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CORPLAW CASE DIGEST SET 3 1. Gokongwei Jr. vs. SEC and San Miguel Corp.
GR L-45911, 11 April 1979
Ayson 1. Gokongwei v. SEC "The power to amend the by-laws in order to protect the lawful
Dela Cruz 2. Pena v. Court of Appeals interests the corp."
Gervacio 3. China Banking Corp. v. Court of Appeals
Hourani 4. De la Rama v. Ma-ao Sugar Long case, I just included the ones relevant in our topic to make it
Lapuz 5. Tuason & Co. v. Bolanos shorter and to prevent confusion aa well.
Ledesma 6. Harden v. Benguet
Leveriza 7. Pirovano v. De la Rama
Lua 8. Filipinas Port Services v. Go Case:
Lim 9. Angeles v. Santos The majority stockholders of San Miguel Corp. (SMC) amended their
Miranda 10. Tan v. Sycip by-laws disqualifying Gokongwei for running as a Director of SMC
Molaer 11. Board of Liquidators v. Heirs of Maximo Kalaw since he is the majority stockholder and the president of Universal
Pacamarra 12. Montelibano v. Bacolod-Murcia Robina Corp. and CFC corp., and that these corporations are in
Rivera 13. Philippine Stock Exchange v. CA direct competition with the products of SMC. As a response,
Rovero 14. Ong Yong v. Tiu Gokongwei filed with the SEC a petition to nullify the said
Rubinos 15. Lipat v. Pacific Banking amendments. Furthermore, Gokongwei alleged that the secretary of
Rubio 16. Woodchild v. Roxas Electric the corporation precluded him from examining the books, records,
San Juan 17. Francisco v. GSIS and financial statements of San Miguel International inc., a fully-
Santos, F. 18. Westmont Bank v. Inland Construction owned subsidiary of SMC.
Santos, R 19. Associated Bank v. Pronstroller The SEC ruled that such amendments are valid; Gokongwei is
So Chan 20. Gokongwei , Jr. v. SEC entitled to the examination of the records of SMC, however denying
Sorongon 21. Lee v. CA him his right with regards to the examination of the documents of
Tamondong 22. Monfort v. Monfort San Miguel International Inc.
Torcuator 23. Valle Verde v. Africa
Velena 24. Western Institure of Technology v. Salas The Supreme Court held that the amendments are valid since the
Yogue 25. Palting v. San Jose power to prescribe the qualifications of directors is specifically
Zerrudo 26. Strategic Alliance v. Radstock provided by the Corporation Code. Furthermore, the amendments
are reasonable and not oppressive since a corporation has the right
to protect its interest. An amendment disqualfying a person from
running a s director wherein such person is engaged on businesses
in conflict with corporation is sustained on the grounds that a director
is on a fiduciary relationship with the corporation. He cannot serve
two masters in a sense that he cannot give advantage to another
without detriment to the other. Also, stated as a basis for the
sustainment of the amendments is the prevention of monopolies.
The SC also ruled that since San Miguel Inc. is a wholly-owned
subsidiary of SMC, Gokongwei is entitled to examine its records as
an extension of his right to examine the records of SMC.

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Facts: amendment was based on the


• On 22 October 1976, John Gokongwei Jr., as stockholder of 1961 authorization, Gokongwei
San Miguel Corporation, filed with the Securities and contended that the Board acted
Exchange Commission (SEC) a petition for "declaration of without authority and in
nullity of amended by-laws, cancellation of certificate of filing usurpation of the power of the
of amended by-laws, injunction and damages with prayer for stockholders.
a preliminary injunction" against the majority of the members - It was also claimed that prior to the questioned
of the Board of Directors and San Miguel Corporation as an amendment, Gokongwei had all the qualifications to
unwilling petitioner. be a director of the corporation, being a substantial
- Gokongwei alleged that on stockholder thereof; that as a stockholder,
18 September 1976, Andres Gokongwei had acquired rights inherent in stock
Soriano, Jr., Jose M. ownership, such as the rights to vote and to be
Soriano, Enrique Zobel, voted upon in the election of directors; and that
Antonio Roxas, Emeterio in amending the by-laws, Soriano, et. al.
Buñao, Walthrode B. purposely provided for Gokongwei's
Conde, Miguel Ortigas, and disqualification and deprived him of his vested
Antonio Prieto right as afore-mentioned, hence the amended by-
(Stockholders of San laws are null and void.
Miguel) amended by bylaws - As additional causes of action, it was alleged that
of the corporation, basing corporations have no inherent power to disqualify a
their authority to do so on a stockholder from being elected as a director and,
resolution of the therefore, the questioned act is ultra vires and void.
stockholders adopted on 13 - It was, therefore, prayed that the amended by-laws be
March 1961. declared null and void and the certificate of filing thereof
- It was contended that according be cancelled, and that Soriano, et. al. be made to pay
to section 22 of the Corporation damages, in specified amounts, to Gokongwei.
Law and Article VIII of the by- • On 28 October 1976, in connection with the same case,
laws of the corporation, the Gokongwei filed with the Securities and Exchange Commission an
power to amend, modify, repeal "Urgent Motion for Production and Inspection of Documents",
or adopt new by-laws may be alleging that the Secretary of the corporation refused to allow him
delegated to the Board of to inspect its records despite request made by Gokongwei for
Directors only by the affirmative production of certain documents enumerated in the request, and
vote of stockholders that the corporation had been attempting to suppress information
representing not less than 2/3 of from its stockholders despite a negative reply by the SEC to its
the subscribed and paid up query regarding their authority to do so.
capital stock of the corporation, • Subsequently, a Joint Omnibus Motion for the striking out of the
which 2/3 should have been motion for production and inspection of documents was filed by all
computed on the basis of the the respondents. This was duly opposed by petitioner.
capitalization at the time of the
amendment. Since the

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• On December 29, 1976, the Securities and Exchange Commission authority of the stockholders of San Miguel Corporation
resolved the motion for production and inspection of documents by to invest the funds of respondent corporation in San
issuing Order No. 26, Series of 1977, stating, in part as follows: Miguel International, Inc., until after the hearing on the
1. That respondents produce and permit the inspection, merits of the principal issues in the above-entitled case.
copying and photographing, by or on behalf of the
petitioner-movant, John Gokongwei, Jr., of the minutes of Issues:
the stockholders' meeting of the respondent San Miguel 2. Whether or not the provisions of the amended by-laws of
Corporation held on March 13, 1961, which are in the respondent corporation, disqualifying a competitor from
possession, custody and control of the said corporation, nomination or election to the Board of Directors are valid
it appearing that the same is material and relevant to the and reasonable;
issues involved in the main case. Accordingly, the 3. Whether or not respondent SEC gravely abused its
respondents should allow petitioner-movant entry in the discretion in denying petitioner's request for an examination
principal office of the respondent Corporation, San of the records of San Miguel International, Inc., a fully owned
Miguel Corporation on January 14, 1977, at 9:30 o'clock subsidiary of San Miguel Corporation.
in the morning for purposes of enforcing the rights herein
granted; it being understood that the inspection, copying Held:
and photographing of the said documents shall be 1. Yes
undertaken under the direct and strict supervision of this - Petitioner claims that the amended by-laws are invalid and
Commission. Provided, however, that other documents unreasonable because they were tailored to suppress the
and/or papers not heretofore included are not covered by minority and prevent them from having representation in the
this Order and any inspection thereof shall require the Board", at the same time depriving petitioner of his "vested
prior permission of this Commission; right" to be voted for and to vote for a person of his choice as
2. As to the Balance Sheet of San Miguel International, Inc. director.
as well as the list of salaries, allowances, bonuses, - Upon the other hand, respondents Andres M. Soriano, Jr.,
compensation and/or remuneration received by Jose M. Soriano and San Miguel Corporation content that ex.
respondent Jose M. Soriano, Jr. and Andres Soriano conclusion of a competitor from the Board is legitimate
from San Miguel International, Inc. and/or its successors- corporate purpose, considering that being a competitor,
in- interest, the Petition to produce and inspect the same petitioner cannot devote an unselfish and undivided Loyalty
is hereby DENIED, as petitioner-movant is not a to the corporation; that it is essentially a preventive measure
stockholder of San Miguel International, Inc. and has, to assure stockholders of San Miguel Corporation of
therefore, no inherent right to inspect said documents; reasonable protective from the unrestrained self-interest of
3. In view of the Manifestation of petitioner-movant dated those charged with the promotion of the corporate enterprise;
November 29, 1976, withdrawing his request to copy and that access to confidential information by a competitor may
inspect the management contract between San Miguel result either in the promotion of the interest of the competitor
Corporation and A. Soriano Corporation and the renewal at the expense of the San Miguel Corporation, or the
and amendments thereof for the reason that he had promotion of both the interests of petitioner and respondent
already obtained the same, the Commission takes note San Miguel Corporation, which may, therefore, result in a
thereof; and combination or agreement in violation of Article 186 of the
4. Finally, the Commission holds in abeyance the resolution Revised Penal Code by destroying free competition to the
on the matter of production and inspection of the detriment of the consuming public. It is further argued that

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there is not vested right of any stockholder under Philippine privilege to regulate the disposition of his property which he
Law to be voted as director of a corporation. has invested in the capital stock of the corporation, and
- AUTHORITY OF CORPORATION TO PRESCRIBE surrendered it to the will of the majority of his fellow
QUALIFICATIONS OF DIRECTORS EXPRESSLY incorporators. ... It cannot therefore be justly said that the
CONFERRED BY LAW. contract, express or implied, between the corporation and
- It is recognized by an authorities that 'every corporation the stockholders is infringed ... by any act of the former
has the inherent power to adopt by-laws 'for its internal which is authorized by a majority ... ."
government, and to regulate the conduct and prescribe - Pursuant to section 18 of the Corporation Law, any
the rights and duties of its members towards itself and corporation may amend its articles of incorporation by a vote
among themselves in reference to the management of its or written assent of the stockholders representing at least
affairs. At common law, the rule was "that the power to two-thirds of the subscribed capital stock of the corporation If
make and adopt by-laws was inherent in every the amendment changes, diminishes or restricts the rights of
corporation as one of its necessary and inseparable the existing shareholders then the disenting minority has only
legal incidents. And it is settled throughout the United one right, viz.: "to object thereto in writing and demand
States that in the absence of positive legislative payment for his share." Under section 22 of the same law,
provisions limiting it, every private corporation has this the owners of the majority of the subscribed capital stock
inherent power as one of its necessary and inseparable may amend or repeal any by-law or adopt new by-laws. It
legal incidents, independent of any specific enabling cannot be said, therefore, that petitioner has a vested right to
provision in its charter or in general law, such power of be elected director, in the face of the fact that the law at the
self-government being essential to enable the time such right as stockholder was acquired contained the
corporation to accomplish the purposes of its creation. prescription that the corporate charter and the by-law shall
- In this jurisdiction, under section 21 of the Corporation be subject to amendment, alteration and modification.
Law, a corporation may prescribe in its by-laws "the - A DIRECTOR STANDS IN A FIDUCIARY RELATION TO
qualifications, duties and compensation of directors, THE CORPORATION AND ITS SHAREHOLDERS.
officers and employees ... " This must necessarily refer - Although in the strict and technical sense, directors of a
to a qualification in addition to that specified by section private corporation are not regarded as trustees, there
30 of the Corporation Law, which provides that "every cannot be any doubt that their character is that of a
director must own in his right at least one share of the fiduciary insofar as the corporation and the
capital stock of the stock corporation of which he is a stockholders as a body are concerned. As agents
director ... " entrusted with the management of the corporation for
- NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED the collective benefit of the stockholders, "they occupy a
DIRECTOR fiduciary relation, and in this sense the relation is one of
- Any person "who buys stock in a corporation does so with trust."
the knowledge that its affairs are dominated by a majority of - In Pepper v. Litton, Justice Douglas stated:
the stockholders and that he impliedly contracts that the will "A director is a fiduciary. ... Their powers are
of the majority shall govern in all matters within the limits of powers in trust. ... He who is in such fiduciary
the act of incorporation and lawfully enacted by-laws and not position cannot serve himself first and his cestuis
forbidden by law."To this extent, therefore, the stockholder second. ... He cannot manipulate the affairs of his
may be considered to have "parted with his personal right or corporation to their detriment and in disregard of
the standards of common decency. He cannot by

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the intervention of a corporate entity violate the two entities with competing interests. This doctrine rests
ancient precept against serving two masters ... He fundamentally on the unfairness, in particular
cannot utilize his inside information and strategic circumstances, of an officer or director taking advantage
position for his own preferment. He cannot violate of an opportunity for his own personal profit when the
rules of fair play by doing indirectly through the interest of the corporation justly calls for protection.
corporation what he could not do so directly. He - t is not denied that a member of the Board of Directors
cannot violate rules of fair play by doing indirectly of the San Miguel Corporation has access to sensitive
though the corporation what he could not do so and highly confidential information, such as: (a)
directly. He cannot use his power for his personal marketing strategies and pricing structure; (b) budget
advantage and to the detriment of the for expansion and diversification; (c) research and
stockholders and creditors no matter how development; and (d) sources of funding, availability of
absolute in terms that power may be and no personnel, proposals of mergers or tie-ups with other
matter how meticulous he is to satisfy technical firms.
requirements. For that power is at all times - It is obviously to prevent the creation of an opportunity
subject to the equitable limitation that it may not for an officer or director of San Miguel Corporation, who
be exercised for the aggrandizement, preference is also the officer or owner of a competing corporation,
or advantage of the fiduciary to the exclusion or from taking advantage of the information which he
detriment of the cestuis." acquires as director to promote his individual or
- AN AMENDMENT TO THE CORPORATION BY-LAW corporate interests to the prejudice of San Miguel
WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE Corporation and its stockholders, that the questioned
DIRECTOR, IF HE BE ALSO DIRECTOR IN A amendment of the by-laws was made. Certainly, where
CORPORATION WHOSE BUSINESS IS IN COMPETITION two corporations are competitive in a substantial sense,
WITH THAT OF THE OTHER CORPORATION, HAS BEEN it would seem improbable, if not impossible, for the
SUSTAINED AS VALID. director, if he were to discharge effectively his duty, to
- section 21 of the Corporation Law expressly provides that a satisfy his loyalty to both corporations and place the
corporation may make by-laws for the qualifications of performance of his corporation duties above his
directors. Thus, it has been held that an officer of a personal concerns.
corporation cannot engage in a business in direct - In McKee the Court further listed qualificational by-laws
competition with that of the corporation where he is a director upheld by the courts, as follows:
by utilizing information he has received as such officer, under 1. A director shall not be directly or indirectly
"the established law that a director or officer of a corporation interested as a stockholder in any other firm,
may not enter into a competing enterprise which cripples or company, or association which competes with the
injures the business of the corporation of which he is an subject corporation.
officer or director." 2. A director shall not be the immediate member of the
- It is also well established that corporate officers "are not family of any stockholder in any other firm,
permitted to use their position of trust and confidence to company, or association which competes with the
further their private interests. subject corporation,
- The doctrine of "corporate opportunity" is precisely a 3. A director shall not be an officer, agent, employee,
recognition by the courts that the fiduciary standards attorney, or trustee in any other firm, company, or
could not be upheld where the fiduciary was acting for

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association which compete with the subject - Pursuant to the second paragraph of section 51 of the Corporation
corporation. Law, "(t)he record of all business transactions of the corporation
4. A director shall be of good moral character as an and minutes of any meeting shall be open to the inspection of any
essential qualification to holding office. director, member or stockholder of the corporation at reasonable
5. No person who is an attorney against the hours."
corporation in a law suit is eligible for service on the - The stockholder's right of inspection of the corporation's books
board. and records is based upon their ownership of the assets and
- There is another important consideration in determining property of the corporation. It is, therefore, an incident of
whether or not the amended by-laws are reasonable. The ownership of the corporate property, whether this ownership or
Constitution and the law prohibit combinations in interest be termed an equitable ownership, a beneficial ownership,
restraint of trade or unfair competition. Thus, section 2 or a ownership.
of Article XIV of the Constitution provides: "The State - This right is predicated upon the necessity of self-protection. It is
shall regulate or prohibit private monopolies when the generally held by majority of the courts that where the right is
public interest so requires. No combinations in restraint granted by statute to the stockholder, it is given to him as such
of trade or unfair competition shall be allowed." and must be exercised by him with respect to his interest as a
- Article 186 of the RPC also punishes persons entering or stockholder and for some purpose germane thereto or in the
conspiring to form monopolies. interest of the corporation. In other words, the inspection has to be
- There are other legislation in this jurisdiction, which germane to the petitioner's interest as a stockholder, and has to
prohibit monopolies and combinations in restraint of be proper and lawful in character and not inimical to the interest of
trade. the corporation.
- Basically, these anti-trust laws or laws against - While the right of a stockholder to examine the books and records
monopolies or combinations in restraint of trade are of a corporation for a lawful purpose is a matter of law, the right of
aimed at raising levels of competition by improving the such stockholder to examine the books and records of a wholly-
consumers' effectiveness as the final arbiter in free owned subsidiary of the corporation in which he is a stockholder is
markets. These laws are designed to preserve free and a different thing.
unfettered competition as the rule of trade. "It rests on - In his "Urgent Motion for Production and Inspection of Documents"
the premise that the unrestrained interaction of before respondent SEC, petitioner contended that respondent
competitive forces will yield the best allocation of our corporation "had been attempting to suppress information for the
economic resources, the lowest prices and the highest stockholders" and that petitioner, "as stockholder of respondent
quality ... ." they operate to forestall concentration of corporation, is entitled to copies of some documents which for
economic power. The law against monopolies and some reason or another, respondent corporation is very reluctant
combinations in restraint of trade is aimed at contracts in revealing to the petitioner notwithstanding the fact that no harm
and combinations that, by reason of the inherent nature would be caused thereby to the corporation." There is no question
of the contemplated acts, prejudice the public interest that stockholders are entitled to inspect the books and records of a
by unduly restraining competition or unduly obstructing corporation in order to investigate the conduct of the management,
the course of trade. determine the financial condition of the corporation, and generally
take an account of the stewardship of the officers and directors.
2. Yes (Well actually the Court did not categorically state that - In the case at bar, considering that the foreign subsidiary is
SEC gravely abused its discretion, it just allowed petitioner wholly owned by respondent San Miguel Corporation and,
to examine whether he books of San Miguel Int'l.)

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therefore, under its control, it would be more in accord with 2. PENA vs COURT OF APPEALS
equity, good faith and fair dealing to construe the statutory
right of petitioner as stockholder to inspect the books and By-law provisions on the required quorum for special meetings of the
records of the corporation as extending to books and records Board have the force of law and are binding even on third-parties
of such wholly subsidiary which are in respondent who deal with the properties of the corporation.
corporation's possession and control.
CASE:
FINAL VERDICT: In resume, subject to the qualifications
aforestated judgment is hereby rendered GRANTING the PAMBUSCO took out a loan from the DBP. PAMBUSCO used the
petition by allowing petitioner to examine the books and parcels of land it owns to secure the loan. Due to PAMBUSCO’s
records of San Miguel International, Inc. as specified in the nonpayment, DBP foreclosed the parcels of land. Rosita Peña was
petition. The petition, insofar as it assails the validity of the the highest bidder. Board of PAMBUSCO through a resolution
amended by- laws and the ratification of the foreign investment assigned the properties to Enriquez who excercised its right to
of respondent corporation, for lack of necessary votes, is redeem and sold to Yap. Yap demanded Pena to vacate. Pena now
hereby DISMISSED. questions the validity of the board resolution. The SC held that the
assailed resolution is void. The by-laws are the laws of the
corporation. PAMBUSCO’s by-laws provides that a quorum consists
of at least four directors. Hence, the meeting attended by only three
directors did not comply with the required quorum. Peña being a
third person, she can question the board resolution. The resolution
here is liken to a contract. Under the law, a person who is not a party
obliged principally or subsidiarily in a contract may exercise an action
for nullity of the contract if he or she is prejudiced in his or her rights
with respect to one of the contracting parties, and can show the
detriment which would positively result to him or her from the
contract in which he or she had no intervention.

FACTS:
• In 1962 - the Pampanga Bus Company (PAMBUSCO) took out a
loan from the Development Bank of the Philippines (DBP).
PAMBUSCO used the parcels of land it owns to secure the loan.
• October 1974 - Due to PAMBUSCO’s nonpayment, DBP
foreclosed the parcels of land. Rosita Peña was the highest
bidder.
• Meanwhile, in November 1974, the Board of Directors of
PAMBUSCO had a meeting. The meeting was attended by only
3 out of the 5 Directors. In the said meeting, the Board, through a
resolution, authorized one of the directors, Atty. Joaquin Briones,
to assign the properties of PAMBUSCO.
• Pursuant to the resolution, Briones assigned PAMBUSCO’s

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assets to Marcelino Enriquez. Enriquez, knowing that the • Major Point 2: Under Section 30 of the then applicable
properties were previously mortgaged and foreclosed, exercised Corporation Law, only persons who own at least one (1) share in
PAMBUSCO’s right to redeem. their own right may qualify to be directors of a corporation.
• So in August 1975, he redeemed the said properties and Further, under Section 28 1/2 of the said law, the sale or
thereafter he sold them to Rising Yap. disposition of all and/or substantially all properties of the
• Yap then registered the properties under his name. He then corporation requires, in addition to a proper board resolution, the
demanded Peña to vacate the properties. Peña refused to do affirmative votes of the stockholders holding at least two-thirds
hence Yap filed a complaint. (2/3) of the voting power in the corporation in a meeting duly
• In her defense, Peña averred that Yap acquired no legal title called for that purpose. No doubt, the questioned resolution was
over the property because the board resolution issued by not confirmed at a subsequent stockholders meeting duly called
PAMBUSCO in November 1974 is void; that it is void because for the purpose by the affirmative votes of the stockholders
the resolution was issued without a quorum; that there was no holding at least two-thirds (2/3) of the voting power in the
quorum because under the by-laws of PAMBUSCO, a quorum corporation. The same requirement is found in Section 40 of the
constitutes the presence of 4 out of 5 directors yet the meeting present Corporation Code.
was only attended by three directors. As such, the authority o In this case, the three (3) alleged directors who attended
granted to Briones to assign the properties is void; that the the special meeting on November 19,1974 were not
subsequent assignment by Briones to Enriquez is void; that listed as directors of respondent PAMBUSCO in the
Enriquez acquired no title hence, likewise, Yap acquired no title. latest general information sheet of respondent
Yap insists that Peña has no legal standing to question the board PAMBUSCO filed with the SEC dated 18 March 1951.
resolution because she is not a stockholder. Similarly, the latest list of stockholders of respondent
PAMBUSCO on file with the SEC does not show that the
ISSUE: Whether or not the board resolution is valid. said alleged directors were among the stockholders of
respondent PAMBUSCO.
HELD& RATIO: • Major Point 3: Petitioner has legal standing because her rights
NO, it is void. are adversely affected.
• Major Point 1: The by-laws of a corporation are its own private o Respondent court held that petitioner being a stranger to
laws which substantially have the same effect as the laws of the the questioned resolution and series of succeeding
corporation. They are in effect, written, into the charter. In this transactions has no legal standing to question their
sense they become part of the fundamental law of the validity.
corporation with which the corporation and its directors and o Teves vs. People’s Homesite and Housing Corporation:
officers must comply. We note however, in reading the complaint that the
o Apparently, only three (3) out of five (5) members of the plaintiff is seeking the declaration of the nullity of the
board of directors of respondent PAMBUSCO convened deed of sale, not as a party in the deed, or because she
on November 19, 1974 by virtue of a prior notice of a is obliged principally or subsidiarily under the deed, but
special meeting. There was no quorum to validly because she has an interest that is affected by the deed.
transact business since, under Section 4 of the amended This Court has held that a person who is not a party
by-laws hereinabove reproduced, at least four (4) obliged principally or subsidiarily in a contract may
members must be present to constitute a quorum in a exercise an action for nullity of the contract if he is
special meeting of the board of directors of respondent prejudiced in his rights with respect to one of the
PAMBUSCO. contracting parties, and can show the detriment

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which would positively result to him from the of the donation in the same and in a separate
contract in which he had no intervention, Indeed, in document, the said deed of assignment is thus
the case now before Us, the complaint alleges facts void ab initio and of no force and effect.
which show that plaintiff suffered detriment as a result of FINAL VERDICT: Petition GRANTED.
the deed of sale entered into by and between defendant
PHHC and defendant Melisenda L. Santos. We believe
that the plaintiff should be given a chance to present
evidence to establish that she suffered detriment and
that she is entitled to relief.”
o There can be no question in this case that the
questioned resolution and series of transactions
resulting in the registration of the properties in the name
of respondent Yap spouses adversely affected the rights
of petitioner to the said properties. Consequently,
petitioner has the legal standing to question the validity
of said resolution and transactions.
• Minor Point 1: Liberality as a consideration in the deed of
assignment of the respondent PAMBUSCO in favor of its former
corporate officer for services rendered is not just an ordinary
deed of assignment but a donation.
o Respondent court, in upholding the questioned deed of
assignment, which appears to be without any
consideration at all, held that the consideration thereof is
the liberality of the respondent PAMBUSCO in favor of
its former corporate officer, respondent Enriquez, for
services rendered.
o Assuming this to be so, then as correctly argued by
petitioner, it is not just an ordinary, deed of assignment,
but is in fact a donation.
§ Under Article 725 of the Civil Code, in order to
be valid, such a donation must be made in a
public document and the acceptance must be
made in the same or in a separate instrument. In
the latter case, the donor shall be notified of the
acceptance in an authentic form and such step
must be noted in both instruments.
§ Non-compliance with this requirement renders
the donation null and void. Since undeniably the
deed of assignment dated March 8, 1975 in
question, shows that there was no acceptance

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3. CHINA BANKING CORPORATION, vs.COURT OF APPEALS, • VGCCI cannot due to Calapatia’s unsettled accounts with them
and VALLEY GOLF and COUNTRY CLUB, INC. • Public auction was still held, CBC highest bidder at P20k for the
Binding Effects on By-laws on the Dealing Public: pledged stock, was issued a Certificate of Sale

CASE:
• VGCCI sent Calapatia a notice demanding full payment of his
overdue account = P18,783.24, 2 notices followed
Calapatia was a stockholder of private respondent Valley
Golf & Country Club, Inc. (VGCCI). He pledged his Stock Certificate • VGCCI had a notice of auction sale published in the Daily Exress,
No.1219 to petitioner China Banking Corporation (CBC). Eventually of Calapatia’s Stock Certificate No. 1219
Calapatia was unable to pay CBC thus an extrajudicial foreclosure • VGCCI informed Calapatia of the latter’s termination of
and a public sale ensued, CBC as the highest bidder. CBC informed membership due to the sale of his share of stock
VGCCI of such and requested that the stock certificate be • CBC advised VGCCI that they were the new owner of SC 1219 by
transferred to CBCs name. VGCCI refused since Calapatia has virtue of the 1st auction
unsettled accounts w them. VGCCI held a public sale of the same
stock certificate. There was a question o which had the right to sell
• VGCCI said that the same was sold at a public auction for P25k
the Stock Certificate in dispute. The Court held (as SEC held • CBC protested the sale by VGCCI, filed at the RTC Makati for
previously) that CBC had the better right. According to the principle nullification of auction and issuance of a new stock certificate
on the binding effect of the by-laws, it is the generally accepted rule • RTC Decision - dismissed the complaint - lack of J over subject
that third persons are not bound by by-laws, except when they have matter involving an intra-corporate dispute ; MR denied as well
knowledge of the provisions either actually or constructively.CBC as • CBC filed with the SEC - for nullification of sale, cancellation and
a third party can not be bound by appellee-respondent's by-laws. It issuance of new SC
must be recalled that when appellee-respondent communicated to
appellant-petitioner bank that the pledge agreement was duly noted
• SEC Decision - in favor of VGCCI, that they had a valid reason not
to transfer the share in CBCs name until liquidation of the
in the club's books there was no mention of the shareholder- delinquency
pledgor's unpaid accounts. Thus CBC was in good faith when the
pledge agreement was contracted • SEC en banc Decision - reversed; CBC has a prior right over the
SC; VGCCI appeal denied
• VGCCI sought redress from CA
FACTS: • CA Decision - set aside SEC Orders; declared that the controversy
• Calapatia, stockholder of private respondent Valley Golf & Country between CBC and VGCCI is not intra-corporate; MR denied
Club, Inc. (VGCCI) pledged his Stock Certificate No.1219 to
petitioner China Banking Corporation (CBC) ISSUES:
• CBC wrote VGCCI requesting that the pledge be recorded, latter - Whether or not SEC has jurisdiction over the case
replied said it was duly noted - Whether or not VGCCI had the right to sell the SC1219
• Calapatia obtaining P20k loan from CBC, secured by the pledge • question on good faith since VGCCI only began
agreement sending notices of delinquency to Calapatia AFTER
• CBC filed a petition to extrajudicial foreclosure when Calapatia it was informed by CBC of the foreclosure
failed to pay the loan
• CBC informed VGCCI of the foreclosure and requested that the
pledged stock be transferred to CBC’s name and to be recorded

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HELD & RATIO: 4. De La Rama et al. v. Ma-ao Sugar & Araneta et al.
1. YES. SEC has jurisdiction - In this case, the need for the Authority to Invest, By-Laws
SEC's technical expertise cannot be over-emphasized
involving as it does the meticulous analysis and correct CASE:
interpretation of a corporation's by-laws as well as the
applicable provisions of the Corporation Code in order to In the instant case minority stock holders De La Rama et al. are
determine the validity of VGCCI's claims. The SEC, filing a complaint against the Ma-aso Sugar Corp. and Araneta
therefore, took proper cognizance of the instant case.Parties et al. because the latter are directors that have allegedly acted
explicitly stipulated therein that the pledge will also stand as outside of their scope of authority. The lower court issued an
security for any future advancements injunction against the latter that no further loans be granted to
2. NO - it is the generally accepted rule that third persons are the BOD and that they not be allowed to invest in other
not bound by by-laws, except when they have knowledge of corporations because this would require authorization from the
the provisions either actually or constructively. shareholders of RES Corporation. This was because there were
• VGCCI says CBC is bound by their by-laws becauseCBC in fact investments in Acoje Mining, Mabuhay Printing and other
had actual knowledge of it when CBC foreclosed the pledge corporations that had nothing to do with making sugar. The
made by Calapatia and when CBC purchased the share lower court also ruled that AMADO ARANETA pay back the
foreclosed. Because of this actual knowledge of such by- loans that he had with the corporation in the amount of 46,270
laws then the same bound the CBC as of the time when PHP. The Supreme Court in ruling whether or not these
CBC purchased the share. —> NOT TRUE remedies were proper made reference to the by-laws of the
corporation, which prohibited the directors from taking out
• In order to be bound, the third party must have acquired loans from the same. The injunction on further investments was
knowledge of the pertinent by-laws at the time the
struck down as being improper though because the court,
transaction or agreement between said third party and the
making reference to the Corporation Law, which prohibits
shareholder was entered into, in this case, at the time the
investments in unrelated endeavors w/o the approval of 2/3rds
pledge agreement was executed. VGCCI could have easily
of the stockholders, explained that any investment, which is not
informed CBC of its by-laws when it sent notice formally
in an interest, that is in line with the corporations but is
recognizing CBC as pledgee of one of its shares registered
necessary for the purpose or purposes of said corporation as
in Calapatia's name. CBC’s belated notice of said by-laws at
provided in their by-laws, is something which does not require
the time of foreclosure will not suffice.
the approval of shareholders. [ex. A sugar company investing in
• SEC ruling: CBC as a third party can not be bound by a printing company so it can have labels for their sugar.]
appellee-respondent's by-laws. It must be recalled that when FACTS:
appellee-respondent communicated to appellant-petitioner
• PETs are minority stock holders in the Ma-ao Sugar
bank that the pledge agreement was duly noted in the club's
Central Co. and they are filing a case against the
books there was no mention of the shareholder-pledgor's
corporation and certain members of the Board of
unpaid accounts. Thus CBC was in good faith when the
Directors (BOD) AMADO ARANETA, MRS. RAMON S.
pledge agreement was contracted
ARANETA, ROMUALDO M. ARANETA, and RAMON A.
YULO. The complaint alleged that during the period
FINAL VERDICT: Petition is GRANTED.
from 1946 to 1952 there were 5 causes of action: (1) for
alleged illegal and ultra-vires acts consisting of self-
dealing irregular loans, and unauthorized investments;

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(2) for alleged gross mismanagement; (3) for alleged contravention of the bylaws of the corporation which did
forfeiture of corporate rights warranting dissolution; (4) not allow a director to take loans form the same. 5.
for alleged damages and attorney's fees; and (5) for Diversion of corporate funds as follows.
receivership.
• They prayed that (1) The transactions be annulled (2) J. Amado Araneta & Co. P243,415.62
that the defendants be held liable personally for damage
caused (3) the corporation be dissolved and the assets Luzon Industrial Corp. 585,918.17
be redistributed (4) 300,000 be awarded by way of
damages (5) the corporation presentply be placed in Associated Sugar 463,860.36
receivership.
• Defendants denied all the causes of action as having no General Securities 86,743.65
basis in fact. They responded to the individual
allegations in this manner: (1) that the complaint "is Bacolod Murcia 501,030.61
premature, improper and unjustified"; (2) that plaintiffs
did not make an "earnest, not simulated effort" to Central Azucarera del Danao 97,884.42
exhaust first their remedies within the corporation
Talisay-Silay 4,365.90
before filing their complaint; (3) that no actual loss had
been suffered by the defendant corporation on account • These funds were delivered without approval of the BOD
of the transactions questioned by plaintiffs; (4) that the in violation of the corporate by-laws. The lower court
payments by the debtors of all amounts due to the ruled against herein PETs because of the following
defendant corporation constituted a full, sufficient and provision in the corporation law “No corporation
adequate remedy for the grievances alleged in the organized under this act shall invest its funds in any
complaint and (5) that the dissolution and/or other corporation or business or for any purpose other
receivership of the defendant corporation would violate than the main purpose for which it was organized unless
and impair the obligation of existing contracts of said its board of directors has been so authorized in a
corporation. resolution by the affirmative vote of stockholders
• The lower court did not grant the petition for dissolution holding shares in the corporation entitling them to
but directed the respective members of the BOD exercise at least two-thirds of the voting power on such
impleaded to pay 46,270 PHP and ordered the injunction proposal at the stockholders' meeting called for the
on the taking of loans and investing further in printing purpose.”
and mining of other companies. (Acoje Mining, Mabuhay
Printing) ISSUES:
• Hence the appeal by both parties. 1. W/N the lower court erred in ruling that RES were liable
• The court took notice of certain facts: 1. No regular in the amount of 46,270 PHP
stock meetings were held for the period of 1947 – 1950. 2. W/N the lower court erred in not ordering the
2. There were irregularities in the keeping of the books. corporation insolvent, the actions of RES did not
3. There were illegal investments in Mabuhay Printing constitute mismanagement, and that the corporation
and Acoje Mining in the amount of 2,280 PHP and 7,000 should not be dissolved.
PHP respectively. 4. Amado Araneta was indebted to the
corporation in the amount of 132,082 PHP in

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HELD & RATIO: 5. TUASON V BOLANOS


• NO, “The Directors shall not in any case borrow money from Corporation undertaking a joint venture
the Company. (Sec. III, Art. 7)” is part of the by laws of the
corporation. This was a clear contravention of the corporate CASE:
by-laws and therefore illegal. In this case, the plaintiff’s complaint against defendant was
• NO, The SC held “(1) that the evidence presented did not to recover possession of a registered land. In the complaint, the
show that the defendant Ma-ao Sugar Company was plaintiff is represented by its Managing Partner, Gregorio Araneta,
insolvent (2) that the alleged discriminatory acts committed Inc.,another corporation. Defendant, in his answer, sets up
by the defendant Central against the planters were not a prescription and title in himself thru"open, continuous, exclusive and
proper subject of derivative suit, but, at most, constituted a public and notorious possession under claim of ownership,adverse to
cause of action of the individual planters; and (3) that the the entire world by defendant and his predecessors in interest" from
acts of mismanagement complained of and proved do not “time immemorial". After trial, the lower court rendered judgment for
justify a dissolution of the corporation.” In ruling this way the plaintiff, declaring defendant to be without any right to the land in
court took cognizance of the PETs argument which relied on question and ordering him to restore possession thereof to plaintiff
this provision of the corporation law “No corporation and to pay the latter a monthly rent. Defendant appealed directly to
organized under this act shall invest its funds in any other the Supreme Court and contended, among others, that Gregorio
corporation or business, or for any purpose other than the Araneta, Inc. can not act as managing partner for plaintiff on the
main purpose for which it was organized, unless its board of theory that it is illegal for two corporations to enter into a partnership.
directors has been so authorized in a resolution by the
affirmative vote of stockholders holding shares in the So the issue here is whether or not a corporation may enter
corporation entitling them to exercise at least two-thirds of into a joint venture with another corporation.
the voting power on such proposal at a stockholders'
meeting called for the purpose ....” The SC in resolving Although it is true that the complaint states that the plaintiff is
whether the same applied to the instant case referred to a "represented herein by its Managing Partner Gregorio Araneta, Inc.",
book written by Professor Sulpicio S. Guevara. It was much another corporation, but there is nothing against one corporation
longer but basically it said there that nay investment for a being represented by another person, natural or juridical, in a suit in
purpose in line with what the corporations purpose as set out court. The contention that Gregorio Araneta, Inc. cannot act as
in its by-laws is will not require the conformation of the stock managing partner for plaintiff on the theory that it is illegal for two
holders or a resolution allowing he BOD to act. Therefore the corporations to enter into a partnership is without merit, for the true
investments referred to earlier did not constitute any of the rule is that "though a corporation has no power to enter into a
violations that the plaintiffs are attributing to the respondents partnership, it may nevertheless enter into a joint venture with
in the instant case as they were necessary for the purpose of another where the nature of that venture is in line with the business
the corporation. Therefore the injunction on investments was authorized by its charter." There is nothing in the record to indicate
improper. that the venture in which plaintiff is represented by Gregorio Araneta,
Inc. as "its managing partner" is not in line with the corporate
FINAL VERDICT: In view of the foregoing, the injunction not allowing business of either of them
the RES corporation to invest in Acoje Mining, and Mabuhay Printing
is hereby lifted.

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has no power to enter into a partnership, it may


FACTS: nevertheless enter into a joint venture with another where
• Plaintiff's complaint was amended three times with respect to the nature of that venture is in line with the business
the extent and description of the land sought to be authorized by its charter." (Wyoming-Indiana Oil Gas Co. vs.
recovered. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp.,
• Original complaint described the land as a portion of a lot 1082.) There is nothing in the record to indicate that the
registered in plaintiff's name in Rizal Province and as venture in which plaintiff is represented by Gregorio
containing an area of 13 hectares more or less. Araneta, Inc. as "its managing partner" is not in line with the
• the complaint was amended by reducing the area of 6 corporate business of either of them.
hectares, more or less
• second amendment became necessary and was allowed FINAL VERDICT: Petition is denied. The RTC decisions is affirmed.
following the testimony of plaintiff's surveyors that a portion
of the area was embraced in another certificate of title
• later, in the course of trial, after defendant's surveyor and
witness had testified that the area occupied and claimed by
defendant was about 13 hectares
• Defendant, in his answer, sets up prescription and title in
himself thru "open, continuous, exclusive and public and
notorious possession (of land in dispute) under claim of
ownership, adverse to the entire world by defendant and his
predecessor in interest" from "time in-memorial”
• further alleges that Gregorio Araneta,inc. may not act as a
managing partner as it is a corporation and corporations are
not permitted to enter into a joint venture

• lower court rendered judgment for plaintiff, declaring


defendant to be without any right to the land in question

ISSUES:
1. Pertinent issue here is whether or not a corporation may
enter into a joint venture

HELD & RATIO:


1. Yes, provided that it is provided for in its chapter.

The contention that Gregorio Araneta, Inc. can not


act as managing partner for plaintiff on the theory that it is
illegal for two corporations to enter into a partnership is
without merit, for the true rule is that "though a corporation

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6. Harden vs Benguet Consolidated Mining Co. • The Benguet Consolidated Mining Co. was organized in
Ultra Vires Doctrine June, 1903, as a sociedad anonima in conformity with the
provisions of Spanish law; while the Balatoc Mining Co. was
CASE: organized in December 1925, as a corporation, in conformity
Petitioners, are F.M. Harden as stockowner of thousands of with the provisions of the Corporation Law (Act No. 1459).
shares of Balantoc, and stockholders of that company. Benguet and Both entities were organized for the purpose of engaging in
Balatoc are both corporations engaged in the business of mining the mining of gold in the Philippine Islands, and their
gold in the Philippines. Benguet entered into an agreement with respective properties are located only a few miles apart in
Balatoc Company wherein Benguet would develop and construct a the subprovince of Benguet.
milling plant for Balatoc, and also erect a power plant with the aerial • A contract was formally authorized by the management of
tramlines and such other surface buildings as might be needed to both companies, was executed on March 9, 1927, the
operate the mine. In return Benguet Company should receive from principal features of which were that the Benguet Company
Balatoc Company shares of a par value of P600,000, in payment. was to proceed with the development and construct a milling
However, Section 75 of the Philippine Bill prohibits corporations plant for the Balatoc mine, of a capacity of 100 tons of ore
engaged in mining and members of such from being interested in per day, and with an extraction of at least 85 per cent of the
any other corporations engaged in mining. And that violation of this, gold content. The Benguet Company also agreed to erect an
is to be prosecuted by the Attorney-General in the name of the appropriate power plant, with the aerial tramlines and such
Philippines in a criminal action. other surface buildings as might be needed to operate the
The Court held that given the penalties of the law, it can only mine.
be maintained by the Attorney-General in a criminal action. • In return for this it was agreed that the Benguet Company
Petitioners here are filing a civil action in which, their rights were not should receive from the treasurer of the Balatoc Company
violated. The Court pointed that the above provision was a matter of shares of a par value of P600,000, in payment for the first
public policy in controlling the grant of mining rights. It was held that P600,000 be thus advanced to it by the Benguet Company.
no civil wrong was committed, and if there is any criminal wrong, • The performance of this contract was speedily begun, and
Harden was an inducer in committing it. by May 31, 1929, the Benguet Company had spent upon the
development the sum of P1,417,952.15. In compensation for
OUTLINE: Although the arrangements between the two mining this work a certificate for six hundred thousand shares of the
companies was prohibited under the terms of the Corporation Law, stock of the Balatoc Company has been delivered to the
the Supreme Court did not declare the nullity of the agreements on Benguet Company, and the excess value of the work in the
the ground that only private rights and interests, not public interests, amount of P817,952.15 has been returned to the Benguet
were involved in the case. Company in cash.
• Meanwhile dividends of the Balatoc Company have been
FACTS: enriching its stockholders.
• F. M. Harden, acting in his own behalf and that of all other • While the Benguet Company was pouring its million and a
stockholders of the Balatoc Mining Co. who might join in the half into the Balatoc property, the arrangements made
action and contribute to the expense of the suit. The between the two companies appear to have been viewed by
defendants are the Benguet Consolidated Mining Co., the the plaintiff Harden with complacency, he being the owner of
Balatoc Mining Co., H. E. Renz, John W. Haussermann, and many thousands of the shares of the Balatoc Company. But
A. W. Beam. as soon as the success of the development had become
apparent, he began this litigation in which he has been

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joined by two others of the eighty shareholders of the • Benguet Company has committed no civil wrong
Balatoc Company. against the plaintiffs, and if a public wrong has been
• Act of Congress of August 29, 1916, states "... it shall be committed, the directors of the Balatoc Company,
unlawful for any member of a corporation engaged in and the plaintiff Harden himself, were the active
agriculture or mining and for any corporation organized for inducers of the commission of that wrong. The
any purpose except irrigation to be in any wise interested in contract, supposing it to have been unlawful in fact,
any other corporation engaged in agriculture or in mining." has been performed on both sides, by the building of
• The Act as amended contains a penal penalty the Balatoc plant by the Benguet Company and the
o SEC. 190 (A). Penalties. — The violation of any of delivery to the latter of the certificate of 600,000
the provisions of this Act and its amendments not shares of the Balatoc Company.
otherwise penalized therein, shall be punished by a • Much more is that idea applicable to the situation
fine of not more than five thousand pesos and by now before us, where the special provisions give
imprisonment for not more than five years, in the ample remedies for the enforcement of the law by
discretion of the court. If the violation is committed action in the name of the Government, and where no
by a corporation, the same shall, upon such violation civil wrong has been done to the party here seeking
being proved, be dissolved by quo redress.
warranto proceedings instituted by the Attorney-
General or by any provincial fiscal by order of said FINAL VERDICT: Petition is denied. The CA and RTC decisions are
Attorney-General: . . . . affirmed.

ISSUES:
1. Whether the plaintiffs can maintain an action based upon the Notes:
violation of law supposedly committed by the Benguet
Company in this case? Medyo malabo yung pagsulat ng case. Basically, the outline reads
HELD & RATIO: between the lines and quotes an obiter dictum since in the case it
1. NO, since an action fo the violation of the provision of the was dismissed due to technical reasons, from what I understand the
Act of Congress is a criminal action, which the Attorney- plaintiffs have no legal standing because an action for violation of the
General is allowed to maintain and that petitioners’ right in Corporation Code can only be maintained by the Attorney-General.
this case have not been violated. And it does not explain the ACTUAL reasons why plaintiffs are suing
• Provision referred to was adopted by the lawmakers given the fact that their shares of stocks actually increased in value,
with a sole view to the public policy that should thus it will benefit them since if they sell that stock they earn more
control in the granting of mining rights. Furthermore, than they paid in buying that stock in cheaper prices before.
the penalties imposed in what is now section 190 (A)
of the Corporation Law for the violation of the
prohibition in question are of such nature that they
can be enforced only by a criminal prosecution or by
an action of quo warranto. But these proceedings
can be maintained only by the Attorney-General in
representation of the Government.

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7. PIROVANO v. DE LA RAMA STEAMSHIP CO. • Appellant's theory is that the cash advances to her in the
United States during the Pacific War for her personal
CASE: expenses and for the support and education of her children
Petitioner seeks to recover an amount equivalent to her were assumed by Esteban de la Rama, She claims that the
share of the declared dividends from her shares of stock in advances made to her by the appellee were debited against
Defendant Corporation. Defendant corporation wishes however to the account of Hijos de I. de la Rama & Co., Inc., another
deduct certain withdrawals made by the petitioner for her children’s corporation practically owned by Esteban de Ia Rama and
education. Petitioner claims that the withdrawals she made was that the only sum the appellee corporation may deduct from
shouldered by her deceased father, who owns Hijos de I. de la Rama the amount of dividends to which she is entitled is
& Co., Inc., whose stockholders are practically the same as those of P120,424.55 which she received after the death of her father
defendant corporation. Issue to resolve is whether or not the Esteban de la Rama and was not assumed by him.
deductions claimed by Defendant Corporation can be upheld. • The appellee argues that the assumption by Esteban de la
Court ruled that yes it is petitioner who must shoulder the Rama of the total sum of withdrawals by the appellant for her
prior withdrawals made by her since these withdrawals did not obtain expenses and of her children was never consented to by the
the required consent by the corporation and was in fact a appellee and hence not binding upon it; and that the
circumvention of the prohibition to issue dividends. It must be accounting method by which the withdrawals were charged
remembered that corporate acts of a corporation must appear in its against the Hijas de I. de la Rama & Co., Inc. was to
books or records. In the case at bar however, no such record was circumvent the prohibition imposed upon the appellee to
shown. declare dividends, agreed upon in the deed of trust executed
by the appellee and the National Development Company.

FACTS: ISSUES:
• Plaintiff seeks to recover from the defendant the sum of 2. Whether or not the assumption made by the late
P221, 975.45, the balance of the amount of dividends at Esteban de la Rama in his lifetime of all the advances
P100 per share, as the registered owner of 3,424 shares of made by the appellee to the appellant was binding upon
stock in the defendant corporation, after deducting the sum it.
of P120, 424.55 she had withdrawn or received from the 3. Whether or not the assumption by Esteban de la Rama
defendant for advances made to her after the death of the of the advances made to the appellant by the appellee
late Esteban de la Rama, 20 per cent of the sum sought to was consented to by the appellee to constitute a
be recovered for attorney's fees and expenses of litigation by novation.
way of damages, and costs.
• Answering the complaint, the defendant avers that although HELD & RATIO:
the plaintiff is entitled to the dividends claimed in the 2. NO, there is no doubt that because of the prohibition agreed
complaint, she is indebted to the defendant in the sum of upon in the deed of trust, providing that no dividends could
P444, 202.52, and that by reason of the unnecessary be declared by the appellee during the period of time already
commencement of the suit, the defendant suffered damages stated; the advances to the stockholders would constitute a
in the sum of P100,000. Upon the foregoing allegations the violation. For that reason it was made to appear that such
defendant asks for the dismissal of the complaint. advances were made to the Hijos de I. de la Rama & Co.,
• Court dismissed both the complaint and the counterclaim. Inc. and debited the same against the latter in the books of
the appellee, but in the books of the Hijos de I. de la Rama &

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Co., Inc. the said advances were debited against the corporation. However, the National Development
individual stockholders; the stockholders of both Company chose not to avail itself of its right.
corporations being the same.
3. Such consent does not appear to have been given by the
board of directors of the appellee. Corporate acts of a FINAL VERDICT: Petition is denied. The appellant must answer for
corporation must appear in its books or records. No such the personal advances made to her by the appellee corporation and
consent appears in the books or records of the appellee. the latter may set off the total sum of such advances against the
• The entries on the withdrawals by the appellant amount of dividends to which she is entitled.
entered in the account of Hijos de I. de la Rama &
Co., Inc. or transferred to the account of Esteban de
la Rama have already been explained satisfactorily.
They were done so in order to circumvent the
prohibition referred to above. As a matter of fact the
withdrawals made by the appellant were made by
her and not by the Hijos de I. de la Rama & Co., Inc.
Nor is there any evidence that those advances were
used by the Hijos de I. de la Rama & Co., Inc.
4. As to the inclusion of the withdrawals made by the appellant
in the claim of the Hijos de I. de la Rama & Co., Inc., suffice
it to say that such act of the Hijos de I. de la Rama & Co.,
Inc. cannot and does not bind the appellee. Its appearance
in the probate court was by order of that court and in its
pleading the appellee disclaimed any interest in the claim
filed by the Hijos de I. de la Rama & Co., Inc. against the
estate of the late Esteban de la Rama.
5. Resolution No. 50-127 of the board of directors of the
appellee, whereby a cash dividend of P2,000,000 was
declared in favor of stockholders of record as of 1 December
1950, or at the rate of P100 per share, subject to the
conditions already stated, does not suffer from any legal
infirmity
• There is no room for the application of the in pari
delicto principle to the instant case, because the
appellee corporation and the Hijos de I. de la Rama
& Co., Inc. have committed no crime or violation of
law, but a violation of section 12 of the deed of trust
by the appellee corporation which gave rise to a
cause of action by the National Development
Company, the injured party, against the appellee

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8. FILIPINAS PORT SERVICES V GO to recover from those elected to the aforementioned


Rationale for “Centralized Management Doctrine positions the salaries they have received.
• On June 4 1993, Cruz, purportedly in representation of
CASE: Filport and its stockholders, among which is herein co-
Respondent Filport’s Board of Directors enacted a resolution petitioner Mindanao Terminal and Brokerage Services, Inc.
creating new six positions for officers and giving them monthly (Minterbro), filed with the SEC a derivative suit against
salary. The BOD also increased the salaries of particular positions Filport's BOD for acts of mismanagement detrimental to the
such as the Chairman. interest of the corporation and its shareholders at large.
Eliodoro Cruz, Filport’s previous President, wrote a letter to • Cruz prayed that the BOD be made to pay Filport, jointly and
the BOD questioning the creation and election of six positions and he severally, the sums of money variedly representing the
alleged that the BOD has no authority to create such positions based damages incurred as a result of the creation of the
on the company’s by-laws as required by Section 35 of the offices/positions complained of and the aggregate amount of
Corporation Code. the questioned increased salaries.
The court ruled that the BOD has the power to create the
assailed positions. Although the bylaws of the corporation are silent
as to the creation by its board of directors of an executive committee, ISSUES:
the court cannot deem that the positions created automatically 4. Whether or not the Board of Directors has the power to
formed an executive committee. The positions created are ordinary create the assailed positions
positions which was in accordance with the regular business of
Filport. HELD & RATIO:
The raison d’etre behind the conferment of corporate powers 6. YES, the BOD has the power to create the assailed
on the board of directors is not lost on the Court. Indeed, the positions.
concentration in the board of the powers of control of corporate • Section 23 of the Corporation Code explicitly provides that
business and of appointment of corporate officers and managers is unless otherwise provided therein, the corporate powers of
necessary for efficiency in any large organization. Stockholders are all corporations formed under the Code shall be exercised,
too numerous, scattered and unfamiliar with the business of a all business conducted and all property of the corporation
corporation to conduct its business directly. And so the plan of shall be controlled and held by a board of directors.
corporate organization is for the stockholders to choose the directors • Thus, with the exception only of some powers expressly
who shall control and supervise the conduct of corporate business. granted by law to stockholders (or members, in case of non-
stock corporations), the board of directors (or trustees, in
case of non-stock corporations) has the sole authority to
determine policies, enter into contracts, and conduct the
FACTS: ordinary business of the corporation within the scope of its
charter, i.e., its articles of incorporation, by-laws and relevant
• On September 4 1992, Eliodoro C. Cruz, Filport’s president provisions of law. Verily, the authority of the board of
from 1968-1991, wrote a letter to the corporation’s Board Of directors is restricted to the management of the regular
Directors(BOD) questioning the creation and election of six business affairs of the corporation, unless more extensive
positions with a monthly remuneration of P13,050.00 each. power is expressly conferred.
Cruz requested the board to take necessary action/actions • The raison d’etre behind the conferment of corporate powers
on the board of directors is not lost on the Court. Indeed, the

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concentration in the board of the powers of control of FINAL VERDICT: Petition is denied. The CA and RTC decisions are
corporate business and of appointment of corporate officers affirmed.
and managers is necessary for efficiency in any large
organization. Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to conduct its Notes:
business directly. And so the plan of corporate organization
is for the stockholders to choose the directors who shall
control and supervise the conduct of corporate business.
The election of officers of a corporation is provided for under Section
• In the present case, the board’s creation of the positions of 25 of the Code which reads:
Assistant Vice Presidents for Corporate Planning,
Operations, Finance and Administration, and those of the
Special Assistants to the President and the Board Chairman, Sec. 25. Corporate officers, quorum. – Immediately after their
was in accordance with the regular business operations of election, the directors of a corporation must formally organize by the
Filport as it is authorized to do so by the corporation’s by- election of a president, who shall be a director, a treasurer who may
laws, pursuant to the Corporation Code. or may not be a director, a secretary who shall be a resident and
citizen of the Philippines, and such other officers as may be provided
• The bylaws of the corporation are silent as to the creation by
for in the by-laws.
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 amended Bylaws of Filport provides the following:
the corporation.
• Notwithstanding the silence of Filport’s bylaws on the matter, Officers of the corporation, as provided for by the by-laws, shall be
the court cannot rule that the creation of the executive elected by the board of directors at their first meeting after the
committee by the board of directors is illegal or unlawful. election of Directors. xxx
One reason is the absence of a showing as to the true
nature and functions of said executive committee The officers of the corporation shall be a Chairman of the Board,
considering that the "executive committee," referred to in President, a Vice-President, a Secretary, a Treasurer, a General
Section 35 of the Corporation Code which is as powerful as Manager and such other officers as the Board of Directors may from
the board of directors and in effect acting for the board itself, time to time provide, and these officers shall be elected to hold office
should be distinguished from other committees which are until their successors are elected and qualified.
within the competency of the board to create at anytime and
whose actions require ratification and confirmation by the Likewise, the fixing of the corresponding remuneration for the
board. Another reason is that, ratiocinated by both the two positions in question is provided for in the same by-laws of the
(2) courts below, the Board of Directors has the power to corporation, viz:
create positions not provided for in Filport’s bylaws since the
board is the corporation’s governing body, clearly upholding
xxx The Board of Directors shall fix the compensation of the officers
the power of its board to exercise its prerogatives in
and agents of the corporation.
managing the business affairs of the corporation.

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9. ANGELES v. SANTOS controls and directs the affairs of the corporation by allegation
G.R. No. L-43413 August 31, 1937 of the stockholders. Where a majority of the board of directors
Theories on Source of Board Power wastes or dissipates the funds of the corporation or fraudulently
disposes of its properties, or performs ultra vires acts, the court, in
Petitioners: HIGINIO ANGELES, JOSE E. LARA and AGUEDO the exercise of its equity jurisdiction, and upon showing that intra-
BERNABE, as stockholders for an in behalf and for the benefit of the corporate remedy is unavailing, will entertain a suit filed by the
corporation, Parañaque Rice Mill, Inc. and the other stockholders minority members of the board of directors, for and in behalf of the
who may desire to join corporation.
Defendants: TEODORICO B. SANTOS, ESTANISLAO MAYUGA,
APOLONIO PASCUAL, and BASILISA RODRIGUEZ FACTS:
• The complaint against defendants alleged that:
CASE: o The plaintiffs are stockholders and constitute the minority
This action was instituted by the petitioners (constituting the and the defendants are also stockholders and constitute
minority) against defendants (constituting the majority of the board of the majority of the board of directors of the Parañaque
directors) for the fraudulent acts of Teodorico Santos that were Rice Mill, Inc.
discovered during an investigation conducted on the operations of o The stockholders appointed an investigation committee to
the Corporation. The complaint alleged that defendants, particularly investigate and determine the properties, operations, and
Santos denied access to the records of the corporation and that losses of the corporation as shown in the auditor's report.
Santos appropriated to his own benefit properties, funds, and income o The defendants, particularly Teodorico B. Santos, who
of the corporation. Accordingly, a receiver was appointed by the was the president of the corporation, denied access to the
court. Defendants moved to dismiss the complaint on the ground properties, books and record of the corporation which
that Parañaque Rice Mill, Inc., is a necessary party in this case, and were in their possession.
that not having been made a party, the trial court was without o Teodorico B. Santos, had appropriated to his own benefit
jurisdiction to appoint a receiver. The Supreme Court held that the properties, funds, and income of the corporation in the
general rule is that Parañaque Rice Mill, Inc., should have been sum of P10,000
brought in as necessary party and the action maintained in its name o Santos as president of the corporation, in connivance with
and in its behalf directly and that shareholders cannot ordinarily sue his co-defendants, was disposing of the properties and
to redress wrong done to the corporation except through an action records of the corporation without authority from the
brought by the board of directors. This rule admits an exception and board of directors or the stockholders of the corporation.
that is when the cause of action is based on the wrongful acts of the • Petitioners prayed that the court appoint a receiver for the
members of the boards themselves for obviously, a demand upon corporation, that the defendant Teodorico B. Santos be
the board of directors to institute action and prosecute the same ordered to render a detailed accounting of the properties,
effectively would have been useless. funds and income of the corporation, and that said defendant
It is well settled in this jurisdiction that where corporate pay the corporation damages.
directors are guilty of a breach of trust and intra-corporate remedy is • Accordingly, the court appointed a receiver for the
futile or useless, a stockholder may institute a suit in behalf of corporation.
himself and other stockholders and for the benefit of the corporation, • Defendants-appellants vigorously assert that the
to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. The board of
Parañaque Rice Mill, Inc., is a necessary party in this
directors of a corporation is a creation of the stockholders and case, and that not having been made a party, the trial

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court was without jurisdiction to appoint a receiver and majority of the board of directors wastes or dissipates the
should have dismissed the case. funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires acts, the court, in the
exercise of its equity jurisdiction, and upon showing that
ISSUE: intra-corporate remedy is unavailing, will entertain a suit filed
5. Whether or not the case should be dismissed for failure by the minority members of the board of directors, for and in
to prosecute in the name of the Corporation, a behalf of the corporation, to prevent waste and dissipation
necessary party. and the commission of illegal acts and otherwise redress the
injuries of the minority stockholders against the wrongdoing
HELD & RATIO: of the majority.
• The action in such a case is said to be brought derivatively in
No. The action in the present case was properly instituted by
behalf of the corporation to protect the rights of the minority
the plaintiff as stockholders for and in behalf of the corporation
stockholders thereof.
Parañaque Rice Mill, Inc., and other stockholders of the said
Other matters:
corporation.
1. The appellants contended that lower court erred in ordering the
• While the general rule is that Parañaque Rice Mill, Inc., defendant, Tedorico B. Santos, to render a detailed accounting
should have been brought in as necessary party and the of the properties, funds and income of the corporation,
action maintained in its name and in its behalf directly, this Parañaque Rice Mill., Inc.
rule admits an exception.
o It is well settled in this jurisdiction that where
corporate directors are guilty of a breach of trust and Held: The accounting order was probably intended by the lower court
intra-corporate remedy is futile or useless, a to be filed with it in this proceeding. This requirement will delay the
stockholder may institute a suit in behalf of himself final disposition of the case and we are of the opinion that this
and other stockholders and for the benefit of the accounting should better be filed with the new board of directors
corporation, to bring about a redress of the wrong whose election has been ordered by the lower court. The decision of
inflicted directly upon the corporation and indirectly the lower court in this respect is therefore modified so that the
upon the stockholders. defendant Santos shall render a complete accounting of all the
corporate properties and funds that may have come to his
• There is ample evidence in the present case to show that the
possession during the period mentioned in the judgment of the lower
defendants have been guilty of breach of trust as directors of
court to the new board of director to be elected by the stockholders.
the corporation and the lower court so found.
• The board of directors of a corporation is a creation of the
stockholders and controls and directs the affairs of the 2. Appellants contend that the lower court erred in ordering the
corporation by allegation of the stockholders. removal of the defendants from their offices as members of the
• But the board of directors, or the majority thereof, in drawing board of directors of the corporation.
to themselves the power of the corporation, occupies a
position of trusteeship in relation to the minority of the stock Held: The Corporation Law, as amended, in section 29 to 34, provide
in the sense that the board should exercise good faith, care for the election and removal of the directors of a corporation. Our
and diligence in the administration of the affairs of the Corporation Law (Act No. 1459, as amended), does not confer
corporation and should protect not only the interest of the expressly upon the court the power to remove a director of a
majority but also those of the minority of the stock. Where a corporation.

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There are abundant authorities, however, which hold that if 10. TAN v. SYCIP
the court has acquire jurisdiction to appoint a receiver because of the Theories on Source of Board Power; Right to Vote
mismanagement of directors these may thereafter be remove and
others appointed in their place by the court in the exercise of its CASE:
equity jurisdiction. Petitioner GCHS is a non-stock, non-profit educational
In the present case, however, the properties and assets corporation with 15 regular members. During the annual members’
of the corporation being amply protected by the appointment of meeting where they voted new members in place of the dead ones,
there were only 11 living member-trustees. Out of the eleven, only
a receiver and view of the statutory provisions above referred seven attended through their proxies. Atty. Pacis, one of the proxies,
to, we are of the opinion that the removal of the directors is, objected saying that there was no quorum since only 7 were present
under the circumstances, unnecessary and unwarranted. (15 members- 8 were needed to constitute a quorum; majority rule).
FINAL VERDICT: Petitioners in this case contend that the dead members should not
(1) That the action in the present case was properly instituted by be counted in the computation because upon their death, they have
the plaintiff as stockholders for and in behalf of the lost all their rights including their right to vote.
corporation Parañaque Rice Mill, Inc., and other
stockholders of the said corporation; The issue in this case is whether or not the dead members should
(2) That the lower court committed no reveiwable error in still be counted in the determination of the quorum.
appointing a receiver of the corporation pendente lite;
(3) That the lower court committed no error in ordering an The Supreme Court, in this case, first discussed the basis for the
election of the new board of directors, which election shall be quorum. It held that one of the most important rights of a qualified
held within thirty days from the date this decision becomes shareholder or member is the right 
to vote -- either personally or by
final; proxy -- for the directors or trustees who are to manage the
(4) That Teodorico B. Santos shall render an accounting of all corporate affairs. The right to choose the persons who will direct,
the properties, funds and income of the corporation which manage and operate the corporation is significant, because it is the
may have come into his possession to the new board of main way in which a stockholder can have a voice in the
directors; management of corporate affairs, or in which a member in a non-
(5) That the receiver, Emilio Figueroa, shall continue in office stock corporation can have a say on how the purposes and goals of
until the election and qualification of the members of the new the corporation may be achieved. Once the directors or trustees are
board of directors; elected, the stockholders or members relinquish corporate powers to
(6) That upon the constitution of the new board of directors, the the board in accordance with law. (Theory of Delegated Power;
said receiver shall turn over all the properties of the based from CLV book)
corporation in his possession to the corporation, or such
person or persons as may be duly authorized by it; and. Regarding the issue, the Supreme Court held that dead members
(7) That Higinio Angeles, or his successor in interest, is SHOULD NOT be counted in the determination of the quorum. The
entitled to 600 shares of stock at the par value of Corp. Code provides that the majority of the members representing
the actual number of voting rights, not the number or numerical
P15,000 and the lower court committed no error in
constant that may originally be specified in the articles of
ordering the issuance of the corresponding certificate of incorporation, constitutes the quorum. And because the By Laws of
stock. the corporation specifically provided that membership is terminated

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by death, the dead members have lost their right to vote. Thus, they for or requiring the action or consent of the
are not to be included in the computation for quorum. shareholders or members
• Under the Corporation Code, stockholders or
members periodically elect the board of directors or
FACTS: trustees, who are charged with the management of
• Petitioner Grace Christian High School (GCHS) is a non- the corporation. The board, in turn, periodically
stock, non-profit educational corporation with fifteen (15) elects officers to carry out management functions on
regular members, who also constitute the board of trustees. a day-to-day basis. As owners, though, the
• During the annual members’ meeting, there were only stockholders or members have residual powers over
eleven (11) living member-trustees, as four (4) had already fundamental and major corporate changes.
died. Out of the eleven, seven (7) attended the meeting • While stockholders and members (in some
through their respective proxies. instances) are entitled to receive profits, the
• The meeting convened and 4 new members were voted to management and direction of the corporation are
replace the dead ones but there was an objection from one lodged with their representatives and agents -- the
member, Atty. Pacis, who argued that there was no quorum. board of directors or trustees. In other words, acts of
• The controversy reached the Securities and Exchange management pertain to the board; and those of
Commission. The petitioners contend that the deceased ownership, to the stockholders or members. In the
member-trustees should not be counted in the computation latter case, the board cannot act alone, but must
of the quorum because, upon their death, members seek approval of the stockholders or members.
automatically lost all their rights (including the right to vote) • One of the most important rights of a qualified
and interests in the corporation. shareholder or member is the right 
to vote -- either
• SEC Hearing Officer Malthie G. Militar declared the meeting personally or by proxy -- for the directors or trustees
null and void for lack of quorum. She held that the basis for who are to manage the corporate affairs. The right to
determining the quorum in a meeting of members should be choose the persons who will direct, manage and
their number as specified in the articles of incorporation, not operate the corporation is significant, because it is
simply the number of living members. the main way in which a stockholder can have a
voice in the management of corporate affairs, or in
ISSUES: which a member in a non-stock corporation can
6. Whether or not the dead members should still be have a say on how the purposes and goals of the
counted in the determination of the quorum, for corporation may be achieved. Once the directors or
purposes of conducting the annual members’ meeting. trustees are elected, the stockholders or members
relinquish corporate powers to the board in
HELD & RATIO: accordance with law. (CLV outline)
7. Before resolving the issue, the Court discussed the basis for
quorum (which contained the relevant doctrines on Theory of 8. (On the issue in this case) NO, only those who are actual
Delegated Power based from the CLV book and outline) members with voting rights should be counted.
• Generally, stockholders’ or members’ meetings are • Under Section 52 of the Corporation Code, the
called for the purpose of electing directors or majority of the members representing the actual
trustees and transacting some other business calling number of voting rights, not the number or numerical

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constant that may originally be specified in the


articles of incorporation, constitutes the quorum. 11. THE BOARD OF LIQUIDATORS representing THE
• In this case, the GCHS By-Laws provides that GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES v.
membership in the corporation shall, among others, HEIRS OF MAXIMO M. KALAW, JUAN BOCAR, ESTATE OF THE
be terminated by the death of the member. And, DECEASED CASIMIRO GARCIA, and LEONOR MOLL
Section 91 of the Corporation Code further provides G.R. No. L-18805 August 14, 1967
that termination extinguishes all the rights of a Board Must Act as a Body
member of the corporation.
• Thus, dead members who are dropped from the CASE:
membership roster in the manner and for the cause
provided for in the By-Laws of GCHS are not to be NACOCO was chartered as a non-profit governmental organization
counted in determining the requisite vote in avowedly for the protection, preservation and development of the
corporate matters or the requisite quorum for the coconut industry in the Philippines. General manager and board
annual members’ meeting. chairman was Kalaw; defendants Bocar and Garcia were members
• With 11 remaining members, the quorum in the of the Board; defendant Moll became director only on December 22,
present case should be 6. Therefore, there being a 1947. An unhappy chain of events conspired to deter NACOCO from
quorum, the annual members’ meeting, conducted fulfilling some contracts entered. The buyers threatened damage
with six members present, was valid. suits. All the settlements sum up to P1,343,274.52. NACOCO,
represented by the Board of Liquidators, seeks to recover the above
FINAL VERDICT: Petition is denied. The CA and RTC decisions are sum from general manager and board chairman Kalaw, and directors
affirmed. Bocar, Casimiro and Moll. It charges Kalaw with negligence under
Article 1902 of the old Civil Code and defendant board
members, including Kalaw, with bad faith and/or breach of trust
Notes: for having approved the contracts without prior approval of the
Ratio #1 was based from the CLV outline. Ratio #2 would be as Board. Plaintiff leans heavily on NACOCO's corporate by-
regards the case. I organized it that way because the doctrine in laws. Article IV (b), Chapter III thereof, recites, as amongst the duties
the outline and the discussion in the CLV book cannot be of the general manager, the obligation: "(b) To perform or execute on
deduced directly from the facts and issue presented in the case. behalf of the Corporation upon prior approval of the Board, all
contracts necessary and essential to the proper accomplishment for
There was also a discussion on the right to vote in stock and which the Corporation was organized.”
non-stock corp.
The issue in this case is whether or not the acts of the
Stock Corp- It is settled that unissued stocks may not be voted or respondent as General Manager without prior approval of the
considered in determining whether a quorum is present in a stock- Board are valid corporate acts.
holders’ meeting. Only stock actually issued and outstanding may be
voted. The SC held that the acts of the General Manager were valid
Non-Stock Corp- We hold that when the principle for determining corporate acts. In the case at bar, the practice of the corporation has
the quorum for stock corporations is applied by analogy to non-stock been to allow its general manager to negotiate and execute contracts
corporations, only those who are actual members with voting rights in its copra trading activities for and in NACOCO's
should be counted. behalf without prior board approval. If the by-laws were to be literally

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followed, the board should give its stamp of prior approval on all • No action was taken on the contracts. Neither did the board vote
corporate contracts. But that board itself, by its acts and through thereon at the meeting.
acquiescence, practically laid aside the by-law requirement of prior • January 11, 1948, President Roxas made a statement that the
approval. Under the given circumstances, the Kalaw contracts are NACOCO head did his best to avert the losses, emphasized that
valid corporate acts. Viewed in the light of the entire record, the government concerns faced the same risks that confronted
judgment under review must be affirmed. private companies, that NACOCO was recouping its losses, and
that Kalaw was to remain in his post.
Exercise of powers by the Board of Directors may either be express • The board met again with Kalaw, Bocar, Garcia and Moll in
and formal through the adoption of a board resolution in a meeting attendance. They unanimously approved the contracts.
called for the purpose, or it may be implied where the Board • The buyers threatened damage suits.
collectively and knowingly allows the President to enter into • Some of the claims were settled.
important contracts in the pursuit of the corporate business. • But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact
sue before the Court of First Instance of Manila.
• These cases culminated in an out-of-court amicable settlement
FACTS: when the Kalaw management was already out.
• NACOCO was chartered as a non-profit governmental • The corporation thereunder paid Dreyfus P567,024.52
organization by Commonwealth Act 518 avowedly for the representing 70% of the total claims.
protection, preservation and development of the coconut industry • With particular reference to the Dreyfus claims, NACOCO put up
in the Philippines. the defenses that: (1) the contracts were void because Louis
• NACOCO's charter was amended [Republic Act 5] to grant that Dreyfus & Co. (Overseas) Ltd. did not have license to do
corporation the express power "to buy, sell, barter, export, and in business here; and (2) failure to deliver was due to force
any other manner deal in, coconut, copra, and dessicated majeure, the typhoons.
coconut, as well as their by-products, and to act as agent, broker • All the settlements sum up to P1,343,274.52.
or commission merchant of the producers, dealers or merchants" • NACOCO seeks to recover the above sum from general
thereof. manager and board chairman Kalaw, and directors Bocar,
• General manager and board chairman was Maximo M. Kalaw; Garcia and Moll.
defendants Juan Bocar and Casimiro Garcia were members of • It charges Kalaw with negligence under Article 1902 of the old
the Board; defendant Leonor Moll became director only on Civil Code; and defendant board members, including Kalaw, with
December 22, 1947. bad faith and/or breach of trust for having approved the
• NACOCO, after the passage of Republic Act 5, embarked on contracts.
copra trading activities. • LC: dismissed the complaint without costs as well as defendants'
• An unhappy chain of events conspired to deter NACOCO from counterclaims, except that plaintiff was ordered to pay the
fulfilling these contracts. heirs of Maximo Kalaw the sum of P2,601.94 for unpaid
• When it became clear that the contracts would be salaries and cash deposit due the deceased Kalaw from
unprofitable, Kalaw submitted them to the board for NACOCO.
approval.
• Kalaw made a full disclosure of the situation, apprised the board ISSUES:
of the impending heavy losses.

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Whether or not the acts of the respondent as General Manager forward sales of copra.
without prior approval of the Board are valid corporate acts. • During that period, from those copra sales, NACOCO reaped a
gross profit of P3,631,181.48.
HELD & RATIO: o So pleased was NACOCO's board of directors that, on
December 5, 1946, in Kalaw's absence, it voted to grant
1. YES. They are valid corporate acts. him a special bonus "in recognition of the signal
• Plaintiff leans heavily on NACOCO's corporate by-laws. Article achievement rendered by him in putting the
IV (b), Chapter III thereof, recites, as amongst the duties of the Corporation's business on a self-sufficient basis within a
general manager, the obligation: "(b) To perform or execute on few months after assuming office, despite numerous
behalf of the Corporation upon prior approval of the Board, all handicaps and difficulties."
contracts necessary and essential to the proper accomplishment • These previous contract it should be stressed, were signed
for which the Corporation was organized." by Kalaw without prior authority from the board. Said
• A rule that has gained acceptance through the years is that a contracts were known all along to the board members. Nothing
corporate officer "intrusted with the general management and was said by them.
control of its business, has implied authority to make any • The aforesaid contracts stand to prove one thing: Obviously,
contract or do any other act which is necessary or appropriate to NACOCO board met the difficulties attendant to forward sales by
the conduct of the ordinary business of the corporation. leaving the adoption of means to end, to the sound discretion of
• As such officer, "he may, without any special authority from the NACOCO's general manager Maximo M. Kalaw.
Board of Directors perform all acts of an ordinary nature, which • When the board met, the directors discussed the copra situation:
by usage or necessity are incident to his office, and may bind the There was a slow downward trend but belief was entertained that
corporation by contracts in matters arising in the usual course of the nadir might have already been reached and an improvement
business. in prices was expected. In view thereof, Kalaw informed the
• The peculiar nature of copra trading, at this point, deserves board that "he intends to wait until he has signed contracts to sell
express articulation. Ordinary in this enterprise are copra sales before starting to buy copra."
for future delivery. • In the board meeting, Kalaw reported on the copra price
• The movement of the market requires that sales agreements be conditions then current: The copra market appeared to have
entered into, even though the goods are not yet in the hands of become fairly steady; it was not expected that copra prices
the seller. Known in business parlance as forward sales, would again rise very high as in the unprecedented boom during
• To NACOCO, forward sales were a necessity. Copra could not January-April, 1947; the prices seemed to oscillate between
stay long in its hands; it would lose weight, its value decrease. $140 to $150 per ton; a radical rise or decrease was not
• Above all, NACOCO's limited funds necessitated a quick indicated by the trends. Kalaw continued to say that "the
turnover. Corporation has been closing contracts for the sale of copra
24
o Copra contracts then had to be executed on short notice generally with a margin of P5.00 to P7.00 per hundred kilos."
— at times within twenty-four hours. • We now lift the following excerpts from the minutes of that same
o To be appreciated then is the difficulty of calling a formal board meeting of July 29, 1947:
meeting of the board. • 521. In connection with the buying and selling of copra the Board
• Such were the environmental circumstances when Kalaw went inquired whether it is the practice of the management to close
into copra trading. contracts of sale first before buying. The General Manager
• Long before the disputed contracts came into being, Kalaw replied that this practice is generally followed but that it is not
contracted — by himself alone as general manager — for always possible to do so for two reasons:

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(1) The role of the Nacoco to stabilize the prices of copra 12. Montelibano et al vs. Bacolod-Murcia Milling Co.
requires that it should not cease buying even when it Business Judgment Rule First Branch
does not have actual contracts of sale since the
suspension of buying by the Nacoco will result in CASE:
middlemen taking advantage of the temporary inactivity
of the Corporation to lower the prices to the detriment of The plaintiffs are sugar planters under a concession agreement with
the producers. the defendant sugar mill company. The Board of Directors of the
(2) The movement of the market is such that it may not be sugar mill company approved a resolution extending more favorable
practical always to wait for the consummation of contract terms to other sugar planters. The plaintiffs filed this
contracts of sale before beginning to buy copra. complaint to annul the board resolution as the board exceeded its
• Settled jurisprudence has it that where similar acts have been authority. The SC ruled that when a resolution is passed in good
approved by the directors as a matter of general practice, faith by the Board of Directors, it is valid and binding even if it
custom, and policy, the general manager may bind the company would result in monetary losses to 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 usage and practices of the company FACTS:
and by the knowledge which the board of directors has, or must
be presumed to have, of acts and doings of its subordinates in • Plaintiffs are sugar planters adhered to the defendant-
and about the affairs of the corporation. company's sugar central mill under identical milling
• Authority to act for and bind a corporation may be presumed contracts.
from acts of recognition in other instances where the power was
in fact exercised. • The contracts were stipulated to be in force for 30 years and
• Thus, when, in the usual course of business of a corporation, an that the resulting product should be divided in the ratio of
officer has been allowed in his official capacity to manage its 45% for the mill and 55% for the planters. It was later
affairs, his authority to represent the corporation may be implied proposed to execute amended milling contracts, increasing
from the manner in which he has been permitted by the directors the planters' share to 60% of the manufactured sugar and
to manage its business. resulting molasses, besides other concessions, but
• In the case at bar, the practice of the corporation has been extending the operation of the milling contract from the
to allow its general manager to negotiate and execute original 30 years to 45 years.
contracts in its copra trading activities for and in NACOCO's
behalf without prior board approval. • The Board of Directors of the defendant Bacolod-Murcia
• If the by-laws were to be literally followed, the board should give Milling Co., Inc., adopted a resolution granting further
its stamp of prior approval on all corporate contracts. But that concessions to the planters over and above those contained
board itself, by its acts and through acquiescence, practically laid in the printed Amended Milling Contract. Plaintiffs signed
aside the by-law requirement of prior approval. and executed the printed Amended Milling Contract but a
• Under the given circumstances, the Kalaw contracts are valid copy of the resolution was not attached to the printed
corporate acts. contract.

FINAL VERDICT: Viewed in the light of the entire record, the • In 1953, the plantiffs initiated the present action, contending
judgment under review must be, as it is hereby, affirmed. that three Negros sugar centrals had already granted

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increased participation to their planters, and that under necessary to their exercise. If so, the corporation has the
paragraph 9 of the abovementioned resolution, the power to do it; otherwise, not.
defendant had become obligated to grant similar
concessions to the plaintiffs. • As the resolution in question was passed in good faith
by the board of directors, it is valid and binding, and
• However, Bacolod-Murcia Milling Co., resisted the claim, and whether or not it will cause losses or decrease the
defended by urging that the stipulations contained in the profits of the central, the court has no authority to
resolution were made without consideration; that the review them.
resolution in question was, therefore, null and void ab initio,
being in effect a donation that was ultra vires and beyond the • It is a well-known rule of law that questions of policy or
powers of the corporate directors to adopt. of management are left solely to the honest decision of
officers and directors of a corporation, and the court is
• After trial, the court below rendered judgment upholding the without authority to substitute its judgment of the board
stand of the defendant Milling company, and dismissed the of directors; the board is the business manager of the
complaint. Thereupon, plaintiffs duly appealed to this Court. corporation, and so long as it acts in good faith its
orders are not reviewable by the courts. Hence,
ISSUE: Bacolod-Murcia Milling Company is, under the terms of
its Resolution, duty bound to grant similar increases to
• Whether or not the resolution is valid and binding between plaintiffs herein.
the corporation and planters?
FINAL VERDICT: Petition is granted.
HELD:

• YES. There can be no doubt that the directors of the


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

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13. PHILIPPINE STOCK EXCHANGE, INC. v. CA application to list its shares with supporting documents
G.R. No. 125469 October 27, 1997 attached.
Business Judgment Rule (First Branch) • Before it could act upon PALI's application, the Board of
Governors of PSE received a letter from the heirs of the late
CASE: Pres. Marcos claiming that he was the legal and beneficial
PALI sought to offer its shares to the public, and facilitate the owner of certain properties forming part of the Puerto Azul
trading of shares through PSE. Before PSE’s Board of Governors Beach Hotel and Resort Complex which PALI claims to be
could act upon PALI's applicationan, the heirs of the late Pres. among its assets, and also other properties titled under
Marcos surfaced claiming legal and beneficial ownership of various PALI’s name.
properties of PALI. PSE’s Board of Governors decided to reject • In its regular meeting, PSE’s Board of Governors decided to
PALI's application, citing the existence of serious claims, issues and reject PALI's application, citing the existence of serious
circumstances surrounding PALI's ownership over its assets that claims, issues and circumstances surrounding PALI's
adversely affect the suitability of listing PALI's shares in the stock ownership over its assets that adversely affect the suitability
exchange. SEC reversed PSE's decision and ordered the immediate of listing PALI's shares in the stock exchange.
listing of the PALI shares. On appeal, CA ruled that PSE is subject to • PALI requested SEC, in the exercise of its supervisory and
SEC’s jurisdiction, regulation and control as a corporation and as a regulatory powers over stock exchanges, to review the
stock exchange. PSE's action on PALI's listing application and institute such
W/N CA erred in ruling that the SEC had authority to order measures as are just and proper under the circumstances.
PSE to list the shares of PALI in the stock exchange. • SEC reversed PSE's decision and ordered the immediate
YES. SEC is the entity with the primary say as to whether or listing of the PALI shares in the Exchange, without prejudice
not securities, including shares of stock of a corporation, may be to its authority to require PALI to disclose such other material
traded or not in the stock exchange. This is not to say, however, information it deems necessary for the protection of the
that the PSE's management prerogatives are under the absolute investigating public.
control of the SEC. The PSE is, after all, a corporation authorized • Dissatisfied with SEC’s ruling, PSE filed with CA a Petition
by its corporate franchise to engage in its proposed and duly for Review, but the same was dismissed. CA ruled that SEC
approved business. One of the PSE's main concerns, as such, is still had both jurisdiction and authority to look into the decision of
the generation of profit for its stockholders. Thus, notwithstanding the PSE as was provided in the relevant provisions of the
regulatory power of the SEC over the PSE, and the resultant Revised Securities Act in relation to P.D. No. 902-A and the
authority to reverse the PSE's decision in matters of application for Revised Securities Act, and for the purpose of ensuring fair
listing in the market, the SEC may exercise such power only if the administration of the exchange. Both as a corporation and as
PSE's judgment is attended by bad faith. a stock exchange, PSE is subject to SEC’s jurisdiction,
regulation and control. All in all, CA held that PALI complied
with all the requirements for public listing.
FACTS:
• Puerto Azul Land, Inc. (PALI), a domestic real estate
corporation, had sought to offer its shares to the public. ISSUES:
• Securities and Exchange Commission (SEC) issued PALI a 7. W/N CA erred in ruling that the SEC had authority to
Permit to Sell its shares to the public. To facilitate the trading order PSE to list the shares of PALI in the stock
of its shares, PALI sought to trade through the Philippine exchange.
Stock Exchange, Inc. (PSE). PALI filed to PSE an

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HELD & RATIO: hold property in its own name, to enter


8. YES, while SEC is the entity with the primary say as to (or not to enter) into contracts with third
whether or not securities, including shares of stock of a persons, and to perform all other legal
corporation, may be traded or not in the stock acts within its allocated express or
exchange, this is not to say, however, that the PSE's implied powers.
management prerogatives are under the absolute • A corporation is but an association of individuals,
control of the SEC. allowed to transact under an assumed corporate
• Paramount policy supports the authority of the SEC name, and with a distinct legal personality.
to review PSE's denial of the listing. Being a stock o In organizing itself as a collective body, it
exchange, PSE performs a function that is vital to waives no constitutional immunities and
the national economy, as the business is affected perquisites appropriate to such a body.
with public interest. o As to its corporate and management
o The economy moves on the basis of the rise decisions, the state will generally not
and fall of stocks being traded. By its interfere with the same.
economic power, PSE certainly can dictate o Questions of policy and of management are
which and how many users are allowed to left to the honest decision of the officers and
sell securities thru the facilities of a stock directors of a corporation, and the courts are
exchange, if allowed to interpret its own without authority to substitute their judgment
rules liberally as it may please. PSE can for the judgment of the board of directors.
either allow or deny the entry to the market o The board is the business manager of the
of securities. corporation, and so long as it acts in good
• The role of the SEC in our national economy cannot faith, its orders are not reviewable by the
be minimized. The legislature, through the Revised courts.
Securities Act, Presidential Decree No. 902-A, and o Thus, notwithstanding the regulatory
other pertinent laws, has entrusted to it the serious power of the SEC over the PSE, and the
responsibility of enforcing all laws affecting resultant authority to reverse the PSE's
corporations and other forms of associations not decision in matters of application for
otherwise vested in some other government office. listing in the market, the SEC may
o This is not to say, however, that the exercise such power only if the PSE's
PSE's management prerogatives are judgment is attended by bad faith.
under the absolute control of the SEC. • In reaching its decision, PSE considered important
The PSE is, after all, a corporation facts which bring to serious question the qualification
authorized by its corporate franchise to of PALI to sell its shares to the public through the
engage in its proposed and duly stock exchange.
approved business. o Some of the considerations were the fact
o One of the PSE's main concerns, as that an order of sequestration has been
such, is still the generation of profit for issued covering the properties of PALI, and
its stockholders. Moreover, the PSE has suit for reconveyance to the state has been
all the rights pertaining to corporations, filed in the Sandiganbayan.
including the right to sue and be sued, to

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• PSE was right when it refused the application of 14. ONG YUNG V. TIU
PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the CASE: The Ongs subscribed shares of stock from First Landlink
Revised Securities Act, after all, is to give adequate Asia Development Corporation (FLADC) owned by the Tius in order
and effective protection to the investing public to save it from its debt from PNB which have accumulated due to the
against fraudulent representations, or false mall it wanted to build. There was a Pre-Subscription Contract
promises, and the imposition of worthless ventures. entered into between the parties. However, Tius wanted to rescind
• In sum, the Court finds that the SEC had acted the contract because the Tius breached the contract due to the
arbitrarily in arrogating unto itself the discretion of following acts by the Tius: (1) refusing to credit to them the FLADC
approving the application for listing in the PSE of the shares covering their real property contributions; (2) preventing
private respondent PALI, since this is a matter David S. Tiu and Cely Y. Tiu from assuming the positions of and
addressed to the sound discretion of the PSE, a performing their duties as Vice-President and Treasurer,
corporation entity, whose business judgments are respectively, and (3) refusing to give them the office spaces agreed
respected in the absence of bad faith. upon.

WON the Tuis can rescind the contract


FINAL VERDICT: Petition for Review on Certiorari GRANTED. The
Decisions of the Court of Appeals and the Securities and Exchange Violation of terms embodied in a Subscription Agreement, with are
Commission are REVERSED and SET ASIDE, and a new Judgment personal commitments, do not constitute legal ground to rescind the
is hereby ENTERED, affirming the decision of the PSE to deny the such agreement:. “In the instant case, the rescission of the
application for listing of the private respondent Puerto Azul Land, Inc. PreSubscription Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the corporation,
thereby violating the Trust Fund Doctrine and the Corporation Code,
NOTE: since the rescission of a subscription agreement is not one of the
SEC is the government agency, under the direct general supervision instances when distribution of capital assets and property of the
of the Office of the President, with the immense task of enforcing the corporation is allowed.” Distribution of corporate assets among the
Revised Securities Act, and all other duties assigned to it by stockholders cannot even be resorted to achieve “corporate peace.”
pertinent laws. Among its enumerable functions, and one of the most
important, is the supervision of all corporations, partnerships, or
associations who are grantees of primary franchise and/or a license FACTS:
or permit issued by the government to operate in the Philippines.
§ 1994: construction of the Masagana Citimall in Pasay City
was threatened with stoppage, when its owner, the First Landlink
Asia Development Corporation (FLADC), owned by the Tius,
became heavily indebted to the Philippine National Bank (PNB)
for P190M
§ To save the 2 lots where the mall was being built
from foreclosure, the Tius invited Ong Yong, Juanita Tan Ong,
Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong
Alonzo (the Ongs), to invest in FLADC.

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§ Pre-Subscription Agreement: Ongs and the Tius agreed to numerous litigations,” since the same are not valid grounds
maintain equal shareholdings in FLADC under the Corporation Code. Moreover, the Ongs bewailed the
§ Ongs: subscribe to 1,000,000 shares failure of the CA to grant interest on their P70 million andP20
§ Tius: subscribe to an additional 549,800 shares in million advances to FLADC and David S. Tiu, respectively, and
addition to their already existing subscription of 450,200 shares to award costs and damages.
§ Tius: nominate the Vice-President and the Treasurer plus 5 § February 27, 1996: Tius filed at the Securities and Exchange
directors Commission (SEC) seeking confirmation of their rescission of
§ Ongs nominate the President, the Secretary and 6 directors the Pre-Subscription Agreement
(including the chairman) to the board of directors of FLADC and § SEC: confirmed recission of Tius
right to manage and operate the mall. § Ongs filed reconsideration that their P70M was not a
§ Tius: contribute to FLADC a 4-storey building P20M (for premium on capital stock but an advance loan
200K shares)and 2 parcels of land P30M (for 300K shares) and § SEC en banc: affirmed it was a premium on capital stock
P49.8M (for 49,800 shares) § CA: Ongs and the Tius were in pari delicto (which would not
§ Ongs: paid P190M to settle the mortgage indebtedness of have legally entitled them to rescission) but, "for practical
FLADC to PNB (P100M in cash for their subscription to 1M considerations," that is, their inability to work together, it was
shares) best to separate the two groups by rescinding the Pre-
§ February 23, 1996: Tius rescinded the Pre-Subscription Subscription Agreement, returning the original investment of the
Agreement. The Tius accused the Ongs of (1) refusing to credit Ongs and awarding practically everything else to the Tius.
to them the FLADC shares covering their real property
contributions; (2) preventing David S. Tiu and Cely Y. Tiu from ISSUE:
assuming the positions of and performing their duties as Vice- W/N Specific performance and NOT recission is the remedy
President and Treasurer, respectively, and (3) refusing to give
them the office spaces agreed upon.
§ Ongs argued that the Tius may not properly avail of HELD & RATIO:
rescission under Article 1191 of the Civil Code considering that
the Pre-Subscription Agreement did not provide for reciprocity of YES. Ong’s petition is granted.
obligations; that the rights over the subject matter of the § This Court affirmed the fact that both the Ongs and the Tius
rescission (capital assets and properties) had been acquired by violated their respective obligations under the Pre-
a third party (FLADC); that they did not commit a substantial Subscription Agreement. The Ongs prevented the Tius from
and fundamental breach of their agreement since they did not assuming the positions of Vice-President and Treasurer of
prevent the Tius from assuming the positions of Vice-President the corporation. On the other hand, the Decision established
and Treasurer of FLADC, and that the failure to credit the that the Tius failed to turn over FLADC funds to the Ongs
300,000 shares corresponding to the 1,902.30 square-meter and that the Tius diverted rentals due to FLADC to their
property covered by TCT No. 134066 (formerly 15587) was due MATTERCO account. Consequently, it held that rescission
to the refusal of the Tius to pay the required transfer taxes to was not possible since both parties were in pari
secure the approval of the SEC for the property contribution and, delicto. However, this Court agreed with the Court of
thereafter, the issuance of title in FLADC’s name. They also Appeals that the remedy of specific performance, as
argued that the liquidation of FLADC may not legally be ordered espoused by the Ongs, was not practical and sound either
by the appellate court even for so called “practical and would only lead to further “squabbles and numerous
considerations” or even to prevent “further squabbles and litigations” between the parties.

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§ The breach of the agreement did not justify the rescission of the such agreement:. “In the instant case, the rescission of the
the contract PreSubscription Agreement will effectively result in the unauthorized
§ providing appropriate offices for David S. Tiu and Cely Y. Tiu distribution of the capital assets and property of the corporation,
as Vice-President and Treasurer, respectively, had no thereby violating the Trust Fund Doctrine and the Corporation Code,
bearing on their obligations under the Pre-Subscription since the rescission of a subscription agreement is not one of the
Agreement since the obligation pertained to FLADC itself instances when distribution of capital assets and property of the
§ failure of the Ongs to credit shares of stock in favor of the corporation is allowed.” Distribution of corporate assets among the
Tius for their property contributions also pertained to the stockholders cannot even be resorted to achieve “corporate peace.”
corporation and not to the Ongs
§ the principal objective of both parties in entering into the Pre-
Subscription Agreement in 1994 was to raise the P190
million
§ law requires that the breach of contract should be so
"substantial or fundamental" as to defeat the
primary objectiveof the parties in making the agreement
§ since the cash and other contributions now sought to be
returned already belong to FLADC, an innocent third party,
said remedy may no longer be availed of under the law.
§ Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be formed
shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a
purchase or some other contract
§ Allows the distribution of corporate capital only in three
instances: (1) amendment of the Articles of Incorporationto
reduce the authorized capital stock, (2) purchase of
redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings, and (3)
dissolution and eventual liquidation of the corporation.
§ They want this Court to make a corporate decision for
FLADC.
§ The Ongs' shortcomings were far from serious and certainly
less than substantial; they were in fact remediable and
correctable under the law. It would be totally against all rules
of justice, fairness and equity to deprive the Ongs of their
interests on petty and tenuous grounds.

Note: Violation of terms embodied in a Subscription Agreement, with


are personal commitments, do not constitute legal ground to rescind

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15. LIPAT v. PACIFIC BANKING TeresitaLipat had dealt with Pacific Banking on the mortgage
Counter-veiling doctrines; Estoppel or Ratification contract by virtue of a SPECIAL POWER OF ATTORNEY executed
by Mrs. Lipat.Pacific Banking cannot be faulted for relying on the
CASE: same authority granted to Teresita by Mrs. Lipat by virtue of a
Petitioners: Special Power Of Attorney.
Spouses Lipat
Relevant Doctrine: The principle of estoppel precludes a corporation
Respondent: and its Board of Directors from denying the validity of the transaction
Pacific Banking Corp. (Pacific Banking) entered into by its officer with a third party who in good faith, relied
Eugenio Trinidad (Highest bidder) on the authority of the former as manager to act on behalf of the
corporation.
BET: owned by Spouses Lipat FACTS:
Mystical Fashions in the US: also owned by Spouses Lipat, • Petitioners, Spouses Lipat, owned Bela’s Export Trading
managed by Mrs. Lipat (BET), engaged in the manufacture of garments for domestic
TeresitaLipat: Manager of BET and foreign consumption.
SPA: Mrs. Lipat appointing Teresita as her attorney-in-fact to obtain • Petitioners also owned Mystical Fashions in the US, which
FIRST LOAN from Pacific Banking and to secure such loan by a sells good imported from the Philippines through BET.
MORTGAGE of their property in Quezon City. • Mrs. Lipat designated her daughter, TeresitaLipat, to:
There was a provision in the Mortgage Contract which states that o manage BET in the Philippines while she was
said property was likewise made to secure “other additional or new managing Mystical Fashions in the US
loans…” o and, through a SPECIAL POWER OF ATTORNEY,
BET was incorporated into a family corporation BEC. appointed her daughter as her attorney-in-fact to
CONFLICT OF THE CASE: There were SUBSEQUENT LOANS obtain loans and other credit accommodation from
AND TRANSACTIONS obtained by BEC through Teresita. respondent Pacific Banking Corp. (Pacific Banking).
When BEC defaulted in its payments, Pacific Banking foreclosed the o She likewise authorized her daughter to execute
QC Property and sold it at a public auction with Eugenio Trinidad as mortgage contracts on properties owned or co-
the highest bidder. owned by her as security for the obligation to be
Because of this, Spouses Lipat wished to annul such foreclosure extended by Pacific Banking.
contending that (1) Teresita’s Subsequent Loans were ultra vires
• (FIRST LOAN): Teresita, by virtue of the Special Power of
because they were executed without the requisite board resolution of
Attorney, secured for and in behalf of her mother and BET a
the Board of Directors of BEC; (2) Assuming said acts were valid and
loan from Pacific Banking amounting to more than P500K
binding on BEC, the same were the corporation’s sole obligation, it
o As SECURTY: Lipat spouses represented by
having a personality distinct and separate from Spouses Lipat; (3)
Teresita, executed a Real Estate Mortgage over
The real estate mortgage was executed to secure the Lipats’ and
their property located at Quezon City.
BET’s FIRST LOAN only.
o Said property was likewise made to secure “other
SC: Petition is dismissed. Mortgaged property should bind the
additional or new loanswhich the Mortgagor and/or
loans and credit lines obtained by BEC despite absence of
Debtor may subsequently obtain from the
authorization or board resolution due to estoppel on petitioners’
Mortgagee”
part.
• BET was incorporated into a family corporation named
Bela’s Export Corporation (BEC), engaged in the business of

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manufacturing and exportation of all kinds of garments of oPierced the veil of corporate fiction, BEC and Lipats
whatever kind and description and utilized the same are one and the same.
machineries and equipment previously used by BET. o Pacific Banking had transacted business with both
• SUBSEQUENT LOANS AND TRANSACTIONS (aka BET and BEC on the supposition that both are one
promissory notes, trust receipt, and export bills)were and the same.
obtained by BEC with the corresponding promissory notes o Hence, the Lipats were estopped from
duly executed by Teresita on behalf of the corporation. disclaiming any obligations on the theory of
Subsequent transactions were all secured by the real estate separate personality of corporations.
mortgage over the Lipats’ QC property. • CA dismissed the appeal
• BEC defaulted in its payments. o Mortgage property was not only liable for the FIRST
• Pacific Banking foreclosed Lipats’ property and sold it at a LOAN but likewise for the value of SUBSEQUENT
public auction with Eugenio Trinidad as the highest bidder LOAN AND TRANSACTIONS.
(one of the respondents herein).
• Complaint for Annulment of the Real Estate Mortgage, ISSUES:
Extrajudicial Foreclosure and Certificate Of Sale was filed by 1. W/N Piercing Doctrine is applicable in this case.
Spouses Lipat. (Already discussed in class)
o Alleging that the SUBSEQUENT LOAN AND 2. W/N Petitioners’ property under the real estate mortgage
TRANSACTIONS (aka promissory notes, trust is liable not only for the FIRST LOAN but also for the
receipt, and export bills)were all ultra vires acts of value of SUBSEQUENT LOAN AND TRANSACTIONS.
Teresita as they were executed without the requisite (Relevant Issue)
board resolution of the Board of Directors of BEC.
o Assuming said acts were valid and binding on BEC, HELD & RATIO:
the same were the corporation’s sole obligation, it 1. YES, PIERCING DOCTRINE IS APPLICABLE
having a personality distinct and separate from • BET and BEC are not separate business entities.
Spouses Lipat. • Using the Alter Ego Piercing: BEC is a mere
o The real estate mortgage was executed to secure continuation and successor of BET. Petitioners
the Lipats’ and BET’s FIRST LOAN only. cannot evade their obligations in the mortgage
• Pacific Banking and Trinidad contract secured under the name of BEC on the
o Allege in common that petitioners Spouses Lipat pretext that it was signed for the benefit and under
cannot evade payments of the value of the the name of BET.
SUBSEQUENT LOAN AND TRANSACTIONS with (1) Spouses Lipat are the owners and majority
their property because they and the BEC are one shareholders of BET and BEC
and the same, the latter being a family corporation. (2) Both firms were managed by their daughter
o Petitioners are estopped from denying BEC’s Teresita
existence after holding themselves out as a (3) Both firms were engaged in the garment
corporation. business
• RTC dismissed the complaint. (4) Same office in the same building owned by the
o Convincing and conclusive evidence proving that Lipats
BEC was a mere alter ego of the Lipats. (5) BEC is a family corporation

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(6) Business operations of BEC were merged with • Petitioners contend that the mortgaged property
those of Mrs. Lipat should not bind the loans and credit lines obtained
(7) Corporate funds were held by Mrs. Lipat by BEC as they were secured without any proper
(8) Board of directors composed Burgos and Lipat authorization or board resolution. They also blame
family members the bankfor its laxity and complacency in not
(9) Mrs. Lipat had full control over the activities of requiring a board resolution as a requisite for
the corporation approving the loans.
(10) Mrs. Lipat had benefited from FIRST LOAN • However, SC ruled that: Petitioners’ contentions are
secured from Pacific Banking to finance her untenable.
business abroad and from the SUBSEQUENT LOAN o (1) No business or stockholder’s meeting
AND TRANS. were conducted nor were there election of
2. YES, PETITIONERS’ PROPERTY UNDER THE REAL officers held since its incorporation. Not a
ESTATE MORTGAGE IS LIABLE NOT ONLY FOR THE single board resolution was passed by the
FIRST LOAN BUT ALSO FOR THE VALUE OF corporate board.
SUBSEQUENT LOAN AND TRANSACTIONS. o (2) BUT Principle of estoppel precluded
• FIRST POINT: The mortgage was executed not petitioners from denying the validity of the
only for the purpose of securing BET’s FIRST transactions entered into by Teresita with
LOAN but also “for other additional or new Pacific Banking, who in good faith, relied on
loans, xxx, which the Mortgagor and/or Debtor the authority of the former as manager to act
may subsequently obtain from the mortgagee…” on behalf of petitioner Mrs. Lipat and both
• Petitioners contend that their mortgaged property BET and BEC.
should not be made liable for the SUBSEQUENT o While the power and responsibility to decide
LOANS AND TRANSACTION incurred by BEC whether the corporation should enter into a
because contract that will bind the corporation is
o It was not covered by the mortgage contract lodged in its board of directors subject to the
of BET which only covered the FIRST LOAN article of incorporation, by-laws, or relevant
and which allegedly had already been paid provisions of law, yet, just as a natural
o And that it was secured by TeresitaLipat person may authorize another to do certain
without any authorization or board acts for and on his behalf, the board of
resolutioin of BEC directors may validly delegate some of its
• However, SC ruled that: functions and powers to officers,
o BEC merely succeeded BET as petitioners’ committees, or agents.
alter ego, hence, petitioners’ mortgaged o Apparent authority is derived not merely
property must be held liable for the from practice. Its existence may be
SUBSEQUENT LOANS AND CREDIT ascertained through
LINES of BEC. § General manner in which the
• SECOND POINT: Mortgaged property should corporation hold out an officer or
bind the loans and credit lines obtained by BEC agent as having the power to act, or
despite absence of authorization or board in other words, the apparent
resolution due to estoppel on petitioners’ part.

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authority to act in general with which 16. Woodchild (WHI) vs. Roxas Electric (RECCI)
it clothes him Theory of Estoppel or Ratification
§ Or the acquiescence in his acts of a
particular nature, with actual or CASE:
constructive knowledge therefor, • RECCI was the owner of two parcels of land in
whether within or beyond the scope Sumulong Antipolo Rizal. On May 17 1991, RECCI’s Board
of his ordinary powers, of Directors approved a resolution authorizing the
o TeresitaLipat had dealt with Pacific Banking corporation, through its president, Roberto B. Roxas, to sell
on the mortgage contract by virtue of a Lot 2, with an area of 7,213 square meters, at a price and
SPECIAL POWER OF ATTORNEY under such terms and conditions which he deemed most
executed by Mrs. Lipat. reasonable and advantageous to the corporation; and to
o Teresita acted as manager of both BET and execute, sign and deliver the pertinent sales documents and
BEC and had been deciding business receive the proceeds of the sale for and on behalf of the
matters in the absence of Mrs. Lipat. company.
o Hence, Pacific Banking cannot be faulted for
relying on the same authority granted to • WHI, through its President Jonathan Dy, entered a Deed of
Teresita by Mrs. Lipat by virtue of a Special Absolute Sale in favor of WHI.
Power Of Attorney.
o Doctrine: If a corporation knowingly • Two relevant conditions were agreed upon:
permits one of its officers or any other
agent to act within the scope of an o The Vendor (Roxas Electric) agreed and
apparent authority, it holds him out to the binds itself to give Vendee (Woodchild)
public as possessing the power to do the beneficial use of and a right of way
those acts; thus, the corporation will, as from Sumulong Highway to the property
against anyone who has in good faith
dealt with it through such agent, be o The Vendor agrees that in the event that
estopped from denying the agent’s the right of way is insufficient for the
authority. Vendee’s use (ex entry of a 45-foot
container) the Vendor agrees to sell
FINAL VERDICT: Petition is denied. additional square meters from its current
  adjacent property to allow the Vendee full
access and full use of the property.

• Thereafter, WHI complained to Roberto Roxas that the


vehicles of RECCI were parked on a portion of the property
over which WHI had been granted a right of way

• Roxas died soon thereafter. So, WHI wrote the RECCI,


reiterating its verbal requests to purchase a portion of
the said lot as provided for in the deed of absolute sale,

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and complained about the latter’s failure to eject the • At a special meeting on May 17, 1991, Board of Directors of
squatters within the three-month period agreed upon in RECCI approved a resolution authorizing the corporation,
the said deed. through its president, Roberto B. Roxas, to sell Lot 2, with an
area of 7,213 square meters, at a price and under such
Issue: Whether or not (RECCI) is bound by the provisions in the terms and conditions which he deemed most reasonable and
deed of absolute sale granting to the petitioner beneficial use and a advantageous to the corporation; and to execute, sign and
right of way over a portion of Lot 1 accessing to the Sumulong deliver the pertinent sales documents and receive the
Highway and granting the option to the petitioner to buy a portion proceeds of the sale for and on behalf of the company.
thereof, and, if so, whether such agreement is enforceable against
the respondent; • Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy
Lot 2 on which it planned to construct its warehouse building,
The Court said No. Roxas was not so authorized under the May 17, and a portion of the adjoining lot, Lot 1, so that its 45-foot
1991 Resolution of its Board of Directors to impose a burden or to container van would be able to readily enter or leave the
grant a right of way in favor of the petitioner (WHI) on Lot 1, much property.
less convey a portion thereof to the petitioner. Hence, the
respondent was not bound by such provisions contained in the deed • WHI President Jonathan Y. Dy offered to buy Lot 2 under
of absolute sale. stated terms and conditions for P1,000 per square meter or
at the price of P7,213,000
As per CLV’s outline, Under Article 1910 of the New Civil Code, acts
done by such officers beyond the scope of their authority cannot bind • Roxas, as President of RECCI, as vendor, and Dy, as
the corporation unless it has ratified such acts expressly or tacitly, or President of WHI, as vendee, executed a contract to sell in
is estopped from denying them. . . . Thus, contracts entered into by which RECCI bound and obliged itself to sell to Dy Lot No. 2
corporate officers beyond the scope of authority are unenforceable for P7,213,000.
against the corporation unless ratified by the Corporation.
• On September 5, 1991, a Deed of Absolute Sale in favor of
For an act of the principal to be considered as an implied ratification WHI was issued, under which Lot No. 2 was sold
of an unauthorized act of an agent, such act must be inconsistent for P5,000,000, receipt of which was acknowledged by
with any other hypothesis than that he approved and intended to Roxas under the following terms and conditions:
adopt what had been done in his name. Ratification is based on
waiver – the intentional relinquishment of a known right. Ratification • The Vendor (Roxas Electric) agreed and
cannot be inferred from acts that a principal has a right to do binds itself to give Vendee (Woodchild) the
independently of the unauthorized act of the agent beneficial use of and a right of way from
Sumulong Highway to the property herein
conveyed consists of 25 square meters wide to be
FACTS: used as the latter’s egress from and ingress to and
an additional 25 square meters in the corner of Lot
• Respondent, Roxas Electric and Construction Company, 1, as turning and/or maneuvering area for Vendee’s
Inc. (RECCI), was the owner of two parcels of land in vehicles.
Sumulong Highway, Antipolo, Rizal.

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• The Vendor agrees that in the event that squatters within the three-month period agreed upon in
the right of way is insufficient for the Vendee’s the said deed.
use (ex entry of a 45-foot container) the Vendor
agrees to sell additional square meters from its • WHI demanded that the RECCI sell a portion of Lot No.1
current adjacent property to allow the Vendee beneficial use within 72 hours from notice thereof, otherwise
full access and full use of the property. the appropriate action would be filed against it. RECCI
rejected the demand of WHI. WHI reiterated its demand in a
• On September 10, 1991, the contractor of WHI - Wimbeco Letter dated May 29, 1992. There was no response from
Builder’s, Inc. (WBI) submitted its quotation to WHI for the RECCI.
construction of the warehouse building on a portion of the
property. In a Letter dated September 16, 1991, another • WHI filed a complaint against the RECCI with the Regional
company, Ponderosa Leather Goods Company, Inc. Trial Court of Makati, for specific performance and damages
confirmed its lease agreement with WHI of said portion of
the warehouse yet to be constructed. Ponderosa • ISSUE:
emphasized the need for the warehouse to be ready for
occupancy before April 1, 1992. WHI accepted the Whether or not the respondent (RECCI) is bound by the
offer. However, WBI failed to commence the construction of provisions in the deed of absolute sale granting to the
the warehouse in October 1, 1991 as planned because of petitioner beneficial use and a right of way over a portion of
the presence of squatters in the property and suggested a Lot 1 accessing to the Sumulong Highway and granting the
renegotiation of the contract after the squatters shall have option to the petitioner to buy a portion thereof, and, if so,
been evicted. Subsequently, the squatters were evicted from whether such agreement is enforceable against the
the property. (this paragraph contains info which might be respondent;
asked, but not really important in the issue)
HELD & RATIO:
• WHI complained to Roberto Roxas that the vehicles of
RECCI were parked on a portion of the property over which • No. RECCI is not bound by the actions of Roxas.
WHI had been granted a right of way. Roxas promised to • Roxas was not so authorized under the May 17, 1991
look into the matter. Resolution of its Board of Directors to impose a burden or to
grant a right of way in favor of the petitioner (WHI) on Lot 1,
• Dy and Roxas discussed the need of the WHI to buy a 500- much less convey a portion thereof to the petitioner. Hence,
square-meter portion of Lot No. 1 as provided for in the deed the respondent was not bound by such provisions contained
of absolute sale. in the deed of absolute sale. Besides, the respondent
contends, the petitioner cannot enforce its right to buy a
• However, Roxas died soon thereafter. portion of the said property since there was no agreement in
the deed of absolute sale on the price thereof as well as the
• On April 15, 1992, the WHI wrote the RECCI, reiterating specific portion and area to be purchased by the petitioner.
its verbal requests to purchase a portion of the said lot
as provided for in the deed of absolute sale, and • In San Juan Structural and Steel Fabricators, Inc. v. Court of
[21]
complained about the latter’s failure to eject the Appeals, we held that:

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• xxx. Indubitably, a corporation may act only through petitioner on a portion of Lot No. 1 or to agree to sell to the
its board of directors or, when authorized either by petitioner a portion thereof.
its by-laws or by its board resolution, through its
officers or agents in the normal course of • The authority of Roxas, under the resolution, to sell Lot 2 did
business. The general principles of agency govern not include the authority to sell a portion of the adjacent lot,
the relation between the corporation and its officers Lot 1, or to create or convey real rights thereon. Neither
or agents, subject to the articles of incorporation, by- may such authority be implied from the authority granted to
laws, or relevant provisions of law. … Roxas to sell Lot 2 to the petitioner “on such terms and
conditions which he deems most reasonable and
• Generally, the acts of the corporate officers within the scope advantageous.”
of their authority are binding on the corporation. However,
under Article 1910 of the New Civil Code, acts done by such • Under paragraph 12, Article 1878 of the New Civil Code, a
officers beyond the scope of their authority cannot bind the special power of attorney is required to convey real rights
corporation unless it has ratified such acts expressly or over immovable property. Article 1358 of the New Civil Code
tacitly, or is estopped from denying them: requires that contracts which have for their object the
creation of real rights over immovable property must appear
• Art. 1910. The principal must comply with all the in a public document. WHI cannot feign ignorance of the
obligations which the agent may have contracted within need for Roxas to have been specifically authorized in
the scope of his authority. writing by the Board of Directors to be able to validly grant a
right of way and agree to sell a portion of Lot No. 1. The rule
• As for any obligation wherein the agent has is that if the act of the agent is one which requires
exceeded his power, the principal is not bound except authority in writing, those dealing with him are charged
when he ratifies it expressly or tacitly. with notice of that fact.

• Thus, contracts entered into by corporate officers beyond the • For the principle of apparent authority to apply, WHI was
scope of authority are unenforceable against the corporation burdened to prove the following:
unless ratified by the corporation.
• (a) the acts of the respondent justifying belief in the agency
• Relevant to the issue is the May 17, 1991 Resolution of the by the petitioner;
Board of Directors of the respondent, which is worded as
follows: • (b) knowledge thereof by the respondent which is sought to
be held; and,
xxx. FURTHER RESOLVED, that Mr. ROBERTO B.
ROXAS, President of the corporation, be, as he is • (c) reliance thereon by the petitioner consistent with ordinary
hereby authorized to execute, sign and deliver the care and prudence.
pertinent sales documents and receive the proceeds
of sale for and on behalf of the company. xxx • In this case, there is no evidence on record of
specific acts made by the RECCI showing or
• Evidently, Roxas was not specifically authorized under indicating that it had full knowledge of any
the said resolution to grant a right of way in favor of the representations made by Roxas to the petitioner that

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the respondent had authorized him to grant to the 17. Trinidad Francisco vs Government Service Insurance
respondent an option to buy a portion of Lot 1. System (1963)

• WHI’s contention that by receiving and retaining CASE:


the P5,000,000 purchase price of Lot 2, RECCI Trinidad Francisco loaned Php 400,000 from GSIS. As security, she
effectively and impliedly ratified the grant of a mortgaged a parcel of land known as the Vic-Mari Compound in
right of way on the adjacent lot, Lot 1, and to Quezon City. Since Francisco failed to pay, GSIS extra-judicially
grant to the petitioner an option to sell a portion foreclosed the property and GSIS itself was the buyer of such.
thereof, is barren of merit. Trinidad’s father(Vicente Francisco) sent a letter to the general
Manager of GSIS, Mr. Rodolfo Andal, proposing a payment scheme
• For an act of the principal to be considered as an (a compromise) and asking that the foreclosure be set aside. On the
implied ratification of an unauthorized act of an same day, Mr. Andal sent a telegram which said that GSIS approved
agent, such act must be inconsistent with any other his request regarding the redemption of the foreclosed property of
hypothesis than that he approved and intended to his daughter. Hence, Francisco remitted to GSIS, through Andal,
adopt what had been done in his name. Ratification Php30,000 in accordance with the terms of the compromise.
is based on waiver – the intentional However, Trinidad Francisco was shocked when GSIS sent letters
relinquishment of a known right. asking for a proposal of the payment of her indebtedness. Trinidad
said that GSIS through Andal had already settled matters with her as
• Ratification cannot be inferred from acts that a evidenced by the telegram sent by Andal. But GSIS said that such
principal has a right to do independently of the telegram should be disregarded since such did not express the
unauthorized act of the agent. Moreover, if a writing contents of the board resolution due to the error of its minor
is required to grant an authority to do a particular employees in couching the correct wording of the telegram. Hence,
act, ratification of that act must also be in GSIS insisted that Francisco would pay all the expenses incurred by
writing. Since the respondent had not ratified the GSIS in the foreclosure. The Court ruled that the compromise
unauthorized acts of Roxas, the same are entered into between GSIS and Francisco was validly accepted and
unenforceable. Hence, by the respondent’s retention was binding on GSIS. If a corporation knowingly permits one of its
of the amount, it cannot thereby be implied that it officers, or any other agent, to do those acts, the corporation will, as
had ratified the unauthorized acts of its agent, against anyone who has in good faith dealt with the corporation
Roberto Roxas. through such agent, be estopped from denying his authority.

FACTS:
• 10 Oct 1956- Trinidad Francisco, in consideration of the Php
400,000 loan released to her by GSIS mortgaged in favor of
GSIS a parcel of land containing an area of P18,232 square
meters with 21 bungalows known as the Vic-Mari Compound
located at Baesa, Quezon City.
• 6 Jan 1959- GSIS extra-judicially foreclosed the mortgaged
on the ground that Francisco was in arrears on her monthly
instalment in the amount of Php 52,000. GSIS was the
highest bidder and was itself the buyer of said propery

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o The cost of foreclose incurred by GSIS was Php • GSIS countered the protest and insisted that Francisco
130,000 should pay all expenses incurred by the GSIS in the
• 20 Feb 1959- Atty. Vicente Francisco, Trinidad Francisco’s foreclose of the mortgage. It also said that the telegram
father sent a letter to the general manager of GSIS, Mr. should be disregarded in view of its failure to express the
Rodolfo Andal which contained a proposal for a compromise: contents of the board resolution due to the error of its
o He proposes to pay Php 30,000 if GSIS agrees to employees in couching the correct wording of the telegram.
set aside the foreclosure of his daughter’s mortgage
o Since Php 30,000 does not cover the total arrearage ISSUES:
of Php 52,000, GSIS will take over the Whether or not the compromise made by Francisco had
administration of the mortgaged property and to been validly accepted by GSIS and is binding on GSIS.
collect the monthly installment amounting to Php
5,000 due on the unpaid purchase price of more HELD & RATIO:
than 31 lots and houses in the property. Such YES. The terms of the offer were clear, and over the
collection shall be applied to the payment of his signature of defendant's general manager, Rodolfo Andal,
daughter’s arrearage until the same is fully covered. plaintiff was informed telegraphically that her proposal had
• On the same day, Atty. Francisco received a telegram from been accepted. There was nothing in the telegram that
GSIS, through Anal, which read that the GSIS BOARD hinted at any anomaly, or gave ground to suspect its
approved his request regarding the redemption of the veracity, and Francisco, therefore, cannot be blamed for
foreclosed property of his daughter. relying upon it.
• 28 Feb 1959- Atty Francisco remitted to GSIS a check worth
Php 30,000 as earlier agreed upon in their compromise. There is no denying that the telegram was within Andal's
GSIS received the amount of 30K and issued an official apparent authority. His defense is that he did not sign it, but
receipt. It did not however take over the administration of the that it was sent by the Board Secretary in his name and
compound. Hence, Trinidad Francisco remitted the monthly without his knowledge. Assuming this to be true, how was
installment from the compound to GSIS and the latter also appellee to know it? Corporate transactions would speedily
issued official receipts for such payments come to a standstill were every person dealing with a
• 1960- GSIS sent three letters, signed by its assistant general corporation held duty-bound to disbelieve every act of its
manager and its general manager Andal. In these letters, responsible officers, no matter how regular they should
GSIS asked Francisco for a proposal for the payment of her appear on their face. This Court has observed in Ramirez vs.
indebtedness since the one year redemption period has Orientalist Co that:
already expired.
o In reply, Atty Francisco sent a letter protesting “In passing upon the liability of a corporation in
against GSIS’ request for proposal of payment and cases of this kind it is always well to keep in mind
invited its attention to the concluded contract the situation as it presents itself to the third party
generated by his offer on 20 Feb 1959 and its with whom the contract is made. Naturally he can
acceptance by telegram of the same date, the have little or no information as to what occurs in
compliance of the terms of the offer already corporate meetings; and he must necessarily rely
commenced by Francisco, and the misapplication of upon the external manifestations of corporate
GSIS of the remittances she had made, and consent. The integrity of commercial transactions
requesting the proper correction. can only be maintained by holding the corporation

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strictly to the liability fixed upon it by its agents in


accordance with law; and we would be sorry to Hence, even if it were the board secretary who sent the
announce a doctrine which would permit the telegram, the corporation could not evade the binding effect
property of a man in the city of Paris to be whisked produced by the telegram.
out of his hands and carried into a remote quarter of
the earth without recourse against the corporation The defendant-appellant does not disown the telegram, and
whose name and authority had been used in the even asserts that it came from its offices, as may be gleaned
manner disclosed in this case. As already from the letter, dated 31 May 1960, to Atty. Francisco, and
observed, it is familiar doctrine that if a signed "R. P. Andal, general manager by Leovigildo
corporation knowingly permits one of its Monasterial, legal counsel", wherein these phrases occur:
officers, or any other agent, to do acts within the "the telegram sent ... by this office" and "the telegram we
scope of an apparent authority, and thus holds sent your”, but it alleges mistake in couching the correct
him out to the public as possessing power to do wording. This alleged mistake cannot be taken seriously,
those acts, the corporation will, as against any because while the telegram is dated 20 February 1959, the
one who has in good faith dealt with the defendant informed Atty. Francisco of the alleged mistake
corporation through such agent, be estopped only on 31 May 1960, and all the while it accepted the
from denying his authority; and where it is said "if various other remittances, starting on 28 February 1959,
the corporation permits" this means the same as "if sent by the plaintiff to it in compliance with her performance
the thing is permitted by the directing power of the of her part of the new contract.
corporation."
The inequity of permitting the System to deny its acceptance
A very large part of the business of the country is carried on become more patent when account is taken of the fact that
by corporations. It certainly is not the practice of persons in remitting the payment of P30,000 advanced by her father,
dealing with officers or agents who assume to act for such plaintiff's letter to Mr. Andal quoted verbatim the telegram of
entities to insist on being shown the resolution of the board acceptance. This was in itself notice to the corporation of the
of directors authorizing the particular officer or agent to terms of the allegedly unauthorized telegram, for as
transact the particular business which he assumes to Ballentine says: “Knowledge of facts acquired or possessed
conduct. A person who knows that the officer or agent of the by an officer or agent of a corporation in the course of his
corporation habitually transacts certain kinds of business for employment, and in relation to matters within the scope of
such corporation under circumstances which necessarily his authority, is notice to the corporation, whether he
show knowledge on the part of those charged with the communicates such knowledge or not.” .
conduct of the corporate business assumes, as he has the
right to assume, that such agent or officer is acting within the Yet,   notwithstanding   this   notice,   the   defendant   System  
scope of his authority. — pocketed   the   amount,   and   kept   silent   about   the   telegram  
not   being   in   accordance   with   the   true   facts,   as   it   now  
If a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it, alleges.  This  silence,  taken  together  with  the  unconditional  
the corporation will be estopped to deny that such apparent acceptance   of   three   other   subsequent   remittances  
authority is real, as to innocent third persons dealing in good remittances   from   plaintiff,   constitutes   in   itself   a   binding  
faith with such officers or agents. ratification  of  the  original  agreement.  

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18. Westmont Bank v. Inland Construction to debit P350,000 from its savings account to partially satisfy
Doctrine of Apparent Authority its obligations
• Deed of Assignment, Conveyance and Release, Felix
CASE: Aranda, President of Inland, assigned and conveyed all his
CLV: The general rule remains that, in the absence of authority from rights and interests at Hanil-Gonzales Construction &
the Board of Directors, no person, not even its officers, can validly Development Corporation (Hanil-Gonzales Corporation) in
bind a corporation. If a corporation, however, consciously lets one of favor of Horacio Abrantes (Abrantes), Executive Vice-
its officers, or any other agent, to act within the scope of an apparent President and General Manager of Hanil-Gonzales
authority, it will be estopped from denying such officer’s authority… Corporation.
Unmistakably, the Court’s directive in Yao KA Sin Trading is that a • Under the same Deed of Assignment, it appears that
corporation should first prove by clear evidence that its corporate Abrantes assumed, among other obligations of Inland and
officer is not in fact authorized to act on its behalf before the burden Aranda,
of evidence shifts to the other party to prove, by previous specific • Promissory Note in the amount of P800,000 as shown in
acts, that an officer was clothed by the corporation with apparent the May 26, 1978 Deed of Assignment of Obligation in which
authority. Aranda and Inland, on one hand, and Abrantes and Hanil-
Gonzales Corporation
Inland obtained various loans Westmont Bank. Inland executed real • Inland was served a Notice of Sheriff’s Sale foreclosing the
estate mortgages over three real properties but Inland defaulted in its real estate mortgages over its real properties, prompting
payments. A Deed of Assignment was executed so that Hanil- it to file a complaint for injunction against the bank and the
Gonzales Corp. was assigned and conveyed all the rights and Provincial Sheriff of Rizal at the Regional Trial Court (RTC)
obligations of Inland. Inland was surprised when it was served a of Pasig City
Notice of Sheriff’s Sale foreclosing the real estate mortgages. Inland • RTC: WHEREFORE, judgment is hereby rendered in favor
filed a complaint for injunction against Bank and the Sherriff. The of the plaintiff and against the defendants, permanently,
issue is W/N the Deed of Assignment entered into by account officer perpetually and forever restraining and enjoining the
Calo bound the bank? Yes Calo had the authority. PET Bank failed defendants Associated Citizens Bank and the Sheriff of this
to discharge its primary burden of proving that Calo Court from proceeding with the foreclosure of and
was not authorized to bind it, as it did not present proof that Calo conducting an auction sale
was unauthorized. o bank ratified the act of its account officer Calo
o the defendant Bank ratified the act of Calo when
its Executive Committee failed to repudiate the
FACTS: assignment within a reasonable time and even
• Inland Construction and Development Corp. (Inland) approved the request for a restructuring of
obtained various loans and other credit accommodations Liberty Const. & Dev. Corp./Hanil-Gonzales
from petitioner, then known as Associated Citizens Bank Construction & Development Corp.’s obligations,
([the bank] which later became United Overseas Bank, which included the P880,000.00 loan
Phils., and still later Westmost Bank) in 1977. • CA: modified the same
• Inland executed real estate mortgages over three real o restrains the sheriff from proceeding with the
properties in Pasig City threatened foreclosure auction sale of the subject
• When the first and second promissory notes fell due, Inland mortgage properties.
defaulted in its payments. It, however, authorized the bank

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o both the assignors (Aranda and Inland) and officers, or any other agent, to act within the scope
assignees(Abrantes and Hanil-Gonzales) in the of an apparent authority, it will be estopped from
subject deed of assignment have been major clients denying such officer’s authority
of Associated Bank for several years with accounts • Since it conducted business through Calo, who is an
amounting to millions of pesos. For several years, Account Officer, it is presumed that he had authority
Associated Bank had, either intentionally or to sign for the bank in the Deed of Assignment.
negligently, been habitually clothing Calo with • PET cannot feign ignorance of the May 26,
the apparent powers to perform acts in behalf of 1978 Deed of Assignment
the bank. • PET, as a banking institution, is expected to have
o Associated Bank never made any attempt to exercised the highest degree of diligence and
repudiate the act of Calo until almost seven (7) meticulousness in the conduct of its business.
years later, (through the INTER-OFFICE MEMO) • Court’s directive in Yao Ka Sin Trading is that a
o Mitos C. Olivares, Manager of the Cash Department corporation should first prove by clear evidence that
of Associated Bank, issued an INTER-OFFICE its corporate officer is not in fact authorized to act on
MEMORANDUM its behalf before the burden of evidence shifts to the
§ The abovequoted inter-office other party to prove, by previous specific acts, that
memorandum is addressed internally to an officer was clothed by the corporation with
the other offices within Associated apparent authority.
Bank. It is not addressed to Inland or • PET-Bank failed to discharge its primary burden of
any outsider for that matter. Worse, it proving that Calo was not authorized to bind it, as it
was not even offered in evidence by did not present proof that Calo was unauthorized.
Associated Bank to give Inland the •
[28]
inter-office memorandum stating that Calo had “no
opportunity to object to or comment on signing authority” remains self-serving as it does not
the said document, even form part of petitioner’s body of evidence.
• PET: maintains that Calo had no authority to bind it in the • Both the trial court’s and the appellate court’s
Deed of Assignment and that a single, isolated unauthorized inferences and conclusion that petitioner ratified its
act of its agent is not sufficient to establish that it clothed him account officer’s act are thus rationally based on
with apparent authority. PET adds that the records fail to evidence and circumstances duly highlighted in their
disclose evidence of similar acts of Calo executed either in respective decisions
its favor or in favor of other parties.
FINAL VERDICT: WHEREFORE, the petitions are DENIED. CA is
ISSUES: AFFIRMED
9. Whether or not Calo had the authority to bind the Bank?

HELD & RATIO:


Notes:
9. Yes Calo had the authority.
• The general rule remains that, in the absence of
In Yao Ka Sin Trading, the therein respondent cement company had
authority from the board of directors, no person, not
[21] shown by clear and convincing evidence that its president was not
even its officers, can validly bind a corporation. If
authorized to undertake a particular transaction.
a corporation, however, consciously lets one of its

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Thus, it was only after the company successfully discharged its 19. ASSOCIATED BANK (now UNITED OVERSEAS BANK) v.
burden that the other party, the therein petitioner Yao Ka Sin SPOUSES RAFAEL and MONALIZA PRONSTROLLER
Trading, had to prove that indeed the cement company had clothed Doctrine of Apparent Authority
its president with the apparent power to execute the contract by
evidence of similar acts executed in its favor or in favor of other CASE:
parties. Petitioner Associated Bank acquired a parcel of land, which
is subject of a case before the SC, through a foreclosure sale. The
respondents Pronstroller wished to purchase it, so they and
petitioner, through its then VP Atty. Soluta, entered into a Letter-
Agreement setting forth the terms of the sale. The Agreement
provides that respondents must deposit the purchase balance within
a period of 90 days. Prior to the expiration of such period,
respondents requested that the balance be paid only upon the final
decision of the SC regarding the same property. A month later, and
after the period had lapsed, respondents and petitioner, through Atty.
Soluta, again entered into a Letter-Agreement (July 1993 Letter-
Agreement), granting respondents’ request.
Petitioner reorganized its management, and Atty. Soluta was
relieved of his responsibilities. The new Board informed respondents
that it wished to rescind the contract for respondents’ failure to pay
within the 90-day period. When the respondents showed the July
1993 Letter-Agreement, petitioner claimed that Atty. Soluta had no
authority to modify the original agreement.
The issue is whether or not petitioner is bound by the July
1993 Letter-Agreement.
The SC ruled against the petitioner under the doctrine of
apparent authority. Petitioner had previously allowed Atty. Soluta to
enter into the first agreement without a board resolution expressly
authorizing him, thus, it had clothed him with apparent authority to
modify the same through the July 1993 Letter-Agreement. Petitioner
may not impute negligence on the part of the respondents, because
the latter necessarily would rely on the external manifestations of
corporate consent. Naturally, respondents would have no idea as to
what transpires in the boardroom.

FACTS:
• Spouses Eduardo and Pilar Vaca (spouses Vaca) executed
a Real Estate Mortgage in favor of petitioner Associated
Bank over their parcel of land.

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• For failure of spouses Vaca to pay their obligation, the • The matter was submitted to the Board of Directors, but was
property was sold at a public auction with petitioner as the later on disapproved by it.
highest bidder. The TCT was later transferred to petitioner’s • Petitioner informed the respondents of the Board’s decision,
name. so in light of this, it wished to rescind the contract and forfeit
• Spouses Vaca commenced an action for the nullification of respondents’ deposit.
the REM and the foreclosure sale. • When the respondents showed the petitioner the July 1993
• Petitioner filed for a writ of possession which was denied by Letter-Agreement (granting them an extension), Associated
the RTC, so it elevated the case to CA, which gave the Bank claimed that the letter was a mistake and that Atty.
petitioner a favorable decision. Spouses Vaca questioned Soluta was not authorized to give such extension.
the CA decision in the SC. • Meanwhile, the SC affirmed petitioner’s right to possess.
• During the pendency of the case, petitioner advertised to sell • Respondents filed this complaint for specific performance.
the property. • Petitioner insists that the contract had already been
• Respondent spouses Pronstroller offered to purchase it for rescinded because of respondents’ failure to deposit the
7.5M. The offer was made through Atty. Jose Soluta, Jr. purchase balance within the stipulated period.
(Atty. Soluta), petitioner’s VP, Corporate Secretary and a • During the pendency of the case, petitioner sold the property
member of its Board of Directors. to spouses Vaca. [but this is another issue]
• Petitioner accepted the offer. The respondents paid 10% of
the purchase price. ISSUE: [major issue] Is the petitioner bound by the July 1993 Letter-
• In 1993, petitioner, through Atty. Soluta, executed a Agreement signed by Atty. Soluta?
Letter-Agreement setting forth the terms and conditions of
the sale. The Agreement stated that the deposit of the HELD & RATIO: Yes, petitioner is bound under the doctrine of
purchase balance shall be made under an escrow apparent authority.
agreement, within 90 days from date hereof. • The general rule is that in the absence of authority from the
• Prior to the expiration of the 90-day period, respondents board of directors, no person can validly bind a corporation.
requested that the balance of the purchase price be However, the board may validly delegate some of its
made payable only upon service on them of a final functions and powers to officers, committees and agents.
decision of the SC regarding the case between spouses This authority may be actual or apparent. Apparent
Vaca and petitioner, affirming the latter’s right to possess. authority may be ascertained through
• A month after they made the request and after the period o the general manner in which the corporation
had lapsed, respondents and Atty. Soluta, acting for the holds out an officer or agent as having the
petitioner, executed another letter-agreement (July 14, 1993 power to act the apparent authority; or
Letter-Agreement), allowing the former to pay the balance o the acquiescence in his acts of a particular
upon receipt of final order from the SC. nature, with actual or constructive knowledge
• Petitioner reorganized its management; Atty. Soluta was thereof, within or beyond the scope of his
relieved of his responsibilities. ordinary powers.
• The petitioner found through its records that respondents • Petitioner had previously allowed Atty. Soluta to enter into
failed to deposit the balance within the agreed period, and the first agreement without a board resolution expressly
also found that they requested an extension to pay. authorizing him, thus, it had clothed him with apparent
authority to modify the same through the July 1993
Letter-Agreement.

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• Rationale for the Doctrine of Apparent Authority: Naturally, 20. GOKONGWEI, JR. v. SEC
third persons have little or no information as to what Qualifications of Directors/Trustees
occurs in corporate meetings; they must necessarily
rely upon the external manifestations of corporate CASE:
consent. What transpires in the boardroom is entirely an
internal matter. Hence, petitioner may not impute negligence Gokongwei Jr., as stockholder of San Miguel Corporation, filed with
on the part of the respondents. the SEC a petition for declaration of nullity of amended by-laws
• If a corporation knowingly permits its officers to act within the alleging that corporations had no inherent power to provide for
scope of apparent authority as against any person who has additional qualifications for directors. (Amendment: That no person
dealt in good faith with the corporation through such agent, shall qualify or be eligible for nomination if he is engaged in any
the corporation estopped from denying such authority. competitive or antagonistic business with that of the Corporation)
• Gokongwei claimed that prior to the questioned amendment, he had
FINAL VERDICT: Petition dismissed. all the qualifications to be a director of the corporation, being a
substantial stockholder thereof.
NOTE: This has a Motion for Reconsideration case but the issues
are no longer related to Corp Law. Whether the corporation has the power to provide for the
(additional) qualifications of its directors:

YES. It is recognized by all authorities that "every corporation has


the inherent power to adopt by-laws 'for its internal government, and
to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the
management of its affairs.'"
Sec. 18 of the Corporation Law, any corporation may amend its
articles of incorporation by a vote or written assent of the
stockholders representing at least 2/3 of the subscribed capital stock
of the corporation. If the amendment changes, diminishes or restricts
the rights of the existing shareholders, then the dissenting minority
has only one right: "to object thereto in writing and demand payment
for his share."
Sec. 22: the owners of the majority of the subscribed capital stock
may amend or repeal any by-law or adopt new by-laws.
It cannot be said, therefore, that Gokongwei has a vested right to be
elected director.

FACTS:
1. John Gokongwei Jr., as stockholder of San Miguel
Corporation, filed with the SEC a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of

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filing of amended by-laws, injunction and damages with stockholder from being elected as a director and, therefore,
prayer for a preliminary injunction" against the majority of the the questioned act is ultra vires and void.
members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. ISSUES:
2. Gokongwei alleged that the Board amended the bylaws of 3. Whether the corporation has the power to provide for
the corporation as void, ultra vires, unreasonable and the (additional) qualifications of its directors
oppressive:
3. prescribing additional qualifications for its
directors, “that no person shall qualify or be eligible HELD & RATIO:
for nomination if he is engaged in any competitive • YES, It is recognized by all authorities that "every
or antagonistic business with that of the corporation has the inherent power to adopt by-laws 'for its
Corporation.” internal government, and to regulate the conduct and
2. submitting all nominations for election of directors in prescribe the rights and duties of its members towards itself
writing at least 5 working days before the date of the and among themselves in reference to the management of
Annual Meeting. its affairs.'"
2. The board based their authority to do so on a resolution of o In this jurisdiction under Sec. 21 of the Corporation
the stockholders. Law: A corporation may prescribe in its by-laws "the
3. It was contended that according to Sec. 22 of the qualifications, duties and compensation of directors,
Corporation Law and Article VIII of the by-laws of the officers and employees."
corporation, the power to amend, modify, repeal or adopt o This must necessarily refer to a qualification in
new by-laws may be delegated to the Board of Directors only addition to that specified by Sec. 30 of the
by the affirmative vote of stockholders representing not less Corporation Law: every director must own in his right
than 2/3 of the subscribed and paid up capital stock of the at least one share of the capital stock of the stock
corporation, which 2/3 should have been computed on the corporation of which he is a director."
basis of the capitalization at the time of the amendment. o Any person "who buys stock in a corporation does
4. Since the amendment was based on the 1961 authorization, so with the knowledge that its affairs are dominated
Gokongwei contended that the Board acted without authority by a majority of the stockholders and that he
and in usurpation of the power of the stockholders. impliedly contracts that the will of the majority shall
5. Gokongwei claimed that prior to the questioned amendment, govern in all matters within the limits of the act of
he had all the qualifications to be a director of the incorporation and lawfully enacted by-laws and not
corporation, being a substantial stockholder thereof; that as forbidden by law."
a stockholder, Gokongwei had acquired rights inherent in • To this extent, therefore, the stockholder may be
stock ownership, such as the rights to vote and to be voted considered to have "parted with his personal right or
upon in the election of directors; and that in amending the privilege to regulate the disposition of his property which
by-laws, Soriano, et. al. purposely provided for Gokongwei's he has invested in the capital stock of the corporation, and
disqualification and deprived him of his vested right as afore- surrendered it to the will of the majority of his fellow
mentioned, hence the amended by-laws are null and void. incorporators. It cannot therefore be justly said that the
6. As additional causes of action, it was alleged that contract, express or implied, between the corporation and
corporations have no inherent power to disqualify a the stockholders is infringed by any act of the former which
is authorized by a majority."

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• Pursuant to Sec. 18 of the Corporation Law, any directors is a reasonable exercise of corporate authority. Sound
corporation may amend its articles of incorporation by a principles of corporate management counsel against sharing
vote or written assent of the stockholders representing at sensitive information with a director whose fiduciary duty to loyalty
least two-thirds of the subscribed capital stock of the may require that he discloses this information to a competitive rival.
corporation. If the amendment changes, diminishes or
restricts the rights of the existing shareholders, then the
dissenting minority has only one right, viz.: "to object
thereto in writing and demand payment for his share."
• Under Sec. 22 of the same law, the owners of the majority
of the subscribed capital stock may amend or repeal any
by-law or adopt new by-laws. It cannot be said, therefore,
that Gokongwei has a vested right to be elected director, in
the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that
the corporate charter and the by-law shall be subject to
amendment, alteration and modification.

FINAL VERDICT: Petition is DENIED. On the matter of the validity of


the amended by-laws of respondent San Miguel Corporation, 6
Justices, namely voted to sustain the validity per se of the amended
by-laws in question and to dismiss the petition without prejudice to
the question of the actual disqualification of petitioner John
Gokongwei, Jr. to run and if elected to sit as director of respondent
San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision
shall be appealable to the respondent Securities and Exchange
Commission deliberating and acting en banc and ultimately to
this Court. Unless disqualified in the manner herein provided, the
prohibition in the afore-mentioned amended by-laws shall not apply
to petitioner.

Notes:

A corporation is authorized to prescribe qualifications of its


directors; such is not invalid, provided, however that before such
nominee is disqualified, he should be given due process to show that
he is not covered by such disqualification. A director stands in
fiduciary relation to the corporation and its stockholders. The
disqualification of a competition from being elected to the board of

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21. LEE and LACDAO Ramon Lee and Antonio Lacdao, the president and vice-
versus president of ALFA respectively, and ICB.
COURT OF APPEALS, SACOBA MANUFACTURING CORP., • Ramon Lee informed that ALFA management was
PABLO GONZALES, JR. and THOMAS GONZALES transferred to DBP.
Beneficial ownership under VTA no longer qualifies as a director • So, the trial court issued an order requiring the issuance of
owning at least one share of stock in his name. an alias summons upon ALFA through the Development
Bank of the Philippines (DBP).
CASE: • However, DBP claimed that it was not authorized to receive
This case involves a complaint for a sum of money. As a such summons.
result of this complaint, a third-party complaint was filed against Alfa • So, private respondents again took steps to serve the
Integrated Textile Mills (ALFA), through Ramon Lee and Antonio summons to ALFA, again through Lee and Lacdao.
Lacdao, president and vice-president respectively of the said • Lee and Lacdao filed a motion for reconsideration that they
corporation. The lower court served summons to ALFA through Lee should not be served with the summons because they were
and Lacdao. no longer officers of ALFA.
Lee and Lacdao argued that they should not be the ones to
be served with the summons because they are no longer directors of They contend that through a Voting Trust Agreement
ALFA by virtue of a Voting Trust Agreement (VTA) which transferred (VTA) between ALFA and DBP, the management and
the management and control of ALFA to Development Bank of the control of ALFA were already vested upon DBP. Being
Philippines (DBP). Therefore, service to them of the summons is not such, they were no longer directors of ALFA.
tantamount to service of summons to ALFA. Therefore, service upon them who were no
The issue is: Whether or not Lee and Lacdao are still longer corporate officers of ALFA cannot be considered
directors of ALFA after the execution of the VTA? as proper service of summons on ALFA.
No. The VTA divested them with any share of the capital
stock of the corporation. Under the law, for one to become a director ISSUES:
of a corporation, he must own at least one (1) share of the capital Whether or not Ramon Lee and Antonio Lacdao are still
stock of the corporation. directors of ALFA after the execution of the Voting Trust
In the case at bar, since Lee and Lacdao were divested Agreement (VTA)?
of any share in the corporation through the VTA, they can no
longer be directors of the corporation. HELD & RATIO:
Hence, they should not be served with the said summons. NO. Through the VTA, they no longer own any share of the
capital stock of the corporation. Hence, they ceased to be
directors or officers of the corporation ALFA.
FACTS: • Every director must own at least one (1) share of the
• This case involves a complaint for a sum of money. capital stock of the corporation of which he is a
• The complaint was filed by the International Corporate Bank, director which share shall stand in his name on the
Inc. (ICB) against Sacoba Manufacturing, and Pablo and books of the corporation. Any director who ceases to
Thomas Gonzales, the private respondents herein. be the owner of at least one (1) share of the capital
• Private respondents in turn filed a third-party complaint stock of the corporation of which he is a director
against Alfa Integrated Textile Mills (ALFA) through shall thereby cease to be director.

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• Under the Corporation Code, a voting trust 22. MONFORT v. MONFORT


agreement is an agreement in writing whereby one Requirements in Election of Directors
or more stockholders of a corporation consent to
transfer his or their shares to a trustee in order to CASE:
vest in the latter voting or other rights pertaining to The group of Antonio Monfort III, through force and
said shares for a period not exceeding five years intimidation, allegedly took possession of certain properties the
upon the fulfillment of statutory conditions and such Monfort Corporation owns. Salvatierra filed a case on behalf of the
other terms and conditions specified in the Corporation for the Group to return what they got and a complaint for
agreement. The five year-period may be extended in forcible entry. The Group’s defense is that Salvatierra does not have
cases where the voting trust is executed pursuant to the legal capacity to sue on behalf of the Corporation. The Court
a loan agreement whereby the period is made ruled in favor of the Group as Salvatierra failed to prove that four of
contingent upon full payment of the loan. those who authorized her to represent the Corporation were the
• The facts of this case show that the petitioners, by lawfully elected Members of the Board of the Corporation. As such,
virtue of the voting trust agreement executed in 1981 they cannot confer valid authority for her to sue on behalf of the
disposed of all their shares through assignment and corporation. Sec. 26 of the Corporation Code requires corporations
delivery in favor of the DBP, as trustee. to submit to the SEC within 30 days after the election the names,
Consequently, the petitioners ceased to own at least nationalities and residences of the elected directors, trustees and
one share standing in their names on the books of officers of the Corporation. In line with this, SEC requires
ALFA as required under Section 23 of the new corporations to submit a General Information Sheet which shall state,
Corporation Code. They also ceased to have among others, the names of the elected directors and officers,
anything to do with the management of the together with their corresponding position title. The Corporation was
enterprise. The petitioners ceased to be directors. not able to follow this. The GIS they submitted contained 6 names, 4
Hence, the transfer of the petitioners' shares to the of which were dead already (2 of the signatories are Ramon and
DBP created vacancies in their respective positions Salvatierra). The accountant of the Corporation tried to correct this
as directors of ALFA. The transfer of shares from the by informing SEC of the oversight of not including the newly elected
stockholder of ALFA to the DBP is the essence of officers (in replacement of the 4 deceased). Court said this does not
the subject voting trust agreement. remove the doubt of an invalid election they informed SEC of the
election 2 years after the alleged election already. They also just
FINAL VERDICT: Petition is GRANTED. submitted the Minutes of the election already in 1999, before the CA.
Therefore, there is indeed doubt as to whether the signatories who
approved of Salvatierra’s capacity to sue on behalf of the
Corporation, were duly elected members of the Board.

FACTS:
• This case consists of two consolidated petitions for review of
CA decisions on complaints for forcible entry and replevin
filed by Monfort Hermanos Agricultural Development
Corporation (“Corporation”) and Ramon H. Monfort against

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the children, nephews, and nieces of its original § April 21, 1997: Salvatierra filed on behalf of
incorporators (the group of Antonio Monfort III or “Group”). the Corporation a complaint for forcible
• The Corporation is a domestic and private one, and is the entry, preliminary mandatory injunction with
registered owner of TRO and damages against the Group before
o a farm, fishpond and sugar cane plantation known MTC Cadiz City.
as Haciendas San Antonio II, Marapara, Pinanoag § The Group, in their answer, alleged that
and Tinampa-an, all situated in Cadiz City they are possessing and controlling the
o one unit of motor vehicle and two units of tractors Haciendas and harvesting the produce
o fighting cocks which the Corporation allowed Ramon therein on behalf of the corporation and not
(its EVP) to breed and maintain for themselves. They also raised as defense
• 1997: The group of Antonio Monfort III, through force and the lack of legal capacity of Salvatierra to
intimidation, allegedly took possession of the 4 Haciendas, sue on behalf of the Corporation.
the produce thereon and the motor vehicle and tractors, as § February 18, 1998: MTC dismissed the
well as the fighting cocks of Ramon. complaint.
• Petitions: § RTC reversed MTC’s decision and
o GR 155472 (Group v. CA, Corporation as remanded the case for further proceedings.
represented by Salvatierra and Ramon) § CA set aside RTC’s decision.
§ The Corporation, represented by its
President, Ma. Antonia M. Salvatierra, and ISSUES:
Ramon H. Monfort, in his personal capacity, 10. Whether or not Salvatierra has the legal capacity to sue
filed against the Group, a complaint for on behalf of the Corporation.
delivery of motor vehicle, tractors and 378
fighting cocks, with prayer for injunction and HELD & RATIO:
damages, before the RTC Negros 10. NO, Salvatierra failed to prove that four of those who
Occidental. authorized her to represent the Corporation were the lawfully
§ The Group filed a motion to dismiss (MTD) elected Members of the Board of the Corporation. As such,
contending Salvatierra has no capacity to they cannot confer valid authority for her to sue on behalf of
sue on behalf of the Corporation because the corporation.
the March 31, 1997 Board Resolution • A corporation has no power except those expressly
authorizing her and Ramon to represent the conferred on it by the Corporation Code and those
Corporation is void because the purported that are implied or incidental to its existence. In turn,
Members of the Board who passed it were a corporation exercises said powers through its
not validly elected officers of the board of directors and/or its duly authorized officers
Corporation. and agents.
§ May 4, 1998: Trial court denied the MTD. • Thus, it has been observed that the power of a
§ Case also dismissed in CA. Also with the corporation to sue and be sued in any court is
MR. lodged with the board of directors that exercises its
o GR 152542 (Corporation, as represented by corporate powers. In turn, physical acts of the
Salvatierra v. Group and CA) corporation, like the signing of documents, can be
performed only by natural persons duly authorized

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for the purpose by corporate by-laws or by a specific elected directors and officers, together
act of the board of directors. with their corresponding position title…
• Applicable Laws: • Applying the laws in this case, 4 of the 6 signatories
o In relation to this, Sec. 26 of the Corporation to the March 31, 1997 Board Resolution (1997 BR)
Code requires corporations to submit to the authorizing Salvatierra and/or Monfort to represent
SEC within 30 days after the election the the Corporation does not appear in the 1996
names, nationalities and residences of the General Information Sheet (GIS) submitted by the
elected directors, trustees and officers of the Corporation with SEC (2 of the signatories:
Corporation. Salvatierra and Monfort themselves).
o In order to keep stockholders and the public • There is thus a doubt as to whether the 4 signatories
transacting business with domestic were indeed duly elected Members of the Board
corporations properly informed of their legally constituted to bring suit in behalf of the
organizational operational status, the SEC Corporation.
issued the following rules: • The fact that the 4 of the 6 Members of the Board
2. A General Information Sheet shall listed in the 1996 GIS are already dead at the time
be filed with this Commission within of the 1997 BR was issues does not automatically
thirty (30) days following the date of make the 4 signatories to the said 1997 BR as
the annual stockholders' meeting. among the incumbent Members. It was not yet
No extension of said period shall be established that they were duly elected to replace
allowed, except for very justifiable the said deceased Board Members.
reasons stated in writing by the • The Corporation’s accountant tried to correct the
President, Secretary, Treasurer or error in the GIS by informing SEC in a 1998 letter
other officers, upon which the that the non-inclusion of the new elected directions
Commission may grant an extension was attributable oversight. However, this does not
for not more than ten (10) days. erase the doubt as to whether an election was
2.A. Should a director, indeed held.
trustee or officer die, resign • As previously stated, a corporation is mandated to
or in any manner, cease to inform the SEC of the names and the change in the
hold office, the corporation composition of its officers and board of directors
shall report such fact to the within 30 days after election if one was held, or 15
Commission with fifteen days after the death, resignation or cessation of
(15) days after such death, office of any of its director, trustee or officer if any of
resignation or cessation of them died, resigned or in any manner, ceased to
office. hold office. This, the Corporation failed to do.
3. If for any justifiable reason, the annual • The alleged election of the directors and officers
meeting has to be postponed, the company who signed the March 31, 1997 Board Resolution
should notify the Commission in writing of was held on October 16, 1996, but the SEC was
such postponement. informed thereof more than two years later, or on
The General Information Sheet shall November 11, 1998.
state, among others, the names of the

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• Another instance that raises doubt is that the alleged 23. VALLE VERDE COUNTRY CLUB, INC., ERNESTO
Minutes of the 1996 meeting where the questioned VILLALUNA, RAY GAMBOA, AMADO M. SANTIAGO, JR.,
officers were elected was only presented by the FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA,
Corporation on September 29, 1999 before the CA. FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as
members of the Board of Directors of Valle Verde Country Club,
FINAL VERDICT: Petition in GR 152542 is denied. Petition in GR Inc., and JOSE RAMIREZ,
155472 is granted. (Basically the Group won) v.
VICTOR AFRICA

CASE:
Valle Verde Country Club elected its Board of Directors in 1996 (with
a TERM of office, as provided by Sec 23 the Corp Code of 1 year,
meaning it expires 1997). However, the officers held on to their
positions during the years 1997-2001 for failure to reach the required
voting quorum of the stockholders during those years. Two of the
stockholders resigned in 1998, prompting the board of directors, who
still constituted quorum to replace them under the theory that Sec. 29
of the Corp Code allows the filling-up of vacancies to serve the
“unexpired term”, by the vote of the remaining Board of Directors
(and without need for the vote of the stockholders) when the vacancy
occurred due to factors other than the expiration of the term and the
removal by stockholders. (In essence their theory was that their term
still extended to the 1997-2001, and thus were not yet expired).

The Respondent seeks to nullify the replacements claiming that the


replacements had no “unexpired” term to serve, because all the
officers’ terms were already expired.

The Supreme Court ruled that their TERM had already expired in
1997, as provided for by Sec 23 of the Corp Code, and that “holding-
on” to their positions merely constituted TENURE. Due to the fact
that the Corp Code provides that when the vacancy is caused by
removal of the officer by the stockholders, or by the EXPIRATION of
the TERM (which basically applies to all of them), the “vacancy”
should be filled in by the vote of the stockholders in a meeting for
that purpose. This goes into the principle that the Board of Directors
are mere trustees of the corporation in the management of its affairs;
and that the filling-up of vacancies is only to serve the “unexpired”
term, which in this case, there is no “unexpired term” to begin with.

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FACTS: • On September 1, 1998, Dinglasan resigned from his position


as member of the VVCC Board. (take note: his term has
A.Primary consideration: already expired by this time)
Corp Code “Section  23.The  board  of  directors  or  trustees.  –  Unless   o In a meeting held on October 6, 1998, the remaining
otherwise   provided   in   this   Code,   the   corporate   powers   of   all   directors, still constituting a quorum of VVCC’s nine-
corporations  formed  under  this  Code  shall  be  exercised,  all  business   member board, elected Eric Roxas (Roxas) to fill in the
vacancy created by the resignation of Dinglasan.
conducted  and  all  property  of  such  corporations  controlled  and  held  
by  the  board  of  directors  or  trustees  to  be  elected  from  among  the   • A year later, or on November 10, 1998, Makalintal also
holders   of   stocks,   or   where   there   is   no   stock,   from   among   the   resigned as member of the VVCC Board.
members  of  the  corporation,  who  shall  hold  office  for  one  (1)  year   o He was replaced by Jose Ramirez (Ramirez), who was
until  their  successors  are  elected  and  qualified  xxx” elected by the remaining members of the VVCC Board
on March 6, 2001.
• On February 27, 1996, during the Annual Stockholders’ Meeting
of petitioner Valle Verde Country Club, Inc. (VVCC), the C.Respondent Africa contested these ‘replacements’ for being
following were elected as members of the VVCC Board of contrary to the Corp Code which provides that replacements
Directors: after the EXPIRATION of the term should be done by the vote of
o Ernesto Villaluna, stockholders and not merely by the remaining Members of the
o Jaime C. Dinglasan (Dinglasan), Board of Directors
o Eduardo Makalintal (Makalintal),
o Francisco Ortigas III, • Respondent Africa (Africa), a member of VVCC, questioned the
o Victor Salta, election of Roxas and Ramirez as members of the VVCC Board
o Amado M. Santiago, Jr., with the Securities and Exchange Commission (SEC) and the
o Fortunato Dee, Regional Trial Court (RTC), respectively.
o Augusto Sunico, o The SEC case questioning the validity of Roxas’
o and Ray Gamboa. appointment was docketed as SEC Case No. 01-99-
6177.
• In   the   years 1997, 1998, 1999, 2000, and 2001, however, the o The RTC case questioning the validity of Ramirez’
requisite quorum for the holding of the stockholders’ meeting appointment was docketed as Civil Case No. 68726.
could not be obtained. Consequently, the above-named
directors continued to serve in the VVCC Board in a hold- • In his nullification complaint before the RTC, Africa alleged that
over capacity. (take note: Their TERM, according to Sec. 23 the election of Roxas was contrary to Section 29, in relation to
of the Corp Code EXPIRED in 1997, a year after their Section 23, of the Corporation Code of the Philippines
election; difference of Term and Tenure) (Corporation Code). These provisions read:

(REFER TO SEC. 23 QUOTED ABOVE)


B.Resignations of Dinglasan and Makalintal, and subsequent
xxxx
“filling-up” of vacancies
Sec. 29. Vacancies in the office of director or trustee. -
Any vacancy occurring in the board of directors or

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trustees OTHER THAN BY REMOVAL BY THE • Correlating   Section   29   with   Section   23   of   the   same   law,  
STOCKHOLDERS OR MEMBERS OR BY EXPIRATION
OF TERM, may be filled by the vote of at least a
VVCC   alleges   that   a   member’s   term   shall   be   for   one   year  
majority of the remaining directors or trustees, if still and   until   his   successor   is   elected   and   qualified;   otherwise  
constituting a quorum; OTHERWISE, SAID stated,a  member’s  term  expires  only  when  his  successor  to  
VACANCIES MUST BE FILLED BY THE the   Board   is   elected   and   qualified.     Thus,   “until   such   time   as  
STOCKHOLDERS IN A REGULAR OR SPECIAL
MEETING CALLED FOR THAT PURPOSE.A director or [a   successor   is]   elected   or   qualified   in   an   annual   election  
trustee so elected to fill a vacancy shall be elected only for where  a  quorum  is  present,”  VVCC  contends  that  “the  term  
the unexpired term of his predecessor in office. xxx. of   [a   member]   of   the   board   of   directors   has   yet   not  
[Emphasis supplied.]
expired.”
• Africa
claimed that a year after Makalintal’s election as member of the ISSUES:
VVCC Board in 1996, his [Makalintal’s] term – as well as (relevant to the issue of Term of Office v Tenure)
those of the other members of the VVCC Board – should be Whether or not the VVCC Board of Director’s TERM of office expired
considered to have already expired. in 1997, despite their hold-over of the positions due to non-quorum?
o Thus, according to Africa, the resulting vacancy should YES. Their individual terms of office expired in 1997—one year
have been filled by the stockholders in a regular or after they were duly elected, as provided in the Corp Code.
special meeting called for that purpose, and not by the
remaining members of the VVCC Board, as was done (relevant to the issue of Directors as trustees)
in this case. Whether or not the remaining directors may still validly replace
Makalintal and Dinglasan by the vote of the remaining Board of
D.RTC and SEC affirmed Africa’s Theory Directors?
No. Their terms of office having already expired, the Corp Code
Expressly provides that the power to replace a ‘vacant’ position
• Through a partial decision promulgated on January 23, 2002, the in the Board of Directors now rests in the STOCKHOLDERS, in a
RTC ruled in favor of Africa and declared the election of meeting called for that purpose.
Ramirez, as Makalintal’s replacement, to the VVCC Board as
null and void. HELD:
1.The holdover Period is not part of the term of office of a
• Incidentally, the SEC issued a similar ruling on June 3, 2003, member of the board of directors
nullifying the election of Roxas as member of the VVCC Board,
vice hold-over director Dinglasan. While VVCC manifested its • The word “term” has acquired a definite meaning in
intent to appeal from the SEC’s ruling, no petition was actually jurisprudence. In several cases, we have defined “term” as
filed with the Court of Appeals; thus, the appellate court the time during which the officer may claim to hold the
considered the case closed and terminated and the SEC’s ruling office as of right, and fixes the interval after which the
final and executory. several incumbents shall succeed one another.

• The term of office is not affected by the holdover. The


Petitioners’ Contentions
term is fixed by statute and it does not change simply
because the office may have become vacant, nor because

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the incumbent holds over in office beyond the end of the 2.The powers of the corporation’s board of directors emanate
term due to the fact that a successor has not been elected from its stockholders
and has failed to qualify. • VVCC’s construction of Section 29 of the Corporation Code on
the authority to fill up vacancies in the board of directors, in
• Term is distinguished from tenure in that an officer’s relation to Section 23 thereof, effectively weakens the
“tenure” represents the term during which the stockholders’ power to participate in the corporate governance
incumbent actually holds office. The tenure may be by electing their representatives to the board of directors.
shorter (or, in case of holdover, longer) than the term for o The board of directors is the directing and
reasons within or beyond the power of the incumbent.In this controlling body of the corporation. It is a creation of
case, the VVCC Board of Directors’ TERM ended in 1997, the stockholders and derives its power to control
despite the hold-over of their positions. and direct the affairs of the corporation from them.
o After the lapse of one year from his election as The board of directors, in drawing to themselves the
member of the VVCC Board in 1996, Makalintal’s powers of the corporation, occupies a position of
term of office is deemed to have already expired. trusteeship in relation to the stockholders, in the
That he continued to serve in the VVCC Board in a sense that the board should exercise not only care
holdover capacity cannot be considered as and diligence, but utmost good faith in the
extending his term. To be precise, Makalintal’s term management of corporate affairs
of office began in 1996 and expired in 1997, but, by o This theory of delegated power of the board of directors
virtue of the holdover doctrine in Section 23 of the similarly explains why, under Section 29 of the
Corporation Code, he continued to hold office until Corporation Code, in cases where the vacancy in the
his resignation on November 10, 1998. This corporation’s board of directors is caused not by the
holdover period, however, is not to be expiration of a member’s term, the successor “so elected
considered as part of his term, which, as to fill in a vacancy shall be elected only for the
declared, had already expired. unexpired term of the his predecessor in office.” The
law has authorized the remaining members of the board
o With the expiration of Makalintal’s term of office, a to fill in a vacancy only in specified instances, so as not
vacancy resulted which, by the terms of Section 29 to retard or impair the corporation’s operations; yet, in
of the Corporation Code, must be filled by the recognition of the stockholders’ right to elect the
stockholders of VVCC in a regular or special members of the board, it limited the period during which
meeting called for the purpose. To assume – as the successor shall serve only to the “unexpired term of
VVCC does – that the vacancy is caused by his predecessor in office.”
Makalintal’s resignation in 1998, not by the o The shareholder vote is critical to the theory that
expiration of his term in 1997, is both illogical and legitimizes the exercise of power by the directors or
unreasonable. officers over properties that they do not own

o His resignation as a holdover director did not change


the nature of the vacancy; the vacancy due to the
expiration of Makalintal’s term had been created FINAL VERDICT:
long before his resignation. WHEREFORE, we DENY the petitioners’ petition for review on
certiorari, and AFFIRM the partial decision of the Regional Trial

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Court, Branch 152, Manila, promulgated on January 23, 2002, in compensation not as directors but as officers of
Civil Case No. 68726. Costs against the petitioners. corporation

RECIT READY:

Petitioners, small minority stockholders of WIT sued private


respondent Salas for criminal (Falsification, Estafa) as well as civil
for a resolution passed during a special board meeting regarding
implementation of compensation for certain members of the board, in
their capacity as chairman, vice chairman, etc. The respondent was
acquitted but the petitioners still claim civil liability by arguing that
they are not entitled to compensation. The court ruled that they are
entitled as Section 30 only prohibits compensation in their capacity
as Directors, but not in any other capacity. Resolution entitles them
in their capacity as Chairman, Vice Chairman, etc, so they are
entitled.

FACTS

• Private respondents, all surnamed Salas, belonging to the


same family, are the majority and controlling members of the
Board of Trustees of Western Institute of Technology, Inc.
(WIT, for short), a stock corporation engaged in the
operation, among others, of an educational institution.
• According to petitioners, as minority stockholders of WIT,
sometime on June 1, 1986, a Special Board meeting was
held. The meeting was about the possible implementation of
Art III, Section 6 of their by-laws regarding compensation of
all officers of the corporation.
• In said meeting, the Board of Trustees passed Resolution
No. 48, s. 1986, granting monthly compensation to the
private respondents as corporate officers retroactive June 1,
1985, stating that (IMPORTANT!!!)
‘The Officers of the Corporation be granted monthly
compensation for services rendered as follows: Chairman -
P9,000.00/month, Vice-Chairman - P3,500.00/month,
Corporate Treasurer - P3,500.00/month and Corporate
Secretary - P3,500.00/month, retroactive June 1, 1985 and
24. WESTERN INSTITUTE OF TECHNOLOGY vs. SALAS the ten percentum of the net profits shall be distributed
equally among the ten members of the Board of Trustees.
Section 30 of Corp Code; Members of the board can be entitled to
This shall amend and supersede any previous resolution.’

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• Richard Salas then certified that such meeting was held on income tax of the corporation during the preceding year.”
March 30, 1986. This became a basis for the petitioners to
file a criminal case against Richard Salas for alleged
falsification of public document and estafa since the • There is no argument that directors or trustees, as the case
company’s income statement filed with SEC for the fiscal may be, are not entitled to salary or other compensation
year 1985-1986 reflecting therein the disbursement of when they perform nothing more than the usual and ordinary
corporate funds for the compensation of private respondents duties of their office. This rule is founded upon a
based on Resolution No. 4, series of 1986, making it appear presumption that directors /trustees render service
that the same was passed by the board on March 30, 1986, gratuitously and that the return upon their shares adequately
when in truth, the same was actually passed on June 1, furnishes the motives for service, without compensation
1986, a date not covered by the corporation’s fiscal year
• Under the foregoing section, there are only two (2) ways by
1985-1986. However, Salas was acquitted by the RTC on
which members of the board can be granted compensation
both counts, without imposing civil liability. (minor fact only)
apart from reasonable per diems:
• Petitioners then filed a Motion for Reconsideration on the 1. When there is a provision in the by-laws fixing their
Civil Aspect of RTC but was denied. compensation; and
• Petitioners claim that the grant of compensation to private 2. When the stockholders representing a majority of
respondents (in Resolution 48) is proscribed under Section the outstanding capital stock at a regular or special
30 of the Corporation Code. stockholders’ meeting agree to give it to them.
ISSUE: • However, worthy of note is the clear phraseology of Section
30 which states: “The directors shall not receive any
1. Whether or not the respondents as officers of the corporation are compensation, as such directors” The phrase as such
entitled to compensation directors limits the scope of the prohibition to
compensation given to them for services performed
HELD + RATIO: purely in their capacity as directors or trustees.
• Implication is that members of the board may receive
compensation, in addition to reasonable per diems, when
1. YES. Such officers are entitled to compensation in their capacity they render services to the corporation in a capacity
as officers but not as directors. other than as directors/trustees.
• In the case at bench, Resolution No. 48, s. 1986 granted
Section 30 of the Corporation Code states “Compensation of monthly compensation to private respondents not in their
directors.--- In the absence of any provision in the by-laws fixing capacity as members of the board, but rather as officers of
their compensation, the directors shall not receive any the corporation, more particularly as Chairman, Vice-
compensation, as such directors, except for reasonable per Chairman, Treasurer and Secretary of Western Institute of
diems: Provided, however, That any such compensation (other Technology.
than per diems) may be granted to directors by the vote of the • Clearly, therefore , the prohibition with respect to granting
stockholders representing at least a majority of the outstanding compensation to corporate directors/trustees as such under
capital stock at a regular or special stockholders’ meeting. In no Section 30 is not violated in this particular case.
case shall the total yearly compensation of directors, as such • Consequently, the last sentence of Section 30 which
directors, exceed ten (10%) percent of the net income before provides: “In no case shall the total yearly compensation of

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directors, as such directors, exceed ten (10%) percent of the CASE:


net income before income tax of the corporation during the SAN JOSE PETROLEUM, a foreign corporation organized
preceding year.” does not likewise find application in this and existing in the Republic of Panama, owns 90% of the
case since the compensation is being given to private outstanding capital stock of SAN JOSE OIL COMPANY(domestic
respondents in their capacity as officers of WIT and not as Mining Corporation). SAN JOSE PETROLEUM filed with the
board members. Philippine Securities and Exchange Commission a sworn registration
statement, for the registration and licensing for sale in the
Philippines Voting Trust Certificates. It was alleged that the
entire proceeds of the sale of said securities will be devoted or
used exclusively to finance the operations of SAN JOSE OIL. It
was the express condition of the sale that every purchaser of the
securities shall not receive a stock certificate, but a registered or
bearer-voting-trust certificate from the voting trustees. Pedro Palting,
among others, allegedly prospective investors in the shares of SAN
JOSE PETROLEUM, filed with the Securities and Exchange
Commission an opposition to registration and licensing of the
securities. SEC ruled in favor of San Jose Petroleum and granted the
latter the registration and licensing of the sale in the Philippines of a
portion of the capital stock of SAN JOSE OIL.
The main issues in this case are: 1) whether or not the "tie-
up" between the respondent SAN JOSE PETROLEUM, a foreign
corporation, and SAN JOSE OIL COMPANY, INC., a domestic
mining corporation, is violative of the Constitution, the Laurel-Langley
Agreement, the Petroleum Act of 1949, and the Corporation Law;
and 2) whether or not the sale of respondent's securities is
fraudulent, or would work or tend to work fraud to purchasers
of such securities in the Philippinesà SC ruled both issues in
the affirmative.
With regard to the first issue, SC ruled that the "tie-up"
between the respondent SAN JOSE PETROLEUM and SAN
JOSE OIL is violative of the Constitution, the Laurel-Langley
Agreement, the Petroleum Act of 1949, and the Corporation
Law. SAN JOSE PETROLEUM, as presently constituted, is not a
business enterprise that is authorized to exercise the parity privileges
under the Parity Ordinance, the Laurel-Langley Agreement and the
Petroleum Law (these laws extended the the right to utilize and
25. Pedro Palting v. San Jose Petroleum Incorporated exploit our natural resources to citizens of the United States). Since
G.R. No. L-14441; December 17, 1966 SAN JOSE PETROLEUM is a Panamanian Corporation, its tie-up
Pre-Corporation Code Fiduciary Rule for Corporate Officers with SAN JOSE OIL is, consequently, illegal.
With regard to the second issue, SC ruled thatthe sale of

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respondent's securities is fraudulent, or would work or tend to • SAN JOSE PETROLEUM filed with the Philippine
work fraud to purchasers of such securities in the Philippines. Securities and Exchange Commission a sworn
In this case SC recognized the common-law fiduciary duties of registration statement, for the registration and
director, trustees, and officers under the Old Corporation law.
licensing for sale in the Philippines Voting Trust
Certain provisions in the Articles of Incorporation of SAN JOSE
PETROLEUM (see ratio #4) arein direct opposition to our corporation
Certificates representing 2,000,000 shares of its capital
law and corporate practices in this country. These provisions alone stock of a par value of $0.35 a share, at P1.00 per share.
would outlaw any corporation locally organized or doing business in o It was alleged that the entire proceeds of the
this jurisdiction considering the unique and unusual provision sale of said securities will be devoted or used
mention in #3 of its Articles of Incorporation (see ratio #4). The exclusively to finance the operations of SAN
impact of these provisions upon the traditional judiciary relationship JOSE OIL.
between the directors and the stockholders of a corporation is too o It was the express condition of the sale that every
obvious to escape notice by those who are called upon to protect the purchaser of the securities shall not receive a
interest of investors. Based on the provisions, the directors and stock certificate, but a registered or bearer-voting-
officers of the company can do anything, short of actual fraud,
trust certificate from the voting trustees named
with the affairs of the corporation even to benefit themselves
directly or other persons or entities in which they are interested,
therein James L. Buckley and Austin G.E. Taylor,
and with immunity because of the advance condonation or relief the first residing in Connecticut, U.S.A., and the
from responsibility by reason of such acts. This and the other second in New York City
provision which authorizes the election of non-stockholders as • Pedro R. Palting and others, allegedly prospective
directors, completely disassociate the stockholders from the investors in the shares of SAN JOSE PETROLEUM, filed
government and management of the business in which they with the Securities and Exchange Commission an
have invested are indeed proof that the sale of respondent's opposition to registration and licensing of the securities
securities would, to say the least, work or tend to work fraud to on the grounds that:
Philippine investors. 1. the tie-up between the issuer, SAN JOSE
Note: guys, I am so sorry. I tried my best to make a decent digest
PETROLEUM, a Panamanian corporation and
but this case is just so hard to understand. L
SAN JOSE OIL, a domestic corporation, violates
FACTS: the Constitution of the Philippines, the
• SAN JOSE PETROLEUM, a foreign corporation Corporation Law and the Petroleum Act of 1949;
organized and existing in the Republic of Panama, owns 2. the issuer has not been licensed to transact
90% of the outstanding capital stock of SAN JOSE OIL business in the Philippines;
COMPANY(domestic Mining Corporation). 3. the sale of the shares of the issuer is fraudulent,
• SAN JOSE PETROLEUM’s majority interest is owned by and works or tends to work a fraud upon
OIL INVESTMENTS, Inc., another foreign (Panamanian) Philippine purchasers; and
company wholly (100%) owned by PANTEPEC OIL 4. the issuer as an enterprise, as well as its
COMPANY, C.A., and PANCOASTAL PETROLEUM business, is based upon unsound business
COMPANY, C.A., both organized and existing under the principles.
laws of Venezuela

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• SAN JOSE PETROLEUM claimed that it was a "business 1. Yes, Palting has personality to file the present petition for
enterprise" enjoying parity rights under the Ordinance review of the order of the Securities and Exchange
appended to the Constitution, which parity right, with Commission.
respect to mineral resources in the Philippines, may be • Respondent’s Contention:
exercised, pursuant to the Laurel-Langley Agreement, o SAN JOSE PETROLEUM contends that as a mere
only through the medium of a corporation organized "prospective investor", he is not an "Aggrieved" or
under the laws of the Philippines. Thus, registrant which "interested" person who may properly maintain the
is allegedly qualified to exercise rights under the Parity suit.
Amendment, had to do so through the medium of a • SC RULING:
domestic corporation, which is the SAN JOSE OIL. o As construed by the administrative office entrusted
• Securities and Exchange Commission ruled in favor of with the enforcement of the Securities Act, any
SAN JOSE PEROLEUM by granting the registration, and person (who may not be "aggrieved" or "interested"
licensing the sale in the Philippines, of 5,000,000 shares within the legal acceptation of the word) is allowed
of the capital stock of the SAN JOSE PETROLEUM. or permitted to file an opposition to the registration
of securities for sale in the Philippines. And this is
ISSUES: in consonance with the generally accepted principle
1. Whether or not petitioner Pedro R. Palting, as a that Blue Sky Laws (a state law in the United
"prospective investor" in respondent's securities, has States that regulates the offering and sale of
personality to file the present petition for review of the securities to protect the public from fraud) are
order of the Securities and Exchange Commission; enacted to protect investors and prospective
2. Whether or not the issue raised herein is already moot and purchasers and to prevent fraud and preclude the
academic; sale of securities which are in fact worthless or
3. Whether or not the "tie-up" between the respondent worth substantially less than the asking price. It is
SAN JOSE PETROLEUM, a foreign corporation, and for this purpose that herein petitioner duly filed his
SAN JOSE OIL COMPANY, INC., a domestic mining opposition giving grounds therefor.
corporation, is violative of the Constitution, the Laurel- 2. No, the issues raised herein are neither moot nor
Langley Agreement, the Petroleum Act of 1949, and academic.
the Corporation Law; and • Respondent’s Contention:
4. Whether or not the sale of respondent's securities is o SAN JOSE PETROLEUM contends that since the
fraudulent, or would work or tend to work fraud to order of Registration/Licensing dated September 9,
purchasers of such securities in the Philippines. 1958 took effect 30 days from September 3, 1958,
and since no stay order has been issued by the
Supreme Court, respondent's shares became
registered and licensed under the law as of October
RULING: 3, 1958. Consequently, it is asserted, the present
appeal has become academic

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•SC RULING: • SC RULING:


o While apparently the immediate issue in this appeal o Relevant Laws:
is the right of respondent SAN JOSE PETROLEUM § Article XIII, Section 1 of the Philippine
to dispose of and sell its securities to the Filipino Constitution provides:
public, the real and ultimate controversy here would § SEC. 1. All agricultural, timber, and mineral
actually call for the construction of the constitutional lands of the public domain, waters, minerals,
provisions governing the disposition, utilization, coal, petroleum, and other mineral oils, all
exploitation and development of our natural forces of potential energy, and other natural
resources. And certainly this is neither moot nor resources of the Philippines belong to the
academic. State, and their disposition, exploitation,
3. Yes, the "tie-up" between the respondent SAN JOSE development, or utilization shall be limited to
PETROLEUM and SAN JOSE OIL is violative of the citizens of the Philippines, or to corporations or
Constitution, the Laurel-Langley Agreement, the associations at least sixty per centum of the
Petroleum Act of 1949, and the Corporation Law. SAN capital of which is owned by such citizens,
JOSE PETROLEUM, as presently constituted, is not a subject to any existing right, grant, lease or
business enterprise that is authorized to exercise the parity concession at the time of the inauguration of
privileges under the Parity Ordinance, the Laurel-Langley this Government established under this
Agreement and the Petroleum Law. Its tie-up with SAN Constitution. . . . (Emphasis supplied)
JOSE OIL is, consequently, illegal. § 1946 Ordinance Appended to the Constitution
• Petitioner’s Contention: and the Laurel-Langley Agreement extended
o The relationship between SAN JOSE PETROLEUM the right to utilize and exploit our natural
and its subsidiary, SAN JOSE OIL, violates the resources to citizens of the United States.
Petroleum Law of 1949, the Philippine Constitution, o The relationship of these corporations involved or
and Section 13 of the Corporation Law, which affected in this case is admitted and established
inhibits a mining corporation from acquiring an through the papers and documents which are parts
interest in another mining corporation. of the records: SAN JOSE OIL, is a domestic
• Respondent’s Contention: mining corporation, 90% of the outstanding capital
o The “tie-up” between SAN JOSE PETROLEUM and stock of which is owned by respondent SAN JOSE
SAN JOSE OIL is far from violating the PETROLEUM, a foreign (Panamanian) corporation,
Constitution; such relationship between the two the majority interest of which is owned by OIL
corporations is in accordance with the Laurel- INVESTMENTS, Inc., another foreign
Langley Agreement which implemented the (Panamanian) company. This latter corporation in
Ordinance Appended to the Constitution, and that turn is wholly (100%) owned by PANTEPEC OIL
Section 13 of the Corporation Law is not applicable COMPANY, C.A., and PANCOASTAL
because respondent is not licensed to do business, PETROLEUM COMPANY, C.A., both organized
as it is not doing business, in the Philippines. and existing under the laws of Venezuela.

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o SAN JOSE PETROLEUM, as presently no proof to this effect.


constituted, is not a business enterprise that is 4. Yes, the sale of respondent's securities is fraudulent,
authorized to exercise the parity privileges or would work or tend to work fraud to purchasers of
under the Parity Ordinance, the Laurel-Langley such securities in the Philippines.
Agreement and the Petroleum Law. Its tie-up • In the Articles of Incorporation of SAN JOSE
with SAN JOSE OIL is, consequently, illegal. PETROLEUM, it stated that:
1. It is not owned or controlled directly by (1) the directors of the Company need not be
citizens of the United States, because it is shareholders;
owned and controlled by a corporation, the (2) that in the meetings of the board of directors, any
OIL INVESTMENTS, another foreign director may be represented and may vote
(Panamanian) corporation. through a proxy who also need not be a director
2. Neither can it be said that it is indirectly or stockholder; and
owned and controlled by American citizens (3) that no contract or transaction between the
through the OIL INVESTMENTS, for this corporation and any other association or
latter corporation is in turn owned and partnership will be affected, except in case of
controlled, not by citizens of the United fraud, by the fact that any of the directors or
States, but still by two foreign (Venezuelan) officers of the corporation is interested in, or is a
corporations, the PANTEPEC OIL COMPANY director or officer of, such other association or
and PANCOASTAL PETROLEUM. partnership, and that no such contract or
3. Although it is claimed that these two last transaction of the corporation with any other
corporations are owned and controlled person or persons, firm, association or
respectively by 12,373 and 9,979 partnership shall be affected by the fact that any
stockholders residing in the different director or officer of the corporation is a party to
American states, there is no showing in the or has an interest in, such contract or transaction,
certification furnished by respondent that the or has in anyway connected with such other
stockholders of PANCOASTAL or those of person or persons, firm, association or
them holding the controlling stock, are partnership; and finally, that all and any of the
citizens of the United States. persons who may become director or officer of
4. Granting that these individual stockholders the corporation shall be relieved from all
are American citizens, it is yet necessary to responsibility for which they may otherwise be
establish that the different states of which liable by reason of any contract entered into with
they are citizens, allow Filipino citizens or the corporation, whether it be for his benefit or for
corporations or associations owned or the benefit of any other person, firm, association
controlled by Filipino citizens, to engage in or partnership in which he may be interested.
the exploitation, etc. of the natural resources • The abovementioned provisions are in direct opposition
of these states. Respondent has presented to our corporation law and corporate practices in this

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country. These provisions alone would outlaw any Trustees in their own discretion, having in mind
corporation locally organized or doing business in this the best interests of the holders of the voting
jurisdiction considering the unique and unusual trust certificates, it being understood that any
provision mention in #3 (Articles of Incorporation).The and all of the Trustees shall be eligible for
impact of these provisions upon the traditional election as directors;
judiciary relationship between the directors and the (2) On any proposition for removal of a director, the
stockholders of a corporation is too obvious to escape Trustees shall designate a suitable proxy or
notice by those who are called upon to protect the proxies to vote for or against such proposition as
interest of investors. the Trustees in their own discretion may
o The directors and officers of the company determine, having in mind the best interest of the
can do anything, short of actual fraud, with holders of the voting trust certificates;
the affairs of the corporation even to benefit (3) With respect to all other matters arising at any
themselves directly or other persons or meeting of stockholders, the Trustees will
entities in which they are interested, and instruct such proxy or proxies attending such
with immunity because of the advance meetings to vote the shares of stock held by the
condonation or relief from responsibility by Trustees in accordance with the written
reason of such acts. This and the other instructions of each holder of voting trust
provision which authorizes the election of certificates. (Emphasis supplied.)
non-stockholders as directors, completely • It was also therein provided that the said
disassociate the stockholders from the Agreement shall be binding upon the parties
government and management of the thereto, their successors, and upon all holders of
business in which they have invested. voting trust certificates.
• Moreover, on April 17, 1957, admittedly to assure • Given that these are the voting trust certificates that
continuity of the management and stability of SAN are offered to investors as authorized by Security and
JOSE PETROLEUM, OIL INVESTMENTS, as holder Exchange Commissioner.It cannot be doubted that
of the only subscribed stock of the former corporation the sale of respondent's securities would, to say
and acting "on behalf of all future holders of voting the least, work or tend to work fraud to Philippine
trust certificates," entered into a voting trust investors.
agreement12 with James L. Buckley and Austin E.
Taylor, whereby said Trustees were given authority to FINAL VERDICT: the motion of respondent to dismiss this appeal,
vote the shares represented by the outstanding trust is denied and the orders of the Securities and Exchange
certificates (including those that may henceforth be Commissioner, allowing the registration of Respondent's securities
issued) in the following manner: and licensing their sale in the Philippines are hereby set aside. The
(1) At all elections of directors, the Trustees will case is remanded to the Securities and Exchange Commission for
designate a suitable proxy or proxies to vote for appropriate action in consonance with this decision.
the election of directors designated by the

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26. STRATEGIC ALLIANCE DEVELOPMENT CORP vs. •CDCP was changed to PNCC to reflect government’s
RADSTOCK SECURITIES LTD and PHIL NATL CONSTRUCTION shareholding in the corporation wherein 90.3% was owned
CORP (PNCC) (2009) by the government.
NLEX/SLEX franchise, three-fold duty of Directors • The P10B loan was not reflected in PNCC’s books but after
20 years in 2000, PNCC suddenly had a transaction
CASE: regarding such loan – Marubeni assigned its entire credit to
CDCP (former name of PNCC) obtained a P10B loan from Marubeni, Radstock Corporation for less than P100M. (basically,
a foreign corporation for the construction of Basay Mining projects. Marubeni wrote off the liability).
CDCP was then changed to PNCC but the loan was not recognized • Radstock, a foreign corporation whose owners are unknown,
by PNCC. It was only after 20 years that PNCC acknowledged it sought to collect the P10B loan from PNCC and filed an
when Marubeni assigned its rights to Radstock (from a loan of P10B, action to collect against PNCC. But eventually entered into a
they assigned it to Radstock for less than P100M!). Radstock then compromise agreement with PNCC containing:
collected payment from PNCC of the P10B loan but due to a o Obligation would be reduced from P10B to P6B
compromise agreement with PNCC, it was reduced to P6B. PNCC, o PNCC shall assign to a third party to be assigned by
which was then worth at least negative P6B, was being questioned Radstock all its rights and interests in specified real
by petitioners who had claims for payment as well from PNCC. properties provided that the assignee shall be duly
Corporate Law issue in this case as stated in the CLV Outline is W/N qualified to own real properties in the Philippines.
PNCC Board acted in bad faith and with gross negligence? SC said § Involved here are 19 pieces of real estate
YES because the Board Resolution issued by PNCC Board of properties.
Directors was a breach of their duty of Diligence since this admitted o PNCC shall assign to Radstock 20% of the
liability to Radstock on the basis of an unauthorized letter of outstanding capital stock of PNCC and 6% share in
guarantee to Murabeni. Compromise Agreement was also held to be the gross toll revenue from the Manila North
void ab initio as it unlawful to assign rights of ownership to land to a Tollways until from year 2008-2035.
third party controlled by a foreign corporation as this is a way of • Present case involves a consolidated petition for review filed
circumventing the Constitution. by Strategic Alliance Development Corp (STRADEC) and
Luis Sison, with a motion for intervention by Asiavest
Merchant Bankers as they challenge the validity of such
compromise agreement.
o STRADEC is claiming as a bidder of the National
FACTS: Government’s shares in PNCC
• Phil. National Construction Corporation (PNCC) used to be o Luis Sison is a stockholder and former PNCC
called Construction Development Corporation of the President and Board Chairman filing a Petition for
Philippines. (CDCP) Annulment of Judgment approving the Compromise
• CDCP had a 30 year franchise to construct and operate toll Agreement
facilities in the North and South Luzon Tollways. o Asiavest is a judgment creditor of PNCC
• One of its affiliates, Basay Mining Corp., obtained a P10B ISSUES:
(actually US$5M and Y5.46 for Basay Mining projects) loan 11. W/N PNCC Board acted in bad faith and with gross
from Marubeni Corp. (Japanese corp.) and CDCP issued negligence?
letters of guarantee for such loans which committed CDCP 12. W/N Compromise Agreement was valid?
to pay solidarily.

Ayson  Dela  Cruz  Hourani  Lapuz  Ledesma  Leveriza  Lua  Molaer  Miranda  Rivera  Rovero  Rubinos  Rubio  San  Juan  Santos  Santos    
So  Chan  Sorongon  Tamondong  Torcuator  Yogue  Zerrudo  Velena  
Corp  Law  Case  Digests  |  Atty.  Hofilena  |  2014  

• It was proven in the Senate hearing that despite the


HELD & RATIO: objection of the former PNCC Director, Atty. Alfredo
11. YES. Laya, Jr., to admit liability for the Marubeni loans,
• 3-fold duty of the Board of Directors: breached duty the act of the PNCC Board in issuing the Board
of diligence. (cited in CLV Outline) Resolution which admitted liability demonstrates
o duty of OBEDIENCE - Direct the affairs of gross and willful disregard of the requisite care and
the corporation in accordance with purposes diligence in managing the affairs of PNCC. It is a
for which it was organized breach of the fiduciary duty to PNCC and its
o duty of DILIGENCE – not to willfully or stockholders.
knowingly vote for or assent to patently • PNCC Board must be liable under Sec. 31 of the
unlawful acts of the corporation or act in Corporation Code - Directors or trustees who
bad faith or with gross negligence in willfully and knowingly vote for or assent to patently
directing the affairs of the corporation unlawful acts of the corporation or who are guilty of
o duty of LOYALTY - shall not acquire gross negligence or bad faith in directing the affairs
personal or pecuniary interest in conflict with of the corporation or acquire any personal or
their duty as such directors or trustees pecuniary interest in conflict with their duty as such
• Acts showing breach of duty of diligence: directors or trustees shall be liable jointly and
o It consistently refused to admit liability for severally for all damages resulting therefrom
the Marubeni loan because there was no suffered by the corporation, its stockholders or
PNCC Board resolution authorizing the members and other persons.
issuance of the letters of guarantee. It was 12. No.
only after 2 decades that they finally • Radstock is disqualified to own rights to lands in the
admitted liability via a Board Resolution. Philippines and assigning it to a third party
o Such loan was never in the accounts of completely under control of Radstock is
PNCC. (defense: it was not an obligation of circumventing the Constitutional prohibition on
PNCC but of CDCP) foreign ownership on land. Radstock (private
o It was admitted that PNCC’s net worth was corporation incorporated in the British Virgin Islands
at least negative P6B. So having an with office in HK).
outstanding obligation of P10B would wipe • Toll fees are public funds and cannot be used to pay
out PNCC without any assets to even pay its private debt of CDCP/PNCC absent any
biggest creditor, the National Government appropriation passed by Congress.
with receivables of P36B from taxes. There
was even an issue as to why should these FINAL VERDICT: Petition for Review is GRANTED. Board
foreign creditors be preferred over the Resolutions are VOID AB INITIO for granting unwarranted benefits to
national government. private party and constituting an unlawful act. Compromise
o Basis for admission of liability for the agreement is also null and void. Intervention of Asiavest is granted
Marubeni loans (opinion of Feria Law Office) but Strategic Alliance Corp has no locus standi.
was not even shown to the PNCC Board.
Atty. Francisco,

Ayson  Dela  Cruz  Hourani  Lapuz  Ledesma  Leveriza  Lua  Molaer  Miranda  Rivera  Rovero  Rubinos  Rubio  San  Juan  Santos  Santos    
So  Chan  Sorongon  Tamondong  Torcuator  Yogue  Zerrudo  Velena