2018 BUSORG2 OUTLINE 7

XIlI. DUTIES OF DIRECTORS & CONTROLLING STOCKHOLDERS

3-fold duty of directors --- Diligence, Loyalty, Obedience

Sec. 21 of NCC;
PNB v. CA May 18, 1978
While petitioner had the ultimate authority of approving or disapproving the proposed lease since
the quota was mortgaged to the Bank, the latter certainly cannot escape its responsibility of
observing, for the protection of the interest of private respondents, that degree of care,
precaution and vigilance which the circumstances justly demand in approving or disapproving the
lease of said sugar quota. The law makes it imperative that every person "must in the exercise
of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith." 4 This petitioner failed to do. Certainly, it knew that the
agricultural year was about to expire, that by its disapproval of the lease private respondents
would be unable to utilize the sugar quota in question. In failing to observe the reasonable
degree of care and vigilance which the surrounding circumstances reasonably impose, petitioner is
consequently liable for the damages caused on private respondents.

Montelibano v. Bacolod Murcia May 18, 1962

CONCESSIONS GIVEN BY CENTRAL TO PLANTERS, IF RETRACTED, WILL
CONSTITUTE FRAUD; CASE AT BAR. — Since there is no rational explanation for the
company's asserting to the further concessions asked by the planters before the contracts were
signed, except as further inducement for the planters to agree to the extension of the contract
period, to allow the company now to retract such concessions would be to sanction a fraud
upon the planters who relied on such additional stipulation.
As the resolution in question was passed in good faith by the board of directors, it is valid and binding,
and whether or not it will cause losses or decrease the profits of the central, the court has no authority to
review them.

Litwin v. Allen, et al 25 N.Y.S. 2d 667 (1940)

A director is not liable for loss or damage other than what was proximately caused by his own acts or
omissions in breach of his duty. Once the option had expired, there was nothing to prevent the directors
of the Company that had taken over the bonds in accordance with its agreement from selling them. Any
loss that incurred after the option had expired was a result of the directors’ independent business
judgment in holding them. The further loss should not be laid at the door of the improper but expired
repurchase option.

Walker v. Man, et al. 253 N.Y.S 458 (1931)

Irrespective of section 58 of the Stock Corporation Law, if the moving defendant approved,
ratified and acquiesced in the declaration of an unlawful dividend and approved of, participated
in and/or received payment of such dividend, and "thereafter failed, neglected and refused to take
any steps or proceedings or to make any efforts to recover back said sums on behalf of the
corporation, or to protect the rights of the stockholders and creditors of the corporation and to
preserve the assets thereof, in that connection," he would be liable.
Of course, the exercise of bad judgment alone cannot be made the foundation for liability. This ninth
cause, however, goes beyond that, and charges that alterations of the plans of the hotel were made by the
defendants "without any competent or proper or adequate investigation upon their part or consultation
amongst themselves or with others as to the financial obligations necessarily to be incurred thereby and
the means of financing the same and without any reasonable or proper regard to the financial obligation
 of the corporation by virtue of its guaranteeing of the existing contracts relating to the erection of said
hotel and that the defendants with gross and culpable negligence did not make any adequate or proper
arrangements for the financing of said additional expenditures

Bates v. Dresser 251 US 524 (1920)

Dresser, as president, was much closer to the operation of the bank than the directors. He was there
every day, and he supervised the actual operation of the bank. This the directors didn’t do; therefore,
Dresser’s position exposed him to the warning signs, while the directors were not exposed and, therefore,
he was personally liable while the directors were not.

1) Compensation of directors – Sec. 30

Western Institute of Technology v. Salas 278 SCRA 216

The proscription, however, against granting compensation to directors/trustees of a corporation is
not a sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: " . . .
[T]he directors shall not receive any compensation, as such directors, . . . ." The phrase as such
directors is not without significance for it delimits the scope of the prohibition to compensation
given to them for services performed purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board may receive compensation, in addition to
reasonable per diems; when they render services to the corporation in a capacity other than as
directors/ trustees.

2) Duty of diligence/Business Judgment Rule – Secs. 23, 31

Board of Liquidators v. Kalaw 20 SCRA 987

The board of directors of a corporation holds the duty to act for the corporation according to
their best judgment, and in so doing it cannot be controlled in the reasonable exercise and
performance of such duty. So long as it acts in good faith its orders are not reviewable by the
courts.
In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in NACOCO's behalf without prior board
approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval
on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid
aside the by-law requirement of prior approval. Under the given circumstances, the contracts executed
by the general manager are valid corporate acts.
Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of
a known duty thru some motive or interest or ill will; it partakes of the nature of fraud. Applying this
precept to the given facts herein, we find that there was no "dishonest purpose," or "some moral
obliquity," or "conscious doing of wrong," or "breach of a known duty," or "some motive or interest or
ill will" that "partakes of the nature of fraud."

Benguet Electric Coop. v. NLRC 209 SCRA 55

We agree with the Solicitor General, secondly, that respondent Board members were guilty of
"gross negligence or bad faith in directing the affairs of the corporation" in enacting the series
of resolutions noted earlier indenitely suspending and dismissing respondent Cosalan from the
position of General Manager of Beneco. Respondent Board members, in so doing, acted beyond
the scope of their authority as such Board members. The dismissal of an ofcer or employee in
bad faith, without lawful cause and without the procedural due process, is an act that is contra
legem. It cannot be supposed that members of boards of directors derive any authority to
violate the express mandates of law or the clear legal rights of their ofcers and employees by
simply purporting to act for the corporation they control
 3) Self-dealing directors- Sec. 32
Prime White Cement v. IAC 220 SCRA 103
Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if
entered into with a person other than a director or officer of the corporation, the fact that the other
party to the contract was a Director and Auditor of the petitioner corporation changes the whole
situation. First of all, We believe that the contract was neither fair nor reasonable. The "dealership
agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white
cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag.
Respondent Te is a businessman himself and must have known, or at least must be presumed to
know, that at that time, prices of commodities in general, and white cement in particular, were not
stable and were expected to rise. At the time of the contract, petitioner corporation had not even
commenced the manufacture of white cement, the reason why delivery was not to begin until 14
months later.

4) Interlocking directors – Sec. 33

Gokongwei v. SEC et al. 89 SCRA 336

As respondent SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries
and regions in the country will 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. CFCRobina 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.

5) Doctrine of Corporate Opportunity – Sec. 34

6) Duty to stockholders - Special Facts Doctrine

Strong v. Repide 41 Phil. 94

Even though a director may not be under the obligation of a fiduciary nature to disclose to a shareholder his
knowledge affecting the value of the shares, that duty may exist in special cases, and did exist upon the facts in
this case.
In this case, the facts clearly indicate that a director of a corporation owning friar lands in the Philippine
Islands, and who controlled the action of the corporation, had so concealed his exclusive knowledge of the
impending sale to the government from a shareholder from whom he purchased, through an agent, shares in
the corporation, that the concealment was in violation of his duty as a director to disclose such knowledge, and
amounted to deceit sufficient to avoid the sale; and, under such circumstances, it was immaterial whether the
shareholder's agent did or did not have power to sell the stock.

7) Duty to creditors –

Steinberg v. Velasco 52 Phil. 953

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

8) Watered Stocks - Sec. 65

9) Duty of shareholders in close corps. – Secs. 97(2); 100 (4),(5)
XlV. DEVICES AFFECTING CONTROL

1) Proxy device – Section 58; SEC Memo Circ. 4 (2004)

SEC v. CA (GR 187702; OCT. 22, 2014)

The Court explained that the power of the SEC to regulate proxies remains in place in instances
when stockholders vote on matters other than the election of directors. The test is whether the
controversy relates to such election. All matters affecting the manner and conduct of the election of
directors are properly cognizable by the regular courts. Otherwise, these matters may be brought before
the SEC for resolution based on the regulatory powers it exercises over corporations, partnerships and
associations.

2) Voting trusts – Sec. 59

Everett v. Asia Banking (49 Phil 512)
It may be inferred that the stockholders may bring suit against the trustees if the voting trust agreement is being
used by the said Trustees to perpetuate fraud against the corporation, as is present in this case. The
stockholders would still have legal standing to institute the suit in behalf of the corporation for acts done by the
trustees to defraud the corporation, when the said trustees already have control of the Board of the said
corporation. A derivative suit is still proper.

NIDC v. Aquino (163 SCRA 153)

Noteworthy is the fact that, in the Voting Trust Agreement, the parties thereto were NIDC and certain
stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec. 2, Rule 3 of the Rules of Court,
every action must be prosecuted and defended in the name of the real party in interest. Applying the rule in the
present case, the action should have been filed by the stockholders of Batjak, who executed the Voting Trust
Agreement with NIDC, and not by Batjak itself which is not a party to said agreement, and therefore, not
the real party in interest in the suit to enforce the same.

Lee v. CA Feb. 4, 1992

EFFECT THEREOF ON THE STATUS OF TRANSFERRING STOCKHOLDERS. — Both under the old
and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust agreement
on the status of a stockholder who is a party to its execution — from legal title holder or owner of the shares
subject of the voting trust agreement, he becomes the equitable or beneficial owner.

3) Pooling & voting agreements – Sec. 100

4) Cumulative voting – Sec. 24
5) Classification of shares – Sec. 6
6) Control Test vs. Grandfather Rule
7) Restriction on transfer of shares – Sec. 98
8) Prescribing qualifications for directors – Sec. 47 (5)
9) Management contracts – Sec. 44
10) “Super” votes; unusual voting/quorum reqs. – Sec. 97
11) Shares that cannot vote --- Sec. 89 vs. Sec. 6

XV. RIGHT OF INSPECTION ----

Secs. 74 – 75
 Rule 7, Rules of Proc. On Intra-corporate Controversies

Pardo v. Hercules Lumber 47 Phil. 965

It may be admitted that the officials in charge of a corporation may deny inspection when sought at
unusual hours or under other improper conditions; but neither the executive officers nor the board of
directors have the power to deprive a stockholder of the right altogether. A by-law unduly restricting the
right of inspection is undoubtedly invalid

Philpotts v. Phil. Mfg. Co. 40 Phil. 471

The right of examination into corporate affairs which is conceded to the stockholder by
section 51 of the Corporation Law may be exercised either by the stockholder in person
or by any duly authorized representative.

Gonzales v. PNB 122 SCRA 490

LIMITATIONS OF RIGHT OF INSPECTION UNDER THE NEW CODE (B.P. BLG. 68). — As
may be noted, among the changes introduced in the new Code with respect to the right of inspection
granted to a stockholder are the following: the records must be kept at the principal office of the
corporation; the inspection must be made on business days; the stockholder may demand a copy of the
excerpts of the records or minutes; and the refusal to allow such inspection shall subject the erring officer
or agent of the corporation to civil and criminal liabilities. However, while seemingly enlarging the right
of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a
condition for such examination that the one requesting it must not have been guilty of using improperly
any information secured through a prior examination, and that the person asking for such examinations
must be "acting in good faith and for a legitimate purpose in making his demand."

Veraguth v. Isabela Sugar Co. 57 Phil. 266

A director or stockholder has no absolute right to secure certified copies of the minutes of a corporation
until these minutes have been written up and approved by the directors.
Combining the facts and the law, we do not think that anything improper occurred when the secretary
declined of furnish certified copies of minutes which had not been approved by the board of directors,
and that while so much of the last resolution of the board of directors as provides for the prior approval
of the president of the corporation before the books of the corporation can be inspected puts an illegal
obstacle in the way of a stockholder or director, that resolution, so far as we are aware, has not been
enforced to the detriment of anyone.

Gokongwei v. SEC L- 45911, April 11, 1979

RIGHT TO EXAMINE BOOKS OF A WHOLLY OWNED SUBSIDIARY. — 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. Where a foreign subsidiary is wholly owned
by respondent corporation and, therefore, under its control, it would be in accord with equity, good faith
and fair dealing to construe the statutory right of a stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly owned subsidiary which are in respondent
corporation's possession and control.

Lim Po v. DOJ and Tan Feb. 11, 2013

The requisites in order for the penal provision under Section 144 of the Corporation Code to apply in a
case of violation of a stockholder or member's right to inspect the corporate books/records as provided
for under Section 74 of the Corporation Code, are
First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of
excerpts from the corporation's records or minutes;
 Second. Any officer or agent of the concerned corporation shall refuse to allow the said director,
trustee, stockholder or member of the corporation to examine and copy said excerpts;

XVI. DERIVATIVE SUIT

Rule 8, Rules of Proc. On Intra-corporate Controversies

Evangelista v. Santos 86 Phil. 387

In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation
but for their own benefit, since they ask that the defendant make good the losses occasioned by his
mismanagement and pay to them the value of their respective participation in the corporate assets on the basis
of their respective holdings. Clearly, this cannot be done until all corporate debts, if there be any, are paid and
the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of
the provisions of section 16 of the Corporation Law.It results that plaintiffs' complaint shows no cause of
action in their favor so that the lower court did not err in dismissing the complaint on that ground.
While plaintiffs ask for a remedy to which they are not entitled unless the requirement of section 16 of the
Corporation Law be first complied with, we note that the action stated in their complaint is susceptible of
being converted into a derivative suit for the benefit of the corporation by a mere change in the prayer.

Republic Bank v. Cuaderno 19 SCRA 671

In corporate derivative suits it is not important whether the corporation is made party plaintiff or party
defendant as practiced either in England or in the United States respectively, because the trial court has the
power to direct amendments of the pleadings, by adding or dropping parties, as may be required in the interest
of justice It is enough that the corporation is made a party to the suit so that judgment will be
binding upon it to bar future relitigation of issues.

Pascual v. Orozco 19 Phil 83 (1911)

A stockholder in a corporation who was not such at the time when alleged objectionable transactions took
place, or whose shares of stock have not since devolved upon him by operation of law, can not maintain suits
of this character, unless such transactions continue and are injurious to such stockholder or affect him
especially or specifically in some other way.

SMC v. Khan Aug. 11, 1989

The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to
bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since he is
not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a
wrong committed against him, individually, but in behalf and for the benefit of the corporation.

Yu v. Yukayguan June 18, 2009

Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are
neither part of each other nor the necessary consequence of the other. There is totally no justification for the
Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own
behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of Winchester,
Inc.
The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when
the said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for mismanagement, waste or
dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In
effect, the suit is an action for specific performance of an obligation owed by the corporation to the
stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal
of the directors or management to make suitable measures for its protection. The basis of a stockholder’s suit is
always one in equity. However, it cannot prosper without first complying with the legal requisites for its
institution.
 Cua v. Ocampo Tan Dec. 4, 2009
More than anything, the argument of respondents Miguel, et al., raises questions of whether their derivative suit
was prematurely filed for they had failed to exert all reasonable efforts to exhaust all other remedies available
under the articles of incorporation, bylaws, laws, or rules governing the corporation or partnership, as required
by Rule 8, Section 1 (2) of the IRPICC. The obvious intent behind the rule is to make the derivative suit the
final recourse of the stockholder, after all other remedies to obtain the relief sought have failed.

Ching and Wellington v. Subic Bay Golf Sept. 10, 2014

With regard, however, to the second requisite, we find that petitioners failed to state with particularity in the
Complaint that they had exerted all reasonable efforts to exhaust all remedies available under the articles of
incorporation, bylaws, and laws or rules governing the corporation to obtain the relief they desire. The
Complaint contained no allegation whatsoever of any effort to avail of intracorporate remedies. Indeed, even if
petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the same in the
Complaint and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the
Complaint, even motu proprio, in accordance with the Interim Rules.

XVII. MERGERS & CONSOLIDATION

Sec. 76 – 80
R.A. 10667 (Phil. Competition Act of 2015) – Title IV

Reyes et al. v. Blouse et al. (1952) 91 Phil 305

A merger implies necessarily the termination or cessation of the merged corporations and not merely a merger
of their properties and assets.

Edward Nell Co. v. Pacific Farms, Inc. (1965) 15 SCRA 415

Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the latter
is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly
agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the
corporations; (3) where the purchasing corporation is merely a continuation of the selling corporation; and (4)
where the transaction is entered into fraudulently in order to escape liability for such debts.

Laguna Trans. Co. Inc. v. SSS (1960) 107 Phil 833

The weight of authority the view that where a corporation was formed by, and consisted of members of
partnership whose business and property was conveyed and transferred to the corporation for the purpose of
continuing its business, in payment for which corporate capital stock was issued, such corporation is presumed
to have assumed partnership debts, and is prima facie liable therefor. The reason for the rule is that the
members of the partnership may be said to have simply put on a new coat, or taken on a corporate cloak, and
the corporation is a mere continuation of the partnership.

Lozano v. De Los Santos 274 SCRA 452

There is no intracorporate nor partnership relation between petitioner and private respondent. The controversy
between them arose out of their plan to consolidate their respective jeepney drivers' and operators' associations
into a single common association. This unified association was, however, still a proposal. It had not been
approved by the SEC, neither had its officers and members submitted their articles of consolidation in
accordance with Sections 78 and 79 of the Corporation Code. Consolidation becomes effective not upon mere
agreement of the members but only upon issuance of the certificate of consolidation by the SEC.

Global Business v. Surecomp Software Oct.13, 2010

Due to Global's merger with ABC and because it is the surviving corporation, it is as if it was the one which
entered into contract with Surecomp. In the merger of two existing corporations, one of the corporations
survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities are
acquired by the surviving corporation. 28 This is particularly true in this case. Based on the findings of fact of
the RTC, as a􀁎rmed by the CA, under the terms of the merger or consolidation, Global assumed all the
liabilities and obligations of ABC as if it had incurred such liabilities or obligations itself. In the same way,
Global also has the right to exercise all defenses, rights, privileges, and counter-claims of every kind and nature
which ABC may have or invoke under the law.

BPI v. BPI Employees Union Aug. 10, 2010

In fact, the Corporation Code does not also mandate the absorption of the employees of the non-surviving
corporation by the surviving corporation in the case of a merger.

AND Resolution on MR Oct. 19, 2011

Taking a second look on this point, we have come to agree with Justice Brion's view that it is more in keeping
with the dictates of social justice and the State policy of according full protection to labor to deem employment
contracts as automatically assumed by the surviving corporation in a merger, even in the absence of an express
stipulation in the articles of merger or the merger plan.

BANCOM v. RPN April 21, 2014

Indubitably, it is clear that no merger took place between Bancommerce and TRB as the requirements
and procedures for a merger were absent. A merger does not become effective upon the mere agreement of the
constituent corporations. All the requirements specified in the law must be complied with in order for merger
to take effect. Section 79 of the Corporation Code further provides that the merger shall be effective only upon
the issuance by the Securities and Exchange Commission (SEC) of a certificate of merger.
No de facto merger took place in the present case simply because the TRB owners did not get in
exchange for the bank's assets and liabilities an equivalent value in Bancommerce shares of stock.
Bancommerce and TRB agreed with BSP approval to exclude from the sale the TRB's contingent judicial
liabilities, including those owing to RPN, et al

MUYCO v. FLORETE ( GR 174909 and 177275 Jan. 20, 2016)

The Marcelino, Jr. Group points to violations of specific provisions of the Corporation Code that supposedly
attest to how their rights as stockholders have been besmirched. However, this is not enough to sustain a claim
that the Marcelino, Jr. Group initiated a valid individual or class suit. To reiterate, whether stockholders suffer
from a wrong done to or involving a corporation does not readily vest in them a sweeping license to sue in
their own capacity.
In derivative suits, the corporation concerned must be impleaded as a party.