enacted by-laws not proscribed by law. It is, however, equally true that other
stockholders are afforded the right to intervene especially during critical periods in the life of a
corporation like reorganization, or in this case, suspension of payments, more so, when the majority
seek to impose their will and through fraudulent means, attempt to siphon off Ruby’s valuable assets
to the great prejudice of Ruby itself, as well as the minority stockholders and the unsecured
creditors.