EN BANC

G.R. No. L-30460 March 12, 1929

C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated, plaintiff-

appellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.

Frank H. Young for appellant.

Pablo Lorenzo and Delfin Joven for appellees.

STATEMENT

Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The defendants
are residents of the Philippine Islands.

It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president,
Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company, at a
meeting of the board of directors held on July 24, 1922, approved and authorized various lawful
purchases already made of a large portion of the capital stock of the company from its various
stockholders, thereby diverting its funds to the injury, damage and in fraud of the creditors of the
corporation. That pursuant to such resolution and on March 31, 1922, the corporation purchased
from the defendant S. R. Ganzon 100 shares of its capital stock of the par value of P10, and on June
29, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par value of P10,
and on July 16, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, each, and on April 5, 1922, it purchased from the defendant Dionisio Saavedra 10
shares of the same par value, and on June 29, 1922, it purchased from the defendant Valentin
Matias 20 shares of like value. That the total amount of the capital stock unlawfully purchased was
P3,300. That at the time of such purchase, the corporation had accounts payable amounting to
P13,807.50, most of which were unpaid at the time petition for the dissolution of the corporation was
financial condition, in contemplation of an insolvency and dissolution.

As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and directors of the
corporation approved a resolution for the payment of P3,000 as dividends to its stockholders, which
was wrongfully done and in bad faith, and to the injury and fraud of its creditors. That at the time the
petition for the dissolution of the corporation was presented it had accounts payable in the sum of
P9,241.19, "and practically worthless accounts receivable."

Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco, Felix del
Castillo, Andres L. Navallo and Rufino Manuel, personally as members of the Board of Directors, or
for the recovery from the defendants S. R. Ganzon, of the sum of P1,000, from the defendant Felix
D. Mendaros, P2,000, and from the defendant Dionisio Saavedra, P100, and under his second
cause of action, he prays judgment for the sum of P3,000, with legal interest against the board of
directors, and costs.

For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio Saavedra and
Valentin Matias made a general and specific denial.

In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2 and 3 of each
cause of action of the complaint, and that the shares mentioned in paragraph 4 of the first cause of
action were purchased, but alleges that they were purchased by virtue of a resolution of the board of
directors of the corporation "when the business of the company was going on very well." That the
defendant is one of the principal shareholders, and that about the same time, he purchase other
shares for his own account, because he thought they would bring profits. As to the second cause of
action, he admits that the dividends described in paragraph 4 of the complaint were distributed, but
alleges that such distribution was authorized by the board of directors, "and that the amount
represented by said dividends really constitutes a surplus profit of the corporation," and as
counterclaim, he asks for judgment against the receiver for P12,512.47 for and on account of his
negligence in failing to collect the accounts.

Although duly served, the defendant Mendaros did not appear or answer. The defendant Navallo
was not served, and the case against him was dismissed.

April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon which the
lower court dismissed plaintiff's complaint, and rendered judgment for the defendants, with costs
against the plaintiff, and absolved him from the cross-complaint of the defendant Velasco, and on
appeal, the plaintiff assigns the following errors:

1. In holding that the Sibuguey Trading Company, Incorporated, could legally purchase its
own stock.

2. In holding that the Board of Directors of the said Corporation could legally declared a
dividend of P3,000, July 24, 1922.

JOHNS, J.:

It is stipulated that on July 24, 1922, the directors of the corporation approved the purchase of stocks
as follows:

One hundred shares from S. R. Ganzon for P1,000;

One hundred shares from Felix D. Mendaros at the same price; which purchase was made on June
29, 1922; another

One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;

Ten shares from Dionisio Saavedra at the same price on June 29, 1922.

That during such times, the defendant Gregorio Velasco purchased 13 shares for the corporation for
P130; Felix del Castillo — 42 shares for P420; Andres Navallo — 15 shares for P150; and the
defendant Mendaros — 10 shares for P100. That during the time these various purchases were
made, the total amount of subscribed and paid up capital stock of the corporation was P10,030, out
of the authorized capital stock 2,000 shares of the par value of P10 each.

Paragraph 4 of the stipulation also recites:

Be it also admitted as a fact that the time of the said purchases there was a surplus profit of
the corporation above-named of P3,314.72.

Paragraph 5 is as follows:
 That at the time of the repeatedly mentioned various purchases of the said capital stock were
made, the said corporation had Accounts Payable in the total amount of P13,807.50 as
shown by the statement of the corporation, dated June 30, 1922, and the Accounts
Receivable in the sum of P19,126.02 according to the books, and that the intention of the
Board of Directors was to resell the stocks purchased by the corporations at a sum above
par for each stock, this expectation being justified by the then satisfactory and sound
financial condition of the business of the corporation.

It is also stipulated that on September 11, 1923, when the petition for the dissolution of the
corporation was presented to the court, according to a statement made June 30, 1923, it has
accounts payable aggregating P9,41.19, and accounts receivable for P12,512.47.

Paragraph 7 of the stipulation recites:

That the same defendants, mentioned in paragraph 2 of this stipulation of facts and in the
same capacity, on the same date of July 24, 1922, and at the said meeting of the said Board
of Directors, approved and authorized by resolution the payment of dividends to its
stockholders, in the sum of three thousand pesos (P3,000), Philippine currency, which
payments were made at different dates, between September 30, 1922, and May 12, 1923,
both dates inclusive, at a time when the corporation had accounts less in amount than the
accounts receivable, which resolution was based upon the balance sheet made as June 30,
1922, said balance sheet showing that the corporation had a surplus of P1,069.41, and a
profit on the same date of P2,656.08, or a total surplus amount of P3,725.49, and a reserve
fund of P2,889.23 for bad and doubtful accounts and depreciation of equipment, thereby
leaving a balance of P3,314.72 of net surplus profit after paying this dividend.

It is also stipulated at a meeting of the board of directors held on July 24, 1922, as follows:

6. The president and manager submitted to the Board of Directors his statement and balance
sheet for the first semester ending June 30, 1922 and recommended that P3,000 — out of
the surplus account be set aside for dividends payable, and that payments be made in
installments so as not to effect the financial condition of the corporation. That stockholders
having outstanding account with the corporation should settle first their accounts before
payments of their dividends could be made. Mr. Castillo moved that the statement and
balance sheet be approved as submitted, and also the recommendations of the president.
Seconded by Mr. Manuel. Approved.

Paragraph 8 of the stipulation is as follows:

That according to the balance sheet of the corporation, dated June 30, 1923, it had accounts
receivable in the sum of P12,512.47, due from various contractor and laborers of the
National Coal Company, and also employees of the herein corporation, which the herein
receiver, after his appointment on February 28, 1924, although he made due efforts by
personally visiting the location of the corporation, and of National Coal Company, at its
offices, at Malangas, Mindanao, and by writing numerous letters of demand to the debtors of
the corporation, in order to collect these accounts receivable, he was unable to do so as
most of them were without goods or property, and he could not file any suit against them that
might have any property, for the reason that he had no funds on hand with which to pay the
filing and sheriff fees to Malangas, and other places of their residences.

From all of which, it appears that on June 30, 1922, the board of directors of the corporation
authorized the purchase of, purchased and paid for, 330 shares of the capital stock of the
corporation at the agreed price of P3,300, and that at the time the purchase was made, the
corporation was indebted in the sum of P13,807.50, and that according to its books, it had accounts
receivable in the sum of P19,126.02. That on September 11, 1923, when the petition was filed for its
dissolution upon the ground that it was insolvent, its accounts payable amounted to P9,241.19, and
its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over and above its liabilities.
But it will be noted that there is no stipulation or finding of facts as to what was the actual cash value
of its accounts receivable. Neither is there any stipulation that those accounts or any part of them
ever have been or will be collected, and it does appear that after his appointment on February 28,
1924, the receiver made a diligent effort to collect them, and that he was unable to do so, and it also
appears from the minutes of the board of directors that the president and manager "recommended
that P3,000 — out of the surplus account to be set aside for dividends payable, and that payments
be made in installments so as not to effect the financial condition of the corporation."

If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over and above all of
its debt and liabilities, the payment of the P3,000 in dividends would not in the least impair the
financial condition of the corporation or prejudice the interests of its creditors.

It is very apparent that on June 24, 1922, the board of directors acted on assumption that, because it
appeared from the books of the corporation that it had accounts receivable of the face value of
P19,126.02, therefore it had a surplus over and above its debts and liabilities. But as stated there is
no stipulation as to the actual cash value of those accounts, and it does appear from the stipulation
that on February 28, 1924, P12,512.47 of those accounts had but little, if any, value, and it must be
conceded that, in the purchase of its own stock to the amount of P3,300 and in declaring the
dividends to the amount of P3,000, the real assets of the corporation were diminished P6,300. It also
appears from paragraph 4 of the stipulation that the corporation had a "surplus profit" of P3,314.72
only. It is further stipulated that the dividends should "be made in installments so as not to effect
financial condition of the corporation." In other words, that the corporation did not then have an
actual bona fide surplus from which the dividends could be paid, and that the payment of them in full
at the time would "affect the financial condition of the corporation."

It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in
declaring the dividends on the stock was all done at the same meeting of the board of directors, and
it appears in those minutes that the both Ganzon and Mendaros were formerly directors and
resigned before the board approved the purchase and declared the dividends, and that out of the
whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of
the 330, which were purchased by the corporation, and for which it paid P3,300. In other words, that
the directors were permitted to resign so that they could sell their stock to the corporation. As stated,
the authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10 each,
which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of the
stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends, there
would be left P4,000 only. In this situation and upon this state of facts, it is very apparent that the
directors did not act in good faith or that they were grossly ignorant of their duties.

Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, section 454
where it is said:

General Duty to Exercise Reasonable Care. — The directors of a corporation are bound to
care for its property and manage its affairs in good faith, and for a violation of these duties
resulting in waste of its assets or injury to the property they are liable to account the same as
other trustees. Are there can be no doubt that if they do acts clearly beyond their power,
whereby loss ensues to the corporation, or dispose of its property or pay away its money
without authority, they will be required to make good the loss out of their private estates. This
 is the rule where the disposition made of money or property of the corporation is one either
not within the lawful power of the corporation, or, if within the authority of the particular officer
or officers.

And section 458 which says:

Want of Knowledge, Skill, or Competency. — It has been said that directors are not liable for
losses resulting to the corporation from want of knowledge on their part; or for mistake of
judgment, provided they were honest, and provided they are fairly within the scope of the
powers and discretion confided to the managing body. But the acceptance of the office of a
director of a corporation implies a competent knowledge of the duties assumed, and
directors cannot excuse imprudence on the ground of their ignorance or inexperience; and if
they commit an error of judgment through mere recklessness or want of ordinary prudence or
skill, they may be held liable for the consequences. Like a mandatory, to whom he has been
likened, a director is bound not only to exercise proper care and diligence, but ordinary skill
and judgment. As he is bound to exercise ordinary skill and judgment, he cannot set up that
he did not possess them.

Creditors of a corporation have the right to assume that so long as there are outstanding debts and
liabilities, the board of directors will not use the assets of the corporation to purchase its own stock,
and that it will not declare dividends to stockholders when the corporation is insolvent.

The amount involved in this case is not large, but the legal principles are important, and we have
given them the consideration which they deserve.

The judgment of the lower court is reversed, and (a), as to the first cause of action, one will be
entered for the plaintiff and against the defendant S. R. Ganzon for the sum of P1,000, with legal
interest from the 10th of February, 1926, and against the defendant Felix D. Medaros for P2,000,
with like interests, and against the defendant Dionisio Saavedra for P100, with like interest, and
against each of them for costs, each on their primary liability as purchasers of stock, and (b) against
the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as members of
the board of directors of the Sibuguey Trading Company, Incorporated, as secondarily liable for the
whole amount of such stock sold and purchased as above stated, and on the second cause of
action, judgment will be entered (c) for the plaintiff and jointly and severally against the defendants
Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the board of
directors of the Sibuguey Trading Company, Incorporated, for P3,000, with interest thereon from
February 10, 1926, at the rate of 6 per cent per annum, and costs. So ordered.

Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.

EN BANC

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.

EN BANC

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.

EN BANC

G.R. No. L-21601 December 17, 1966

NIELSON & COMPANY, INC., plaintiff-appellant,
vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.

W. H. Quasha and Associates for plaintiff-appellant.

Ponce Enrile, Siguion-Reyna, Montecillo and Belo for defendant-appellee.

ZALDIVAR, J.:

On February 6, 1958, plaintiff brought this action against defendant before the Court of First Instance
of Manila to recover certain sums of money representing damages allegedly suffered by the former
in view of the refusal of the latter to comply with the terms of a management contract entered into
between them on January 30, 1937, including attorney's fees and costs.

Defendant in its answer denied the material allegations of the complaint and set up certain special
defenses, among them, prescription and laches, as bars against the institution of the present action.

After trial, during which the parties presented testimonial and numerous documentary evidence, the
court a quo rendered a decision dismissing the complaint with costs. The court stated that it did not
find sufficient evidence to establish defendant's counterclaim and so it likewise dismissed the same.

The present appeal was taken to this Court directly by the plaintiff in view of the amount involved in
the case.

The facts of this case, as stated in the decision appealed from, are hereunder quoted for purposes of
this decision:

It appears that the suit involves an operating agreement executed before World War II
between the plaintiff and the defendant whereby the former operated and managed the
mining properties owned by the latter for a management fee of P2,500.00 a month and a
10% participation in the net profits resulting from the operation of the mining properties. For
brevity and convenience, hereafter the plaintiff shall be referred to as NIELSON and the
defendant, LEPANTO.

The antecedents of the case are: The contract in question (Exhibit `C') was made by the
parties on January 30, 1937 for a period of five (5) years. In the latter part of 1941, the
parties agreed to renew the contract for another period of five (5) years, but in the meantime,
the Pacific War broke out in December, 1941.

In January, 1942 operation of the mining properties was disrupted on account of the war. In
February of 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand
and mines, were destroyed upon orders of the United States Army, to prevent their utilization
by the invading Japanese Army. The Japanese forces thereafter occupied the mining
properties, operated the mines during the continuance of the war, and who were ousted from
the mining properties only in August of 1945.

After the mining properties were liberated from the Japanese forces, LEPANTO took
possession thereof and embarked in rebuilding and reconstructing the mines and mill; setting
up new organization; clearing the mill site; repairing the mines; erecting staff quarters and
bodegas and repairing existing structures; installing new machinery and equipment; repairing
roads and maintaining the same; salvaging equipment and storing the same within the
 bodegas; doing police work necessary to take care of the materials and equipment
recovered; repairing and renewing the water system; and remembering (Exhibits "D" and
"E"). The rehabilitation and reconstruction of the mine and mill was not completed until 1948
(Exhibit "F"). On June 26, 1948 the mines resumed operation under the exclusive
management of LEPANTO (Exhibit "F-l").

Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement
arose between NIELSON and LEPANTO over the status of the operating contract in question
which as renewed expired in 1947. Under the terms thereof, the management contract shall
remain in suspense in case fortuitous event orforce majeure, such as war or civil commotion,
adversely affects the work of mining and milling.

"In the event of inundations, floodings of mine, typhoon, earthquake or any other
force majeure, war, insurrection, civil commotion, organized strike, riot, injury to the
machinery or other event or cause reasonably beyond the control of NIELSON and
which adversely affects the work of mining and milling; NIELSON shall report such
fact to LEPANTO and without liability or breach of the terms of this Agreement, the
same shall remain in suspense, wholly or partially during the terms of such inability."
(Clause II of Exhibit "C").

NIELSON held the view that, on account of the war, the contract was suspended during the
war; hence the life of the contract should be considered extended for such time of the period
of suspension. On the other hand, LEPANTO contended that the contract should expire in
1947 as originally agreed upon because the period of suspension accorded by virtue of the
war did not operate to extend further the life of the contract.

No understanding appeared from the record to have been bad by the parties to resolve the
disagreement. In the meantime, LEPANTO rebuilt and reconstructed the mines and was able
to bring the property into operation only in June of 1948, . . . .

Appellant in its brief makes an alternative assignment of errors depending on whether or not the
management contract basis of the action has been extended for a period equivalent to the period of
suspension. If the agreement is suspended our attention should be focused on the first set of errors
claimed to have been committed by the court a quo; but if the contrary is true, the discussion will
then be switched to the alternative set that is claimed to have been committed. We will first take up
the question whether the management agreement has been extended as a result of the supervening
war, and after this question shall have been determined in the sense sustained by appellant, then
the discussion of the defense of laches and prescription will follow as a consequence.

The pertinent portion of the management contract (Exh. C) which refers to suspension should any
event constitutingforce majeure happen appears in Clause II thereof which we quote hereunder:

In the event of inundations, floodings of the mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery or
other event or cause reasonably beyond the control of NIELSON and which adversely affects
the work of mining and milling; NIELSON shall report such fact to LEPANTO and without
liability or breach of the terms of this Agreement, the same shall remain in suspense, wholly
or partially during the terms of such inability.

A careful scrutiny of the clause above-quoted will at once reveal that in order that the management
contract may be deemed suspended two events must take place which must be brought in a
satisfactory manner to the attention of defendant within a reasonable time, to wit: (1) the event
constituting the force majeure must be reasonably beyond the control of Nielson, and (2) it must
adversely affect the work of mining and milling the company is called upon to undertake. As long as
these two condition exist the agreement is deem suspended.

Does the evidence on record show that these two conditions had existed which may justify the
conclusion that the management agreement had been suspended in the sense entertained by
appellant? Let us go to the evidence.

It is a matter that this Court can take judicial notice of that war supervened in our country and that
the mines in the Philippines were either destroyed or taken over by the occupation forces with a view
to their operation. The Lepanto mines were no exception for not was the mine itself destroyed but
the mill, power plant, supplies on hand, equipment and the like that were being used there were
destroyed as well. Thus, the following is what appears in the Lepanto Company Mining Report dated
March 13, 1946 submitted by its President C. A. DeWitt to the defendant:1 "In February of 1942, our
mill, power plant, supplies on hand, equipment, concentrates on hand, and mine, were destroyed
upon orders of the U.S. Army to prevent their utilization by the enemy." The report also mentions the
report submitted by Mr. Blessing, an official of Nielson, that "the original mill was destroyed in 1942"
and "the original power plant and all the installed equipment were destroyed in 1942." It is then
undeniable that beginning February, 1942 the operation of the Lepanto mines stopped or became
suspended as a result of the destruction of the mill, power plant and other important equipment
necessary for such operation in view of a cause which was clearly beyond the control of Nielson and
that as a consequence such destruction adversely affected the work of mining and milling which the
latter was called upon to undertake under the management contract. Consequently, by virtue of the
very terms of said contract the same may be deemed suspended from February, 1942 and as of that
month the contract still had 60 months to go.

On the other hand, the record shows that the defendant admitted that the occupation forces
operated its mining properties subject of the management contract,2 and from the very report
submitted by President DeWitt it appears that the date of the liberation of the mine was August 1,
1945 although at the time there were still many booby traps.3 Similarly, in a report submitted by the
defendant to its stockholders dated August 25, 1948, the following appears: "Your Directors take
pleasure in reporting that June 26, 1948 marked the official return to operations of this Company of
its properties in Mankayan, Mountain Province, Philippines."4

It is, therefore, clear from the foregoing that the Lepanto mines were liberated on August 1, 1945,
but because of the period of rehabilitation and reconstruction that had to be made as a result of the
destruction of the mill, power plant and other necessary equipment for its operation it cannot be said
that the suspension of the contract ended on that date. Hence, the contract must still be deemed
suspended during the succeeding years of reconstruction and rehabilitation, and this period can only
be said to have ended on June 26, 1948 when, as reported by the defendant, the company officially
resumed the mining operations of the Lepanto. It should here be stated that this period of
suspension from February, 1942 to June 26, 1948 is the one urged by plaintiff.5

It having been shown that the operation of the Lepanto mines on the part of Nielson had been
suspended during the period set out above within the purview of the management contract, the next
question that needs to be determined is the effect of such suspension. Stated in another way, the
question now to be determined is whether such suspension had the effect of extending the period of
the management contract for the period of said suspension. To elucidate this matter, we again need
to resort to the evidence.

For appellant Nielson two witnesses testified, declaring that the suspension had the effect of
extending the period of the contract, namely, George T. Scholey and Mark Nestle. Scholey was a
mining engineer since 1929, an incorporator, general manager and director of Nielson and
Company; and for some time he was also the vice-president and director of the Lepanto Company
during the pre-war days and, as such, he was an officer of both appellant and appellee companies.
As vice-president of Lepanto and general manager of Nielson, Scholey participated in the
negotiation of the management contract to the extent that he initialed the same both as witness and
as an officer of both corporations. This witness testified in this case to the effect that the
standard force majeure clause embodied in the management contract was taken from similar mining
contracts regarding mining operations and the understanding regarding the nature and effect of said
clause was that when there is suspension of the operation that suspension meant the extension of
the contract. Thus, to the question, "Before the war, what was the understanding of the people in the
particular trend of business with respect to the force majeure clause?", Scholey answered: "That was
our understanding that the suspension meant the extension of time lost."6

Mark Nestle, the other witness, testified along similar line. He had been connected with Nielson
since 1937 until the time he took the witness stand and had been a director, manager, and president
of the same company. When he was propounded the question: "Do you know what was the custom
or usage at that time in connection with force majeure clause?", Nestle answered, "In the mining
world the force majeure clause is generally considered. When a calamity comes up and stops the
work like in war, flood, inundation or fire, etc., the work is suspended for the duration of the calamity,
and the period of the contract is extended after the calamity is over to enable the person to do the
big work or recover his money which he has invested, or accomplish what his obligation is to a third
person ."7

And the above testimonial evidence finds support in the very minutes of the special meeting of the
Board of Directors of the Lepanto Company issued on March 10, 1945 which was then chairmaned
by Atty. C. A. DeWitt. We read the following from said report:

The Chairman also stated that the contract with Nielson and Company would soon expire if
the obligations were not suspended, in which case we should have to pay them the retaining
fee of P2,500.00 a month. He believes however, that there is a provision in the contract
suspending the effects thereof in cases like the present, and that even if it were not there,
the law itself would suspend the operations of the contract on account of the war. Anyhow,
he stated, we shall have no difficulty in solving satisfactorily any problem we may have with
Nielson and Company.8

Thus, we can see from the above that even in the opinion of Mr. DeWitt himself, who at the time was
the chairman of the Board of Directors of the Lepanto Company, the management contract would
then expire unless the period therein rated is suspended but that, however, he expressed the belief
that the period was extended because of the provision contained therein suspending the effects
thereof should any of the case of force majeure happen like in the present case, and that even if
such provision did not exist the law would have the effect of suspending it on account of the war. In
substance, Atty. DeWitt expressed the opinion that as a result of the suspension of the mining
operation because of the effects of the war the period of the contract had been extended.

Contrary to what appellant's evidence reflects insofar as the interpretation of the force
majeure clause is concerned, however, appellee gives Us an opposite interpretation invoking in
support thereof not only a letter Atty. DeWitt sent to Nielson on October 20, 1945,9 wherein he
expressed for the first time an opinion contrary to what he reported to the Board of Directors of
Lepanto Company as stated in the portion of the minutes of its Board of Directors as quoted above,
but also the ruling laid down by our Supreme Court in some cases decided sometime ago, to the
effect that the war does not have the effect of extending the term of a contract that the parties may
enter into regarding a particular transaction, citing in this connection the cases of Victorias Planters
Association v. Victorias Milling Company, 51 O.G. 4010; Rosario S. Vda. de Lacson, et al. v.
Abelardo G. Diaz, 87 Phil. 150; and Lo Ching y So Young Chong Co. v. Court of Appeals, et al., 81
Phil. 601.

To bolster up its theory, appellee also contends that the evidence regarding the alleged custom or
usage in mining contract that appellant's witnesses tried to introduce was incompetent because (a)
said custom was not specifically pleaded; (b) Lepanto made timely and repeated objections to the
introduction of said evidence; (c) Nielson failed to show the essential elements of usage which must
be shown to exist before any proof thereof can be given to affect the contract; and (d) the testimony
of its witnesses cannot prevail over the very terms of the management contract which, as a rule, is
supposed to contain all the terms and conditions by which the parties intended to be bound.

It is here necessary to analyze the contradictory evidence which the parties have presented
regarding the interpretation of the force majeure clause in the management contract.

At the outset, it should be stated that, as a rule, in the construction and interpretation of a document
the intention of the parties must be sought (Rule 130, Section 10, Rules of Court). This is the basic
rule in the interpretation of contracts because all other rules are but ancilliary to the ascertainment of
the meaning intended by the parties. And once this intention has been ascertained it becomes an
integral part of the contract as though it had been originally expressed therein in unequivocal terms
(Shoreline Oil Corp. v. Guy, App. 189, So., 348, cited in 17A C.J.S., p. 47). How is this intention
determined?

One pattern is to ascertain the contemporaneous and subsequent acts of the contracting parties in
relation to the transaction under consideration (Article 1371, Civil Code). In this particular case, it is
worthy of note what Atty. C. A. DeWitt has stated in the special meeting of the Board of Directors of
Lepanto in the portion of the minutes already quoted above wherein, as already stated, he
expressed the opinion that the life of the contract, if not extended, would last only until January, 1947
and yet he said that there is a provision in the contract that the war had the effect of suspending the
agreement and that the effect of that suspension was that the agreement would have to continue
with the result that Lepanto would have to pay the monthly retaining fee of P2,500.00. And this belief
that the war suspended the agreement and that the suspension meant its extension was so firm that
he went to the extent that even if there was no provision for suspension in the agreement the law
itself would suspend it.

It is true that Mr. DeWitt later sent a letter to Nielson dated October 20, 1945 wherein apparently he
changed his mind because there he stated that the contract was merely suspended, but not
extended, by reason of the war, contrary to the opinion he expressed in the meeting of the Board of
Directors already adverted to, but between the two opinions of Atty. DeWitt We are inclined to give
more weight and validity to the former not only because such was given by him against his own
interest but also because it was given before the Board of Directors of Lepanto and in the presence,
of some Nielson officials 10 who, on that occasion were naturally led to believe that that was the true
meaning of the suspension clause, while the second opinion was merely self-serving and was given
as a mere afterthought.

Appellee also claims that the issue of true intent of the parties was not brought out in the complaint,
but anent this matter suffice it to state that in paragraph No. 19 of the complaint appellant pleaded
that the contract was extended. 11 This is a sufficient allegation considering that the rules on
pleadings must as a rule be liberally construed.

It is likewise noteworthy that in this issue of the intention of the parties regarding the meaning and
usage concerning the force majeure clause, the testimony adduced by appellant is uncontradicted. If
such were not true, appellee should have at least attempted to offer contradictory evidence. This it
did not do. Not even Lepanto's President, Mr. V. E. Lednicky who took the witness stand,
contradicted said evidence.

In holding that the suspension of the agreement meant the extension of the same for a period
equivalent to the suspension, We do not have the least intention of overruling the cases cited by
appellee. We simply want to say that the ruling laid down in said cases does not apply here because
the material facts involved therein are not the same as those obtaining in the present. The rule
of stare decisis cannot be invoked where there is no analogy between the material facts of the
decision relied upon and those of the instant case.

Thus, in Victorias Planters Association vs. Victorias Milling Company, 51 O.G. 4010, there was no
evidence at all regarding the intention of the parties to extend the contract equivalent to the period of
suspension caused by the war. Neither was there evidence that the parties understood the
suspension to mean extension; nor was there evidence of usage and custom in the industry that the
suspension meant the extension of the agreement. All these matters, however, obtain in the instant
case.

Again, in the case of Rosario S. Vda. de Lacson vs. Abelardo G. Diaz, 87 Phil. 150, the issue
referred to the interpretation of a pre-war contract of lease of sugar cane lands and the liability of the
lessee to pay rent during and immediately following the Japanese occupation and where the
defendant claimed the right of an extension of the lease to make up for the time when no cane was
planted. This Court, in holding that the years which the lessee could not use the land because of the
war could not be discounted from the period agreed upon, held that "Nowhere is there any
insinuation that the defendant-lessee was to have possession of lands for seven years excluding
years on which he could not harvest sugar." Clearly, this ratio decidendi is not applicable to the case
at bar wherein there is evidence that the parties understood the "suspension clause by force
majeure" to mean the extension of the period of agreement.

Lastly, in the case of Lo Ching y So Young Chong Co. vs. Court of Appeals, et al., 81 Phil. 601,
appellant leased a building from appellee beginning September 13, 1940 for three years, renewable
for two years. The lessee's possession was interrupted in February, 1942 when he was ousted by
the Japanese who turned the same over to German Otto Schulze, the latter occupying the same
until January, 1945 upon the arrival of the liberation forces. Appellant contended that the period
during which he did not enjoy the leased premises because of his dispossession by the Japanese
had to be deducted from the period of the lease, but this was overruled by this Court, reasoning that
such dispossession was merely a simple "perturbacion de merohecho y de la cual no responde el
arrendador" under Article 1560 of the old Civil Code Art. 1664). This ruling is also not applicable in
the instant case because in that case there was no evidence of the intention of the parties that any
suspension of the lease by force majeure would be understood to extend the period of the
agreement.

In resume, there is sufficient justification for Us to conclude that the cases cited by appellee are
inapplicable because the facts therein involved do not run parallel to those obtaining in the present
case.

We shall now consider appellee's defense of laches. Appellee is correct in its contention that the
defense of laches applies independently of prescription. Laches is different from the statute of
limitations. Prescription is concerned with the fact of delay, whereas laches is concerned with the
effect of delay. Prescription is a matter of time; laches is principally a question of inequity of
permitting a claim to be enforced, this inequity being founded on some change in the condition of the
property or the relation of the parties. Prescription is statutory; laches is not. Laches applies in
equity, whereas prescription applies at law. Prescription is based on fixed time, laches is not. (30
C.J.S., p. 522; See also Pomeroy's Equity Jurisprudence, Vol. 2, 5th ed., p. 177).

The question to determine is whether appellant Nielson is guilty of laches within the meaning
contemplated by the authorities on the matter. In the leading case of Go Chi Gun, et al. vs. Go Cho,
et al., 96 Phil. 622, this Court enumerated the essential elements of laches as follows:

(1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation of which complaint is made and for which the complaint seeks a remedy; (2) delay
in asserting the complainant's rights, the complainant having had knowledge or notice of the
defendant's conduct and having been afforded an opportunity to institute a suit; (3) lack of
knowledge or notice on the part of the defendant that the complainant would assert the right
on which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is
accorded to the complainant, or the suit is not held barred.

Are these requisites present in the case at bar?

The first element is conceded by appellant Nielson when it claimed that defendant refused to pay its
management fees, its percentage of profits and refused to allow it to resume the management
operation.

Anent the second element, while it is true that appellant Nielson knew since 1945 that appellee
Lepanto has refused to permit it to resume management and that since 1948 appellee has resumed
operation of the mines and it filed its complaint only on February 6, 1958, there being apparent delay
in filing the present action, We find the delay justified and as such cannot constitute laches. It
appears that appellant had not abandoned its right to operate the mines for even before the
termination of the suspension of the agreement as early as January 20, 194612 and even before
March 10, 1945, it already claimed its right to the extension of the contract,13 and it pressed its claim
for the balance of its share in the profits from the 1941 operation14 by reason of which negotiations
had taken place for the settlement of the claim15 and it was only on June 25, 1957 that appellee
finally denied the claim. There is, therefore, only a period of less than one year that had elapsed
from the date of the final denial of the claim to the date of the filing of the complaint, which certainly
cannot be considered as unreasonable delay.

The third element of laches is absent in this case. It cannot be said that appellee Lepanto did not
know that appellant would assert its rights on which it based suit. The evidence shows that Nielson
had been claiming for some time its rights under the contract, as already shown above.

Neither is the fourth element present, for if there has been some delay in bringing the case to court it
was mainly due to the attempts at arbitration and negotiation made by both parties. If Lepanto's
documents were lost, it was not caused by the delay of the filing of the suit but because of the war.

Another reason why appellant Nielson cannot be held guilty of laches is that the delay in the filing of
the complaint in the present case was the inevitable of the protracted negotiations between the
parties concerning the settlement of their differences. It appears that Nielson asked for
arbitration16 which was granted. A committee consisting of Messrs. DeWitt, Farnell and Blessing was
appointed to act on said differences but Mr. DeWitt always tried to evade the issue17 until he was
taken ill and died. Mr. Farnell offered to Nielson the sum of P13,000.58 by way of compromise of all
its claim arising from the management contract18 but apparently the offer was refused. Negotiations
continued with the exchange of letters between the parties but with no satisfactory result.19 It can be
said that the delay due to protracted negotiations was caused by both parties. Lepanto, therefore,
cannot be permitted to take advantage of such delay or to question the propriety of the action taken
by Nielson. The defense of laches is an equitable one and equity should be applied with an even
hand. A person will not be permitted to take advantage of, or to question the validity, or propriety of,
any act or omission of another which was committed or omitted upon his own request or was caused
by his conduct (R. H. Stearns Co. vs. United States, 291 U.S. 54, 78 L. Ed. 647, 54 S. Ct., 325;
United States vs. Henry Prentiss & Co., 288 U.S. 73, 77 L. Ed., 626, 53 S. Ct., 283).

Had the action of Nielson prescribed? The court a quo held that the action of Nielson is already
barred by the statute of limitations, and that ruling is now assailed by the appellant in this appeal. In
urging that the court a quo erred in reaching that conclusion the appellant has discussed the issue
with reference to particular claims.

The first claim is with regard to the 10% share in profits of 1941 operations. Inasmuch as appellee
Lepanto alleges that the correct basis of the computation of the sharing in the net profits shall be as
provided for in Clause V of the Management Contract, while appellant Nielson maintains that the
basis should be what is contained in the minutes of the special meeting of the Board of Directors of
Lepanto on August 21, 1940, this question must first be elucidated before the main issue is
discussed.

The facts relative to the matter of profit sharing follow: In the management contract entered into
between the parties on January 30, 1937, which was renewed for another five years, it was
stipulated that Nielson would receive a compensation of P2,500.00 a month plus 10% of the net
profits from the operation of the properties for the preceding month. In 1940, a dispute arose
regarding the computation of the 10% share of Nielson in the profits. The Board of Directors of
Lepanto, realizing that the mechanics of the contract was unfair to Nielson, authorized its President
to enter into an agreement with Nielson modifying the pertinent provision of the contract effective
January 1, 1940 in such a way that Nielson shall receive (1) 10% of the dividends declared and paid,
when and as paid, during the period of the contract and at the end of each year, (2) 10% of any
depletion reserve that may be set up, and (3) 10% of any amount expended during the year out of
surplus earnings for capital account. 20 Counsel for the appellee admitted during the trial that the
extract of the minutes as found in Exhibit B is a faithful copy from the original. 21 Mr. George Scholey
testified that the foregoing modification was agreed upon. 22

Lepanto claims that this new basis of computation should be rejected (1) because the contract was
clear on the point of the 10% share and it was so alleged by Nielson in its complaint, and (2) the
minutes of the special meeting held on August 21, 1940 was not signed.

It appearing that the issue concerning the sharing of the profits had been raised in appellant's
complaint and evidence on the matter was introduced 23 the same can be taken into account even if
no amendment of the pleading to make it conform to the evidence has been made, for the same is
authorized by Section 4, Rule 17, of the old Rules of Court (now Section 5, Rule 10, of the new
Rules of Court).

Coming now to the question of prescription raised by defendant Lepanto, it is contended by the latter
that the period to be considered for the prescription of the claim regarding participation in the profits
is only four years, because the modification of the sharing embodied in the management contract is
merely verbal, no written document to that effect having been presented. This contention is
untenable. The modification appears in the minutes of the special meeting of the Board of Directors
of Lepanto held on August 21, 1940, it having been made upon the authority of its President, and in
said minutes the terms of the modification had been specified. This is sufficient to have the
agreement considered, for the purpose of applying the statute of limitations, as a written contract
even if the minutes were not signed by the parties (3 A.L.R., 2d, p. 831). It has been held that a
writing containing the terms of a contract if adopted by two persons may constitute a contract in
writing even if the same is not signed by either of the parties (3 A.L.R., 2d, pp. 812-813). Another
authority says that an unsigned agreement the terms of which are embodied in a document
unconditionally accepted by both parties is a written contract (Corbin on Contracts, Vol. 1, p. 85)

The modification, therefore, made in the management contract relative to the participation in the
profits by appellant, as contained in the minutes of the special meeting of the Board of Directors of
Lepanto held on August 21, 1940, should be considered as a written contract insofar as the
application of the statutes of limitations is concerned. Hence, the action thereon prescribes within ten
(10) years pursuant to Section 43 of Act 190.

Coming now to the facts, We find that the right of Nielson to its 10% participation in the 1941
operations accrued on December 21, 1941 and the right to commence an action thereon began on
January 1, 1942 so that the action must be brought within ten (10) years from the latter date. It is
true that the complaint was filed only on February 6, 1958, that is sixteen (16) years, one (1) month
and five (5) days after the right of action accrued, but the action has not yet prescribed for various
reasons which We will hereafter discuss.

The first reason is the operation of the Moratorium Law, for appellant's claim is undeniably a claim
for money. Said claim accrued on December 31, 1941, and Lepanto is a war sufferer. Hence the
claim was covered by Executive Order No. 32 of March 10, 1945. It is well settled that the operation
of the Moratorium Law suspends the running of the statue of limitations (Pacific Commercial Co. vs.
Aquino, G.R. No. L-10274, February 27, 1957).

This Court has held that the Moratorium Law had been enforced for eight (8) years, two (2) months
and eight (8) days (Tioseco vs. Day, et al., L-9944, April 30, 1957; Levy Hermanos, Inc. vs. Perez, L-
14487, April 29, 1960), and deducting this period from the time that had elapsed since the accrual of
the right of action to the date of the filing of the complaint, the extent of which is sixteen (16) years,
one (1) month and five (5) days, we would have less than eight (8) years to be counted for purposes
of prescription. Hence appellant's action on its claim of 10% on the 1941 profits had not yet
prescribed.

Another reason that may be taken into account in support of the no-bar theory of appellant is the
arbitration clause embodied in the management contract which requires that any disagreement as to
any amount of profits before an action may be taken to court shall be subject to arbitration. 24 This
agreement to arbitrate is valid and binding. 25 It cannot be ignored by Lepanto. Hence Nielson could
not bring an action on its participation in the 1941 operations-profits until the condition relative to
arbitration had been first complied with. 26 The evidence shows that an arbitration committee was
constituted but it failed to accomplish its purpose on June 25, 1957. 27 From this date to the filing of
the complaint the required period for prescription has not yet elapsed.

Nielson claims the following: (1) 10% share in the dividends declared in 1941, exclusive of interest,
amounting to P17,500.00; (2) 10% in the depletion reserves for 1941; and (3) 10% in the profits for
years prior to 1948 amounting to P19,764.70.

With regard to the first claim, the Lepanto's report for the calendar year of 1954 28 shows that it
declared a 10% cash dividend in December, 1941, the amount of which is P175,000.00. The
evidence in this connection (Exhibits L and O) was admitted without objection by counsel for
Lepanto. 29 Nielson claims 10% share in said amount with interest thereon at 6% per annum. The
document (Exhibit L) was even recognized by Lepanto's President V. L. Lednicky, 30 and this claim is
predicated on the provision of paragraph V of the management contract as modified pursuant to the
proposal of Lepanto at the special meeting of the Board of Directors on August 21, 1940 (Exh. B),
whereby it was provided that Nielson would be entitled to 10% of any dividends to be declared and
paid during the period of the contract.

With regard to the second claim, Nielson admits that there is no evidence regarding the amount set
aside by Lepanto for depletion reserve for 1941 31 and so the 10% participation claimed thereon
cannot be assessed.

Anent the third claim relative to the 10% participation of Nielson on the sum of P197,647.08, which
appears in Lepanto's annual report for 1948 32 and entered as profit for prior years in the statement
of income and surplus, which amount consisted "almost in its entirety of proceeds of copper
concentrates shipped to the United States during 1947," this claim should to denied because the
amount is not "dividend declared and paid" within the purview of the management contract.

The fifth assignment of error of appellant refers to the failure of the lower court to order Lepanto to
pay its management fees for January, 1942, and for the full period of extension amounting to
P150,000.00, or P2,500.00 a month for sixty (60) months, — a total of P152,500.00 — with interest
thereon from the date of judicial demand.

It is true that the claim of management fee for January, 1942 was not among the causes of action in
the complaint, but inasmuch as the contract was suspended in February, 1942 and the management
fees asked for included that of January, 1942, the fact that such claim was not included in a specific
manner in the complaint is of no moment because an appellate court may treat the pleading as
amended to conform to the evidence where the facts show that the plaintiff is entitled to relief other
than what is asked for in the complaint (Alonzo vs. Villamor, 16 Phil. 315). The evidence shows that
the last payment made by Lepanto for management fee was for November and December,
1941. 33 If, as We have declared, the management contract was suspended beginning February
1942, it follows that Nielson is entitled to the management fee for January, 1942.

Let us now come to the management fees claimed by Nielson for the period of extension. In this
respect, it has been shown that the management contract was extended from June 27, 1948 to June
26, 1953, or for a period of sixty (60) months. During this period Nielson had a right to continue in
the management of the mining properties of Lepanto and Lepanto was under obligation to let
Nielson do it and to pay the corresponding management fees. Appellant Nielson insisted in
performing its part of the contract but Lepanto prevented it from doing so. Hence, by virtue of Article
1186 of the Civil Code, there was a constructive fulfillment an the part of Nielson of its obligation to
manage said mining properties in accordance with the contract and Lepanto had the reciprocal
obligation to pay the corresponding management fees and other benefits that would have accrued to
Nielson if Lepanto allowed it (Nielson) to continue in the management of the mines during the
extended period of five (5) years.

We find that the preponderance of evidence is to the effect that Nielson had insisted in managing the
mining properties soon after liberation. In the report 34 of Lepanto, submitted to its stockholders for
the period from 1941 to March 13, 1946, are stated the activities of Nielson's officials in relation to
Nielson's insistence in continuing the management. This report was admitted in evidence without
objection. We find the following in the report:

Mr. Blessing, in May, 1945, accompanied Clark and Stanford to San Fernando (La Union) to await
the liberation of the mines. (Mr. Blessing was the Treasurer and Metallurgist of Nielson). Blessing
with Clark and Stanford went to the property on July 16 and found that while the mill site had been
cleared of the enemy the latter was still holding the area around the staff houses and putting up a
strong defense. As a result, they returned to San Fernando and later went back to the mines on July
26. Mr. Blessing made the report, dated August 6, recommending a program of operation. Mr.
Nielson himself spent a day in the mine early in December, 1945 and reiterated the program which
Mr. Blessing had outlined. Two or three weeks before the date of the report, Mr. Coldren of the
Nielson organization also visited the mine and told President C. A. DeWitt of Lepanto that he thought
that the mine could be put in condition for the delivery of the ore within ten (10) days. And according
to Mark Nestle, a witness of appellant, Nielson had several men including engineers to do the job in
the mines and to resume the work. These engineers were in fact sent to the mine site and submitted
reports of what they had done. 35

On the other hand, appellee claims that Nielson was not ready and able to resume the work in the
mines, relying mainly on the testimony of Dr. Juan Nabong, former secretary of both Nielson and
Lepanto, given in the separate case of Nancy Irving Romero vs. Lepanto Consolidated Mining
Company (Civil Case No. 652, CFI, Baguio), to the effect that as far as he knew "Nielson and
Company had not attempted to operate the Lepanto Consolidated Mining Company because Mr.
Nielson was not here in the Philippines after the last war. He came back later," and that Nielson and
Company had no money nor stocks with which to start the operation. He was asked by counsel for
the appellee if he had testified that way in Civil Case No. 652 of the Court of First Instance of
Baguio, and he answered that he did not confirm it fully. When this witness was asked by the same
counsel whether he confirmed that testimony, he said that when he testified in that case he was not
fully aware of what happened and that after he learned more about the officials of the corporation it
was only then that he became aware that Nielson had really sent his men to the mines along with
Mr. Blessing and that he was aware of this fact personally. He further said that Mr. Nielson was here
in 1945 and "he was going out and contacting his people." 36

Lepanto admits, in its own brief, that Nielson had really insisted in taking over the management and
operation of the mines but that it (Lepanto) unequivocally refuse to allow it. The following is what
appears in the brief of the appellee:

It was while defendant was in the midst of the rehabilitation work which was fully described
earlier, still reeling under the terrible devastation and destruction wrought by war on its mine
that Nielson insisted in taking over the management and operation of the mine. Nielson thus
put Lepanto in a position where defendant, under the circumstances, had to refuse, as in fact
it did, Nielson's insistence in taking over the management and operation because, as was
obvious, it was impossible, as a result of the destruction of the mine, for the plaintiff to
manage and operate the same and because, as provided in the agreement, the contract was
suspended by reason of the war. The stand of Lepanto in disallowing Nielson to assume
again the management of the mine in 1945 was unequivocal and cannot be
misinterpreted, infra.37

Based on the foregoing facts and circumstances, and Our conclusion that the management contract
was extended, We believe that Nielson is entitled to the management fees for the period of
extension. Nielson should be awarded on this claim sixty times its monthly pay of P2,500.00, or a
total of P150,000.00.

In its sixth assignment of error Nielson contends that the lower court erred in not ordering Lepanto to
pay it (Nielson) the 10% share in the profits of operation realized during the period of five (5) years
from the resumption of its post-war operations of the Mankayan mines, in the total sum of
P2,403,053.20 with interest thereon at the rate of 6% per annum from February 6, 1958 until full
payment. 38

The above claim of Nielson refers to four categories, namely: (1) cash dividends; (2) stock dividends;
(3) depletion reserves; and (4) amount expended on capital investment.
Anent the first category, Lepanto's report for the calendar year 1954 39 contains a record of the cash
dividends it paid up to the date of said report, and the post-war dividends paid by it corresponding to
the years included in the period of extension of the management contract are as follows:

POST-WAR

8 10% November 1949 P 200,000.00

9 10% July 1950 300,000.00

10 10% October 1950 500,000.00

11 20% December 1950 1,000,000.00

12 20% March 1951 1,000,000.00

13 20% June 1951 1,000,000.00

14 20% September 1951 1,000,000.00

15 40% December 1951 2,000,000.00

16 20% March 1952 1,000,000.00

17 20% May 1952 1,000,000.00

18 20% July 1952 1,000,000.00

19 20% September 1952 1,000,000.00

20 20% December 1952 1,000,000.00

21 20% March 1953 1,000,000.00

22 20% June 1953 1,000,000.00

TOTAL P14,000,000.00

According to the terms of the management contract as modified, appellant is entitled to 10% of the
P14,000,000.00 cash dividends that had been distributed, as stated in the above-mentioned report,
or the sum of P1,400,000.00.

With regard to the second category, the stock dividends declared by Lepanto during the period of
extension of the contract are: On November 28, 1949, the stock dividend declared was 50% of the
outstanding authorized capital of P2,000,000.00 of the company, or stock dividends worth
P1,000,000.00; and on August 22, 1950, the stock dividends declared was 66-2/3% of the standing
authorized capital of P3,000,000.00 of the company, or stock dividends worth P2,000,000.00. 40

Appellant's claim that it should be given 10% of the cash value of said stock dividends with interest
thereon at 6% from February 6, 1958 cannot be granted for that would not be in accordance with the
management contract which entitles Nielson to 10% of any dividends declared paid, when and as
paid. Nielson, therefore, is entitled to 10% of the stock dividends and to the fruits that may have
accrued to said stock dividends pursuant to Article 1164 of the Civil Code. Hence to Nielson is due
shares of stock worth P100,000.00, as per stock dividends declared on November 28, 1949 and all
the fruits accruing to said shares after said date; and also shares of stock worth P200,000.00 as per
stock dividends declared on August 20, 1950 and all fruits accruing thereto after said date.

Anent the third category, the depletion reserve appearing in the statement of income and surplus
submitted by Lepanto corresponding to the years covered by the period of extension of the contract,
may be itemized as follows:

In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the depletion reserve set up was P11,602.80.

In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the depletion reserve set up was P33,556.07.

In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37, the depletion reserve set up was
P84,963.30.

In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45, the depletion reserve set up was
P129,089.88.

In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41, the depletion reserve was
P147,141.54.

In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the depletion reserve set up as P277,493.25.

Regarding the depletion reserve set up in 1948 it should be noted that the amount given was for the
whole year. Inasmuch as the contract was extended only for the last half of the year 1948, said
amount of P11,602.80 should be divided by two, and so Nielson is only entitled to 10% of the half
amounting to P5,801.40.

Likewise, the amount of depletion reserve for the year 1953 was for the whole year and since the
contract was extended only until the first half of the year, said amount of P277,493.25 should be
divided by two, and so Nielson is only entitled to 10% of the half amounting to P138,746.62.
Summing up the entire depletion reserves, from the middle of 1948 to the middle of 1953, we would
have a total of P539,298.81, of which Nielson is entitled to 10%, or to the sum of P53,928.88.

Finally, with regard to the fourth category, there is no figure in the record representing the value of
the fixed assets as of the beginning of the period of extension on June 27, 1948. It is possible,
however, to arrive at the amount needed by adding to the value of the fixed assets as of December
31, 1947 one-half of the amount spent for capital account in the year 1948. As of December 31,
1947, the value of the fixed assets was P1,061,878.88 41 and as of December 31, 1948, the value of
the fixed assets was P3,270,408.07. 42 Hence, the increase in the value of the fixed assets for the
year 1948 was P2,208,529.19, one-half of which is P1,104,264.59, which amount represents the
expenses for capital account for the first half of the year 1948. If to this amount we add the fixed
assets as of December 31, 1947 amounting to P1,061,878.88, we would have a total of
P2,166,143.47 which represents the fixed assets at the beginning of the second half of the year
1948.

There is also no figure representing the value of the fixed assets when the contract, as extended,
ended on June 26, 1953; but this may be computed by getting one-half of the expenses for capital
account made in 1953 and adding the same to the value of the fixed assets as of December 31,
1953 is P9,755,840.41 43 which the value of the fixed assets as of December 31, 1952 is
P8,463,741.82, the difference being P1,292,098.69. One-half of this amount is P646,049.34 which
would represent the expenses for capital account up to June, 1953. This amount added to the value
of the fixed assets as of December 31, 1952 would give a total of P9,109,791.16 which would be the
value of fixed assets at the end of June, 1953.

The increase, therefore, of the value of the fixed assets of Lepanto from June, 1948 to June, 1953 is
P6,943,647.69, which amount represents the difference between the value of the fixed assets of
Lepanto in the year 1948 and in the year 1953, as stated above. On this amount Nielson is entitled
to a share of 10% or to the amount of P694,364.76.

Considering that most of the claims of appellant have been entertained, as pointed out in this
decision, We believe that appellant is entitled to be awarded attorney's fees, especially when,
according to the undisputed testimony of Mr. Mark Nestle, Nielson obliged himself to pay attorney's
fees in connection with the institution of the present case. In this respect, We believe, considering
the intricate nature of the case, an award of fifty thousand (P50,000.00) pesos for attorney's fees
would be reasonable.

IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a
quo and enter in lieu thereof another, ordering the appellee Lepanto to pay appellant Nielson the
different amounts as specified hereinbelow:

(1) 10% share of cash dividends of December, 1941 in the amount of P17,500.00, with legal interest
thereon from the date of the filing of the complaint;

(2) management fee for January, 1942 in the amount of P2,500.00, with legal interest thereon from
the date of the filing of the complaint;

(3) management fees for the sixty-month period of extension of the management contract,
amounting to P150,000.00, with legal interest from the date of the filing of the complaint;

(4) 10% share in the cash dividends during the period of extension of the management contract,
amounting to P1,400,000.00, with legal interest thereon from the date of the filing of the complaint;

(5) 10% of the depletion reserve set up during the period of extension, amounting to P53,928.88,
with legal interest thereon from the date of the filing of the complaint;

(6) 10% of the expenses for capital account during the period of extension, amounting to
P694,364.76, with legal interest thereon from the date of the filing of the complaint;

(7) to issue and deliver to Nielson and Co., Inc. shares of stock of Lepanto Consolidated Mining Co.
at par value equivalent to the total of Nielson's l0% share in the stock dividends declared on
November 28, 1949 and August 22, 1950, together with all cash and stock dividends, if any, as may
have been declared and issued subsequent to November 28, 1949 and August 22, 1950, as fruits
that accrued to said shares;

If sufficient shares of stock of Lepanto's are not available to satisfy this judgment, defendant-
appellee shall pay plaintiff-appellant an amount in cash equivalent to the market value of said shares
at the time of default (12 C.J.S., p. 130), that is, all shares of the stock that should have been
delivered to Nielson before the filing of the complaint must be paid at their market value as of the
date of the filing of the complaint; and all shares, if any, that should have been delivered after the
filing of the complaint at the market value of the shares at the time Lepanto disposed of all its
available shares, for it is only then that Lepanto placed itself in condition of not being able to perform
its obligation (Article 1160, Civil Code);

(8) the sum of P50,000.00 as attorney's fees; and

(9) the costs. It is so ordered.

EN BANC

G.R. No. L-5377 December 29, 1954

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,

vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.

Del Rosario and Garcia for appellant.

Vicente J. Francisco for appellees.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Rizal declaring the donation made
by the defendant in favor of the minor children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life valid and binding, and ordering said defendant to pay to said
minor children the sum of P583,813.59, with interest thereon at the rate of per cent from the date of
filing of the complaint, plus an additional amount equivalent to 20 per cent of said sum of
P538,813.59 as damages by way of attorney's fees and the costs of action.

Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and
judicial guardian Estefania R. Pirovano. They seek to enforce certain resolutions adopted by the
Board of Directors and stockholders of the defendant company giving to said minor children of the
proceeds of the insurance policies taken on the life of their deceased father Enrico Pirovano with the
company as beneficiary. Defendant's main defense is: that said resolutions and the contract
executed pursuant thereto are ultra vires, and, if valid, the obligation to pay the amount given is not
yet due and demandable.

The trial court resolved all the issues raised by the parties in favor of the plaintiffs and, after
considering the evidence, both oral and documentary, arrived at the following conclusions:

First. — That the contract executed between the plaintiffs and the defendant is a
renumerative donation.

Second. — That said contract or donation is not ultra vires, but an act executed within the
powers of the defendant corporation in accordance with its articles of incorporation and by
laws, sanctioned and approved by its Board of Directors and stockholders; and subsequently
ratified by other subsequent acts of the defendant company.

Third. — That the said donation is in accordance with the trend of modern and more
enlightened legislation in its treatment of questions between labor and capital.
 Fourth. — That the condition mentioned in the donation is null and void because it depends
on the provisions of Article 1115 of the old Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of the
defendant company from obeying and doing the wishes and mandates of the majority of the
stockholders.

Sixth. — That the non-payment of the debt in favor of the National Development Company is
not due to the lack of funds, nor to lack of authority, but the desire of the President of the
corporation to preserve and continue the Government participation in the company.

Seventh. — That due demands were made by the plaintiffs and their attorneys and these
demands were rejected for no justifiable or legal grounds.

The important facts which need to be considered for purposes of this appeal may be briefly stated as
follows: Defendant is a corporation duly organized in accordance with law with an authorized capital
of P500,000, divided into 5,000 shares, with a par value of P100 each share. The stockholders were:
Esteban de la Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania de la Rama, 100
shares, and Eliseo Hervas, Tomas Concepcion, Antonio G. Juanco, and Gaudencio Volasote with 5
shares each. Leonor and Estefania are daughters of Don Esteban, while the rest his employees.
Estefania de la Rama was married to the late Enrico Pirovano and to them four children were born
who are the plaintiffs in this case.

Enrico Pirovano became the president of the defendant company and under his management the
company grew and progressed until it became a multi-million corporation by the time Pirovano was
executed by the Japanese during the occupation. On May 13, 1941, the capital stock of the
corporation was increased to P2,000,000, after which a 100 per cent stock dividend was declared.
Subsequently, or before the outbreak of the war , new stock dividends of 200 per cent and 33 1/3
per cent were again declared. On December 4, 1941, the capital stock was once more increased to
P5,000,000. Under Pirovano's management, the assets of the company grew and increased from an
original paid up capital of around P240,000 to P15,538,024.37 by September 30, 1941 (Exhibit HH).

In the meantime, Don Esteban de la Rama, who practically owned and controlled the stock of the
defendant corporation, distributed his shareholding among his five daughters, namely, Leonor,
Estefania, Lourdes, Lolita and Conchita and his wife Natividad Aguilar so that, at that time, or on July
10, 1946, the stockholding of the corporation stood as follows: Esteban de la Rama, 869 shares,
Leonor de la Rama, 3,375 shares, Estefania de la Rama, 3,368 shares, Lourdes de la Rama, 3,368
shares, Lolita de la Rama, 3,368 shares, Conchita de la Rama, 3,376 shares, and Natividad Aguilar,
2,136 shares. The other stockholders , namely, Eliseo Hervas, Tomas Concepcion, Antonio Juanco,
and Jose Aguilar, who were merely employees of Don Esteban, were given 40 shares each, while
Pio Pedrosa, Marcial P. Lichauco and Rafael Roces, one share each, because they merely
represented the National Development Company. This Company was given representation in the
Board Of Directors of the corporation because at that time the latter had an outstanding bonded
indebtedness to the National Development Company.

This bonded indebtedness was incurred on February 26, 1940 and was in the amount of P7,500.00.
The bond held by the National Development Company was redeemable within a period of 20 years
from March 1, 1940,. bearing interest at the rate of 5 per cent per annum. To secure said bonded
indebtedness, all the assets of the De la Rama Steamship Co., Inc., and properties of Don Esteban
de la Rama, as well as those of the Hijos de I. de la Rama and Co., Inc., a sister corporation owned
by Don Esteban and his family, were mortgaged to the National Development Company (Annexes A,
B, C, D of Exhibit 3, Deed of Trust). Payments made by the corporation under the management of
Pirovano reduced this bonded indebtedness to P3,260,855.77.

Upon arrangement made with the National Development Company, the outstanding bonded
indebtedness was converted into non-voting preferred shares of stock of the De la Rama company
under the express condition that they would bear affixed cumulative dividend of 6 per cent per
annum and would be redeemable within 15 years (Exhibits 5 and 7). This conversion was carried out
on September 23, 1949, when the National Development Company executed a "Deed of
Termination of Trust and Release of Mortgage" in favor of the De la Rama company (Exhibit 6.) The
immediate effect of this conversion was the released from incumbrance of all the properties Of Don
Esteban and of the Hijos de I. de la Rama and Co., Inc., which was apparently favorable to the
interests of the De la Rama company, but, on the other hand, it resulted in the inconvenience that,
as holder of the preferred stock, the National Development Company, was given to the right to 40
per cent of the membership of the Board of Directors of the De la Rama company, which meant an
increase in the representation of the National Development Company from 2 to 4 of the 9 members
of said Board of Directors.

The first resolution granting to the Pirovano children the proceeds of the insurance policies taken on
his life by the defendant company was adopted by the Board of Directors at a meeting held on July
10, 1946, (Exhibit B). This grant was called in the resolution as "Special Payment to Minor Heirs of
the late Enrico Pirovano". Because of its direct hearing on the issues involved in this case, said
resolution is hereunder reproduced in toto:

SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANO

The President stated that the principal purpose for which the meeting had been called was to
discuss the advisability of making some form of compensation to the minor heirs of the late
Enrico Pirovano, former President and General Manager of the Company. As every member
of the Board knows, said the President, the late Enrico Pirovano who was largely responsible
for the very successful development of the activities of the Company prior to war was killed
by the Japanese in Manila sometime in 1944 leaving as his only heirs four minor children,
Maria Carla, Esteban, Enrico and John Albert. Early in 1941, explained the President, the
Company had insured the life of Mr. Pirovano for a million pesos. Following the occupation of
the Philippines by Japanese forces the Company was unable to pay the premiums on those
policies issued by Filipino companies and these policies had lapsed. But with regards to the
York Office of the De la Rama Steamship Co., Inc. had kept up payment of the premiums
from year to year. The payments made on account of these premiums, however, are very
small compared to the amount which the Company will now receive as a result of Mr.
Pirovano's death. The President proposed therefore that out of the proceeds of these
policies the sum of P400,000 be set aside for the minor children of the deceased, said sum
of money to be convertible into 4,000 shares of the stock of the Company, at par, or 1,000
shares for each child. This proposal, explained the President as being made by him upon
suggestion of President Roxas, but, he added, that he himself was very much in favor of it
also. On motion of Miss Leonor de la Rama duly seconded by Mrs. Lourdes de la Rama de
Osmeña, the following resolution was, thereupon, unanimously approved:

Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama
Steamship Company, died in Manila sometime in November, 1944:

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of thus company;
 Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various
Philippine and American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and four
minor children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano; lawphil.net

Whereas, said Enrico Pirovano left practically nothing to his heirs and it is but fit proper that
this company which owes so much to the deceased should make some provision for his
children;

Whereas, this company paid premium on Mr. Pirovano's life insurance policies for a period of
only 4 years so that it will receive from the insurance companies sums of money greatly in
excess of the premiums paid by this company.

Be it resolved, That out of the proceeds to be collected from the life insurance policies on the
life of the late Enrico Pirovano, the sum of P400,000 be set aside for equal division among
the 4 minor children of the deceased, to wit: Esteban, Maria Carla, Enrico and John Albert,
all surnamed Pirovano, which sum of money shall be convertible into shares of stock of the
De la Rama Steamship Company, at par and, for that purpose, that the present registered
stockholders of the corporation be requested to waive their preemptive right to 4,000 shares
of the unissued stock of the company in order to enable each of the 4 minor heirs of the
deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano, to
obtain 1,000 shares at par;

Resolved, further, that in view of the fact that under the provisions of the indenture with the
National Development Company, it is necessary that action herein proposed to be confirmed
by the Board of Directors of that company, the Secretary is hereby instructed to send a copy
of this resolution to the proper officers of the National Development Company for appropriate
action. (Exhibit B)

The above resolution, which was adopted on July 10, 1946, was submitted to the stockholders of the
De la Rama company at a meeting properly convened, and on that same date, July 10, 1946, the
same was duly approved.

It appears that, although Don Esteban and the Members of his family were agreeable to giving to the
Pirovano children the amount of P400,000 out of the proceeds of the insurance policies taken on the
life of Enrico Pirovano, they did not realize that when they provided in the above referred two
resolutions that said Amount should be paid in the form of shares of stock, they would be actually
giving to the Pirovano children more than what they intended to give. This came about when
Lourdes de la Rama, wife of Sergio Osmeña, Jr., showed to the latter copies of said resolutions and
asked him to explain their import and meaning, and it was value then that Osmeña explained that
because the value then of the shares of stock was actually 3.6 times their par value, the donation
their value, the donation, although purporting to be only P400,00, would actually amount to a total of
P1,440,000. He further explained that if the Pirovano children would given shares of stock in lieu of
the amount to be donated, the voting strength of the five daughters of Don Esteban in the company
would be adversely affected in the sense that Mrs. Pirovano would be adversely affected in the
sense that Mrs. Pirovano would have a voting power twice as much as that of her sisters. This
caused Lourdes de la Rama to write to the secretary of the corporation, Atty. Marcial Lichauco,
asking him to cancel the waiver she supposedly gave of her pre-emptive rights. Osmeña elaborated
on this matter at the annual meeting of the stockholders held on December 12, 1946 but at said
meeting it was decided to leave the matter in abeyance pending further action on the part of the
members of the De la Rama family.
Osmeña, in the meantime, took up the matter with Don Esteban and, as consequence, the latter, on
December 30, 1946, addressed to Marcial Lichauco a letter stating, among other things, that "in view
of the total lack of understanding by me and my daughters of the two Resolutions abovementioned,
namely, Directors' and Stockholders' dated July 10, 1946, as finally resolved by the majority of the
Stockholders and Directors present yesterday, that you consider the abovementioned resolutions
nullified." (Exhibit CC).

On January 6, 1947, the Board of Directors of the De la Rama company, as a consequence of the
change of attitude of Don Esteban, adopted a resolution changing the form of the donation to the
Pirovano children from a donation of 4,000 shares of stock as originally planned into a renunciation
in favor of the children of all the company's "right, title, and interest as beneficiary in and to the
proceeds of the abovementioned life insurance policies", subject to the express condition that said
proceeds should be retained by the company as a loan drawing interest at the rate of 5 per cent per
annum and payable to the Pirovano children after the company "shall have first settled in full the
balance of its present remaining bonded indebtedness in the sum of approximately P5,000,000"
(Exhibit C). This resolution was concurred in by the representatives of the National Development
Company. The pertinent portion of the resolution reads as follows:

Be resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it
hereby renounces, all of his right, title, and interest as beneficiary in and to the proceeds of
the abovementioned life insurance policies in favor of Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano, subject to the terms and conditions herein after provided;

That the proceeds of said insurance policies shall be retained by the Company in the nature
of a loan drawing interest at the rate of 5 per cent annum from the date of receipt of payment
by the Company from the various insurance companies above-mentioned until the time the
time the same amounts are paid to the minor heirs of Enrico Pirovano previously mentioned;

That all amounts received from the above-mentioned policies shall be divided equally among
the minors heirs of said Enrico Pirovano;

That the company shall proceed to pay the proceeds of said insurance policies plus interests
that may have accrued to each of the heirs of the said Enrico Pirovano or their duly
appointed representatives after the Company shall have first settled in full the balance of its
present remaining bonded indebtedness in the sum of the approximately P5,000,000.

The above resolution was carried out by the company and Mrs. Estefania R. Pirovano, the latter
acting as guardian of her children, by executing a Memorandum Agreement on January 10, 1947
and June 17, 1947, respectively, stating therein that the De la Rama Steamship Co., Inc., shall enter
in its books as a loan the proceeds of the life insurance policies taken on the life of Pirovano totalling
S321,500, which loan would earn interest at the rate of 5 per cent per annum. Mrs. Pirovano, in
executing the agreement, acted with the express authority granted to her by the court in an order
dated March 26, 1947.

On June 24, 1947, the Board of Directors approved a resolution providing therein that instead of the
interest on the loan being payable, together with the principal, only after the company shall have first
settled in full its bonded indebtedness, said interest may be paid to the Pirovano children "whenever
the company is in a position to met said obligation" (Exhibit D), and on February 26, 1948, Mrs.
Pirovano executed a public document in which she formally accepted the donation (Exhibit H). The
Dela Rama company took "official notice" of this formal acceptance at a meeting held by its Board of
Directors on February 26, 1948.
In connection with the above negotiations, the Board of Directors took up at its meeting on July 25,
1949, the proposition of Mrs. Pirovano to buy the house at New Rochelle, New York, owned by the
Demwood Realty, a subsidiary of the De la Rama company at its original costs of $75,000, which
would be paid from the funds held in trust belonging to her minor children. After a brief discussion
relative to the matter, the proposition was approved in a resolution adopted on the same date.

The formal transfer was made in an agreement signed on September 5, 1949 by Mrs. Pirovano, as
guardian of her children, and by the De la Rama company, represented by its new General
Manager, Sergio Osmeña, Jr. The transfer of this property was approved by the court in its order of
September 20, 1949. lawphil.net

On September 13, 1949, or two years and 3 months after the donation had been approved in the
various resolutions herein above mentioned, the stockholders of the De la Rama company formally
ratified the donation (Exhibit E), with certain clarifying modifications, including the resolution
approving the transfer of the Demwood property to the Pirovano children. The clarifying
modifications are quoted hereunder:

1. That the payment of the above-mentioned donation shall not be affected until such time as
the Company shall have first duly liquidated its present bonded indebtedness in the amount
of P3,260,855.77 with The National Development Company, or fully redeemed the preferred
shares of stock in the amount which shall be issued to the National Development Company
in lieu thereof;

2. That any and all taxes, legal fees, and expenses in any way connected with the above
transaction shall be chargeable and deducted from the proceeds of the life insurance policies
mentioned in the resolutions of the Board of Directors. (Exhibit E)

Sometime in March 1950, the President of the corporation, Sergio Osmeña, Jr., addressed an
inquiry to the Securities and Exchange Commission asking for opinion regarding the validity of the
donation of the proceeds of the insurance policies to the Pirovano children. On June 20, 1950 that
office rendered its opinion that the donation was void because the corporation could not dispose of
its assets by gift and therefore the corporation acted beyond the scope of its corporate powers. This
opinion was submitted to the Board of Directors at its meting on July 12, 1950, on which occasion
the president recommend that other legal ways be studied whereby the donation could be carried
out. On September 14, 1950, another meeting was held to discuss the propriety of the donation. At
this meeting the president expressed the view that, since the corporation was not authorized by its
charter to make the donation to the Pirovano children and the majority of the stockholders was in
favor of making provision for said children, the manner he believed this could be done would be to
declare a cash dividend in favor of the stockholders in the exact amount of the insurance proceeds
and thereafter have the stockholders make the donation to the children in their individual capacity.
Notwithstanding this proposal of the president, the board took no action on the matter, and on March
8, 1951, at a stockholders' meeting convened on that date the majority of the stockholders' voted to
revoke the resolution approving the donation to the Pirovano children. The pertinent portion of the
resolution reads as follows:

Be it resolved, as it is hereby resolved, that in view of the failure of compliance with the
above conditions to which the above donation was made subject, and in view of the opinion
of the Securities and Exchange Commissioner, the stockholders revoke, rescind and annul,
as they do thereby revoke, rescind and annul, its ratification and approval on September 13,
1949 of the aforementioned resolution of the Board of Directors of January 6, 1947, as
amended on June 24, 1947. (Exhibit T)
In view of the resolution declaring that the corporation failed to comply with the condition set for the
effectivity of the donation and revoking at the same time the approval given to it by the corporation,
and considering that the corporation can no longer set aside said donation because it had no longer
set aside said donation because it had long been perfected and consummated, the minor children of
the late Enrico Pirovano, represented by their mother and guardian, Estefania R. de Pirovano,
demanded the payment of the credit due them as of December 31, 1951, amounting to P564,980.89,
and this payment having been refused, they instituted the present action in the Court of First
Instance of Rizal wherein they prayed that the be granted an alternative relief of the following tenor:
(1) sentencing defendant to pay to the plaintiff the sum of P564,980.89 as of December 31, 1951,
with the corresponding interest thereon; (2) as an alternative relief, sentencing defendant to pay to
the plaintiffs the interests on said sum of P564,980.89 at the rate of 5 per cent per annum, and the
sum of P564,980.89 after the redemption of the preferred shares of the corporation held by the
National Development Company; and (3) in any event, sentencing defendant to pay the plaintiffs
damages in the amount of not less than 20 per cent of the sum that may be adjudged to the
plaintiffs, and the costs of action.

The only issues which in the opinion of the court need to be determined in order to reach a decision
in this appeal are: (1) Is the grant of the proceeds of the insurance policies taken on the life of the
late Enrico Pirovano as embodied in the resolution of the Board of Directors of defendant corporation
adopted on January 6, 1947 and June 24, 1947 a remunerative donation as found by the lower
court?; (2) IN the affirmative case, has that donation been perfected before its rescission or
nullification by the stockholders of the corporation on March 8, 1951?; (3) Can defendant corporation
give by way of donation the proceeds of said insurance policies to the minor children of the late
Enrico Pirovano under the law or its articles of corporation, or is that donation an ultra vires act?; and
(4) has the defendant corporation, by the acts it performed subsequent to the granting of the
donation, deliberately prevented the fulfillment of the condition precedent to the payment of said
donation such that it can be said it has forfeited its right to demand its fulfillment and has made the
donation entirely due and demandable?

We will discuss these issues separately.

1. To determine the nature of the grant made by the defendant corporation to the minor children of
the late Enrico Pirovano, we do not need to go far nor dig into the voluminous record that lies at the
bottom of this case. We do not even need to inquire into the interest which has allegedly been
shown by President Roxas in the welfare of the children of his good friend Enrico Pirovano. Whether
President Roxas has taken the initiative in the move to give something to said children which later
culminated in the donation now in dispute, is of no moment for the fact is that, from the mass of
evidence on hand, such a donation has been given the full indorsement and encouraging support by
Don Esteban de la Rama who was practically the owner of the corporation. We only need to fall back
to accomplish this purpose on the several resolutions of the Board of Directors of the corporations
containing said grant for they clearly state the reasons and purposes why the donation has been
given.

Before we proceed further, it is convenient to state here in passing that, before the Board of
Directors had approved its resolution of January 6, 1947, as later amended by another resolution
adopted on June 24, 1947, the corporation had already decided to give to the minor children of the
late Enrico Pirovano the sum of P400,000 out of the proceeds of the insurance policies taken on his
life in the form of shares, and that when this form was considered objectionable because its result
and effect would be to give to said children a much greater amount considering the value then of the
stock of the corporation, the Board of Directors decided to amend the donation in the form and under
the terms stated in the aforesaid resolutions. Thus, in the original resolution approved by the Board
of Directors on July 10, 1946, wherein the reasons for granting the donation to the minor children of
the late Enrico Pirovano were clearly, we find out the following revealing statements:
 Whereas, the late Enrico Pirovano President and General Manager of the De la Rama
Steamship Company, died in Manila sometime in November, 1944;

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of this company;

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various
Philippine and American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and 4 minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano;

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and
proper that this company which owes so much to the deceased should make some
provisions for his children;

Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for a period
of only 4 years so that it will receive from the insurance companies sums of money greatly in
excess of the premiums paid by the company,

Again, in the resolution approved by the Board of Directors on January 6, 1947, we also find the
following expressive statements which are but a reiteration of those already expressed in the original
resolution:

Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama
Steamship Co., Inc., died in Manila sometime during the latter part of the year 1944;

Whereas, the said Enrico Pirovano was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this company;

Whereas, early in 1941, the life of the said Enrico Pirovano was insured in various life
companies, to wit:

Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano; and

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and
proper that this Company which owes so much to the deceased should make some provision
for his children;

Be it resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it
hereby renounces, . . . .

From the above it clearly appears that the corporation thought of giving the donation to the children
of the late Enrico Pirovano because he "was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this company"; and also because he "left
practically nothing to his heirs and it is but fit and proper that this company which owes so much to
the deceased should make some provision to his children", and so, the donation was given "out of
gratitude to the late Enrico Pirovano." We do not need to stretch our imagination to see that a grant
or donation given under these circumstances is remunerative in nature in contemplation of law.
 That which is made to a person in consideration of his merits or for services rendered to the
donor, provided they do not constitute recoverable debts, or that in which a burden less than
the value of the thing given is imposed upon the donee, is also a donation." (Art. 619, old
Civil Code.)

In donations made to a person for services rendered to the donor, the donor's will is moved
by acts which directly benefit him. The motivating cause is gratitude, acknowledgment of a
favor, a desire to compensate. A donation made to one who saved the donor's life, or a
lawyer who renounced his fees for services rendered to the donor, would fall under this class
of donations. These donations are called remunerative donations . (Sinco and Capistrano,
The Civil Code, Vol. 1, p. 676; Manresa, 5th ed., pp. 72-73.)

2. The next question to be determined is whether the donation has been perfected such that the
corporation can no longer rescind it even if it wanted to. The answer to this question cannot but be in
the affirmative considering that the same has not only been granted in several resolutions duly
adopted by the Board of Directors of the defendant corporation, and in all these corporate acts the
concurrence of the representatives of the National Development Company, the only creditor whose
interest may be affected by the donation, has been expressly given. The corporation has even gone
further. It actually transferred the ownership of the credit subject of donation to the Pirovano children
with the express understanding that the money would be retained by the corporation subject to the
condition that the latter would pay interest thereon at the rate of 5 per cent per annum payable
whenever said corporation may be in a financial position to do so. Thus, the following acts of the
corporation as reflected from the evidence bear this out:

(a) The donation was embodied in a resolution duly approved by the Board of Directors on January
6, 19437. In this resolution, the representatives of the National Development Company, have given
their concurrence. This is the only creditor which can be considered as being adversely affected by
the donation. The resolution of June 24, 1947 did not modify the substance of the former resolution
for it merely provided that instead of the interest on the loan being payable, together with the
principal, only after the corporation had first settled in full its bonded indebtedness, said interest
would be paid "whenever the company is in a position to meet said obligation."

(b) The resolution of January 6, 1947 was actually carried out when the company and Mrs. Estefania
R. Pirovano, executed a memorandum agreement stating therein hat the proceeds of the insurance
policies would be entered in the books of the corporation as a loan which would bear an interest at
the rate of 5 per cent per annum, and said agreement was signed by Mrs. Pirovano as judicial
guardian of her children after she had been expressly authorized by the court to accept the donation
in behalf of her children.

(c) While the donation can be considered as duly executed by the execution of the document stated
in the preceding paragraph, and by the entry in the books of the corporation of the donation as a
loan, a further record of said execution was made when Mrs. Pirovano executed a public document
on February 26, 1948 making similar acceptance of the donation. And this acceptance was officially
recorded by the corporation when on the same date its Board of Directors approved a resolution
taking "official notice" of said acceptance.

(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano to buy the
house at New Rochelle, New York, owned by a subsidiary of the corporation at the costs of S75,000
which would be paid from the sum held in trust belonging to her minor children. And this agreement
was actually carried out in a document signed by the general manager of the corporation and by
Mrs. Pirovano, who acted on the matter with the express authority of the court.
(e) And on September 30, 1949, or two years and 3 months after the donation had been executed,
the stockholders of the defendant corporation formally ratified and gave approval to the donation as
embodied in the resolutions above referred to, subject to certain modifications which did not
materially affect the nature of the donation.

There can be no doubt from the foregoing relation of facts the donation was a corporate act carried
out by the corporation not only with the sanction of its Board of Directors but also of its stockholders.
It is evident that the donation has reached the stage of perfection which is valid and binding upon the
corporation and as such cannot be rescinded unless there is exists legal grounds for doing so. In this
case, we see none. The two reasons given for the rescission of said donation in the resolution of the
corporation adopted on March 8, 1951, to wit: that the corporation failed to comply with the
conditions to which the above donation was made subject, and that in the opinion of the Securities
and Exchange Commission said donation is ultra vires, are not, in our opinion, valid and legal as to
justify the rescission of a perfected donation. These reasons, as we will discuss in the latter part of
this decision, cannot be invoked by the corporation to rescind or set at naught the donation, and the
only way by which this can be done is to show that the donee has been in default, or that the
donation has not been validly executed, or is illegal or ultra vires, and such is not the case as we will
see hereafter. We therefore declare that the resolution approved by the stockholders of the
defendant corporation on March 8, 1951 did not and cannot have the effect of nullifying the donation
in question.

3. The third question to be determined is: Can defendant corporation give by way of donation the
proceeds of said insurance policies to the minor children of the late Enrico Pirovano under the law or
its articles of corporation, or is that donation an ultra vires act? To answer this question it is
important for us to examine the articles of incorporation of the De la Rama company to see this
question it is important for us to examine the articles of incorporation of the De la Rama company to
see if the act or donation is outside of their scope. Paragraph second of said articles provides:

Second.— The purposes for which said corporation is formed are:

(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or vessels,
together with equipments and furniture therefor, and to employ the same in conveyance and
carriage of goods, wares and merchandise of every description, and of passengers upon the
high seas.

(b) To sell, let, charter, or otherwise dispose of the said vessels or other property of the
company.

(c) To carry on the business of carriers by water.

(d) To carry on the business of shipowners in all of its branches.

(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and other things
which the company may deem necessary or advisable to be purchased or leased for the
necessary and proper purposes of the business of the company, and from time to time to sell
the dispose of the same.

(f) To promote any company or companies for the purposes of acquiring all or any of the
property or liabilities of this company, or both, or for any other purpose which may seem
directly or indirectly calculated to benefit the company.
 (g) To invest and deal with the moneys of the company and immediately required, in such
manner as from time to time may be determined.

(h) To borrow, or raise, or secure the payment of money in such manner as the company
shall think fit.

(i) Generally, to do all such other thing and to transact all business as may be directly or
indirectly incidental or conducive to the attainment of the above object, or any of them
respectively.

(j) Without in any particular limiting or restricting any of the objects and powers of the
corporation, it is hereby expressly declared and provided that the corporation shall have
power to issue bonds and provided that the corporation shall have power to issue bonds and
other obligations, to mortgage or pledge any stocks, bonds or other obligations or any
property which may be required by said corporations; to secure any bonds, guarantees or
other obligations by it issued or incurred; to lend money or credit to and to aid in any other
manner any person, association, or corporation of which any obligation or in which any
interest is held by this corporation or in the affairs or prosperity of which this corporation or in
the affairs or prosperity of which this corporation has a lawful interest, and to do such acts
and things as may be necessary to protect, preserve, improve, or enhance the value of any
such obligation or interest; and, in general, to do such other acts in connection with the
purposes for which this corporation has been formed which is calculated to promote the
interest of the corporation or to enhance the value of its property and to exercise all the
rights, powers and privileges which are now or may hereafter be conferred by the laws of the
Philippines upon corporations formed under the Philippine Corporation Act; to execute from
time to time general or special powers of attorney to persons, firms, associations or
corporations either in the Philippines, in the United States, or in any other country and to
revoke the same as and when the Directors may determine and to do any and or all of the
things hereinafter set forth and to the same extent as natural persons might or could do.

After a careful perusal of the provisions above quoted we find that the corporation was given broad
and almost unlimited powers to carry out the purposes for which it was organized among them, (1)
"To invest and deal with the moneys of the company not immediately required, in such manner as
from time to time may be determined" and, (2) "to aid in any other manner any person, association,
or corporation of which any obligation or in which any interest is held by this corporation or in the
affairs or prosperity of which this corporation has a lawful interest." The world dealis broad enough to
include any manner of disposition, and refers to moneys not immediately required by the
corporation, and such disposition may be made in such manner as from time to time may be
determined by the corporations. The donation in question undoubtedly comes within the scope of
this broad power for it is a fact appearing in the evidence that the insurance proceeds were not
immediately required when they were given away. In fact, the evidence shows that the corporation
declared a 100 per cent cash dividend, or P2,000,000, and later on another 30 per cent cash
dividend. This is clear proof of the solvency of the corporation. It may be that, as insinuated, Don
Esteban wanted to make use of the insurance money to rehabilitate the central owned by a sister
corporation, known as Hijos de I. de la Rama and Co., Inc., situated in Bago, Negros Occidental, but
this, far from reflecting against the solvency of the De la Rama company, only shows that the funds
were not needed by the corporation.

Under the second broad power we have the above stated, that is, to aid in any other manner any
person in the affairs and prosperity of whom the corporation has a lawful interest, the record of this
case is replete with instances which clearly show that the corporation knew well its scope and
meaning so much so that, with the exception of the instant case, no one has lifted a finger to dispute
their validity. Thus, under this broad grant of power, this corporation paid to the heirs of one
Florentino Nonato, an engineer of one of the ships of the company who died in Japan, a gratuity of
P7,000, equivalent to one month salary for each year of service. It also gave to Ramon Pons, a
captain of one of its ships , a retirement gratuity equivalent to one month salary for every year of
service, the same to be based upon his highest salary. And it contributed P2,000 to the fund raised
by the Associated Steamship Lines for the widow of the late Francis Gispert, secretary of said
Association, of which the De la Rama Steamship Co., Inc., was a member along with about 30 other
steamship companies. In this instance, Gispert was not even an employee of the corporation. And
invoking this vast power, the corporation even went to the extent of contributing P100,000 to the
Liberal Party campaign funds, apparently in the hope that by conserving its cordial relations with that
party it might continue to retain the patronage of the administration. All these acts executed before
and after the donation in question have never been questioned and were willingly and actually
carried out.

We don't see much distinction between these acts of generosity or benevolence extended to some
employees of the corporation, and even to some in whom the corporation was merely interested
because of certain moral or political considerations, and the donation which the corporation has
seen fit to give to the children of the late Enrico Pirovano from the point of view of the power of the
corporation as expressed in its articles of incorporation. And if the former had been sanctioned and
had been considered valid and intra vires, we see no plausible reasons why the latter should now be
deemed ultra vires. It may perhaps be argued that the donation given to the children of the late
Enrico Pirovano is so large and disproportionate that it can hardly be considered a pension of
gratuity that can be placed on a par with the instances above mentioned, but this argument
overlooks one consideration: the gratuity here given was not merely motivated by pure liberality or
act of generosity, but by a deep sense of recognition of the valuable services rendered by the late
Enrico Pirovano which had immensely contributed to the growth of the corporation to the extent that
from its humble capitalization it blossomed into a multi-million corporation that it is today. In other
words of the very resolutions granting the donation or gratuity, said donation was given not only
because the company was so indebted to him that it saw fit and proper to make provisions for his
children, but it did so out of a sense of gratitude. Another factor that we should bear in mind is that
Enrico Pirovano was not only a high official of the company but was at the same time a member of
the De la Rama family, and the recipient of the donation are the grandchildren of Don Esteban de la
Rama. This we, may say, is the motivating root cause behind the grant of this bounty.

It may be contended that a donation is different from a gratuity. While technically this may be so in
substance they are the same. They are even similar to a pension. Thus, it was granted for services
previously rendered, and which at the time they were rendered gave rise to no legal obligation. "
(Words and Phrases, Permanent Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306, 176 Cal., 659.) Or
stated in another way, a "Gratuity is mere bounty given by the Government in consideration or
recognition or meritorious services and springs from the appreciation an d graciousness of the
Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A gratuity is something given
freely, or without recompense, a gift, something voluntarily given in return for a favor or services; a
bounty; a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533,
43 Off. Gaz. p. 4633. We do not see much difference between this definition of gratuity and a
remunerative donation contemplated in the Civil Code. In essence they are the same. Such being
the case, it may be said that this donation is gratuity in a large sense for it was given for valuable
services rendered an ultra vires act in the light of the following authorities:

Indeed, some cases seem to hold that the giving of a pure gratuity to directors is ultra
vires of corporation, so that it could not be legalized even if the approval of the shareholders;
but this position has no sound reason to support it, and is opposed to the weight of
authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky. 200; 46 L.R.A. 384).
 But although business corporations cannot contribute to charity or benevolence, yet they are
not required always to insist on the full extent of their legal rights. They are not forbidden for
the recognizing moral obligation of which strict law takes no cognizance. They are not
prohibited from establishing a reputation for board, liberal, equitable dealing which may stand
them in good stead in competition with less fair rivals. Thus, an incorporated fire insurance
company which policies except losses from explosions may nevertheless pay a loss from
that cause when other companies are accustomed to do so, such liberal dealing being
deemed conducive to the prosperity of the corporation." (Modern Law of Corporations,
Machen, Vol. 1, p. 81).

So, a bank may grant a five years pension to the family at one of its officers. In all cases in
this sorts, the amount of the gratuity rests entirely within the discretion of the company,
unless indeed it be all together out of the reason and fitness. But where the company has
ceased to be going concerned, this power to make gifts or present it at the end. (Modern Law
of Corporations, Machen, Vol. 1, p. 82.).

Payment of Gratitude out of Capital.— There seems on principle no reason to doubt that gifts
or gratuities wherever they are lawful may be paid out of capital as well as out of profits.
(Modern Law of corporations, Machen, Vol. 1 p. 83.).

Whether desirable to supplement implied powers of this kind by express provisions.—

Enough has been said to show that the implied powers of a corporation to give gratuities to
its servants and officers, as well as to strangers, are ample, so that there is therefore no
need to supplement them by express provisions." (modern Law of Corporations, Machen,
Vol. 1, p. 83.) 1

Granting arguendo that the donation given by Pirovano children is outside the scope of the powers of the defendant corporation, or the scope
of the powers that it may exercise under the law, or it is an ultra vires act, still it may said that the same can not be invalidated, or declared
legally ineffective for the reason alone, it appearing that the donation represents not only the act of the Board of Directors but of the
stockholders themselves as shown by the fact that the same has been expressly ratified in a resolution duly approved by the latter. By this
ratification, the infirmity of the corporate act, it may has been obliterated thereby making the cat perfectly valid and enforceable. This is
specially so if the donation is not merely executory but executed and consummated and no creditors are prejudice, or if there are creditors
affected, the latter has expressly given their confirmity.

In making this pronouncement, advertence should made of the nature of the ultra vires act that is in
question. A little digression needs be made on this matter to show the different legal effect that may
result consequent upon the performance of a particular ultra vires act on the part of the corporation.
may authorities may be cited interpreting or defining, extent, and scope of an ultra vires act, but all of
them are uniform and unanimous that the same may be either an act performed merely outside the
scope of the powers granted to it by it articles of incorporation, or one which is contrary to law or
violative of any principle which will void any contract whether done individually or collectively. In
other words, a distinction should be made between corporate acts or contracts which are illegal and
those which are merely ultra vires. The former contemplates the doing of an act which is contrary to
law, morals, or public policy or public duty, and are, like similar transactions between the individuals
void. They cannot serve as basis of a court action, nor require validity ultra vires acts on the other
hand, or those which are not illegal and void ab initio, but are merely within 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.

Strictly speaking, an ultra vires act is one outside the scope of the power conferred by the
legislature, and although the term has been used indiscriminately, it is properly
distinguishable from acts which are illegal, in excess or abuse of power, or executed in an
unauthorized manner, or acts within corporate powers but outside the authority of particular
officers or agents (19 C. J. S. 419).
 Corporate transactions which are illegal because prohibited by statute or against public
policy are ordinarily void and unenforceable regardless of the part performance, ratification,
or estoppel; but general prohibitions against exceeding corporate powers and prohibitions
intended to protect a particular class or specifying the consequences of violation may not
preclude enforcement of the transaction and an action may be had for the part unaffected by
the illegality or for equitable restitution. (19 C.J.S. 421.)

Generally, a transaction within corporate powers but executed in an irregular or unauthorized

manner is voidable only, and may become enforceable by reason of ratification or express or
implied assent by the stockholders or by reason of estoppel of the corporation or the other
party to the transaction to raise the objection, particularly where the benefits are retained

As appears in paragraphs 960-964 supra, the general rule is that a corporation must act in
the manner and with the formalities, if any, prescribed by its character or by the general law.
However, a corporation transaction or contract which is within the corporation powers, which
is neither wrong in itself nor against public policy, but which is defective from a failure to
observe in its execution a requirement of law enacted for the benefit or protection of a certain
class, is voidable and is valid until avoided, not void until validated; the parties for whose
benefit the requirement was enacted may ratify it or be estoppel to assert its invalidity, and
third persons acting in good faith are not usually affected by an irregularity on the part of the
corporation in the exercise of its granted powers. (19 C.J.S., 423-24.)

It is true that there are authorities which told that ultra vires acts, or those performed beyond the
powers conferred upon the corporation either by law or by its articles of incorporation, are not only
voidable, but wholly void and of no legal effect, and that such acts cannot be validated by ratification
or be the basis of any action in court; but such ruling does not constitute the weight of authority, the
reason being that they fail to make the important distinction we have above adverted to. Because
rule has been rejected by most of the state courts and even by the modern treaties or corporations
(7 Flethcer, Cyc. Corps., 563-564). And now it can be said that the majority of the cases hold that
acts which are merely ultra vires, or acts which are not illegal, may be ratified by the stockholders of
a corporation (Brooklyn Heights R. Co. vs. Brooklyn City R. Co., 135 N.Y. Supp. 1001).

Strictly speaking, an act of a corporation outside of its character powers is just as such ultra
vires where all the stockholders consent thereto as in a case where none of the stockholders
expressly or cannot be ratified so as to make it valid, even though all the stockholders
consent thereto; but inasmuch as the stockholders in reality constitute the corporation, it
should , it would seem, be estopped to allege ultra vires, and it is generally so held where
there are no creditors, or the creditors are not injured thereby, and where the rights of the
state or the public are not involved, unless the act is not only ultra vires but in addition illegal
and void. of course, such consent of all the stockholders cannot adversely affect creditors of
the corporation nor preclude a proper attack by the state because of such ultra vires act. (7
Fletcher Corp., Sec. 3432, p. 585)

Since it is not contended that the donation under consideration is illegal, or contrary to any of the
express provision of the articles of incorporation, nor prejudicial to the creditors of the defendant
corporation, we cannot but logically conclude, on the strength of the authorities we have quoted
above, that said donation, even if ultra vires in the supposition we have adverted to, is not void, and
if voidable its infirmity has been cured by ratification and subsequent acts of the defendant
corporation. The defendant corporation, therefore, is now prevented or estopped from contesting the
validity of the donation. This is specially so in this case when the very directors who conceived the
idea of granting said donation are practically the stockholders themselves, with few nominal
exception. This applies to the new stockholder Jose Cojuangco who acquired his interest after the
donation has been made because of the rule that a "purchaser of shares of stock cannot avoid ultra
vires acts of the corporation authorized by its vendor, except those done after the purchase" (7
Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19 Phil., 82.) Indeed, how
can the stockholders now pretend to revoke the donation which has been partly consummated? How
can the corporation now set at naught the transfer made to Mrs. Pirovano of the property in New
York, U.S.A., the price of which was paid by her but of the proceeds of the insurance policies given
as donation. To allow the corporation to undo what it has done would only be most unfair but would
contravene the well-settled doctrine that the defense of ultra vires cannot be set up or availed of in
completed transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19 C.J.S., 431).

4. We now come to the fourth and last question that the defendant corporation, by the acts it has
performed subsequent to the granting of the donation, deliberately prevented the fulfillment of the
condition precedent to the payment of said donation such that it can be said it has forfeited entirely
due and demandable.

It should be recalled that the original resolution of the Board of Directors adopted on July 10, 1946
which provided for the donation of P400,000 out of the proceeds which the De la Rama company
would collect on the insurance policies taken on the life of the late Enrico Pirovano was, as already
stated above, amended on January 6, 1947 to include, among the conditions therein provided, that
the corporation shall proceed to pay said amount, as well as the interest due thereon, after it shall
have settled in full balance of its bonded indebtedness in the sum of P5,000,000. It should be
recalled that on September 13, 1949, or more than 2 years after the last amendment referred too
above, the stockholders adopted another resolution whereby they formally ratified said donation but
subject to the following clarifications: (1) that the amount of the donation shall not be effected until
such time as the company shall have first duly liquidated its present bonded indebtedness in the
amount of P3,260,855.77 to the National Development Company, or shall have first fully redeemed
the preferred shares of stock in the amount to be issued to said company in lieu thereof, and (2) that
any and all taxes, legal fees, and expenses connected with the transaction shall be chargeable from
the proceeds of said insurance policies.

The trial court, in considering these conditions in the light of the acts subsequently performed by the
corporation in connection with the proceeds of the insurance policies, considered said conditions null
and void, or at most not written because in its pinion their non-fulfillment was due to a deliberate
desistance of the corporation and not to lack of funds to redeem the preferred shares of the National
Development Company. The conclusions arrived at by the trial court on this point are as follows:

Fourth. — that the condition mentioned in the donation is null and void because it depends
on the exclusive will of the donor, in accordance with the provisions of Article 1115 of the Old
Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of the
defendant company from obeying and doing the wishes and mandate of the majority of the
stockholders.

Sixth. — That the non-payment of the debt in favor of the National Development Company is
due to the lack of funds, nor to lack of authority, but to the desire of the President of the
corporation to preserve and continue the Government participation in the company.

To this views of the trial court, we fail to agree. There are many factors we can consider why the
failure to immediately redeem the preferred shares issued to the National Development Company as
desired by the minor children of the late Enrico Pirovano cannot or should not be attributed to a mere
desire on the part of the corporation to delay the redemption, or to prejudice the interest of the
minors, but rather to protect the interest of the corporation itself. One of them is the text of the very
resolution approved by the National Development Company on February 18, 1949 which prescribed
the terms and conditions under which it expressed its conformity to the conversion of the bonded
indebtedness into preferred shares of stock. The text of the resolution above mentioned reads:

Resolved: That the outstanding bonded indebtedness of the Dela Rama Steamship Co., Inc.,
in the approximate amount of P3,260,855.77 be converted into non-voting preferred shares
of stock of said company, said shares to bear a fixed dividend of 6 percent per annum which
shall be cumulative and redeemable within 15 years. Said shares shall be preferred as to
assets in the event of liquidation or dissolution of said company but shall be non-
participating.

It is plain from the text of the above resolution that the defendant corporation had 15 years from
February 18, 1949, or until 1964, within which to effect the redemption of the preferred shares issued
to the National Development Company. This condition cannot but be binding and obligatory upon the
donees, if they desire to maintain the validity of the donation, for it is not only the basis upon which
the stockholders of the defendant corporation expressed their willingness to ratify the donation, but it
is also by way which its creditor, the National Development Company, would want it to be. If the
defendant corporation is given 15 years within which to redeem the preferred shares, and that period
would expire in 1964, one cannot blame the corporation for availing itself of this period if in its
opinion it would redound to its best interest. It cannot therefore be said that the fulfillment of the
condition for the payment of the donation is one that wholly depends on the exclusive will of the
donor, as the lower court has concluded, simply because it failed to meet the redemption of said
shares in her manner desired by the donees. While it may be admitted that because of the
disposition of the assets of the corporation upon the suggestion of its general manager more than
enough funds had been raised to effect the immediate redemption of the above shares, it is not
correct to say that the management has completely failed in its duty to pay its obligations for,
according to the evidence, a substantial portion of the indebtedness has been paid and only a
balance of about P1,805,169.98 was outstanding when the stockholders of the corporation decided
to revoke or cancel the donation. (Exhibit P.)

But there are other good reasons why all the available funds have not been actually applied to the
redemption of the preferred shares, one of them being the "desire of the president of the corporation
to preserve and continue the government participation in the company" which even the lower court
found it to be meritorious, which is one way by which it could continue receiving the patronage and
protection of the government. Another reason is that the redemption of the shares does not depend
on the will of the corporation alone but to a great extent on the will of a third party, the National
Development Company. In fact, as the evidence shows, this Company had pledged these shares to
the Philippine National Bank and the Rehabilitation Finance Corporation as a security to obtain
certain loans to finance the purchase of certain ships to be built for the use of the company under
management contract entered into between the corporation and the National Development
Company, and this was what prevented the corporation from carrying out its offer to pay the sum
P1,956,513.07 on April 5, 1951. Had this offer been accepted, or favorably acted upon by the
National Development Company, the indebtedness would have been practically liquidated, leaving
outstanding only one certificate worth P217,390.45. Of course, the corporation could have insisted in
redeeming the shares if it wanted to even to the extent of taking a court action if necessary to force
its creditor to relinquish the shares that may be necessary to accomplish the redemption, but such
would be a drastic step which would have not been advisable considering the policy right along
maintained by the corporation to preserve its cordial and smooth relation with the government. At
any rate, whether such attitude be considered as a mere excuse to justify the delay in effecting the
redemption of the shares, or a mere desire on the part of the corporation to retain in its possession
more funds available to attend to other pressing need as demanded by the interest of the
corporation, we fail to see in such an attitude an improper motive to circumvent the early realization
of the desire of the minors to obtain the immediate payment of the donation which was made
dependent upon the redemption of said shares there being no clear evidence that may justify such
design. Anyway, a great portion of the funds went to the stockholders themselves by way of
dividends to offset, so it appears, the huge advances that the corporation had made to them which
were entered in the books of the corporation as loans and, therefore, they were invested for their
own benefit. As General Manager Osmeña said, "we were first confronted with the problem of the
withdrawals of the family which had to be repaid back to the National Development Company and
one of the most practical solutions to that was to declare dividends and reduce the amounts of their
withdrawals", which then totalled about P3,000,000.

All things considered, we are of the opinion that the finding of the lower court that the failure of the
defendant corporation to comply with the condition of the donation is merely due to its desistance
from obeying the mandate of the majority of the stockholders and not to lack of funds, or to lack of
authority, has no foundation in law or in fact, and, therefore, its conclusion that because of such
desistance that condition should be deemed as fulfilled and the payment of the donation due and
demandable, is not justified. In this respect, the decision of the lower court should be reversed.

Having reached the foregoing conclusion, we deem it unnecessary to discuss the other issues raised
by the parties in their briefs.

The lower court adjudicated to plaintiff an additional amount equivalent to 20 per cent of the amount
claimed as damages by way of attorney's fees, and in our opinion, this award can be justified under
Article 2208, paragraph 2, of the new Civil Code, which provides: "When the defendant's act or
omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his
interest", attorney's fees nay be awarded as damages. However, the majority believes that this
award should be reduced to 10 per cent.

Wherefore, the decision appealed from should be modified as follows: (a) that the donation made in
favor of the children of the late Enrico Pirovano of the proceeds of the insurance policies taken on
his life is valid and binding on the defendant corporation, (b) that said donation, which amounts to a
total of P583,813.59, including interest, as it appears in the books of the corporation as of August 31,
1951, plus interest thereon at the rate of 5 per cent per annum from the filing of the complaint,
should be paid to the plaintiffs after the defendant corporation shall have fully redeemed the
preferred shares issued to the National Development Company under the terms and conditions
stated in the resolutions of the Board of Directors of January 6, 1947 and June 24, 1947, as
amended by the resolution of the stockholders adopted on September 13,1949; and (c) defendant
shall pay to plaintiffs an additional amount equivalent to 10 per cent of said amount of P583,813.59
as damages by way of attorney's fees, and to pay the costs of action.

Paras, C. J., Pablo Bengzon, Padilla, Montemayor, Jugo, Concepcion, and Reyes, J. B. L., concur.
Reyes, A., concurs in the result.

EN BANC

G.R. No. L-36207 October 26, 1932

IRINEO G. CARLOS, plaintiff-appellant,

vs.
MINDORO SUGAR CO., ET AL., defendants-appellees.
Jose Ayala for appellant.
Ross, Lawrence & Selph for appellees.

IMPERIAL, J.:

The plaintiff brought this action to recover from the defendants the value of four bonds, Nos. 1219,
1220, 1221, and 1222, with due and unpaid interest thereon, issued by the Mindoro Sugar Company
and placed in trust with the Philippine Trust Company which, in turn, guaranteed them for value
received. Said plaintiff appealed from the judgment rendered by the Court of First Instance of Manila
absolving the defendants from the complaint, excepting the Mindoro Sugar Company, which was
sentenced to pay the value of the four bonds with interest at 8 per cent per annum, plus costs.

The Mindoro Sugar Company is a corporation constituted in accordance with the laws of the country
and registered on July 30, 1917. According to its articles of incorporation, Exhibit 5, one of its
principal purposes was to acquire and exercise the franchise granted by Act No. 2720 to George H.
Fairchild, to substitute the organized corporation, the Mindoro Company, and to acquire all the rights
and obligations of the latter and of Horace Havemeyer and Charles J. Welch in the so-called San
Jose Estate in the Province of Mindoro.

The Philippine Trust Company is another domestic corporation, registered on October 21, 1917. In
its articles of incorporation, Exhibit A, some of its purposes are expressed thus: "To acquire by
purchase, subscription, or otherwise, and to invest in, hold, sell, or otherwise dispose of stocks,
bonds, mortgages, and other securities, or any interest in either, or any obligations or evidences of
indebtedness, of any other corporation or corporations, domestic or foreign. . . . Without in any
particular limiting any of the powers of the corporation, it is hereby expressly declared that the
corporation shall have power to make any guaranty respecting the dividends, interest, stock, bonds,
mortgages, notes, contracts or other obligations of any corporation, so far as the same may be
permitted by the laws of the Philippine Islands now or hereafter in force." Its principal purpose, then,
as its name indicates, is to engage in the trust business.

On November 17, 1917, the board of directors of the Philippine Trust Company, composed of Phil,
C. Whitaker, chairman, and James Ross, Otto Vorster, Charles D. Ayton, and William J. O'Donovan,
members, adopted a resolution authorizing its president, among other things, to purchase at par and
in the name and for the use of the trust corporation all or such part as he may deem expedient, of
the bonds in the value of P3,000,000 that the Mindoro Sugar Company was about to issue, and to
resell them, with or without the guarantee of said trust corporation, at a price not less than par, and
to guarantee to the Philippine National Bank the payment of the indebtedness to said bank by the
Mindoro Sugar Company or Charles J. Welch and Horace Havemeyer, up to P2,000,000. The
relevant part of the resolution, Exhibit 3, reads as follows:

Resolved that Mr. Phil. C. Whitaker, president of this company, be and he hereby is
authorized to purchase at par in the name and for the use of this company all, or such part
as he may deem expedient, of the said P3,000,000 of 20-year 8 per cent coupon bonds of
the said Mindoro Sugar Company, and to resell or otherwise dispose of the said bonds, with
or without this company's guaranty, at a price not less than par; and it was further

Resolved that Mr. Phil. C. Whitaker, president of the company be and he hereby is
authorized in the name of this company alone or in connection with others, by joint and
several obligations, to guarantee to the Philippine National Bank the due and punctual
 payment of any and all indebtedness owing to the said Bank by either the Mindoro Sugar
Company, the Mindoro Company, or Charles J. Welch and Horace Havemeyer, up to
P2,000,000; and it was further

Resolved that the said president, Mr. Phil. C. Whitaker, be and he hereby is authorized to
execute in the name of this company any and all notes, mortgages, bonds, guaranties, or
instruments in writing whatever necessary for the carrying into effect of the authority hereby
granted.

In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar Company executed in
favor of the Philippine Trust Company the deed of trust, Exhibit 6, transferring all of its property to it
in consideration of the bonds it had issued to the value of P3,000,000, the value of each bond being
$1,000, which par value, with interest at 8 per cent per annum, the Philippine Trust Company had
guaranteed to the holders, and in consideration, furthermore, of said trust corporation having
guaranteed to the Philippine National Bank all the obligations contracted by the Mindoro Sugar
Company, Charles J. Welch and Horace Havemeyer up to the aforesaid amount of P2,000,000. The
aforementioned deed was approved by his Excellency, the Governor-General, upon
recommendation of the Secretary of Agriculture and Natural Resources, and in accordance with the
provisions of Act No. 2720 of the Philippine Legislature. Following are the clauses of said Exhibit 6
material to this decision:

Whereas, for the purposes aforesaid, and in further pursuance of said resolutions of its board
of directors and of its stockholders, the company, in order to secure the payment of said First
Mortgage, Twenty Year, Eight Per Cent, Gold Bonds, has determined to execute and deliver
to said Philippine Trust Company, as trustee, a deed of trust of its properties hereinafter
described, and the board of directors of the Company has approved the form of this
indenture and directed that the same be executed and delivered to said trustee; and

Whereas, all things necessary to make said bonds, when certified by said trustee as in this
indenture provided, valid, binding, legal and negotiable obligations of the company and this
indenture a valid deed of trust to secure the payment of said bonds, have been done and
performed, and the creation and issue of said bonds, and the execution, acknowledgment
and delivery of this deed of trust have been duly authorized;

Now, therefore, in order to secure the payment of the principal and interest of all such bonds
at any time issued and outstanding under this indenture, according to their tenor, purport and
effect, and to secure the performance and observance of all the covenants and conditions
herein contained and to declare the terms and conditions upon which said bonds are issued,
received and held, and for and in consideration of the premises, and of the purchase or
acceptance of such bonds by the holders thereof, and of the sum of one dollar, United States
currency, to it duly paid at or before the ensealing and delivery of these presents, the receipt
whereof is hereby acknowledged, the Mindoro Sugar Company, party of the first part, has
sold and conveyed, and by these presents does sell and convey to the Philippine Trust
Company, party of the second part, its successors and assigns forever;

(Description of the property.)

In consequence of this transaction, the bonds, with their coupons were placed on the market and
sold by the Philippine Trust Company, all endorsed as follows:

This is to certify that the within bond is one of the series described in the trust deed
therein mentioned.
 PHILIPPINE TRUST COMPANY
by: (Sgd.) PHIL. C. WHITAKER
President

For values received, the Philippine Trust Company hereby guarantees the payment
of principal and interest of the within bond.

Manila, Jan.—2, 1918

PHILIPPINE TRUST COMPANY

by: (Sgd.) PHIL. C. WHITAKER
President

The Philippine Trust Company sold thirteen bonds, Nos. 1219 to 1231, to Ramon Diaz for P27,300,
at a net profit of P100 per bond. The four bonds Nos. 1219, 1220, 1221, and 1222, here in litigation,
are included in the thirteen sold to Diaz.

The Philippine Trust Company paid the appellant, upon presentation of the coupons, the stipulated
interest from the date of their maturity until the 1st of July, 1928, when it stopped payments; and
thenceforth it alleged that it did not deem itself bound to pay such interest or to redeem the
obligation because the guarantee given for the bonds was illegal and void.

The appellant now contends that the judgment appealed from is untenable, assigning the following
errors:

FIRST ERROR

The lower court erred in sustaining the demurrer against the amended complaint, filed by
defendant J. S. Reis (Reese) and consequently in dismissing the same with regard to this
defendant.

SECOND ERROR

The lower court, without a proof to support it or an averment in defense by the defendant
Philippine Trust Company, erred in finding hypothetically that if the guarantee made by this
company be held valid, the trust funds and deposits in its hands would probably be
endangered.

THIRD ERROR

The lower court erred in holding that the Philippine Trust Company has no power to
guarantee the obligation of another juridical personality, for value received.

FOURTH ERROR

The lower court erred in not recognizing the validity and effect of the guarantee subscribed
by the Philippine Trust Company for the payment of the four bonds claimed in the complaint,
endorsed upon them, and in absolving said institution from the complaint.

FIFTH ERROR
 The lower court erred in absolving the ex-directors of the Philippine Trust Company, Phil. C.
Whitaker, O. Vorster, and Charles D. Ayton, from the complaint.

We shall not follow the order of the appellant's argument, deeming it unnecessary, but shall decide
only the third and fourth assignments of error upon which the merits of the case depend. For the
clear understanding of this decision and to avoid erroneous interpretations, however, we wish to
state that in this decision we shall decide only the rights of the parties with regard to the four bonds
in question and whatever we say in no wise affects or applies to the rest of the bonds.

We shall begin by saying that the majority of the justices of this court who took part in the case are of
opinion that the only point of law to be decided is whether the Philippine Trust Company acquired
the four bonds in question, and whether as such it bound itself legally and acted within its corporate
powers in guaranteeing them. This question was answered in the affirmative. 1aw phil.net

In adopting this conclusion we have relied principally upon the following facts and circumstances:
Firstly, that the Philippine Trust Company, although secondarily engaged in banking, was primarily
organized as a trust corporation with full power to acquire personal property such as the bonds in
question according to both section 13 (par. 5) of the Corporation Law and its duly registered by-laws
and articles of incorporation; secondly, that being thus authorized to acquire the bonds, it was given
implied power to guarantee them in order to place them upon the market under better, more
advantageous conditions, and thereby secure the profit derived from their sale:

It is not, however, ultra vires for a corporation to enter into contracts of guaranty or
suretyship where it does so in the legitimate furtherance of its purposes and business. And it
is well settled that where a corporation acquires commercial paper or bonds in the legitimate
transaction of its business it may sell them, and in furtherance of such a sale it may, in order
to make them the more readily marketable, indorse or guarantee their payment. (7 R. C. L.,
p. 604 and cases cited.)

"Whenever a corporation has the power to take and dispose of the securities of another corporation,
of whatsoever kind, it may, for the purpose of giving them a marketable quality, guarantee their
payment, even though the amount involved in the guaranty may subject the corporation to liabilities
in excess of the limit of indebtedness which it is authorized to incur. A corporation which has power
by its charter to issue its own bonds has power to guarantee the bonds of another corporation, which
has been taken in payment of a debt due to it, and which it sells or transfers in payment of its own
debt, the guaranty being given to enable it to dispose of the bond to better advantage. And so
guaranties of payment of bonds taken by a loan and trust company in the ordinary course of its
business, made in connection with their sale, are not ultra vires, and are binding." (14-A C. J., pp.
742-743 and cases cited); thirdly, that although it does not clearly appear in the deed of trust (Exhibit
6) that the Mindoro Sugar Company transferred the bonds therein referred to, to the Philippine Trust
Company, nevertheless, in the resolution of the board of directors (Exhibit 3), the president of the
Philippine Trust Company was expressly authorized to purchase all or some of the bonds and to
guarantee them; whence it may be inferred that subsequent purchasers of the bonds in the market
relied upon the belief that they were acquiring securities of the Philippine Trust Company,
guaranteed by this corporation; fourthly, that as soon as P3,000,000 worth of bonds was issued, and
by the deed of trust the Mindoro, Sugar Company transferred all its real property to the Philippine
Trust Company, the cause or consideration of the transfer being, (1) the guarantee given by the
purchaser to the bonds, and (2) its having likewise guaranteed its obligations and those of Welch
and Havemeyer in favor of the Philippine National Bank up to the amount of P2,000,000; fifthly, that
in transferring its real property as aforesaid the Mindoro Sugar Company was reduced to a real state
of bankruptcy, as the parties specifically agreed during the hearing of the case, to the point of having
become a nominal corporation without any assets whatsoever; sixthly, that such operation or
transaction cannot mean anything other than that the real intention of the parties was that the
Philippine Trust Company acquired the bonds issued and at the same time guaranteed the payment
of their par value with interest, because otherwise the transaction would be fraudulent, inasmuch as
nobody would be answerable to the bond-holders for their value and interest; seventhly, that the
Philippine Trust Company had been paying the appellant the interest accrued upon the four bonds
from the date of their issuance until July 1, 1928, such payment of interest being another proof that
said corporation had really become the owner of the aforesaid bonds; and, eightly, that the
Philippine Trust Company has not adduced any evidence to show any other conclusions.

There are other considerations leading to the same result even in the supposition that the Philippine
Trust Company did not acquire the bonds in question, but only guaranteed them. In such a case the
guarantee of these bonds would at any rate, be valid and the said corporation would be bound to
pay the appellant their value with the accrued interest in view of the fact that they become due on
account of the lapse of sixty (60) days, without the accrued interest due having been paid; and the
reason is that it is estopped from denying the validity of its guarantee.

. . . On the other hand, according to the view taken by other courts, which it must be
acknowledged are in the majority, a recovery directly upon the contract is permitted, on the
ground that the corporation, having received money or property by virtue of a contract not
immoral or illegal of itself, is estopped to deny liability; and that the only remedy is one on
behalf of the state to punish the corporation for violating the law. (7 R. C. L., pp. 680-681 and
cases cited.)

. . . The doctrine of ultra vires has been declared to be entirely the creation of the courts and
is of comparatively modern origin. The defense is by some courts regarded as an ungracious
and odious one, to be sustained only where the most persuasive considerations of public
policy are involved, and there are numerous decisions and dicta to the effect that the plea
should not as a general rule prevail whether interposed for or against the corporation, where
it will not advance justice but on the contrary will accomplish a legal wrong. (14-A C. J., pp.
314-315.)

The doctrine of the Supreme Court of the United States together with the English courts and
some of the state courts is that no performance upon either side can validate an ultra vires
transaction or authorize an action to be maintained directly upon it. However, the great
weight of authority in the state courts is to the effect that a transaction which is merely ultra
vires and not malum in se or malum prohibitum although it may be made by the state a basis
for the forfeiture of the corporate charter or the dissolution of the corporation, is, if performed
by one party, not void as between the parties to all intents and purposes, and that an action
may be brought directly upon the transaction and relief had according to its terms. ( 14-A C.
J., pp. 319-320.)

When a contract is not on its face necessarily beyond the scope of the power of the
corporation by which it was made, it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to
prevail where it would defeat the ends of justice or work a legal wrong. (Coleman vs. Hotel
de France Co., 29 Phil., 323.)

Guaranties of payment of bonds taken by a loan and trust company in the ordinary course of
its business, made in connection with their sale, are not ultra vires, and are binding.
(Broadway Nat. Bank vs. Baker, 57 N. E., p. 603.)
It has been intimated according to section 121 of the Corporation Law, the Philippine Trust
Company, as a banking institution, could not guarantee the bonds to the value of P3,000,000
because this amount far exceeds its capital of P1,000,000 of which only one-half has been
subscribed and paid. Section 121 reads as follows:

SEC. 212. No such bank shall at any time be indebted or in any way liable to an amount
exceeding the amount of its capital stock at such time actually paid in and remaining
undiminished by losses or otherwise, except on account of demands of the following nature:

(1) Moneys deposited with or collected by the bank;

(2) Bills of exchange or drafts drawn against money actually on deposit to the credit
of the bank or due thereto;

(3) Liabilities to the stockholders of the bank for dividends and reserve profits.

This difficulty is easily obviated by bearing in mind that, as we stated above, the banking operations
are not the primary aim of said corporation, which is engaged essentially in the trust business, and
that the prohibition of the law is not applicable to the Philippine Trust Company, for the evidence
shows that Mindoro Sugar Company transferred all its real property, with the improvements, to it,
and the value of both, which surely could not be less than the value of the obligation guaranteed,
became a part of its capital and assets; in other words, with the value of the real property transferred
to it, the Philippine Trust Company had enough capital and assets to meet the amount of the bonds
guaranteed with interest thereon.

Wherefore, the decision appealed from is reversed and the Philippine Trust Company is sentenced
to pay to the appellant the sum of four thousand dollars ($4,000) with interest at eight per cent (8%)
per annum from July 1, 1928 until fully paid, and the costs of both instances. So ordered.

EN BANC

G.R. No. L-8987 May 23, 1957

JAPANESE WAR NOTES CLAIMANTS ASSOCIATION OF THE PHILIPPINES, INC., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, respondent.

Felix B. Mintu for petitioner.

Office of the Solicitor General Ambrosio Padilla and Solicitor Jorge R. Coquia for respondent.

LABRADOR, J.:

On August 25, 1954 the Securities and Exchange Commissioner issued an order requiring petitioner
herein and its President, Mr. Alfredo Abcede, to show cause why it should not be proceeded against
for making misrepresentations to the public about the need of registering and depositing Japanese
war notes, with a view to their probable redemption as contemplated in Senate Bill No. 163 and in
Senate Concurrent Resolution No. 14, for otherwise they would be valueless. At the investigation
that was conducted in connection with the above order, the petitioner tried to show that there were
no misrepresentations made by them in their publications and that the mistake made by them (that
President Magsaysay would soon make representations to the United States Government to have
the war notes redeemed) was made in good faith as it was later retracted and rectified. They also
stated that they longed and hoped that the war notes would be redeemed; that they are sincere and
honest in their activities; and that they are entitled to their beliefs. After the investigation, in which it
was disclosed that the petitioner claimed the right to continue in the above-mentioned activities, the
Commissioner found that according to its articles the petitioner has the privilege to work for the
redemption of the war notes of its members alone, but that it can not offer its services to the public
for a valuable consideration, because there is nothing definite and tangible about the redemption of
the war notes and its success is speculative; that any authority given to offer services can easily
degenerate into a racket; that under its articles of incorporation the petitioner is a civic and non-stock
corporation and should not engage in business for profit; that it has received war notes for deposit,
upon payment of fees, without authority in its articles to do so; that it had previously been ordered to
desist from collecting fees for those registering the war notes, but notwithstanding this prohibition it
has, done so in the guise of service fees. Hence the Commissioner ordered:

(1) That the Association, and all/any of its officers, directors, employees, representative or
agents stop immediately the registration of Japanese War Notes, receiving the same for
deposit, and charging fees therefor. It is not, however, prohibited from admitting members,
with the corresponding rights and obligations as such.

(2) That the Association and all/any of its officers, directors, employees, representatives, or
agents, desist forthwith from accepting and collecting fees for reparation claims for civilians
casualties and other injuries, as it is not authorized so to do under its articles of
incorporation. (Order of the Securities and Exchange Commission dated February 28, 1955.)

The case at bar is for a review of the above. It is contended that the Commissioner erred (1) finding
that petitioner made misrepresentations to the public so as to induce holders of war notes to register
them with petitioner, (2) in ordering the petitioner to stop the registration of Japanese war notes,
receiving same for deposit and charging fees therefore, and (3) in ordering petitioner to desist from
accepting and collecting fees for reparation claims for civilian casualties and injuries.

We are not permitted to examine the correctness of the first contention as above set forth as the
same involves questions of fact; only questions of law may be raised in this case for review (section
2, Rule 43 of the Rules of Court).

In support of the second contention it is claimed that the order was beside the issue investigated.
While it may be true that the issue which started the investigation has been the misrepresentations
made to the public by the petitioner herein, the order is based on the findings of fact made in the
course of the investigation and the prohibition stated in the order aims at the eradication of the
source of the evil of misrepresentation that was the subject of the investigation. It can not be said,
therefore, that the resultant order is not germane or related to the subject-matter of the investigation.

It is also argued that the registration of war notes and the collection of fees therefor is not prohibited
by the corporation law and the authority of the petitioner to engage therein is implied from its articles
of incorporation, the purposes of which are:

(1) To consecrate and sanctify in a strong and militant organization in the furtherance of the
financial conditions of its members, toward the attainment of their claims;

(2) To take a position which is only secondary and complimentary to that of our constituted
government in campaigning for the welfare of our people, especially when it is to demand
redemption of currency from foreign country;
 (3) To work for, and to make due representations with the United States and Japanese
Governments, for the redemption and, or, for the future payments of the Japanese War
Notes (mickey mouse money);

(4) To instill the ties of comradeship through this and noble gesture of goodwill between our
people and country with the people and countries of the United States and Japan;

(5) To do any and all acts and things which are naturally incidental on arising out of the
purpose or any others. (Petitioner's brief, pp. 57-58.)

We do not find any merit in the contention. The articles authorize collection of fees from members;
but they do not authorize the corporation to engage in the business of registering and accepting war
notes for deposit and collecting fees from such services. This was the ruling of the Commissioner
and this we find to be correct.

Neither do we find any merit in the third contention that the association has authority to accept and
collect fees for reparation claims for civilian casualties and other injuries. This is beyond any of the
powers of the association as embodied in its articles and have absolutely no relation to the avowed
purpose of the association to work for the redemption of war notes.

The order of the Securities and Exchange was evidently promulgated under the authority of section
1 (b) of Republic Act No. 1143 which reads:

(b) To penalize any violation of or non-compliance with any terms of conditions of any
certificate, license, or permit issued by the Commission or of any order, decision, ruling or
regulation thereof, by a fine of not exceeding two hundred pesos per day for every day
during which such violation or default continues; and the Commission is hereby authorized
and empowered to impose and collect such fine after due notice and hearing.

The order sought to be re viewed is hereby affirmed, with costs against the petitioner. So ordered.

SECOND DIVISION

G.R. No. 80599 September 15, 1989

ERNESTINA CRISOLOGO-JOSE, petitioner,

vs.
COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as Vice-President
for Sales of Mover Enterprises, Inc., respondents.

Melquiades P. de Leon for petitioner.

Rogelio A. Ajes for private respondent.

REGALADO, J.:
Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals, promulgated on
September 8, 1987, which reversed the decision of the trial Court 2 dismissing the complaint for
consignation filed by therein plaintiff Ricardo S. Santos, Jr.

The parties are substantially agreed on the following facts as found by both lower courts:

In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises,
Inc. in-charge of marketing and sales; and the president of the said corporation was
Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his
clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against
Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 (Exh- 'I')
payable to defendant Ernestina Crisologo-Jose. Since the check was under the
account of Mover Enterprises, Inc., the same was to be signed by its president, Atty.
Oscar Z. Benares, and the treasurer of the said corporation. However, since at that
time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed
upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid chEck as an alternate
story. Plaintiff Ricardo S. Santos, Jr. did sign the check.

It appears that the check (Exh. '1') was issued to defendant Ernestina Crisologo-Jose
in consideration of the waiver or quitclaim by said defendant over a certain property
which the Government Service Insurance System (GSIS) agreed to sell to the clients
of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding
that upon approval by the GSIS of the compromise agreement with the spouses Ong,
the check will be encashed accordingly. However, since the compromise agreement
was not approved within the expected period of time, the aforesaid check for
P45,000.00 (Exh. '1') was replaced by Atty. Benares with another Traders Royal
Bank cheek bearing No. 379299 dated August 10, 1980, in the same amount of
P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant Jose. This replacement
check was also signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S.
Santos, Jr. When defendant deposited this replacement check (Exhs. 'A' and '2') with
her account at Family Savings Bank, Mayon Branch, it was dishonored for
insufficiency of funds. A subsequent redepositing of the said check was likewise
dishonored by the bank for the same reason. Hence, defendant through counsel was
constrained to file a criminal complaint for violation of Batas Pambansa Blg. 22 with
the Quezon City Fiscal's Office against Atty. Oscar Z. Benares and plaintiff Ricardo
S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso Llamas, accordingly
filed an amended information with the court charging both Oscar Benares and
Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as Criminal
Case No. Q-14867 of then Court of First Instance of Rizal, Quezon City.

Meanwhile, during the preliminary investigation of the criminal charge against

Benares and the plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas,
plaintiff Ricardo S. Santos, Jr. tendered cashier's check No. CC 160152 for
P45,000.00 dated April 10, 1981 to the defendant Ernestina Crisologo-Jose, the
complainant in that criminal case. The defendant refused to receive the cashier's
check in payment of the dishonored check in the amount of P45,000.00. Hence,
plaintiff encashed the aforesaid cashier's check and subsequently deposited said
amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. 'D' and 'E').
Incidentally, the cashier's check adverted to above was purchased by Atty. Oscar Z.
Benares and given to the plaintiff herein to be applied in payment of the dishonored
check. 3
After trial, the court a quo, holding that it was "not persuaded to believe that consignation referred to
in Article 1256 of the Civil Code is applicable to this case," rendered judgment dismissing plaintiff s
complaint and defendant's counterclaim. 4

As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived
the complaint for consignation, directing the trial court to give due course thereto.

Hence, the instant petition, the assignment of errors wherein are prefatorily stated and
discussed seriatim.

1. Petitioner contends that respondent Court of Appeals erred in holding that private
respondent, one of the signatories of the check issued under the account of Mover
Enterprises, Inc., is an accommodation party under the Negotiable Instruments Law
and a debtor of petitioner to the extent of the amount of said check.

Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private
respondent who merely signed the check in question in a representative capacity, that is, as vice-
president of said corporation, hence he is not liable thereon under the Negotiable Instruments Law.

The pertinent provision of said law referred to provides:

Sec. 29. Liability of accommodation party an accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder,
at the time of taking the instrument, knew him to be only an accommodation party.

Consequently, to be considered an accommodation party, a person must (1) be a party to the

instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3)
sign for the purpose of lending his name for the credit of some other person.

Based on the foregoing requisites, it is not a valid defense that the accommodation party did not
receive any valuable consideration when he executed the instrument. From the standpoint of
contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not
received any valuable consideration for the instrument he signs. Nevertheless, he is liable to a
holder for value as if the contract was not for accommodation 5 in whatever capacity such
accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held
that in lending his name to the accommodated party, the accommodation party is in effect a surety
for the latter. 6

Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as
petitioner suggests, the inevitable question is whether or not it may be held liable on the
accommodation instrument, that is, the check issued in favor of herein petitioner.

We hold in the negative.

The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party
liable on the instrument to a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, does not include nor apply to corporations
which are accommodation parties. 7 This is because the issue or indorsement of negotiable paper by
a corporation without consideration and for the accommodation of another is ultra vires. 8 Hence, one
who has taken the instrument with knowledge of the accommodation nature thereof cannot recover
against a corporation where it is only an accommodation party. If the form of the instrument, or the
nature of the transaction, is such as to charge the indorsee with knowledge that the issue or
indorsement of the instrument by the corporation is for the accommodation of another, he cannot
recover against the corporation thereon. 9

By way of exception, an officer or agent of a corporation shall have the power to execute or indorse
a negotiable paper in the name of the corporation for the accommodation of a third person only if
specifically authorized to do so. 10 Corollarily, corporate officers, such as the president and vice-
president, have no power to execute for mere accommodation a negotiable instrument of the
corporation for their individual debts or transactions arising from or in relation to matters in which the
corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced
against the corporation, especially since it is not involved in any aspect of the corporate business or
operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be
personally liable therefor, as well as the consequences arising from their acts in connection
therewith.

The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge
petitioner in her aforesaid postulation, then she is effectively barred from recovering from Mover
Enterprises, Inc. the value of the check. Be that as it may, petitioner is not without recourse.

The fact that for lack of capacity the corporation is not bound by an accommodation paper does not
thereby absolve, but should render personally liable, the signatories of said instrument where the
facts show that the accommodation involved was for their personal account, undertaking or purpose
and the creditor was aware thereof.

Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the cheek was
issued at the instance and for the personal account of Atty. Benares who merely prevailed upon
respondent Santos to act as co-signatory in accordance with the arrangement of the corporation with
its depository bank. That it was a personal undertaking of said corporate officers was apparent to
petitioner by reason of her personal involvement in the financial arrangement and the fact that, while
it was the corporation's check which was issued to her for the amount involved, she actually had no
transaction directly with said corporation.

There should be no legal obstacle, therefore, to petitioner's claims being directed personally against
Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vice-president,
respectively, of Mover Enterprises, Inc.

2. On her second assignment of error, petitioner argues that the Court of Appeals
erred in holding that the consignation of the sum of P45,000.00, made by private
respondent after his tender of payment was refused by petitioner, was proper under
Article 1256 of the Civil Code.

Petitioner's submission is that no creditor-debtor relationship exists between the parties, hence
consignation is not proper. Concomitantly, this argument was premised on the assumption that
private respondent Santos is not an accommodation party.

As previously discussed, however, respondent Santos is an accommodation party and is, therefore,
liable for the value of the check. The fact that he was only a co-signatory does not detract from his
personal liability. A co-maker or co-drawer under the circumstances in this case is as much an
accommodation party as the other co-signatory or, for that matter, as a lone signatory in an
accommodation instrument. Under the doctrine in Philippine Bank of Commerce vs. Aruego, supra,
he is in effect a co-surety for the accommodated party with whom he and his co-signatory, as the
other co-surety, assume solidary liability ex lege for the debt involved. With the dishonor of the
check, there was created a debtor-creditor relationship, as between Atty. Benares and respondent
Santos, on the one hand, and petitioner, on the other. This circumstance enables respondent Santos
to resort to an action of consignation where his tender of payment had been refused by petitioner.

We interpose the caveat, however, that by holding that the remedy of consignation is proper under
the given circumstances, we do not thereby rule that all the operative facts for consignation which
would produce the effect of payment are present in this case. Those are factual issues that are not
clear in the records before us and which are for the Regional Trial Court of Quezon City to ascertain
in Civil Case No. Q-33160, for which reason it has advisedly been directed by respondent court to
give due course to the complaint for consignation, and which would be subject to such issues or
claims as may be raised by defendant and the counterclaim filed therein which is hereby ordered
similarly revived.

3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the
Regional Trial Court of Quezon City filed against private respondent for violation of
Batas Pambansa Blg. 22, by holding that no criminal liability had yet attached to
private respondent when he deposited with the court the amount of P45,000.00 is the
final plaint of petitioner.

We sustain petitioner on this score.

Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV.
No. 05464. In its own decision therein, it declared that "(t)he lone issue dwells in the question of
whether an accommodation party can validly consign the amount of the debt due with the court after
his tender of payment was refused by the creditor." Yet, from the commercial and civil law aspects
determinative of said issue, it digressed into the merits of the aforesaid Criminal Case No. Q-14867,
thus:

Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such

insufficiency of funds or credit. Thus, the making, drawing and issuance of a check,
payment of which is refused by the drawee because of insufficient funds in or credit
with such bank is prima facie evidence of knowledge of insufficiency of funds or
credit, when the check is presented within 90 days from the date of the check.

It will be noted that the last part of Section 2 of B.P. 22 provides that the element of
knowledge of insufficiency of funds or credit is not present and, therefore, the crime
does not exist, when the drawer pays the holder the amount due or makes
arrangements for payment in full by the drawee of such check within five (5) banking
days after receiving notice that such check has not been paid by the drawee.

Based on the foregoing consideration, this Court finds that the plaintiff-appellant
acted within Ms legal rights when he consigned the amount of P45,000.00 on August
14, 1981, between August 7, 1981, the date when plaintiff-appellant receive (sic) the
notice of non-payment, and August 14, 1981, the date when the debt due was
deposited with the Clerk of Court (a Saturday and a Sunday which are not banking
days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal
liability has yet attached to plaintiff-appellant when he deposited the amount of
P45,000.00 with the Court a quo on August 14, 1981. 11
That said observations made in the civil case at bar and the intrusion into the merits of the criminal
case pending in another court are improper do not have to be belabored. In the latter case, the
criminal trial court has to grapple with such factual issues as, for instance, whether or not the period
of five banking days had expired, in the process determining whether notice of dishonor should be
reckoned from any prior notice if any has been given or from receipt by private respondents of the
subpoena therein with supporting affidavits, if any, or from the first day of actual preliminary
investigation; and whether there was a justification for not making the requisite arrangements for
payment in full of such check by the drawee bank within the said period. These are matters alien to
the present controversy on tender and consignation of payment, where no such period and its legal
effects are involved.

These are aside from the considerations that the disputed period involved in the criminal case is only
a presumptive rule, juris tantum at that, to determine whether or not there was knowledge of
insufficiency of funds in or credit with the drawee bank; that payment of civil liability is not a mode for
extinguishment of criminal liability; and that the requisite quantum of evidence in the two types of
cases are not the same.

To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q-
14867, the resolution of which should not be interfered with by respondent Court of Appeals at the
present posture of said case, much less preempted by the inappropriate and unnecessary holdings
in the aforequoted portion of the decision of said respondent court. Consequently, we modify the
decision of respondent court in CA-G.R. CV No. 05464 by setting aside and declaring without force
and effect its pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and
the liability of the accused therein are concerned.

WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of Appeals
is AFFIRMED.

SO ORDERED.