2. ANTONIO PARDO v.

THE HERCULES LUMBER and IGNACIO FERRER

FACTS: Pardo is a stockholder of Hercules Lumber and Ferrer is the acting secretary of the said
company. The Company refused to permit Pardo to inspect the records and business transactions of the
company. There was no question regarding the right to inspect as it is guaranteed in the Corp. Law. The
main consideration in this case has reference to the time, or times, within which the right of inspection
may be exercised. The company, through various resolutions, had designated certain times to which the
stockholders can inspect the books. Allegedly, Pardo didn’t get permission to inspect thus was denied
such. Hence, this petition. The main ground upon which the defense of the company appears to be rested
has reference to the time, or times, within which the right of inspection may be exercised.

Article 10 of the By-laws of the company provides:

"Every shareholder may examine the books of the company and other documents pertaining to the
same upon the days which the board of directors shall annually fix."

A Board Resolution was passed at the directors' meeting held on 16 February 1924. The board also
resolved to call the usual general (meeting of shareholders) for March 30 of the present year, with notice to
the shareholders that the books of the company are at their disposition from the 15th to 25th (10 days) of the
same month for examination, in appropriate hours.

ISSUES:
1) WON the board resolution constitutes a lawful restriction on the right conferred by statute? NO
2) WON Pardo lost his right to inspection and examination for the year, since he has not availed
himself of the permission [to inspect the company’s books and transactions within the 10 days
defined in the board resolution? NO
3) WON the shareholder’s motive in exercising this right is material? NO

Held: The basis of right of inspection is Sec. 51 of Act No. 1459 [Corporation Law]. In Philpotts v.
Philippine Manufacturing Co., and Berry, it was held that the right of examination there conceded to the
stockholder may be exercised either by a stockholder in person or by any duly authorized agent or
representative. It may be admitted that the officials in charge of a corporation may deny inspection
when sought at unusual hours or under other improper conditions; but neither the executive officers
nor the board of directors have the power to deprive a stockholder of the right altogether. A by-law unduly
restricting the right of inspection is undoubtedly invalid. Under a statute similar to our own it has been held
that the statutory right of inspection is not affected by the adoption by the board of directors of a resolution
providing for the closing of transfer books thirty days before an election. Our statute declares that the
right of inspection can be exercised "at reasonable hours." This means at reasonable hours on
business days throughout the year, and not merely during some arbitrary period of a few days chosen
by the directors.

On the issue of motives that prompted Pardo to make inspection, it is alleged that the information which
Pardo seeks is desired for ulterior purposes in connection with a competitive firm with which Pardo is
alleged to be connected. It is also insisted that one of Pardo’s purposes is to obtain evidence preparatory to
the institution of an action, which he means to bring against the company re: a contract of employment
which once existed between the corporation and himself. These suggestions are entirely apart from the
issue — the motive of the shareholder exercising the right is immaterial.

Section 51. All business corporations shall keep and carefully preserve a record of all
business transactions, and a minute of all meetings of directors, members, or stockholders, in which
shall be set forth in detail the time and place of holding the meeting, how authorized, the notice
 given, whether the meeting was regular or special, if special its object, those present and absent,
and every act done or ordered done at the meeting. On the demand of any director, member, or
stockholder, the time when any director, member, or stockholder entered or left the meeting must be
noted on the minutes, and on a similar demand, the yeas and nays must be taken on any motion or
proposition and a record thereof carefully made. The protest of any director, member, or
stockholder on any action or proposed action must be recorded in full on his demand. The record of
all business transactions of the corporation and the minutes of any meeting shall be open to the
inspection of any director, member, or stockholder of the corporation at reasonable hours.

Therefore, Pardo is granted the relief to inspect. Right to inspect is open to any director, trustee or
stockholder or member of the corporation at reasonable hours on business days. He may demand in
writing a copy of excerpts at his expense.

4. Gonzales vs PNB 122 SCRA 489

FACTS: Gonzales instituted a suit, as a taxpayer, against Sec. of Public Works and Communications, the
Commissioner of Public Highways, and PNB for alleged anomalies committed regarding the bank’s
extension of credit to import public works equipment intended for the massive development program. The
petitioner’s standing was questioned because he did not own any share in PNB. Consequently, Petitioner
bought 1 share of PNB stocks in order to gain standing as a stockholder. Petitioner thereafter sought to
inquire and ordered PNB to produce its books and records which the Bank refused, invoking the provisions
from its charter created by Congress. The petitioner filed petition for mandamus to compel PNB to produce
its books and records. The RTC dismissed the petition and it ruled that the right to examine and inspect
corporate books is not absolute, but is limited to purposes reasonably related to the interest of the
stockholder, must be asked for in good faith for a specific and honest purpose and not gratify curiosity
or for speculative or vicious purposes; that such examination would violate the confidentiality of the
records of the respondent bank as provided in Section 16 of its charter, Republic Act No. 1300, as
amended; and that the petitioner has not exhausted his administrative remedies.

ISSUE: Whether or not Petitioner may compel PNB to produce its books and records

HELD: No. As may be noted from the Sec 74 BP Blg. 68, among the changes introduced in the new Code
with respect to the right of inspection granted to a stockholder are the following: (1) the records must be
kept at the principal office of the corporation; (2) the inspection must be made on business days; (3) the
stockholder may demand a copy of the excerpts of the records or minutes; and (4) the refusal to allow such
inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities.
However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to
the same. It is now expressly required as a condition for such examination that the one requesting it must
not have been guilty of using improperly any information through a prior examination, and that the
person asking for such examination must be "acting in good faith and for a legitimate purpose in
making his demand."

Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of
the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection,
except to satisfy himself as to the truth of published reports regarding certain transactions entered into by
the respondent bank and to inquire into their validity. The circumstances under which he acquired one
share of stock in the respondent bank purposely to exercise the right of inspection do not argue in
favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry
into transactions entered into by the respondent bank even before he became a stockholder. His obvious
purpose was to arm himself with materials which he can use against the respondent bank for acts
done by the latter when the petitioner was a total stranger to the same. He could have been impelled
by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder.

The inspection sought to be exercised by the petitioner would be violative of the provisions of its charter of
PNB. The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is
not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. — Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them or
applicable to them. Supplemented by the provisions of this Code, insofar as they are applicable.

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to
the right of a stockholder to demand an inspection or examination of the books of the corporation
may not be reconciled with the above-quoted provisions of the charter of the respondent bank. It is
not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code
may apply in a supplementary capacity to the charter of the respondent bank.

6. Bitong v. CA (G.R. NO. 123553)

Facts: Petitioner Bitong allegedly acting for the benefit of Mr. & Ms. Co. filed a derivative suit before the
SEC against respondent spouses Apostol, who were officers in said corporation, to hold them liable for
fraud and mismanagement in directing its affairs. Respondent spouses moved to dismiss on the ground that
petitioner had no legal standing to bring the suit as she was merely a holder-in-trust of shares of JAKA
Investments which continued to be the true stockholder of Mr. & Ms. Petitioner contends that she was a
holder of proper stock certificates and that the transfer was recorded. She further contends that even in the
absence of the actual certificate, mere recording will suffice for her to exercise all stockholder rights,
including the right to file a derivative suit in the name of the corporation. The SEC Hearing Panel
dismissed the suit. On appeal, the SEC En Banc found for petitioner. CA reversed the SEC En Banc
decision.

Issue: Whether or not petitioner is the true holder of stock certificates to be able institute a derivative
suit.

Ruling: NO. Sec 63 of the Corporation Code envisions a formal certificate of stock which can be issued
only upon compliance with certain requisites. First, the certificates must be signed by the president or
vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation. A mere typewritten statement advising a stockholder of the extent of his ownership in a
corporation without qualification and/or authentication cannot be considered as a formal certificate of
stock. Second, delivery of the certificate is an essential element of its issuance. Hence, there is no
issuance of a stock certificate where it is never detached from the stock books although blanks therein are
properly filled up if the person whose name is inserted therein has no control over the books of the
company. Third, the par value, as to par value shares, or the full subscription as to no par value
shares, must first be fully paid. Fourth, the original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from a stockholder.
The certificate of stock itself once issued is a continuing affirmation or representation that the stock
described therein is valid and genuine and is at least prima facie evidence that it was legally issued in the
absence of evidence to the contrary. However, this presumption may be rebutted. Aside from petitioner’s
own admissions, several corporate documents disclose that the true party-in-interest is not petitioner but
JAKA. It should be emphasized that JAKA executed, a deed of sale over 1,000 Mr. & Ms. shares in
favor of respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a declaration of
trust stating that she was the registered owner of 1,000 Mr. & Ms. shares covered by a Certificate of
Stock. And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on
respondent Eugenia D. Apostol. Neither was there any evidence that the principal (JAKA) had requested
her to assign and transfer the shares of stock to petitioner. In fine, the records are unclear on how petitioner
allegedly acquired the shares of stock of JAKA.
Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of the
stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and, (c) to be valid against third parties, the transfer
must be recorded in the books of the corporation. At most, in the instant case, petitioner has satisfied
only the third requirement. Compliance with the first two requisites has not been clearly and sufficiently
shown. The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without
first complying with the legal requisites for its institution. The most important of these is the bona
fide ownership by a stockholder of a stock in his own right at the time of the transaction complained
of which invests him with standing to institute a derivative action for the benefit of the corporation.

8. CANDIDO PASCUAL, plaintiff-appellant, vs. EUGENIO DEL SAZ OROZCO, ET AL,

defendants-appellees.

FACTS: This action was brought by the plaintiff Pascual, in his own right as a stockholder of the bank, for
the benefit of the bank, and all the other stockholders thereof. The Banco Español-Filipino is a banking
corporation, constituted as such by royal decree of the Crown of Spain in the year 1854, the original grant
having been subsequently extended and modified by royal decree of July 14, 1897, and by Act No. 1790 of
the Philippine Commission. It is alleged in the amended complaint that the only compensation
contemplated or provided for the managing officers of the bank was a certain per cent of the net
profits resulting from the bank's operations, as set forth in article 30 of its reformed charter or
statutes.

The gist of the first and second causes of action is as follows: The defendants constitute a majority of the
present board of directors of the bank, who alone can authorize an action against them in the name of the
corporation. It appears that during the years 1903, 1904, 1905, and 1907 the defendants and appellees,
without the knowledge, consent, or acquiescence of the stockholders, deducted their respective
compensation from the gross income instead of from the net profits of the bank, thereby defrauding the
bank and its stockholders of approximately P20,000 per annum.

The second cause of action sets forth that defendants' and appellees' immediate predecessors in office in the
bank during the years 1899, 1900, 1901, and 1902, committed the same illegality as to their compensation
as is charged against the defendants themselves. In the four years immediately following the year 1902, the
defendants and appellees were the only officials or representatives of the bank who could and should
investigate and take action in regard to the sums of money thus fraudulently appropriated by their
predecessors. They were the only persons interested in the bank who knew of the fraudulent appropriation
by their predecessors. The court below sustained the demurrer as to the first and second causes of action on
the ground that in actions of this character the plaintiff must aver in his complaint that he was the owner
of stock in the corporation at the time of the occurrences complained of, or else that the stock has
since devolved upon him by operation of law.

ISSUE: Whether or not the petitioner has a cause of action to file a derivative suit.

RULING: Yes. As to the first cause of action: In suits of this character the corporation itself and not the
plaintiff stockholder is the real party in interest. The rights of the individual stockholder are merged
into that of the corporation. It is a universally recognized doctrine that a stockholder in a corporation
has no title legal or equitable to the corporate property; that both of these are in the corporation
itself for the benefit of all the stockholders. So it is clear that the plaintiff, by reason of the fact that he is
a stockholder in the bank (corporation) has a right to maintain a suit for and on behalf of the bank, but the
extent of such a right must depend upon when, how, and for what purpose he acquired the shares which he
now owns.
As to the Second cause of action: It affirmatively appears from the complaint that the plaintiff was not a
stockholder during any of the time in question in this second cause of action. Upon the question whether or
not a stockholder can maintain a suit of this character upon a cause of action pertaining to the corporation
when it appears that he was not a stockholder at the time of the occurrence of the acts complained of and
upon which the action is based, the authorities do not agree.

10. Republic Bank vs. Cuaderno, G.R. No. L-22399, March 30, 1967

FACTS: Damaso Perez, a stockholder of the Republic Bank, had complained to the Monetary Board of the
Central Bank against certain frauds allegedly committed by defendant Pablo Roman, in that being
chairman of the Board of Directors of the Republic Bank, and of its Executive Loan Committee, in 1957 to
1959, "in grave abuse of his fiduciary duty and taking advantage of his said positions and in connivance
with other officials of the Republic Bank", Roman had fraudulently granted or caused to be granted
loans to fictitious and non-existing persons and to their close friends, relatives and/or employees, who
were in reality their dummies, on the basis of fictitious and inflated appraised values of real estate
properties. Respondent Cuaderno, governor of the central bank, ordered an investigation, which was
carried out of the Bank Examiners. They reported that the bank has certain mortgage loans which were
granted in violations of several provisions of General Banking Act.

The Monetary Board ordered a new Board of Directors of the Republic Bank to be elected, which was
done, and subsequently approved by the Monetary Board. The Monetary Board later accepted the offer of
Pablo Roman to put up adequate security for the questioned loans made by the Republic Bank, and such
security was made a condition for the resumption of the Bank's normal operations. However, no
information was filed up to the time of the retirement of Cuaderno. Subsequently, Pablo Roman engaged
Miguel Cuaderno as technical consultant and selected Bienvenido Dizon as chairman of the Board of
Directors of the Republic Bank. Damaso Perez filed a derivative suit on behalf of the corporation for a
writ of preliminary injunction against the Monetary Board to prevent its confirmation of the appointments
of Dizon and Cuaderno alleging that the Board of Directors composed of individuals personally selected
and chosen by Roman, connived and confederated in approving the appointment and selection of Cuaderno
and Dizon; that such action was motivated by bad faith and without intention to protect the interest of the
Republic Bank but were prompted to protect Pablo Roman from criminal prosecution. The Monetary Board
filed an answer with separate motion to dismiss on the ground of lack of legal capacity of plaintiff-relator
to sue and non-exhaustion of intra-corporate remedies. The court denied the petition for a writ of
preliminary injunction and dismissed the case. Hence, this direct appeal to the Court.

ISSUE: Whether or not Damaso Perez, a stockholder, has a right to question the appointment and
selection of defendants, which can only be the result of corporate acts?

RATIO: YES. Normally, an individual stockholder is permitted to institute a derivative or representative

suit on behalf of the corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with
the corporation as the real party in interest. He is neither alleging nor vindicating his own individual
interest or prejudice, but the interest of the Republic Bank and the damage caused to it. The action he
has brought is a derivative one, expressly manifested to be for and in behalf of the Republic Bank, because
it was futile to demand action by the corporation, since its Directors were nominees and creatures of
defendant Pablo Roman. The frauds charged by plaintiff are frauds against the Bank that redounded to its
prejudice.
Defendants urge that the action is improper because the plaintiff was not authorized by the corporation to
bring suit in its behalf. Any such authority could not be expected as the suit is aimed to nullify the
action taken by the manager and the board of directors of the Republic Bank; and any demand for
intra-corporate remedy would be futile, as expressly pleaded in the complaint. These circumstances
permit a stockholder to bring a derivative suit. That no other stockholder has chosen to make common
cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings is no ground for denying
him relief.

12. Rural Bank of Milaor v. Ocfemia

FACTS: Several parcels of land were mortgaged by the respondents during the lifetime of the
respondent’s grandparents to the Rural Bank of Milaor as shown by the Deed of Real Estate Mortgage
and the Promissory Note. Spouses Felicisimo Ocfemia and Juanita Ocfemia, one of the respondents,
were not able to redeem the mortgaged properties consisting of seven parcels of land and so the mortgage
was foreclosed and thereafter ownership was transferred to the petitioner bank. Out of the seven parcels
of land that were foreclosed, five of them are in the possession of the respondents because these five
parcels of land were sold by the petitioner bank to the respondents as evidenced by a Deed of Sale.
However, the five parcels of land cannot be transferred in the name of the parents of Merife Nino, one of
the respondents, because there is a need to have the document of sale registered. The Register of deeds,
however, said that the document of sale cannot be registered without the board resolution of the petitioner
bank confirming both the Deed of sale and the authority of the bank manager, Fe S. Tena, to enter such
transaction.

The petitioner bank refused her request for a board resolution and made many alibis. Respondents initiated
the present proceedings so that they could transfer to their names the subject five parcel of land and
subsequently mortgage said lots and to use the loan proceeds for the medical expenses of their ailing
mother.

ISSUE: May the Board of Directors of a rural banking corporation be compelled to confirm a deed of
absolute sale of real property owned by the corporation which deed of sale was executed by the bank
manager without prior authority of the board of directors of the rural banking corporation?

HELD: YES. The bank acknowledges, by its own acts or failure to act, the authority of Fe S. Tena to
enter into binding contracts. After the execution of the Deed of Sale, respondents occupied the properties
in dispute and paid the real estate taxes. If the bank management believed that it had title to the
property, it should have taken measures to prevent the infringement and invasion of title thereto and
possession thereof. Likewise, Tena had previously transacted business on behalf of the bank, and the
latter had acknowledged her authority. A bank is liable to innocent third persons where
representation is made in the course of its normal business by an agent like Manager Tena even
though such agent is abusing her authority. Clearly, persons dealing with her could not be blamed for
believing that she was authorized to transact business for and on behalf of the bank.

The bank is estopped from questioning the authority of the bank to enter into contract of sale. If a
corporation knowingly permits one of its officers or any other agent to act within the scope of an
apparent authority, it holds the agent out to the public as possessing the power to do those acts; thus,
the corporation will, as against anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent’s authority.

14. GOKONGWEI v. SEC

FACTS: Gokongwei, a stockholder of SMC filed a petition with the SEC against the majority of the
members of the BOD of SMC seeking for the nullity of the by-laws which the said majority members of
BOD of SMC have amended. Said resolution contained that stockholders who are as well directors in
another corporation engaging in the same business with SMC are disqualified to be elected as director of
SMC. Gokongwei argues that prior to the questioned amendment; he had all the qualifications to be a
director of SMC. That as a stockholder, he had acquired inherent rights in stock ownership, such as the
rights to vote and to be voted upon in the election of directors and that in amending the by-laws, the
majority members of the BOD purposely provided for his disqualification and deprived him of his vested
right hence the said amended by-laws are null and void. At that time, Gokongwei is a stockholder of
SMC and president and controlling shareholder of CFC-Robina, a corporation engaged in business
competitive to that of SMC. He also alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and therefore, the questioned act is ultra vires and void.
Issue: WON the corporations have no inherent power to disqualify a stockholder from being elected
as a director; WON stockholders have vested right to be elected as directors
Held:
1) 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.

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.'" In this jurisdiction under
section 21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications,
duties and compensation of directors, officers and employees." This must necessarily refer to a
qualification in addition to that specified by section 30 of the Corporation Law, which provides that
"every director must own in his right at least one share of the capital stock of the stock corporation
of which he is a director."

Pursuant to section 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 two-thirds 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, viz.: "to object thereto in writing and demand payment for
his share." Under section 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.

2) Stockholders have no vested right to be elected as directors. Any person who buys stock in a
corporation does so with the knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of the majority shall govern in all
matters within the limits of the act of incorporation and lawfully enacted by-laws and not
forbidden by law.
To this extent, therefore, the stockholder may be considered to have parted with his personal right or
privilege to regulate the disposition of his property which he has invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow incorporators. It cannot therefore be
justly said that the contract, express or implied, between the corporation and the stockholders is infringed
by any act of the former which is authorized by the majority.
Pursuant to 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. Under also the
Corporation Law, the owners of the majority of the subscribed capital may amend or repeal any 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.
3) An amendment to the corporate by-law which renders a stockholder ineligible to be director,
if he be also director in a corporation whose business is in competition with that of the other
corporation is valid.

Although in the strict and technical sense, directors of a private corporation are not regarded as trustees,
there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the management of the corporation for the
collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is one
of trust." "The ordinary trust relationship of directors of a corporation and stockholders is not a matter of
statutory or technical law. It springs from the fact that directors have the control and guidance of corporate
affairs and property and hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof."
A director is a fiduciary. Their powers are powers in trust. He who is in such fiduciary position cannot
serve himself first and his cestuis second. He cannot manipulate the affairs of his corporation to their
detriment and in disregard of the standards of common decency. He cannot by the intervention of a
corporate entity violate the ancient precept against serving two masters. He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do so directly. He cannot violate rules of fair play by
doing indirectly through the corporation what he could not do so directly. He cannot use his power for his
personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms
that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is
at all times subject to the equitable limitation that it may not be exercised for the aggrandizement,
preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. The doctrine of
"corporate opportunity" is precisely a recognition by the courts that the fiduciary standards could not be
upheld where the fiduciary was acting for two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular circumstances, of an officer or director taking
advantage of an opportunity for his own personal profit when the interest of the corporation justly
calls for protection. It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel, proposals of mergers or tie-ups
with other firms. It is obviously to prevent the creation of an opportunity for an officer or director of
San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking
advantage of the information which he acquires as director to promote his individual or corporate
interests to the prejudice of San Miguel Corporation and its stockholders, that the questioned
amendment of the by-laws was made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the director, if he were to
discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of
his corporation duties above his personal concerns. The offer and assurance of Gokongwei that to avoid
any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he
would absent himself from meetings at which confidential matters would be discussed, would not detract
from the validity and reasonableness of the by-laws involved. Apart from the impractical results that would
ensue from such arrangement, it would be inconsistent with Gokongwei's primary motive in running for
board membership — which is to protect his investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity
to the corporation, for the policy of the law is to encourage and enforce responsible corporate management.

16. Grace Christian High School vs. Court of Appeals

FACTS: Grace Christian High School (GCHS) is an educational institution in Grace Village (QC). Grace
Village Association, Inc. (GVAI) is the homeowners association in Grace Village. GVAI has existing by-
laws which was already in effect since 1968. But in 1975, the board of directors made a draft amending
the by-laws whereby the representative of GCHS shall have a permanent seat in the 15-seat board. The
draft however was never presented to the general membership for approval. But nevertheless, the
representative of GCHS held a seat in the board for 15 years until in 1990 when a proposal was made
to the board to reconsider the practice of allowing the GCHS representative in taking a permanent seat.
Thereafter, an election was scheduled for the 15 seat in the board. GCHS opposed the election as it insists
that the election should only be for 14 directors because it has a permanent seat. GVAI argued that GCHS
claim has no basis because the 1975 proposed amendment was never ratified. GCHS averred that it was
ratified when it was allowed to take the seat for 15 years and as such its right has already vested.
ISSUE: Whether or not the representative from Grace Christian High School should be allowed to
have a permanent seat in the board of directors.
HELD: No. The Corporation Code is clear when it provides that members of the board of a
corporation must be elected by the stockholders (Stock Corporation) or the members (Non-stock
Corporation). Admittedly, there are corporations who allow some of their directors to sit in the board
without being elected – but such practice cannot prevail over provisions of law. Practice, no matter
how long continued, cannot give rise to any vested right if it is contrary to law. Further, there is no
reason as to why a representative from GCHS should be given an automatic seat. It should therefore go
through the process of election. It cannot also be argued that the draft of the by-laws in 1975 was
ratified when GCHS was allowed to take its seat for 15 years without an election. In the first place,
the proposal was merely a draft and even if passed and approved by the general membership, it
cannot be given effect because it is void and contrary to the law. GCHS’ seat in the corporate board is
at best merely tolerated by GVAI.

18. Roxas vs. Dela Rosa, 49 PHIL 609 (1926)

Removal of Directors: Under the law the directors of a corporation can only be removed from office by
a vote of the stockholders representing at least two-thirds of the subscribed capital stock entitled to
vote (Act No. 1459, sec. 34); while vacancies in the board, when they exist, can be filled by mere majority
vote, (Act No. 1459, sec. 25). Moreover, the law requires that when action is to be taken at a special
meeting to remove the directors, such purpose shall be indicated in the call (Act No. 1459, sec. 34)

SUMMARY: Representatives of the voting trust, holding majority of the shares, calls for a shareholders
meeting with the purpose of electing the members of the board of directors notwithstanding the fact that all
the positions in the board are occupied by the members elected in a previous shareholders meeting. A civil
action was filed to enjoin such meeting and the petitioners filed a certiorari proceeding for the issuance of
the CFI judge of a restraining order to enjoin the meeting. SC held that the restraining order was valid
because in order to remove the current members of the BOD, a vote of at least 2/3 of the shareholders is
necessary.

FACTS: Binalbagan Estate, Inc. (BEI) is a corporation having its principal plant in Occidental Negros
where it is engaged in the manufacture of raw sugar from canes grown upon farms accessible to its central.
In July, 1924, the possessors of a majority of the shares of the Binalbagan Estate, Inc., formed a voting
trust composed of three members, namely, Salvador Laguna, Segunda Monteblanco, and Arthur F.
Fisher, as trustee. By the document constituting this voting trust, the trustees were authorized to represent
and vote the shares pertaining to their constituents, and to this end the shareholders undertook to assign
their shares to the trustees on the books of the company. The total number of outstanding shares of the
corporation is somewhat over 5,500, while the number of shares controlled by the voting trust is less than
3,000.

On 26 Feb 1926, BEI held its General Annual Shareholders Meeting at which Mr. J. P. Heilbronn
appeared as representative of the voting trust, his authority being recognized by the holders of all the other
shares present at this meeting. Heilbronn having the control of the majority of the shares (the case didn’t
say how that happened – maybe he owned several shares plus the shares of the voting trust he was
representing to make up the majority – it’s just an inference) was able to nominate and elect a board of
directors to his own liking, without opposition from the minority. After the board of directors had been thus
elected and had qualified, they chose a set of officers constituting of Jose M. Yusay, president, Timoteo
Unson, vice-president, Jose G. Montalvo, secretary-treasurer, and H. W. Corp and Agustin Coruna, as
members. Said officials immediately entered upon the discharged of their duties and have continued
in possession of their respective offices until the present time.

Since the creation of the voting trust there have been a number of vacancies caused by resignation or the
absence of members from the Philippine Islands, with the result that various substitutions have been made
in the personnel of the voting trust. At the present time the petitioners Roxas, Echaus, and Lacson
presumably constitute its membership. The current members of the voting trust (petitioners) wanted to
oust the current officers/directors of the corporation, even though it was the previous representative of the
voting trust (Heilbronn) who elected them. Thus, the petitioners in their character as members of the voting
trust, on August 2, 1926, caused the secretary of the Binalbagan Estate, Inc., to issue to the shareholders a
notice calling for a special general meeting of shareholders to be held at 10 a. m., on August 16, 1926, "for
the election of the board of directors, for the amendment of the By-Laws, and for any other business
that can be dealt with in said meeting." Respondents Coruna and Ledesma, as director and shareholder
of the corporation respectively, filed a civil action before CFI to enjoin the meeting to be held on Aug. 16,
1926. Respondent judge De La Rosa issued a restraining order or preliminary injunction to enjoin the
meeting which gave rise to the present certiorari proceeding filed by petitioners.

ISSUE: Whether or not it was within the judicial powers of Judge De La Rosa to issue the restraining
order or preliminary injunction? (YES)

MAIN ISSUE: W/N the petitioners can hold another shareholders meeting for the election of board of
directors even though no vacancies have occurred to justify such election? (NO)

RULING: Vacancies in the Board of Directors occur either due to death, resignation, removal, or
otherwise. The law requires that for a director to be removed, a vote of at least two-thirds of the
subscribed capital stock is necessary. In this case, the voting trust only has the majority of the shares.
Majority is not equivalent to two-thirds. It must be noted that there are no vacancies in the board of
directors. Therefore, a call for an election of the board of directors made by the petitioners is tantamount to
an ousting of the current members of the board. The present board of directors is de facto incumbents of
the office whose acts will be valid until they shall be lawfully removed from the office or cease from the
discharge of their functions. In this case it is not necessary for us to agitate ourselves over the question
whether the respondent judge properly exercised his judicial discretion in granting the order complained of.
If suffices to know that in making the order he was acting within the limits of his judicial powers.

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

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

20. Western Institute of Technology vs Salas (1997)

Facts: Private respondents are the majority and controlling members of the Board of Trustees of Western
Institute of Technology, Inc. a stock corporation engaged in the operation, among others, of an
educational institution. Then, the board of directors amended their by-laws giving the members of
board of directors, compensation. The ten per centum of the net profits shall be distributed equally
among the ten members of the Board of Trustees. Few years later, the private respondents were charged of
falsification of public documents and estafa. The charge for falsification of public document was anchored
on the private respondents’ submission of WIT’s income statement for the fiscal year 1985-1986 with
the Securities and Exchange Commission (SEC) reflecting therein the disbursement of corporate
funds making it appear that the same was passed by the board on March 30, 1986, when in truth, the
same was actually passed on June 1, 1986, a date not covered by the corporation’s fiscal year 1985-1986.
After a full-blown hearing TC handed down a verdict of acquittal on both counts without imposing any
civil liability against the accused therein.

Issue: WON the compensation of the board of directors as stated in their by-laws violates the
corporation code?

Held: NO. There is no argument that directors or trustees, as the case may be, are not entitled to salary or
other compensation when they perform nothing more than the usual and ordinary duties of their office. This
rule is founded upon a presumption that directors/trustees render service gratuitously, and that the return
upon their shares adequately furnishes the motives for service, without compensation. Under the
foregoing section, there are only two (2) ways by which members of the board can be granted
compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing
their compensation; and (2) when the stockholders representing a majority of the outstanding capital
stock at a regular or special stockholders’ meeting agree to give it to them. In the case at bench,
Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity as
members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-
Chairman, Treasurer and Secretary of Western Institute of Technology. Clearly, therefore, the
prohibition with respect to granting compensation to corporate directors/trustees as such under
Section 30 is not violated in this particular case.

22. TABANG v. NLRC

FACTS: Petitioner Purificacion Tabang was a founding member, a member of the Board of Trustees, and
the corporate secretary of private respondent Pamana Golden Care Medical Center Foundation, Inc., a
non-stock corporation engaged in extending medical and surgical services. On October 30, 1990, the Board
of Trustees issued a memorandum appointing petitioner as Medical Director and Hospital Administrator of
private respondents Pamana Golden Care Medical Center in Calamba, Laguna.
Although the memorandum was silent as to the amount of remuneration for the position, petitioner claims
that she received a monthly retainer fee of P5,000.00 from private respondent, but the payment
thereof was allegedly stopped in November, 1991. In her capacity as such, Petitioner was tasked to run
the affairs of the aforesaid medical center and perform all acts of administration relative to its daily
operations. On May 1, 1993, petitioner was allegedly informed personally by Dr. Ernesto Naval that in a
special meeting held on April 30, 1993, the Board of Trustees passed a resolution relieving her of her
position as Medical Director and Hospital Administrator, and appointing Naval and Dr. Benjamin
Donasco as acting Medical Director and acting Hospital Administrator, respectively. Petitioner averred
that she thereafter received a copy of said board resolution. On June 6, 1993, petitioner filed a complaint
for illegal dismissal and non-payment of wages, among others, before the labor arbiter.
Respondent Corporation moved for the dismissal of the complaint on the ground of lack of jurisdiction over
the subject matter. It argued that petitioner’s position as Medical Director and Hospital Administrator was
interlinked with her position as member of the Board of Trustees; hence, her dismissal is an intra-
corporate controversy which falls within the exclusive jurisdiction of the Securities and Exchange
Commission (SEC). Petitioner opposed the motion to dismiss, contending that her position as Medical
Director and Hospital Administrator was separate and distinct from her position as member of the Board
of Trustees. She claimed that there is no intra-corporate controversy involved since she filed the
complaint in her capacity as Medical Director and Hospital Administrator, or as an employee of
private respondent.
On April 26, 1994, the labor arbiter issued an order dismissing the complaint for lack of jurisdiction. He
ruled that the case falls within the jurisdiction of the SEC; pursuant to Section 5 of Presidential Decree No.
902-A. Petitioners motion for reconsideration was treated as an appeal by the labor arbiter who
consequently ordered the elevation of the entire records of the case to public respondent NLRC for
appellate review. NLRC affirmed the dismissal of the case on the additional ground that the position of a
Medical Director and Hospital Administrator is akin to that of an executive position in a corporate
ladder structure, hence, petitioners removal from the said position was an intra-corporate controversy
within the original and exclusive jurisdiction of the SEC.
ISSUE: Whether or not the present case constitutes an intracorporate controversy – YES
The charges against herein private respondent partake of the nature of an intra-corporate
controversy. Similarly, the determination of the rights of petitioner and the concomitant liability of private
respondent arising from her ouster as a medical director and/or hospital administrator, which are
corporate offices, is an intra-corporate controversy subject to the jurisdiction of the SEC. Contrary to the
contention of petitioner, a medical director and a hospital administrator are considered as corporate
officers under the by-laws of Respondent Corporation. Section 2(i), Article I thereof states that one of
the powers of the Board of Trustees is to appoint a Medical Director, Comptroller/Administrator, Chiefs
of Services and such other officers as it may deem necessary and prescribe their powers and duties.
The president, vice-president, secretary and treasurer are commonly regarded as the principal or
executive officers of a corporation and modern corporation statutes usually designate them as the officers
of the corporation. However, other offices are sometimes created by the charter or by-laws of a
corporation or the board of directors may be empowered under the by-laws of a corporation to
create additional offices as may be necessary. It has been held that an office is created by the charter
of the corporation and the officer is elected by the directors or stockholders. On the other hand, an
employee usually occupies no office and generally is employed not by action of the directors or
stockholders but by the managing officer of the corporation who also determines the compensation to be
paid to such employee.
In the case at bar, considering that herein petitioner, unlike an ordinary employee, was appointed by
respondent corporations Board of Trustees in its memorandum of October 30, 1990, she is deemed an
officer of the corporation. Perforce, Section 5(c) of Presidential Decree No. 902-A, which provides that
the SEC exercises exclusive jurisdiction over controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships or associations, applies in the present
dispute. Accordingly, jurisdiction over the same is vested in the SEC, and not in the Labor Arbiter or the
NLRC. Moreover, the allegation of petitioner that her being a member of the Board of Trustees was
not one of the considerations for her appointment is belied by the tenor of the memorandum itself. It
states: We hope that you will uphold and promote the mission of our foundation, and this cannot be
construed other than in reference to her position or capacity as a corporate trustee.
A corporate officers’ dismissal is always a corporate act, or an intra-corporate controversy, and
the nature is not altered by the reason or wisdom with which the Board of Directors may have in
taking such action. Also, an intra-corporate controversy is one which arises between a stockholder
and the corporation. There is no distinction, qualification, nor any exemption whatsoever. The
provision is broad and covers all kinds of controversies between stockholders and corporations.
24. PSBA vs. LEANO, GR L- 58468 February 24, 1984

FACTS: Tan is one of the stockholders of PSBA. He was a director and Executive Vice-President
enjoying salaries and allowances. During a regular meeting, the Board of Directors declared all
corporate positions vacant except those of the president and chairman and at the same time elected
new set of officers. Tan was not reelected for which he filed for illegal dismissal before the NLRC. He also
instituted a one million peso damage suit before the Court of First Instance for the illegal and oppressive
removal. He lodged another complaint with the SEC questioning the validity of the elections and his ouster.
The SEC issued a subpoena duces tecum commanding the production of all corporate documents, records,
books. The Labor Arbiter also issued a subpoena duces tecum for the production of the same records and
documents. Petitioners moved for the dismissal of the complaint before the NLRC invoking the
principle against split jurisdiction.

ISSUE: Whether or not the NLRC has jurisdiction over the case.

RULING: NO. PSBA is a domestic corporation duly organized and existing under our laws. General
management is vested in a Board of seven elected annually by stockholders entitled to vote, who serve until
the election and qualification of their successors. Any vacancy in the board of directors is filled up by a
majority vote of the subscribed capital stock entitled to vote at a meeting generally called for the
purpose, and the directors so chosen shall hold office for the unexpired term. Corporate officers are
provided for, among them, the Executive Vice-President, who is elected by the board from their own
number. The officers receive such salaries as the board may fix. The by-laws likewise provide that should
the office be rendered vacant by reason of death, resignation, disqualification or otherwise, the board, by a
majority vote may choose a successor who shall hold office for the unexpired term of the predecessor.
The controversy is intra-corporate in nature. It revolves around the election of directors,
officers and managers of PSBA, the relation between and among its stockholders, and between them
and the corporation. PD 902-A vests in the SEC the original and exclusive jurisdiction to hear and decide
cases involving controversies arising out of intra-corporate relations between and among stockholders, and
between the stockholders and the corporation. It also has exclusive jurisdiction over controversies
involving the election and appointment of officers, directors, trustees or managers of such corporation.
The case is not a case of dismissal. The case is that of a corporate office having been declared
vacant and of Tan’s not having been re-elected thereafter. The matter of whom to elect is a prerogative
that belongs to the Board and involves the exercise of deliberate choice and the faculty of discriminative
selection. Generally speaking, the relationship of a person to the corporation, whether as an officer or
as agent or employee, is not determined by the services performed but by the incidents of the
relationship as they actually exist.

26. Reahs Corporation vs. NLRC, GR No. 117473 [14 April 1997]

FACTS: Complainant (herein private respondent) Bonifacio Red, among other complainants, alleged that
he started working as a supervisor at the health and sauna parlor of respondents from September 5, 1977 to
November 6, 1990 when, without any notice and without paying his wages and other statutory benefits, the
said establishment was closed by respondents on November 6, 1990. Likewise, Benedicto Tulabing, Nancy
Cenita, Susan Calwit, Edna Wahingon, Susan dela Cruz, Sonia dela Cruz and Victoria Padilla (other
private respondents) also alleged that they used to work on the same company, albeit on different dates,
when it suddenly closed its business on the said date (Nov. 6) without having been notified therefor and
without having been paid by the company of the salaries, commissions and benefits due them in accordance
with the Labor Code.

On the other hand, respondents (herein Petitioner) allege that sometime in 1986, a certain Ms. Soledad
Domingo, the sole proprietress and operator of Rainbow Sauna located at 316 Araneta Avenue, Quezon
City, offered to sell her business to respondent Reah's Corporation. After the sale, all the assets of Ms.
Domingo were turned over to respondent Reah's, which put a sing-along coffee shop and massage clinic;
that complainant Red started his employment on the first week of December 1988 as a room boy
at P50.00/day and was given living quarters inside the premises as he requested; that sometime in March
1989, complainant Red asked permission to go to Bicol for a period of ten (10) days, which was granted,
and was given an advance money of P1,200.00 to bring some girls from the province to work as attendants
at the respondent's massage clinic; that it was only on January 1, 1990 that complainant Red returned and
was re-hired under the same terms and conditions of his previous employment with the understanding that
he will have to refund the P1,200.00 cash advance given to him; that due to poor business, increase in the
rental cost and the failure of Meralco to reconnect the electrical services in the establishment, it suffered
losses leading to its closure."

On 6 May 1993, the labor arbiter rendered judgment dismissing private respondents' complaints
for unfair labor practice and illegal dismissal but upholding the claims for separation pay, underpayment
of wages, holiday pay and 13th month pay. All eight (8) private respondents were awarded separation
pay. However, only Bonifacio Red and Benedicto Tulabing were declared entitled to the claimed labor
standard benefits as the rest were found to have been employed on commission basis.
Petitioners appealed the labor arbiter's decision to the NLRC, contending mainly that Article 283 of the
Labor Code, "exempts establishment(s) from payment of termination pay when the closure of business is
due to serious business losses or financial reverses"; that petitioners Castulo, Pascua and Valenzuela,
while admittedly the acting chairman of the board, board member and accountant acting manager
respectively of Reah's Corporation, cannot be held jointly and severally liable with Reah's "unless there is
evidence to show that the cause of the closure of the business was due to the criminal negligence of the
[respondent] officers."

ISSUE: WHETHER OR NOT THE OFFICERS OF REAH'S CORPORATION CAN BE HELD

JOINTLY AND SEVERALLY LIABLE WITH THE CORPORATION IN PAYMENT OF THE
MONETARY CLAIMS AWARDED PRIVATE RESPONDENTS IN THE ABSENCE OF ANY
FINDING OF UNFAIR LABOR PRACTICES OR ILLEGAL DISMISSAL. - YES

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

At the very least, as what we held in Pabalan v. NLRC, to justify solidary liability, "there must be an
allegation or showing that the officers of the corporation deliberately or maliciously designed to evade the
financial obligation of the corporation to its employees", or a showing that the officers indiscriminately
stopped its business to perpetrate an illegal act, as a vehicle for the evasion of existing obligations, in
circumvention of statutes, and to confuse legitimate issues. While there is no sufficient evidence to
conclude that petitioners have indiscriminately stopped the entity's business, at the same time,
petitioners have opted to abstain from presenting sufficient evidence to establish the serious and
adverse financial condition of the company.

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

28. ALFREDO MONTELIBANO, ET AL. vs. BACOLOD-MURCIA MILLING CO. INC. GR L-

15902

FACTS: Montelibano et al. are sugar planters adhered to the Bacolod-Murcia Milling Co., Inc.’s sugar
central mill under identical milling contracts originally executed in 1919. In 1936, it was proposed to
execute amended milling contracts, increasing the planters’ share of the manufactured sugar, besides other
concessions. To this effect, a printed Amended Milling Contract form was drawn up. The Board of
Directors of Bacolod-Murcia Milling Co., Inc. adopted a resolution granting further concessions to the
planters over and above those contained in the printed Amended Milling Contract on August 20, 1936. The
printed Amended Milling Contract was signed by the Appellants on September 10, 1936, but a copy
of the resolution was not attached to the printed contract until April 17, 1937. In 1953, the appellants
initiated an action, contending that 3 Negros sugar centrals had already granted increased participation to
their planters, and that under paragraph 9 of the resolution of August 20, 1936, the appellee had become
obligated to grant similar concessions to the appellants herein. The Bacolod-Murcia Milling Co., Inc.,
resisted the claim, urging that the resolution in question was null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate directors to adopt.
ISSUE: WON the act of the BOD ultra vires?
RULING: NO. 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 corporations business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the power to do it otherwise, not.
(The Bacolod-Murcia Milling Co., Inc. is ordered to pay appellants the increase of
participation in the milled sugar in accordance with paragraph 9 of the Resolution of August 20, 1936.)
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no
authority to review them.
It is a well-known rule of law that questions of policy or of management are left solely to
the honest decision of officers and directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the business manager of the corporation, and
so long as it acts in good faith its orders are not reviewable by the courts.
It must be remembered that the controverted resolution was adopted by appellee corporation
as a supplement to, or further amendment of, the proposed milling contract, and that it was approved on
August 20, 1936, twenty-one days prior to the signing by appellants on September 10, of the Amended
Milling Contract itself; so that when the Milling Contract was executed, the concessions granted by the
disputed resolution had been already incorporated into its terms.

30. Charles Mead vs E. C. McCullough

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