[G.R. No. 126006.

January 29, 2004]

LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN, petitioners,

vs. COURT OF APPEALS (Seventeenth Division) and ALLIED
BANKING CORP., respondents

DECISION
CALLEJO, SR., J.:

Before the Court is the petition for review on certiorari filed by the
Lapulapu Foundation, Inc. and Elias Q. Tan seeking to reverse and set aside
the Decision dated June 26, 1996 of the Court of Appeals (CA) in CA-G.R.
[1]

CV No. 37162 ordering the petitioners, jointly and solidarily, to pay the
respondent Allied Banking Corporation the amount of P493,566.61 plus
interests and other charges. Likewise, sought to be reversed and set aside is
the appellate courts Resolution dated August 19, 1996 denying the petitioners
motion for reconsideration.
The case stemmed from the following facts:
Sometime in 1977, petitioner Elias Q. Tan, then President of the co-
petitioner Lapulapu Foundation, Inc., obtained four loans from the respondent
Allied Banking Corporation covered by four promissory notes in the amounts
of P100,000 each. The details of the promissory notes are as follows:

P/N No. Date of P/N Maturity Date Amount as of 1/23/79

BD No. 504 Nov. 7, 1977 Feb. 5, 1978 P123,377.76

BD No. 621 Nov. 28, 1977 Mar. 28, 1978 P123,411.10

BD No. 716 Dec. 12, 1977 Apr. 11, 1978 P122,322.21

BD No. 839 Jan. 5, 1978 May 5, 1978 P120,455.54 [2]

As of January 23, 1979, the entire obligation amounted to P493,566.61

and despite demands made on them by the respondent Bank, the petitioners
failed to pay the same. The respondent Bank was constrained to file with the
Regional Trial Court of Cebu City, Branch 15, a complaint seeking payment by
the petitioners, jointly and solidarily, of the sum of P493,566.61 representing
their loan obligation, exclusive of interests, penalty charges, attorneys fees
and costs.
In its answer to the complaint, the petitioner Foundation denied incurring
indebtedness from the respondent Bank alleging that the loans were obtained
by petitioner Tan in his personal capacity, for his own use and benefit and on
the strength of the personal information he furnished the respondent Bank.
The petitioner Foundation maintained that it never authorized petitioner Tan to
co-sign in his capacity as its President any promissory note and that the
respondent Bank fully knew that the loans contracted were made in petitioner
Tans personal capacity and for his own use and that the petitioner Foundation
never benefited, directly or indirectly, therefrom. The petitioner Foundation
then interposed a cross-claim against petitioner Tan alleging that he, having
exceeded his authority, should be solely liable for said loans, and a
counterclaim against the respondent Bank for damages and attorneys fees.
For his part, petitioner Tan admitted that he contracted the loans from the
respondent Bank in his personal capacity. The parties, however, agreed that
the loans were to be paid from the proceeds of petitioner Tans shares of
common stocks in the Lapulapu Industries Corporation, a real estate firm. The
loans were covered by promissory notes which were automatically renewable
(rolled-over) every year at an amount including unpaid interests, until such
time as petitioner Tan was able to pay the same from the proceeds of his
aforesaid shares.
According to petitioner Tan, the respondent Banks employee required him
to affix two signatures on every promissory note, assuring him that the loan
documents would be filled out in accordance with their agreement. However,
after he signed and delivered the loan documents to the respondent Bank,
these were filled out in a manner not in accord with their agreement, such that
the petitioner Foundation was included as party thereto. Further, prior to its
filing of the complaint, the respondent Bank made no demand on him.
After due trial, the court a quo rendered judgment the dispositive portion of
which reads:

WHEREFORE, in view of the foregoing evidences [sic], arguments and

considerations, this court hereby finds the preponderance of evidence in favor of the
plaintiff and hereby renders judgment as follows:

1. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc. [the
petitioners herein] to pay jointly and solidarily to the plaintiff Allied Banking
Corporation [the respondent herein] the amount of P493,566.61 as principal obligation
for the four promissory notes, including all other charges included in the same, with
interest at 14% per annum, computed from January 24, 1979, until the same are fully
paid, plus 2% service charges and 1% monthly penalty charges.

2. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc., to pay
jointly and solidarily, attorneys fees in the equivalent amount of 25% of the total
amount due from the defendants on the promissory notes, including all charges;

3. Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc., to pay
jointly and solidarily litigation expenses of P1,000.00 plus costs of the suit.
[3]

On appeal, the CA affirmed with modification the judgment of the court a

quo by deleting the award of attorneys fees in favor of the respondent Bank
for being without basis.
The appellate court disbelieved petitioner Tans claim that the loans were
his personal loans as the promissory notes evidencing them showed upon
their faces that these were obligations of the petitioner Foundation, as
contracted by petitioner Tan himself in his official and personal character.
Applying the parol evidence rule, the CA likewise rejected petitioner Tans
assertion that there was an unwritten agreement between him and the
respondent Bank that he would pay the loans from the proceeds of his shares
of stocks in the Lapulapu Industries Corp.
Further, the CA found that demand had been made by the respondent
Bank on the petitioners prior to the filing of the complaint a quo. It noted that
the two letters of demand dated January 3, 1979 and January 30, [4]

1979 asking settlement of the obligation were sent by the respondent Bank.
[5]

These were received by the petitioners as shown by the registry return

cards presented during trial in the court a quo.
[6]

Finally, like the court a quo, the CA applied the doctrine of piercing the veil
of corporate entity in holding the petitioners jointly and solidarily liable. The
evidence showed that petitioner Tan had represented himself as the President
of the petitioner Foundation, opened savings and current accounts in its
behalf, and signed the loan documents for and in behalf of the latter. The CA,
likewise, found that the petitioner Foundation had allowed petitioner Tan to act
as though he had the authority to contract the loans in its behalf. On the other
hand, petitioner Tan could not escape liability as he had used the petitioner
Foundation for his benefit.
Aggrieved, the petitioners now come to the Court alleging that:
 I. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE LOANS
SUBJECT MATTER OF THE INSTANT PETITION ARE ALREADY DUE AND
DEMANDABLE DESPITE ABSENCE OF PRIOR DEMAND.
II. THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THE PAROL
EVIDENCE RULE AND THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE ENTITY AS BASIS FOR ADJUDGING JOINT AND SOLIDARY
LIABILITY ON THE PART OF PETITIONERS ELIAS Q. TAN AND LAPULAPU
FOUNDATION, INC.[7]

The petitioners assail the appellate courts finding that the loans had
become due and demandable in view of the two demand letters sent to them
by the respondent Bank. The petitioners insist that there was no prior demand
as they vigorously deny receiving those letters. According to petitioner Tan,
the signatures on the registry return cards were not his.
The petitioners denial of receipt of the demand letters was rightfully given
scant consideration by the CA as it held:

Exhibits R and S are two letters of demand, respectively dated January 3, 1979 and
January 30, 1979, asking settlement of the obligations covered by the promissory
notes. The first letter was written by Ben Tio Peng Seng, Vice-President of the bank,
and addressed to Lapulapu Foundation, Inc., attention of Mr. Elias Q. Tan, President,
while the second was a final demand written by the appellees counsel, addressed to
both defendants-appellants, and giving them five (5) days from receipt within which
to settle or judicial action would be instituted against them. Both letters were duly
received by the defendants, as shown by the registry return cards, marked as Exhibits
R-2 and S-1, respectively. The allegation of Tan that he does not know who signed the
said registry return receipts merits scant consideration, for there is no showing that the
addresses thereon were wrong. Hence, the disputable presumption that a letter duly
directed and mailed was received in the regular course of mail (per par. V, Section 3,
Rule 131 of the Revised Rules on Evidence) still holds. [8]

There is no dispute that the promissory notes had already matured.

However, the petitioners insist that the loans had not become due and
demandable as they deny receipt of the respondent Banks demand letters.
When presented the registry return cards during the trial, petitioner Tan
claimed that he did not recognize the signatures thereon. The petitioners
allegation and denial are self-serving. They cannot prevail over the registry
return cards which constitute documentary evidence and which enjoy the
presumption that, absent clear and convincing evidence to the contrary, these
were regularly issued by the postal officials in the performance of their official
duty and that they acted in good faith. Further, as the CA correctly opined,
[9]

mails are presumed to have been properly delivered and received by the
addressee in the regular course of the mail. As the CA noted, there is no
[10]
showing that the addresses on the registry return cards were wrong. It is the
petitioners burden to overcome the presumptions by sufficient evidence, and
other than their barefaced denial, the petitioners failed to support their claim
that they did not receive the demand letters; therefore, no prior demand was
made on them by the respondent Bank.
Having established that the loans had become due and demandable, the
Court shall now resolve the issue of whether the CA correctly held the
petitioners jointly and solidarily liable therefor.
In disclaiming any liability for the loans, the petitioner Foundation
maintains that these were contracted by petitioner Tan in his personal
capacity and that it did not benefit therefrom. On the other hand, while
admitting that the loans were his personal obligation, petitioner Tan avers that
he had an unwritten agreement with the respondent Bank that these loans
would be renewed on a year-to-year basis and paid from the proceeds of his
shares of stock in the Lapulapu Industries Corp.
These contentions are untenable.
The Court particularly finds as incredulous petitioner Tans allegation that
he was made to sign blank loan documents and that the phrase IN MY
OFFICIAL/PERSONAL CAPACITY was superimposed by the respondent
Banks employee despite petitioner Tans protestation. The Court is hard
pressed to believe that a businessman of petitioner Tans stature could have
been so careless as to sign blank loan documents.
In contrast, as found by the CA, the promissory notes clearly showed
[11]

upon their faces that they are the obligation of the petitioner Foundation, as
contracted by petitioner Tan in his official and personal capacity. Moreover,
[12]

the application for credit accommodation, the signature cards of the two
[13]

accounts in the name of petitioner Foundation, as well as New Current

[14]

Account Record, all accompanying the promissory notes, were signed by

[15]

petitioner Tan for and in the name of the petitioner Foundation. These [16]

documentary evidence unequivocally and categorically establish that the

loans were solidarily contracted by the petitioner Foundation and petitioner
Tan.
As a corollary, the parol evidence rule likewise constrains this Court to
reject petitioner Tans claim regarding the purported unwritten agreement
between him and the respondent Bank on the payment of the obligation.
Section 9, Rule 130 of the of the Revised Rules of Court provides that [w]hen
the terms of an agreement have been reduced to writing, it is to be considered
as containing all the terms agreed upon and there can be, between the parties
and their successors-in-interest, no evidence of such terms other than the
contents of the written agreement. [17]

In this case, the promissory notes are the law between the petitioners and
the respondent Bank. These promissory notes contained maturity dates as
follows: February 5, 1978, March 28, 1978, April 11, 1978 and May 5, 1978,
respectively. That these notes were to be paid on these dates is clear and
explicit. Nowhere was it stated therein that they would be renewed on a year-
to-year basis or rolled-over annually until paid from the proceeds of petitioner
Tans shares in the Lapulapu Industries Corp. Accordingly, this purported
unwritten agreement could not be made to vary or contradict the terms and
conditions in the promissory notes.
Evidence of a prior or contemporaneous verbal agreement is generally not
admissible to vary, contradict or defeat the operation of a valid
contract. While parol evidence is admissible to explain the meaning of
[18]

written contracts, it cannot serve the purpose of incorporating into the contract
additional contemporaneous conditions which are not mentioned at all in
writing, unless there has been fraud or mistake. No such allegation had been
[19]

made by the petitioners in this case.

Finally, the appellate court did not err in holding the petitioners jointly and
solidarily liable as it applied the doctrine of piercing the veil of corporate entity.
The petitioner Foundation asserts that it has a personality separate and
distinct from that of its President, petitioner Tan, and that it cannot be held
solidarily liable for the loans of the latter.
The Court agrees with the CA that the petitioners cannot hide behind the
corporate veil under the following circumstances:

The evidence shows that Tan has been representing himself as the President of
Lapulapu Foundation, Inc. He opened a savings account and a current account in the
names of the corporation, and signed the application form as well as the necessary
specimen signature cards (Exhibits A, B and C) twice, for himself and for the
foundation. He submitted a notarized Secretarys Certificate (Exhibit G) from the
corporation, attesting that he has been authorized, inter alia, to sign for and in behalf
of the Lapulapu Foundation any and all checks, drafts or other orders with respect to
the bank; to transact business with the Bank, negotiate loans, agreements, obligations,
promissory notes and other commercial documents; and to initially obtain a loan
for P100,000.00 from any bank (Exhibits G-1 and G-2). Under these circumstances,
the defendant corporation is liable for the transactions entered into by Tan on its
behalf.[20]
 Per its Secretarys Certificate, the petitioner Foundation had given its
President, petitioner Tan, ostensible and apparent authority to inter alia deal
with the respondent Bank. Accordingly, the petitioner Foundation is estopped
from questioning petitioner Tans authority to obtain the subject loans from the
respondent Bank. It is a familiar doctrine that if a corporation knowingly
permits one of its officers, or any other agent, to act within the scope of an
apparent authority, it holds him out to the public as possessing the power to
do those acts; and thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying the
agents authority. [21]

In fine, there is no cogent reason to deviate from the CAs ruling that the
petitioners are jointly and solidarily liable for the loans contracted with the
respondent Bank.
WHEREFORE, premises considered, the petition is DENIED and the
Decision dated June 26, 1996 and Resolution dated August 19, 1996 of the
Court of Appeals in CA-G.R. CV No. 37162 are AFFIRMED in toto.
SO ORDERED.
Puno, (Chairman) Quisumbing, Austria-Martinez, and Tinga, JJ., concur.
G.R. No. L-18805 August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE

PHILIPPINES,plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO
GARCIA,3 and LEONOR MOLL, defendants-appellees.

Simeon M. Gopengco and Solicitor General for plaintiff-appellant.

L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna,
Montecillo and Belo for defendants-appellees.

SANCHEZ, J.:

The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental
organization on May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation
and development of the coconut industry in the Philippines. On August 1, 1946, NACOCO's charter
was amended [Republic Act 5] to grant that corporation the express power "to buy, sell, barter,
export, and in any other manner deal in, coconut, copra, and dessicated coconut, as well as their by-
products, and to act as agent, broker or commission merchant of the producers, dealers or
merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve coconut
producers by securing advantageous prices for them, to cut down to a minimum, if not altogether
eliminate, the margin of middlemen, mostly aliens.4
General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro
Garcia were members of the Board; defendant Leonor Moll became director only on December 22,
1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the
scores of contracts executed by general manager Kalaw are the disputed contracts, for the delivery
of copra, viz:

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b.,
delivery: August and September, 1947. This contract was later assigned to Louis Dreyfus &
Co. (Overseas) Ltd.

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton,
f.o.b., Philippine ports, to be shipped: September-October, 1947. This contract was also
assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery:
September, 1947.

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f.,
Los Angeles, California, delivery: November, 1947.

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long
tons, $164,00 per ton, c.i.f., New York, to be shipped in November, 1947.

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00
per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery:
November and December, 1947. This contract was assigned to Pacific Vegetable Co.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific
ports, delivery: December, 1947 and January, 1948. This contract was assigned to Pacific
Vegetable Co.

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific
ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature
supervened. Four devastating typhoons visited the Philippines: the first in October, the second and
third in November, and the fourth in December, 1947. Coconut trees throughout the country suffered
extensive damage. Copra production decreased. Prices spiralled. Warehouses were destroyed.
Cash requirements doubled. Deprivation of export facilities increased the time necessary to
accumulate shiploads of copra. Quick turnovers became impossible, financing a problem.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board
for approval. It was not until December 22, 1947 when the membership was completed. Defendant
Moll took her oath on that date. A meeting was then held. Kalaw made a full disclosure of the
situation, apprised the board of the impending heavy losses. No action was taken on the contracts.
Neither did the board vote thereon at the meeting of January 7, 1948 following. Then, on January 11,
1948, President Roxas made a statement that the NACOCO head did his best to avert the losses,
emphasized that government concerns faced the same risks that confronted private companies, that
NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter,
that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance.
They unanimously approved the contracts hereinbefore enumerated.

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers Tons Delivered Undelivered

Pacific Vegetable Oil 2,386.45 4,613.55

Spencer Kellog None 1,000

Franklin Baker 1,000 500

Louis Dreyfus 800 2,200

Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850

Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245

TOTALS 7,091.45 9,408.55

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil
Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00;
Spencer Kellog & Sons, P159,040.00.

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance
of Manila, upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case
4459); P287,028.00; for the balance on the August 14 contract (Civil Case 4398), P75,098.63; for
that per the September 12 contract reduced to judgment (Civil Case 4322, appealed to this Court in
L-2829), P447,908.40. These cases culminated in an out-of-court amicable settlement when the
Kalaw management was already out. The corporation thereunder paid Dreyfus P567,024.52
representing 70% of the total claims. With particular reference to the Dreyfus claims, NACOCO put
up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did
not have license to do business here; and (2) failure to deliver was due to force majeure, the
typhoons. To project the utter unreasonableness of this compromise, we reproduce in haec
verba this finding below:

x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co.
(Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim of
P345,654.68 wherein defendant set up same defenses as above, plaintiff accepted
a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the same proportion, the claim
of Dreyfus against NACOCO should have been compromised for only P10,000.00, if at all.
Now, why should defendants be held liable for the large sum paid as compromise by the
Board of Liquidators? This is just a sample to show how unjust it would be to hold
defendants liable for the readiness with which the Board of Liquidators disposed of the
NACOCO funds, although there was much possibility of successfully resisting the claims, or
at least settlement for nominal sums like what happened in the Syjuco case.5

All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52
from general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro
Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code
(now Article 2176, new Civil Code); and defendant board members, including Kalaw, with bad faith
and/or breach of trust for having approved the contracts. The fifth amended complaint, on which this
case was tried, was filed on July 2, 1959. Defendants resisted the action upon defenses hereinafter
in this opinion to be discussed.

The lower court came out with a judgment dismissing the complaint without costs as well as
defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the
sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from NACOCO.

Plaintiff appealed direct to this Court.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but adversely decided by, the court
below, arrest our attention. On appeal, defendants renew their bid. And this, upon established
jurisprudence that an appellate court may base its decision of affirmance of the judgment below on a
point or points ignored by the trial court or in which said court was in error.6

1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators
has lost its legal personality to continue with this suit.

Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1)
under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation
Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct "such disposition of
its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of
the corporation;" (2) under Section 77 of the Corporation Law, whereby a corporation whose
corporate existence is terminated, "shall nevertheless be continued as a body corporate for three
years after the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose
of and convey its property and to divide its capital stock, but not for the purpose of continuing the
business for which it was established;" and (3) under Section 78 of the Corporation Law, by virtue of
which the corporation, within the three year period just mentioned, "is authorized and empowered to
convey all of its property to trustees for the benefit of members, stockholders, creditors, and others
interested."8

It is defendants' pose that their case comes within the coverage of the second method. They reason
out that suit was commenced in February, 1949; that by Executive Order 372, dated November 24,
1950, NACOCO, together with other government-owned corporations, was abolished, and the Board
of Liquidators was entrusted with the function of settling and closing its affairs; and that, since the
three year period has elapsed, the Board of Liquidators may not now continue with, and prosecute,
the present case to its conclusion, because Executive Order 372 provides in Section 1 thereof that
—

Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation,
the National Tobacco Corporation, the National Food Producer Corporation and the former
enemy-owned or controlled corporations or associations, . . . are hereby abolished. The said
corporations shall be liquidated in accordance with law, the provisions of this Order, and/or in
such manner as the President of the Philippines may direct; Provided, however, That each of
the said corporations shall nevertheless be continued as a body corporate for a period of
 three (3) years from the effective date of this Executive Order for the purpose of prosecuting
and defending suits by or against it and of enabling the Board of Liquidators gradually to
settle and close its affairs, to dispose of and, convey its property in the manner hereinafter
provided.

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible
within the 3 year period to reduce disputed claims to judgment, nonetheless, "suits by or against a
corporation abate when it ceases to be an entity capable of suing or being sued" (Fisher, The
Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris Secundum likewise is authority for
the statement that "[t]he dissolution of a corporation ends its existence so that there must be
statutory authority for prolongation of its life even for purposes of pending litigation"9and that suit
"cannot be continued or revived; nor can a valid judgment be rendered therein, and a judgment, if
rendered, is not only erroneous, but void and subject to collateral attack." 10 So it is, that abatement
of pending actions follows as a matter of course upon the expiration of the legal period for
liquidation, 11 unless the statute merely requires a commencement of suit within the added
time. 12 For, the court cannot extend the time alloted by statute. 13

We, however, express the view that the executive order abolishing NACOCO and creating the Board
of Liquidators should be examined in context. The proviso in Section 1 of Executive Order 372,
whereby the corporate existence of NACOCO was continued for a period of three years from the
effectivity of the order for "the purpose of prosecuting and defending suits by or against it and of
enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and convey its
property in the manner hereinafter provided", is to be read not as an isolated provision but in
conjunction with the whole. So reading, it will be readily observed that no time limit has been tacked
to the existence of the Board of Liquidators and its function of closing the affairs of the various
government owned corporations, including NACOCO.

By Section 2 of the executive order, while the boards of directors of the various corporations were
abolished, their powers and functions and duties under existing laws were to be assumed and
exercised by the Board of Liquidators. The President thought it best to do away with the boards of
directors of the defunct corporations; at the same time, however, the President had chosen to see to
it that the Board of Liquidators step into the vacuum. And nowhere in the executive order was there
any mention of the lifespan of the Board of Liquidators. A glance at the other provisions of the
executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators may, under
section 1, proceed in accordance with law, the provisions of the executive order, "and/or in such
manner as the President of the Philippines may direct." By Section 4, when any property, fund, or
project is transferred to any governmental instrumentality "for administration or continuance of any
project," the necessary funds therefor shall be taken from the corresponding special fund created in
Section 5. Section 5, in turn, talks of special funds established from the "net proceeds of the
liquidation" of the various corporations abolished. And by Section, 7, fifty per centum of the fees
collected from the copra standardization and inspection service shall accrue "to the special fund
created in section 5 hereof for the rehabilitation and development of the coconut industry." Implicit in
all these, is that the term of life of the Board of Liquidators is without time limit. Contemporary history
gives us the fact that the Board of Liquidators still exists as an office with officials and numerous
employees continuing the job of liquidation and prosecution of several court actions.

Not that our views on the power of the Board of Liquidators to proceed to the final determination of
the present case is without jurisprudential support. The first judicial test before this Court is National
Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the
corporation, already dissolved, commenced suit within the three-year extended period for liquidation.
That suit was for recovery of money advanced to defendant for the purchase of hemp in behalf of the
corporation. She failed to account for that money. Defendant moved to dismiss, questioned the
corporation's capacity to sue. The lower court ordered plaintiff to include as co-party plaintiff, The
Board of Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372.
Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider.
Ground: excusable negligence, in that its counsel prepared the amended complaint, as directed, and
instructed the board's incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo,
to mail the original thereof to the court and a copy of the same to defendant's counsel. She mailed
the copy to the latter but failed to send the original to the court. This motion was rejected below.
Plaintiff came to this Court on appeal. We there said that "the rule appears to be well settled that, in
the absence of statutory provision to the contrary, pending actions by or against a corporation are
abated upon expiration of the period allowed by law for the liquidation of its affairs." We there said
that "[o]ur Corporation Law contains no provision authorizing a corporation, after three (3) years from
the expiration of its lifetime, to continue in its corporate name actions instituted by it within said
period of three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in that case
that the Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the
complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for
the settlement of its affairs is what impelled the President to create a Board of Liquidators, to
continue the management of such matters as may then be pending." 15 We accordingly directed the
record of said case to be returned to the lower court, with instructions to admit plaintiff's amended
complaint to include, as party plaintiff, the Board of Liquidators.

Defendants' position is vulnerable to attack from another direction.

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its
assets in the hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on
behalf of the government. It was an express trust. The legal interest became vested in the trustee —
the Board of Liquidators. The beneficial interest remained with the sole stockholder — the
government. At no time had the government withdrawn the property, or the authority to continue the
present suit, from the Board of Liquidators. If for this reason alone, we cannot stay the hand of the
Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions of Section 78
of the Corporation Law — the third method of winding up corporate affairs — find application.

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in
this case.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their
nineteenth special defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and
may not be deemed to have survived after his death.18 They say that the controlling statute is
Section 5, Rule 87, of the 1940 Rules of Court.19which provides that "[a]ll claims for money against
the decedent, arising from contract, express or implied", must be filed in the estate proceedings of
the deceased. We disagree.

The suit here revolves around the alleged negligent acts of Kalaw for having entered into the
questioned contracts without prior approval of the board of directors, to the damage and prejudice of
plaintiff; and is against Kalaw and the other directors for having subsequently approved the said
contracts in bad faith and/or breach of trust." Clearly then, the present case is not a mere action for
the recovery of money nor a claim for money arising from contract. The suit involves alleged tortious
acts. And the action is embraced in suits filed "to recover damages for an injury to person or
property, real or personal", which survive. 20

The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There,
plaintiffs sought to recover damages from defendant Llemos. The complaint averred that Llemos had
served plaintiff by registered mail with a copy of a petition for a writ of possession in Civil Case 4824
of the Court of First Instance at Catbalogan, Samar, with notice that the same would be submitted to
the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice served,
plaintiffs proceeded to the said court of Samar from their residence in Manila accompanied by their
lawyers, only to discover that no such petition had been filed; and that defendant Llemos maliciously
failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be in vain, causing
them mental anguish and undue embarrassment. Defendant died before he could answer the
complaint. Upon leave of court, plaintiffs amended their complaint to include the heirs of the
deceased. The heirs moved to dismiss. The court dismissed the complaint on the ground that the
legal representative, and not the heirs, should have been made the party defendant; and that,
anyway, the action being for recovery of money, testate or intestate proceedings should be initiated
and the claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the
Rules of Court, those concerning claims that are barred if not filed in the estate settlement
proceedings (Rule 87, sec. 5) and those defining actions that survive and may be prosecuted
against the executor or administrator (Rule 88, sec. 1), it is apparent that actions for
damages caused by tortious conduct of a defendant (as in the case at bar) survive the death
of the latter. Under Rule 87, section 5, the actions that are abated by death are: (1) claims for
funeral expenses and those for the last sickness of the decedent; (2) judgments for money;
and (3) "all claims for money against the decedent, arising from contract express or implied."
None of these includes that of the plaintiffs-appellants; for it is not enough that the claim
against the deceased party be for money, but it must arise from "contract express or
implied", and these words (also used by the Rules in connection with attachments and
derived from the common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-
194,

"to include all purely personal obligations other than those which have their source
in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a
decedent's executors or administrators, and they are: (1) actions to recover real and
personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions to
recover damages for an injury to person or property. The present suit is one for damages
under the last class, it having been held that "injury to property" is not limited to injuries to
specific property, but extends to other wrongs by which personal estate is injured or
diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously
cause a party to incur unnecessary expenses, as charged in this case, is certainly injury to
that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).

The ruling in the preceding case was hammered out of facts comparable to those of the present. No
cogent reason exists why we should break away from the views just expressed. And, the conclusion
remains: Action against the Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia
survives.

The preliminaries out of the way, we now go to the core of the controversy.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the
controverted contracts without the prior approval of the corporation's directorate. Plaintiff leans
heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as amongst the
duties of the general manager, the obligation: "(b) To perform or execute on behalf of the
Corporation upon prior approval of the Board, all contracts necessary and essential to the proper
accomplishment for which the Corporation was organized."

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general
manager's position in the corporate structure. A rule that has gained acceptance through the years is
that a corporate officer "intrusted with the general management and control of its business, has
implied authority to make any contract or do any other act which is necessary or appropriate to the
conduct of the ordinary business of the corporation. 21 As such officer, "he may, without any special
authority from the Board of Directors perform all acts of an ordinary nature, which by usage or
necessity are incident to his office, and may bind the corporation by contracts in matters arising in
the usual course of business. 22

The problem, therefore, is whether the case at bar is to be taken out of the general concept of the
powers of a general manager, given the cited provision of the NACOCO by-laws requiring prior
directorate approval of NACOCO contracts.

The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this
enterprise are copra sales for future delivery. The movement of the market requires that sales
agreements be entered into, even though the goods are not yet in the hands of the seller. Known in
business parlance as forward sales, it is concededly the practice of the trade. A certain amount of
speculation is inherent in the undertaking. NACOCO was much more conservative than the
exporters with big capital. This short-selling was inevitable at the time in the light of other factors
such as availability of vessels, the quantity required before being accepted for loading, the labor
needed to prepare and sack the copra for market. To NACOCO, forward sales were a necessity.
Copra could not stay long in its hands; it would lose weight, its value decrease. Above all,
NACOCO's limited funds necessitated a quick turnover. Copra contracts then had to be executed on
short notice — at times within twenty-four hours. To be appreciated then is the difficulty of calling a
formal meeting of the board.

Such were the environmental circumstances when Kalaw went into copra trading.

Long before the disputed contracts came into being, Kalaw contracted — by himself alone as
general manager — for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw
signed some 60 such contracts for the sale of copra to divers parties. During that period, from those
copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased was NACOCO's board of
directors that, on December 5, 1946, in Kalaw's absence, it voted to grant him a special bonus "in
recognition of the signal achievement rendered by him in putting the Corporation's business on a
self-sufficient basis within a few months after assuming office, despite numerous handicaps and
difficulties."

These previous contract it should be stressed, were signed by Kalaw without prior authority from the
board. Said contracts were known all along to the board members. Nothing was said by them. The
aforesaid contracts stand to prove one thing: Obviously, NACOCO board met the difficulties
attendant to forward sales by leaving the adoption of means to end, to the sound discretion of
NACOCO's general manager Maximo M. Kalaw.

Liberally spread on the record are instances of contracts executed by NACOCO's general manager
and submitted to the board after their consummation, not before. These agreements were not
Kalaw's alone. One at least was executed by a predecessor way back in 1940, soon after NACOCO
was chartered. It was a contract of lease executed on November 16, 1940 by the then general
manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the lease of a space in
Soriano Building On November 14, 1946, NACOCO, thru its general manager Kalaw, sold 3,000
tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22, 1947, when
the controversy over the present contract cropped up, the board voted to approve a lease contract
previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of
the latter. On the same date, the board gave its nod to a contract for renewal of the services of Dr.
Manuel L. Roxas. In fact, also on that date, the board requested Kalaw to report for action all copra
contracts signed by him "at the meeting immediately following the signing of the contracts." This
practice was observed in a later instance when, on January 7, 1948, the board approved two
previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and a certain
"GNAPO".

And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of
Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such
ratification was necessary because, as stated by Kalaw in that same meeting, "under an existing
resolution he is authorized to give a brokerage fee of only 1% on sales of copra made through
brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on three export contracts,
and 2% on three others, for the sale of copra were approved by the board with a proviso authorizing
the general manager to pay a commission up to the amount of 1-1/2% "without further action by the
Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000
tons of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage
commission was similarly approved by the board for Pacific Trading Corporation on the sale of 2,000
tons of copra.

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by
the board, not the sales contracts themselves. And even those fee agreements were
submitted only when the commission exceeded the ceiling fixed by the board.

Knowledge by the board is also discernible from other recorded instances. 1äw phï1.ñët

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow
downward trend but belief was entertained that the nadir might have already been reached and an
improvement in prices was expected. In view thereof, Kalaw informed the board that "he intends to
wait until he has signed contracts to sell before starting to buy copra."23

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current:
The copra market appeared to have become fairly steady; it was not expected that copra prices
would again rise very high as in the unprecedented boom during January-April, 1947; the prices
seemed to oscillate between $140 to $150 per ton; a radical rise or decrease was not indicated by
the trends. Kalaw continued to say that "the Corporation has been closing contracts for the sale of
copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24

We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

521. In connection with the buying and selling of copra the Board inquired whether it is the
practice of the management to close contracts of sale first before buying. The General
Manager replied that this practice is generally followed but that it is not always possible to do
so for two reasons:

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease
buying even when it does not have actual contracts of sale since the suspension of buying
by the Nacoco will result in middlemen taking advantage of the temporary inactivity of the
Corporation to lower the prices to the detriment of the producers.
 (2) The movement of the market is such that it may not be practical always to wait for the
consummation of contracts of sale before beginning to buy copra.

The General Manager explained that in this connection a certain amount of speculation is
unavoidable. However, he said that the Nacoco is much more conservative than the other
big exporters in this respect.25

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter
of general practice, custom, and policy, the general manager may bind the company without formal
authorization of the board of directors. 26 In varying language, existence of such authority is
established, by proof of the course of business, the usage and practices of the company and by
the knowledge which the board of directors has, or must bepresumed to have, of acts and doings of
its subordinates in and about the affairs of the corporation. 27 So also,

x x x authority to act for and bind a corporation may be presumed from acts of recognition in
other instances where the power was in fact exercised. 28

x x x Thus, when, in the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs, his authority to represent the corporation
may be implied from the manner in which he has been permitted by the directors to manage
its business.29

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate
and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board
approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval
on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid
aside the by-law requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on
January 30, 1948, though it is our (and the lower court's) belief that ratification here is nothing more
than a mere formality.

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized
act or contract by its officers or others relates back to the time of the act or contract ratified, and is
equivalent to original authority;" and that " [t]he corporation and the other party to the transaction are
in precisely the same position as if the act or contract had been authorized at the time." 30 The
language of one case is expressive: "The adoption or ratification of a contract by a corporation is
nothing more or less than the making of an original contract. The theory of corporate ratification
is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to
a grant of prior authority." 31

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the
moment it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus
purged of whatever vice or defect they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of
prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize
equitable considerations. And, the conclusion inevitably is that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach
of trust" in the board's ratification of the contracts without prior approval of the board. For, in reality,
all that we have on the government's side of the scale is that the board knew that the contracts so
confirmed would cause heavy losses.

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

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

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

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

The directors are not liable." 38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions.
Result: Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers
could not be expected. NACOCO was not alone in this misfortune. The record discloses that private
traders, old, experienced, with bigger facilities, were not spared; also suffered tremendous losses.
Roughly estimated, eleven principal trading concerns did run losses to about P10,300,000.00.
Plaintiff's witness Sisenando Barretto, head of the copra marketing department of NACOCO,
observed that from late 1947 to early 1948 "there were many who lost money in the
trade." 39 NACOCO was not immune from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus &
Co. by pleading in its answers force majeure as an affirmative defense and there vehemently
asserted that "as a result of the said typhoons, extensive damage was caused to the coconut trees
in the copra producing regions of the Philippines and according to estimates of competent
authorities, it will take about one year until the coconut producing regions will be able to produce
their normal coconut yield and it will take some time until the price of copra will reach normal levels;"
and that "it had never been the intention of the contracting parties in entering into the contract in
question that, in the event of a sharp rise in the price of copra in the Philippine market produce
by force majeure or by caused beyond defendant's control, the defendant should buy the copra
contracted for at exorbitant prices far beyond the buying price of the plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from
permitting plaintiff to stray away therefrom, to charge now that the damage suffered was because of
Kalaw's negligence, or for that matter, by reason of the board's ratification of the contracts. 41

Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual
obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts involved
delivery of but 16,500 tons over a five-month period. Despite the typhoons, NACOCO was still able
to deliver a little short of 50% of the tonnage required under the contracts.

As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of
damage and wrong is here absent. There cannot be an actionable wrong if either one or the other is
wanting. 43

7. On top of all these, is that no assertion is made and no proof is presented which would link
Kalaw's acts — ratified by the board — to a matrix for defraudation of the government. Kalaw is clear
of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that
he had authority to enter into the contracts, that he did so in the best interests of the corporation; that
he entered into the contracts in pursuance of an overall policy to stabilize prices, to free the
producers from the clutches of the middlemen. The prices for which NACOCO contracted in the
disputed agreements, were at a level calculated to produce profits and higher than those prevailing
in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to think
that one would sign (a) contract when you are going to lose money" and that no contract was
executed "at a price unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing,
NACOCO envisioned a profit of around P752,440.00. 46

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with
NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and
quotations from abroad were guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the
coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in
his duty. He exerted efforts to stave off losses. He asked the Philippine National Bank to implement
its commitment to extend a P400,000.00 loan. The bank did not release the loan, not even the sum
of P200,000.00, which, in October, 1947, was approved by the bank's board of directors. In
frustration, on December 12, 1947, Kalaw turned to the President, complained about the bank's
short-sighted policy. In the end, nothing came out of the negotiations with the bank. NACOCO
eventually faltered in its contractual obligations.

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem
to be supported by the fact that even as the contracts were being questioned in Congress and in the
NACOCO board itself, President Roxas defended the actuations of Kalaw. On December 27, 1947,
President Roxas expressed his desire "that the Board of Directors should reelect Hon. Maximo M.
Kalaw as General Manager of the National Coconut Corporation." 47 And, on January 7, 1948, at a
time when the contracts had already been openly disputed, the board, at its regular meeting,
appointed Maximo M. Kalaw as acting general manager of the corporation.

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc.,
L-15092, May 18, 1962:

"They (the directors) hold such office charged with the duty to act for the corporation according to
their best judgment, and in so doing they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a corporation should be operated at a loss
during a business depression, or closed down at a smaller loss, is a purely business and economic
problem to be determined by the directors of the corporation, and not by the court. It is a well known
rule of law that questions of policy 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 for the
judgment of the board of directors; the board is the business manager of the corporation,
and so long as it acts in good faith its orders are not reviewable by the courts." (Fletcher on
Corporations, Vol. 2, p. 390.) 48

Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49

Viewed in the light of the entire record, the judgment under review must be, as it is hereby, affirmed.

Without costs. So ordered.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.
Fernando, J., took no part.
Concepcion, C.J. and Dizon, J., are on leave.

G.R. No.176897 December 11, 2013

ADVANCE PAPER CORPORATION and GEORGE HAW, in his capacity as President of

Advance Paper Corporation, Petitioners,
vs.
ARMA TRADERS CORPORATION, MANUEL TING, CHENG GUI and BENJAMIN
NG, Respondents.

x-------------------------------------------------x

ANTONIO TAN and UY SENG KEE WILLY, Respondents.

DECISION

BRION, J.:

Before us is a Petition for Review1 seeking to set aside the Decision of the Court of Appeals (CA) in
CA-G.R. CV No. 71499 dated March 31, 2006 and the Resolution dated March 7, 2007.2 The
Decision reversed and set aside the ruling of the Regional Trial Court (RTC) of Manila, Branch 18 in
Civil Case No. 94-72526 which ordered Arma Traders Corporation (Arma Traders) to pay Advance
Paper Corporation (Advance Paper) the sum of ₱15,321,798.25 with interest, and ₱1,500,000.00 for
attorney’s fees, plus the cost of the suit.3

Factual Antecedents

Petitioner Advance Paper is a domestic corporation engaged in the business of producing, printing,
manufacturing, distributing and selling of various paper products.4 Petitioner George Haw (Haw) is
the President while his wife, Connie Haw, is the General Manager.5

Respondent Arma Traders is also a domestic corporation engaged in the wholesale and distribution
of school and office supplies, and novelty products.6 Respondent Antonio Tan (Tan) was formerly the
President while respondent Uy Seng Kee Willy (Uy) is the Treasurer of Arma Traders.7 They
represented Arma Traders when dealing with its supplier, Advance Paper, for about 14 years.8

On the other hand, respondents Manuel Ting, Cheng Gui and Benjamin Ng worked for Arma Traders
as Vice-President, General Manager and Corporate Secretary, respectively.9

On various dates from September to December 1994, Arma Traders purchased on credit notebooks
and other paper products amounting to ₱7,533,001.49 from Advance Paper. 10

Upon the representation of Tan and Uy, Arma Traders also obtained three loans from Advance
Paper in November 1994 in the amounts of ₱3,380,171.82, ₱1,000,000.00, and ₱3,408,623.94 or a
total of ₱7,788,796.76.11 Arma Traders needed the loan to settle its obligations to other suppliers
because its own collectibles did not arrive on time.12 Because of its good business relations with
Arma Traders, Advance Paper extended the loans.13

As payment for the purchases on credit and the loan transactions, Arma Traders issued 82
postdated checks14payable to cash or to Advance Paper. Tan and Uy were Arma Traders’ authorized
bank signatories who signed and issued these checks which had the aggregate amount of
₱15,130,636.87.15

Advance Paper presented the checks to the drawee bank but these were dishonored either for
"insufficiency of funds" or "account closed." Despite repeated demands, however, Arma Traders
failed to settle its account with Advance Paper.16

On December 29, 1994, the petitioners filed a complaint17 for collection of sum of money with
application for preliminary attachment against Arma Traders, Tan, Uy, Ting, Gui, and Ng.

Claims of the petitioners

The petitioners claimed that the respondents fraudulently issued the postdated checks as payment
for the purchases and loan transactions knowing that they did not have sufficient funds with the
drawee banks.18

To prove the purchases on credit, the petitioners presented the summary of the transactions and
their corresponding sales invoices as their documentary evidence.19

During the trial, Haw also testified that within one or two weeks upon delivery of the paper products,
Arma Traders paid the purchases in the form of postdated checks. Thus, he personally collected
these checks on Saturdays and upon receiving the checks, he surrendered to Arma Traders the
original of the sales invoices while he retained the duplicate of the invoices.20
To prove the loan transactions, the petitioners presented the copies of the checks21 which Advance
Paper issued in favor of Arma Traders. The petitioners also filed a manifestation22 dated June 14,
1995, submitting a bank statement from Metrobank EDSA Kalookan Branch. This was to show that
Advance Paper’s credit line with Metrobank has been transferred to the account of Arma Traders as
payee from October 1994 to December 1994.

Moreover, Haw testified to prove the loan transactions. When asked why he considered extending
the loans without any collateral and loan agreement or promissory note, and only on the basis of the
issuance of the postdated checks, he answered that it was because he trusted Arma Traders since it
had been their customer for a long time and that none of the previous checks ever bounced.23

Claims of the respondents

The respondents argued that the purchases on credit were spurious, simulated and fraudulent
since there was no delivery of the ₱7,000,000.00 worth of notebooks and other paper products.24

During the trial, Ng testified that Arma Traders did not purchase notebooks and other paper products
from September to December 1994. He claimed that during this period, Arma Traders concentrated
on Christmas items, not school and office supplies. He also narrated that upon learning about the
complaint filed by the petitioners, he immediately looked for Arma Traders’ records and found no
receipts involving the purchases of notebooks and other paper products from Advance Paper.25

As to the loan transactions, the respondents countered that these were the personal obligations of
Tan and Uy to Advance Paper. These loans were never intended to benefit the respondents.

The respondents also claimed that the loan transactions were ultra vires because the board of
directors of Arma Traders did not issue a board resolution authorizing Tan and Uy to obtain the
loans from Advance Paper. They claimed that the borrowing of money must be done only with the
prior approval of the board of directors because without the approval, the corporate officers are
acting in excess of their authority or ultra vires. When the acts of the corporate officers are ultra
vires, the corporation is not liable for whatever acts that these officers committed in excess of their
authority. Further, the respondents claimed that Advance Paper failed to verify Tan and Uy’s
authority to transact business with them. Hence, Advance Paper should suffer the consequences.26

The respondents accused Tan and Uy for conspiring with the petitioners to defraud Arma Traders
through a series of transactions known as rediscounting of postdated checks. In rediscounting, the
respondents explained that Tan and Uy would issue Arma Traders’ postdated checks to the
petitioners in exchange for cash, discounted by as much as 7% to 10% depending on how long were
the terms of repayment. The rediscounted percentage represented the interest or profit earned by
the petitioners in these transactions.27

Tan did not file his Answer and was eventually declared in default.

On the other hand, Uy filed his Answer28 dated January 20, 1995 but was subsequently declared in
default upon his failure to appear during the pre-trial. In his Answer, he admitted that Arma Traders
together with its corporate officers have been transacting business with Advance Paper.29 He claimed
that he and Tan have been authorized by the board of directors for the past 13 years to issue checks
in behalf of Arma Traders to pay its obligations with Advance Paper.30 Furthermore, he admitted
that Arma Traders’ checks were issued to pay its contractual obligations with Advance
Paper.31 However, according to him, Advance Paper was informed beforehand that Arma Traders’
checks were funded out of the ₱20,000,000.00 worth of collectibles coming from the provinces.
Unfortunately, the expected collectibles did not materialize for unknown reasons.32
Ng filed his Answer33 and claimed that the management of Arma Traders was left entirely to Tan and
Uy. Thus, he never participated in the company’s daily transactions.34

Atty. Ernest S. Ang, Jr. (Atty. Ang), Arma Traders’ Vice-President for Legal Affairs and Credit and
Collection, testified that he investigated the transactions involving Tan and Uy and discovered that
they were financing their own business using Arma Traders’ resources. He also accused Haw for
conniving with Tan and Uy in fraudulently making Arma Traders liable for their personal debts. He
based this conclusion from the following: First, basic human experience and common sense tell us
that a lender will not agree to extend additional loan to another person who already owes a
substantial sum from the lender – in this case, petitioner Advance Paper. Second, there was no
other document proving the existence of the loan other than the postdated checks. Third, the total of
the purchase and loan transactions vis-à-vis the total amount of the postdated checks did not
tally. Fourth, he found out that the certified true copy of Advance Paper’s report with the Securities
and Exchange Commission (SEC report) did not reflect the ₱15,000,000.00 collectibles it had with
Arma Traders.35

Atty. Ang also testified that he already filed several cases of estafa and qualified theft36 against Tan
and Uy and that several warrants of arrest had been issued against them.

In their pre-trial brief,37 the respondents named Sharow Ong, the secretary of Tan and Uy, to testify
on how Tan and Uy conspired with the petitioners to defraud Arma Traders. However, the
respondents did not present her on the witness stand.

The RTC Ruling

On June 18, 2001, the RTC ruled that the purchases on credit and loans were sufficiently proven by
the petitioners. Hence, the RTC ordered Arma Traders to pay Advance Paper the sum of
₱15,321,798.25 with interest, and ₱1,500,000.00 for attorney’s fees, plus the cost of the suit.

The RTC held that the respondents failed to present hard, admissible and credible evidence to prove
that the sale invoices were forged or fictitious, and that the loan transactions were personal
obligations of Tan and Uy. Nonetheless, the RTC dismissed the complaint against Tan, Uy, Ting,
Gui and Ng due to the lack of evidence showing that they bound themselves, either jointly or
solidarily, with Arma Traders for the payment of its account.38

Arma Traders appealed the RTC decision to the CA.

The CA Ruling

The CA held that the petitioners failed to prove by preponderance of evidence the existence of the
purchases on credit and loans based on the following grounds:

First, Arma Traders was not liable for the loan in the absence of a board resolution authorizing Tan
and Uy to obtain the loan from Advance Paper.39 The CA acknowledged that Tan and Uy were Arma
Traders’ authorized bank signatories. However, the CA explained that this is not sufficient because
the authority to sign the checks is different from the required authority to contract a loan.40

Second, the CA also held that the petitioners presented incompetent and inadmissible evidence to
prove the purchases on credit since the sales invoices were hearsay.41 The CA pointed out that
Haw’s testimony as to the identification of the sales invoices was not an exception to the hearsay
rule because there was no showing that the secretaries who prepared the sales invoices are already
dead or unable to testify as required by the Rules of Court.42 Further, the CA noted that the
secretaries were not identified or presented in court.43

Third, the CA ruling heavily relied on Ng’s Appellant’s Brief44 which made the detailed description of
the "badges of fraud." The CA averred that the petitioners failed to satisfactorily rebut the badges of
fraud45 which include the inconsistencies in:

(1) "Exhibit E-26," a postdated check, which was allegedly issued in favor of Advance Paper
but turned out to be a check payable to Top Line, Advance Paper’s sister company;46

(2) "Sale Invoice No. 8946," an evidence to prove the existence of the purchases on credit,
whose photocopy failed to reflect the amount stated in the duplicate copy,47 and;

(3) The SEC report of Advance Paper for the year ended 1994 reflected its account
receivables amounting to ₱219,705.19 only – an amount far from the claimed
₱15,321,798.25 receivables from Arma Traders.48

Hence, the CA set aside the RTC’s order for Arma Traders to pay Advance Paper the sum of
₱15,321,798.25, ₱1,500,000.00 for attorney’s fees, plus cost of suit.49 It affirmed the RTC decision
dismissing the complaint against respondents Tan, Uy, Ting, Gui and Ng.50 The CA also directed the
petitioners to solidarily pay each of the respondents their counterclaims of ₱250,000.00 as moral
damages, ₱250,000.00 as exemplary damages, and ₱250,000.00 as attorney’s fees.51

The Petition

The petitioners raise the following arguments.

First, Arma Traders led the petitioners to believe that Tan and Uy had the authority to obtain loans
since the respondents left the active and sole management of the company to Tan and Uy since
1984. In fact, Ng testified that Arma Traders’ stockholders and board of directors never conducted a
meeting from 1984 to 1995. Therefore, if the respondents’ position will be sustained, they will have
the absurd power to question all the business transactions of Arma Traders.52 Citing Lipat v. Pacific
Banking Corporation,53 the petitioners said that if a corporation knowingly permits one of its officers
or any other agent to act within the scope of an apparent authority, it holds him 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.

Second, the petitioners argue that Haw’s testimony is not hearsay. They emphasize that Haw has
personal knowledge of the assailed purchases and loan transactions because he dealt with the
customers, and supervised and directed the preparation of the sales invoices and the deliveries of
the goods.54 Moreover, the petitioners stress that the respondents never objected to the admissibility
of the sales invoices on the ground that they were hearsay.55

Third, the petitioners dispute the CA’s findings on the existence of the badges of fraud. The
petitioners countered:

(1) The discrepancies between the figures in the 15 out of the 96 photocopies and duplicate
originals of the sales invoices amounting to ₱4,624.80 – an insignificant amount
compared to the total purchases of ₱7,533,001.49 – may have been caused by the failure
to put the carbon paper.56 Besides, the remaining 81 sales invoices are
 uncontroverted. The petitioners also raise the point that this discrepancy is a nonissue
because the duplicate originals were surrendered in the RTC.57

(2) The respondents misled Haw during the cross-examination and took his answer out of
context.58 The petitioners argue that this maneuver is insufficient to discredit Haw’s entire
testimony.59

(3) Arma Traders should be faulted for indicating Top Line as the payee in Exhibit E-26 or
PBC check no. 091014. Moreover, Exhibit E-26 does not refer to PBC check no. 091014 but
to PBC check no. 091032 payable to the order of cash.60

(4) The discrepancy in the total amount of the checks which is ₱15,130,363.87 as against
the total obligation of ₱15,321,798.25 does not necessarily prove that the transactions are
spurious.61

(5) The difference in Advance Paper’s accounts receivables in the SEC report and in Arma
Traders’ obligation with Advance Paper was based on non-existent evidence because
Exhibit 294-NG does not pertain to any balance sheet.62 Moreover, the term "accounts
receivable" is not synonymous with "cause of action." The respondents cannot escape their
liability by simply pointing the SEC report because the petitioners have established their
cause of action – that the purchases on credit and loan transactions took place, the
respondents issued the dishonored checks to cover their debts, and they refused to settle
their obligation with Advance Paper.63

The Case for the Respondents

The respondents argue that the Petition for Review should be dismissed summarily because of the
following procedural grounds: first, for failure to comply with A.M. No. 02-8-13-SC;64 and second, the
CA decision is already final and executory since the petitioners filed their Motion for Reconsideration
out of time. They explain that under the rules of the CA, if the last day for filing of any pleading falls
on a Saturday not a holiday, the same must be filed on said Saturday, as the Docket and Receiving
Section of the CA is open on a Saturday.65

The respondents argue that while as a general rule, a corporation is estopped from denying the
authority of its agents which it allowed to deal with the general public; this is only true if the person
dealing with the agent dealt in good faith.66 In the present case, the respondents claim that the
petitioners are in bad faith because the petitioners connived with Tan and Uy to make Arma Traders
liable for the non-existent deliveries of notebooks and other paper products.67 They also insist that
the sales invoices are manufactured evidence.68

As to the loans, the respondents aver that these were Tan and Uy’s personal obligations with
Advance Paper.69Moreover, while the three cashier’s checks were deposited in the account of Arma
Traders, it is likewise true that Tan and Uy issued Arma Traders’ checks in favor of Advance Paper.
All these checks are evidence of Tan, Uy and Haw’s systematic conspiracy to siphon Arma Traders
corporate funds.70

The respondents also seek to discredit Haw’s testimony on the basis of the following. First, his
testimony as regards the sales invoices is hearsay because he did not personally prepare these
documentary evidence.71 Second, Haw suspiciously never had any written authority from his own
Board of Directors to lend money. Third, the respondents also questioned why Advance Paper
granted the ₱7,000,000.00 loan without requiring Arma Traders to present any collateral or
guarantees.72
 The Issues

The main procedural and substantive issues are:

I. Whether the petition for review should be dismissed for failure to comply with A.M. No. 02-
8-13-SC.

II. Whether the petition for review should be dismissed on the ground of failure to file the
motion for reconsideration with the CA on time.

III. Whether Arma Traders is liable to pay the loans applying the doctrine of apparent
authority.

IV. Whether the petitioners proved Arma Traders’ liability on the purchases on credit by
preponderance of evidence.

The Court's Ruling

We grant the petition.

The procedural issues.

First, the respondents correctly cited A.M. No. 02-8-13-SC dated February 19, 2008 which refer to
the amendment of the 2004 Rules on Notarial Practice. It deleted the Community Tax Certificate
among the accepted proof of identity of the affiant because of its inherent unreliability. The
petitioners violated this when they used Community Tax Certificate No. 05730869 in their Petition for
Review.73 Nevertheless, the defective jurat in the Verification/Certification of Non-Forum Shopping is
not a fatal defect because it is only a formal, not a jurisdictional, requirement that the Court may
waive.74 Furthermore, we cannot simply ignore the millions of pesos at stake in this case. To do so
might cause grave injustice to a party, a situation that this Court intends to avoid.

Second, no less than the CA itself waived the rules on the period to file the motion for
reconsideration. A review of the CA Resolution75 dated March 7, 2007, reveals that the petitioners’
Motion for Reconsideration was denied because the allegations were a mere rehash of what the
petitioners earlier argued – not because the motion for reconsideration was filed out of time.

The substantive issues.

Arma Traders is liable to pay the

loans on the basis of the doctrine of
apparent authority.

The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent’s authority if it knowingly permits one of its officers or any other agent to act within the scope
of an apparent authority, and it holds him out to the public as possessing the power to do those
acts.76 The doctrine of apparent authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the agent’s acts or conduct must have produced a change of
position to the third party’s detriment.77

In Inter-Asia Investment Industries v. Court of Appeals,78 we explained:

Under this provision [referring to Sec. 23 of the Corporation Code], the power and responsibility to
decide whether the corporation should enter into a contract that will bind the corporation is lodged in
the board, subject to the articles of incorporation, bylaws, or relevant provisions of law. However,
just as a natural person who may authorize another to do certain acts for and on his behalf,
the board of directors may validly delegate some of its functions and powers to officers,
committees or agents. The authority of such individuals to bind the corporation is generally
derived from law, corporate bylaws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general course of business, viz.:

A corporate officer or agent may represent and bind the corporation in transactions with third
persons to the extent that [the] authority to do so has been conferred upon him, and this includes
powers as, in the usual course of the particular business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has caused person dealing
with the officer or agent to believe that it has conferred.

[A]pparent authority is derived not merely from practice. Its existence may be ascertained
through (1) the general manner in which the corporation holds out an officer or agent as having the
power to act or, in other words the apparent authority to act in general, with which it clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers. It requires presentation of
evidence of similar act(s) executed either in its favor or in favor of other parties. It is not the
quantity of similar acts which establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation. [emphases and underscores ours]

In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals,79 we ruled that the doctrine of
apparent authority is applied when the petitioner, through its president Antonio Punsalan Jr., entered
into the First Contract without first securing board approval. Despite such lack of board approval,
petitioner did not object to or repudiate said contract, thus "clothing" its president with the power to
bind the corporation.

"Inasmuch as a corporate president is often given general supervision and control over corporate
operations, the strict rule that said officer has no inherent power to act for the corporation is slowly
giving way to the realization that such officer has certain limited powers in the transaction of the
usual and ordinary business of the corporation."80 "In the absence of a charter or bylaw provision
to the contrary, the president is presumed to have the authority to act within the domain of
the general objectives of its business and within the scope of his or her usual duties."81

In the present petition, we do not agree with the CA’s findings that Arma Traders is not liable to pay
the loans due to the lack of board resolution authorizing Tan and Uy to obtain the loans. To begin
with, Arma Traders’ Articles of Incorporation82 provides that the corporation may borrow or raise
money to meet the financial requirements of its business by the issuance of bonds, promissory
notes and other evidence of indebtedness. Likewise, it states that Tan and Uy are not just
ordinary corporate officers and authorized bank signatories because they are also Arma
Traders’ incorporators along with respondents Ng and Ting, and Pedro Chao. Furthermore, the
respondents, through Ng who is Arma Traders’ corporate secretary, incorporator, stockholder and
director, testified that the sole management of Arma Traders was left to Tan and Uy and that he
and the other officers never dealt with the business and management of Arma Traders for 14
years. He also confirmed that since 1984 up to the filing of the complaint against Arma
Traders, its stockholders and board of directors never had its meeting.83
Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to transact with
third persons without the necessary written authority from its non-performing board of directors.
Arma Traders failed to take precautions to prevent its own corporate officers from abusing their
powers. Because of its own laxity in its business dealings, Arma Traders is now estopped from
denying Tan and Uy’s authority to obtain loan from Advance Paper.

We also reject the respondents’ claim that Advance Paper, through Haw, connived with Tan and Uy.
The records do not contain any evidence to prove that the loan transactions were personal to Tan
and Uy. A different conclusion might have been inferred had the cashier’s checks been issued in
favor of Tan and Uy, and had the postdated checks in favor of Advance Paper been either Tan
and/or Uy’s, or had the respondents presented convincing evidence to show how Tan and Uy
conspired with the petitioners to defraud Arma Traders.84 We note that the respondents initially
intended to present Sharow Ong, the secretary of Tan and Uy, to testify on how Advance Paper
connived with Tan and Uy. As mentioned, the respondents failed to present her on the witness
stand.

The respondents failed to object to

the admissibility of the sales invoices
on the ground that they are hearsay

The rule is that failure to object to the offered evidence renders it admissible, and the court cannot,
on its own, disregard such evidence.85 When a party desires the court to reject the evidence offered,
it must so state in the form of a timely objection and it cannot raise the objection to the evidence for
the first time on appeal. Because of a party’s failure to timely object, the evidence becomes part of
the evidence in the case. Thereafter, all the parties are considered bound by any outcome arising
from the offer of evidence properly presented.86

In Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M. Ureta,87 however, we held:

[H]earsay evidence whether objected to or not cannot be given credence for having no probative
value. This principle, however, has been relaxed in cases where, in addition to the failure to object
1âwphi 1

to the admissibility of the subject evidence, there were other pieces of evidence presented or
there were other circumstances prevailing to support the fact in issue. (emphasis and
underscore ours; citation omitted)

We agree with the respondents that with respect to the identification of the sales invoices, Haw’s
testimony was hearsay because he was not present during its preparation88 and the secretaries who
prepared them were not presented to identify them in court. Further, these sales invoices do not fall
within the exceptions to the hearsay rule even under the "entries in the course of business" because
the petitioners failed to show that the entrant was deceased or was unable to testify.89

But even though the sales invoices are hearsay, nonetheless, they form part of the records of the
case for the respondents’ failure to object as to the admissibility of the sales invoices on the ground
that they are hearsay.90Based on the records, the respondents through Ng objected to the offer "for
the purpose [to] which they are being offered" only – not on the ground that they were hearsay.91

The petitioners have proven their

claims for the unpaid purchases on
credit by preponderance of evidence.

We are not convinced by the respondents’ argument that the purchases are spurious because no
less than Uy admitted that all the checks issued were in payments of the contractual
obligations of the Arma Traders with Advance Paper.92 Moreover, there are other pieces of
evidence to prove the existence of the purchases other than the sales invoices themselves. For one,
Arma Traders’ postdated checks evince the existence of the purchases on credit. Moreover, Haw
testified that within one or two weeks, Arma Traders paid the purchases in the form of postdated
checks. He personally collected these checks on Saturdays and upon receiving the checks, he
surrendered to Arma Traders the original of the sales invoices while he retained the duplicate of the
invoices.93

The respondents attempted to impugn the credibility of Haw by pointing to the inconsistencies they
can find from the transcript of stenographic notes. However, we are not persuaded that these
inconsistencies are sufficiently pervasive to affect the totality of evidence showing the general
relationship between Advance Paper and Arma Traders.

Additionally, the issue of credibility of witnesses is to be resolved primarily by the trial court because
it is in the better position to assess the credibility of witnesses as it heard the testimonies and
observed the deportment and manner of testifying of the witnesses. Accordingly, its findings are
entitled to great respect and will not be disturbed on appeal in the absence of any showing that the
trial court overlooked, misunderstood, or misapplied some facts or circumstances of weight and
substance which would have affected the result of the case.94

In the present case, the RTC judge took into consideration the substance and the manner by which
Haw answered each propounded questions to him in the witness stand. Hence, the minor
inconsistencies in Haw’s testimony notwithstanding, the RTC held that the respondents claim that
the purchase and loan transactions were spurious is "not worthy of serious consideration." Besides,
the respondents failed to convince us that the RTC judge overlooked, misunderstood, or misapplied
some facts or circumstances of weight and substance which would have affected the result of the
case.

On the other hand, we agree with the petitioners that the discrepancies in the photocopy of the sales
invoices and its duplicate copy have been sufficiently explained. Besides, this is already a non-issue
since the duplicate copies were surrendered in the RTC.95 Furthermore, the fact that the value of
Arma Traders' checks does not tally with the total amount of their obligation with Advance Paper is
not inconsistent with the existence of the purchases and loan transactions.

As against the case and the evidence Advance Paper presented, the respondents relied on the core
theory of an alleged conspiracy between Tan, Uy and Haw to defraud Arma Traders. However, the
records are bereft of supporting evidence to prove the alleged conspiracy. Instead, the respondents
simply dwelled on the minor inconsistencies from the petitioners' evidence that the respondents
appear to have magnified. From these perspectives, the preponderance of evidence thus lies heavily
in the petitioners' favor as the RTC found. For this reason, we find the petition meritorious.

WHEREFORE, premises considered, we GRANT the petition. The decision dated March 31, 2006
and the resolution dated March 7, 2007 of the Court of Appeals in CA-G.R. CV No. 71499 are
REVERSED and SET ASIDE. The Regional Trial Court decision in Civil Case No. 94-72526 dated
June 18, 2001 is REINSTATED. No costs.

SO ORDERED.

G.R. No. 201298 February 5, 2014

RAUL C. COSARE, Petitioner,
vs.
BROADCOM ASIA, INC. and DANTE AREVALO, Respondents.

DECISION

REYES, J.:

Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court, which
assails the Decision2 dated November 24, 2011 and Resolution3 dated March 26, 2012 of the Court
of Appeals (CA) in CA-G.R. SP. No. 117356, wherein the CA ruled that the Regional Trial Court
(RTC), and not the Labor Arbiter (LA), had the jurisdiction over petitioner Raul C. Cosare's (Cosare)
complaint for illegal dismissal against Broadcom Asia, Inc. (Broadcom) and Dante Arevalo (Arevalo),
the President of Broadcom (respondents).

The Antecedents

The case stems from a complaint4 for constructive dismissal, illegal suspension and monetary claims
filed with the National Capital Region Arbitration Branch of the National Labor Relations Commission
(NLRC) by Cosare against the respondents.

Cosare claimed that sometime in April 1993, he was employed as a salesman by Arevalo, who was
then in the business of selling broadcast equipment needed by television networks and production
houses. In December 2000, Arevalo set up the company Broadcom, still to continue the business of
trading communication and broadcast equipment. Cosare was named an incorporator of Broadcom,
having been assigned 100 shares of stock with par value of ₱1.00 per share.5 In October 2001,
Cosare was promoted to the position of Assistant Vice President for Sales (AVP for Sales) and Head
of the Technical Coordination, having a monthly basic net salary and average commissions of
₱18,000.00 and ₱37,000.00, respectively.6

Sometime in 2003, Alex F. Abiog (Abiog) was appointed as Broadcom’s Vice President for Sales
and thus, became Cosare’s immediate superior. On March 23, 2009, Cosare sent a confidential
memo7 to Arevalo to inform him of the following anomalies which were allegedly being committed by
Abiog against the company: (a) he failed to report to work on time, and would immediately leave the
office on the pretext of client visits; (b) he advised the clients of Broadcom to purchase camera units
from its competitors, and received commissions therefor; (c) he shared in the "under the-table
dealings" or "confidential commissions" which Broadcom extended to its clients’ personnel and
engineers; and (d) he expressed his complaints and disgust over Broadcom’s uncompetitive salaries
and wages and delay in the payment of other benefits, even in the presence of office staff. Cosare
ended his memo by clarifying that he was not interested in Abiog’s position, but only wanted Arevalo
to know of the irregularities for the corporation’s sake.

Apparently, Arevalo failed to act on Cosare’s accusations. Cosare claimed that he was instead
called for a meeting by Arevalo on March 25, 2009, wherein he was asked to tender his resignation
in exchange for "financial assistance" in the amount of ₱300,000.00.8 Cosare refused to comply with
the directive, as signified in a letter9dated March 26, 2009 which he sent to Arevalo.

On March 30, 2009, Cosare received from Roselyn Villareal (Villareal), Broadcom’s Manager for
Finance and Administration, a memo10 signed by Arevalo, charging him of serious misconduct and
willful breach of trust, and providing in part:
 1. A confidential memo was received from the VP for Sales informing me that you had
directed, or at the very least tried to persuade, a customer to purchase a camera from
another supplier. Clearly, this action is a gross and willful violation of the trust and confidence
this company has given to you being its AVP for Sales and is an attempt to deprive the
company of income from which you, along with the other employees of this company, derive
your salaries and other benefits. x x x.

2. A company vehicle assigned to you with plate no. UNV 402 was found abandoned in
another place outside of the office without proper turnover from you to this office which had
assigned said vehicle to you. The vehicle was found to be inoperable and in very bad
condition, which required that the vehicle be towed to a nearby auto repair shop for extensive
repairs.

3. You have repeatedly failed to submit regular sales reports informing the company of your
activities within and outside of company premises despite repeated reminders. However, it
has been observed that you have been both frequently absent and/or tardy without proper
information to this office or your direct supervisor, the VP for Sales Mr. Alex Abiog, of your
whereabouts.

4. You have been remiss in the performance of your duties as a Sales officer as evidenced
by the fact that you have not recorded any sales for the past immediate twelve (12) months.
This was inspite of the fact that my office decided to relieve you of your duties as technical
coordinator between Engineering and Sales since June last year so that you could focus and
concentrate [on] your activities in sales.11

Cosare was given forty-eight (48) hours from the date of the memo within which to present his
explanation on the charges. He was also "suspended from having access to any and all company
files/records and use of company assets effective immediately."12 Thus, Cosare claimed that he was
precluded from reporting for work on March 31, 2009, and was instead instructed to wait at the
office’s receiving section. Upon the specific instructions of Arevalo, he was also prevented by
Villareal from retrieving even his personal belongings from the office.

On April 1, 2009, Cosare was totally barred from entering the company premises, and was told to
merely wait outside the office building for further instructions. When no such instructions were given
by 8:00 p.m., Cosare was impelled to seek the assistance of the officials of Barangay San Antonio,
Pasig City, and had the incident reported in the barangay blotter.13

On April 2, 2009, Cosare attempted to furnish the company with a Memo14 by which he addressed
and denied the accusations cited in Arevalo’s memo dated March 30, 2009. The respondents
refused to receive the memo on the ground of late filing, prompting Cosare to serve a copy thereof
by registered mail. The following day, April 3, 2009, Cosare filed the subject labor complaint,
claiming that he was constructively dismissed from employment by the respondents. He further
argued that he was illegally suspended, as he placed no serious and imminent threat to the life or
property of his employer and co-employees.15

In refuting Cosare’s complaint, the respondents argued that Cosare was neither illegally suspended
nor dismissed from employment. They also contended that Cosare committed the following acts
inimical to the interests of Broadcom: (a) he failed to sell any broadcast equipment since the year
2007; (b) he attempted to sell a Panasonic HMC 150 Camera which was to be sourced from a
competitor; and (c) he made an unauthorized request in Broadcom’s name for its principal,
Panasonic USA, to issue an invitation for Cosare’s friend, one Alex Paredes, to attend the National
Association of Broadcasters’ Conference in Las Vegas, USA.16 Furthermore, they contended that
Cosare abandoned his job17 by continually failing to report for work beginning April 1, 2009,
prompting them to issue on April 14, 2009 a memorandum18 accusing Cosare of absence without
leave beginning April 1, 2009.

The Ruling of the LA

On January 6, 2010, LA Napoleon M. Menese (LA Menese) rendered his Decision19 dismissing the
complaint on the ground of Cosare’s failure to establish that he was dismissed, constructively or
otherwise, from his employment. For the LA, what transpired on March 30, 2009 was merely the
respondents’ issuance to Cosare of a show-cause memo, giving him a chance to present his side on
the charges against him. He explained:

It is obvious that [Cosare] DID NOT wait for respondents’ action regarding the charges leveled
against him in the show-cause memo. What he did was to pre-empt that action by filing this
complaint just a day after he submitted his written explanation. Moreover, by specifically seeking
payment of "Separation Pay" instead of reinstatement, [Cosare’s] motive for filing this case becomes
more evident.20

It was also held that Cosare failed to substantiate by documentary evidence his allegations of illegal
suspension and non-payment of allowances and commissions.

Unyielding, Cosare appealed the LA decision to the NLRC.

The Ruling of the NLRC

On August 24, 2010, the NLRC rendered its Decision21 reversing the Decision of LA Menese. The
dispositive portion of the NLRC Decision reads:

WHEREFORE, premises considered, the DECISION is REVERSED and the Respondents are found
guilty of Illegal Constructive Dismissal. Respondents BROADCOM ASIA, INC. and Dante Arevalo
are ordered to pay [Cosare’s] backwages, and separation pay, as well as damages, in the total
amount of ₱1,915,458.33, per attached Computation.

SO ORDERED.22

In ruling in favor of Cosare, the NLRC explained that "due weight and credence is accorded to
[Cosare’s] contention that he was constructively dismissed by Respondent Arevalo when he was
asked to resign from his employment."23The fact that Cosare was suspended from using the assets
of Broadcom was also inconsistent with the respondents’ claim that Cosare opted to abandon his
employment.

Exemplary damages in the amount of ₱100,000.00 was awarded, given the NLRC’s finding that the
termination of Cosare’s employment was effected by the respondents in bad faith and in a wanton,
oppressive and malevolent manner. The claim for unpaid commissions was denied on the ground of
the failure to include it in the prayer of pleadings filed with the LA and in the appeal.

The respondents’ motion for reconsideration was denied.24 Dissatisfied, they filed a petition for
certiorari with the CA founded on the following arguments: (1) the respondents did not have to prove
just cause for terminating the employment of Cosare because the latter’s complaint was based on an
alleged constructive dismissal; (2) Cosare resigned and was thus not dismissed from employment;
(3) the respondents should not be declared liable for the payment of Cosare’s monetary claims; and
(4) Arevalo should not be held solidarily liable for the judgment award.

In a manifestation filed by the respondents during the pendency of the CA appeal, they raised a new
argument, i.e., the case involved an intra-corporate controversy which was within the jurisdiction of
the RTC, instead of the LA.25They argued that the case involved a complaint against a corporation
filed by a stockholder, who, at the same time, was a corporate officer.

The Ruling of the CA

On November 24, 2011, the CA rendered the assailed Decision26 granting the respondents’ petition.
It agreed with the respondents’ contention that the case involved an intra-corporate controversy
which, pursuant to Presidential Decree No. 902-A, as amended, was within the exclusive jurisdiction
of the RTC. It reasoned:

Record shows that [Cosare] was indeed a stockholder of [Broadcom], and that he was listed as one
of its directors. Moreover, he held the position of [AVP] for Sales which is listed as a corporate office.
Generally, the president, vice-president, secretary or 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, it bears mentioning that under Section 25 of the
Corporation Code, the Board of Directors of [Broadcom] is allowed to appoint such other officers as
it may deem necessary. Indeed, [Broadcom’s] By-Laws provides:

Article IV
Officer

Section 1. Election / Appointment – Immediately after their election, the Board of Directors shall
formally organize by electing the President, the Vice-President, the Treasurer, and the Secretary at
said meeting.

The Board, may, from time to time, appoint such other officers as it may determine to be necessary
or proper. x x x

We hold that [the respondents] were able to present substantial evidence that [Cosare] indeed held
a corporate office, as evidenced by the General Information Sheet which was submitted to the
Securities and Exchange Commission (SEC) on October 22, 2009.27 (Citations omitted and emphasis
supplied)

Thus, the CA reversed the NLRC decision and resolution, and then entered a new one dismissing
the labor complaint on the ground of lack of jurisdiction, finding it unnecessary to resolve the main
issues that were raised in the petition. Cosare filed a motion for reconsideration, but this was denied
by the CA via the Resolution28 dated March 26, 2012. Hence, this petition.

The Present Petition

The pivotal issues for the petition’s full resolution are as follows: (1) whether or not the case
instituted by Cosare was an intra-corporate dispute that was within the original jurisdiction of the
RTC, and not of the LAs; and (2) whether or not Cosare was constructively and illegally dismissed
from employment by the respondents.

The Court’s Ruling

The petition is impressed with merit.

Jurisdiction over the controversy

As regards the issue of jurisdiction, the Court has determined that contrary to the ruling of the CA, it
is the LA, and not the regular courts, which has the original jurisdiction over the subject controversy.
An intra-corporate controversy, which falls within the jurisdiction of regular courts, has been
regarded in its broad sense to pertain to disputes that involve any of the following relationships: (1)
between the corporation, partnership or association and the public; (2) between the corporation,
partnership or association and the state in so far as its franchise, permit or license to operate is
concerned; (3) between the corporation, partnership or association and its stockholders, partners,
members or officers; and (4) among the stockholders, partners or associates, themselves.29 Settled
jurisprudence, however, qualifies that when the dispute involves a charge of illegal dismissal, the
action may fall under the jurisdiction of the LAs upon whose jurisdiction, as a rule, falls termination
disputes and claims for damages arising from employer-employee relations as provided in Article
217 of the Labor Code. Consistent with this jurisprudence, the mere fact that Cosare was a
stockholder and an officer of Broadcom at the time the subject controversy developed failed to
necessarily make the case an intra-corporate dispute.

In Matling Industrial and Commercial Corporation v. Coros,30 the Court distinguished between a
"regular employee" and a "corporate officer" for purposes of establishing the true nature of a dispute
or complaint for illegal dismissal and determining which body has jurisdiction over it. Succinctly, it
was explained that "[t]he determination of whether the dismissed officer was a regular employee or
corporate officer unravels the conundrum" of whether a complaint for illegal dismissal is cognizable
by the LA or by the RTC. "In case of the regular employee, the LA has jurisdiction; otherwise, the
RTC exercises the legal authority to adjudicate.31

Applying the foregoing to the present case, the LA had the original jurisdiction over the complaint for
illegal dismissal because Cosare, although an officer of Broadcom for being its AVP for Sales, was
not a "corporate officer" as the term is defined by law. We emphasized in Real v. Sangu Philippines,
Inc.32 the definition of corporate officers for the purpose of identifying an intra-corporate controversy.
Citing Garcia v. Eastern Telecommunications Philippines, Inc.,33 we held:

" ‘Corporate officers’ in the context of Presidential Decree No. 902-A are those officers of the
corporation who are given that character by the Corporation Code or by the corporation’s by-laws.
There are three specific officers whom a corporation must have under Section 25 of the Corporation
Code. These are the president, secretary and the treasurer. The number of officers is not limited to
these three. A corporation may have such other officers as may be provided for by its by-laws like,
but not limited to, the vice-president, cashier, auditor or general manager. The number of corporate
officers is thus limited by law and by the corporation’s by-laws."34 (Emphasis ours)

In Tabang v. NLRC,35 the Court also made the following pronouncement on the nature of corporate
offices:

It has been held that an "office" is created by the charter of the corporation and the officer is elected
by the directors and 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.36 (Citations
omitted)

As may be deduced from the foregoing, there are two circumstances which must concur in order for
an individual to be considered a corporate officer, as against an ordinary employee or officer,
namely: (1) the creation of the position is under the corporation’s charter or by-laws; and (2) the
election of the officer is by the directors or stockholders. It is only when the officer claiming to have
been illegally dismissed is classified as such corporate officer that the issue is deemed an intra-
corporate dispute which falls within the jurisdiction of the trial courts.

To support their argument that Cosare was a corporate officer, the respondents referred to Section
1, Article IV of Broadcom’s by-laws, which reads:

ARTICLE IV
OFFICER

Section 1. Election / Appointment – Immediately after their election, the Board of Directors shall
formally organize by electing the President, the Vice-President, the Treasurer, and the Secretary at
said meeting.

The Board may, from time to time, appoint such other officers as it may determine to be necessary
or proper. Any two (2) or more compatible positions may be held concurrently by the same person,
except that no one shall act as President and Treasurer or Secretary at the same time.37 (Emphasis
ours)

This was also the CA’s main basis in ruling that the matter was an intra-corporate dispute that was
within the trial courts’ jurisdiction.

The Court disagrees with the respondents and the CA. As may be gleaned from the aforequoted
provision, the only officers who are specifically listed, and thus with offices that are created under
Broadcom’s by-laws are the following: the President, Vice-President, Treasurer and Secretary.
Although a blanket authority provides for the Board’s appointment of such other officers as it may
deem necessary and proper, the respondents failed to sufficiently establish that the position of AVP
for Sales was created by virtue of an act of Broadcom’s board, and that Cosare was specifically
elected or appointed to such position by the directors. No board resolutions to establish such facts
form part of the case records. Further, it was held in Marc II Marketing, Inc. v. Joson38 that an
enabling clause in a corporation’s by-laws empowering its board of directors to create additional
officers, even with the subsequent passage of a board resolution to that effect, cannot make such
position a corporate office. The board of directors has no power to create other corporate offices
without first amending the corporate by-laws so as to include therein the newly created corporate
office.39 "To allow the creation of a corporate officer position by a simple inclusion in the corporate
by-laws of an enabling clause empowering the board of directors to do so can result in the
circumvention of that constitutionally well-protected right [of every employee to security of tenure]."40

The CA’s heavy reliance on the contents of the General Information Sheets41, which were submitted
by the respondents during the appeal proceedings and which plainly provided that Cosare was an
"officer" of Broadcom, was clearly misplaced. The said documents could neither govern nor establish
the nature of the office held by Cosare and his appointment thereto. Furthermore, although Cosare
could indeed be classified as an officer as provided in the General Information Sheets, his position
could only be deemed a regular office, and not a corporate office as it is defined under the
Corporation Code. Incidentally, the Court noticed that although the Corporate Secretary of
Broadcom, Atty. Efren L. Cordero, declared under oath the truth of the matters set forth in the
General Information Sheets, the respondents failed to explain why the General Information Sheet
officially filed with the Securities and Exchange Commission in 2011 and submitted to the CA by the
respondents still indicated Cosare as an AVP for Sales, when among their defenses in the charge of
illegal dismissal, they asserted that Cosare had severed his relationship with the corporation since
the year 2009.
Finally, the mere fact that Cosare was a stockholder of Broadcom at the time of the case’s filing did
not necessarily make the action an intra- corporate controversy. "Not all conflicts between the
stockholders and the corporation are classified as intra-corporate. There are other facts to consider
in determining whether the dispute involves corporate matters as to consider them as intra-corporate
controversies."42 Time and again, the Court has ruled that in determining the existence of an intra-
corporate dispute, the status or relationship of the parties and the nature of the question that is the
subject of the controversy must be taken into account.43 Considering that the pending dispute
particularly relates to Cosare’s rights and obligations as a regular officer of Broadcom, instead of as
a stockholder of the corporation, the controversy cannot be deemed intra-corporate. This is
consistent with the "controversy test" explained by the Court in Reyes v. Hon. RTC, Br. 142,44 to wit:

Under the nature of the controversy test, the incidents of that relationship must also be considered
for the purpose of ascertaining whether the controversy itself is intra-corporate. The controversy
must not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to
the enforcement of the parties’ correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents
are merely incidental to the controversy or if there will still be conflict even if the relationship does not
exist, then no intra-corporate controversy exists.45 (Citation omitted)

It bears mentioning that even the CA’s finding46 that Cosare was a director of Broadcom when the
dispute commenced was unsupported by the case records, as even the General Information Sheet
of 2009 referred to in the CA decision to support such finding failed to provide such detail.

All told, it is then evident that the CA erred in reversing the NLRC’s ruling that favored Cosare solely
on the ground that the dispute was an intra-corporate controversy within the jurisdiction of the
regular courts.

The charge of constructive dismissal

Towards a full resolution of the instant case, the Court finds it appropriate to rule on the correctness
of the NLRC’s ruling finding Cosare to have been illegally dismissed from employment.

In filing his labor complaint, Cosare maintained that he was constructively dismissed, citing among
other circumstances the charges that were hurled and the suspension that was imposed against him
via Arevalo’s memo dated March 30, 2009. Even prior to such charge, he claimed to have been
subjected to mental torture, having been locked out of his files and records and disallowed use of his
office computer and access to personal belongings.47While Cosare attempted to furnish the
respondents with his reply to the charges, the latter refused to accept the same on the ground that it
was filed beyond the 48-hour period which they provided in the memo.

Cosare further referred to the circumstances that allegedly transpired subsequent to the service of
the memo, particularly the continued refusal of the respondents to allow Cosare’s entry into the
company’s premises. These incidents were cited in the CA decision as follows:

On March 31, 2009, [Cosare] reported back to work again. He asked Villareal if he could retrieve his
personal belongings, but the latter said that x x x Arevalo directed her to deny his request, so
[Cosare] again waited at the receiving section of the office. On April 1, 2009, [Cosare] was not
allowed to enter the office premises. He was asked to just wait outside of the Tektite (PSE) Towers,
where [Broadcom] had its offices, for further instructions on how and when he could get his personal
belongings. [Cosare] waited until 8 p.m. for instructions but none were given. Thus, [Cosare] sought
the assistance of the officials of Barangay San Antonio, Pasig who advised him to file a labor or
replevin case to recover his personal belongings. x x x.48 (Citation omitted)
It is also worth mentioning that a few days before the issuance of the memo dated March 30, 2009,
Cosare was allegedly summoned to Arevalo’s office and was asked to tender his immediate
resignation from the company, in exchange for a financial assistance of ₱300,000.00.49 The directive
was said to be founded on Arevalo’s choice to retain Abiog’s employment with the company.50 The
respondents failed to refute these claims.

Given the circumstances, the Court agrees with Cosare’s claim of constructive and illegal dismissal.
"[C]onstructive dismissal occurs when there is cessation of work because continued employment is
rendered impossible, unreasonable, or unlikely as when there is a demotion in rank or diminution in
pay or when a clear discrimination, insensibility, or disdain by an employer becomes unbearable to
the employee leaving the latter with no other option but to quit."51 In Dimagan v. Dacworks United,
Incorporated,52 it was explained:

The test of constructive dismissal is whether a reasonable person in the employee’s position would
have felt compelled to give up his position under the circumstances. It is an act amounting to
dismissal but is made to appear as if it were not. Constructive dismissal is therefore a dismissal in
disguise. The law recognizes and resolves this situation in favor of employees in order to protect
their rights and interests from the coercive acts of the employer.53(Citation omitted)

It is clear from the cited circumstances that the respondents already rejected Cosare’s continued
involvement with the company. Even their refusal to accept the explanation which Cosare tried to
tender on April 2, 2009 further evidenced the resolve to deny Cosare of the opportunity to be heard
prior to any decision on the termination of his employment. The respondents allegedly refused
acceptance of the explanation as it was filed beyond the mere 48-hour period which they granted to
Cosare under the memo dated March 30, 2009. However, even this limitation was a flaw in the
memo or notice to explain which only further signified the respondents’ discrimination, disdain and
insensibility towards Cosare, apparently resorted to by the respondents in order to deny their
employee of the opportunity to fully explain his defenses and ultimately, retain his employment. The
Court emphasized in King of Kings Transport, Inc. v. Mamac54 the standards to be observed by
employers in complying with the service of notices prior to termination:

[T]he first written notice to be served on the employees should contain the specific causes or
grounds for termination against them, and a directive that the employees are given the opportunity to
submit their written explanation within a reasonable period. "Reasonable opportunity" under the
Omnibus Rules means every kind of assistance that management must accord to the employees to
enable them to prepare adequately for their defense. This should be construed as a period of at
least five (5) calendar days from receipt of the notice to give the employees an opportunity to study
the accusation against them, consult a union official or lawyer, gather data and evidence, and decide
on the defenses they will raise against the complaint. Moreover, in order to enable the employees to
intelligently prepare their explanation and defenses, the notice should contain a detailed narration of
the facts and circumstances that will serve as basis for the charge against the employees. A general
description of the charge will not suffice. Lastly, the notice should specifically mention which
company rules, if any, are violated and/or which among the grounds under Art. 282 is being charged
against the employees.55 (Citation omitted, underscoring ours, and emphasis supplied)

In sum, the respondents were already resolute on a severance of their working relationship with
Cosare, notwithstanding the facts which could have been established by his explanations and the
respondents’ full investigation on the matter. In addition to this, the fact that no further investigation
and final disposition appeared to have been made by the respondents on Cosare’s case only
negated the claim that they actually intended to first look into the matter before making a final
determination as to the guilt or innocence of their employee. This also manifested from the fact that
even before Cosare was required to present his side on the charges of serious misconduct and
willful breach of trust, he was summoned to Arevalo’s office and was asked to tender his immediate
resignation in exchange for financial assistance.

The clear intent of the respondents to find fault in Cosare was also manifested by their persistent
accusation that Cosare abandoned his post, allegedly signified by his failure to report to work or file
a leave of absence beginning April 1, 2009. This was even the subject of a memo56 issued by
Arevalo to Cosare on April 14, 2009, asking him to explain his absence within 48 hours from the date
of the memo. As the records clearly indicated, however, Arevalo placed Cosare under suspension
beginning March 30, 2009. The suspension covered access to any and all company files/records
and the use of the assets of the company, with warning that his failure to comply with the memo
would be dealt with drastic management action. The charge of abandonment was inconsistent with
this imposed suspension. "Abandonment is the deliberate and unjustified refusal of an employee to
resume his employment. To constitute abandonment of work, two elements must concur: ‘(1) the
employee must have failed to report for work or must have been absent without valid or justifiable
reason; and (2) there must have been a clear intention on the part of the employee to sever the
employer- employee relationship manifested by some overt act.’"57Cosare’s failure to report to work
beginning April 1, 2009 was neither voluntary nor indicative of an intention to sever his employment
with Broadcom. It was illogical to be requiring him to report for work, and imputing fault when he
failed to do so after he was specifically denied access to all of the company’s assets. As correctly
observed by the NLRC:

[T]he Respondent[s] had charged [Cosare] of abandoning his employment beginning on April 1,
2009. However[,] the show-cause letter dated March 3[0], 2009 (Annex "F", ibid) suspended
[Cosare] from using not only the equipment but the "assets" of Respondent [Broadcom]. This insults
rational thinking because the Respondents tried to mislead us and make [it appear] that [Cosare]
failed to report for work when they had in fact had [sic] placed him on suspension. x x x.58

Following a finding of constructive dismissal, the Court finds no cogent reason to modify the NLRC's
monetary awards in Cosare's favor. In Robinsons Galleria/Robinsons Supermarket Corporation v.
Ranchez,59 the Court reiterated that an illegally or constructively dismissed employee is entitled to:
(1) either reinstatement, if viable, or separation pay, if reinstatement is no longer viable; and (2)
backwages.60 The award of exemplary damages was also justified given the NLRC's finding that the
respondents acted in bad faith and in a wanton, oppressive and malevolent manner when they
dismissed Cosare. It is also by reason of such bad faith that Arevalo was correctly declared solidarily
liable for the monetary awards.

WHEREFORE, the petition is GRANTED. The Decision dated November 24, 2011 and Resolution
dated March 26, 2012 of the Court of Appeals in CA-G.R. SP. No. 117356 are SET ASIDE. The
Decision dated August 24, 2010 of the National Labor Relations Commission in favor of petitioner
Raul C. Cosare is AFFIRMED.

SO ORDERED.

[G.R. No. 108905. October 23, 1997]

GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF
APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO
G. BELTRAN, and ERNESTO L. GO, respondents.

DECISION
MENDOZA, J.:

The question for decision in this case is the right of petitioners

representative to sit in the board of directors of respondent Grace Village
Association, Inc. as a permanent member thereof. For fifteen years from 1975
until 1989 petitioners representative had been recognized as a permanent
director of the association. But on February 13, 1990, petitioner received
notice from the associations committee on election that the latter was
reexamining (actually, reconsidering) the right of petitioners representative to
continue as an unelected member of the board. As the board denied
petitioners request to be allowed representation without election, petitioner
brought an action for mandamus in the Home Insurance and Guaranty
Corporation. Its action was dismissed by the hearing officer whose decision
was subsequently affirmed by the appeals board. Petitioner appealed to the
Court of Appeals, which in turn upheld the decision of the HIGCs appeals
board. Hence this petition for review based on the following contentions:

1. The Petitioner herein has already acquired a vested right to a permanent seat in the
Board of Directors of Grace Village Association;

2. The amended By-laws of the Association drafted and promulgated by a Committee

on December 20, 1975 is valid and binding; and

3. The Practice of tolerating the automatic inclusion of petitioner as a permanent

member of the Board of Directors of the Association without the benefit of election is
allowed under the law. [1]

Briefly stated, the facts are as follows:

Petitioner Grace Christian High School is an educational institution offering
preparatory, kindergarten and secondary courses at the Grace Village in
Quezon City. Private respondent Grace Village Association, Inc., on the other
hand, is an organization of lot and/or building owners, lessees and residents
at Grace Village, while private respondents Alejandro G. Beltran and Ernesto
L. Go were its president and chairman of the committee on election,
respectively, in 1990, when this suit was brought.
 As adopted in 1968, the by-laws of the association provided in Article IV,
as follows:

The annual meeting of the members of the Association shall be held on the first
Sunday of January in each calendar year at the principal office of the Association at
2:00 P.M. where they shall elect by plurality vote and by secret balloting, the Board of
Directors, composed of eleven (11) members to serve for one (1) year until their
successors are duly elected and have qualified. [2]

It appears, that on December 20, 1975, a committee of the board of

directors prepared a draft of an amendment to the by-laws, reading as
follows:[3]

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall be held on the second
Thursday of January of each year. Each Charter or Associate Member of the
Association is entitled to vote. He shall be entitled to as many votes as he has acquired
thru his monthly membership fees only computed on a ratio of TEN (P10.00)
PESOS for one vote.

The Charter and Associate Members shall elect the Directors of the Association. The
candidates receiving the first fourteen (14) highest number of votes shall be declared
and proclaimed elected until their successors are elected and qualified. GRACE
CHRISTIAN HIGH SCHOOL representative is a permanent Director of the
ASSOCIATION.

This draft was never presented to the general membership for

approval. Nevertheless, from 1975, after it was presumably submitted to the
board, up to 1990, petitioner was given a permanent seat in the board of
directors of the association. On February 13, 1990, the associations
committee on election in a letter informed James Tan, principal of the school,
that it was the sentiment that all directors should be elected by members of
the association because to make a person or entity a permanent Director
would deprive the right of voters to vote for fifteen (15) members of the Board,
and it is undemocratic for a person or entity to hold office in perpetuity. For [4]

this reason, Tan was told that the proposal to make the Grace Christian High
School representative as a permanent director of the association, although
previously tolerated in the past elections should be reexamined. Following this
advice, notices were sent to the members of the association that the provision
on election of directors of the 1968 by-laws of the association would be
observed.
Petitioner requested the chairman of the election committee to change the
notice of election by following the procedure in previous elections, claiming
that the notice issued for the 1990 elections ran counter to the practice in
previous years and was in violation of the by-laws (of 1975) and unlawfully
deprive[d] Grace Christian High School of its vested right [to] a permanent
seat in the board. [5]

As the association denied its request, the school brought suit

for mandamus in the Home Insurance and Guaranty Corporation to compel
the board of directors of the association to recognize its right to a permanent
seat in the board. Petitioner based its claim on the following portion of the
proposed amendment which, it contended, had become part of the by-laws of
the association as Article VI, paragraph 2, thereof:

The Charter and Associate Members shall elect the Directors of the Association. The
candidates receiving the first fourteen (14) highest number of votes shall be declared
and proclaimed elected until their successors are elected and qualified. GRACE
CHRISTIAN HIGH SCHOOL representative is a permanent Director of the
ASSOCIATION.

It appears that the opinion of the Securities and Exchange Commission on

the validity of this provision was sought by the association and that in reply to
the query, the SEC rendered an opinion to the effect that the practice of
allowing unelected members in the board was contrary to the existing by-laws
of the association and to 92 of the Corporation Code (B.P. Blg. 68).
Private respondent association cited the SEC opinion in its
answer. Additionally, the association contended that the basis of the petition
for mandamus was merely a proposed by-laws which has not yet been
approved by competent authority nor registered with the SEC or HIGC. It
argued that the by-laws which was registered with the SEC on January 16,
1969 should be the prevailing by-laws of the association and not the proposed
amended by-laws. [6]

In reply, petitioner maintained that the amended by-laws is valid and

binding and that the association was estopped from questioning the by-laws. [7]

A preliminary conference was held on March 29, 1990 but nothing

substantial was agreed upon. The parties merely agreed that the board of
directors of the association should meet on April 17, 1990 and April 24, 1990
for the purpose of discussing the amendment of the by-laws and a possible
amicable settlement of the case. A meeting was held on April 17, 1990, but
the parties failed to reach an agreement. Instead, the board adopted a
resolution declaring the 1975 provision null and void for lack of approval by
members of the association and the 1968 by-laws to be effective.
On June 20, 1990, the hearing officer of the HIGC rendered a decision
dismissing petitioners action. The hearing officer held that the amended by-
laws, upon which petitioner based its claim, [was] merely a proposed by-laws
which, although implemented in the past, had not yet been ratified by the
members of the association nor approved by competent authority; that, on the
contrary, in the meeting held on April 17, 1990, the directors of the association
declared the proposed by-law dated December 20, 1975 prepared by the
committee on by-laws . . . null and void and the by-laws of December 17,
1968 as the prevailing by-laws under which the association is to operate until
such time that the proposed amendments to the by-laws are approved and
ratified by a majority of the members of the association and duly filed and
approved by the pertinent government agency. The hearing officer rejected
petitioners contention that it had acquired a vested right to a permanent seat
in the board of directors. He held that past practice in election of directors
could not give rise to a vested right and that departure from such practice was
justified because it deprived members of association of their right to elect or to
be voted in office, not to say that allowing the automatic inclusion of a member
representative of petitioner as permanent director [was] contrary to law and
the registered by-laws of respondent association. [8]

The appeals board of the HIGC affirmed the decision of the hearing officer
in its resolution dated September 13, 1990. It cited the opinion of the SEC
based on 92 of the Corporation Code which reads:

92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which
may be more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify themselves that the
term of office of one-third (1/3) of the number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the board of trustees shall be held
annually and trustees so elected shall have a term of three (3) years. Trustees
thereafter elected to fill vacancies occurring before the expiration of a particular term
shall hold office only for the unexpired period.

The HIGC appeals board denied claims that the school [was] being deprived
of its right to be a member of the Board of Directors of respondent
association, because the fact was that it may nominate as many
representatives to the Associations Board as it may deem appropriate. It said
that what is merely being upheld is the act of the incumbent directors of the
Board of correcting a long standing practice which is not anchored upon any
legal basis.[9]

Petitioner appealed to the Court of Appeals but petitioner again lost as the
appellate court on February 9, 1993, affirmed the decision of the HIGC. The
Court of Appeals held that there was no valid amendment of the associations
by-laws because of failure to comply with the requirement of its existing by-
laws, prescribing the affirmative vote of the majority of the members of the
association at a regular or special meeting called for the adoption of
amendment to the by-laws. Article XIX of the by-laws provides: [10]

The members of the Association by an affirmative vote of the majority at any regular
or special meeting called for the purpose, may alter, amend, change or adopt any new
by-laws.

This provision of the by-laws actually implements 22 of the Corporation

Law (Act No. 1459) which provides:

22. The owners of a majority of the subscribed capital stock, or a majority of the
members if there be no capital stock, may, at a regular or special meeting duly called
for the purpose, amend or repeal any by-law or adopt new by-laws. The owners of
two-thirds of the subscribed capital stock, or two-thirds of the members if there be no
capital stock, may delegate to the board of directors the power to amend or repeal any
by-law or to adopt new by-laws: Provided, however, That any power delegated to the
board of directors to amend or repeal any by-law or adopt new by-laws shall be
considered as revoked whenever a majority of the stockholders or of the members of
the corporation shall so vote at a regular or special meeting. And provided, further,
That the Director of the Bureau of Commerce and Industry shall not hereafter file an
amendment to the by-laws of any bank, banking institution or building and loan
association, unless accompanied by certificate of the Bank Commissioner to the effect
that such amendments are in accordance with law.

The proposed amendment to the by-laws was never approved by the

majority of the members of the association as required by these provisions of
the law and by-laws. But petitioner contends that the members of the
committee which prepared the proposed amendment were duly authorized to
do so and that because the members of the association thereafter
implemented the provision for fifteen years, the proposed amendment for all
intents and purposes should be considered to have been ratified by
them.Petitioner contends: [11]
Considering, therefore, that the agents or committee were duly authorized to draft the
amended by-laws and the acts done by the agents were in accordance with such
authority, the acts of the agents from the very beginning were lawful and binding on
the homeowners (the principals) per se without need of any ratification or
adoption. The more has the amended by-laws become binding on the homeowners
when the homeowners followed and implemented the provisions of the amended by-
laws. This is not merely tantamount to tacit ratification of the acts done by duly
authorized agents but express approval and confirmation of what the agents did
pursuant to the authority granted to them.

Corollarily, petitioner claims that it has acquired a vested right to a

permanent seat in the board. Says petitioner:

The right of the petitioner to an automatic membership in the board of the Association
was granted by the members of the Association themselves and this grant has been
implemented by members of the board themselves all through the years. Outside the
present membership of the board, not a single member of the Association has
registered any desire to remove the right of herein petitioner to an automatic
membership in the board. If there is anybody who has the right to take away such
right of the petitioner, it would be the individual members of the Association through
a referendum and not the present board some of the members of which are motivated
by personal interest.

Petitioner disputes the ruling that the provision in question, giving petitioners
representative a permanent seat in the board of the association, is contrary to
law. Petitioner claims that that is not so because there is really no provision of
law prohibiting unelected members of boards of directors of
corporations. Referring to 92 of the present Corporation Code, petitioner says:

It is clear that the above provision of the Corporation Code only provides for the
manner of election of the members of the board of trustees of non-stock corporations
which may be more than fifteen in number and which manner of election is even
subject to what is provided in the articles of incorporation or by-laws of the
association thus showing that the above provisions [are] not even mandatory.

Even a careful perusal of the above provision of the Corporation Code would not
show that it prohibits a non-stock corporation or association from granting one of its
members a permanent seat in its board of directors or trustees. If there is no such legal
prohibition then it is allowable provided it is so provided in the Articles of
Incorporation or in the by-laws as in the instant case.

....
If fact, the truth is that this is allowed and is being practiced by some corporations
duly organized and existing under the laws of the Philippines.

One example is the Pius XII Catholic Center, Inc. Under the by-laws of this
corporation, that whoever is the Archbishop of Manila is considered a member of the
board of trustees without benefit of election. And not only that. He also automatically
sits as the Chairman of the Board of Trustees, again without need of any election.

Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also
provided in the by-laws of this corporation that whoever is the Archbishop of Manila
is considered a member of the board of trustees year after year without benefit of any
election and he also sits automatically as the Chairman of the Board of Trustees.

It is actually 28 and 29 of the Corporation Law not 92 of the present law or

29 of the former one which require members of the boards of directors of
corporations to be elected. These provisions read:

28. Unless otherwise provided in this Act, the corporate powers of all corporations
formed under this Act shall be exercised, all business conducted and all property of
such corporations controlled and held by a board of not less than five nor more than
eleven directors to be elected from among the holders of stock or, where there is no
stock, from the members of the corporation:Provided, however, That in corporations,
other than banks, in which the United States has or may have a vested interest,
pursuant to the powers granted or delegated by the Trading with the Enemy Act, as
amended, and similar Acts of Congress of the United States relating to the same
subject, or by Executive Order No. 9095 of the President of the United States, as
heretofore or hereafter amended, or both, the directors need not be elected from
among the holders of the stock, or, where there is no stock from the members of the
corporation. (emphasis added)

29. At the meeting for the adoption of the original by-laws, or at such subsequent
meeting as may be then determined, directors shall be elected to hold their offices for
one year and until their successors are elected and qualified. Thereafter the directors
of the corporation shall be elected annually by the stockholders if it be a stock
corporation or by the members if it be a nonstock corporation, and if no provision is
made in the by-laws for the time of election the same shall be held on the first
Tuesday after the first Monday in January. Unless otherwise provided in the by-laws,
two weeks notice of the election of directors must be given by publication in some
newspaper of general circulation devoted to the publication of general news at the
place where the principal office of the corporation is established or located, and by
written notice deposited in the post-office, postage pre-paid, addressed to each
stockholder, or, if there be no stockholders, then to each member, at his last known
place of residence. If there be no newspaper published at the place where the principal
office of the corporation is established or located, a notice of the election of directors
shall be posted for a period of three weeks immediately preceding the election in at
least three public places, in the place where the principal office of the corporation is
established or located. (Emphasis added)

The present Corporation Code (B.P. Blg. 68), which took effect on May 1,
1980, similarly provides:
[12]

23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the holders of stocks, or where
there is no stock, from among the members of the corporation, who shall hold office
for one (1) year and until their successors are elected and qualified. (Emphasis added)

These provisions of the former and present corporation law leave no room
for doubt as to their meaning: the board of directors of corporations must be
elected from among the stockholders or members. There may be corporations
in which there are unelected members in the board but it is clear that in the
examples cited by petitioner the unelected members sit as ex
officio members, i.e., by virtue of and for as long as they hold a particular
office. But in the case of petitioner, there is no reason at all for its
representative to be given a seat in the board. Nor does petitioner claim a
right to such seat by virtue of an office held. In fact it was not given such seat
in the beginning. It was only in 1975 that a proposed amendment to the by-
laws sought to give it one.
Since the provision in question is contrary to law, the fact that for fifteen
years it has not been questioned or challenged but, on the contrary, appears
to have been implemented by the members of the association cannot forestall
a later challenge to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the power of the
members of the association to waive its invalidity. For that matter the
members of the association may have formally adopted the provision in
question, but their action would be of no avail because no provision of the by-
laws can be adopted if it is contrary to law. [13]

It is probable that, in allowing petitioners representative to sit on the board,

the members of the association were not aware that this was contrary to
law. It should be noted that they did not actually implement the provision in
question except perhaps insofar as it increased the number of directors from
11 to 15, but certainly not the allowance of petitioners representative as an
unelected member of the board of directors. It is more accurate to say that the
members merely tolerated petitioners representative and tolerance cannot be
considered ratification.
Nor can petitioner claim a vested right to sit in the board on the basis of
practice. Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law. Even less tenable is petitioners claim that
its right is coterminus with the existence of the association. [14]

Finally, petitioner questions the authority of the SEC to render an opinion

on the validity of the provision in question. It contends that jurisdiction over
this case is exclusively vested in the HIGC.
But this case was not decided by the SEC but by the HIGC. The HIGC
merely cited as authority for its ruling the opinion of the SEC chairman. The
HIGC could have cited any other authority for the view that under the law
members of the board of directors of a corporation must be elected and it
would be none the worse for doing so.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
G.R. No. L-27694 October 24, 1928

ZAMBOANGA TRANSPORTATION COMPANY, INC., plaintiff-appellee,

vs.
THE BACHRACH MOTOR CO., INC., defendant-appellant.

-------------------------

G.R. No. L-27997 October 24, 1928

THE BACHRACH MOTOR CO., INC., plaintiff-appellee,

vs.
ZAMBOANGA TRANSPORTATION COMPANY, INC., defendant-appellant.

Gibbs and McDonough and Roman Ozaeta for appellant in case No. 27694 and for appellee in case
No. 27997.
C. A. Sobral and Jose Erquiaga for appellee in case No. 27694 and for appellant in case No. 27997.

VILLA-REAL, J.:

We are here concerned with two appeals, one taken by the defendant the Bachrach Motor Co., Inc.,
from the judgment of the Court of First Instance of Zamboanga in civil case No. 1286 of said court
(G.R. No. 27694) holding that the chattel mortgage executed by the president and general manager
of the plaintiff corporation, the Zamboanga Transportation Co., Inc., is null and void, and ordering the
register of deeds of said province to cancel the registration of said mortgage at the instance of said
defendant, the Bachrach Motor Co., Inc., with costs; and the other by the defendant Zamboanga
Transportation Co., Inc., from the judgment of the Court of First Instance of Manila in civil case No.
28123 (G.R. No. 27997) ordering said defendant Zamboanga Transportation Co., Inc., the sum of
P18,298.58, with 10 per cent interest on the sum of P6,254.81, from May 19, 1925, and legal interest
on the balance of said sum from May 23, 1925, when the complaint was filed, plus the costs, and
dismissing all the counterclaims and cross complaints set up by the defendant corporation.

In support of its appeal, the Bachrach Motor Co., Inc., assigns the following alleged errors as
committed by the Court of First Instance of Zamboanga in its judgment to wit:

1. The trial court erred in not finding that Mr. Jose Erquiaga, president, general manager,
director, stockholder, auditor, attorney and legal adviser, and principal witness of the
Zamboanga Transportation Co., Inc., personified and practically constituted that corporation
at the time he signed the chattel mortgage in question in its behalf;

2. The trial court erred in not finding that the so-called board of directors of the Zamboanga
Transportation Co., Inc., was composed of "dummy" directors, who were mere puppets in the
hands of the said Jose Erquiaga;

3. The trial court erred in not finding that the pretended resolution of the said so-called board
of directors dated of May 20, 1925 (Exhibit FF), purporting to disapprove the chattel
mortgage in question was mere contrivance of the said Jose Erquiaga, framed up for the
purpose of attempting to avoid the obligation of said mortgage;

4. Trial court erred in holding that the chattel mortgage in question was void and of no effect
because it had not been previously approved by the Public Utility Commission;

5. The trial court erred in not dismissing plaintiff's complaint.

In support of its appeal the Zamboanga Transportation Co., Inc., in turn assigns the following alleged
errors as committed by the Court of First Instance of Manila, to wit:

1. The Manila trial court erred in holding that chattel mortgage in question was valid and
binding upon the corporation notwithstanding the fact that it was disapproved by a resolution
of its board of directors and that it had not been previously approved by the Public Utility
Commission as required by law;

2. In not finding that Jose Erquiaga, president and general manager of the corporation,
executed and signed said mortgage upon the express condition that it would not be valid
unless it was ratified by a resolution of the board of directors, as required by the by-laws of
the corporation and that it was agreed that in case said mortgage was not approved by said
board of directors, Bachrach would be at liberty to foreclose the other two previous mortgage
which were the real basis of the debt represented by the mortgage in question;

3. In not finding as a fact that all previous contracts of any kind signed by Jose Erquiaga, as
president or general manager or by his predecessors in office, affecting the company, had to
be submitted for approval or ratification by the board of directors, as shown by the minutes
kept by the secretary of the corporation, and that Bachrach was in possesssion of and knew
the by-laws of the company at least since 1923;
 4. In not finding that it was verbally agreed between the said Jose Erquiaga and E. M.
Bachrach that the chattel mortgage in question would not be registered in the offices of the
register of deeds concerned until it was approved by the board of directors of the mortgagor
and by the Public Utility Commission;

5. In not finding that it was also agreed between said Jose Erquiaga, E. M. Bachrach, and
Mons. Jose Clos, Bishop of Zamboanga, in connection with the execution of the agreement
of February 14, 1925, that the mortgagee would not foreclose said mortgage before the
return of the Bishop of Zamboanga from his trip to Rome calculated to last six months, and
without first giving the bishop opportunity to pay the whole amount of the mortgage with a ten
per cent rebate;

6. In utterly disregarding the testimony, in support of mortgagor's contention, of the Right

Rev. Jose Clos, Bishop of Zamboanga, and in not admitting his deposition, as corrected by
deponent, notwithstanding the fact that said deposition was obtained at mortgagee's request,
and the questions made to the bishop were made by mortgagee's attorney in the absence of
the mortgagor or his attorney;

7. In not finding as a fact that at least two of the directors, Jose Camins and Ciriaco Bernal,
were big stackholders owning nearly twenty thousand pesos of stock each and were not
dummy directors who were mere puppets in the hands of said Jose Erquiaga, president and
general manager of the corporation;

8. In finding that the mortgator took advantage of the alleged benefits of the mortgage in
question with the full knowledge of said board of directors and that the validity of the
mortgage was not disputed until after the mortgagee began proceedings for the foreclosure
of said mortgage, when as a matter of fact the mortgagor filed the action in the Zamboanga
court asking that the mortgage, be declared null and void as soon as he discovered that the
mortgage had been registered with the register of deeds of Zamboanga, contrary to what
had been stipulated, and before the mortgator had any notice that the mortgagee was going
to foreclose said mortgage;

9. In finding that the execution of the chattel mortgage in question was merely a novation of
the two previous mortgages in favor of the mortgagee and of the mortgage in favor of the
Bishop of Zamboanga;

The complaint filed by the Zamboanga Transportation Co., Inc., against the Bachrach Motor Co.,
Inc., in the Court of First Instance of Zamboanga seeks the annulment of a chattel mortgage
executed on Febuary 14, 1925 (Exhibit B and C), by the plaintiff's president and general manager in
favor of the Bachrach Motor Co., Inc. 1awph!l.net

The complaint filed by the Bachrach Motor Co., Inc., against the Zamboanga Transportation Co.,
Inc., in the Court of First Instance of Manila seeks the foreclosure of said chattel mortgage.

By their respective assignments of error both appellants raise questions of fact as well as of law,
rendering it necessary to make our findings of facts.

The preponderance of the evidence established the following pertinent and essential facts:

Both appellants are corporations created and organized under the laws of the Philippine Islands. The
Zamboanga Transportation Co., Inc., is managed by a board of directors composed of five
stockholders elected at a general annual meeting of the stockholders. The directors for the year
1925 were elected at the general meeting of the stockholders on January 26th of that year, as
appears from the following copy of the minutes:

MINUTES OF THE GENERAL MEETING OF STOCKHOLDERS OF THE ZAMBOANGA

TRANSPORTATION CO., INC., HELD ON JANUARY 26, 1925, IN THE OFFICES OF THE
COMPANY AT NO. 20 CORCUERA STREET, ZAMBOANGA, P. I.

The meeting was called to order with the Vice-President, Mr. Jose Erquiaga, in the absence
of the President, Mr. Jose Longa, as chairman at 5 o'clock in the afternoon of this 26th day of
January 1925, the following stockholders being present either personally or by proxy:

Shares
Carlos Camins, in his own behalf 1
Jose Erquiaga, in his own behalf 466
Valera C. de Erquiaga, for Jose Erquiaga 1,800
Eduardo Montenegro, for Jose Erquiaga 1,000
Mons. Jose Clos, Bishop of Zamboanga, for Jose
Erquiaga 2,410
Mission of the society of Jesus, for Jose Erquiaga 115
Melecio Ramos, for Jose Erquiaga 40
Jose Arguirre, for Jose Erquiaga 200
Ciriaco Bernal, in his own behalf 1,854
Superior of the Jesuit Fathers, for Jose Erquiaga 200
Dolores C. de Longa, for G. J. Cristobal 1,950
G. J. Cristobal, in his own behalf 1

Total 10,017

There being a total of 10,017 shares represented, which constitute a majority or

quorum according to the by-laws, the following business was considered:

Upon motion of Mr. G. J. Cristobal, seconded by Mr. Ciriaco Bernal, the minutes of
the previous general meeting were read and approved. The Manager's Annual
Report of the condition of the business and the accounts corresponding thereto for
1924 were submitted for consideration. After the reading and examination of said
report and accounts, on motion of Mr. C. Camins, seconded by Mr. G. J. Cristobal,
said report was approved.

Immediately afterwards they proceeded to the election of the directors for the year
1925, the following being elected:

Votes
 Mr. Jose Erquiaga 10,505
Mr. C. Camins 10,500
Mr. Jose Camins 10,055
Mr. G.J. Cristobal 9,755
Mr. Ciriaco Bernal 9,270

There being no further business the meeting adjourned at 6:30 p.m.

I certify that the foregoing minutes are correct, and that the same were approved at the
abovementioned general meeting.

(Sgd.) JOSE ERQUIAGA

President ad interim

(Sgd.) C. CAMINS
Secretary

For nearly ten years the two associations have had business relations with each other, the
Zamboanga Transportation Co., Inc., purchasing trucks, automobiles, repair and accessory parts for
use in the business of transportation in which it is engaged, from the Bachrach Motor Co., Inc.
Payments were made by installments, and for the security of the vendor the Bachrach Motor Co.,
Inc., the purchaser, the Zamboanga Transportation Co., Inc., executed in its favor several chattel
mortgages.

From the year 1920 Jose Erquiaga, one of the stockholders and directors of the Zamboanga
Transportation Co., Inc., has been also its attorney and legal adviser. In March 1924, he was
appointed general manager, and in January 1925 was elected president. Lastly, he also acted as
auditor.

In February 1925, the Zamboanga Transportation Co., Inc., owed the Bachrach Motor Co., Inc., the
sum of P44,095.78, which was the balance due on the purchase price of several White trucks and
accessory parts, bought on the installments plan from the latter. This balance was secured by two
chattel mortgages, executed on February 17, 1923 (Exhibit 2) and December 4, 1923 (Exhibit 1),
respectively.

During the last five years the Zamboanga Transportation Co., Inc., found itself in financial straits and
on several occasions appealed to Mons. Jose Clos, Bishop of Zamboanga for loans of money. As
the latter, who was the principal stock holder of the Zamboanga Transportation Co. Inc., was leaving
for Rome in February 1925 and could not continue to loan money to said corporation to pay the
installments stipulated in the chattel mortgages Exhibits 1 and 2, and in view of the fact that the
hypothecated trucks were in a bad state or repair, and that the mortgagee required more security,
additional agreements were entered between Mons. Clos and the Bachrach Motor Co., Inc. These
agreements, in which the Zamboanga Trasportation Co., Inc., intervened and took part, are evidence
in the letter quoted below:

February 14, 1925

The RIGHT REVEREND JOSE CLOS
Bishop of Zamboanga
Manila, P.I.

MOST REVEREND SIR: The purpose of this letter is to set forth in writing certain
conditions and stipulations connected with the transfer to us of certain securities now
held by you consisting of a mortgage made and executed in your favor by the
Zamboanga Transportation Co., Inc., covering certain equipment, business credits,
privileges, etc., as set forth therein.

1. You agree to release, and hereby do release and cancel said mortgage made and
executed in your favor by the Zamboanga Transporation Co. under date of January
10th, 1925.

2. The Zamboanga Transportation Co. is to be permitted to execute in our favor a

new mortgage covering all property, business credits and privileges mentioned and
set forth therein, excepting the second mortgage on property mortgaged by the
Zamboanga Transportation Company to the Standard Oil Company. This is in
addition to and to be included with property already mortgaged to us by the
Zamboanga Transportation Company for which purpose an entirely new document,
bearing a new schedule of payments inclusive of interest thereon to dates of
maturity, will be made and executed in our favor by the said Zamboanga
Transportation Company.

3. For and in consideration of the release and cancellation of the mortgage to us the
property mentioned therein by the Zamboanga Transportation Company, we agree to
accept a reduced schedule of payments for a period of six months from date, after
which period the former schedule of payments will be taken up and resumed as set
forth in our memorandum of January 10th. It is further agreed that such payments
instead of falling due on the 15th of each month shall become due and payable on
the 1st day of the succeeding month as set forth and made of record in the new
notes and mortgages to be made and executed in our favor by the Zamboanga
Transportation Company. We also agree to permit the transfer of trucks and
equipment now mortgage to us by the Zamboanga Transportation Company or such
portion thereof as may be necessary for their purpose to Dansalan, Lanao.

4. As a further consideration, we also agree to permit you to liquidate the entire

indebtedness of the Zamboanga Transportation Company by paying to us at any
time that may be convenient for you to do so the entire amount due less a discount of
10 per cent as outlined in our letter of December 26, 1924; such discount, however,
is to be based on the amount actually due by the Zamboanga Transportation
Company at that time inclusive of balance due by them on their current account.

5. It is further stipulated and agreed that the President and General Manager of the
Zamboanga Transportation Company will furnish us a copy of the Resolution of the
board of directors authorizing him to execute this new mortgage in our favor.

Kindly confirm and ratify this agreement by signing with us at the bottom of this letter.

Very truly yours,

 THE BACHRACH MOTOR CO., INC.
By (Sgd.) E.M. BACHRACH

Conforme:

THE ZAMBOANGA TRANSPORATION CO., INC.

By (Sgd.) JOSE ERQUIAGA

I agree to and accept conditions outlined.

(Sgd.) JOSE CLOS

In pursuance of said agreement the new chattel mortgage (Exhibits B and C) was executed on
February 14, 1925 by the Zamboanga Transportation Co., Inc., represented by its president, general
manager, and attorney Jose Erquiaga. In this last mortgage the same goods were pledged that had
been hypothecated by the Zamboanga Transporatation Co., Inc., to the Bachrach Motor Co., by
virtue of instruments Exhibits 1 and 2, and to Mons. Jose Clos Bishop of Zamboanga, by the virtue
of the deed Exhibit 3.

In a letter written on February 28, 1925, Jose Erquiaga submitted said mortgage deed to the board
of directors through its secretary, and upon his return to Zamboanga from Manila, discussed said
mortgage with directors Carlos Camins and Ciriaco Bernal, who expressed their satisfaction with the
advantages obtained by their president and general manager.

The Zamboanga Transportation Co., Inc., partially complied with the conditions of said mortgage
deed, paying the Bachrach Motor Co., Inc., on March 1 and April 1, 1925.

During the latter half of the month of April 1925, the mortgagor received a letter dated April 13, 1925,
through its president and general manager, Jose Erquiaga, from the mortgagee, enclosing the
cancellation of the two former chattel mortgages Exhibits 1 and 2, in order to be recorded in the
registries of deeds of Cebu and Zamboanga, respectively, where said mortgages were registered.
On April 27, 1925, said president and general manager, Jose Eraquiaga, sent the mortgage letter
(Exhibits HH and 14) in which, replying to the latter's communication dated April 13, 1925, he
informed it that said cancellations could not be registered, because the new chattel mortgage had
not been approved by the mortgagor's board of directors, according to the express stipulation of the
parties, and that as soon as it was approved it would be submitted to the Public Utility Commission
for approval in conformity with the law.

On May 3, 1925, the Zamboanga Transportation Co., Inc., through its general manager, Jose
Erquiaga, addressed the letter marked Exhibit C to the Bachrach Motor Co., Inc., which, among
other things, said the following:

This is to inform you that on account of our Dansalan's Branch failure to send us any money
so far, we are utterly unable, for the present, to make our remittances to you in accordance
with our last contract.

xxx xxx xxx

In view of all this and having in mind the fact that you hold now a mortgage practically on all
our business and your credit is perfectly secured we would request that during this period of
business depression we be allowed to make smaller payments and furthermore that we be
authorized by you to sell our equipments in Cebu and Dansalan, or part of it, upon the
 condition that any amount obtained from such sales, will be paid to you to apply to our
monthly payments as per contract. Should you not be satisfied with this letter, I request that
you send a man of your confidence down here to examine our business and report to you.

I will try to be in Manila by twelve of this month, passing thru Cebu and will take this matter
with you personally. In this connection, I may tell you that I have already advanced some of
my personal funds to help the company. Inasmuch as Bishop Clos who holds a second
mortgage on our properties, is not here at present and he is not expected to be back until
August, it is requested that no action be taken by you until he returns.

Expecting to see you personally within a few days and hoping a favorable consideration, I
am,

Yours very truly,

ZAMBOANGA TRANSPORTATION CO., INC.

By (Sgd.) JOSE ERQUIAGA

President and General Manager

When, as announced in the foregoing letter, Jose Erquiaga interviewed E.M. Bachrach, president of
Bachrach Motor Co., Inc., in the latter's office in Manila on May 6 and 12, 1925, in order to secure
his consent to the sale of some trucks in Cebu and Dansalan, the same being included in those
mortgaged, in order to apply the proceeds to the payment of the unpaid debt, said E.M. Bachrach
asked Jose Erquiaga why the board of directors of the Zamboanga Transportation had not approved
the mortgage yet, and without waiting for an answer, denied his request saying that the mortgagor
was "at their mercy" and that they did not care whether the board of directors approved the mortgage
or not, adding, "You cannot impose conditions now." After this interview Jose Erquiaga returned to
Zamboanga and immediately made special efforts to have the mortgagor's board of directors meet
and take definite action on said mortgage, which was done, said mortgage being rejected by the
resolution of May 20, 1925. At that time the mortgagor discovered that the mortgagee had registered
the chattel mortgage in question in the registry of deeds of Zamboanga, by a letter dated February
17, 1924, addressed to the register of deeds of Zamboanga, without the knowledge or consent of
said mortgagor, and without having first registered the cancellations of the two previous mortgages
which included part of the goods affected by the mortgage in question, as required by the law, which
cancellations, as stated, were sent to the mortgagor only two months afterwards with the
communication of April 13, 1925. This discovery was the cause of the resolution adopted by the
board of directors of the Zamboanga Transprotation Co., Inc., dated May 21, 1925, directing its
attorney to institute an action for the annulment of said mortgage, which was done on May 21, 1925,
the complaint being registered in the Court of First Instance of Zamboanga as No. 2186.

The Bachrach Motor Co., Inc., acting through its president, filed a complaint against the Zamboanga
Transportation Co., Inc., in the Court of First Instance of Manila on May 23, 1925, and by means of a
bond fixed by the court, obtained through the sheriff of Zamboanga, possession of all the chattels
described in the chattel mortgages (Exhibits B and C) and their sale at public auction in conformity
with the provision of section 14 of the Chattel Mortgage Law, and having been the highest bidder
they were awarded to it for the sum of P35,000, which amount was reduced to P34,642.63 after
deducting the expenses of the auction and the sheriff's fees, which amounted to P357.37. The
aforesaid sum of P34,642.63 having been applied to the defendant's account, there remained a
balance of P18,298.58 which is the amount owed by the Zamboanga Transportation Co., Inc., to the
Bachrach Motor Co., Inc., icluding the stipulated penalty.
The Zamboanga Transportation Co., Inc., tried to prove that at the time the chattel mortgage was
executed there existed an oral agreement between the parties, which contained the following
stipulations: (1) That the mortgage would not be valid until it was approved by resolution of the board
of directors of the mortgagor; (2) that it would not be recorded in the proper registry of deeds until
such approval was obtained; (3) that after the mortgagor's board of directors had approved it, the
approval of the Public Utility Commission as required by Act No. 3108 would also be requested; (4)
that should the mortgagor's board of directors disapproved said mortgage, the mortgagee would
have a right to foreclose the two previous mortgages at any time; (5) that even if the mortgage be
approved by the mortgagor's board of directors, the mortgagee would not foreclose said mortgage in
case of violation of the condition until after the return of the Bishop of Zamboanga from his trip to
Rome, which, it was calculated would take about six months and without first giving said Bishop the
option to pay the whole debt to the mortgagee with a 10 per cent discount; (6) that notwithstanding
the fact that said mortgage is not valid without the approval of the board of directors of the
Zamboanga Transportation Co., Inc., its conditions would go into effect immediately after being
signed by Jose Erquiaga, as president of the mortgagor, the sum and the amount of the monthly
payments being suspended from the date; (7) that in view of this stipulation Jose Erquiaga, as
president and general manager of the mortgagor, made two payments in accordance with the terms
of said mortgage, but without the knowledge of the board of directors and before the formal
disapproval of the said mortgage by resolution dated May 20, 1925.

In view of the facts recited above as proven at the trial, partly by a preponderance of the evidence
and partly by the admission of the parties, the following questions of law are raised:

(1) Whether the chattel mortgage evidenced by Exhibits B and C, dated February 14, 1925,
and executed by Jose Erquiaga, president, general manager, attorney, and auditor of the
Zamboanga Transaportation Co., Inc., in behalf thereof is valid and binding upon said
corporation, after payments have been made to the Bachrach Motor Co., Inc., by virtue
thereof, notwithstanding the fact that it was disapproved by the mortgagor's board of
directors four months after its execution.

(2) If so, whether said mortgage was effective not withstanding the fact that the authorization
and approval of the Public Utility Commission were not obtained until after and action for
annulment had been instituted by the Zamboanga Transportation Co., Inc., on May 21, 1925,
and almost a year after said mortgage had been executed.

With regard to the first question, we have seen that Jose Erquiaga is one of the largest stockholders
of the Zamboanga Transportation Co., Inc., and represented the greatest majority of the stock at the
general meeting of stockholders held on January 26, 1925 at which he was elected president. In
addition to this office, he acted as general manager, auditor, and attorney of legal adviser of said
corporation. In this manifold capacity Jose Erquiaga entered into the chattel mortgage contract here
in question with the Bachrach Motor Co., Inc., by virtue of which the Zamboanga Transportaion Co.,
Inc., obtained greater advantages; and upon his return to Zamboanga after having entered into said
contract, he discussed the new chattel mortgage with the directors of said corporation, Carlos
Camins and Ciriaco Bernal, who expresed their president and general manager, and the
Zamboanga Transportation Co., Inc., availed itself fo these advantages, making two payments under
the new contract to the Bachrach Motor Co., Inc.: The first on March 1, 1925, and the second on the
first of April of the same year.

While it is true that said last chattel mortgage contract was not approved by the board of directors of
the Zamboanga Transportation Co., Inc., whose approval was necessary in order to validate it
according to the by-laws of said corporation, the broad powers vested in Jose Erquiaga as president,
general manager, auditor, attorney or legal adviser, and one of the largest shareholders; the
approval of his act in connection with said chattel mortgage contract in question, with which two
other directors expressed satisfaction, one of which is also one of the largest shareholders, who
together with the president constitute a majority: The payments made under said contract with the
knowledge of said three directors are equivalent to a tacit approval by the board of directors of said
chattel mortgage contract and binds the Zamboanga Transportation Co., Inc. In truth and in fact
Jose Erquiaga, in his multiple capacity, was and is the factotum of the corporation and may be said
to be the corporation itself.

In the case of Halley First National Bank vs. G. V. B. Min. Co. (89 Fed., 439), the following rule was
laid down:

Where the chief officers of a corporation are in reality its owners, holding nearly all of its
stock, and are permitted to manage the business by the directors, who are only interested
nominally or to a small extent, and are controlled entirely by the officers, the acts of such
officers are binding on the corporation, which cannot escape liability as to third persons
dealing with it in good faith on the pretense that such acts were ultra vires.

We therefore conclude that when the president of a corporation, who is one of the principal
stockholders and at the same time its general manager, auditor, attorney or legal adviser, is
empowered by its by-laws to enter into chattel mortgage contracts, subject to the approval of the
board of directors, and enters into such contracts with the tacit approval of two other members of the
board of directors, one of whom is also a principal shareholder, both of whom, together with the
president, form a majority, and said corporation takes advantage of the benefits afforded by said
contract, such acts are equivalent to an implied ratification of said contract by the board of directors
and binds the corporation even if not formally approved by said board of directors as required by the
by-laws of the aforesaid corporation.

With respect to the second question, having arrived at the conclusion that the chattel mortgage
deed, which is the subject matter of this litigation, is valid and effective, the lack of previous
authorization and approval of the Public Utility Commission, while it, indeed, rendered said contract
ineffective, was cured by the nunc pro tunc authorization and approval granted by said Commission,
and the contract was made effective from its execution, for, as this court held in the case of
Zamboanga Transportation Co., vs. Public Utility Commission (50 Phil., 237), although the
authorization and approval of said Commission were needed to render said chattel mortgage
contract effective, they were not necessary for the intrinsic validity of said contract so long as the
legal elements necessary to give it juridical life are present.

In consideration of the premises, we are of the opinion and so hold, that while a chattel mortgage
contract entered into by a public service corporation is ineffective without the authorization and
approval of the Public Utility Commission, it may be valid if it contains all the material and formal
requisites demanded by the law for its validity, and said Public Utility Commission may make it
retroactive by nunc pro tunc authorization and approval.

Wherefore, the judgment appealed from in the case of Zamboanga Transporatation Co., Inc., vs.
Bachrach Motor Co., Inc., of the Court of First Instance of Zamboanga, G.R. No. 27694, is reversed
with costs against the appellee, and the judgment in the case of Bachrach Motor Co., Inc., vs.
Zamboanga Transportation Co., Inc., rendered by the Court of First Instance of Manila, is affirmed,
with the costs against the appellant. So ordered.

Avancena, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur.
 [G.R. No. L-12282. March 31, 1959.]

THE BOARD OF DIRECTORS and ELECTION COMMITTEE OF THE SMB WORKERS SAVINGS AND
LOAN ASSOCIATION, INC., ET AL., Petitioners, v. HON BIENVENIDO A. TAN, ETC., ET
AL., Respondent.

Panfilo M. Manguera and Restituto L. Opiz, for Petitioners.

Cipriano Cid & Associates for Respondents.

SYLLABUS

1. CORPORATION LAW; LABOR ASSOCIATIONS; PROVISIONS OF CONSTITUTION AND BY-LAWS SHOULD BE

COMPLIED WITH. — The constitution and by-laws of the petitioner association provide that notice of a
special meeting of members should be given at least five days before the date of the meeting. It appears
that the notice was posted on 26 March and the election was set for 28 March. Therefore, the five days
previous notice required would not be complied with.

2. ID.; ID.; AUTHORITY OF COURTS TO APPOINT COMMITTEE TO SUPERVISE ELECTION OF OFFICIALS. --

When it appears that a fair election cannot be had, the court in the exercise of its equity jurisdiction may
appoint a committee with the authority to call, conduct and supervise the election of the directors or the
association.

DECISION

PADILLA, J.:

Petitioners pray for a writ of certiorari with preliminary injunction.

On 17 January 1957 John de Castillo Et. Al., commenced a suit in the Court of First Instance of Manila to
declare null and void the election of the members of the board of directors of the SMB Workers Savings and
Loan Association, Inc. and of the members of the Election Committee for the year 1957 held on 11 12
January; to compel the board of directors of the association to call for and hold another election in
accordance with its constitution and by-laws and the Corporation Law; to restrain the defendants who had
been illegally elected as members of the board of directors from exercising the functions of their office; to
order the defendants to pay the plaintiffs attorney’s fees and costs of the suit; and to grant them other just
equitable relief (civil No. 31584, Annex A). The defendants filed an answer (Annex B), and after joinder of
issues the Court set the case for trial. On the day set for trial of the case, neither the defendants nor their
attorney appeared. The Court proceeded to receive the plaintiffs’ evidence. On 11 February, the Court
rendered judgment declaring the election held on 11 and 12 January null and void, ordering the defendants
to call for and hold another election in accordance with the constitution and by-laws of the association and
the Corporation Law, and sentencing the defendants to pay the plaintiffs the sum of P1,500 as attorney’s
fees, and to pay the costs of the suit (Annex C). 1 On 15 February, before the expiration of the time to
appeal, the plaintiffs moved for immediate execution of the judgment (Annex F). On 4 March the Court
granted the plaintiffs motion and issued the writ of execution prayed for (Annex G). On 9 March the
defendants moved for stay of execution of the judgment, for which they offered to file a supersedeas bond
in the amount to be fixed by the Court (Annex H). On 23 March the Court denied the defendants’ motion. In
compliance with the judgment rendered by the Court, on 26 March the election committee composed of
Quintin Tesalona, Manuel Dumaup and Jose Capino Santos set the meeting of the members of the
association for 28 March at 5:30 o’clock in the afternoon to elect the new members of the board of directors
(Annex J & 4). On 27 March the plaintiffs filed an ex-parte motion alleging that the election committee that
had called the meeting of members of the association is composed of the same members that had
conducted and supervised the election of the members of the board of directors that was declared null and
void by the Court; that in view thereof it would be inequitable to allow them to conduct and supervise again
the forth-coming election; that the election to be conducted and supervised by the said committee would not
be held in accordance with the constitution and by-laws of the association providing for five days notice to
the members before the election, since the notice was posted and sent out only on 26 March, and the
election would be held on 28 March, or two days after notice; that the notice that beginning 26 March any
member could secure his ballot and proxy from the office of the association is in violation of section 5,
article III of the constitution and by-laws, which prohibits voting by proxy in the election of members of the
board of directors, 2 and that the defendants did not show that arrangement is being made "to guarantee
that the election will be held in accordance with the constitution and by-laws and by the law." They prayed
that the Court appoint its representative or representatives, whose compensation shall be paid out of the
funds of the association, to supervise and conduct the election ordered by it (Annex 4). On the same day, 27
March, the Court entered an order providing as follows: c hanro b1e s virt ual 1aw li bra ry

. . . the Court hereby orders that the election scheduled for March 28, 1957 be, as it hereby is, cancelled,
and a committee of three is hereby constituted and appointed to call, conduct and supervise the election of
the members of the board of directors of the association for 1957, said committee to be composed of: Mr.
Candido C. Viernes as representative of the Court and to act as Chairman; and one representative each from
the plaintiffs and defendants, as members, as members. The committee is vested with the sole and
exclusive power and authority to call conduct and supervise the election of the members of the board of
directors of the association for the year 1957.

The chairman of the committee shall receive a compensation of P50.00 per day and the members thereof
P30.00 each per day, said compensation to be paid by the association.

SO ORDERED. (Annex E & 3.)

On 28 March the defendants moved for reconsideration of the foregoing order (Annex L). On 30 March the
Court denied the motion for reconsideration.

Claiming that in issuing the order of 27 March 1957 (Annexes E & 3) and in denying their motion for
reconsideration, the Court acted without or in excess of jurisdiction or with grave abuse of discretion; and
that there being no appeal or any plain, speedy and adequate remedy in the ordinary course of law, the
petitioners pray for a writ of certiorari to annul and set aside the order assailed, and a writ of preliminary
injunction to restrain the respondent court from enforcing its order of 27 March 1957 (Annexes E & 3) after
the filing of a bond in the amount to be fixed by this Court; for costs to be taxed against the respondents,
and for such other just and equitable relief as may be granted to them. On 14 May 1957, after the
petitioners had filed a bond in the sum of P200, this Court issued the writ of preliminary injunction prayed
for.

Section 3, article III, of the constitution and by-laws of the association provides: chan rob1e s virtual 1aw lib rary

Notice of the time and place of holding of any annual meeting, or any special meeting, of the members, shall
be given either by posting the same in a postage prepaid envelope, addressed to each member on record at
the address left by such member with the Secretary of the Association, or at his known post-office address,
or by delivering the same in person, at least five (5) days before the date set for such meeting. . . . In lieu
of addressing or serving personal notices to the members, notice of a regular annual meeting or of a special
meeting of the members may be given by posting copies of said notice at the different departments and
plants of the San Miguel Brewery Inc., not less than five (5) days prior to the date of the meeting. (Annex
K.)

Notice of a special meeting of members should be given at least five days before the date of the meeting. It
appears that the notice was posted on 26 March and the election was set for 28 March. Therefore, the five
days previous notice required would not be complied with.

As regards the creation of a committee of three vested with the authority to call, conduct and supervise the
election, and the appointment thereto of Candido C. Viernes as chairman and representative of the court
and one representative each from the parties, the Court in the exercise of its equity jurisdiction may appoint
such committee, it having been shown that the Election Committee provided for in section 7 of the by-laws
of the association that conducted the election annulled by the respondent court if allowed to act as such may
jeopardize the rights of the respondents.

In a proper proceeding a court of equity may direct the holding of a stockholders’ meeting under the control
of a special master, and the action taken at such a meeting will not be set aside because of a wrongful use
of the court’s interlocutory decree, where not brought to the attention of the court prior to the meeting. (18
C. J. S. 1270.)
A court equity may, on showing of good reason, appoint a master to conduct and supervise an election of
directors when it appears that a fair election cannot otherwise be had. Such a court cannot make directions
contrary to statute and public policy with respect to the conduct of such election. (19 C. J. S. 41)

The writ prayed for is denied and the writ of preliminary injunction heretofore issued dissolved, with costs
against the petitioners.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. and
Endencia, JJ., concur.

G.R. No. L-5883 November 28, 1953

DOMINGO PONCE AND BUHAY L. PONCE, petitioners,

vs.
DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of Manila, Branch I, and
POTENCIANO GAPOL, respondents.

Marcelino Lontok for petitioners.

Zavalla, Bautista and Nuevas for respondents.

PADILLA, J.:

This is a petition for a writ of certiorari to annul an order of the respondent court granting Potenciano
Gapol authority, pursuant to section 26, Act No. 1459, otherwise known as the Corporation Law, to
call a meeting of the stockholders of the Dagunoy Enterprises, Inc. and to preside at such meeting
by giving proper notice to the stockholders, as required by law or by laws of the corporation, until
after the majority of the stockholders present and qualified to vote shall have chosen one of them to
act as presiding officer of the meeting; another order denying a motion of the petitioners to have the
previous order set aside; and a third order denying a motion to the same effect as the one previously
filed.

The petitioners aver that the Daguhoy Enterprises, Inc., was duly registered as such on 24 June
1948; that on 16 April 1951 at a meeting duly called, the voluntary dissolution of the corporation and
the appointment of Potenciano Gapol as receiver were agreed upon and to that end a petitioner
Domingo Ponce; that instead of filing the petition for voluntary dissolution of the of the corporation as
agreed upon, the respondent Potenciano Gapol, who is the largest stockholder, charged his mind
and filed a complaint in the Court of First Instance of Manila (civil No. 13753) to compel the
petitioners to render an accounting of the funds and assets of the corporation, to reimburse it, jointly
and severally, in the sum of P4,500, the purchase price of a parcel of land acquired by the
corporation; P6,190 loaned to the wife of petitioner Domingo Ponce; and P8,000 spent by the latter
in his trip to the United States, or a total sum of P18,690, plus interest, or such sum as may be found
after the accounting shall have been rendered to have been misspent, misapplied, missappropriated
and converted by the petitioner Domingo Ponce to his own use and benefit; that on 18 May 1951 the
plaintiff in that case, the respondent Potenciano Gapol in this case, filed a motion praying that the
petitioners be removed as members of the board of directors which was denied by the court; that on
3 January 1952 respondent Potenciano Gapol filed a petition (civil No. 15445, Exhibit L), praying for
an order directing him to a call a meeting of the stockholders of the corporation and to preside at
such meeting in accordance with section 26 of the Corporation law; that two days later, without
notice to the petitioners and to the other members of the board of directors and in violation of the
Rules of Court which require that the adverse parties be notified of the hearing of the motion three
days in advance, the respondent court issued the order as prayed for (Exhibit M); that the petitioners
learned only of this order of the court on 27 February, when the Bank of America refused to
recognize the new board of directors elected at such meeting and returned the checks drawn upon it
by the said board of directors; that the election of Juanito R. Tianzon as member of the board of
directors of the corporation he must be a member of the Legionarios del Trabajo, as required and
provided for in article 7 of the by-laws of the corporation; that on 5 March the petitioners filed a
petition in the respondent court to have the order of 5 January set aside but on April, the date set for
the hearing of the petition, as the respondent judge was on leave vacation judge directed its transfer
to the branch of the respondent judge; that without having set the motion for hearing, the respondent
court denied the motion of 5 March in its order of 7 May; that on 14 May the petitioners filed another
motion inviting the attention of the respondent court to the irregularity and illegality of its procedure
and setting the motion for hearing on 21 May, but the court denied the motion by its order of 13
June.

The only question to determine in this case is whether under and pursuant to section 26 of Act No.
1459, known as the Corporation law, the respondent court may issue the order complained of. Said
section provides: —

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

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

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

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

Article 20 of the by-laws in part provides:

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

The requirement that "on the showing of good cause therefor," the court may grant to a stockholder
the authority to call such meeting and to preside thereat does not mean that the petition must be set
for hearing with notice served upon the board of directors. The respondent court was satisfied that
there was a showing of good cause for authorizing the respondent Potenciano Gapol to call a
meeting of the stockholders for the purpose of electing the board of directors as required and
provided for in the by-laws, because the chairman of the board of directors called upon to do so had
failed, neglected, or refused to perform his duty. It may be likened to a writ of preliminary injunction
or of attachment which may be issued ex-parte upon compliance with the requirements of the rules
and upon the court being satisfied that the same should be issue. Such provisional reliefs have not
been deemed and held as violative of the due process of law clause of the Constitution.

In several state of the Union1 the remedy which may be availed of our resorted to in a situation such
as the one brought about in this case is mandamus to compel the officer or incumbent board of
directors to perform a duties specifically enjoined by law or by-laws, to wit: to call a meeting of the
stockholders. Dela ware is the estate that has a law similar to ours and there the chancellor of a
chancery court may summarily issue or enter an order authorizing a stockholder to call a meeting of
the stockholders of the corporation and preside thereat.2 It means that the chancellor may issue such
order without notice and hearing.

That the relief granted by the respondent court lies within its jurisdiction is not disputed. Having the
authority to grant the relief, the respondent court did not exceed its jurisdiction; nor did it abuse its
discretion in granting it.

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

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

The petition is denied, with costs against the petitioners.

Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo, Bautista Angelo and Labrador,
JJ., concur.

G.R. No. L-23428 November 29, 1968

DETECTIVE & PROTECTIVE BUREAU, INC., petitioner,

vs.
THE HONORABLE GAUDENCIO CLORIBEL, in his capacity as Presiding Judge of Branch VI,
Court of First Instance of Manila, and FAUSTINO S. ALBERTO, respondents.

Crispin D. Biazas and Associates and Jose S. Sarte for petitioner.

Gaudencio T. Bocobo for respondents.

ZALDIVAR, J.:

The complaint, in Civil Case No. 56949 of the Court of First Instance of Manila, dated May 4, 1964,
filed by Detective and Protective Bureau, Inc., therein plaintiff (petitioner herein) against Fausto S.
Alberto, therein defendant (respondent herein), for accounting with preliminary injunction and
receivership, alleged that plaintiff was a corporation duly organized and existing under the laws of
the Philippines; that defendant was managing director of plaintiff corporation from 1952 until January
14, 1964; that in June, 1963, defendant illegally seized and took control of all the assets as well as
the books, records, vouchers and receipts of the corporation from the accountant-cashier, concealed
them illegally and refused to allow any member of the corporation to see and examine the same; that
on January 14, 1964, the stockholders, in a meeting, removed defendant as managing director and
elected Jose de la Rosa in his stead; that defendant not only had refused to vacate his office and to
deliver the assets and books to Jose de la Rosa, but also continued to perform unauthorized acts for
and in behalf of plaintiff corporation; that defendant had been required to submit a financial
statement and to render an accounting of his administration from 1952 but defendant has failed to do
so; that defendant, contrary to a resolution adopted by the Board of Directors on November 24,
1963, had been illegally disposing of corporate funds; that defendant, unless immediately
restrained ex-parte, would continue discharging the functions of managing director; and that it was
necessary to appoint a receiver to take charge of the assets and receive the income of the
corporation. Plaintiff prayed that a preliminary injunction ex-parte be issued restraining defendant
from exercising the functions of managing director and from disbursing and disposing of its funds;
that Jose M. Barredo be appointed receiver; that, after judgment, the injunction be made permanent
and defendant be ordered to render an accounting.

Herein respondent Judge, the Honorable Gaudencio Cloribel, set for hearing plaintiff's prayer for
ancillary relief and required the parties to submit their respective memoranda. On June 18, 1964,
respondent Judge granted the writ of preliminary injunction prayed for, conditioned upon plaintiff's
filing a bond of P5,000.00. Plaintiff filed the bond, but while the same was pending approval
defendant Fausto S. Alberto filed, on July 1, 1964, a motion to admit a counter-bond for the purpose
of lifting the order granting the writ of preliminary injunction. Inspite of the opposition filed by plaintiff,
respondent Judge issued, on August 5, 1964, an order admitting the counterbond and setting aside
the writ of preliminary injunction.

On the belief that the order approving the counter-bond and lifting the writ of preliminary injunction
was contrary to law and the act of respondent Judge constituted a grave abuse of discretion, and
that there was no plain, speedy and adequate remedy available to it, plaintiff filed with this Court the
instant petition for certiorari, praying that a writ of preliminary injunction enjoining defendant Fausto
S. Albert from exercising the functions of managing director be issued, and that the order dated
August 5, 1964 of respondent Judge approving the counter-bond and lifting the writ of preliminary
injunction he had previously issued be set aside and declared null and void. The Court gave due
course to the petition but did not issue a preliminary injunction.

In his answer, now respondent Fausto S. Alberto traversed the material allegations of the petition,
justified the order complained of, and prayed for the dismissal of the petition.

From the pleadings, it appears that the only issue to be resolved is whether the order of respondent
Judge dated August 5, 1964, admitting and approving the counter-bond of P5,000 and setting aside
the writ of preliminary injunction granted in his order dated June 18, 164, was issued contrary to law
and with grave abuse of discretion.

Now petitioner contends that the setting aside of the order granting the writ was contrary to law and
was done with a grave abuse of discretion, because: (1) the motion to admit defendant's counter-
bond was not supported by affidavits showing why the counter-bond should be admitted, as required
by Section 6 of Rule 58; (2) the preliminary injunction was not issued ex-parte but after hearing, and
the admission of the counter-bond rendered said writ ineffective; (3) the writ was granted in
accordance with Rule 58 of the Rules of Court and established precedents' (4) public interest
required that the writ be not set aside because respondent had arrogated unto himself all the powers
of petitioning corporation, to the irreparable damage of the corporation; and that (5) the counter-bond
could not compensate petitioner's damage.

1. The first reason given by petitioner in support of its contention that the dissolution of the writ of
preliminary injunction was contrary to law is that the motion to admit respondent's counter-bond for
the dissolution of the writ was not supported by affidavits as required by section 6 of Rule 58 of the
Rules of Court. The controverted motion, however, does not appear in the record. However, the
record shows that respondent Alberto had filed a verified answer to the complaint and a verified
opposition to the issuance of the writ of preliminary injunction.

Regarding the necessity of verification of the motion for dissolution of a writ of preliminary injunction,
this Court has ruled that the requirement of verification is not absolute but is dependent on the
circumstances obtaining in a particular case. In the case of Sy Sam Bio, et al. vs. Barrios and
Buyson Lampa,1 the only question raised was whether the respondent Judge exceeded his
jurisdiction and abused his discretion in setting aside an order directing the issuance of a writ of
preliminary injunction. In maintaining the affirmative, petitioners in that case alleged that the
questioned order was issued in violation of the provisions of Section 169 of Act 190(which is one of
the sources of Sec. 6 of Rule 58 of the revised Rules of Court)inasmuch as the Judge set aside said
order and directed the dissolution of the preliminary injunction without any formal petition of the
parties and without having followed the procedure prescribed by the statute. There was, however, a
verbal application for the dissolution of the writ, based upon the ground of the in suficiency of the
complaint which was the basis of the application for the issuance of said writ of preliminary
injunction. This Court said:

Section 169 of Act 1909 does not prescribe the manner of filing the application to annul or
modify a writ of preliminary injunction. It simply states that if a temporary injunction be
granted without notice, the defendant, at any time before trial, may apply, upon reasonable
notice to the adverse party, to the judge who granted the injunction, or to the judge of the
court of which the action was brought, to dissolve or modify the same.

On the strength of the decision in the above-cited case, this Court in Caluya, et al. vs. Ramos, et
al.,2 said;

Petitioners' criticism that the motion to dissolve filed by the defendants in Civil Case No.
4634 was not verified, is also groundless inasmuch as even an indirect verbal application for
the dissolution of an ex parteorder of preliminary injunction has been held to be a sufficient
compliance with the provisions of Section 6 of Rule 60 (Moran, Comments on the Rules of
Court, Second Edition, Vol. II, p. 65, citing the case of Sy Yam Bio v. Barrios, etc., 63 Phil.
206), the obvious reason being that said rule does not prescribe the form by which an
application for the dissolution or modification of an order of preliminary injunction should be
presented.

If according to the above rulings, Section 6 of Rule 60 (now sec. 6, Rule 58) of the Rules of Court did
not require any form for the application for the dissolution of the writ of preliminary injunction, then
respondent Fausto Alberto's motion to lift the preliminary injunction in the court below need not be
verified, and much less must the motion be supported by affidavits, as urged by petitioner.

However, in Canlas, et al. vs. Aquino, et al.,3 this Court ruled that a motion for the dissolution of a
writ of preliminary injunction should be verified. In that case, respondent Tayag filed an unverified
motion for the dissolution of a writ of preliminary injunction, alleging that the same "would work great
damage to the defendant who had already spend a considerable sum of money" and that petitioners
"can be fully compensated for any damages that they may suffer." The court granted the motion and
dissolved the preliminary injunction. In an original action for a writ of certiorari filed with this Court to
annual said order, this Court remarked in part:

Petitioners herein are entitled to the writ prayed for. The motion of respondent Tayag for the
dissolution of the writ of preliminary injunction issued on October 22, 1959, was unverified....

From the precedents quoted above, as well as from the terminology of Section 6 of Rule 58 of the
new Rules of Court, it is evident that whether the application for the dissolution of the writ of
preliminary injunction must be verified or not depends upon the ground upon which such application
is based. If the application is based on the insufficiency of the complaint, the motion need not be
verified. If the motion is based on the ground that the injunction would cause great damage to
defendant while the plaintiff can be fully compensated for such damages as he may suffer, the
motion should be verified.

In the instant case, it is alleged by petitioner that the motion for the dissolution of the writ of
preliminary injunction was not verified. This allegation was not denied in the answer. But because
said motion does not appear in the record of the case now before this Court, We cannot determine
what are the grounds for the dissolution that are alleged therein, and so We cannot rule on whether
the motion should have been verified or not. This Court, therefore, has to rely on the order of
respondent Judge, dated August 5, 1964, which states that "the filing of the counter-bond is in
accordance with law." Consequently, the first ground alleged by petitioner must be brushed aside.

2. The second and third reasons alleged by petitioner in its petition for certiorari assume that a
preliminary injunction issued after hearing and in accordance with Rule 58 cannot be set aside. This
contention is untenable. The provision of Section 6 of Rule 58 that "the injunction may be refused,
or, if granted ex parte, may be dissolved" can not be construed as putting beyond the reach of the
court the dissolution of an injunction which was granted after hearing. The reason is because a writ
of preliminary injunction is an interlocutory order, and as such it is always under the control of the
court before final judgment. Thus, in Caluya, et al. vs. Ramos, et al.,4 this Court said:

The first contention of the petitioners is that, as said injunction was issued after a hearing,
the same cannot be dissolved, specially on the strength of an unverified motion for
dissolution and in the absence to support it. Reliance is placed on Section 6 of Rule 60 of the
Rules of Court which provides that "the injunction may be reduced, or, if granted ex parte,
maybe dissolved," thereby arguing that if an injunction is not issued ex partethe same cannot
be dissolved. The contention is clearly erroneous. Although said section prescribes the
grounds for objecting to, or for moving the dissolution of, a preliminary injunction prior to its
issuance or after its granting ex parte, it does not thereby outlaw a dissolution if the
injunction has been issued after a hearing. This is to be so, because a writ of preliminary
injunction is an interlocutory order which is always under the control of the court before final
judgment. (Manila Electric Company vs. Artiaga and Green, 50 Phil. 144, 147).

This Court has also ruled that the dissolution of a writ of preliminary injunction issued after hearing,
even if the dissolution is ordered without giving the other party an opportunity to be heard, does not
constitute an abuse of discretion and may be cured not by certiorari but by appeal. In Clarke vs.
Philippine Ready Mix Concrete Co., Inc., et al.,5 one of the issues presented was whether a writ of
preliminary injunction granted the plaintiff by a trial court after hearing, might be dissolved upon an
ex parte application by the defendant, and this Court ruled that:

The action of a trial court in dissolving a writ of preliminary injunction already issued after
hearing, without giving petitioner an opportunity to be heard, does not constitute lack or
 excess of jurisdiction or an abuse of discretion, and any irregularity committed by the trial
court on this score may be cured not by certiorari but by appeal.

3. The fourth reason alleged by petitioner in support of its stand is that public interest demanded that
the writ enjoining respondent Fausto Alberto from exercising the functions of managing director be
maintained. Petitioner contended that respondent Alberto had arrogated to himself the power of the
Board of Directors of the corporation because he refused to vacate the office and surrender the
same to Jose de la Rosa who had been elected managing director by the Board to succeed him.
This assertion, however, was disputed by respondent Alberto who stated that Jose de la Rosa could
not be elected managing director because he did not own any stock in the corporation.

There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If
he did not own any share of stock, certainly he could not be a director pursuant to the mandatory
provision of Section 30 of the Corporation Law, which in part provides:

There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation. If
he did not own any share of stock, certainly he could not be a director pursuant to the mandatory
provision of Section 30 of the Corporation Law, which in part provides:

Sec. 30. Every director must own in his own right at least one share of the capital stock of
the stock corporation of which he is a director, which stock shall stand in his name on the
books of the corporations....

If he could not be a director, he could also not be a managing director of the corporation, pursuant to
Article V, Section 3 of the By-Laws of the Corporation which provides that:

The manager shall be elected by the Board of Directors from among its members.... (Record,
p. 48)

If the managing director-elect was not qualified to become managing director, respondent Fausto
Alberto could not be compelled to vacate his office and cede the same to the managing director-
elect because the by-laws of the corporation provides in Article IV, Section 1 that "Directors shall
serve until the election and qualification of their duly qualified successor."

4. The fifth reason alleged by herein petitioner in support of its contention that respondent Judge
gravely abused his discretion when he lifted the preliminary injunction upon the filing of the counter-
bond was that said counter-bond could not compensate for the irreparable damage that the
corporation would suffer by reason of the continuance of respondent Fausto Alberto as managing
director of the corporation. Respondent Alberto, on the contrary, contended that he really was the
owner of the controlling interest in the business carried on the name of the petitioner, having
invested therein a total of P57,727.29 as against the sum of P4,000 only invested by one other
director, Jose M. Barredo. We find that there was a question as to who own the controlling interest in
the corporation. Where ownership is in dispute, the party in control or possession of the disputed
interest is presumed to have the better right until the contrary is adjudged, and hence that party
should not be deprived of the control or possession until the court is prepared to adjudicate the
controverted right in favor of the other party.6

Should it be the truth that respondent Alberto is the controlling stockholder, then the damages said
respondent would suffer would be the same, if not more, as the damages that the corporation would
suffer if the injunction were maintained. If the bond of P5,000 filed by petitioner for the injunction
would be sufficient to answer for the damages that would be suffered by respondent Alberto by
reason of the injunction, there seems to be no reason why the same amount would not be sufficient
to answer for the damages that might be suffered by the petitioning corporation by reason of the
lifting of the injunction. The following ruling of this Court has a persuasive application in this case:

The rule that a court should not, by means of a preliminary injunction, transfer property in
litigation from the possession of one party to another is more particularly applicable where
the legal title is in dispute and the party having possession asserts ownership in himself.7

Let it be stated, in relation to all the reason given by petitioner, that it is a settled rule that the
issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights
of a party in a pending case is entirely within the discretion of the court taking cognizance of the
case — the only limitation being that this discretion should be exercised based upon the grounds
and in the manner provided by law,8 and it is equally well settled that a wide latitude is given under
Section 7 of Rule 58 of the Rules of Court to the trial court to modify or dissolve the injunction as
justice may require. The court which is to exercise that discretion is the trial court, not the appellate
court.9 The exercise of sound judicial discretion by the lower court in injunctive matters should not be
interfered with except in cases of manifest abuse.10 In the instant case, We find that petitioner failed
to show manifest abuse of discretion by respondent Judge in setting aside the writ of preliminary
injunction.

There is, however, one vital reason why the instant petition for certiorari should be denied. And it is,
that from the order dissolving the writ of preliminary injunction, the petitioner has gone directly to this
Court without giving the respondent Judge (or trial court) a chance or opportunity to correct his error,
if any, in an appropriate motion for reconsideration. An omission to comply with this procedural
requirement justifies a denial of the writ applied for.11

The instant case is not one of the exceptions in the application of this rule, which are: where the
questions of jurisdiction has been squarely raised, argued before, submitted to, and met and decided
by the respondent court; where the questioned order is a patent nullity; and where there is a
deprivation of the petitioner's fundamental right to due process.12

It being our considered view that respondent Judge had not committed grave abuse of discretion in
issuing the order dated August 5, 1964 lifting the writ of preliminary injunction which had previously
been granted in the order dated June 18, 1964, and the herein petition for certiorari having been filed
without previously complying with a well settled procedural requirement, there is no alternative for
this Court but to order its dismissal.

WHEREFORE, the instant petition for certiorari with preliminary injunction is dismissed, with costs
againsts the petitioner. It is so ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Fernando and Capistrano,
JJ., concur.

G.R. No. L-26555 November 16, 1926

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J. LACSON, petitioners,

vs.
Honorable MARIANO DE LA ROSA, Auxiliary Judge of First Instance of Occidental Negros,
AGUSTIN CORUNA, MAURO LEDESMA and BINALBAGAN ESTATE, INC., respondents.

Roman J. Lacson, for petitioners.

The respondent judge in his own behalf.
The respondent corporation in its own behalf.
R. Nolan and Feria and La O for the respondents Coruna and Ledesma.

STREET, J.:

This is an original petition for the writ of certiorari whereby the petitioners, Baldomeo Roxas, Enrique
Echaus, and Roman J. Lacson, seek to procure the abrogation of an order of the respondent judge
granting a preliminary injunction in an action in the Court of First Instance of Occidental Negros,
instituted by Agustin Coruna and Mauro Ledesma against the petitioners and the Binalbagan Estate,
Inc. The cause is now before us upon the issues made by the answers filed by the respondents.

It appears that the Binalbagan Estate, Inc., 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 February 1, 1926, the general annual meeting of the shareholders of the Binalbagan Estate, Inc.,
took place, 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. Upon said occasion
Heilbronn, by virtue of controlling the majority of the shares, 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. We say presumably, because in the
present proceedings an issue of fact is made by the respondents upon the point whether the three
individuals named have been regularly substituted for their several predecessors. In the view we
take of the case it is not necessary to determine this issue; and we shall assume provisionally that
the three petitioners are the lawful components of the voting trust.

Although the present officers of the Binalbagan Estate, Inc., were elected by the representative of
the voting trust, the present trustee are apparently desirous of ousting said officers, without awaiting
the termination of their official terms at the expiration of one year from the date of their election. In
other to effect this purpose 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."
Within a few days after said notice was issued Agustin Coruña, as member of the existing board,
and Mauro Ledesma, as a simple shareholder of the corporation, instituted a civil action (No. 3840)
in the Court of First Instance of Occidental Negros against the trustees and the Binalbagan Estate,
Inc., for the purpose of enjoining the meeting completed in the notice above-mentioned.

In response to a proper for a preliminary injunction, in connection with said action, the respondent
judge issued the restraining order, or preliminary injunction, which gave rise to the present petition
for the writ of certiorari. In the dispositive part of said order the Binalbagan Estate, Inc., its lawyers,
agents, representatives, and all others who may be assisting or corroborating with them, are
restrained from holding the general shareholders' meeting called for the date mentioned and from
electing new directors for the company in substitution of the present incumbents, said injunction to
be effective until further order of the court. it is now asserted here by the petitioners that the making
of this order was beyond the legitimate powers of the respondent judge, and it is accordingly prayed
that said order be set aside.

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

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

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

It is instituted that there was some irregularity or another in the election of the present directorate.
We see nothing upon which this suggestion can be safely planted; And at any rate the present board
of directors are de facto incumbents of the office whose acts will be valid until they shall be lawfully
removed from the office or cease from the discharge of their functions. In this case it is not
necessary for us to agitate ourselves over the question whether the respondent judge properly
exercised his judicial discretion in granting the order complained of. If suffices to know that in making
the order he was acting within the limits of his judicial powers.
It will be noted that the order in question enjoins the defendants from holding the meeting called for
August 16; and said order must not be understood as constituting any obstacle for the holding of the
regular meeting at the time appointed in the by-laws of the corporation.

For the reasons stated the petition will be denied, and it is so ordered, with costs.

Johnson, Malcom, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

G.R. No. L-43413 August 31, 1937

HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE,

as stockholders for an in behalf and for the benefit of the corporation, Parañaque Rice Mill,
Inc. and the other stockholders who may desire to join, plaintiffs-appellees,
vs.
TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO PASCUAL, and BASILISA
RODRIGUEZ,defendant-appellants.

P. Masalin and A. Sta. Maria for appellants.

Eulogio P. Revilla and Barrera and Reyes for appellees.

LAUREL, J.:

The plaintiff and the defenant aree all stockholders and member of the board of directors of the
"Parañaque Rice Mill, Inc., "a corporation organized for the purpose of operating a rice mill in the
municipality of Parañaque, Province of Rizal. On September 6, 1932, a complaint entitle "Higinio
Angeles, Jose de Lara, Aguedo Bernabe, as stockholders, for and in behalf of the corporation,
Parañaque Rice Mill, Inc., and other stockholders of said corporation who may desire to join, plaintiff,
vs. Teodorico B. Santos, Estanislao Mayuga, Apolonio Pascual, and Basilisa Rodriguez, defendant
was filed with the Court of First Instance of Rizal. After formal allegation relative to age and
residence of the parties and the due incorporation of the Parañaque Rice Mill, Inc., the complaint
avers subtantially the following: (a) That the plaintiffs are stockholders and constitute the minority
and the defendants are also stockholers and constitute the majority of the board of directors of the
Parañaque Rice Mill, Inc.; (b) that at an extraordinary meeting held on February 21, 1932, the
stockholders appointed an investigation committee of which the plaintiff Jose de Lara was chairman
and the stockholers Dionisio Tomas and Aguedo Bernabe were members, to investigate and
determine the properties, operations, and losses of the corporation as shown in the auditor's report
corresponding to the year 1931, but the defendants, particularly Teodorico B. Santos, who was the
president of the corporation, denied access to the properties, books and record of the corporation
which were in their possession (c) That the defendant Teodorico B. Santos, in violation of the by-
laws of the corporation, had taken possession of the books, vouchers, and corporate records as well
as of the funds and income of the Parañaque Rice Mill, Inc., all of which, according to the by-laws,
should be under the exclusive control and possession of the secretary-treasurer, the plaintiff Aguedo
Bernabe; (d) That the said Teodorico B. Santos, had appropriated to his own benefit properties,
funds, and income of the corporation in the sum of P10,000; (e) that Teodoro B. Santos, for the
purpose of illegally controlling the affairs of the corporation, refuse to sign and issue the
corresponding certificate of stock for the 600 fully paid-up share of the plaintiff, Higinio Angeles, of
the total value of P15,000; ( f ) that notwithstanding written requests made in conformity with the by-
laws of the corporation of three members of the board of directors who are holders of more than
one-third of the subscribed capital stock of the corporation, the defendant Teodorico B. Santos as
president of the corporation refuse to call a meeting of the board of directors and of the stockholers;
(g) that in violation of the by-laws of the corporation, the defendant who constitute the majority of the
board of directors refused to hold ordinary monthly meetings of the board since March, 19332; (h)
that Teodorico B. Santos as president of the corporation, in connivance with his
co-defendants, was disposing of the properties and records of the corporation without authority from
the board of directors or the stockholders of the corporation and without making any report of his
acts to the said board of directors or to any other officer of the corporation, and that, to prevent any
interferrence with or examination of his arbitrary acts, he arbitrarily suspended plaintiff Jose de Lara
from the office of general manager to which office the latter had been lawfully elected by the
stockholders; and (i) that the corporation had gained about P4,000 during the first half of the year
1932, but that because of the illegal and arbitrary acts of the defendants not only the funds but also
the books and records of the corporation are in danger of disappearing.

The complaint prays: (a) That after the filing of the bond in an amount to be fixed by the court,
Melchor de Lara of Parañaque, Rizal, be appointed receiver of the properties, funds and business of
the Parañaque Rice Mill, Inc., as well as the books and record thereof, with authority to continue the
business of the corporation; (b) that the defendant Teodorico B. Santos be ordered to render a
detailed accounting of the properties, funds and income of the corporation from the year 1927 to
date; (c) that the said defendant be required to pay to the corporation the amount of P10,000 and
other amounts which may be found due to the said corporation as damages or for my other cause,
(d) that said defendant be ordered to sign the certificate of stock subscribed to and paid by the
plaintiff Higinio Angeles; and (e) that the members of the board of directors of the Parañaque Rice
Mill, Inc., be removed and an exrtraodinary meeting of the stockholders called for the purpose of
electing a new board of directors.

On the date of the filling of the complaint, September 6, 1932, the court issue an ex parte order of
receivership appointing Melchor de Lara as receiver of the corporation upon the filling of a bond of
P1,000 by the plaintiffs-appellees. The bond of the receiver was fixed at P4,000.

Upon an urgent motion of the defendants-appellants setting forth the reasons why Melchor de Lara
should not have been appointed receiver, and upon agreement of the parties, the trial court, by order
of September 13, 1932, appointed Benigno Agco, as receiver, in lieu of Melchor de Lara. About a
month after, or on October 14, 1932, the court, after considering the memoranda filed by both parties
revoked its order appointing Agco as receiver.

On July 12, 1933, the defendants-appellants presented their amended answer to the complaint,
containing a general and specific denial, and alleging as special defense that the defendant
Teodorico B. Santos refused to sign the certificate of stock in favor of the plaintiff Higinio Angeles for
600 shares valued at P15,00, because the board of directors decided to give Higinio Angeles only
320 shares of stock worth P8,000. The answer contains a counter-claim for P5,000 alleged illegal
and malicious procurement by the plaintiffs of an ex parte order of receivership. Damages in the
amount of P2,000 are also alleged to have been suffered by the defendants by reason of the failure
of the plaintiffs to present their grievances to the Board of directors before going to court. The
amended answer sets forth, furthermore, a cross-complaint against the plaintiffs, and in behalf of the
Parañaque Rice Mill, Inc., based on the alleged failure of the plaintiff Higinio Angeles to render a
report of his administration of the corporation from February 14 to June 30, 1928, during which time
the corporation is alleged to have accrued earnings of approximately P3,000. In both the counter
claim and cross-complaint Parañaque Rice Mill, Inc. is joined as party defendant.

On July 24, 1934, the plaintiffs-appellees renewed their petition for the appointment of a
receiver pendente lite alleging, among other things, that defendant Teodorico B. Santos was using
the funds of the corporation for purely personal ends; that said Teodorico B. Santos was managing
to the interest of the Corporation and its stockholders; that said defendant did not render any
account of his management or for the condition of the business of the corporation; that since 1932
said defendant called no meeting of the board of directors or of the stockholders thus enabling him
to continue holding, without any election, the position of present and, finally, that of manager; and
that, without the knowledge and consent of the stockholders and of the board of directors, the said
defendant installed a small rice mill for converting rice husk into "tiqui-tiqui", the income of which was
never turned over or reported to the treasurer of the corporation.

The defendant-appellants objected to the petition for the appointment of a receiver on the ground,
among others, that the court had no jurisdiction over the Parañaque Rice Mill, Inc., because it had
not been include as party defendant in this case and that, therefore the court could not properly
appoint a receiver of the corporation pendente lite.

After hearing both parties, the trial court by order of October 31, 1934, appointed Emilio Figueroa, as
receiver of the corporation, after giving a bond in the amount of P2,000. An urgent for the
reconsideration of this order filed by counsel for the defendant-appellant on November 3, 1934, was
denied by the court on November 7, 1934.

On November 8, 1934, the trial court, having heard the case on its merits rendered a decision, the
dispositive part of which is as follows:

Por todo lo expuesto el Juzgado fall este asunto:

1. Ordenando al demandado Teodorico B. Santos a rendircuenta ellada de las propiedads,

fondos e ingresos dela corporacion Parañaque Rice Mill, Inc., de el año 1931 hasta la fecha;

2. Condenando a dicho demandado a pagar a la corporacion Parañaque Rice Mill, Inc.,

cualesquiera cantida o cantidades que resultate en deber a dicha corporacion; de acuerdo
con dicha rendicion de cuentas;

3. Declarando al demanante Higinio M. Angeles con derecho a tener expedido a su nombre

600 acciones por valor par de P15,000.

4. Destituyendo a los demandados de su cargo como directores e la corporacion hasta la

nueva eleccion por los accionistas que se convocara una vez firme esta sentencia; y

5. Condenando a los demandados a pagar las costas.

On November 21, 1934, the defendants-appellants, moved for reconsideration of the decision and at
the same time prayed for the dismissal of the case, because of defect of parties defendant.

On December 6, 1934, the Parañaque Rice Mill, Inc., thru counsel for the defendants, entered a
special appearance for the sole purpose of objecting to the order of the court of October 31, 1934,
appointing a receiver, on the ground that the Parañaque Rice Mill, Inc., was not a party to the
proceedings. And on December 8, 1934, the defendants excepted to the decision of the trial court
and moved for a new trial on the ground that the evidence presented was insufficient to justify the
decision and that said decision was contrary to law. The motions for reconsideration and new trial
and the special appearance were, by separate orders bearing date of December 19, 1934, denied by
the trial court. The case was finally elevated to this court by bill of exceptions.

The defendants-appellants submit the following assignment of errors:

1. The lower court erred in holding that it has jurisdiction to appoint a receiver o the
corporation, "Parañaque Rice Mill, Inc.," on October 31, 1934.
 2. The lower court erred in overruling the motion of the defendants the include the defendant
corporation as party defendant and in holding that it is not a necessary party.

3. The lower court erred in not granting a motion for a new trial because there is a defect of
party defendant.

4. The lower court erred in not dismissing the case because a necessary defendant was not
made a party in the case.

5. The lower court erred in ordering the defendant Teodorico B. Santos to render a detailed
accounting of the properties, funds and income of the corporation "Parañaque Rice Mill,
Inc.," from the year 1931 to this date.

6. The lower court erred in condemning the defendant Teodorico B. Santos to pay the
corporation whatever sum or sums which may be found owing to said corporation, in
accordance with the said accounting to be one by him.

7. The lower court erred in ordering the destitution of the defendants from their office as
members of the board of directors of the corporation, until the new election of the
stockholders which shall be held once the decision has become final..

8. The lower court erred in declaring that Higino Angeles is entitled to have in his name 600
shares of stock of the par value of P15,000.

9. The lower court erred in overruling and denying appellants' motion for the reconsideration
and the dismissal of the case dated November 21, 1934.

10. The lower court erred in denying the motion of these appellants for new trial.

In their discussion of the first, second, third, and fourth assignment of error, the defendants-
appellants vigorously assert that the Parañaque Rice Mill, Inc., is a necessary party in this case, and
that not having been made a party, the trial court was without jurisdiction to appoint a receiver and
should have dismissed the case.

There is ample evidence in the present case to show that the defendants have been guilty of breach
of trust as directors of 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 corporation by
allegation of the stockholers. But the board of directors, or the majority thereof, in drawing to
themselves the power of the corporation, occupies a position of trusteeship in relation to the minority
of the stock in the sense that the board should exercise good faith, care and diligence in the
administration of the affairs of the corporation and should protect not only the interest of the majority
but also those of the minority of the stock. Where a majority of the board of directors wastes or
dissipates the 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 intracorporate
remedy is unavailing, will entertain a suit filed by the minority members of the board of directors, for
and in behalf of the corporation, to prevent waste and dissipation and the commission of illegal acts
and otherwise redress the injuries of the minority stockholders against the wrongdoing of the
majority. The action in such a case is said to be brought derivatively in behalf of the corporation to
protect the rights of the minority stockholers thereof (7 R. C. L., pars. 293 and 294, and authority
therein cited; 13 Fletcher, Cyc. of Corp., pars. 593, et seq., an authorities therein cite).
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not
of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholers. An illustration of a suit of this kind is found in the case of Pascual vs.
Del Sanz Orozco (19 Phil., 82), decided by this court as early as 1911. In that case, the Banco
Español-Filipino suffered heavy losses due to fraudulent connivance between a depositor and an
employee of the bank, which losses, it was contened, could have been avoided if the president and
directors has been more vigilant in the administration of the affairs of the bank. The stockholers
constituting the minority brought a suit in behalf of the bank against the directors to recover
damages, and this over the objection of the majority of the stockholers and the directors. This court
held that the suit properly be maintained.

The contention of the defendants in the case at bar that the Parañaque Rice Mill, Inc., should have
been brought in as necessary party and the action maintained in its name and in its behalf directly
states the general rule, but not the exception recognize by this court in the case of Everrett vs. Asia
Banking Corporation (49 Phil., 512, 527). In that case, upon invocation of the general rule by the
appellees there, this court said:

Invoking the well-known rule that shareholers cannot ordinarily sue in equity to redress
wrong done to the corporation, but that the action must be brought by the board of directors,
the appellees argue — and the court below held — that the corporation Teal & Company is a
necessary party plaintiff and that the plaintiff stockholder, not having made any demand on
the board to bring the action, are not the proper parties plaintiff. But, like most rules, the rule
in question has its exceptions. It is alleged in the complaint and, consequently, admitted
through the demurrer that the corporation Teal & Company is under the complete control of
the principal defendants in the case, and, in these circumstances it is obvious that a demand
upon the board of directors to institute action and prosecute the same effectively would have
been useless, and the law does not require litigants to perform useless acts. (Exchange
Bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs. Black Warrior Copper
Co., 15 Ariz., 1; Wickersham vs. Crittenen, 106 Cal., 329; Glem vs. Kittanning Brewing Co.,
259 Pa., 510; Hawes vs. Contra Costa Water Company, 104 U.S., 450.)

The action having been properly brought and by the lower court entertained it was within its power,
upon proper showing, to appoint a receiver of the corporation pendente lite (secs. 173, 174, et seq.
Code of Civil Procedure). The appointment of a receiver upon application of the minority stockholers
is power to be exercised with great caution. But this does not mean that right of the minority
stockholers may be entirely disregarded, and where the necessity has arisen, the appointment of a
receiver for a corporation is a matter resting largely in the sound discretion of the trial court. Counsel
for appellants argue that the appointment of a receiver pendente lite in the present case has
deprived the corporation, Parañaque Rice Mill, Inc., of property without due process of law. But it is
too plain to require argument that the receiver was precisely appointed to preserve the properties of
the corporation. The receivership in this case shall continue until a new board of directors shall have
been elected and the corporation.

The first, second, third, and fourth assignments of error are, therefore, overruled.

The appellants contend in their fifth and sixth assignments of error that lower court erred in ordering
the defendant, Tedorico B. Santos, to render a detailed accounting of the properties, funds and
income of the corporation, Parañaque Rice Mill., Inc., from the year 1931 and in condemning him to
pay "the corporation whatever sum or sums which may be found owing to said corporation, in
accordance with said accounting to be done by him." We note that the lower court in its decision not
only orders the defendant Santos to account for the properties and funds of the corporation, but it
also and at the same time adjudges him to pay an undermine amount which is made to depend upon
the result of such accounting. The accounting order was probably intended by the lower court to be
file with it in this proceeding. This requirement will delay the final disposition of the case and we are
of the opinion that this accounting should better be filed with the new board of directors whose
election has been ordered by the lower court. The decision of the lower court in this respect is
therefore modified so that the defendant Santos shall render a complete accounting of all the
corporate properties and funds that may have come to his possession during the period mentioned
in the jugment of the lower court to the new board of director to be elected by the stockholders.

In the seventh assignment of error, the appellants contend that the lower court erred in ordering the
removal of the defendants from their offices as members of the board of directors of the corporation.
The Corporation Law, as amended, in section 29 to 34, provide for the election and removal of the
directors of a corporation. Our Corporation Law (Act No. 1459, as amended), does not confer
expressly upon the court the power to remove a director of a corporation. In some jurisdictions,
statutes expressly provide a more or less summary method for the confirmation of the election and
for the a motion of the directors of a corporation. This is true in New York, New Jersey, Virginia and
other states of the American Union. There are abundant authorities, however, which hold that if the
court has acquire jurisdiction to appoint a receiver because of the mismanagement of directors these
may thereafter be remove and others appointed in their place by the court in the exercise of its
equity jurisdiction (2 Fletcher, Cyc. of Corp., ftn. sec. 358, pp. 18 an 119). In the present case,
however, the properties and assets of the corporation being amply protected by the appointment of a
receiver and view of the statutory provisions above referred to, we are of the opinion that the
removal of the directors is, under the circumstances, unnecessary and unwarranted. The seventh
assignment of error is, therefore, sustained.

Under the eighth assignment of error, the appellants argue that the lower court erred in deciding that
the plaintiff Higinio Angeles is entitled to the issuance in his name of a certificate covering 600
shares of stock of the total par value of P15,000. A review of the evidence, oral and documentary,
relative to the number of shares of stock to which Higinio Angeles is entitled, shows that Higinio
Angeles brought in P15,000 party in money and party in property, for 600 shares of stock. The very
articles of incorporation signed by all the incorporators, among whom are the defendants, show that
Higinio Angeles paid P5,600 on account of his subscription amounting to P10,000. The amount of
P5,600 is the value of Angeles' cinematograph building in Bacoor, Cavite, which he transferred to
the municipality of Parañaque where the same was reconstructed for the use of the corporation. The
receipts signed by the Philippine Engineering Company and the testimony of Higinio Angeles and
Aguedo Bernabe (secretary-treasurer of the corporation) show that Higinio Angeles paid with his
own funds the sum of P2,750 to the Philippine Engineering Co., as part of the purchase price of the
ricemill bought for the corporation. Angeles paid a further sum of P2,397.99 to the Philippine
Engineering Company. It also appears that for the installation of the Rice Mill, the construction
of camarin, and the cement paving (cementacion) of the whole area of two camarines, and for the
excavation of a well for the use of the rice mill the plaintiff Higinio Angeles paid with his own funds
the amount of P7,431.47. Adding all these sums together we have a total of P18, 179.46. At a
meeting of the board of directors on December 27, 1931, which meeting was convoked by Angeles,
it seemed to have been agreed that Angeles was to be given shares of stock of the total par value of
P15,000. Angeles wanted to have P16,000 worth of stock to his credit for having made the
disbursements mentioned above, but he finally agreed to accept 600 share worth only P15,000. The
certificate of stock, however, was not issued as disagreement arose between him and the defendant
Santos. We, therefore, find no error in the decision of the lower court ordering the issuance of a
certificate for 600 shares of stock of the total par value of P15,000 to Higinio Angeles.

It is unnecessary to consider the ninth and tenth assignments of error.

In view of the foregoing, we hold:

(1) That the action in the present case was properly instituted by the plaintiff as stockholders
for and in behalf of the corporation Parañaque Rice Mill, Inc., and other stockholders of the
said corporation;

(2) That the lower court committed no reveiwable error in appointing a receiver of the
corporation pendente lite;

(3) That the lower court committed no error in ordering an election of the new board of
directors, which election shall be held within thirty days from the date this decision becomes
final;

(4) That Teodorico B. Santos shall render an accounting of all the properties, funds and
income of the corporation which may have come into his possession to the new board of
directors;

(5) That the receiver, Emilio Figueroa, shall continue in office until the election and
qualification of the members of the new board of directors;

(6) That upon the constitution of the new board of directors, the said receiver shall turn over
all the properties of the corporation in his possession to the corporation, or such person or
persons as may be duly authorized by it; and.

(7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of stock at the
par value of P15,000 and the lower court committed no error in ordering the issuance of the
corresponding certificate of stock.

On June 10, 1937, counsel for the plaintiff-appellees filed a motion making it appear of record that
Higinio Angeles, one of the plaintiffs and appellees, died on May 4, 1937 and that one of his
daughters, Maura Angeles y Reyes, had been granted letters of administration as evidenced by the
document attached to the motion as Exhibit A, and praying that said Maura Angeles y Reyes be
substituted as one of the plaintiffs and appellees in lieu of Higinio Angeles, deceased. This motion is
hereby granted.

Defendant-appellants shall pay the costs in both instances. So ordered.

Avanceña, C.J., Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

ampbell v. Loew's, Incorporated

Annotate this Case

134 A.2d 852 (1957)

Ralph B. CAMPBELL, Plaintiff, v. LOEW'S, INCORPORATED, a Delaware corporation,

Joseph R. Vogel, William A. Parker, George L. Killion and John L. Sullivan, Defendants.
Court of Chancery of Delaware, New Castle.

September 19, 1957.

*854 Henry M. Canby of Richards, Layton & Finger and Arthur G. Logan and Aubrey B.
Lank of Logan, Marvel, Boggs & Theisen, Wilmington, and Milton S. Pollack, New York
City, for plaintiff.

David F. Anderson of Berl, Potter & Anderson, Wilmington, and Louis Nizer of Phillips,
Nizer, Benjamin & Krim, New York City, and Benjamin Melniker, New York City, for
corporate defendant.

The individual defendants have not yet appeared.

SEITZ, Chancellor.

This is the decision on plaintiff's request for a preliminary injunction to restrain the
holding of a stockholders' meeting or alternatively to prevent the meeting from
considering certain matters or to prevent the voting of certain proxies. Certain other
relief is also requested.

The corporate defendant appeared and resisted the motion.[1] The four individual
defendants, who are directors, were given until September 23, to appear and as of this
date (September 19, 1957) have not appeared. Consequently, reference to "defendant"
will embrace only the corporation unless otherwise indicated.

*855 Some background is in order if the many difficult and novel issues are to be
understood. Two factions have been fighting for control of Loew's. One faction is
headed by Joseph Tomlinson (hereafter "Tomlinson faction") while the other is headed
by the President of Loew's, Joseph Vogel (hereafter "Vogel faction"). At the annual
meeting of stockholders last February a compromise was reached by which each
nominated six directors and they in turn nominated a thirteenth or neutral director. But
the battle had only begun. Passing by much of the controversy, we come to the July 17-
18 period of this year when two of the six Vogel directors and the thirteenth or neutral
director resigned. A quorum is seven.

On the 19th of July the Tomlinson faction asked that a directors' meeting be called for
July 30 to consider, inter alia, the problem of filling director vacancies. On the eve of this
meeting one of the Tomlinson directors resigned. This left five Tomlinson directors and
four Vogel directors in office. Only the five Tomlinson directors attended the July 30
meeting. They purported to fill two of the director vacancies and to take other action.
This Court has now ruled that for want of a quorum the two directors were not validly
elected and the subsequent action taken at that meeting was invalid. See Tomlinson v.
Loew's, Inc., Del.Ch., 134 A.2d 518.
On July 29, the day before the noticed directors' meeting, Vogel, as president, sent out
a notice calling a stockholders' meeting for September 12 for the following purposes:

1. to fill director vacancies.

2. to amend the by-laws to increase the number of the board from 13 to 19; to increase
the quorum from 7 to 10 and to elect six additional directors.

3. to remove Stanley Meyer and Joseph Tomlinson as directors and to fill such
vacancies.

Still later, another notice for a September 12 stockholders' meeting as well as a proxy
statement went out over the signature of Joseph R. Vogel, as president. It was
accompanied by a letter from Mr. Vogel dated August 9, 1957, soliciting stockholder
support for the matters noticed in the call of the meeting, and particularly seeking to fill
the vacancies and newly created directorships with "his" nominees. Promptly thereafter,
plaintiff began this action. An order was entered requiring that the stockholders' meeting
be adjourned until October 15, to give the Court more time to decide the serious and
novel issues raised. See Campbell v. Loew's, Inc., Del.Ch., 134 A.2d 565.

I believe it is appropriate first to consider those contentions made by plaintiff which

concern the legality of the call of the stockholders' meeting for the purposes stated.

Plaintiff contends that the president had no authority in fact to call a special meeting of
stockholders to act upon policy matters which have not been defined by the board of
directors. Defendant says that the by-laws specifically authorize the action taken.

It is helpful to have in mind the pertinent by-law provisions:

Section 7 of Article I provides:

"Special meetings of the stockholders for any purpose or purposes, other than those regulated
by statute, may be called by the President * * *"

Section 2 of Article IV reads:

"The President * * * shall have power to call special meetings of the stockholders * * * for any
purpose or purposes * * *"

It is true that Section 8(11) of Article II also provides that the board of directors may call
a special meeting of stockholders for any purpose. But, in view of the explicit language
of the by-laws above quoted, can this Court say that the president was without authority
to call this meeting *856 for the purposes stated? I think not. I agree that the purposes
for which the president called the meeting were not in furtherance of the routine
business of the corporation. Nevertheless, I think the stockholders, by permitting the
quoted by-laws to stand, have given the president the power to state these broad
purposes in his call. Moreover, it may be noted that at least one other by-law (Article V,
§ 2) makes certain action of the president subject to board approval. The absence of
such language in connection with the call provision, while not conclusive, is some
evidence that it was intended that the call provision should not be so circumscribed.

The plaintiff argues that if this by-law purports to give the president the power to call
special stockholders' meetings for the purposes here stated, then it is contrary to 8
Del.C. § 141(a), which provides:

"The business of every corporation organized under the provisions of this chapter shall be
managed by a board of directors, except as hereinafter or in its certificate of incorporation
otherwise provided."

I do not believe the call of a stockholders' meeting for the purposes mentioned is action
of the character which would impinge upon the power given the directors by the statute.
I say this because I believe a by-law giving the president the power to submit matters
for stockholder action presumably only embraces matters which are appropriate for
stockholder action. So construed the by-laws do not impinge upon the statutory right
and duty of the board to manage the business of the corporation. Plaintiff does not
suggest that the matters noticed are inappropriate for stockholder consideration. And, of
course, the Court is not concerned with the wisdom of the grant of such power to the
president.

Plaintiff's next argument is that the president has no authority, without board approval,
to propose an amendment of the by-laws to enlarge the board of directors. Admittedly
this would be a most radical change in this corporate management. Indeed, it may well
involve the determination of control. However, as I have already indicated, I believe the
wording of the by-laws authorizes such action.

Plaintiff next argues that the president had no power to call a stockholders' meeting to
fill vacancies on the board. As I understand plaintiff's argument it is that the existence of
Article V, § 2 of the by-laws, which provides that the stockholders or the remaining
directors may fill vacancies, by implication, precludes the president from calling a
stockholders' meeting for that purpose; that provision being intended for stockholder use
only at the initiative of the stockholders. First of all, the by-laws permit the president to
call a meeting for any purpose. This is broad and all-embracing language and I think it
must include the power to call a meeting to fill vacancies. The fact that the stockholders
may on their initiative have the right to call a meeting for that purpose does not seem to
be a sufficient reason for implying that the president is thereby deprived of such power.

Plaintiff points to the "extraordinary state of affairs" which the recognition of such power
in the president would create. Obviously it gives the president power which may place
him in conflict with the members of the board. But such consequences inhere in a
situation where those adopting the by-laws grant such broad and concurrent power to
the board and to the president. The validity but not the wisdom of the grant of power is
before the Court. I conclude that under the by-laws the president has the power to call a
meeting to fill vacancies on the board.

Plaintiff next argues that the president's action in calling a stockholders' meeting to fill
vacancies was unlawful because it was in conflict with the previously scheduled action
by the board on the same subject. It should be noted that the proxy statement *857 sent
out by the president states that the stockholders would only fill the two vacancies
purportedly filled by the board, if their election by the board was held to be invalid. To
this extent then the call was not in conflict with this aspect of the board's action. But in
any event I have now ruled that the board did not legally fill the vacancies and so the
matter would seem to be moot. Moreover, the record is so cloudy as to some of the
facts involved on this point that it would not warrant the granting of relief at this time.

The next point made in plaintiff's brief is that the president had no power to fix the
record date for voting purposes. However, it turned out that the executive committee
fixed the record date and plaintiff's counsel, although given the opportunity at oral
argument, did not attack the action of the executive committee. I assume that plaintiff
has in effect abandoned this contention.

I therefore conclude that the president had the power to call the meeting for the
purposes noticed. I need not consider the effect of the fact that the executive committee
recommended that a special stockholders' meeting be called.

Plaintiff next argues that the stockholders have no power between annual meetings to
elect directors to fill newly created directorships.

Plaintiff argues in effect that since the Loew's by-laws provide that the stockholders may
fill "vacancies", and since our Courts have construed "vacancy" not to embrace "newly
created directorships" (Automatic Steel Products v. Johnston, 31 Del. Ch. 469, 64 A.2d
416, 6 A.L.R.2d 170), the attempted call by the president for the purpose of filling newly
created directorships was invalid.

Conceding that "vacancy" as used in the by-laws does not embrace "newly created
directorships", that does not resolve this problem. I say this because in Moon v. Moon
Motor Car Co., 17 Del.Ch. 176, 151 A. 298, it was held that the stockholders had the
inherent right between annual meetings to fill newly created directorships. See also
Automatic Steel Products v. Johnston, above. There is no basis to distinguish the Moon
case unless it be because the statute has since been amended to provide that not only
vacancies but newly created directorships "may be filled by a majority of the directors
then in office * * * unless it is otherwise provided in the certificate of incorporation or the
by-laws * * *". 8 Del.C. § 223. Obviously, the amendment to include new directors is not
worded so as to make the statute exclusive. It does not prevent the stockholders from
filling the new directorships.

Is there any reason to consider the absence of a reference in the by-laws to new
directorships to be significant? I think not. The by-law relied upon by plaintiff was
adopted long before the statutory amendment and it does not purport to be exclusive in
its operation. It would take a strong by-law language to warrant the conclusion that
those adopting the by-laws intended to prohibit the stockholders from filling new
directorships between annual meetings. No such strong language appears here and I
do not think the implication is warranted in view of the subject matter.

I therefore conclude that the stockholders of Loew's do have the right between annual
meetings to elect directors to fill newly created directorships.

Plaintiff next argues that the shareholders of a Delaware corporation have no power to
remove directors from office even for cause and thus the call for that purpose is invalid.
The defendant naturally takes a contrary position.

While there are some cases suggesting the contrary, I believe that the stockholders
have the power to remove a director for cause. See Auer v. Dressel, 306 N.Y. 427, 118
N.E.2d 590, 48 A.L.R.2d 604; *858 compare Bruch v. National Guarantee Credit Corp.,
13 Del.Ch. 180, 116 A. 738. This power must be implied when we consider that
otherwise a director who is guilty of the worst sort of violation of his duty could
nevertheless remain on the board. It is hardly to be believed that a director who is
disclosing the corporation's trade secrets to a competitor would be immune from
removal by the stockholders. Other examples, such as embezzlement of corporate
funds, etc., come readily to mind.

But plaintiff correctly states that there is no provision in our statutory law providing for
the removal of directors by stockholder action. In contrast he calls attention to § 142 of 8
Del.C., dealing with officers, which specifically refers to the possibility of a vacancy in an
office by removal. He also notes that the Loew's by-laws provide for the removal of
officers and employees but not directors. From these facts he argues that it was
intended that directors not be removed even for cause. I believe the statute and by-law
are of course some evidence to support plaintiff's contention. But when we seek to
exclude the existence of a power by implication, I think it is pertinent to consider
whether the absence of the power can be said to subject the corporation to the
possibility of real damage. I say this because we seek intention and such a factor would
be relevant to that issue. Considering the damage a director might be able to inflict upon
his corporation, I believe the doubt must be resolved by construing the statutes and by-
laws as leaving untouched the question of director removal for cause. This being so, the
Court is free to conclude on reason that the stockholders have such inherent power.

I therefore conclude that as a matter of Delaware corporation law the stockholders do

have the power to remove directors for cause. I need not and do not decide whether the
stockholders can by appropriate charter or by-law provision deprive themselves of this
right.

Plaintiff next argues that the removal of Tomlinson and Meyer as directors would violate
the right of minority shareholders to representation on the board and would be contrary
to the policy of the Delaware law regarding cumulative voting. Plaintiff contends that
where there is cumulative voting, as provided by the Loew's certificate, a director cannot
be removed by the stockholders even for cause.

It is true that the Chancellor noted in the Bruch case that the provision for cumulative
voting in the Delaware law was one reason why directors should not be considered to
have the power to remove a fellow director even for cause. And it is certainly evident
that if not carefully supervised the existence of a power in the stockholders to remove a
director even for cause could be abused and used to defeat cumulative voting. See 66
Harvard L.R. 531.

Does this mean that there can be no removal of a director by the stockholders for cause
in any case where cumulative voting exists? The conflicting considerations involved
make the answer to this question far from easy. Some states have passed statutes
dealing with this problem but Delaware has not. The possibility of stockholder removal
action designed to circumvent the effect of cumulative voting is evident. This is
particularly true where the removal vote is, as here, by mere majority vote. On the other
hand, if we assume a case where a director's presence or action is clearly damaging the
corporation and its stockholders in a substantial way, it is difficult to see why that
director should be free to continue such damage merely because he was elected under
a cumulative voting provision.

On balance, I conclude that the stockholders have the power to remove a director for
cause even where there is a provision for cumulative voting. I think adequate protection
is afforded not only by the legal safeguards announced in this opinion but by the
existence of a remedy to test the validity of any such action, if taken.

The foregoing points constitute all of the arguments advanced by plaintiff which *859 go
to the validity of the call of the meeting for the purposes stated. It follows from my
various conclusions that the meeting was validly called by the president to consider the
matters noticed.

I turn next to plaintiff's charges relating to procedural defects and to irregularities in

proxy solicitation by the Vogel group.

Plaintiff's first point is that the stockholders can vote to remove a director for cause only
after such director has been given adequate notice of charges of grave impropriety and
afforded an opportunity to be heard.

Defendant raises a preliminary point that plaintiff, being only a stockholder, has no
standing to make the contention that the foregoing requirements have not been met.[2]
It may be noted that the director whose removal was involved in the Bruch case was not
a party in that case and yet the Court considered the issue properly raised. The same
situation applied in the Auer case in New York. Moreover, on reason, there would seem
no basis for telling a stockholder, particularly where cumulative voting is involved, that
he has no right to challenge the legal propriety of action proposed to be taken to remove
a member of the board of directors. After all, the board is managing the corporation for
all the stockholders and while a director may have sufficient standing to attack the
action himself, I cannot believe that a stockholder is lacking a sufficient interest to
warrant legal recognition.

I am inclined to agree that if the proceedings preliminary to submitting the matter of

removal for cause to the stockholders appear to be legal and if the charges are legally
sufficient on their face, the Court should ordinarily not intervene. The sufficiency of the
evidence would be a matter for evaluation in later proceedings. But where the
procedure adopted to remove a director for cause is invalid on its face, a stockholder
can attack such matters before the meeting. This conclusion is dictated both by the
desirability of avoiding unnecessary and expensive action and by the importance of
settling internal disputes, where reasonably possible, at the earliest moment. Compare
Empire Southern Gas Co. v. Gray, 29 Del.Ch. 95, 46 A.2d 741. Otherwise a director
could be removed and his successor could be appointed and participate in important
board action before the illegality of the removal was judicially established. This seems
undesirable where the illegality is clear on the face of the proceedings.

Defendant contends that the sufficiency of the charges or the evidence in support
thereof is not for the Court to consider, citing Griffith v. Sprowl, 45 Ind.App. 504, 91 N.E.
25; New Founded Indus. Missionary Baptist Ass'n v. Anderson, La.App., 49 So. 2d 342;
State ex rel. Blackwood v. Brast, 98 W.Va. 596, 127 S.E. 507. These cases involved
either a pertinent by-law or statute, and none involved the removal of a director. They
are not contrary to the rules here announced. I conclude that plaintiff can raise the issue
as to the propriety of the removal procedure.

Turning now to plaintiff's contentions, it is certainly true that when the shareholders
attempt to remove a director for cause, "* * * there must be the service of specific
charges, adequate notice and full opportunity of meeting the accusation * * *". See Auer
v. Dressel *860 [306 N.Y. 427, 118 N.E.2d 593], above. While it involved an invalid
attempt by directors to remove a fellow director for cause, nevertheless, this same
general standard was recognized in Bruch v. National Guarantee Credit Corp. [13
Del.Ch. 180, 116 A. 741], above. The Chancellor said that the power of removal could
not "be exercised in an arbitrary manner. The accused director would be entitled to be
heard in his own defense".

Plaintiff asserts that no specific charges have been served upon the two directors
sought to be ousted; that the notice of the special meeting fails to contain a specific
statement of the charges; that the proxy statement which accompanied the notice also
failed to notify the stockholders of the specific charges; and that it does not inform the
stockholders that the accused must be afforded an opportunity to meet the accusations
before a vote is taken.

Matters for stockholder consideration need not be conducted with the same formality as
judicial proceedings. The proxy statement specifically recites that the two directors are
sought to be removed for the reasons stated in the president's accompanying letter.
Both directors involved received copies of the letter. Under the circumstances I think it
must be said that the two directors involved were served with notice of the charges
against them. It is true, as plaintiff says, that the notice and the proxy statement failed to
contain a specific statement of charges. But as indicated, I believe the accompanying
letter was sufficient compliance with the notice requirement.

Contrary to plaintiff's contention, I do not believe the material sent out had to advise the
stockholders that the accused must be afforded an opportunity to defend the charges
before the stockholders voted. Such an opportunity had to be afforded as a matter of
law and the failure to so advise them did not affect the necessity for compliance with the
law. Thus, no prejudice is shown.

I next consider plaintiff's contention that the charges against the two directors do not
constitute "cause" as a matter of law. It would take too much space to narrate in detail
the contents of the president's letter. I must therefore give my summary of its charges.
First of all, it charges that the two directors (Tomlinson and Meyer) failed to cooperate
with Vogel in his announced program for rebuilding the company; that their purpose has
been to put themselves in control; that they made baseless accusations against him and
other management personnel and attempted to divert him from his normal duties as
president by bombarding him with correspondence containing unfounded charges and
other similar acts; that they moved into the company's building, accompanied by
lawyers and accountants, and immediately proceeded upon a planned scheme of
harassment. They called for many records, some going back twenty years, and were
rude to the personnel. Tomlinson sent daily letters to the directors making serious
charges directly and by means of innuendos and misinterpretations.

Are the foregoing charges, if proved, legally sufficient to justify the ouster of the two
directors by the stockholders? I am satisfied that a charge that the directors desired to
take over control of the corporation is not a reason for their ouster. Standing alone, it is
a perfectly legitimate objective which is a part of the very fabric of corporate existence.
Nor is a charge of lack of cooperation a legally sufficient basis for removal for cause.

The next charge is that these directors, in effect, engaged in a calculated plan of
harassment to the detriment of the corporation. Certainly a director may examine books,
ask questions, etc., in the discharge of his duty, but a point can be reached when his
actions exceed the call of duty and become deliberately obstructive. In such a situation,
if his actions constitute a real burden on the corporation then the stockholders are
entitled to relief. The *861 charges in this area made by the Vogel letter are legally
sufficient to justify the stockholders in voting to remove such directors. Compare
Markovitz v. Markovitz, 336 Pa. 145, 8 A.2d 46, 124 A.L.R. 359, and see 19 C.J.S.
Corporations § 738(4). In so concluding I of course express no opinion as to the truth of
the charges.

I therefore conclude that the charge of "a planned scheme of harassment" as detailed in
the letter constitutes a justifiable legal basis for removing a director.
I next consider whether the directors sought to be removed have been given a
reasonable opportunity to be heard by the stockholders on the charges made.

The corporate defendant freely admits that it has flatly refused to give the five
Tomlinson directors or the plaintiff a stockholders' list. Any doubt about the matter was
removed by the statement of defendant's counsel in open court at the argument that no
such list would be supplied. The Vogel faction has physical control of the corporate
offices and facilities. By this action the corporation through the Vogel group has
deliberately refused to afford the directors in question an adequate opportunity to be
heard by the stockholders on the charges made. This is contrary to the legal
requirements which must be met before a director can be removed for cause.

At the oral argument the defendant's attorney offered to mail any material which might
be presented by the Tomlinson faction. This falls far short of meeting the requirements
of the law when directors are sought to be ousted for cause. Nor does the granting of
the statutory right to inspect and copy some 26,000 names fulfill the requirement that a
director sought to be removed for cause must be afforded an opportunity to present his
case to the stockholders before they vote.

When Vogel as president caused the notice of meeting to be sent, he accompanied it

with a letter requesting proxies granting authority to vote for the removal of the two
named directors. It is true that the proxy form also provided a space for the stockholder
to vote against such removal. However, only the Vogel accusations accompanied the
request for a proxy. Thus, while the stockholder could vote for or against removal, he
would be voting with only one view-point presented. This violates every sense of equity
and fair play in a removal for cause situation.

While the directors involved or some other group could mail a letter to the stockholders
and ask for a proxy which would revoke the earlier proxy, this procedure does not
comport with the legal requirement that the directors in question must be afforded an
opportunity to be heard before the shareholders vote. This is not an ordinary proxy
contest case and a much more stringent standard must be invoked, at least at the initial
stage, where it is sought to remove a director for cause. This is so for several reasons.
Under our statute the directors manage the corporation and each has a somewhat
independent status during his term of office. This right could be greatly impaired if
substantial safeguards were not afforded a director whose removal for cause is sought.
The possibility of abuse is evident. Also, as the Chancellor pointed out in the Bruch
case, the power of removal can be a threat to cumulative voting rights. This is
particularly true where, as here, the removal is by mere majority vote.

There seems to be an absence of cases detailing the appropriate procedure for

submitting a question of director removal for cause for stockholder consideration. I am
satisfied, however, that to the extent the matter is to be voted upon by the use of
proxies, such proxies may be solicited only after the accused directors are afforded an
opportunity to present their case to the stockholders. This means, in my opinion, that an
opportunity must be provided such directors to present their defense to the stockholders
by a statement which must accompany or precede the initial solicitation of proxies
seeking authority to vote *862 for the removal of such director for cause. If not provided
then such proxies may not be voted for removal. And the corporation has a duty to see
that this opportunity is given the directors at its expense. Admittedly, no such
opportunity was given the two directors involved. Indeed, the corporation admittedly
refused to supply them with a stockholders' list.

To require anything less than the foregoing is to deprive the stockholders of the
opportunity to consider the case made by both sides before voting and would make a
mockery of the requirement that a director sought to be removed for cause is entitled to
an opportunity to be heard before the stockholders vote. See the persuasive language
of the dissent in Auer v. Dressel, above. But in referring to the language of the dissent I
do not thereby suggest that my conclusion here is necessarily contrary to the majority
decision on this point.

I therefore conclude that the procedural sequence here adopted for soliciting proxies
seeking authority to vote on the removal of the two directors is contrary to law. The
result is that the proxy solicited by the Vogel group, which is based upon unilateral
presentation of the facts by those in control of the corporate facilities, must be declared
invalid insofar as they purport to give authority to vote for the removal of the directors for
cause.

A preliminary injunction will issue restraining the corporation from recognizing or

counting any proxies held by the Vogel group and others insofar as such proxies purport
to grant authority to vote for the removal of Tomlinson and Meyer as directors of the
corporation.

The Court emphasizes that it is considering only the proxy solicitation and use aspect of
this problem and is considering those only where advance authority is given to vote in a
particular way. I am not called upon to consider what procedural and substantive
requirements must be met if the matter is raised for consideration by stockholders
present in person at the meeting.

Plaintiff seeks a preliminary injunction restraining the defendant from using the
corporate funds, employees and facilities for the solicitation of proxies for the Vogel
group and from voting proxies so solicited. Plaintiff bases this request upon the
contention that Vogel and his group, by calling the meeting and by using corporate
funds and facilities, are usurping the authority of the board of directors. Plaintiff says
that the president in effect is using his corporate authority and the corporate resources
to deny the will of the board of directors and to maintain himself in office.

This brings the Court to an analysis of this most unusual aspect of this most unusual
case. The by-laws provide for thirteen directors. Seven is a quorum. Due to four
resignations there are now nine directors in office. Five of the nine are of the Tomlinson
faction while the remaining four are of the Vogel faction. Since the Vogel faction will not
attend directors' meetings, or at least will not attend directors meetings at which matters
may possibly be considered which they do not desire to have considered, it follows that
the Tomlinson faction is unable to muster a quorum of the board and thus is unable to
take action on behalf of the board. See Tomlinson v. Loew's, Inc., Del.Ch., 134 A.2d
518. In this setting, where a special stockholders' meeting for the election of directors is
pending, it becomes necessary to determine the status of each faction in order to
resolve the issues posed. And it must be kept in mind that this election can determine
which faction will control the corporation.

We start with the basic proposition that the board of directors acting as a board must be
recognized as the only group authorized to speak for "management" in the sense that
under the statute they are responsible for the management of the corporation. 8 Del.C.
§ 141(a). In substance that was the holding of the Court *863 in Empire Southern Gas
Co. v. Gray, 29 Del.Ch. 95, 46 A.2d 741. However, we are not here confronted with the
situation in the Gray case because Loew's board as such cannot act for want of a
quorum. Thus, there is no board policy as such with respect to the matters noticed for
stockholder consideration. I am nevertheless persuaded that at least where a quorum of
directors is in office the majority thereof are not "outsiders" merely because they cannot
procure the attendance of a quorum at a meeting. By this I mean that they are not like
the customary opposition which is seeking to take control of corporate management. To
hold otherwise would be to set a most undesirable legal precedent in connection with
the allocation of corporate powers.

Since the Vogel group, being in physical possession of the records and facilities of the
corporation, treated the request of the directors for a stockholders' list as though it were
to be judged by standards applicable to a mere stockholder's request, I think they
violated the duty owed such directors as directors. I need not decide how far the rights
of such directors go but I am satisfied that they are not less than the rights of the four
"in" directors insofar as the right to have a stockholders' list is concerned. The fact that
Vogel, as president, had the power to call a stockholders' meeting to elect directors, and
is, so to speak, in physical control of the corporation, cannot obscure the fact that the
possible proxy fight is between two sets of directors. Vogel, as president, has no legal
standing to make "his" faction the exclusive voice of Loew's in the forthcoming election.

On balance, I believe the conclusion on this point should not result in the absolute
nullification of all proxies submitted by the Vogel group. However, I believe it does
require that their use be made subject to terms. I say this because they should not be
permitted to benefit merely because they have physical control of the corporate facilities
when they represent less than a majority of the directors in office.

I conclude that the Vogel group should be enjoined from voting any proxies unless and
until the Tomlinson board members are given a reasonable period to solicit proxies after
a stockholders' list is made available to them without expense by the corporation.

If the list is submitted on or before September 24, 1957, the Court will not interfere with
the holding of the meeting set for October 15, 1957. If the corporation decides to accept
this condition the following constitutes the mechanics for compliance. Plaintiff's
Delaware counsel, who is also counsel for the Tomlinson faction, should be delivered
the stockholders' list in his office unless the parties agree in writing to a different
method. If there is delivery the defendant should serve and file an affidavit in the Court
immediately showing such delivery. Unless plaintiff attacks the sufficiency of
defendant's compliance by motion within one day thereafter it will be assumed that the
condition imposed has been fully met. In such event the preliminary injunction will be
considered as vacated to the extent it enjoins all recognition of proxies held by the
Vogel group.

I next consider how these two groups should be classified for purposes of determining
the rights of the Vogel group in connection with the use of corporate money and
facilities for proxy solicitation at a stockholders' meeting duly called by the president.
Basically, the stockholders are being asked whether they approve of a record made by
one group and perhaps opposed by another. While the Tomlinson faction has five of the
nine directors, it would be most misleading to have them represent to the stockholders
that they are "management" in the sense that they have been responsible for the
corporate policy and administration up to this stage. Resignations of directors have
created the unusual situation now presented.

Viewing the situation in the light of what has just been said, it is apparent that the Vogel
group is entitled to solicit proxies, *864 not as representing a majority of the board, but
as representing those who have been and are now responsible for corporate policy and
administration. Whereas, the Tomlinson group, while not management in the sense that
it is able on its own to take effective director action, is representative of the majority of
the encumbent directors and is entitled to so represent to the stockholders if it decides
to solicit proxies.

Since the stockholders will, in the event of a proxy fight, be asked to determine which
group should run the corporation in the future, the Vogel faction, because it symbolizes
existing policy, has sufficient status to justify the reasonable use of corporate funds to
present its position to the stockholders. I am not called upon to decide whether the
Tomlinson board members would also be entitled to have the corporation pay its
reasonable charges for proxy solicitation.

Since I have concluded that the Vogel faction is entitled to expend reasonable sums of
corporate funds in the solicitation of proxies, it follows that the request for a preliminary
injunction against such use will be denied. The restraining order heretofore entered will
be vacated to the extent that it prevents such expenditures.

I next consider whether the Vogel faction is entitled to use corporate facilities and
employees in connection with its solicitation. Because such action would carry the intra-
corporate strife even deeper within the corporation and because there is no practical
way, if there is a proxy contest, to assure equal treatment for both factions in this area
when only one is in physical control of such facilities and personnel, I conclude that the
defendant should be preliminarily enjoined from using corporate facilities and personnel
in soliciting proxies. I emphasize that this conclusion is based upon the corporate status
of the two factions herein involved.

Plaintiff next claims that the Vogel group should be enjoined from voting any proxies
obtained as a result of the material sent out by Vogel. He argues that Vogel's letter to
the stockholders, the proxy statement and the form of proxy deceived and misled the
stockholders into believing that the matters noticed for consideration by the
stockholders were proposed by the company or its management, whereas the Vogel
group is not authorized to speak as "management".

I should say preliminarily that I believe the proxy statement would have been more
accurately informative had it contained a concise statement showing the factual
situation which created the present status of the two groups. The proxy statement did
receive S.E.C. clearance. However, that agency labored under a difficult burden since it
did not know the legal rights and status of the Vogel group.

I turn now to the various factors which, according to plaintiff, show that the Vogel faction
represented, contrary to fact, that it was soliciting proxies as management.

1. The letter of Mr. Vogel to the shareholders is reproduced on the letterhead of Loew's,
Incorporated and comes from the "Office of the President".

I have already pointed out that this is not the case of a working majority of the board
versus the president. Indeed, in this case Vogel's administration as president
symbolizes one choice in the policy dispute. This dispute is evident from a reading of
the material in its entirety. I therefore conclude that by sending the letter on Loew's
stationery from the office of the president, Vogel, was not misleading the stockholders.

2. The notice of the special meeting is reproduced on the letterhead of Loew's,

Incorporated, signed, by order of the president, by Irving H. Greenfield, Secretary.

The fact is that there was no misrepresentation when the notice of the special meeting
was reproduced on Loew's letterhead and signed by the order of the president. *865 I
say this because the president was authorized as president to call such a meeting.

3. I assume that plaintiff had now abandoned this point which deals with the power to
close the transfer books.

4. The proxy statement recites that "it is considered to be in the best interest of Loew's
and the stockholders to remove * * * [Mr. Meyer and Mr. Tomlinson] as a director".

This is nothing more than a statement of belief of Vogel and his group. I cannot see how
it is misleading.

5. The proxy material states that Loew's will bear all costs in connection with the
solicitation of proxies; that Loew's will reimburse the brokerage houses for expenses
incident to the solicitation of proxies; that Loew's has entered into contracts with certain
firms to solicit proxies and has agreed to pay them a fee for their services, and that the
costs to be paid by Loew's for proxy solicitation will be approximately $100,000.

Plaintiff is here saying in effect that Vogel's group was representing to the stockholders
that the corporation would pay for the expenses of proxy solicitation for the Vogel group
and thus leading the reader to believe that it was a management solicitation. First of all,
such was the intention of the Vogel group and thus it did not constitute a
misrepresentation as to their intention. But, in any event, I have now held that
reasonable expenses of such solicitation are properly chargeable to the corporation and
so no factual misrepresentation was involved. In any event, since the Vogel group was
synonymous with management in the policy sense, I cannot see how a stockholder
would be misled.

6. The proxy material states that the officers and employees of Loew's will solicit and
request the return of proxies.

This is not a misrepresentation in the sense that it was contrary to the intention of the
Vogel group. The Court has now determined that the officers and employees in such
capacity, cannot solicit proxies. This does not mean that the representation is so
material that it can be said to influence stockholders to the extent that the proxies
should be voided.

7. The proxy statement is signed by Joseph R. Vogel, as president.

There is no merit to this contention. Vogel as president was certainly authorized to sign
the statement in view of the fact that he had the authority to call the meeting.

8. The business reply envelope included with the proxy has on it that postage will be
paid by the secretary of Loew's Inc., and is addressed to him in his official capacity. The
permit on the envelope is Loew's permit.

The foregoing facts are true but I do not believe that they are so misleading as to void
the proxies. After all, the Vogel group is soliciting proxies on the basis of its record in
administering the corporation.

Plaintiff contends that in any event the cumulative effect of the various statements
mentioned is to lead the ordinary reader to believe that the solicitation is by
management.

Plaintiff recognizes that the proxy statement and the form of proxy both recite that "this
proxy is solicited by the President and George L. Killion [of the Vogel group] who are
members of the executive committee of Loew's, Inc., and in view of the circumstances,
not by the management". However, he argues that the import of this statement is lost in
the overall impact of the material. Since the meeting was validly called by the president,
there was nothing misleading in the creation of the impression that the meeting and
material were initiated by the company. I think the whole impact of the proxy material
conveyed to the average reader the impression that there is a bitter fight between the
president and his faction and another faction on the board.

*866 While I have no doubt that it would have been better for the material to have
contained a more explicit factual narrative of the status of the board personnel at the
time of the proxy solicitation, I cannot believe that the overall result is so misleading as
to justify this Court in concluding that the proxies may not be used for any purpose.
Compare Schiff v. RKO Pictures Corp., Del.Ch., 104 A.2d 267. This is particularly so in
view of the statement made that it was not solicited by management. Indeed, I think the
statement, which was apparently required by the S.E.C. may have been somewhat
misleading in the sense that it may have suggested to the reader that the Vogel group
was not responsible for the corporate policy up to that date. To this extent, it was more
prejudicial to the Vogel group than the Tomlinson group, if a stockholder desired to vote
for "management" in the policy sense.

Plaintiff's request that the Vogel group be enjoined from voting any proxies solicited
under the material sent out by Vogel will be denied. This disposes of the issues raised
in connection with the stockholders' meeting.

Plaintiff next seeks a mandatory injunction to compel the individual defendants (four
Vogel directors) to attend directors' meetings. He argues that Vogel and his associates
acted unlawfully in attempting to cause the absence of a quorum at meetings of the
board of directors for the purpose of preventing the board from exercising its powers.

While a concerted plan to abstain from attending directors' meetings may be improper
under some circumstances, I cannot find that the fact that the so-called Vogel directors
did not attend directors' meetings called to take action which would give an opposing
faction an absolute majority of the board solely because of director resignations is such
a breach of their fiduciary duty that they should be judicially compelled to attend board
meetings. This is particularly so where stockholder action is in the offing to fill the board.

Other considerations aside, no mandatory injunction will issue to compel the individual
defendants (Vogel directors) to attend directors' meetings. I have considered this issue
on its merits because no point was made of the fact that the individual defendants have
not appeared and because of my conclusion that plaintiff's contention lacks merit.

Plaintiff also argues that Vogel violated his fiduciary duty to the board of directors by
issuing statements impugning the propriety and necessity of a meeting of the board and
attacking the legality of the action taken at the July 30 directors' meeting. Plaintiff does
not indicate what relief is requested under this head of his argument and so I see no
profit in discussing the matter.

I should add that the prolix factual presentation was put before the Court in such a
fashion that it has been at times difficult for the Court to determine whether or not the
facts relied upon here are all of record. If I have taken liberties with the record I will
expect counsel to promptly so inform me in detail.

I now summarize my conclusions with respect to the relief requested:

1. No preliminary injunction will issue to enjoin the holding of the meeting, now fixed for
October 15, 1957.

2. The corporation will be preliminarily enjoined from recognizing and counting any
proxies held by the individual defendants unless the corporation supplies the Tomlinson
board members the stockholders' list as herein provided.

3. Without regard to the action taken by the defendant under Point 2, the corporation will
be preliminarily enjoined from recognizing or counting any proxies held by the Vogel
group or others to the extent that such proxies purport to grant authority to vote for the
removal of Tomlinson and Meyer as directors.

*867 4. No preliminary injunction will issue to restrain the corporation from paying
reasonable sums incurred by the Vogel group in soliciting proxies.

5. A preliminary injunction will issue restraining the corporation from permitting the use
of its personnel and facilities for the solicitation of proxies by the Vogel group.

6. No mandatory preliminary injunction will issue to compel the individual defendants to

attend directors' meetings.

Present order on notice.

NOTES

[1] Since the point is not raised, I need not consider whether those speaking for the
corporation are authorized to do so. Compare Bruch v. National Guarantee Credit
Corporation, 13 Del.Ch. 180, 116 A. 738.

[2] This defense comes with somewhat poor grace from the corporation when we
consider that the corporation, as represented by this same faction, consented to the
entry of an injunction in New York restraining the Tomlinson faction (which involves the
two directors sought to be removed) from interfering with the stockholders' meeting
called for September 12, 1957. While later modified, at the time this action was filed the
directors who are sought to be removed for cause appear to have been under an
injunction (whether effective, I need not decide) preventing them from attacking the
proposed action even in Court.

G.R. No. L-17504 & L-17506 February 28, 1969

RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and

PATRIA SALAS, heirs of Magdalena Salas, as stockholders on their own behalf and for the
benefit of the Ma-ao Sugar Central Co., Inc., and other stockholders thereof who may wish to
join in this action, plaintiffs-appellants,
vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA,
ROMUALDO M. ARANETA, and RAMON A. YULO, defendants-appellants.

San Juan, Africa and Benedicto for plaintiffs-appellants.

Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendants-appellants.

CAPISTRANO, J.:

This was a representative or derivative suit commenced on October 20, 1953, in the Court of First
Instance of Manila by four minority stockholders against the Ma-ao Sugar Central Co., Inc. and J.
Amado Araneta and three other directors of the corporation.

The complaint comprising the period November, 1946 to October, 1952, stated five causes of action,
to wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and
unauthorized investments; (2) for alleged gross mismanagement; (3) for alleged forfeiture of
corporate rights warranting dissolution; (4) for alleged damages and attorney's fees; and (5) for
receivership.

Plaintiffs prayed, in substance, as follows:

Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his individual co-
defendants be ordered to render an accounting of all transactions made and carried out by them for
defendant corporation, and "to collect, produce and/or pay to the defendant corporation the
outstanding balance of the amounts so diverted and still unpaid to defendant corporation";

Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and be
ordered to pay to the defendant corporation "whatever amounts may be recovered by the plaintiffs in
Civil Case No. 20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar Central Co.'"; to return to the
defendant corporation all amounts withdrawn by way of discretionary funds or backpay, and to
account for the difference between the corporation's crop loan accounts payable and its crop loan
accounts receivable;

Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net assets be
distributed to the stockholders; and

Under the FOURTH CAUSE OF ACTION, that the defendants be ordered "to pay the sum of
P300,000.00 by way of compensatory, moral and exemplary damages and for expenses of litigation,
including attorney's fees and costs of the suit."

THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of receivership.

In their answer originally filed on December 1, 1953, and amended on February 1, 1955, defendants
denied "the allegations regarding the supposed gross mismanagement, fraudulent use and diversion
of corporate funds, disregard of corporate requirements, abuse of trust and violation of fiduciary
relationship, etc., supposed to have been discovered by plaintiffs, all of which are nothing but
gratuitous, unwarranted, exaggerated and distorted conclusions not supported by plain and specific
facts and transactions alleged in the complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the
complaint "is premature, improper and unjustified"; (2) that plaintiffs did not make an "earnest, not
simulated effort" to exhaust first their remedies within the corporation before filing their complaint; (3)
that no actual loss had been suffered by the defendant corporation on account of the transactions
questioned by plaintiffs; (4) that the payments by the debtors of all amounts due to the defendant
corporation constituted a full, sufficient and adequate remedy for the grievances alleged in the
complaint and (5) that the dissolution and/or receivership of the defendant corporation would violate
and impair the obligation of existing contracts of said corporation.

BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among others, that the
complaint was premature, improper and malicious, and that the language used was "unnecessarily
vituperative abusive and insulting, particularly against defendant J. Amado Araneta who appears to
be the main target of their hatred." Wherefore, the defendant sought to recover "compensation for
damages, actual, moral, exemplary and corrective, including reasonable attorney's fees."

After trial, the Lower Court rendered its Decision (later supplemented by an Order resolving
defendants' Motion for Reconsideration), the dispositive portion of which reads:

IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns J.
Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. the amount of P46,270.00 with
8% interest from the date of the filing of this complaint, plus the costs; the Court reiterates
the preliminary injunction restraining the Ma-ao Sugar Central Co., Inc. management to give
any loans or advances to its officers and orders that this injunction be as it is hereby made,
permanent; and orders it to refrain from making investments in Acoje Mining, Mabuhay
Printing, and any other company whose purpose is not connected with the Sugar Central
business; costs of plaintiffs to be borne by the Corporation and J. Amado Araneta.

From this judgment both parties appealed directly to the Supreme Court.

Before taking up the errors respectively, assigned by the parties, we should state that the following
findings of the Lower Court on the commission of corporate irregularities by the defendants have not
been questioned by the defendants:

1. Failure to hold stockholders' meetings regularly. No stockholders' meetings were held in

1947, 1950 and 1951;

2. Irregularities in the keeping of the books. Untrue entries were made in the books which
could not simply be considered as innocent errors;

3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining, P7,000.00.
The investments were made not in pursuance of the corporate purpose and without the
requisite authority of two-thirds of the stockholders;

4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to the

defendants, had been fully paid), in violation of the by-laws of the corporation which prohibits
any director from borrowing money from the corporation;

5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:

J. Amado Araneta & Co. P243,415.62

 Luzon Industrial Corp. 585,918.17
Associated Sugar 463,860.36
General Securities 86,743.65
Bacolod Murcia 501,030.61
Central Azucarera del Danao 97,884.42
Talisay-Silay 4,365.90

The Court found that sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc. and
delivered to these affiliated companies, and vice versa, without the approval of the Ma-ao Board of
Directors, in violation of Sec. III, Art. 6-A of the by-laws.

The errors assigned in the appeal of the plaintiffs, as appellants, are as follows:

I.

THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE

FUNDS OF THE MA-AO SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER
PROCESSING CO., INC. WAS NOT A VIOLATION OF SEC. 17-½ OF THE
CORPORATION LAW.

II.

THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL
CO., INC. WAS INSOLVENT.

III.

THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS

COMMITTED AGAINST PLANTERS DID NOT CONSTITUTE MISMANAGEMENT.

IV.

THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE ACTS WERE
INSUFFICIENT FOR THE DISSOLUTION OF THE CORPORATION.

The portions of the Decision of the Lower Court assailed by the plaintiffs as appellants are as
follows:

(1) ".... Finally, as to the Philippine Fiber, the Court takes it that defendants admit having
invested P655,000.00 in shares of stock of this company but that this was ratified by the
Board of Directors in Resolutions 60 and 80, Exhibits "R" and "R-2"; more than that,
defendants contend that since said company was engaged in the manufacture of sugar bags
it was perfectly legitimate for Ma-ao Sugar either to manufacture sugar bags or invest in
another corporation engaged in said manufacture, and they quote authorities for the
purpose, pp. 28-31, memorandum; the Court is persuaded to believe that the defendants on
this point are correct, because while Sec. 17-1/2 of the Corporation Law provides that:
 No corporation organized under this act shall invest its funds in any other corporation
or business or for any purpose other than the main purpose for which it was
organized unless its board of directors has been so authorized in a resolution by the
affirmative vote of stockholders holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such proposal at the stockholders'
meeting called for the purpose.

the Court is convinced that that law should be understood to mean as the authorities state,
that it is prohibited to the Corporation to invest in shares of another corporation unless such
an investment is authorized by two-thirds of the voting power of the stockholders, if the
purpose of the corporation in which investment is made is foreign to the purpose of the
investing corporation because surely there is more logic in the stand that if the investment is
made in a corporation whose business is important to the investing corporation and would
aid it in its purpose, to require authority of the stockholders would be to unduly curtail the
Power of the Board of Directors; the only trouble here is that the investment was made
without any previous authority of the Board of Directors but was only ratified afterwards; this
of course would have the effect of legalizing the unauthorized act but it is an indication of the
manner in which corporate business is transacted by the Ma-ao Sugar administration, the
fact that off and on, there would be passed by the Board of Directors, resolutions ratifying all
acts previously done by the management, e.g. resolutions passed on February 25, 1947, and
February 25, 1952, by the Board of Directors as set forth in the affidavit of Isidro T. Dunca p.
127, etc. Vol. 1. (Decision, pp. 239-241 of Record on Appeal.)

xxx xxx xxx

(2) "On the other hand, the Court has noted against plaintiffs that their contention that Ma-ao
Sugar is on the verge of bankruptcy has not been clearly shown; against this are Exh. C to
Exh. C-3 perhaps the best proof that insolvency is still far is that this action was filed in 1953
and almost seven years have passed since then without the company apparently getting
worse than it was before; ..." (Decision, pp. 243-244, supra.)

xxx xxx xxx

(3) "As to the crop loan anomalies in that instead of giving unto the planters the entire
amount alloted for that, the Central withheld a certain portion for their own use, as can be
seen in Appendix A of Exh. C-1, while the theory of plaintiffs is that since between the
amount of P3,791,551.78 the crop loan account payable, and the amount of P1,708,488.22,
the crop loan receivable, there is a difference of P2,083,063.56, this would indicate that this
latter sum had been used by the Central itself for its own purposes; on the other hand,
defendants contend that the first amount did not represent the totality of the crop loans
obtained from the Bank for the purpose of relending to the planters, but that it included the
Central's own credit line on its 40% share in the standing crop; and that this irregularity
amounts to a grievance by plaintiffs as planters and not as stockholders, the Court must find
that as to this count, there is really reason to find that said anomaly is not a clear basis for
the derivative suit, first, because plaintiffs' evidence is not very sufficient to prove clearly the
alleged diversion in the face of defendants' defense; there should have been a showing that
the Central had no authority to make the diversion; and secondly, if the anomaly existed,
there is ground to hold with defendants that it was an anomaly pernicious not to the Central
but to the planters; it was not even pernicious to the stockholders.

Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of cane

allotments, withholding of molasses and alcohol shares, withholding of trucking allowance,
 formation of rival planters associations, refusal to deal with legitimate planters group, Exh. S;
the Court notices that as to the failure to provide hauling transportation, this in a way is
corroborated by Exh. 7, that part containing the decision of the Court of First Instance of
Manila, civil 20122, Francisco Rodriguez v. Ma-ao Sugar; for the reason, however, that even
if these were true, those grievances were grievances of plaintiffs as planters and not as
stockholders — just as the grievance as to the crop loans already adverted to, — this Court
will find insufficient merit on this count. (Decision, pp. 230-231, supra.)

xxx xxx xxx

(4) "...; for the Court must admit its limitations and confess that it cannot pretend to know
better than the Board in matters where the Board has not transgressed any positive statute
or by-law especially where as here, there is the circumstance that presumably, an impartial
representative in the Board of Directors, — the one from the Philippine National Bank, —
against whom apparently plaintiffs have no quarrel, does not appear to have made any
protest against the same; the net result will be to hold that the culpable acts proved are not
enough to secure a dissolution; the Court will only order the correction of abuses, proved as
already mentioned; nor will the Court grant any more damages one way or the other.
(Decision, p. 244, supra.)

On the other hand, the errors assigned in the appeal of the defendants as appellants are as follows:

I.

THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO

SUGAR CENTRAL CO., INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST FROM
THE DATE OF FILING OF THE COMPLAINT.

II.

THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE
DEFENDANTS, PARTICULARLY J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN
THE COUNTERCLAIM OF SAID DEFENDANTS.

The portions of the Decision of the Lower Court assailed by the defendants as appellants are as
follows:

(1) "As to the alleged juggling of books in that the personal account of J. Amado Araneta of
P46,270.00 was closed on October 31, 1947 by charges transferred to loans receivable nor
was interest paid on this amount, the Court finds that this is related to charge No. 1, namely,
the granting of personal loans to J. Amado Araneta; it is really true that according to the
books, and as admitted by defendants, J. Amado Araneta secured personal loans; in 1947,
the cash advance to him was P132,082.00 (Exh. A); the Court has no doubt that this was
against the By-Laws which provided that:

The Directors shall not in any case borrow money from the Company. (Sec. III, Art.
7);

the Court therefore finds this count to be duly proved; worse, the Court also finds that as
plaintiffs contend, while the books of the Corporation would show that the last balance of
P46,270.00 was written off as paid, as testified to by Auditor Mr. Sanchez, the payment
 appeared to be nothing more than a transfer of his loan receivable account, stated otherwise,
the item was only transferred from the personal account to the loan receivable account, so
that again the Court considers established the juggling of the books; and then again, it is also
true that the loans were secured without any interest and while it is true that in the Directors'
meeting of 21 October, 1953, it was resolved to collect 8%, the Court does not see how such
a unilateral action of the Board could bind the borrowers. Be it stated that defendants have
presented in evidence Exh. 5 photostatic copy of the page in loan receivable and it is sought
to be proved that J. Amado Araneta's debt was totally paid on 31 October, 1953; to the
Court, in the absence of definite primary proof of actual payment having found out that there
had already been a juggling of books, it cannot just believe that the amount had been paid as
noted in the books. (Decision, pp. 233-235 of Record on Appeal.)

(2) "With respect to the second point in the motion for reconsideration to the effect that the
Court did not make any findings of fact on the counterclaim of defendants, although the
Court did not say that in so many words, the Court takes it that its findings of fact on pages
17 to 21 of its decision were enough to justify a dismissal of the counterclaim, because the
counterclaims were based on the fact that the complaint was premature, improper, malicious
and that the language is unnecessarily vituperative abusive and insulting; but the Court has
not found that the complaint is premature; nor has the Court found that the complaint was
malicious; these findings can be gleaned from the decision with respect to the allegation that
the complaint was abusive and insulting, the Court does not concur; for it has not seen
anything in the evidence that would justify a finding that plaintiffs and been actuated by bad
faith, nor is there anything in the complaint essentially libelous; especially as the rule is that
allegations in pleading where relevant, are privileged even though they may not clearly
proved afterwards; so that the Court has not seen any merit in the counterclaims; and the
Court had believed that the decision already carried with it the implication of the dismissal of
the counterclaims, but if that is not enough, the Court makes its position clear on this matter
in this order, and clarifies that it has dismissed the counterclaims of defendant; ..." (Order of
September 3, 1960, pp. 248-249, supra.)

Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as appellants,
it appears to us that the Lower Court was correct in its appreciation (1) that the evidence presented
did not show that the defendant Ma-ao Sugar Company was insolvent (2) that the alleged
discriminatory acts committed by the defendant Central against the planters were not a proper
subject of derivative suit, but, at most, constituted a cause of action of the individual planters; and (3)
that the acts of mismanagement complained of and proved do not justify a dissolution of the
corporation.

Whether insolvency exists is usually a question of fact, to be determined from an inventory of

the assets and their value, as well as a consideration of the liabilities.... But the mere
impairment of capital stock alone does not establish insolvency there being other evidence
as to the corporation being a going concern with sufficient assets. Also, the excess of
liabilities over assets does not establish insolvency, when other assets are available.
(Fletcher Cyc. of the Law of Private Corporations, Vol. 15A, 1938 Ed pp. 34-37; Emphasis
supplied).

But relief by dissolution will be awarded in such cases only where no other adequate remedy
is available, and is not available where the rights of the stockholders can be, or are,
protected in some other way. (16 Fletcher Cyc. Corporations, 1942 Ed., pp. 812-813, citing
"Thwing v. McDonald", 134 Minn. 148, 156 N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann.
Cas. 1918 E 420; Mitchell v. Bank of St. Paul, 7 Minn. 252).
The First Assignment of Error in the brief of the plaintiffs as appellants, contending that the
investment of corporate funds by the Ma-ao Sugar Co., Inc., in another corporation (the Philippine
Fiber Processing Co., Inc.) constitutes a violation of Sec. 17-½ of the Corporation Law, deserves
consideration.

Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through its President, J.
Amado Araneta,, subscribed for P300,000.00 worth of capital stock of the Philippine Fiber
Processing Co. Inc., that payments on the subscription were made on September 20, 1950, for
P150,000.00, on April 30, 1951, for P50,000.00, and on March 6, 1952, for P100,000.00; that at the
time the first two payments were made there was no board resolution authorizing the investment;
and that it was only on November 26, 1951, that the President of Ma-ao Sugar Central Co., Inc., was
so authorized by the Board of Directors.

In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by
Luzon Industrial, corporation were transferred on May 31, 1952, to the defendant Ma-ao Sugar
Central Co., Inc., with a valuation of P355,000.00 on the basis of P1.00 par value per share. Again
the "investment" was made without prior board resolution, the authorizing resolution having been
subsequentIy approved only on June 4, 1952.

Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board Resolutions are
valid, the transaction, is still wanting in legality, no resolution having been approved by the
affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power, as required in Sec. 17-½ of the Corporation Law.

The legal provision invoked by the plaintiffs, as appellants, Sec. 17-½ of the Corporation Law,
provides:

No corporation organized under this act shall invest its funds in any other corporation or
business, or for any purpose other than the main purpose for which it was organized, unless
its board of directors has been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise at least two-thirds of
the voting power on such proposal at a stockholders' meeting called for the purpose ....

On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the Corporation Law,
which provides:

SEC. 13. — Every corporation has the power:

xxx xxx xxx

(9) To enter into any obligation or contract essential to the proper administration of its
corporate affairs or necessary for the proper transaction of the business or accomplishment
of the purpose for which the corporation was organized;

(10) Except as in this section otherwise provided, and in order to accomplish its purpose as
stated in the articles of incorporation, to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities and other evidences of indebtedness of any domestic or foreign
corporation.

A reading of the two afore-quoted provisions shows that there is need for interpretation of the
apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th edition, Professor Sulpicio S.
Guevara of the University of the Philippines, College of Law, a well-known authority in commercial
law, reconciled these two apparently conflicting legal provisions, as follows:

j. Power to acquire or dispose of shares or securities. — A private corporation, in order to

accomplish its purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic
or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not
need the approval of the stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the limitations established by the
Corporation Law; namely, (a) that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation; or (b) that a non-agricultural or non-
mining corporation shall be restricted to own not more than 15% of the voting stock of any
agricultural or mining corporation; and (c) that such holdings shall be solely for investment
and not for the purpose of bringing about a monopoly in any line of commerce or
combination in restraint of trade. (The Philippine Corporation Law by Sulpicio S. Guevara,
1967 Ed., p. 89.) (Emphasis ours.) lawphi1.nêt

40. Power to invest corporate funds. — A private corporation has the power to invest its
corporate funds in any other corporation or business, or for any purpose other than the main
purpose for which it was organized, provided that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
proposal at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural or
mining corporation. When the investment is necessary to accomplish its purpose or purposes
as stated in it articles of incorporation, the approval of the stockholders is not necessary. (Id.,
p. 108.) (Emphasis ours.)

We agree with Professor Guevara.

We therefore agree with the finding of the Lower Court that the investment in question does not fall
under the purview of Sec. 17- ½ of the Corporation Law.

With respect to the defendants' assignment of errors, the second (referring to the counterclaim) is
clearly without merit. As the Lower Court aptly ruled in its Order of September 3, 1960 (resolving the
defendants' Motion for Reconsideration) the findings of fact were enough to justify a dismissal of the
counterclaim, "because the counterclaims were based on the fact that the complaint was premature,
improper, malicious and that the language is unnecessarily vituperative abusive and insulting; but
the Court has not found that the complaint is premature; nor has the Court found that the complaint
was malicious; these findings can be gleaned from the decision; with respect to the allegation that
the complaint was abusive and insulting, the Court does not concur; for it has not seen anything in
the evidence that would justify a finding that plaintiffs had been actuated by bad faith, nor is there
anything in the complaint essentially libelous especially as the rule is that allegations in pleadings
where relevant, are privileged even though they may not be clearly proved afterwards; ..."

As regards defendants' first assignment of error, referring to the status of the account of J. Amado
Araneta in the amount of P46,270.00, this Court likewise agrees with the finding of the Lower Court
that Exhibit 5, photostatic copy of the page on loans receivable does not constitute definite primary
proof of actual payment, particularly in this case where there is evidence that the account in question
was transferred from one account to another. There is no better substitute for an official receipt and
a cancelled check as evidence of payment.

In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co., Inc. "to
refrain from making investments in Acoje Mining, Mabuhay Printing and any other company whose
purpose is not connected with the sugar central business." This portion of the decision should be
reversed because, Sec. 17-½ of the Corporation Law allows a corporation to "invest its fund in any
other corporation or business, or for any purpose other than the main purpose for which it was
organized," provided that its board of directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-thirds of the voting power.

IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao Sugar
Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing, and any
other: company whose purpose is not connected with the sugar central business," is reversed. The
other parts of the judgment are, affirmed. No special pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando and Barredo, JJ., concur.
Makalintal, Sanchez and Teehankee, JJ., took no part.

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

JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos

Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-
laws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for
a preliminary injunction" against the majority of the members of the Board of Directors and San
Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres
Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde,
Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent
corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share
and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding
and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended
that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation,
the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of
Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed
and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of
the capitalization at the time of the amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without authority and in usurpation of the
power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the authority of the Board ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of Directors had
changed since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all
the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof;
that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights
to vote and to be voted upon in the election of directors; and that in amending the by-laws,
respondents purposely provided for petitioner's disqualification and deprived him of his vested right
as afore-mentioned hence the amended by-laws are null and void. 1

As additional causes of action, it was 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; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations,
entered into contracts (specifically a management contract) with respondent corporation, which was
allowed because the questioned amendment gave the Board itself the prerogative of determining
whether they or other persons are engaged in competitive or antagonistic business; that the portion
of the amended bylaws which states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business and family relationship, is
unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws
which requires that "all nominations for election of directors ... shall be submitted in writing to the
Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise
unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of
filing thereof be cancelled, and that individual respondents be made to pay damages, in specified
amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that
the Secretary of respondent corporation refused to allow him to inspect its records despite request
made by petitioner for production of certain documents enumerated in the request, and that
respondent corporation had been attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b)
copy of the management contract between San Miguel Corporation and A. Soriano Corporation
(ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the
stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e)
lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M.
Soriano, Jr. and/or its successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents,
alleging, among others that the motion has no legal basis; that the demand is not based on good
faith; that the motion is premature since the materiality or relevance of the evidence sought cannot
be determined until the issues are joined, that it fails to show good cause and constitutes continued
harrasment, and that some of the information sought are not part of the records of the corporation
and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique
Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial
allegations therein and stating, by way of affirmative defenses that "the action taken by the Board of
Directors on September 18, 1976 resulting in the ... amendments is valid and legal because the
power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961
and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined
in relation to the total subscribed capital stock at the time the delegation of said power is made, not
when the Board opts to exercise said delegated power"; that petitioner has not availed of his intra-
corporate remedy for the nullification of the amendment, which is to secure its repeal by vote of the
stockholders representing a majority of the subscribed capital stock at any regular or special
meeting, as provided in Article VIII, section I of the by-laws and section 22 of the Corporation law,
hence the, petition is premature; that petitioner is estopped from questioning the amendments on the
ground of lack of authority of the Board. since he failed, to object to other amendments made on the
basis of the same 1961 authorization: that the power of the corporation to amend its by-laws is
broad, subject only to the condition that the by-laws adopted should not be respondent corporation
inconsistent with any existing law; that respondent corporation should not be precluded from
adopting protective measures to minimize or eliminate situations where its directors might be
tempted to put their personal interests over t I hat of the corporation; that the questioned amended
by-laws is a matter of internal policy and the judgment of the board should not be interfered with:
That the by-laws, as amended, are valid and binding and are intended to prevent the possibility of
violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the petition
states no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner
be ordered to pay damages and attorney's fees to respondents. The application for writ of
preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition,
denying the material averments thereof and stating, as part of their affirmative defenses, that in
August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began acquiring shares therein. until September 1976
when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated Foods
Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its total holdings
amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president
and controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares
of stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted
malevolent and malicious publicity campaign against SMC" to generate support from the stockholder
"in his effort to secure for himself and in representation of Robina and CFC interests, a seat in the
Board of Directors of SMC", that in the stockholders' meeting of March 18, 1976, petitioner was
rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue
that petitioner was engaged in a competitive business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat
in the Board of Directors at the next annual meeting; that thereafter the Board of Directors amended
the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection
of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors
and they accordingly filed their oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as
follows:

Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing,
by or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel Corporation held on March 13,
1961, which are in the possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues involved in the main
case. Accordingly, the respondents should allow petitioner-movant entry in the
principal office of the respondent Corporation, San Miguel Corporation on January
14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the rights herein
granted; it being understood that the inspection, copying and photographing of the
said documents shall be undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or papers not heretofore
included are not covered by this Order and any inspection thereof shall require the
prior permission of this Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of
salaries, allowances, bonuses, compensation and/or remuneration received by
respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International,
Inc. and/or its successors-in- interest, the Petition to produce and inspect the same is
hereby DENIED, as petitioner-movant is not a stockholder of San Miguel
International, Inc. and has, therefore, no inherent right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976,

withdrawing his request to copy and inspect the management contract between San
Miguel Corporation and A. Soriano Corporation and the renewal and amendments
thereof for the reason that he had already obtained the same, the Commission takes
note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of

production and inspection of the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation in San Miguel International,
 Inc., until after the hearing on the merits of the principal issues in the above-entitled
case.

This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation
issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of
the amendment to the By-laws", setting such meeting for February 10, 1977. This prompted
petitioner to ask respondent Commission for a summary judgment insofar as the first cause of action
is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid
purpose, private respondents admitted the invalidity of the amendments of September 18, 1976. The
motion for summary judgment was opposed by private respondents. Pending action on the motion,
petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that
pending the determination of petitioner's application for the issuance of a preliminary injunction
and/or petitioner's motion for summary judgment, a temporary restraining order be issued,
restraining respondents from holding the special stockholder's meeting as scheduled. This motion
was duly opposed by respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.

A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed
by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the
time of the filing of the instant petition, the said motion had not yet been scheduled for hearing.
Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner's
motion for production of record had not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had been
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that
he intended to run for the position of director of respondent corporation. Thereafter, respondents
filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors
of respondent corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications
specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason
thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents were seeking to nullify and render
ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner's irreparable
damage and prejudice, Allegedly despite a subsequent Manifestation to prod respondent
Commission to act, petitioner was not heard prior to the date of the stockholders' meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to
act hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have private respondents Andres M.
Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such
violation, and ordered to account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February
4, 1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to
dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on
April 29 and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof,
the following:

6. Re-affirmation of the authorization to the Board of Directors by the stockholders at

the meeting on March 20, 1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for which the Corporation
has been organized, and ratification of the investments thereafter made pursuant
thereto.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of
the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May
3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission,
however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17,
1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding,
no action has been taken up to the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch
on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon
his rights as stockholder of respondent corporation, and that respondent are acting oppressively
against petitioner, in gross derogation of petitioner's rights to property and due process. He prayed
that this Court direct respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents
from disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court
or until the Securities and Ex-change Commission acts on the matters complained of in the instant
petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had
been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner
copies of the following orders:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part petitioner's
motion for production of documents, petitioner's motion for reconsideration of the order denying the
issuance of a temporary restraining order denying the issuance of a temporary restraining order, and
petitioner's consolidated motion to declare respondents in contempt and to nullify the stockholders'
meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of
the Agenda for the annual stockholders' meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for summary
judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void
and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings
relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:

(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and controls a
greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in business directly and substantially competing with
the allied businesses of respondent SMC and of corporations in which SMC has substantial
investments. Further, when CFC and Robina had accumulated investments. Further, when CFC and
Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and
present danger that competitors or antagonistic parties may be elected directors and thereby have
easy and direct access to SMC's business and trade secrets and plans;

(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear
and present danger that business competitors, if allowed to become directors, will illegally and
unfairly utilize their direct access to its business secrets and plans for their own private gain to the
irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that
membership of a competitor in the Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in restraint of trade;

(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve
and protect itself by excluding competitors and antogonistic parties, under the law of self-
preservation, and it should be allowed a wide latitude in the selection of means to preserve itself;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on
May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has become moot and academic
because respondent Commission has acted on the pending incidents, complained of. It was,
therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition
has become moot and academic for the reason, among others that the acts of private respondent
sought to be enjoined have reference to the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the
order of respondent Commission, petitioner was allowed to run and be voted for as director; and that
in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed.
Further it was averred that the questions and issues raised by petitioner are pending in the
Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing
on the merits has been had; hence the elevation of these issues before the Supreme Court is
premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
questions for the determination of this Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court;
(2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to
the bylaws which specifically bars petitioner from being a director is void since it deprives him of his
vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did
not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC
Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation,
took into consideration an urgent manifestation filed with the Commission by petitioner on May 3,
1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The
reason given for denial of deferment was that "such action is within the authority of the corporation
as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to express
their wishes regarding disposition of corporate funds considering that their investments are the ones
directly affected." It was alleged that the main petition has, therefore, become moot and academic.

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent
Commission are now before this Honorable Court which has the authority and the competence to act
on them as it may see fit." (Reno, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for
an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San
Miguel Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of
Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of
the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2
of the Corporation Law.

Whether or not amended by-laws are valid is purely a legal question which public interest requires to
be resolved —

It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for
an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle
of exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to
what the provisions are and evidence is not necessary to determine whether such amended by-laws
are valid as framed and approved ... "; second: "it is for the interest and guidance of the public that
an immediate and final ruling on the question be made ... "; third: "petitioner was denied due process
by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather than serve
the ends of justice."

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the
legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court
should always strive to settle the entire controversy in a single proceeding leaving no root or branch
to bear the seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is the prayer of
San Miguel Corporation that this Court resolve on the merits the validity of its amended by laws and
the rights and obligations of the parties thereunder, otherwise "the time spent and effort exerted by
the parties concerned and, more importantly, by this Honorable Court, would have been for naught
because the main question will come back to this Honorable Court for final resolution." Respondent
Eduardo R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for
hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and
decide case involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the ends of justice would not be
subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et
al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v. Central Surety
and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for
further proceedings, citing precedent where this Court, in similar situations resolved to decide the
cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would
not be subserved by the remand of the case; or (b) where public interest demand an early
disposition of the case; or (c) where the trial court had already received all the evidence presented
by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the
case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only
a question of law is involved. 8a Because uniformity may be secured through review by a single
Supreme Court, questions of law may appropriately be determined in the first instance by
courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws
were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a
special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were
ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong
Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by the stockholders.

II

Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or
election to the Board of Directors of SMC are valid and reasonable —

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the
by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal
sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to
the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon
which reasonable minds must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-laws and who have
exercised their authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored
to suppress the minority and prevent them from having representation in the Board", at the same
time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as
director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided
Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San
Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with
the promotion of the corporate enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of petitioner and respondent San Miguel
Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of
the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is
further argued that there is not vested right of any stockholder under Philippine Law to be voted as
director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or
thru two corporations owned or controlled by him, control over the following shareholdings in San
Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation
— 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the
outstanding capital stock of San Miguel Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner
represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also
contended that petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members
of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation
are engaged in businesses directly and substantially competing with the alleged businesses of San
Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN

MIGUEL CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its
Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total

1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved
product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC.
Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken,
poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of such
dominance as to affect the prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines
which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina
was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex,
excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with
Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The
areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the
total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because
they "realized the grave dangers to the corporation in the event a competitor gets a board seat in
SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it
by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of
February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders'
Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the
outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801
shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders,
owning more than 30 million shares, or more than 90% of the total outstanding shares. voted against
petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the
clear and present danger that the election of a business competitor to the Board may cause upon
the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore,
is the issue — whether or not respondent San Miguel Corporation could, as a measure of self-
protection, disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by an 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. 12 At
common law, the rule was "that the power to make and adopt by-laws was inherent in every
corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the
United States that in the absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and inseparable legal incidents,
independent of any specific enabling provision in its charter or in general law, such power of self-
government being essential to enable the corporation to accomplish the purposes of its creation. 13

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 ... " In Government v. El Hogar, 14 the Court sustained the
validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their
action, on the ground that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majorityof 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." 15 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 a majority ... ." 16

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 disenting 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 petitioner 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. 17

It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is whether the disqualification of a competitor from being
elected to the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS

SHAREHOLDERS

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." 18 "The ordinary trust relationship of directors of
a corporation and stockholders", according to Ashaman v. Miller, 19 "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 * * *.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of
the directors of corporations, thus:

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 though 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.

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can
a director. Human nature is too weak -for this. Take whatever statute provision you
please giving power to stockholders to choose directors, and in none will you find any
express prohibition against a discretion to select directors having the company's
interest at heart, and it would simply be going far to deny by mere implication the
existence of such a salutary power

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from
being a director, the same reasoning would apply to disqualify the wife and immediate member of
the family of such stockholder, on account of the supposed interest of the wife in her husband's
affairs, and his suppose influence over her. It is perhaps true that such stockholders ought not to be
condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So
it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of control in this corporation as in many
others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test
that we can apply is as to whether or not the action of the Board is authorized and sanctioned by
law. ... . 22

These principles have been applied by this Court in previous cases.23

AN AMENDMENT TO THE CORPORATION 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, HAS BEEN
SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power
to make by-laws declaring a person employed in the service of a rival company to be ineligible for
the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected,
subjects to removal, a director if he be also a director in a corporation whose business is in
competition with or is antagonistic to the other corporation is valid." 24This is based upon the principle
that where the director is so employed in the service of a rival company, he cannot serve both, but
must betray one or the other. Such an amendment "advances the benefit of the corporation and is
good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law
in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to
add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because
as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may
make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation
cannot engage in a business in direct competition with that of the corporation where he is a director
by utilizing information he has received as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director. 26

It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a
rival business, the directors entered into a new contract themselves with the foreign firm for
exclusive sale of its products, the court held that equity would regard the new contract as an offshoot
of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not
reap the fruits of his misconduct to the exclusion of his principal. 28

The doctrine of "corporate opportunity" 29 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. 30

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.

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be
directors, officers, employees, agents, nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court,
thus:

... A bank director has access to a great deal of information concerning the business
and plans of a bank which would likely be injurious to the bank if known to another
bank, and it was reasonable and prudent to enlarge this minimum disqualification to
include any director, officer, employee, agent, nominee, or attorney of any other bank
in California. The Ashkins case, supra, specifically recognizes protection against
rivals and others who might acquire information which might be used against the
interests of the corporation as a legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney for another bank, in
addition to the direct conflict or potential conflict of interest, there is also the danger
of inadvertent leakage of confidential information through casual office discussions or
accessibility of files. Defendant's directors determined that its welfare was best
protected if this opportunity for conflicting loyalties and potential misuse and leakage
of confidential information was foreclosed.

In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:

(1) A director shall not be directly or indirectly interested as a stockholder in any

other firm, company, or association which competes with the subject corporation.

(2) A director shall not be the immediate member of the family of any stockholder in
any other firm, company, or association which competes with the subject corporation,

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any
other firm, company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding

office.

(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience — that a person cannot
serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner 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 here involved. Apart from the impractical results that would ensue from such
arrangement, it would be inconsistent with petitioner'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. As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors ...
without active and conscientious participation in the managerial functions of the company. As
directors, it is their duty to control and supervise the day to day business activities of the company or
to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that these
policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to
the corporation."

Sound principles of corporate management counsel against sharing sensitive information with a
director whose fiduciary duty of loyalty may well require that he disclose this information to a
competitive arrival. These dangers are enhanced considerably where the common director such as
the petitioner is a controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to appropriate for the benefit
of his own corporation the corporate plans and policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and
unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new products could enable said competitor to
utilize such knowledge to his advantage. 32

There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair
competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or
prohibit private monopolies when the public interest so requires. No combinations in restraint of
trade or unfair competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or

commerce, or shall combine with any other person or persons to monopolize said
merchandise or object in order to alter the price thereof by spreading false rumors or
making use of any other artifice to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any

merchandise or object of commerce or an importer of any merchandise or object of
commerce from any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with any person likewise
engaged in the manufacture, production, processing, assembling or importation of
such merchandise or object of commerce or with any other persons not so similarly
 engaged for the purpose of making transactions prejudicial to lawful commerce, or of
increasing the market price in any part of the Philippines, or any such merchandise
or object of commerce manufactured, produced, processed, assembled in or
imported into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of
commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in
restraint of trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter
in free markets. These laws are designed to preserve free and unfettered competition as the rule of
trade. "It rests on the premise that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices and the highest quality ... ." 34 they
operate to forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a
well defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general sense, or to control prices to the detriment
of the public. 37 In short, it is the concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when desired. 38 Further, it
must be considered that the Idea of monopoly is now understood to include a condition produced by
the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the
suppression of competition by the qualification of interest or management, or it may be thru
agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination
or conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what the parties
actually did and not the words they used. For instance, the Clayton Act prohibits a person from
serving at the same time as a director in any two or more corporations, if such corporations are, by
virtue of their business and location of operation, competitors so that the elimination of competition
between them would constitute violation of any provision of the anti-trust laws. 42 There is here a
statutory recognition of the anti-competitive dangers which may arise when an individual
simultaneously acts as a director of two or more competing corporations. A common director of two
or more competing corporations would have access to confidential sales, pricing and marketing
information and would be in a position to coordinate policies or to aid one corporation at the expense
of another, thereby stifling competition. This situation has been aptly explained by Travers, thus:

The argument for prohibiting competing corporations from sharing even one director
is that the interlock permits the coordination of policies between nominally
independent firms to an extent that competition between them may be completely
eliminated. Indeed, if a director, for example, is to be faithful to both corporations,
some accommodation must result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that would injure B without
 violating his duty of loyalty to B at the same time he could hardly abstain from voting
without depriving A of his best judgment. If the firms really do compete — in the
sense of vying for economic advantage at the expense of the other — there can
hardly be any reason for an interlock between competitors other than the
suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of
men have been able to dominate and control a great number of corporations ... to the detriment of
the small ones dependent upon them and to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the
prices of his products or vary its marketing strategies by region or by brand in order to get the most
out of the consumers. Where the two competing firms control a substantial segment of the market
this could lead to collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry between the corporations, to
seek out ways of compromising opposing interests, and thus eliminate competition. As respondent
SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in
the country win enable the former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups and change varying prices in
order to maximize profits from every market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product line in which it competes with SMC.
Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive
the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then
the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained
in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more
than one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder
but waived in the case of another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders.
The equal protection clause of the Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible to run for director, there
must be hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support the view that
a by-law which disqualifies a competition from election to the Board of Directors of another
corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to
the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment
of those who are authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the
terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or
more forces, each possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more advantageous terms as an inducement to
secure trade. 46 The test must be whether the business does in fact compete, not whether it is
capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristics
activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same
kind is a competitor. Such factors as quantum and place of business, Identity of products and area of
competition should be taken into consideration. It is, therefore, necessary to show that petitioner's
business covers a substantial portion of the same markets for similar products to the extent of not
less than 10% of respondent corporation's market for competing products. While We here sustain
the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner
is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing
at which the petitioner must be given the fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of
directors to act with fairness to the stockholders.48Pursuant to this obligation and to remove any
suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities behind Exchange Commission en banc and its decision shall
be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public
policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste,
dissipation or misapplication of the corporation assets, a court of equity has the power to grant
appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was
denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over
a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a
complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes
of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment
in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries,
allowances, bonuses and other compensation or remunerations received by the directors and
corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC;
and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May
1976, with deletions of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976;
(1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in
Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948
with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign
bank under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that
as of December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that
the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and
(4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used
in line with a program for the setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of
the afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of
the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection.
It is generally held by majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other
words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular
Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest
purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial
opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court
to inquire into and consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused
when the information is not sought in good faith or is used to the detriment of the corporation." 57 But
the "impropriety of purpose such as will defeat enforcement must be set up the corporation
defensively if the Court is to take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general
rule that stockholders are entitled to full information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such information, especially where it
appears that the company is being mismanaged or that it is being managed for the personal benefit
of officers or directors or certain of the stockholders to the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for a lawful
purpose is a matter of law, the right of such stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.

Some state courts recognize the right under certain conditions, while others do not. Thus, it has
been held that where a corporation owns approximately no property except the shares of stock of
subsidiary corporations which are merely agents or instrumentalities of the holding company, the
legal fiction of distinct corporate entities may be disregarded and the books, papers and documents
of all the corporations may be required to be produced for examination, 60 and that a writ of
mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes,
the records of the parent even though subsidiary was not named as a party. 61 mandamus was
likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof
of sufficient control or dominion by the parent showing the relation of principal or agent or something
similar thereto. 62

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
corporation is a separate and distinct corporation domiciled and with its books and records in
another jurisdiction, and is not legally subject to the control of the parent company, although it owned
a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an allied
corporation by stockholder of the parent company which owns all the stock of the subsidiary has
been refused on the ground that the stockholder was not within the class of "persons having an
interest." 64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in corporation's possession and control in
its office in New York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and
directors.

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress information for
the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies
of some documents which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the books and records
of a corporation in order to investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the stewardship of the officers and
directors. 68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and
fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of such wholly subsidiary which are in
respondent corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for ratification is
a sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was organized"
provided that its Board of Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is
made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is
only when the purchase of shares is done solely for investment and not to accomplish the purpose of
its incorporation that the vote of approval of the stockholders holding shares entitling them to
exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is
to manufacture and market beer. It appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong
Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as
a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the
stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the
manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is important to the investing corporation and
would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the
power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and,
quoting Prof. Sulpicio S. Guevara, said:

"j. Power to acquire or dispose of shares or securities. — A private corporation, in

order to accomplish is purpose as stated in its articles of incorporation, and subject to
the limitations imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the approval of stockholders; but
when the purchase of shares of another corporation is done solely for investment
and not to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of such shares or securities
must be subject to the limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to own not more than
15% of the voting stock of nay agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the purpose of bringing about a
monopoly in any line of commerce of combination in restraint of trade." The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis
supplied.)

40. Power to invest corporate funds. — A private corporation has the power to invest
its corporate funds "in any other corporation or business, or for any purpose other
than the main purpose for which it was organized, provide that 'its board of directors
has been so authorized in a resolution by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of the voting
power on such a propose at a stockholders' meeting called for that purpose,' and
provided further, that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby render
binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because
the questioned investment is neither contrary to law, morals, public order or public policy. It is a
corporate transaction or contract which is within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said
this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within
the scope of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted
the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977
cannot be construed as an admission that respondent corporation had committed an ultra vires act,
considering the common practice of corporations of periodically submitting for the gratification of
their stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, 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.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on
the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending
hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a
separate opinion, wherein they voted against the validity of the questioned amended bylaws and that
this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They
concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in
the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing
by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the
petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as
specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and
the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is
hereby DISMISSED. No costs.

Makasiar, Santos Abad Santos and De Castro, JJ., concur.

Aquino, and Melencio Herrera JJ., took no part.

G.R. No. L-25241 November 3, 1926

HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.

ROBINSON, plaintiffs-appellants,
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC BARCLAY, ALFRED F.
KELLY, JOHN W. MEARS and CHARLES D. MACINTOSH, defendants-appellees.

Thomas Cary Welch for appellants.

Gibbs and McDonough for appellees.

OSTRAND, J.:

This is an appeal from a decision of the Court of First Instance of Manila, sustaining a demurrer to
the complaint. The plaintiffs declined to amend and judgment was rendered dismissing the case.
The complaint in question reads as follows:

The above named plaintiffs, by Thomas Cary Welch, their attorney, complain of the above-
named defendants and for cause of action against them allege:

1st. That at al times in this complaint mentioned the plaintiffs Harrie S. Everett, Ellis H. Teal
and George W. Robinson were and now are residents of the City of Manila, Philippine
Islands. That the plaintiff Carl G. Clifford was formerly a resident of said City of Manila and
now is the resident of the City of Washington, District of Columbia.

2nd. That at all times in this complaint mentioned the defendant the Asia Banking
Corporation hereinafter called "the Bank", was and now is a foreign banking corporation duly
licensed to transact banking business in the Philippine Islands, having, its principal office and
place of business at Manila aforesaid and that said Asia Banking Corporation never has
been empowered by law or licensed to do any business other than commercial banking in
the Philippine Islands. That the defendants Nicholas E. Mullen, Alfred F. Kelly, John W.
Mears, and Charles D. Macintosh were residents of said City of Manila and were officers,
agents and employees of the said Asia Banking Corporation, the said Mullen being the
General Manager thereof in said City; That: the defendant Eric Barclay is a now a resident of
Los Angeles, California, and the defendant Mcintosh is also residing in the United States, his
exact residence being unknown.
3rd. That at all times in this complaint mentioned Teal and Company hereinafter called the
Company, was and now is a domestic corporation duly incorporated under the laws of the
Philippine Islands and having its principal office and place of business at Manila aforesaid.
That during said times the plaintiffs Everett, Clifford, Teal and Robinson were the principal
stockholders in the Company owning a total of 4,478 shares therein and that the defendant
Barclay was the only other stockholder, owning one share thereof.

4th. That in the year 1921, the said Teal and Company has become indebted to the firm of H.
W. Peabody and Company in about the sum of P300,000, being for tractors, plows and parts
which had been ordered and delivered, the Bank and other banks in Manila held drafts
accepted by the Company under said H. W. Peabody and Company's guarantee. That said
tractors having become unsailable by reason of the financial and agricultural depression that
had overtaken the Islands, the said tractors were all returned to the said H. W. Peabody and
Company and as these plaintiffs are informed and verily believes were by it returned to the
United States, and while the events herein set forth were taking place the Company made
payments on its indebtedness through the Bank to H. W. Peabody and Company, amounting
to the sum of at least P150,000. that at about the same time the Company had ordered
another lot of tractors, etc., from a business house in the United States, known as Smith,
Kirkpatrick and Co., under a commercial letter of credit which the Company had from the
Bank in New York City, but that shipment of such tractors had been delayed until the credit
had been rescinded by the Bank and that upon such rescission Smith, Kirkpatrick and Co.,
had been advised by telegraph that the order was cancelled and not to ship the tractors. That
nevertheless and contrary to such advise the said Smith, Kirkpatrick and Co. did ship the
tractors doing so under D/A drafts therefor and that when said tractors arrived in Manila and
in order, if possible to save Smith, Kirkpatrick and Co. from additional loss, the Company at
the request and on the advice of the said Bank accepted the drafts and stored the same in a
warehouse in Manila rented by it and gave receipts therefor.

5th. That thereafter and on or about March 1921, the Bank persuaded the Company and the
said H. W. Peabody and Co. and Smith, Kirkpatrick and Co. to enter into a so called
"creditors agreement" with itself, wherein it was mutually agreed that neither of the parties
should take action to collect its debts from the Company for the term of two years after the
date thereof. That these plaintiffs have no copy of said agreement but beg leave to refer to
the original of same, in possession of the Bank, for greater certainty.

6th. That the business of said Company consisted mainly in the merchandising of
automobiles, trucks, tractors, spare parts and accessories therefor, and the repairing thereof.
That on the 29th day of December, 1922, said company was solvent and in the enjoyment of
a large, growing, and lucrative business and in the possession of a valuable reputation and
good-will. That since its, organization in May, 1919, it had done its banking business and
financing almost exclusively thru and with the Bank and by reason of such continued
relations the officers of the Company had acquired trust and confidence in the integrity and
good intentions of the said bank and its officers and the other defendants in their friendliness
to themselves and the Company.

7th. That on said 29th day of December, 1922, the said Company was indebted to the Bank
in about the sum of P750,000, which said sum was secured by mortgage on its personal
property and the improvements upon the real estate occupied by it, which real estate was
held under a ninety-nine years lease upon very favorable terms and which lease was a
valuable asset and constantly increasing in value, and that the said Bank held acceptances,
warehouse receipts or pledges for such other indebtedness, as was not covered by the last
mentioned mortgage, which said security was ample to cover the amount of the
indebtedness.
8th. That toward the end of the year 1922, the Bank, through its manager the defendant
Mullen represented to the Company and its managers that for the protection both of the Bank
and the Company it was advisable for them both that the Bank should temporarily obtain
control of the management and affairs of the Company in order that the affairs of the
Company could be conducted by the Bank without interference or hindrance from outside,
and to this end that it would be necessary for the stockholders in the Company to place their
shares therein in a Voting Trust to be held by the Bank would then finance the Company
under its own supervision and that if and when the same were successful and in position to
resume independent operation the said trust would be terminated and the stock returned to
its true owners, and further represented that in case at any time the Bank decided to
discontinue operation under the said trust that then the stock also would be so returned.

9th. That it was further represented by the Bank and the said Mullen that in order to protect
the mutual interests of the Bank and the Company it was necessary to carry into effect the
said proposed voting trust without the knowledge of the creditors above named and thereby
place the Bank in an advantageous position with regard to them. That relying upon the
previous friendly relations between the bank and the Company and between the individual
defendants and these plaintiffs and relying upon the promise and representations of the
defendants, these plaintiffs were induced to sign and did sign and deliver to the Bank
simultaneously a so-called "Voting Trust Agreement," executed by the plaintiff stockholders
and a Memorandum of Agreement executed by the Company, both dated and executed and
delivered the 29th day of December, 1922, the two forming one document and a copy of
which is hereto attached and marked Exhibit A.

10th. That by reason of the facts above set forth and of their reliance upon the good faith and
good-will of the defendants these plaintiffs were induced to sign the "Memorandum of
Agreement," and "Voting Trust Agreement," Exhibit A, understanding from the defendant that
the same were intended for the protection of all parties thereto from outside creditors, but
that they were not intended to be enforced according to the letter thereof, and that they did
not contain the true agreement between the Bank and the Company which was to finance
the Company without interference from the above named creditors, to hold the voting trust as
a protection to the bank as against the said creditors and for its own advances, and the
further agreement that in case in the Bank did not operate under the said voting trust
because of the disapproval by its New York headquarters of such action, or for any other
cause, the said trust would be cancelled and the stock in and control of the Company
returned to its true owners.

11th. That shortly subsequent to the execution and delivery of the voting trust and
memorandum of agreement hereinabove described, in violation of the obligations and duties
imposed by law upon the trustee and in pursuance of a scheme to defraud these plaintiffs
hereinbelow more fully set forth, the said voting trustee, the defendant Mullen, caused and
procured, by virtue of the powers delegated in the said voting trust, the displacement and
removal from the Board of Directors of the Company of each and every person who was at
the time of the execution of the said voting trust a stockholder in the Company and the
substitution in their places as such directors, of the above named persons defendant, or of
other persons at the time employees and servants of the Bank, that thereafter and at no
subsequent time did the said trustee allow or permit to act as a Director of the Company any
person who was in fact a stockholder in the Company; that no one of the so-called directors
so placed in ostensible office, at any time has ever purchased from any stockholder of the
Company a single share of the capital stock thereof, or paid to any stockholder or the
Company any money or consideration whatsoever for the stock by virtue of the assumed
ownership of which he has assumed to be a director of the Company and that at all time
since, the Company has been exclusively controlled and managed by the said defendants
none of whom had any legal or equitable right to a voice in the control or management
thereof.

12th. That in pursuance of the above-mentioned and hereinafter described scheme to

defraud these plaintiffs, the new so-called directors proceeded to remove from office the
Secretary of the Company, and to discharge from employment all of the old responsible
managers and foremen in the office and shops who were total to the Company and to these
plaintiffs as the strockholders thereof and to displace them substitute for them creatures of
their own choosing whose interest consisted wholly in pleasing themselves and the Bank,
and who were wholly foreign to the stockholders, these plaintiffs who were and are the real
owners of the Company. That thereafter said defendants conducted the business of the
Company without consulting the stockholders thereof and denied to the stockholders any
knowledge or information as to their actions, or the business of the Company, and at all
times thereafter carried on the business and management in all respects as if they and the
Bank were the real stockholders and owners thereof and in utter and entire disregard of the
rights and interests of these plaintiffs who were and are the real owners. That the said
individual defendants, as such pretended stockholders and directors as aforesaid, from time
to time gave new mortgages upon the properties of the Company to the Bank as if from time
to time required and without regard to the interest of the Company and looking solely to the
advantage of the Bank whose employees and henchmen all of them were and are.

13th. That after excluding the real owners from voice in the management or knowledge of the
affairs of the Company, the said individual defendants and or the Bank by agreement among
themselves or because the individual defendants as employees were coerced by the Bank,
the said defendants gave pledges and mortgages from the Company to the Bank and
entered into contracts as directed by the Bank, and permitted the Bank to foreclose the same
and to sell the property of the Company at such times and in such manners as to be solely to
the interests of the Bank of themselves, and wholly without regard to the best interests of the
Company itself in disregard to the duties and obligations of a trustee, and permitted the Bank
to bring suits or suits against the Company, in which the Company was not represented by
anyone having its interest at heart and in which by reason of the above set forth relation of
the Company to the Bank, the Bank in truth occupied the position of both plaintiff and
defendant and tricked and deluded the courts into giving judgments in which the rights of the
real parties were concealed and unknown to the courts.

14th. That on or about the 18th day of August, 1923, in order more effectually to plunder the
Company and to defraud these plaintiffs the said defendants, Mullen, Barclay, Mears and
Mcintosh, made, executed and filed in the Bureau of Commerce and Industry of the
Philippine Islands, articles of incorporation of a corporation called the "Philippine Motors
Corporation," having its principal office in the City of Manila, a capital stock of P25,000, of
which the sum of P5,000, was alleged to have been subscribed and paid as follows: the
defendant Barclay P200, defendant Mears P1,200, defendant Kelly P1,200, defendant
Mcintosh P1,200, defendant Mullen P1,200, the treasurer thereof being the defendant
Mears. And these plaintiffs beg leave to refer to the original articles of Incorporation on file in
the said Bureau for greater certainty.

That at the time of such incorporation each and every one of the last above named
defendants was an officer or employee of the defendant Bank. That these plaintiffs have nor
information nor means of obtaining information as to whether the money alleged to have
been described by them for their shares of stock was of their personal funds and property or
whether it was money furnished them by the Bank of purpose moneys such incorporation
was a fraud upon these plaintiffs for the reason that it was intended for the sole purpose of
taking over the assets of the Company and said defendants were enabled to effectuate such
intent by reason of their positions as officers and employees of the Bank and because each
and every one of them were nominally and de facto directors of the Company, by reason of
their appointments as such by the defendant Mullen, the Voting Trustee, under the Voting
Trust hereinabove set forth, of which facts each and every one of said defendant
incorporators were at the time fully informed as these plaintiffs verily believe.

15th. That after the incorporation described in the last preceding paragraph the said Bank
turned over to the Philippine Motors Corporation all of the business and assets of the
company of every name nature and description and with the connivance and consent of the
individual defendants acting in their double capacity as directors of both corporations,
permitted and assisted the said Philippine Motors Corporation to enter and possess itself of
the premises and good will of the Company and to continue and carry on the business for the
sole benefit of the new corporation and to collect the debts owing to the Company and
convert the advantages, profits and proceeds thereof to itself. And that at all times since the
said Philippine Motors Corporation has continued to conduct and advantage itself of the
business of the Company to the disregard of and detriment to the rights of these plaintiffs
and to their damage.

16th. That these plaintiffs, by reason of the facts hereinabove set forth were and are ignorant
of the exact relations that have existed and do exist between the Bank and the said
Philippine Motors Corporation, or between the Bank and the individual defendants as
ostensible stockholders thereof and that the Bank has prevented these plaintiffs from
obtaining any such information by refusing after demand to return to these plaintiffs their
stock in the Company or to dissolve the Voting Trust or in any wise to allow them to regain
control of what is left of the Company or its records and has endeavored to forestall and
prevent any action toward regaining such control or enforcement of their rights by bringing
suit against one of the principal stockholders in the Company, the plaintiff Everett, based on
an alteration and falsification of the books of the Company and by threat of proceedings
against another principal stockholder in the Company, the plaintiff Clifford, to collect a large
sum of money as and for an alleged non payment of a subscription to the stock of the
Company, which the records of the Company plainly show does not exist and has no
foundation in equity or in law.

That by the reason of ignorance, so generated and maintained, of facts wholly within the
knowledge of defendants and concealed from these plaintiffs, they are unable to allege
positively and therefore must charge as they do charge in the alternative;

(a) That the said Philippine Motors Corporation is a fictitious entity brought into
semblance of being by the Bank through the control of its employees the above
named individual defendants acting as pretended incorporators, stockholders and
directors, when in truth and in fact the said individuals had and have no personal
property interest therein, and that in case of foregoing is found to be the fact the said
Philippine Motors Corporations never obtained and has now no legal existence for
the reason that it was and is the Bank itself operating under a disguise and because
said Bank, under its license to do business in the Philippine Islands, is without power
or authority to engage in the business assumed by the Philippine Motors
Corporation, and because said corporation so pretendedly created by the Bank is in
violation of its duties and obligations assumed by it as Trustee of the stockholders of
the Company, Or

(b) That in case the individual defendants as individuals created the said, the
Philippine Motors Corporation, and the same is the property of themselves as
 stockholders and bona fide investors of their own money in the stock of the same,
then such creation and all subsequent operations of the said Corporation were a
fraud upon these plaintiffs because such incorporation and subsequent acts of the
Corporation were caused and procured by said individual defendants the defendant
Mullen being the voting trustee of the Company and at the same time being the
Manager in the Philippine Islands of the Bank, and by virtue of the power so focused
and concentrated in himself together with the powers of the others individual
defendants as agents and employees of the Bank, and simultaneously as officers
and directors of the Company enabled the said individual defendants to take
advantage of their position in respect to the Company and the Bank and to sue the
same to the defraudation of these plaintiffs.

17th. That the return to the above named individual plaintiffs by the Trustee of the stock in
the Company, transferred to it by said Voting Trust Agreement, has been demanded and
refused.

18th. That by reason of the facts above alleged these plaintiffs have been kept and are in
ignorance of accurate knowledge of the actions of the defendants and of the amount of
damage thereby caused these plaintiffs and represent to the court what accurate information
can only be obtained by a discovery by the defendants and each of them of all and every fact
relevant to this cause.

19th. That these plaintiffs are credibly informed and verily believe that the defendants are
now confabulating among themselves further to conceal the facts and to damage these
plaintiffs by a sale of the Philippine Motors Corporation and all its assets tangible and
intangible to a new purchaser, in which new purchaser the said defendants will have
interests, and that in case such sale should be made it will damage these plaintiffs in a
manner for which there is no adequate remedy and will cause and produce a multiplicity of
actions.

Wherefore these plaintiffs demand the decrees and judgment of this court:

1st. Enjoining and restraining the defendants and each of them from transferring the
corporation called Philippine Motors Corporation or any of the capital stock therein to any
person or corporation during the pendency of this action.

2nd. Ordering the said defendants at once to cancel the said Voting trust and to return to
these plaintiffs their shares of the stock of Teal and Company, taken under said trust and to
return to them all the books and records of every kind and nature of said Teal and Company,
and to regain to these defendants their pretended positions in and control of Teal and
Company.

3rd. Decreeing that the defendants and each of them make full and true discovery of all the
facts in relation to the formation, incorporation, and ownership of the Philippine Motors
Corporation and of all dealings and transactions between the defendant Asia Banking
Corporation and said Philippine Motors Corporation to the end that the court and these
plaintiffs shall have information whether said Philippine Motors Corporation is in fact the Asia
Banking Corporation operating under a disguise or is the creation of the individual
defendants availing themselves of their connections with and positions in the said Bank in
order to take advantage of these plaintiffs and of Teal and Company.
 4th. Decreeing that the said defendants make discovery of all and every one of their acts and
transactions with respect to Teal and Company since the same was taken by them adding
and including a full and true discovery of all sales of the property of Teal and Company of
every kind and nature with the full and true consideration received in every case, the amount
received from any compromise entered into by them in the name of Teal and Company and
the true consideration therefor.

5th. In case it be found that the said Philippine Motors Corporations is in fact the Asia
Banking Corporation that a decree be entered ordering the said Bank immediately to
dissolve the same and to account to these plaintiffs for all profits made thereby since its
organization.

6th. For judgment against said defendants jointly and severally for the damages caused by
their acts aforesaid which the plaintiffs charged to be not less than P500,000.

7th. For such other or further relief, or both, in the premises as to this court may seem just
and equitable.

To this complaint the defendants demurred on the grounds (1) that it is ambiguous, unintelligible and
uncertain; (2) that the plaintiffs have not the legal capacity to bring this action; (3) that the complaint
does not state facts sufficient to constitute a cause of action, and (4) that there is a defect or
misjoinder of parties defendant.

The court below sustained the demurrer on all four grounds and held that the complaint, especially in
its paragraphs 4 and 5, is ambiguous, confusing, unintelligible and vague; that Teal and Company
should have been joined as a party plaintiff; that, as far as the Philippine Motors Corporation is
concerned, the plaintiffs, not being stockholders in that corporation, had no legal right to proceed
against it in this case; and that the court could not be called upon to act as investigator of the facts
referred to in paragraphs 3 and 4 of the complaint, but that such investigations fall within the duty of
the interested party, the Attorney-General, the Insular Auditor or the Insular Treasurer.

If this were an ordinary action at law, the ruling of the court below would be correct in most respects;
it must be conceded that the complaint violates at least three of the four principal rules as to the
manner or stating facts in complaints in such actions. It suffers from duplicity, the facts are not stated
with certainty, and the statement is sometimes indirect and partly in the alternative. law phil.net

But we are not here dealing with a complaint in an action at law; this is in effect a bill of discovery
and the proceeding is primarily one for equitable relief, though it may eventually develop into an
action at law. In such proceedings considerable latitude in the manner of stating facts in the
pleadings is allowed. The minute and varied statements of the probative facts, the charge to
anticipate a defense, and the interrogatories, become necessary in the equity practice, because bills
are for discovery as well as for relief, and in order to search the conscience of the defendant, he is
treated, in the pleading, somewhat as though placed upon the stand and examined as an unwilling
witness. (Bliss on Code Pleading, 3rd edition, section 319.)

Counsel for the defendants argue that there is no express provision in the Code of Civil Procedure
for a proceeding such as the present, and that, therefore, proceedings for discovery must be
considered limited to the taking of depositions under subsection 1 of section 355 of the Code and the
compulsory attendance of witnesses by means of subpoena. But, upon a moment's reflection, it
becomes evident that the means of discovery suggested by counsel are not always available or
adequate. Before they can be utilized there must be an action pending, or, in other words, a
complaint must have been filed and summons served upon the defendants. Now, there are cases
where facts, essential to the plaintiffs cause of action, are within the knowledge of the defendants,
but of which the plaintiff is so imperfectly informed that he cannot state them with certainty, even on
information and belief. He may, however, known that one out of two or more sets of facts is true
without knowing which of them is true. In such circumstances the plaintiff cannot, of course, state
any of the facts with certainty and it stands to reason that he cannot be required to plead with
certainty facts which he does not definitely believe to be true. But the facts being essential to this
cause of action, he must state them in one form or another and cannot very well file his complaint
before so doing. And if he cannot file his complaint, he cannot, as we have already stated, avail
himself of the remedy, provided for in subsection 1 of section 355, supra. It seems clear that, in such
a case, the proper procedure is for the plaintiff to state the facts within his knowledge with certainty,
but to plead in the alternative the, to him, doubtful facts, which are wholly within the defendant's
knowledge and call upon the defendant to make a full disclosure of these facts. That is exactly what
the plaintiffs have done in the present case, and bearing in mind the purpose of the action, their
complaint seems sufficiently intelligible and free from ambiguity.

The fact that there is no special express provision in the Code of Civil Procedure for bills of
discovery of this character does not necessarily signify that the remedy does not exist in this
jurisdiction. The maxim of equity that "Equity will not permit a wrong without a remedy" still holds
good, and our liberal Code of Civil Procedure is, if properly interpreted, sufficiently broad and flexible
to enable the courts to apply all necessary remedies, both legal and equitable.

II

Invoking the well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs
done to the corporation, but that the action must be brought by the Board of Directors, the appellees
argue — and the court below held — that the corporation Teal and Company is a necessary party
plaintiff and that the plaintiff stockholders, not having made any demand on the Board to bring the
action, are not the proper parties plaintiff. But, like most rules, the rule in question has its exceptions.
It is alleged in the complaint and, consequently, admitted through the demurrer that the corporation
Teal and Company is under the complete control of the principal defendants in the case, and, in
these circumstances, it is obvious that a demand upon the Board of Directors to institute an action
and prosecute the same effectively would have been useless, and the law does not require litigants
to perform useless acts. (Exchange bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and
Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden, 106 Cal., 329;
Glenn vs. Kittaning Brewing Co., 259 Pa., 510; Hawes vs.Contra Costa Water Company, 104 U. S.,
450.)

III

The conclusion of the court below that the plaintiffs, not being stockholders in the Philippine Motors
Corporation, had no legal right to proceed against that corporation in the manner suggested in the
complaint evidently rest upon a misconception of the character of the action. In this proceeding it
was necessary for the plaintiffs to set forth in full the history of the various transactions which
eventually led to the alleged loss of their property and, in making a full disclosure, references to the
Philippine Motors Corporation appear to have been inevitable. It is to be noted that the plaintiffs seek
no judgment against the corporation itself at this stage of the proceedings.

IV
The court below also erred in holding that the investigation of the transaction referred to in the
complaint is not within the province of the courts, but should be conducted by some other agency.
That discovery, such as that demanded in the present action, is one of the functions of a court of
equity is so well established as to require no discussion.

In our opinion the plaintiffs state a good cause of action for equitable relief and their complaint is not
in any respect fatally defective. The judgment of the court below is therefore reversed, the
defendants demurrer is overruled, and it is ordered that the return of the record to the Court within
ten days from the return of the record to the Court of First Instance. So ordered.

Avanceña, C. J., Street, Villamor, Johns, Romualdez and Villa-Real, JJ., concur.